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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to ________________.
Commission file number: 0-26176
ECHOSTAR COMMUNICATIONS CORPORATION
(Exact name of registrant as specified in its charter)
NEVADA 88-0336997
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization Identification No.)
5701 S. SANTA FE
LITTLETON, COLORADO 80120
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (303) 723-1000
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Class A Common
Stock, $0.01 par
value 6 3/4% Series
C Cumulative
Convertible
Preferred Stock
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of March 7, 2000, the aggregate market value of Class A Common Stock
held by non-affiliates* of the Registrant approximated $13.4 billion based upon
the closing price of the Class A Common Stock as reported on the Nasdaq National
Market as of the close of business on that date.
As of March 7, 2000, the Registrant's outstanding Common stock
consisted of 114,079,274 shares of Class A Common Stock and 119,217,604 shares
of Class B Common Stock, each $0.01 par value.
DOCUMENTS INCORPORATED BY REFERENCE
The following documents are incorporated into this Form 10-K by
reference:
Portions of the Registrant's definitive Proxy Statement to be filed in
connection with the Annual Meeting of Shareholders of Registrant to be held
April 28, 2000 are incorporated by reference in Part III herein.
* Without acknowledging that any individual director or executive officer
of the Company is an affiliate, the shares over which they have voting
control have been included as owned by affiliates solely for purposes
of this computation.
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TABLE OF CONTENTS
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PART I
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Item 1. Business...................................................................................... 1
Item 2. Properties.................................................................................... 21
Item 3. Legal Proceedings............................................................................. 21
Item 4. Submission of Matters to a Vote of Security Holders........................................... 23
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters......................... 24
Item 6. Selected Financial Data....................................................................... 25
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations......... 27
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.................................... 37
Item 8. Financial Statements and Supplementary Data................................................... 37
Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure.......... 37
PART III
Item 10. Directors and Executive Officers of the Registrant............................................ 38
Item 11. Executive Compensation........................................................................ 38
Item 12. Security Ownership of Certain Beneficial Owners and Management................................ 38
Item 13. Certain Relationships and Related Transactions................................................ 38
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K............................... 39
Signatures.................................................................................... 46
Index to Financial Statements................................................................. F-1
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PART I
All statements contained herein, as well as statements made in press
releases and oral statements that may be made by us or by officers, directors or
employees acting on our behalf, that are not statements of historical fact
constitute "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Such forward-looking statements
involve known and unknown risks, uncertainties and other factors that could
cause our actual results to be materially different from historical results or
from any future results expressed or implied by such forward-looking statements.
Among the factors that could cause our actual results to differ materially are
the following: a total or partial loss of a satellite due to operational
failures, space debris or otherwise; an unsuccessful launch or deployment of our
sixth satellite, EchoStar VI; delays in the construction of our seventh, eighth
or ninth satellites; a decrease in sales of digital equipment and related
services to international direct-to-home or DTH service providers; a decrease in
DISH Network subscriber growth; an increase in subscriber turnover; an increase
in subscriber acquisition costs; impediments to the retransmission of local or
distant broadcast network signals which could result from pending litigation; 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 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.
ITEM 1. BUSINESS
GENERAL
Our common stock is publicly traded on the Nasdaq National Market under
the symbol "DISH". We conduct substantially all of our operations through our
subsidiaries. We operate three business units:
o The DISH Network - our direct broadcast satellite, or DBS,
subscription television service in the United States. As of
December 31, 1999, we had approximately 3.4 million DISH Network
subscribers.
o EchoStar Technologies Corporation - our engineering division,
which is principally responsible for the design of digital set-top
boxes, or satellite receivers, necessary for consumers to receive
DISH Network programming, and the sale of set-top boxes to
international direct-to-home satellite operators. We have also
provided uplink center design, construction oversight and other
project integration services for international direct-to-home
ventures.
o Satellite Services - our division that provides video, audio and
data services to business television customers and other satellite
users.
RECENT DEVELOPMENTS
During February 2000, we announced the formation of a joint venture
with OpenTV Corp. intended to offer DISH Network customers and other video
platforms around the world a low cost, interactive digital receiver with a
built-in hard disk drive that will permit viewers to pause and record live
programs without the need for video tape. The new set-top box, expected to be
available during the fourth quarter of 2000, would offer interactive television
services developed by OpenTV. In connection with formation of the joint venture,
OpenTV and EchoStar licensed certain intellectual property rights to the joint
venture and we were issued 2,252,252 shares of OpenTV common Stock. The shares
of OpenTV common Stock are subject to forfeiture if we fail to activate the
OpenTV system in at least 500,000 set top boxes on or before February 23, 2003.
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During February 2000, we also 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. Both will include
spot-beam technology which could allow DISH Network to offer local channels or
other value added services in as many as 60 or more markets across the United
States. The third satellite, EchoStar IX, will be a hybrid Ku/Ka-band satellite,
which may provide our satellite services division with increased opportunities
to attract business customers and may provide DISH Network customers with
expanded services such as Internet, data and potentially two-way wireless
communications. See "-DISH Network - Satellites Under Construction."
On each of July 19, 1999, and October 25, 1999, we completed
two-for-one splits of our outstanding class A and class B common stock. On
February 28, 2000 we announced a two-for-one split of our outstanding class A
and class B common stock effective March 22, 2000 to shareholders of record as
of the close of business on March 10, 2000. All references to shares included
herein retroactively give effect to the stock splits completed in July and
October of 1999, but not the announced March 22, 2000 stock split.
During February 2000 EchoStar filed suit against DirecTV and Thomson
Consumer Electronics/RCA in the Federal District Court of Colorado. The suit
alleges that DirecTV has utilized improper conduct in order to fend off
competition from the DISH Network. According to the complaint, DirecTV has
demanded that certain retailers stop displaying EchoStar merchandise and has
threatened to cause economic damage to retailers if they continued to offer both
product lines in head-to-head competition. The suit alleges that DirecTV has
acted in violation of federal and state anti-trust laws in order to protect
DirecTV's market share. EchoStar is seeking injunctive relief and monetary
damages. It is too early in the litigation to make an assessment of the probable
outcome.
DISH NETWORK
Since 1994, we have dedicated significant resources to develop the DISH
Network and our related DBS system. "DBS" describes a satellite service with
frequency allocation and wide spacing between satellites that generally permits
higher powered transmissions than other satellite services and allows for
reception with a small, 18-24 inch satellite dish. We believe that DBS provides
the most cost-efficient national point to multi-point transport of video and
audio services available today. As of December 31, 1999, approximately 13
million United States households subscribed to direct broadcast satellite and
other direct-to-home satellite services. Our DBS system presently includes
FCC-allocated DBS licenses, five operational DBS satellites, digital satellite
receivers, two digital broadcast operations centers, customer service
facilities, and other assets used in our operations. We believe that DISH
Network offers programming packages that have a better "price-to-value"
relationship than packages currently offered by most other subscription
television providers, particularly cable TV operators. We believe there
continues to be significant unsatisfied demand for high quality, reasonably
priced television programming services.
We started offering subscription television services on the DISH
Network in March 1996. As of December 31, 1999, more than 3.4 million households
subscribed to DISH Network programming services. During 1999, more than 1.4
million net new households subscribed to our direct broadcast satellite
services, an increase of 63% from 1998. Further, in 1999, J.D. Power and
Associates ranked us number one in overall customer satisfaction in the pay TV
industry and a Consumer Reports customer satisfaction survey rated DISH Network
highest in the "Satellite TV Providers" category.
COMPONENTS OF A DBS SYSTEM
In order to provide programming services to DISH Network subscribers,
we have entered into agreements with video, audio and data programmers, who
deliver their programming content to our digital broadcast operations center in
Cheyenne, Wyoming, via commercial satellites, fiber optics or microwave
transmissions. We monitor those signals for quality, and can add promotional
messages, public service programming or other information. Equipment at our
digital broadcast operations center then digitizes, compresses, encrypts and
combines the signal with other necessary data, such as conditional access
information. We then "uplink" or transmit the signals to one of our DBS
satellites where we then broadcast directly to DISH Network subscribers.
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In order to receive DISH Network programming, a subscriber needs:
o a satellite antenna, which people sometimes refer to as a "dish,"
and related components;
o an integrated receiver/decoder, which people sometimes refer to as
a "satellite receiver" or "set-top box"; and
o a television set.
Set-top boxes communicate with our authorization center through
telephone lines to report the purchase of pay-per-view movies and other events.
Conditional Access System. We use conditional access technology to
encrypt the programming so only those who pay can receive the programming. We
use microchips placed on credit card-sized access cards, or "smart cards" to
control access to authorized programming content. We own 50% of NagraStar LLC, a
joint venture that provides us with smart cards. NagraStar purchases these smart
cards from Nagra Plus SA, a Swiss company that owns the other 50% of NagraStar
LLC. These smart cards, which we can update or replace periodically, are a key
element in preserving the security of our conditional access system. When a
consumer orders a particular channel, we send a message by satellite that
instructs the smart card to permit decryption of the programming for viewing by
that consumer. The set-top box then decompresses the programming and sends it to
the consumer's television.
The access control system is central to the security network that
prevents unauthorized viewing of programming. It is illegal to create, sell or
otherwise distribute mechanisms or devices to circumvent that encryption.
However, 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. We continue to respond to compromises of our encryption system with
measures intended to make signal theft of our programming commercially
uneconomical. We utilize a variety of tools to continue to accomplish this goal.
Ultimately, 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. If we can not promptly correct a
compromise in our encryption technology, it would adversely affect our revenue
and our ability to contract for video and audio services provided by
programmers.
Programming. We use a "value-based" strategy in structuring the content
and pricing of programming packages available from the DISH Network. For
example, we currently sell our entry-level "America's Top 40" programming
package, which includes 40 of the most popular cable channels, to consumers for
$19.99 per month. We estimate cable operators charge over $30 per month, on
average, for their entry-level expanded basic service that typically consists of
approximately 55 analog channels. We believe that our "America's Top 100 CD"
programming package, which we currently sell for $28.99 per month, also compares
favorably to similar cable television programming. We believe that our America's
Top 100 CD package is similar to an expanded basic cable package plus a digital
music service. Based on cable industry statistics, we estimate that cable
operators would charge in excess of $40 per month for a similar package.
Our five operational satellites currently enable us to provide over 500
channels of video and audio programming, Internet and high-speed data services
and high definition television nationwide to a subscriber's single 18-20 inch
satellite dish. Since we use many of these channels for local programming, no
particular consumer could subscribe to all 500 channels, but a single dish could
receive all of those channels. See " - Government Regulation".
We currently offer up to seven premium movie channels for only $10.99
per month. We believe we offer more premium movie channels than cable at a
comparable price.
Currently we offer approximately 50 foreign-language channels including
Spanish, Arabic, Greek and others. We believe we deliver the most popular
foreign-language programming to customers in the United States at the best
value. We believe foreign-language programming is a valuable niche product that
attracts a number of new subscribers who are unable to get similar programming
elsewhere.
Internet and High-Speed Data Services. We are expanding our offerings
to include Internet and high-speed data services. We have formed a joint venture
with OpenTV which will offer DISH Network customers an interactive digital
receiver with a built-in hard disk drive that will permit viewers to pause and
record live programs without the need for video tape. We also intend to offer
interactive television services developed by OpenTV,
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including a new electronic program guide, a local weather application and other
innovative interactive applications for consumers. In addition, OpenTV is
expected to develop and produce a number of applications and interactive TV
services for the joint venture, which will include video replay, interactive TV
advertising, and entertainment services.
We also recently signed an agreement with Gilat Satellite Networks Ltd.
that will enable us to jointly offer consumers two-way, high-speed satellite
Internet access along with DISH Network satellite television programming via a
single dish. We believe this technology is particularly well-suited for areas
without cable infrastructure. Two-way satellite service offers significant
benefits for consumers, including a persistent or "always on" connection that
saves time over dial-up methods and eliminates the need for a second phone line.
DISH Network customers will need an oblong dish, approximately 24 inches by 36
inches, and other equipment to take advantage of two-way Internet satellite
service. We expect to offer consumers a complete hardware and services solution
for broadband Internet access combined with DISH Network programming by the end
of 2000. We are also seeking additional ways to expand our Internet and
high-speed data services that may include, but are not limited to, partnerships
with third parties who have particular expertise in the high speed transmission
of digital information. Although there can be no assurance, we believe we will
be able to increase our subscriber base and our average revenue per subscriber
by offering these and other similar services.
Local Strategy. In order to provide the strongest possible competition
to cable, and thereby maximize our potential market, we currently provide major
local broadcast network channels to certain of our subscribers. Subject to
eligibility conditions, we currently offer satellite-delivered local network
signals to consumers in some of the largest markets in the continental United
States, including Atlanta, Boston, Chicago, Cleveland, Dallas/Ft. Worth, Denver,
Detroit, Houston, Kansas City, Los Angeles, Miami/Ft. Lauderdale,
Minneapolis/St. Paul, Nashville, New York, Orlando, Philadelphia, Phoenix,
Portland, Pittsburgh, Sacramento, Salt Lake City, San Francisco/Oakland/San
Jose, Seattle/Tacoma, St. Louis, Tampa/St. Petersburg and Washington, D.C.
EchoStar VII and EchoStar VIII will be equipped with spot-beam technology that
will allow us to offer local channels in as many as 60 or more markets across
the United States without reducing our current programming offerings.
EchoStar Receiver Systems. EchoStar receiver systems include an 18-20
inch satellite dish, a digital satellite receiver that descrambles signals for
television viewing, a remote control, and other related components. We offer a
number of set-top box models. Our standard system comes with an infrared remote
control, an on-screen program guide, and the ability to switch between DISH
Network and off-air local programming using the remote control. Our mid-level
model has all of the basic features but also includes a UHF remote control that
allows subscribers to control their EchoStar receiver system from up to 150 feet
away through walls, and a high-speed data port. Our premium model includes
additional features such as on-screen caller identification capability, event
timers to automatically tune into or record selected programming and one-touch
VCR recording. We also offer a variety of specialized receiver systems such as
HDTV receiver systems, receiver systems that include either a VCR or DVD player
and receivers capable of receiving Internet TV services. DISH Network reception
equipment is incompatible with competitors' systems in the United States.
Although we internally design and engineer our receiver systems, we do
not manufacture these systems. Rather, we outsource the manufacturing process to
high-volume contract electronics manufacturers. SCI Technology, Inc.
manufactures the majority of our receiver systems. During 1998, Vtech
Communications, Ltd. began manufacturing our set-top boxes. JVC Company of
America manufactures consumer electronics products, including a digital VCR with
an integrated EchoStar receiver system.
During the fourth quarter of 2000, together with OpenTV we expect to
offer DISH Network customers and other video platforms around the world a low
cost, interactive digital receiver with a built-in hard disk drive that would
permit viewers to pause and record live programs without the need for video
tape. The new set-top box is also expected to offer interactive television
services developed by OpenTV, including a new electronic program guide, a local
weather application and other innovative interactive applications for consumers.
Installation. While many consumers have the skills necessary to install
our equipment in their homes, we believe that most installations are best
performed by professionals, and that on time, quality installations are
important to our success. Consequently, we are currently expanding our
installation business, conducted through our DISH Network Service Corporation
subsidiary. During 2000, we plan to expand our DISH Network Service Corporation
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from 19 offices to approximately 50 offices. We also plan to integrate business
partners as external installation providers. Our external installation business
partners will be held to DISH Network Service Corporation service standards to
attempt to ensure each DISH Network customer receives the same quality
installation and service. Our offices and external business partners will be
strategically located throughout the continental United States, in order to
enable us to provide service to a greater number of DISH Network customers
throughout the country. Currently, customers' installations may be delayed due
to rapid subscriber growth resulting in a large demand for DISH Network
professional installation services. Although there can be no assurance, we
believe this expansion of our installation business will decrease wait time on
service calls and new installations and help us to better accommodate
anticipated subscriber growth.
Customer Service Center. We currently own and operate customer service
centers in Thornton, Colorado, Littleton, Colorado, McKeesport, Pennsylvania and
El Paso, Texas. These centers field all of our customer service calls. Potential
and existing subscribers can call a single telephone number to receive
assistance for hardware, programming, installation and technical support. Due to
rapid subscriber growth and recent marketing promotions, some customers are
currently experiencing longer than anticipated wait times. However, we plan to
open a fifth customer service center during 2000 to provide additional customer
support and help us to better accommodate anticipated subscriber growth.
Digital Broadcast Operations Center. Our principal digital broadcast
operations center is located in Cheyenne, Wyoming. During 1999, we acquired a
second digital broadcast operations center in Gilbert, Arizona. During 2000, we
plan to "build-out" the Gilbert facility to be used as a back up for our main
digital broadcast operations center in Cheyenne. Upon commercial operation of
EchoStar VII and EchoStar VIII we plan to also begin utilizing the Gilbert
facility as a primary digital broadcast operations center. Almost all of the
functions necessary to provide satellite-delivered services occur at the digital
broadcast operations center. The digital broadcast operations center uses fiber
optic lines and downlink antennas to receive programming and other data at the
center. The digital broadcast operations center uplinks programming content to
our DBS satellites via large uplink antennas. The digital broadcast operations
center also maintains a number of large uplink antennas and other equipment
necessary to modulate and demodulate the programming and data signals. Equipment
at our digital broadcast operations center performs all compression and
encryption of the DISH Network's programming signals.
Subscriber Management. We presently use, and are dependent on, CSG
Systems Incorporated's software system, for all DISH Network subscriber
management and billing functions.
SALES AND MARKETING
Approximately 20,000 independent dealers and distributors, retailers
and consumer electronics stores currently sell EchoStar receiver systems and
DISH Network programming services. While we also sell receiver systems and
programming directly, independent dealers are responsible for most of our sales.
These independent dealers are primarily local retailers who specialize in TV and
home entertainment systems.
We intend to enhance consumer awareness of our products by continuing
to form alliances with nationally recognized distributors of other consumer
electronics products. We have formed strategic alliances with JVC and Philips.
JVC and Philips now distribute our receiver systems under their labels through
certain of their nationwide retailers.
Through our direct sales efforts, customers can call a single telephone
number (1-800-333-DISH) 24 hours a day, seven days a week, to order EchoStar
receiver systems, activate programming services, resolve billing questions,
schedule installation or obtain technical support. We believe that we are
presently the only DBS provider to offer a comprehensive, single-point customer
service function.
We offer our distributors and retailers a competitive residual, or
commission, program. The program pays qualified distributors and retailers an
activation bonus, along with a fixed monthly residual for programming services
while the respective DISH Network subscriber remains active.
We use regional and national broadcast and print advertising to promote
the DISH Network. We also offer point-of-sale literature, product displays,
demonstration kiosks and signage for retail outlets. We provide guides to
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our dealers and distributors at nationwide educational seminars and directly by
mail, that describe DISH Network products and services. Our mobile sales and
marketing team visits retail outlets regularly to reinforce training and ensure
that these outlets quickly fulfill point-of-sale needs. Additionally, we
dedicate one DISH Network channel and provide a retailer specific website to
provide information about special services and promotions that we offer from
time to time.
Our future success in the subscription television industry depends on
our ability to acquire and retain DISH Network subscribers, among other factors.
Beginning in 1996, to stimulate subscriber growth we reduced the retail price
charged to consumers for EchoStar receiver systems. Accordingly, since August
1996, we have sold our receiver systems to DISH Network subscribers below
manufactured cost. The amount of the subsidy varies depending on many factors.
Periodically we also provide varying levels of other subsidies and incentives to
attract customers, including free or subsidized installations, antennas,
programming and other items. We developed this marketing strategy to rapidly
build our subscriber base, expand retail distribution of our products, and build
consumer awareness of the DISH Network brand. This marketing strategy emphasizes
our long-term business strategy of maximizing future revenue by selling DISH
Network programming to the largest possible subscriber base and rapidly
increasing the size of that subscriber base. Since we subsidize the consumer
up-front costs, we incur significant costs each time we acquire a new
subscriber. Although there can be no assurance, we believe that we will be able
to fully recoup the up-front costs of subscriber acquisition from future
subscription television services revenue.
We also offer consumers the option to lease EchoStar receiver systems.
We expect to expand this marketing option during 2000. We believe giving
consumers a choice between purchasing and leasing an EchoStar receiver system
will enable us to reach additional DISH Network subscribers.
We base our marketing promotions on current competitive conditions.
Currently, we offer promotions including product rebates and bounty programs.
These bounty programs are designed to entice subscribers to certain other pay TV
services to become DISH Network customers. If competition increases, or we
determine for any other reason that it is necessary to increase our subscriber
acquisition costs to attract new customers, our profitability and costs of
operation could be adversely affected.
SATELLITES
We presently have five operational DBS satellites in geostationary
orbit approximately 22,500 miles above the equator. Satellites are located in
orbital positions, or slots, that are designated by their longitude. An orbital
position describes both a physical location and an assignment of spectrum in the
applicable frequency band. The FCC has divided each orbital position into 32
frequency channels. Each transponder on our satellites can exploit one frequency
channel. Through digital compression technology, we can currently transmit
between seven and ten digital video channels from each transponder. The FCC
licensed us to operate 96 DBS frequencies at various orbital positions
including:
o 21 frequencies at the 119 (degrees) WL orbital slot and 29
frequencies at the 110 (degrees) WL orbital slot, both capable of
providing service to the entire continental United States;
o 11 frequencies at the 61.5 (degrees) WL orbital slot, capable of
providing service to the Eastern and Central United States;
o 24 frequencies at the 148 (degrees) WL orbital slot, capable of
providing service to the Western United States;
o 21 frequencies at the 175 (degrees) WL orbital slot, capable of
providing service to only the most western portion of the United
States; See " - Government Regulation" and
o 11 additional as yet unassigned frequencies, likely to be made
available at the 175 (degrees) WL orbital slot, but only if
certain regulatory hurdles are met. See " - Government
Regulation".
We previously indicated that in connection with the launch of EchoStar
V and EchoStar VI we expected to incur material one-time expenses, primarily
during 2000, associated with repositioning existing subscribers' satellite
dishes from the 119 (degrees) WL orbital location to the 110 (degrees) WL
orbital location. We have now decided to utilize the 110 (degrees) WL orbital
location, where EchoStar V and VI will be located, to enhance revenue
opportunities with new value added services for our current and future
subscribers, and to maintain our primary DBS service at the 119 (degrees) WL
orbital location. Consequently, while we still expect to incur costs to upgrade
some subscribers to dishes capable of
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receiving signals from both the 110 (degrees) WL and 119 (degrees) WL orbital
locations, these costs are not expected to be as significant during 2000 as
previously planned.
EchoStar I and EchoStar II each have 16 transponders that operate at
130 watts of power. Subject to the anomalies described below, EchoStar III and
EchoStar IV each have 32 transponders that operate at approximately 120 watts
per channel, switchable to 16 transponders operating at over 230 watts per
channel. EchoStar V has 32 transponders that operate at approximately 110 watts
per channel, switchable to 16 transponders operating at approximately 220 watts
per channel. Each transponder can transmit multiple digital video, audio and
data channels. Each of our satellites has a minimum design life of 12 years.
During 1998, three transponders on EchoStar III malfunctioned,
resulting in the failure of a total of six transponders on the satellite. While
the satellite can operate a maximum of 32 transponders at any time, the
satellite manufacturer equipped it with a total of 44 transponders to provide
redundancy. As a result of this redundancy and because the FCC licensed us to
operate only 11 transponders at 61.5(degree) WL, where the satellite is located,
the transponder anomaly has not caused 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, 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 we would lose the ability to operate at least
the 11 licensed transponders on the satellite.
As a result of the failure of EchoStar IV solar arrays to fully deploy,
and the unrelated failure of 20 transponders to date, a maximum of approximately
16 of the 44 transponders on EchoStar IV are currently available for use. Due to
the normal degradation of the solar arrays, the number of available transponders
may further decrease over time. Based on current data from Lockheed Martin, we
expect that at least 10 high power transponders or 5 extra-high power
transponders will probably be available over the remaining useful life of the
satellite, absent significant additional transponder problems or other failures.
In addition to the transponder failures, EchoStar IV has experienced anomalies
affecting its heating systems and fuel system during 1999. As a result of the
heating system and fuel system anomalies, the remaining useful life of EchoStar
IV has been reduced to less than 10 years.
In September 1998, we filed a $219.3 million insurance claim for a
constructive total loss under the launch insurance policy related to EchoStar
IV. However, if we receive $219.3 million for a constructive total loss on the
satellite, the insurers would obtain the sole right to the benefits of salvage
from EchoStar IV under the terms of the launch insurance policy. Although we
believe we have suffered a total loss of EchoStar IV under that definition in
the launch insurance policy, we intend to negotiate a settlement with the
insurers to compensate us for the reduced satellite transmission capacity and
allow us to retain title to the asset.
While there can be no assurance, we do not currently expect a material
adverse impact on short or medium term satellite operations. Although we have
not fully assessed the impairment to EchoStar IV from the transponder failures
and other anomalies, we continue to believe that insurance proceeds will be
sufficient to offset all write-downs of satellite assets that might ultimately
be necessary because of lost functionality. However, we can provide no assurance
that additional material failures will not occur, and we can provide no
assurance as to the ultimate amount that may be received from the insurance
claim, or that coverage will be available. We will continue to evaluate the
performance of EchoStar IV and may modify our loss assessment as new events or
circumstances develop.
Our satellite insurance policy for EchoStar IV consists of separate
identical policies with different carriers for varying amounts which, in
combination, create a total insured amount of $219.3 million. Two of the
participants in our insurance line have notified us they believe that our
alleged delay in providing required insurance claim information may reduce their
obligation to pay any settlement related to the claim. One carrier recently
asserted it has no obligation to pay. We strongly disagree with the position
taken by those insurers and continue to believe that the EchoStar IV insurance
claim will be resolved in a manner satisfactory to us. However, we cannot assure
you that we will receive the amount claimed or, if we do, that we will retain
title to EchoStar IV with its reduced capacity. We met with our insurance
carriers in November 1999 and are continuing discussions to resolve our claim.
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SATELLITE LAUNCHES
We expect to launch EchoStar VI during the second quarter of 2000 from
Cape Canaveral, Florida on an Atlas IIAS rocket. EchoStar VI will be equipped
with 32 transponders designed to operate at approximately 120 watts per channel,
switchable to 16 transponders operating at approximately 240 watts per channel.
EchoStar VI has a minimum design life of 12 years. Delays or failures of
launches preceding the launch of EchoStar VI could delay the launch date.
Additionally, if other similar satellites experience anomalies, this could delay
the launch of EchoStar VI until technical personnel discover the cause and the
correct the anomalies. It is also possible that the launch date could occur
sooner.
SATELLITES UNDER CONSTRUCTION
EchoStar VII, expected to operate from the 119 (degrees) WL orbital
location, will be designed and manufactured by Lockheed Martin Commercial Space
Systems. EchoStar VIII, which is expected to operate at the 110 (degrees) WL
orbital location, and EchoStar IX, which is expected to operate at the 121
(degrees) WL orbital location, will be designed and manufactured by Space
Systems/Loral. EchoStar VII and EchoStar VIII will each be capable of operating
32 DBS transponders at 120 watts each, switchable to 16 DBS transponders
operating at 240 watts each. Both will include spot-beam technology which could
allow DISH Network to offer local channels or other value added services in as
many as 60 or more markets across the United States. The spot beam payloads for
each satellite have been designed to work together to maximize the number of
local spot markets served across the United States, while providing mutual
backup to offer increased reliability to customers. EchoStar IX will be capable
of operating 32 Ku-band transponders at 110 watts each, in addition to a Ka band
payload.
SATELLITE INSURANCE
We renewed in-orbit insurance for EchoStar I, EchoStar II and EchoStar
III through July 2000. The insurance policy with respect to in-orbit operation
contains standard commercial satellite insurance provisions, including a
material change in underwriting information clause requiring us to notify our
insurers of any material change in the written underwriting information provided
to the insurers or any change in any material fact or circumstance concerning
our satellites insured under the policy. That notification could permit insurers
to renegotiate the terms and conditions if the result is a material change in
risk of loss or insurable interest. A change in the operating status of an
insured satellite or any loss occurring during the policy period does not
entitle the insurers to renegotiate the policy terms. Currently, our satellite
insurance contains customary exclusions and does not apply to loss or damage
caused by acts of war or civil insurrection, anti-satellite devices, nuclear
radiation or radioactive contamination or certain willful or intentional acts
designed to cause loss or failure of a satellite. There may be circumstances in
which insurance will not fully reimburse us for any loss. For example, as a
result of the failure over the past two years of three transponders on EchoStar
III, resulting in the loss of use of six transponders, our new insurance policy
for EchoStar III contains a deductible of three or six transponders, depending
on the power mode that we operate in. As a result of this deductible, we are
currently insured for approximately 81% of our total transponders on EchoStar
III.
The EchoStar IV launch insurance policy provided for insurance of
$219.3 million covering the period from launch of the satellite on May 8, 1998
through May 8, 1999. Due to anomalies experienced by EchoStar IV during that
period and the resulting pending claim for a total constructive loss, we did not
obtain in-orbit insurance on EchoStar IV. Consequently, if we are unable to
resolve our pending insurance claim to our satisfaction, EchoStar IV will not be
insured against further losses in the future. In addition, insurance will not
reimburse us for business interruption, loss of business, profit opportunity and
similar losses that might arise from delay in the launch of any EchoStar
satellite.
We have procured normal and customary launch insurance for EchoStar V.
The launch insurance policy provides for insurance of $225.0 million covering
the period from launch of the satellite on September 23, 1999 through September
23, 2000. Before the policy expires, we expect to procure normal and customary
in-orbit insurance but might not be able to procure that insurance at reasonable
rates, or at all, if EchoStar V experiences any anomalies before that time or if
market conditions change unexpectedly. We have also procured normal and
customary launch insurance for EchoStar VI. The launch insurance policy provides
for insurance of $225.0 million covering a one-year period from the date of
launch of the satellite.
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COMPETITION FOR OUR DISH NETWORK BUSINESS
Our industry is highly competitive. Our competition includes companies
that offer video, audio, data, programming and other entertainment services,
including cable television, wireless cable, direct-to-home satellite, other DBS
companies and companies that are developing new technologies. Many of our
competitors have access to substantially greater financial and marketing
resources than we have. We believe that quality and variety of video, audio and
data programming, quality of picture and service, and cost are the key bases of
competition.
Cable Television. We encounter substantial competition in the
subscription television market from cable television and other land-based
systems. Cable television operators have a large, established customer base, and
may have significant investments in, and access to, programming. Cable
television service is currently available to more than 90% of the approximately
99 million United States television households, and approximately 66% of total
United States households currently subscribe to cable. Cable television
operators currently have an advantage relative to us by providing service to
multiple television sets within the same household at no additional cost. Cable
operators may obtain a competitive advantage by bundling their analog video
service with expanded digital video services delivered terrestrially or via
satellite, efficient 2-way high speed data transmission, and/or telephone
service on upgraded cable systems. For example, some cable companies now offer
high speed Internet access over their upgraded fiber optic systems, and AT&T has
announced that it is seeking to provide telephone service over cable systems. As
a result of these and other factors, we may not be able to continue to expand
our subscriber base or to compete effectively against cable television
operators.
In addition, entities such as regional telephone companies, which are
likely to have greater resources than we have, are implementing and supporting
digital video compression over existing telephone lines and digital "wireless
cable." Moreover, mergers, joint ventures, and alliances among franchise,
wireless or private cable television operators, regional Bell operating
companies and others may result in providers capable of offering bundled cable
television and telecommunications services in competition with us. For instance,
AT&T has acquired cable operator TCI and has entered into a definitive agreement
to acquire the cable and other operations of MediaOne.
Since a subscriber needs a direct line of sight to the satellite to
receive DBS service, some households may not be able to receive DISH Network
programming. Additionally, the cost required to receive DISH Network programming
on multiple television sets may deter some potential customers from switching to
DISH Network service. Furthermore, cable operators pay substantially lower
royalty rates for the retransmission of distant network, local affiliate and
superstation signals than we do.
Other DBS and Direct-to-Home Satellite System Operators. Several other
companies have DBS licenses and can compete with us for home satellite
subscribers. Our primary competitor, DirecTV, operates five DBS satellites and
has 46 channel assignments at orbital slots that provide coverage to the entire
continental United States. DirecTV currently offers more than 300 channels of
combined video and audio programming and, as of December 1999, had approximately
8.1 million subscribers. DirecTV is, and will be for the foreseeable future, in
an advantageous position with regard to market entry, programming, such as
DirecTV's exclusive sports programming and, possibly, volume discounts for
programming offers. Further, DirecTV hardware and programming is available for
sale in Circuit City, Best Buy and Radio Shack. Our equipment is not available
at these, or most other large consumer electronics chains. Additionally, DirecTV
offers out of market NFL, NBA, NHL and other sports programming that is not
available to our subscribers. As discussed above in "Recent Developments", we
have initiated a lawsuit against DirecTV.
Two other satellite companies have conditional permits for a
comparatively small number of DBS frequency assignments that could be used to
provide service to portions of the United States. If the number of DBS operators
increases in the future, or if the number of DBS frequency assignments to our
existing DBS competitors increases, DISH Network subscriber growth could be
adversely affected.
VHF/UHF Broadcasters. Most areas of the United States can receive
traditional terrestrial VHF/UHF television broadcasts of between three and ten
channels. These broadcasters are often low to medium power operators with a
limited coverage area and provide local, network and syndicated programming. The
local content nature of the programming may be important to the consumer, and
VHF/UHF programming is typically provided free of charge.
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The FCC has allocated additional digital spectrum to licensed broadcasters. At
least during a transition period, each existing television station will be able
to retain its present analog frequencies and also transmit programming on a
digital channel that may permit multiple programming services per channel.
ECHOSTAR TECHNOLOGIES CORPORATION
Employees of EchoStar Technologies Corporation, one of our wholly-owned
subsidiaries, internally design and engineer EchoStar receiver systems. Our
satellite receivers have won numerous awards from the Consumer Electronics
Manufacturers Association, dealers, retailers, and industry trade publications.
We outsource the manufacture of EchoStar receiver systems to third parties who
manufacture the receivers in accordance with our specifications.
We created our ETC division in connection with the development of the
DISH Network. We believe that we have an opportunity to grow this business
further in the future. The same employees who design EchoStar receiver systems
for the DISH Network also design the set-top boxes sold to international
direct-to-home satellite TV customers. Our satellite receivers are designed
around the DVB standard, which is widely used in Europe and Asia. Consequently,
international ETC projects may result in improvements in design and economies of
scale in the production of EchoStar receiver systems for the DISH Network.
In addition to supplying EchoStar receiver systems for the DISH
Network, ETC supplies similar digital satellite receivers to international
satellite TV service operators and a variety of digital and analog receivers to
consumers through our international distribution network. We believe that
direct-to-home satellite service is well-suited for countries without extensive
cable infrastructure. We also offer consulting and integration services to
development stage, international direct-to-home satellite operators, which may
result in sales of receiver systems to these customers. We are actively
soliciting new business for ETC, but we can not provide any assurance in that
regard.
Our two major international customers are Via Digital, a subsidiary of
Telefonica, Spain's national telephone company, and ExpressVu, a subsidiary of
Bell Canada, Canada's national telephone company. Our future revenue in this
area depends largely on the success of these operators, which in turn, depends
on other factors, such as the level of consumer acceptance of direct-to-home
satellite TV products and the intensity of competition for international
subscription television subscribers.
ETC's business also includes our Atlanta-based EchoStar Data Networks
Corporation and UK-based Eldon Technology Limited subsidiaries. EchoStar Data
Networks is a supplier of technology for distributing Internet content over
satellite networks. Eldon Technology designs digital televisions and set-top
boxes, strengthening our product design capabilities for satellite receivers and
integrated televisions in both the international and United States markets.
COMPETITION FOR OUR ETC BUSINESS
We compete with a substantial number of foreign and domestic companies,
many of which have significantly greater resources, financial or otherwise, than
we have. We expect new competitors to enter this market because of rapidly
changing technology. Our ability to anticipate these technological changes and
introduce enhanced products expeditiously will be a significant factor in our
ability to remain competitive. Existing competitors' actions and new entrants
may have a material adverse impact on our revenues. We do not know if we will be
able to successfully introduce new products and technologies on a timely basis
in order to remain competitive.
SATELLITE SERVICES
Our Satellite Services business unit primarily leases capacity on our
satellites to customers, including international services that broadcast
foreign-language programming to our subscribers in the United States, and
Fortune 1000 companies that use our business television service to communicate
with employees, customers and suppliers located around the United States. In
addition, we are developing a wide range of Internet and high-speed data
services. We have formed a joint venture with OpenTV intended to offer DISH
Network customers and other video platforms around the world a low cost,
interactive digital receiver with a built-in hard disk drive that will
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permit viewers to pause and record live programs without the need for video
tape. The new set-top box, expected to be available during the fourth quarter of
2000, would offer interactive television services developed by OpenTV. In
addition, by the end of 2000, together with Gilat-To-Home we plan to offer
consumers two-way, high-speed satellite Internet access along with DISH Network
satellite television programming via a single dish.
COMPETITION FOR OUR SATELLITE SERVICES BUSINESS
We compete with a number of other companies, including those using
similar and different technologies, to provide satellite services. Many of these
competitors have substantially greater financial and other resources than we
have. Our principal competitors include, other satellite system operators, cable
television system operators, Internet service providers, and telephone
companies. While there can be no assurance, we believe that we can compete with
these other companies based on our knowledge and experience in the
direct-to-home satellite TV and DBS industry, our technological leadership and
new product capabilities, the quality of our video, audio and data
transmissions, the quality of service provided, and cost.
GOVERNMENT REGULATION
The following summary of regulatory developments and legislation is not
intended to describe all present and proposed government regulation and
legislation affecting the video programming distribution industry. Government
regulations that are currently the subject of judicial or administrative
proceedings, legislative hearings or administrative proposals could change our
industry, in varying degrees. We can not predict either the outcome of these
proceedings or any potential impact they might have on the industry or on our
operations. This section sets forth a brief summary of regulatory issues
pertaining to our operations.
We are required to obtain authorizations and permits from the FCC and
other similar foreign regulatory agencies to construct, launch and operate our
satellites and other components of our DBS system. Additionally, as a private
operator of a United States satellite system, we are subject to the regulatory
authority of the FCC and the Radio Regulations promulgated by the International
Telecommunication Union. We also have to obtain import and general destination
export licenses from the United States Department of Commerce to receive and
deliver components of direct-to-home satellite TV systems. In addition, the
delivery of satellites and related technical information for the purpose of
launch by foreign launch services provider is subject to strict export control
and prior approval requirements.
FCC PERMITS AND LICENSES
The FCC has jurisdiction and review power over the following general
areas:
o assigning frequencies and authorizations;
o ensuring compliance with the terms and conditions of such
assignments and authorizations, including required timetables for
construction and operation of satellites and other due diligence
requirements;
o authorizing individual satellites and earth stations;
o avoiding interference with other radio frequency emitters;
o ensuring compliance with applicable provisions of the
Communications Act of 1934.
All of our FCC authorizations are subject to conditions as well as to
the FCC's authority to modify, cancel or revoke them. In addition, all of our
authorizations for satellite systems that are not yet operational are subject to
construction and progress obligations, milestones, reporting and other
requirements. The FCC has indicated that it may revoke, terminate, condition or
decline to extend or renew such authorizations if we fail to comply with
applicable Communications Act requirements. If we fail to file adequate reports
or to demonstrate progress in the construction of our satellite systems, the FCC
has stated that it may cancel our authorizations for those systems. We have not
filed, or timely filed, all required reports or other filings, and some of our
construction permits have expired, in connection with our authorized systems
with the FCC. We cannot be certain whether or not the FCC would cancel our
authorizations. While we have filed with the FCC pending requests for extensions
of authorizations that have expired, we cannot be sure how the FCC will rule on
these requests. In addition, some of our permits and extension requests have
been, and may continue to be, contested in FCC proceedings and in court by
several companies with adverse interests.
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The FCC issues DBS licenses for ten year periods, which is less than
the useful life of a healthy DBS satellite. Upon expiration of the initial
license term, the FCC has the option to renew a satellite operator's license or
authorize an operator to operate for a period of time on special temporary
authority, or decline to renew the license. If the FCC declined to renew the
operator's license, the operator would be required to cease operations and the
frequencies would revert to the FCC. The FCC usually grants special temporary
authorizations for periods of up to 180 days. These authorizations are usually
subject to several other conditions. We also must obtain FCC authorization to
operate our earth stations, including the earth stations necessary to uplink
programming to our satellites.
Our licenses to operate EchoStar I and EchoStar II at the 119 (degrees)
WL orbital location will expire in 2006. Our license to operate EchoStar III
over 11 channels at 61.5 (degrees) WL will expire in 2008. Our authorization at
148 (degrees) WL requires us to construct a satellite by December 20, 2000 and
to utilize all of our FCC-allocated frequencies at that location by December 20,
2002, or risk losing those frequencies that we are not using. During May 1999,
the FCC approved the assignment to us of MCI's license to operate a DBS
satellite system at 110 (degrees) WL. Also, in June 1999, the FCC granted in
part MCI's request to modify and clarify that authorization. The FCC imposed
several conditions on this grant, and while MCI has submitted certain
information to the FCC in response to these conditions, we cannot be sure that
the FCC will consider that submission to be adequate.
EchoStar IV was originally licensed to operate at our 119 (degrees) WL
orbital location, however, it experienced anomalies, as discussed above, that
required us to change our plans. During the first half of 1999, we operated
EchoStar IV at the 148 (degrees) WL orbital location under a special temporary
authorization. As a result of additional anomalies EchoStar IV cannot exploit
all of our frequencies at the 148 (degrees) WL orbital location. In connection
with approval of the 110 acquisition, we received special temporary
authorization from the FCC to temporarily move EchoStar IV from its position at
148 (degrees) WL to the 110 (degrees) WL orbital location and temporarily
provide service from 110 (degrees) WL. The programming EchoStar IV previously
carried was moved to EchoStar I and EchoStar II at the 119 (degrees) WL orbital
location. We recently moved EchoStar IV to the 119 (degrees) WL orbital location
in conjunction with our plan to provide local-into-local broadcast service as
well as core programming from 110 (degrees) WL orbital location. We have an
authorization from the FCC to operate that satellite over certain frequencies at
that location, and we recently received special temporary authorization to
operate the satellite over additional frequencies and at the 119.35 (degrees) WL
orbital location (instead of the authorized 119.2 (degrees) WL location). Our
current plan is to transition some of the programming now on EchoStar I and II
to EchoStar IV, which can provide service to Alaska and Hawaii from that orbital
location. In connection with that plan, we have also petitioned the FCC to
confirm that we have met our due diligence obligations for the 148 (degrees) WL
orbital location, or alternatively to extend our milestone for that location.
The State of Hawaii has opposed that request and there is no assurance that it
will be granted by the FCC.
IN-ORBIT AUTHORIZATIONS
The telemetry, tracking and control operations of EchoStar I are in an
area of the frequency spectrum called the "C-band." Although the FCC granted us
conditional authority to use these frequencies for telemetry, tracking and
control, in January 1996 a foreign government raised an objection to EchoStar
I's use of these frequencies. We cannot be certain whether that objection will
subsequently require us to relinquish the use of such C-band frequencies for
telemetry, tracking and control purposes. Further, EchoStar II's telemetry,
tracking and control operations are in the "extended" C-band. Our authorization
to use these frequencies expired on January 1, 1999. Although we have timely
applied for extension of that authorization to November 2006, we cannot be sure
that the FCC will grant our request. If we lose the ability to use these
frequencies for controlling either satellite, we would lose the satellite.
Recently, the FCC released a notice of proposed rulemaking that may prohibit
future satellite operations in the "extended" C-band frequencies. The FCC also
is no longer accepting earth station applications in that band. These recent
developments might have negative implications for us.
INTERNATIONAL TELECOMMUNICATION UNION STANDARDS
Our DBS system also must conform to the ITU broadcasting satellite
service plan. If any of our operations are not consistent with this plan, the
ITU will only provide authorization on a non-interference basis pending
successful modification of the plan or the agreement of all affected
administrations to the non-conforming operations. Accordingly, unless and until
the ITU modifies its broadcasting satellite service plan to include the
technical
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parameters of DBS applicants' operations, our satellites, along with those of
other DBS operators, must not cause harmful electrical interference to other
assignments that are in conformance with the plan. Further, DBS satellites are
not presently entitled to any protection from other satellites that are in
conformance with the plan. We believe the United States government has filed
modification requests with the ITU for EchoStar I, II and III. The ITU has
requested certain technical information in order to process the requested
modifications. We have cooperated, and continue to cooperate, with the FCC in
the preparation of its responses to the ITU requests. We cannot predict when the
ITU will act upon these requests for modification or if they will be granted.
AUTHORIZATIONS AND FREQUENCIES THAT WE COULD LOSE
We also have conditional authorizations for several other DBS and fixed
service satellites that are not operational. One permit for 10 unspecified
western frequencies was set to expire on August 15, 1995. Although we filed a
timely extension request, the FCC has deferred a decision on that request
pending the FCC's analysis of our due diligence for that permit. The FCC has not
yet assigned the frequencies related to that permit because in 1992 it held that
we had not completed contracting for these western assignments - the first prong
of the required diligence - and asked us to submit amended contract
documentation. Although we submitted such documentation, the FCC has not yet
ruled on this matter, and we cannot be sure that the FCC will rule in our favor.
We also have a conditional permit for one frequency at the 110
(degrees) WL orbital location and a total of 11 western frequencies at the 175
(degrees) WL orbital location that expired on August 15, 1999. That expiration
date is pursuant to an extension granted by the FCC's International Bureau in
1996. That extension was subject to the condition that we make significant
progress toward construction and operation of a DBS system substantially in
compliance with, or ahead of, the most recent timetable that we submitted to the
FCC. The FCC's International Bureau also urged us to expedite construction and
launch of additional satellites for our DBS system at these frequencies.
PrimeStar, a DBS provider that DirecTV acquired in 1999, filed a request with
the FCC that is still pending requesting that the FCC reverse the International
Bureau's grant of an extension.
We also have a conditional permit for 11 additional frequencies at 175
(degrees) WL, which was set to expire on November 30, 1998. That expiration date
was pursuant to an extension granted by the FCC's International Bureau in 1995.
When it granted the extension, the FCC reserved the right to cancel the permit
if we failed to progress toward operation of the DBS system in accordance with
the timetable that we submitted to the FCC. That extension also is subject to a
still pending challenge by PrimeStar.
While we have timely filed requests for extension of all the western
permits, we cannot be sure how the FCC will act with respect to these requests.
OTHER LICENSES AND CONDITIONAL AUTHORIZATIONS
We also have received licenses and conditional authorizations from the
FCC to operate satellites in the Ka-band, Ku-band and extended Ku-band
frequencies. Use of those licenses and conditional authorizations are subject to
certain due technical and due diligence requirements, including the requirement
to construct and launch additional satellites. The granting of those licenses
has been challenged by parties with interests that are adverse to ours. The
construction, completion and launch milestones for both Ku-band satellites have
expired. We have filed a timely request for the extension of these milestones
for our Ku-band system. If we successfully construct and launch Ku-band,
extended Ku-band, Ka-band and/or low earth orbit satellites, we might be able to
use those satellites to complement the DISH Network, or for a variety of other
uses. It is possible that the Ku-band and Ka-band orbital locations requested by
us and others could permit construction of satellites with sufficient power to
allow reception of satellite signals by relatively small dishes. As these
projects are in the early stages of development and are currently being
challenged by several companies with interests adverse to ours, there can be no
assurance that the FCC will sustain these licenses, or grant the pending
applications, or that we will be able to successfully capitalize on any
resulting business opportunities.
REGULATIONS
DBS Rules. Once the FCC grants a conditional construction permit, the
permittee must proceed with due diligence in constructing the system. The FCC
has adopted specific milestones that must be met in order to retain the
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permit, unless the FCC determines that an extension or waiver is appropriate.
Permittees must file semi-annual reports on the status of their due diligence
efforts. The due diligence milestones require holders of conditional permits to
complete contracting for construction of their systems within one year of grant
of the permit. Additionally, the satellites must be operational within six years
of grant. For permits issued after January 19, 1996, permittees must complete
construction of the first satellite in their system within four years of grant
of the permit. The FCC also may impose other conditions on the grant of the
permit. The holders of new DBS authorizations issued on or after January 19,
1996 must also provide DBS service to Alaska and Hawaii from at least one of
their DBS satellites or they will have to relinquish their western assignments.
We are presently not able to satisfy this requirement from 148 (degrees) WL.
Accordingly, we have requested a waiver of that requirement. The state of Hawaii
has requested many conditions to such a waiver, and we have opposed several of
these conditions. In addition, we are required to serve Alaska and Hawaii from
the 110 (degrees) WL orbital location. While we believe that our current plan,
which involves the use of our capacity at that location for local-into-local
broadcast as well as core programming, is in compliance with that requirement,
there can be no assurance that the FCC will consider this plan as complying with
the rule.
Subject to applicable regulations governing non-DBS operations, a
licensee may make unrestricted use of its assigned frequencies for non-DBS
purposes during the first five years of the ten-year license term. After the
first five years, the licensee may continue to provide non-DBS service as long
as at it dedicates at least one-half of its total capacity at a given orbital
location to providing DBS service. Further, the FCC indicated its desire to
streamline and revise its rules governing DBS satellites. We cannot be sure
about the content and effect any new DBS rules might have on our business.
Certain Other Communications Act Provisions. As a distributor of
television programming, we are also affected by numerous laws and regulations,
including the Communications Act.
The FCC imposes different rules for "subscription" and "broadcast"
services. We believe that because we offer a subscription programming service,
we are not subject to many of the regulatory obligations imposed upon broadcast
licensees. However, we cannot be certain whether the FCC will find in the future
that we should comply with regulatory obligations as a broadcast licensee with
respect to our current and future operations, and certain parties have requested
that we be treated as a broadcaster. If the FCC determined that we are a
broadcast licensee, the FCC may require us to comply with all regulatory
obligations imposed upon broadcast licensees, which are generally subject to
more burdensome regulation than subscription service providers like us.
The Communications Act, and the FCC's implementing regulations, provide
that when subsidiaries of a holding company hold certain types of FCC licenses,
foreign nationals or their representatives may not own or vote more than 25% of
the total equity of the holding company, except upon an FCC public interest
determination. Although the FCC's International Bureau has ruled that these
limitations do not apply to providers of subscription DBS service like us, the
ruling is under challenge. Furthermore, the limitations will apply to our
licenses for fixed satellite service if we hold ourselves out as a common
carrier or if the FCC decides to treat us as a common carrier. The FCC has noted
that we have proposed to operate one of our authorized fixed satellite service
systems on a common carrier as well as a non-common carrier basis. We have
recently informed the FCC that we have no common carrier plans with respect to
that system.
Currently, a subsidiary of News Corporation, an Australian corporation,
owns approximately 7% of our total outstanding class A common stock or 1% of our
total voting power. This ownership has increased the possibility that foreign
ownership of our stock may exceed the foreign ownership limitations, if they
apply. In connection with the MCI WorldCom authorization that we received in the
110 acquisition, the FCC has decided to waive any foreign ownership limitations
to the extent applicable. Nevertheless, we cannot foreclose the possibility
that, in light of any subsequent FCC decisions or policy changes, we may in the
future need a separate FCC determination that foreign ownership in excess of any
applicable limits is consistent with the public interest in order to avoid a
violation of the Communications Act or the FCC's rules.
If we do not comply with applicable Communications Act requirements and
FCC rules, regulations, policies, and orders, the FCC could revoke, condition,
or decline to review or decline to extend an authorization.
The Telecommunications Act of 1996. The 1996 Act clarifies that the FCC
has exclusive jurisdiction over direct-to-home satellite services. It further
clarifies that criminal penalties may be imposed for piracy of direct-to-
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home satellite services. The 1996 Act also offers DBS operators relief from
private and local government-imposed restrictions on the placement of receiving
antennas. In some instances, DBS operators have been unable to serve areas due
to laws, zoning ordinances, homeowner association rules, or restrictive property
covenants banning the installation of antennas on or near homes. During 1996,
the FCC announced rules designed to implement Congress' intent. The FCC's rules
prohibit most organizations from imposing restrictions on the installation of
antennas, including DBS satellite dishes smaller than one meter, on or near
homes, unless the restriction is necessary for safety or preservation of a
recognized historic district. Local governments and associations can apply to
the FCC for a waiver of this rule based on local concerns of a highly
specialized or unusual nature. In November 1998, the FCC extended these rules to
allow renters to install antennas within their leaseholds, such as homes,
gardens, patios, terraces and balconies. The FCC declined to extend the rules to
permit the installation of antennas on common property or on property to which a
viewer was not permitted access, such as the locked roof of an apartment
building. Several groups have filed appeals against the November order. The 1996
Act also pre-empted local governments from imposing taxes or fees on
direct-to-home satellite services, including DBS. Finally, the 1996 Act required
that multi-channel video programming distributors, including DBS operators,
fully scramble or block channels providing indecent or sexually explicit adult
programming. If a multi-channel video programming distributor cannot fully
scramble or block such programming, it must restrict transmission to those hours
of the day when minors are unlikely to view the programming.
The Cable Act. In addition to regulating pricing practices and
competition within the franchise cable television industry, the Cable Act was
intended to establish and support existing and new multi-channel video service
providers, such as wireless cable and DBS. We have benefited from the
programming access provisions of the Cable Act and implementing rules, in that
we have been able to gain access to previously unavailable programming services
and, in some circumstances, have obtained certain programming services at
reduced cost. Our business and future results of operations could suffer if the
Cable Act or any of the related rules are amended, or interpreted differently in
the future. For example, if cable companies, or any affiliated entities, could
discriminate against competitors like us with regard to programming access, or
the terms on which such programming was available, our ability to acquire
programming on a cost-effective basis would be impaired. Certain of the
restrictions on cable-affiliated programmers will expire in 2002 unless the FCC
extends such restrictions.
Any change in the Cable Act and the FCC's rules that permit the cable
industry or cable-affiliated programmers to discriminate against competing
businesses, such as ours, in the sale of programming could adversely affect our
ability to acquire programming at all or to acquire programming on a
cost-effective basis. Under the Cable Act and the FCC's rules, cable-affiliated
programmers generally must offer programming they have developed to all
multi-channel video programming distributors on non-discriminatory terms and
conditions. The Cable Act and the FCC's rules also prohibit some types of
exclusive programming contracts. We purchase a substantial percentage of our
programming from cable-affiliated programmers. Some of these restrictions on
cable-affiliated programmers will expire in 2002 unless the FCC extends the
rules. While we have filed several complaints with the FCC alleging
discrimination, exclusivity, or refusals to deal, we have had limited success in
convincing the FCC to grant us relief. The FCC has denied or dismissed many of
our complaints, and we believe has generally not shown a willingness to enforce
the program access rules stringently. As a result, we may be limited in our
ability to obtain access (or non-discriminatory access) to cable-affiliated
programming. In addition, the FCC recently modified certain of its attribution
rules that determine whether a programmer is affiliated with a cable operator
and therefore subject to the program access obligations. We do not yet know the
implications or impact of these modified rules.
We cannot be certain whether or not cable or other TV service providers
would seek to acquire sports franchises or other popular programming and
distribute exclusively the corresponding programming, which could possibly limit
our access to such popular programming. For example, during May 1998, we filed a
complaint against Comcast, a major cable provider, seeking access to the sports
programming controlled by Comcast in the Philadelphia area. In January 1999, the
FCC denied this complaint, partly on the basis that Comcast's programming is
delivered terrestrially and therefore is not subject to program access
prohibitions. We cannot be certain whether or not other TV service providers who
control production or distribution of their own programming would switch to
terrestrial transmission of their programming and seek to rely on the FCC's
denial of our complaint against Comcast in order to deny us access to their
programming.
Under a requirement of the Cable Act, the FCC recently imposed public
interest requirements on DBS licensees, such as us, to set aside four percent of
channel capacity exclusively for noncommercial programming for
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<PAGE> 18
which we must charge programmers below-cost rates and for which we may not
impose additional charges on subscribers. This could also displace programming
for which we could earn commercial rates and could adversely affect our
financial results. In addition, the American Distance Education Consortium, or
ADEC, recently filed an informal complaint claiming that our requested rates for
carrying non-commercial programming are higher than allowed by the rules, and
filed a petition asking the FCC to declare that we may not use our EchoStar III
satellite at the 61.5 (degrees) WL orbital location to carry ADEC's programming,
but must instead use one of our satellites at the 119 (degrees) WL orbital
location. The FCC released its Order in that proceeding on November 24, 1999.
The FCC ruled that we may not use only EchoStar III at the 61.5 (degrees) WL
orbital location for all of the public interest programming that we must carry.
Rather, we must, at a minimum, reserve 4% of our channels at each of our orbital
locations capable of transmitting programming to the entire continental United
States, exclusively for public interest programming. The FCC also deferred
decision on the reasonableness of our proposed fees pending additional
submissions by the parties, which have been made, and ruled that we have the
right to use a third party to aid in the administration of our set-aside
obligation. The FCC's determinations may further restrict our flexibility and
require us to devote additional capacity for public interest programming from
our orbital locations capable of transmitting programming to the entire
continental United States. In addition, the FCC, on December 17, 1999, denied
our request for waiver of the public interest rules to extend the December 15,
1999 deadline by which we had to reserve capacity for noncommercial programming.
While the FCC ruled that it would not initiate enforcement proceedings for
violation of the requirement for the period December 16, 1999 to January 7,
2000, it also stated that it would investigate and possibly initiate enforcement
proceedings for violations occurring on December 15, 1999 or after January 7,
2000. The FCC referred the matter to the Enforcement Division, which
subsequently sent us a letter requesting additional information. We have
submitted that information and believe we have shown that, while we were not in
full compliance with the set-aside requirement on December 15, 1999, we brought
our system into compliance with the rules by January 7, 2000. The Enforcement
Division has sent a second letter requesting additional information. There can
be no assurance that the Enforcement Division will, agree with that view, or
that it will not commence enforcement proceedings.
The FCC has commenced a rulemaking which seeks to streamline and revise
its rules governing DBS operators. This rulemaking concerns many new possible
DBS rules. There can be no assurance about the content and effect of any new DBS
rules passed by the FCC.
Certain Other Rulemakings. The FCC recently proposed to allocate
additional "expansion" spectrum for DBS operators starting in 2007. DirecTV has
filed an application for a satellite system using those expansion frequencies.
Foreign satellite systems also are potential providers of DBS service
within the United States. In May 1996, in its DISCO II proceeding, the FCC
proposed permitting foreign satellite systems to serve the United States if the
home country of the foreign-licensed satellite offers open "effective
competitive opportunities" in the same type of satellite service to United
States licensed satellites. In the February 1997 World Trade Organization
Agreement, the United States offer contained an exemption from market opening
commitments for, among other things, DBS and direct-to-home satellite services.
In November 1997, the FCC released new rules that maintained the effective
competitive opportunities test with respect to foreign-licensed satellites
seeking to provide DBS and direct-to-home satellite services in the United
States. The FCC also established a strong presumption in favor of authorizing
foreign-licensed satellites to provide services other than DBS and
direct-to-home satellite in the United States. The FCC has also reached
bilateral protocols allowing the provision of DBS service by satellites licensed
by Mexico and Argentina.
The FCC has proposed allowing non-geostationary orbit fixed satellite
services to operate on a co-primary basis in the same frequency as DBS and
Ku-based FSS services. If the proposal is adopted, these satellite operations
could provide global high-speed data services. This would, among other things,
create additional competition for satellite and other services. The FCC has also
requested comment on a request that would allow a terrestrial service proposed
by Northpoint Communications, Inc. to retransmit local television or other video
and data services to DBS subscribers or others in the same DBS spectrum that we
use throughout the United States. Northpoint has been allowed by the FCC to
conduct experimental operations in Texas and Washington, D.C. The FCC recently
also allowed DirecTV and us to conduct our own experimental tests for
interference. Furthermore, the Satellite Home Viewer Improvement Act, as adopted
during 1999, requires the FCC to make a determination regarding licenses for
facilities that will broadcast signals to underserved markets by using spectrum
otherwise allocated to commercial use,
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possibly including our DBS spectrum. If Northpoint or other entities become
authorized to use our spectrum, they could cause harmful and substantial
interference into our service.
Distant and Local Broadcast Signals. We believe that our ability to
deliver local programming via satellite into the markets from which the
programming originates helps us attract subscribers who would not otherwise be
willing to purchase satellite systems. Although we have commenced providing
local network service to eligible subscribers in various metropolitan centers,
subject to certain conditions, our ability to provide such a service is limited
as detailed below.
Satellite Home Viewer Act and Retransmission Consent. In order to
retransmit network station programming, satellite companies, including us, must
have a copyright license and must obtain the retransmission consent of the
station concerned, subject to certain exceptions. Through our agreement with
News Corporation, we received the right to retransmit programming from local FOX
Network-owned and operated stations. While we have obtained retransmission
consents from certain network stations, we have not been successful in obtaining
all requested retransmission consents.
The Copyright Act, as amended by the Satellite Home Viewer Improvement
Act of 1999, permits satellite retransmission of distant network channels only
to "unserved households." Whether a household qualifies as "unserved" for the
purpose of eligibility to receive a distant network channel depends, in part, on
whether that household can receive a signal of "Grade B intensity" as defined by
the FCC. In February 1999, the FCC released a report and order on these matters.
Although the FCC declined to change the values of Grade B intensity, it adopted
a method for measuring it at particular households. The FCC recently denied in
part and granted in part our petition for reconsideration, allowing us some
additional flexibility in the method for measuring Grade B intensity but denying
our requests on other matters. We cannot be sure whether these methods are
favorable to us or what weight, if any, the courts will give to the FCC's
decision. In addition, the Satellite Home Viewer Improvement Act of 1999 could
adversely affect us in several respects. The legislation prohibits us from
carrying more than two distant signals for each broadcasting network and leaves
the FCC's Grade B intensity standard unchanged without future legislation. While
the Satellite Home Viewer Improvement Act of 1999 reduces the royalty rate that
we currently pay for superstation and distant network signals, it directs the
FCC to require us to delete substantial programming, including sports
programming, from these signals. These requirements may significantly hamper our
ability to retransmit distant network and superstation signals.
For existing customers, the Satellite Home Viewer Improvement Act of
1999 also permits hundreds of thousands of consumers to continue to receive
distant network channels who would otherwise be required to be disconnected. The
new law generally does not, however, permit consumers predicted to receive a
signal of "Grade A" intensity to continue receiving distant network channels. As
a result, we believe hundreds of thousands of consumers have or could lose
access to distant network channels by satellite. In anticipation of passage of
the legislation, and for other reasons, we have ceased providing distant network
channels to tens of thousands of customers. These turnoffs, together with others
in the future, could result in a temporary material increase in subscriber
turnover and a small reduction in revenue per subscriber. Further, broadcasters
could seek a permanent injunction on our sales of local and distant network
channels, which would have a material adverse effect on our subscriber turnover,
revenue, ability to attract new subscribers, and our business operations
generally. The law also instructs the FCC to enact rules that would require us
to delete substantial programming from distant signals, including sports
programming.
We currently offer programming broadcast by local affiliates of
national television networks to over 20 major population centers in the
continental United States. Although we believe that the Satellite Home Viewer
Act of 1994 permitted us to retransmit the programming of a local network
station back to its local market by satellite, several other parties oppose that
view. The Satellite Home Viewer Improvement Act of 1999 generally gives
satellite companies a statutory copyright license to retransmit local-into-local
network programming subject to obtaining the retransmission consent of the local
network station. If the retransmission consent is not obtained from a particular
local network station on or before May 29, 2000 (the six-month anniversary of
the act), we are required to cease transmission of that station's signals. We
have entered into a limited number of retransmission consent agreements and are
negotiating additional agreements. We cannot be certain, however, whether we
will obtain retransmission consents to the extent they are required from the
three major networks other than Fox's owned and operated stations or any local
affiliate or that we will receive as many consents as our DBS competitor,
DirecTV. If we fail to receive
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such consents on or before May 29, 2000, we may have to turn off some viewers
access to local network stations which could have an adverse effect on our
strategy to compete with cable companies, which provide local programming. While
the legislation directs the FCC to impose certain restrictions on the
broadcasters' flexibility in retransmission consent negotiations, these
restrictions are very limited and could be of little practical benefit to us,
particularly since the FCC is not required to implement rules in this regard for
one year from the passage of the legislation. Consequently, our efforts to
retransmit local channels by satellite could be substantially blocked by the
legislation.
In sum, the compulsory copyright license under the Satellite Home
Viewer Improvement Act of 1999 and the retransmission consent rules of the
Communications Act of 1934, as amended, may not be sufficient to permit us to
implement our strategy to retransmit that programming in the most efficient and
comprehensive manner.
Many other provisions of the Satellite Home Viewer Improvement Act of
1999 could adversely affect us. Among other things, the law includes the
imposition of "must carry" requirements on DBS providers. The must carry rules
generally would require that commencing in January 2002 satellite distributors
carry all the local broadcast stations in areas they serve, not just the four
major networks. Since we have limited capacity, the number of markets in which
we can offer local programming would be reduced by the must carry requirement to
carry large numbers of stations in each market we serve. The legislation also
includes provisions which could expose us to material monetary penalties, and
permanent prohibitions on the sale of all local and distant network channels,
based on what could be considered even inadvertent violations of the
legislation, prior law, or the FCC rules. Imposition of these penalties would
have a material adverse effect on our subscriber turnover, revenue, ability to
attract new subscribers, and our business operations generally.
Consistent with the requirements of the Satellite Home Viewer
Improvement Act of 1999, the FCC has commenced rulemakings on, among other
things, the requirement that broadcasters negotiate in good faith in
retransmission consent negotiations, the requirements for satellite carriers to
delete programming from certain broadcast signals, and the predictive model for
determining whether a household is unserved. Several parties have opposed our
position in these proceedings. For instance the National Association of
Broadcasters and certain members Congress, as well as others, have made
submissions to the FCC requesting lenient treatment of broadcasters under the
good faith requirements. We cannot be sure that the FCC will not agree to these
requests or that these proceedings will result in rules that are favorable to
us.
Opposition to our Delivery of Distant Signals. During 1998, the
national networks and local affiliate stations challenged, based upon copyright
infringement, PrimeTime 24's methods of selling network programming to
consumers. Historically, we obtained distant broadcast network channels for
distribution to our customers through PrimeTime 24. The United States District
Court for the Southern District of Florida entered a nationwide permanent
injunction preventing PrimeTime 24 from selling its programming to consumers
unless the programming was sold in accordance with certain stipulations in the
injunction. The injunction covers distributors as well. The plaintiffs in the
Florida litigation informed us that they considered us a distributor for
purposes of that injunction. A federal district court in North Carolina also
issued an injunction against PrimeTime 24 prohibiting certain distant signal
retransmissions in the Raleigh area. The Fourth Circuit Court of Appeals
recently affirmed the North Carolina Court's decision. 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 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.
In February 1999, CBS, NBC, Fox and ABC filed a "Motion for Temporary
Restraining Order, Preliminary Injunction and Contempt Finding" against DirecTV
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
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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.
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. In general, the networks want us to
turn off programming to our customers on the same schedule agreed to by DirecTV.
A preliminary injunction hearing was held during September 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.
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 new legislation discussed above, among
other things, could also require 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 soon
and have already terminated ABC, NBC, CBS and Fox programming to many customers.
PATENTS AND TRADEMARKS
Many entities, including some of our competitors, now have and may in
the future obtain patents and other intellectual property rights that cover or
affect products or services directly or indirectly related to those that we
offer. In general, if a court determines that one or more of our products
infringes on intellectual property held by others, we would be required to cease
developing or marketing those products, to obtain licenses to develop and market
those products from the holders of the intellectual property, or to redesign
those products in such a way as to avoid infringing the patent claims. If a
competitor holds intellectual property rights, the entity might be predisposed
to exercise its right to prohibit our use of its intellectual property in our
products and services at any price, thus impacting our competitive position.
We cannot assure you that we are aware of all patents and other
intellectual property rights that our products may potentially infringe. In
addition, patent applications in the United States are confidential until the
Patent and Trademark Office issues a patent and, accordingly, we cannot evaluate
the extent to which our products may infringe claims contained in pending patent
applications. Further, it is often not possible to determine definitively
whether a claim of infringement is valid, absent protracted litigation.
We cannot estimate the extent to which we may be required in the future
to obtain licenses with respect to patents held by others and the availability
and cost of any such licenses. Those costs, and their impact on net income,
could be material. Damages in patent infringement cases can also include a
tripling of actual damages in certain cases. To the extent that we are required
to pay royalties to third parties to whom we are not currently making payments,
these increased costs of doing business could negatively affect our liquidity
and operating results. Various parties have asserted patent and other
intellectual property rights with respect to components within our direct
broadcast satellite system. We cannot be certain that these persons do not own
the rights they claim, that our products do not infringe on these rights, that
we would be able to obtain licenses from these persons on commercially
reasonable terms or, if we were unable to obtain such licenses, that we would be
able to redesign our products to avoid infringement.
EMPLOYEES
We had 6,048 employees at December 31, 1999, of which 5,902 worked in
our domestic operations and 146 worked in our international operations. We are
not a party to any collective bargaining agreement and generally consider
relations with our employees to be good.
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EXECUTIVE OFFICERS OF THE REGISTRANT
(FURNISHED IN ACCORDANCE WITH ITEM 401(b) OF REGULATION S-K, PURSUANT TO
GENERAL INSTRUCTION G(3) OF FORM 10-K)
The following table sets forth the name, age and offices with EchoStar
of each of our executive officers, the period during which each executive
officer has served as such, and each executive officer's business experience
during the past five years:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------ ------ ------------------------------------------------------
<S> <C> <C>
Charles W. Ergen ............. 47 Chairman, Chief Executive Officer and President
James DeFranco ............... 47 Executive Vice President and Director
Michael T. Dugan ............. 51 President, EchoStar Technologies Corporation
Steven B. Schaver ............ 46 Chief Operating and Financial Officer
David K. Moskowitz ........... 41 Senior Vice President, General Counsel, Secretary and
Director
Mark W. Jackson .............. 39 Senior Vice President, Satellite Services
Soraya Hesabi-Cartwright ..... 39 Senior Vice President, Human Resources and
Customer Service
Purvish C. Kothari ........... 39 Senior Vice President and Chief Information Officer
</TABLE>
Charles W. Ergen. Mr. Ergen has been Chairman of the Board of
Directors, President and Chief Executive Officer of EchoStar since its formation
and, during the past five years, has held various executive officer positions
with EchoStar's subsidiaries. Mr. Ergen, along with his spouse and James
DeFranco, was a co-founder of EchoStar in 1980.
James DeFranco. Mr. DeFranco, currently the Executive Vice President of
EchoStar, has been a Vice President and a Director of EchoStar since its
formation and, during the past five years, has held various executive officer
positions with EchoStar's subsidiaries. Mr. DeFranco, along with Mr. Ergen and
Mr. Ergen's spouse, was a co-founder of EchoStar in 1980.
Michael T. Dugan. Mr. Dugan is the President of EchoStar Technologies
Corporation (formerly Houston Tracker Systems, Inc). In that capacity, Mr. Dugan
is responsible for, among other things, all engineering operations at EchoStar.
Previously he was the Senior Vice President of the Consumer Products Division of
EchoStar. Mr. Dugan has been with EchoStar since 1990.
Steven B. Schaver. Mr. Schaver was named EchoStar's Chief Financial
Officer in February 1996. In November 1996, Mr. Schaver also was named Chief
Operating Officer. From November 1993 to February 1996, Mr. Schaver was the Vice
President of EchoStar's European and African operations.
David K. Moskowitz. Mr. Moskowitz is the Senior Vice President,
Secretary and General Counsel of EchoStar. Mr. Moskowitz joined EchoStar in
March 1990. He was elected to our Board of Directors during 1998. Mr. Moskowitz
is responsible for all legal affairs and certain business functions for EchoStar
and its subsidiaries.
Mark W. Jackson. Mr. Jackson was named Senior Vice President, Satellite
Services, in December 1997. From April 1993 until December 1997 Mr. Jackson
served as Vice President, Engineering at EchoStar.
Soraya Hesabi-Cartwright. Ms. Hesabi-Cartwright was named Senior Vice
President, Human Resources and Customer Service in November 1998. Ms.
Hesabi-Cartwright joined EchoStar in 1994 as Director of Human Resources and was
promoted to Vice President of Human Resources in 1996. During 1996, Ms.
Hesabi-Cartwright transferred to EchoStar's Customer Service Center as Vice
President of Customer Service, where she served until her promotion in 1998.
Purvish C Kothari. Mr. Kothari joined EchoStar in March 1999 as Senior
Vice President and Chief Information Officer. Mr. Kothari oversees the
enterprise technology applications for EchoStar. From 1998 until he joined
EchoStar in 1999, Mr. Kothari was Vice President of Information Systems at
Tricon Global Restaurants where his primary duties included providing
technological leadership for developing and implementing integrated Information
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System initiatives for Tricon Next Generation Systems. From 1997 to 1998, Mr.
Kothari was Vice President of Operations Information Systems and Strategy at
Coors Brewing Company. His primary duties included overall management of
business application systems, manufacturing support systems, strategic
initiatives and other areas. From 1996 to 1997, Mr. Kothari served as Vice
President of New Products/New Ventures, Engineering Systems and Quality at
Teledyne Water Pik, where his duties included profit and loss responsibility for
directing and planning of new products as well as the quality and engineering
initiatives for the organization. Prior to joining Teledyne Water Pik Mr.
Kothari served as Vice President of Quality and Education at US West Marketing
Resource Group. Mr. Kothari's primary responsibilities included increasing
quality, customer satisfaction and shareholder value.
There are no family relationships among the executive officers and
directors of EchoStar or arrangements or understandings between any executive
officer and any other person pursuant to which any executive officer was
selected as such. Pursuant to the Bylaws of EchoStar, executive officers serve
at the discretion of the Board of Directors.
ITEM 2. PROPERTIES
The following table sets forth certain information concerning our
material properties:
<TABLE>
<CAPTION>
SEGMENT(S) USING APPROXIMATE
DESCRIPTION/USE/LOCATION PROPERTY SQUARE FOOTAGE OWNED OR LEASED
- ------------------------------------------------------- -------------------- ------------------- -------------------
<S> <C> <C> <C>
Corporate headquarters and customer service
center, Littleton, Colorado ........................ All 156,000 Owned
EchoStar Technologies Corporation office and
distribution center, Englewood, Colorado ........... ETC 155,000 Owned
Warehouse and distribution center, Denver,
Colorado ........................................... ETC 132,800 Leased
Customer service center, El Paso, Texas ............... Dish Network 100,000 Leased
Customer service center, McKeesport,
Pennsylvania ....................................... Dish Network 100,000 Leased
Digital broadcast operations center, Gilbert, AZ ...... Dish Network and
Satellite Services 120,000 Owned
Office and distribution center, Sacramento,
California ......................................... ETC 78,500 Owned
Digital broadcast operations center, Cheyenne, Dish Network and
Wyoming ............................................ Satellite Services 55,000 Owned
Customer service center, Thornton, Colorado ........... Dish Network 55,000 Owned
European headquarters and warehouse, Almelo,
The Netherlands .................................... ETC and Other 53,800 Owned
</TABLE>
ITEM 3. LEGAL PROCEEDINGS
DirecTV
During February 2000 EchoStar filed suit against DirecTV and Thomson
Consumer Electronics/RCA in the Federal District Court of Colorado. The suit
alleges that DirecTV has utilized improper conduct in order to fend off
competition from the DISH Network. According to the complaint, DirecTV has
demanded that certain retailers stop displaying EchoStar merchandise and has
threatened to cause economic damage to retailers if they continued to offer both
product lines in head-to-head competition. The suit alleges that DirecTV has
acted in violation of federal and state anti-trust laws in order to protect
DirecTV's market share. EchoStar is seeking injunctive relief and monetary
damages. It is too early in the litigation to make an assessment of the probable
outcome.
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The News Corporation Limited
During February 1997, News Corporation agreed to acquire approximately
50% of our outstanding capital stock. During late April 1997, substantial
disagreements arose between the parties regarding their obligations under this
agreement. Those substantial disagreements led to litigation which the parties
subsequently settled. In connection with the News Corporation litigation, we
have a contingent fee arrangement with the attorneys who represented us in that
litigation, which provides for the attorneys to be paid a percentage of any net
recovery obtained 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. We also believe that the fee
arrangement is void and unenforceable because the attorneys who represented us
are seeking a fee that we believe is unreasonable and excessive, among other
things. If we are unable to resolve this fee dispute with the attorneys, it
would be resolved through arbitration or litigation. During mid-1999, we
initiated litigation against the attorneys in the District Court, Arapahoe
County, Colorado, arguing that the fee arrangement is void and unenforceable. We
have also asserted claims for breach of fiduciary duty, constructive fraud,
breach of the fee arrangement, and misappropriation of trade secrets against the
attorneys. In December 1999, the attorneys initiated an arbitration proceeding
before the American Arbitration Association. 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 court action recently denied our Motion
to Dismiss. 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 court 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
Under the Satellite Home Viewer Act, the determination of whether a
household qualifies as "unserved" for the purpose of eligibility to receive a
distant network channel depends, in part, on whether that household can receive
a signal of "Grade B intensity" as defined by the FCC.
During 1998, the national networks and local affiliate stations
challenged, based upon copyright infringement, PrimeTime 24's methods of selling
network programming to consumers. Historically, we obtained
22
<PAGE> 25
distant broadcast network signals for distribution to our customers through
PrimeTime 24. The United States District Court for the Southern District of
Florida entered a nationwide permanent injunction preventing PrimeTime 24 from
selling its programming to consumers unless the programming was sold in
accordance with certain stipulations in the injunction. The injunction covers
distributors as well. The plaintiffs in the Florida litigation informed us they
considered us a distributor for purposes of that injunction. A federal district
court in North Carolina also issued an injunction against PrimeTime 24
prohibiting certain distant signal retransmissions in the Raleigh area. The
Fourth Circuit Court of Appeals recently affirmed the North Carolina Court's
decision. 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 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.
In February 1999, CBS, NBC, Fox and ABC filed a "Motion for Temporary
Restraining Order, Preliminary Injunction and Contempt Finding" against DirecTV
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.
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. In general, the networks want us to
turn off programming to our customers on the same schedule agreed to by DirecTV.
A preliminary injunction hearing was held during September 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 on
the networks' preliminary injunction motion.
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 new legislation discussed above, among
other things, could also require 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 soon
and have terminated ABC, NBC, CBS and Fox programming to many customers.
In November 1999, Congress passed new legislation regarding the
satellite delivery of network programming and it was signed into law by
President Clinton. This new law has the potential of reducing the number of
customers whose network channels EchoStar may otherwise be required to terminate
as the law "grandfathers" in many subscribers.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No items were submitted to a vote of security holders during the fourth
quarter of 1999.
23
<PAGE> 26
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our Class A common stock is quoted on the Nasdaq Stock Market under the
symbol "DISH." The high and low closing sale prices of the Class A common stock
during 1998 and 1999 on the Nasdaq Stock Market (as reported by Nasdaq) are set
forth below:
<TABLE>
<CAPTION>
1998 High Low
- ---- -------- --------
<S> <C> <C>
First Quarter .......................... 5 25/32 4 5/32
Second Quarter ......................... 7 3/4 5 5/8
Third Quarter .......................... 7 13/32 4 13/32
Fourth Quarter ......................... 12 3/32 5 1/16
<CAPTION>
1999 High Low
- ---- -------- --------
<S> <C> <C>
First Quarter .......................... 20 13/32 11 1/2
Second Quarter ......................... 39 35/64 20 1/8
Third Quarter .......................... 48 1/2 28 3/8
Fourth Quarter ......................... 97 1/2 44 31/32
</TABLE>
As of March 7, 2000, there were approximately 4,000 holders of record
of our Class A common stock, not including stockholders who beneficially own
Class A common stock held in nominee or street name. As of March 7, 2000, all
119,217,604 outstanding shares of our Class B common stock were held by Charles
W. Ergen, our Chief Executive Officer. There is currently no trading market for
our Class B common stock.
We have never declared or paid any cash dividends on any class of our
common stock and do not expect to declare dividends on our common stock in the
foreseeable future. Payment of any future dividends will depend upon our
earnings and capital requirements, restrictions in our debt facilities, and
other factors the Board of Directors considers appropriate. We currently intend
to retain our earnings, if any, to support future growth and expansion. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources."
24
<PAGE> 27
ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated financial data as of and for each of the five
years ended December 31, 1999 have been derived from, and are qualified by
reference to our Consolidated Financial Statements which have been audited by
Arthur Andersen LLP, independent public accountants. This data should be read in
conjunction with our Consolidated Financial Statements and related Notes thereto
for the three years ended December 31, 1999, and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" included elsewhere in
this report.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------------
1995 1996 1997 1998 1999
------------ ------------ ------------ ------------ ------------
(IN THOUSANDS, EXCEPT SUBSCRIBERS AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA
REVENUE:
DISH Network ................................... $ -- $ 60,132 $ 344,250 $ 683,032 $ 1,352,603
DTH equipment sales and integration
services ....................................... 35,816 78,062 91,637 256,193 184,041
Satellite services ............................. -- 5,822 11,135 22,366 41,071
C-band and other ............................... 112,704 54,885 30,396 21,075 25,126
------------ ------------ ------------ ------------ ------------
Total revenue .................................... 148,520 198,901 477,418 982,666 1,602,841
COSTS AND EXPENSES:
DISH Network operating expenses ................ -- 42,456 193,274 395,411 739,310
Cost of sales - DTH equipment and
integration services ......................... 30,404 76,384 61,992 173,388 148,427
Cost of sales - C-band and other ............... 84,846 42,349 23,909 16,496 17,084
Marketing expenses ............................. 1,786 51,520 179,923 320,521 727,061
General and administrative ..................... 36,397 52,123 69,315 97,105 204,822
Depreciation and amortization .................. 3,114 43,414 173,276 102,636 113,228
------------ ------------ ------------ ------------ ------------
Total costs and expenses ......................... 156,547 308,246 701,689 1,105,557 1,949,932
------------ ------------ ------------ ------------ ------------
Operating income (loss) .......................... (8,027) (109,345) (224,271) (122,891) (347,091)
Extraordinary charge for early
retirement of debt, net of tax ............... -- -- -- -- (268,999)
============ ============ ============ ============ ============
Net income (loss) ................................ $ (11,486) $ (100,986) $ (312,825) $ (260,882) $ (792,847)
============ ============ ============ ============ ============
Net loss attributable to common shares ........... $ (12,690) $ (102,190) $ (321,267) $ (296,097) $ (800,100)
============ ============ ============ ============ ============
Weighted-average common shares outstanding ....... 142,248 162,192 167,672 179,928 208,238
============ ============ ============ ============ ============
Basic and diluted loss per share (1) ............. $ (0.09) $ (0.63) $ (1.92) $ (1.65) $ (3.84)
============ ============ ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
----------------------------------------------------------------------------
1995 1996 1997 1998 1999
----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE SHEETS DATA
Cash, cash equivalents and
marketable investment securities .......... $ 37,424 $ 58,038 $ 420,514 $ 324,100 $ 1,254,175
Restricted cash and marketable
investment securities ..................... 99,691 79,291 187,762 77,657 3,000
Total assets ................................ 623,091 1,141,380 1,805,646 1,806,852 3,898,189
Long-term obligations (less current
portion):
1994 Notes ................................ 382,218 437,127 499,863 571,674 1,503
1996 Notes ................................ -- 386,165 438,512 497,955 1,097
1997 Notes ................................ -- -- 375,000 375,000 15
9 1/4% Senior Notes due 2006 .............. -- -- -- -- 375,000
9 3/8% Senior Notes due 2009 .............. -- -- -- -- 1,625,000
4 7/8% Convertible Notes due 2007 ......... -- -- -- -- 1,000,000
Mortgages and other notes
payable, net of current portion ......... 33,444 51,428 51,846 43,450 27,990
Series B Preferred Stock .................... -- -- 199,164 226,038 --
Total stockholders' equity (deficit) ........ 156,686 61,197 (88,961) (371,540) (48,418)
</TABLE>
25
<PAGE> 28
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------
1995 1996 1997 1998 1999
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
OTHER DATA
DISH Network subscribers ........................ -- 350,000 1,040,000 1,940,000 3,410,000
Average monthly revenue per subscriber .......... $ -- $ 35.50 $ 38.50 $ 39.25 $ 43.63
EBITDA(2) ....................................... (4,913) (65,931) (50,995) (20,255) (172,953)
Less amortization of subscriber
acquisition costs ............................. -- (16,073) (121,735) (18,869) --
----------- ----------- ----------- ----------- -----------
EBITDA, as adjusted to exclude
amortization of subscriber acquisition
costs ......................................... (4,913) (82,004) (172,730) (39,124) (172,953)
Net cash flows from:
Operating activities .......................... (20,328) (27,425) 43 (16,890) (58,513)
Investing activities .......................... (38,119) (287,642) (597,249) (8,048) (62,826)
Financing activities .......................... 62,695 332,544 703,182 (13,722) 920,091
</TABLE>
- ----------------------
(1) The earnings (loss) per share amounts prior to 1997 have been restated
as required to comply with Statement of Financial Accounting Standards
("FAS") No. 128, "Earnings Per Share." For further discussion of
earnings (loss) per share and the impact of FAS No. 128, see Note 2 to
our Consolidated Financial Statements.
The loss per share amount in 1999 of $(3.84) includes $(2.55) per share
relating to basic and diluted loss per share before extraordinary
charges and $(1.29) per share relating to the extraordinary charge for
early retirement of debt, net of tax.
(2) We believe it is common practice in the telecommunications industry for
investment bankers and others to use various multiples of current or
projected EBITDA (earnings before interest, taxes, depreciation and
amortization) for purposes of estimating current or prospective
enterprise value and as one of many measures of operating performance.
Conceptually, EBITDA measures the amount of income generated each
period that could be used to service debt, because EBITDA is
independent of the actual leverage employed by the business; but EBITDA
ignores funds needed for capital expenditures and expansion. Some
investment analysts track the relationship of EBITDA to total debt as
one measure of financial strength. However, EBITDA does not purport to
represent cash provided or used by operating activities and should not
be considered in isolation or as a substitute for measures of
performance prepared in accordance with generally accepted accounting
principles.
EBITDA differs significantly from cash flows from operating activities
reflected in the consolidated statement of cash flows. Cash from
operating activities is net of interest and taxes paid and is a more
comprehensive determination of periodic income on a cash (vs. accrual)
basis, exclusive of non-cash items of income and expenses such as
depreciation and amortization. In contrast, EBITDA is derived from
accrual basis income and is not reduced for cash invested in working
capital. Consequently, EBITDA is not affected by the timing of
receivable collections or when accrued expenses are paid. We are not
aware of any uniform standards for determining EBITDA and believe
presentations of EBITDA may not be calculated consistently by different
entities in the same or similar businesses. EBITDA is shown before and
after amortization of subscriber acquisition costs, which were deferred
through September 1997 and amortized over one year. EBITDA for 1999
also excludes approximately $61 million in non-cash, stock-based
compensation expense resulting from significant post-grant appreciation
of stock options granted to employees.
26
<PAGE> 29
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
All statements contained herein, as well as statements made in press
releases and oral statements that may be made by us or by officers, directors or
employees acting on our behalf, that are not statements of historical fact
constitute "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Such forward-looking statements
involve known and unknown risks, uncertainties and other factors that could
cause our actual results to be materially different from historical results or
from any future results expressed or implied by such forward-looking statements.
Among the factors that could cause our actual results to differ materially are
the following: a total or partial loss of a satellite due to operational
failures, space debris or otherwise; an unsuccessful launch or deployment of our
sixth satellite, EchoStar VI; delays in the construction of our seventh, eighth
or ninth satellites; a decrease in sales of digital equipment and related
services to international direct-to-home or DTH service providers; a decrease in
DISH Network subscriber growth; an increase in subscriber turnover; an increase
in subscriber acquisition costs; impediments to the retransmission of local or
distant broadcast network signals which could result from pending litigation; 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 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
Year Ended December 31, 1999 Compared to the Year Ended December 31, 1998.
Revenue. Total revenue for the year ended December 31, 1999 was $1.603
billion, an increase of $620 million compared to total revenue for the year
ended December 31, 1998 of $983 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. As a result of our free system and free installation programs, our
ability to provide major local broadcast network signals and general economic
conditions, we expect strong sales during the first quarter of 2000.
DISH Network subscription television services revenue totaled $1.344
billion for the year ended December 31, 1999, an increase of $675 million
compared to the same period in 1998. This increase was directly attributable to
the increase in the number of DISH Network subscribers and higher average
revenue per subscriber. Average DISH Network subscribers for the year ended
December 31, 1999 increased approximately 85% compared to the same period in
1998. As December 31, 1999, we had approximately 3.4 million DISH Network
subscribers compared to 1.9 million at December 31, 1998. Monthly revenue per
subscriber more than $43 during the year ended December 31, 1999 and
approximated $39 during the same period during 1998. DISH Network subscription
television services revenue principally consists of revenue from basic, premium
and pay-per-view subscription television services. DISH Network subscription
television services 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.
For the year ended December 31, 1999, DTH equipment sales and
integration services totaled $184 million, a decrease of $72 million compared to
the same period during 1998. 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 expected
decrease in DTH equipment sales and integration services revenue was primarily
attributable to a decrease in demand combined with a decrease in the sales price
of digital set-top boxes attributable to increased competition.
27
<PAGE> 30
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. As a result, our ETC business currently is economically dependent on
these two DTH providers. Our future revenue from the sale of DTH equipment and
integration services in international markets depends largely on the success of
these DTH operators and continued demand for our digital set-top boxes. Although
there can be no assurance, we expect that our DTH equipment and integration
services revenue for the year ended December 31, 2000 will approximate DTH
equipment and integration services revenue during 1999. 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, one of the two DTH
service providers described above, has had recurrent discussions and
negotiations for a possible merger with Sogecable (Canal Plus Satellite), one of
its primary competitors. While we are not currently aware of any formal
negotiations between Telefonica and Canal Plus Satellite, there are again rumors
of a potential merger in the marketplace. Although we have binding purchase
orders from Telefonica 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 Telefonica.
Satellite services revenue totaled $41 million during 1999, an increase
of $19 million as compared to the same period during 1998. These revenues
principally include fees charged to content providers for signal carriage and
revenues earned from business television, or BTV customers. The increase in
satellite services revenue was primarily attributable to increased BTV revenue
due to the addition of new full-time BTV customers. Satellite services revenue
for the year ended December 31, 2000 is expected to increase as compared to the
year ended December 31, 1999, to the extent we are successful in increasing the
number of our BTV customers and developing and implementing new services.
In order, among other things, to prepare for a potential adverse result
in our pending litigation with the four major broadcast networks and their
affiliate groups, we have sent letters to some of our subscribers warning that
their access to CBS, NBC, Fox and ABC distant network channels might be
terminated this year. Such terminations would result in a small reduction in
average monthly revenue per subscriber and possibly 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 that will follow the launch of EchoStar VI during the second quarter
of 2000.
DISH Network Operating Expenses. DISH Network operating expenses
totaled $739 million during 1999, an increase of $344 million or 87%, compared
to the same period in 1998. The increase in DISH Network operating expenses was
consistent with, and primarily attributable to, the increase in the number of
DISH Network subscribers. DISH Network operating expenses represented 55% and
59% of subscription television services revenue during the years ended December
31, 1999 and 1998, respectively.
Subscriber-related expenses totaled $575 million during 1999, an
increase of $278 million compared to the same period in 1998. Such expenses,
which include programming expenses, copyright royalties, residuals payable to
retailers and distributors, and billing, lockbox and other variable subscriber
expenses, represented 43% of subscription television services revenues during
the year ended December 31, 1999 compared to 44% during the same period in 1998.
Although we do not currently expect subscriber-related expenses as a percentage
of subscription television services revenue to increase materially in future
periods, there can be no assurance this expense to revenue ratio will not
materially increase.
Customer service center and other expenses principally consist of costs
incurred in the operation of our DISH Network customer service centers, such as
personnel and telephone expenses, as well as subscriber equipment installation
and other operating expenses. Customer service center and other expenses totaled
$122 million during 1999, an increase of $50 million as compared to the same
period in 1998. The increase in customer service center and other expenses
resulted from increased personnel and telephone expenses to support the growth
of the DISH Network, and non-cash compensation expense from significant
post-grant appreciation of stock options granted to certain key customer service
center employees during 1999. Customer service center and other expenses totaled
9% of subscription television services revenue during 1999, as compared to 11%
during the same period in 1998. Customer service center and other expenses in
total, and as a percentage of subscription television services revenue, may
increase
28
<PAGE> 31
in future periods as we continue to develop our customer service centers to
provide additional customer support and help us better accommodate anticipated
subscriber growth.
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 $43 million during 1999, a $17 million increase
compared to the same period in 1998. This increase resulted from higher
satellite and other digital broadcast center operating expenses due to an
increase in the number of operational satellites, and non-cash compensation
expense from significant post-grant appreciation of stock options granted to
certain key digital broadcast operations center employees during 1999. 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% and 4% of subscription television
services revenue during the year ended December 31, 1999 and 1998, respectively.
While we can provide no assurance, we expect this expense to revenue ratio to
decline to the extent we are successful in increasing the number of DISH Network
subscribers and maintaining or increasing revenue per subscriber.
Cost of sales - DTH equipment and Integration Services. Cost of sales -
DTH equipment and integration services totaled $148 million during 1999, a
decrease of $25 million compared to the same period in 1998. 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. Cost of sales - DTH equipment and integration services
represented 81% and 68% of DTH equipment revenue, during the years ended
December 31, 1999 and 1998, respectively. The lower margin was principally
attributable to a $16.6 million loss provision primarily for component parts and
purchase commitments related to our first generation model 7100 set-top boxes,
for which production has been suspended in favor of our second generation model
7200 set-top boxes. The write-off partially offset the expected decrease in cost
of sales - DTH equipment and integration services attributable to a decrease in
demand combined with increased competition. We expect that cost of sales - DTH
equipment and integration services may increase as a percentage of DTH equipment
revenue in the future, due to price pressure resulting from increased
competition from other providers of DTH equipment.
Marketing Expenses. Marketing expenses totaled $727 million during
1999, an increase of $406 million compared to the same period in 1998. The
increase in marketing expenses was primarily attributable to an increase in
subscriber promotion subsidies. Subscriber promotion subsidies include the
excess of transaction costs over transaction proceeds at the time of sale of
EchoStar receiver systems, activation allowances paid to retailers, and other
promotional incentives. Advertising and other expenses totaled $65 million and
$48 million during the years ended December 31, 1999 and 1998, respectively.
During 1999, our total subscriber acquisition costs, inclusive of
acquisition marketing expenses, totaled approximately $729 million, or
approximately $385 per new subscriber activation. Comparatively, our subscriber
acquisition costs during the year ended December 31, 1998, inclusive of
acquisition marketing expenses and deferred subscriber acquisition costs,
totaled $314 million, or approximately $285 per new subscriber activation. The
increase in our subscriber acquisition costs, on a per new subscriber activation
basis, principally resulted from the introduction of several aggressive
marketing promotions to acquire new subscribers.
During 1999, 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 that ranges from $100 up to $299 on the purchase of certain EchoStar
receiver systems. To be eligible for this rebate, a subscriber must make a
one-year commitment to subscribe to our America's Top 100 CD programming package
plus additional channels. The amount of the monthly programming commitment
determines the amount of the rebate. Although subscriber acquisition costs are
materially higher under this plan compared to previous promotions, DISH Network
One-Rate Plan customers generally provide materially greater average revenue per
subscriber than a typical DISH Network subscriber. In addition, we believe that
these customers represent lower credit risk and therefore may be marginally less
likely to disconnect their service than other DISH Network subscribers. To the
extent that actual consumer participation levels exceed present expectations,
subscriber acquisition costs may materially increase. Although there can be no
assurance as to the ultimate duration of the DISH Network One-Rate Plan, it will
continue through at least April 2000.
29
<PAGE> 32
Under our bounty programs, current cable, C-band and PrimeStar
customers are eligible to receive a free base-level EchoStar receiver system and
free installation. In addition, PrimeStar customers are eligible to receive six
months of our America's Top 40 programming or our DISH Latino programming (both
packages retail for $19.99 per month) without charge. A subscriber must make a
one-year commitment to subscribe to either our America's Top 40, our DISH Latino
programming package or our America's Top 100 CD programming package and prove
that they are a current cable, C-band or PrimeStar customer to be eligible for
these programs. Under our free installation program all customers who purchase
an EchoStar receiver system through April 30, 2000 are eligible to receive a
free professional installation.
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. While our average subscriber acquisition cost
was $385 for all of 1999, it was higher during the fourth quarter, averaging
approximately $425 per subscriber. As a result of our free system and free
installation promotion which is anticipated to continue through at least April
30, 2000, we expect our subscriber acquisition costs for 2000 will be highest
during the first several months of the year, but may decline thereafter, and may
average as much as $450 or more for the full year. In connection with our plans
to encourage as many new subscribers as possible to be ready for the additional
services that will become available at the 110(degrees) WL orbital location, and
as a result of continuing competition and our plans to attempt to continue to
drive rapid subscriber growth, we expect that our subscriber acquisition costs
during 2000 could increase by as much as $25 per subscriber or more on average
compared to the fourth quarter of 1999.
In connection with the launch of EchoStar V and EchoStar VI, we will
utilize the 110(degrees) orbital location to enhance revenue opportunities with
new value added services for our current and future subscribers, and maintain
our primary DBS service at the 119(degrees) orbital location. Our existing
subscribers will need to upgrade their dish and receiver systems in order to
take advantage of all of the services we 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. The cost of
this program could be significant if utilized by a large number of our existing
subscribers.
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 programs, our "free system/free
installation" program, or the DISH Network One-Rate Plan, or if we determine
that more aggressive promotions are necessary to respond to competition, or for
other reasons.
Further, in November 1999 we entered into an exclusive multi-year
agreement with Superstar/Netlink Group, a subsidiary of TVGuide, to attempt to
convert its current and inactive C-band (large dish) subscribers to our DBS
(small dish) services. Under the terms of the agreement, we will incur
substantial subscriber acquisition costs, including payments to Superstar and
the retailer, and for equipment and other incentives to the consumer for each
Superstar subscriber who actually converts to and remains a subscriber to our
DBS Services. Subscriber acquisition costs under the terms of this agreement are
generally higher than under our marketing promotions. As a result of this
agreement, subscriber acquisition costs may increase to the extent our efforts
to convert Superstar's subscribers are even more successful than we currently
anticipate. If subscriber acquisition costs increase materially, it could
adversely affect our financial condition and results of operations.
General and Administrative Expenses. General and administrative
expenses totaled $205 million during 1999, an increase of $108 million as
compared to the same period in 1998. The increase in G&A expenses was
principally attributable to increased personnel expenses to support the growth
of the DISH Network and non-cash compensation expense from significant
post-grant appreciation of stock options granted to key employees during 1999.
G&A expenses as a percentage of total revenue increased to 13% during the year
ended December 31, 1999 compared to 10% during the same period in 1998. Although
we expect G&A expenses as a percentage of total revenue to remain near the
current level or decline modestly in future periods, this expense to revenue
ratio could increase.
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<PAGE> 33
EBITDA. EBITDA represents earnings before interest, taxes,
depreciation, amortization, and non-cash , stock-based compensation. EBITDA was
negative $173 million during the year ended December 31, 1999 compared to
negative $20 million during the same period in 1998. EBITDA, as adjusted to
exclude amortization of subscriber acquisition costs, was negative $173 million
for the year ended December 31, 1999 compared to negative $39 million for the
same period in 1998. This decline in EBITDA principally resulted from an
increase in DISH Network operating and marketing expenses. It is important to
note that EBITDA does not represent cash provided or used by operating
activities. Further, our calculation of EBITDA for the year ended December 31,
1999 does not include approximately $61 million of non-cash compensation expense
resulting from post-grant appreciation of stock options granted to employees.
EBITDA should not be considered in isolation or as a substitute for measures of
performance prepared in accordance with generally accepted accounting
principles.
As previously discussed, to the extent we expand our current marketing
promotions and our subscriber acquisition costs materially increase, our EBITDA
results will be negatively impacted because subscriber acquisition costs are
expensed as incurred.
Depreciation and Amortization. Depreciation and amortization expenses
aggregated $113 million during 1999, a $10 million increase compared to the same
period in 1998, during which subscriber acquisition costs were amortized.
Commencing October 1997, we instead expensed all of these costs at the time of
sale. The increase in depreciation and amortization expenses principally
resulted from an increase in depreciation related to the commencement of
operation of EchoStar IV in August of 1998, the commencement of operation of
EchoStar V in November 1999 and other depreciable assets placed in service
during 1999, partially offset by subscriber acquisition costs becoming fully
amortized during the third quarter of 1998.
Other Income and Expense. Other expense, net totaled $177 million
during 1999, an increase of $39 million compared to the same period in 1998.
This increase resulted from a decrease in interest income and an increase in
interest expense. In January 1999, we refinanced our outstanding 12 1/2% Senior
Secured Notes due 2002 issued in June 1997, referred to herein as the 1997
notes; our 12 7/8% Senior Secured Discount Notes due 2004 issued in 1994,
referred to herein as the 1994 notes; and our 13 1/8% Senior Secured Discount
Notes due 2004 issued in 1996, referred to herein as the 1996 notes, at more
favorable interest rates and terms. In connection with the refinancing, we
consummated an offering of 9 1/4% Senior Notes due 2006, referred to herein as
the seven year notes, and 9 3/8% Senior Notes due 2009, referred to herein as
the ten year notes. Although the seven and ten year notes have lower interest
rates than the debt securities we repurchased, interest expense increased by
approximately $34 million because we raised additional debt to cover tender
premiums and consent and other fees related to the refinancing.
Extraordinary Charge for Early Retirement of Debt. In connection with
the January 1999 refinancing, we recognized an extraordinary loss of $269
million comprised of debt costs, discounts, tender costs, and premiums paid over
the accreted values of the debt retired.
Year Ended December 31, 1998 Compared to the Year Ended December 31, 1997.
Revenue. Total revenue for the year ended December 31, 1998 was $983
million, an increase of $506 million compared to total revenue for the year
ended December 31, 1997 of $477 million. The increase in total revenue was
primarily attributable to DISH Network subscriber growth combined with increased
revenue from our ETC and Satellite Services business units.
DISH Network subscription television services revenue totaled $669
million for the year ended December 31, 1998, an increase of $370 million or
124% compared to 1997. This increase was directly attributable to the increase
in the number of DISH Network subscribers. Average DISH Network subscribers for
the year ended December 31, 1998 increased approximately 120% compared to 1997.
As of December 31, 1998, we had approximately 1.9 million DISH Network
subscribers compared to 1.04 million at December 31, 1997. Monthly revenue per
subscriber approximated $39 during the years ended December 31, 1998 and 1997.
For the year ended December 31, 1998, DTH equipment sales and
integration services totaled $256 million, an increase of $164 million compared
to 1997. The increase in DTH equipment sales and integration services revenue
was primarily attributable to an increase in the volume of set-top boxes sold.
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<PAGE> 34
Satellite services revenue totaled $22 million during 1998, an increase
of $11 million as compared to 1997. The increase in satellite services revenue
was primarily attributable to increased BTV revenue due to the addition of new
full-time BTV customers.
DISH Network Operating Expenses. DISH Network operating expenses
totaled $395 million during 1998, an increase of $202 million or 105%, compared
to 1997. 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 59% and 65% of
subscription television services revenue during 1998 and 1997, respectively.
Subscriber-related expenses totaled $297 million during 1998, an
increase of $153 million compared to 1997. Subscriber-related expenses
represented 44% of subscription television services revenues during 1998
compared to 48% during 1997. The decrease in subscriber-related expenses as a
percentage of subscription television services revenue resulted primarily from a
decrease in programming expenses on a per subscriber basis, which resulted from
a change in product mix combined with price discounts received from certain
content providers.
Customer service center and other expenses totaled $72 million during
1998, an increase of $37 million as compared to 1997. The increase in customer
service center and other expenses resulted from increased personnel and
telephone expenses to support the growth of the DISH Network. Customer service
center and other expenses totaled 11% of subscription television services
revenue during 1998 compared to 12% of subscription television services revenue
during 1997.
Satellite and transmission expenses totaled $26 million during 1998, an
$11 million increase compared to 1997. This increase resulted from higher
satellite and other digital broadcast center operating expenses due to an
increase in the number of operational satellites.
Cost of sales - DTH equipment and Integration Services. Cost of sales -
DTH equipment and integration services totaled $173 million during 1998, an
increase of $111 million compared to 1997. This increase is consistent with the
increase in DTH equipment revenue. As a percentage of DTH equipment revenue,
cost of sales represented 68% during each of 1998 and 1997.
Marketing Expenses. Marketing expenses totaled $321 million during
1998, an increase of $141 million or 78%, compared to 1997. The increase in
marketing expenses was primarily attributable to the increase in subscriber
promotion subsidies. During all of 1998 we recognized subscriber promotion
subsidies as incurred. These expenses totaled $273 million during 1998, an
increase of $128 million over 1997. This increase resulted from increased
subscriber activations and the immediate recognition of all subscriber promotion
subsidies incurred in 1998, due to the removal of any prepaid subscription
requirement. During 1997, a portion of such expenses were initially deferred and
amortized over the related prepaid subscription term, generally one year.
Advertising and other expenses totaled $48 million during 1998, an increase of
$13 million over 1997.
During 1998, our subscriber acquisition costs, inclusive of acquisition
marketing expenses, totaled $314 million, or approximately $285 per new
subscriber activation. Comparatively, our 1997 subscriber acquisition costs,
inclusive of acquisition marketing expenses and deferred subscriber acquisition
costs, totaled $252 million, or approximately $340 per new subscriber
activation. The decrease in our subscriber acquisition costs, on a per new
subscriber activation basis, principally resulted from decreases in the
manufactured cost of EchoStar receiver systems.
General and Administrative Expenses. General and administrative
expenses totaled $97 million during 1998, an increase of $28 million as compared
to 1997. The increase in G&A expenses was principally attributable to increased
personnel expenses to support the growth of the DISH Network. G&A expenses as a
percentage of total revenue decreased to 10% during 1998 compared to 15% during
1997.
Earnings Before Interest, Taxes, Depreciation and Amortization. EBITDA
was negative $20 million and negative $51 million, during 1998 and 1997,
respectively. EBITDA, as adjusted to exclude amortization of subscriber
acquisition costs, was negative $39 million for 1998 compared to negative $173
million for 1997. This improvement in EBITDA principally resulted from increases
in our ETC and DISH Network revenues. However, EBITDA does not
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purport to represent cash provided or used by operating activities and 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
during 1998, including amortization of subscriber acquisition costs of $19
million, aggregated $103 million, a $70 million decrease compared to 1997. The
decrease in depreciation and amortization expenses principally resulted from a
decrease in amortization of subscriber acquisition costs of $103 million,
partially offset by an increase in depreciation related to the commencement of
operation of EchoStar III, EchoStar IV and other depreciable assets placed in
service during 1998. Promotional programs changed in October 1997 and we ceased
deferral of subscriber acquisition costs after that date. All previously
deferred costs were fully amortized during 1998
Other Income and Expense. Other expense, net totaled $138 million
during 1998, an increase of $50 million as compared to 1997. The increase in
other expense resulted primarily from interest expense associated with our 1997
notes combined with increased interest expense resulting from increased accreted
balances on our 1994 notes and our 1996 notes.
LIQUIDITY AND CAPITAL RESOURCES
Cash Sources
Since inception, we have financed the development of our EchoStar DBS
system and the related commercial introduction of the DISH Network service
primarily through the sale of equity and debt securities and cash from
operations. From May 1994 through December 31, 1999, we have raised total gross
cash proceeds of approximately $249 million from the sale of our equity
securities and as of December 31, 1999, we had approximately $3.1 billion of
outstanding long-term debt (including current portion). The following summarizes
the net proceeds we raised during 1999 from sales of debt securities:
o our seven and ten year notes offering in January 1999 resulting in
net proceeds of approximately $1.8 billion; and
o our convertible notes offering in December 1999 of 4 7/8%
Convertible Subordinated Notes resulting in net proceeds of
approximately $980 million.
As of December 31, 1999, our unrestricted cash, cash equivalents and
marketable investment securities totaled $1.3 billion compared to $324 million
as of December 31, 1998. For the years ended December 31, 1999, 1998 and 1997,
we reported net cash flows from operating activities of ($59 million), ($17
million) and $43,000, respectively.
Our working capital and capital expenditure requirements were
substantial during the three-year period ended December 31, 1999. Such
expenditures principally related to the ongoing development of the EchoStar DBS
system. Capital expenditures, including expenditures for satellite systems under
construction and FCC authorizations, totaled $91 million, $161 million, $232
million and during 1999, 1998 and 1997, respectively.
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 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, dependent upon the level of success we experience
relative to our goals. 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.
Subscriber Turnover
While our churn increased during 1999, we believe that our average
churn for the year was lower than satellite industry averages. Our maturing
subscriber base, together with the effects of rapid growth, were responsible for
the increase in churn during the year. That rapid growth has resulted in
customer installation delays, and the effectiveness of our customer service has
also been impacted. We are rapidly expanding our customer service and
installation capabilities in response to our increased business, but churn may
increase until
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we have completed the upgrades to our infrastructure. Further, our litigation
with the networks in Miami, and other factors, including our inability to obtain
retransmission consents from local network stations on or before May 29, 2000,
could require us to terminate delivery of network channels to a material portion
of our subscriber base, which could cause many of those subscribers 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 expect to be able to continue to manage churn to a level at
or 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. While our
average subscriber acquisition cost was $385 for all of 1999, it was higher
during the fourth quarter, averaging approximately $425 per subscriber. In
connection with our plans to encourage as many new subscribers as possible to be
ready for the additional services that will become available at the 110(Degree)
WL orbital location, and as a result of continuing competition and our plans to
attempt to continue to drive rapid subscriber growth, we expect that our
subscriber acquisition costs during 2000 could increase by as much as $25 per
subscriber or more on average compared to the fourth quarter of 1999. While
there can be no assurance, as a result of our free system and free installation
promotion which is anticipated to continue through at least April 30, 2000, we
expect our subscriber acquisition costs for 2000 will be highest during the
first several months of the year and may decline thereafter, and 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 further to the extent that we continue or expand our bounty programs,
our "free system/free installation" program, or the DISH Network One-Rate Plan,
or if we determine that more aggressive promotions are necessary to respond to
competition, or for other reasons.
Further, in November 1999 we entered into an exclusive multi-year
agreement with Superstar/Netlink Group, a subsidiary of TVGuide, to convert its
current and inactive C-band (large dish) subscribers to our DBS (small dish)
services. Under the terms of the agreement, we will incur substantial subscriber
acquisition costs, including payments to Superstar and the retailer, and for
equipment and other incentives to the consumer for each Superstar subscriber who
actually converts to and remains a subscriber to our DBS Services. Subscriber
acquisition costs under the terms of this agreement are generally higher than
under our marketing promotions. As a result of this agreement, subscriber
acquisition costs may increase to the extent our efforts to convert Superstar's
subscribers are even more successful than we anticipate.
Since we currently subsidize the cost of EchoStar receiver systems and
their installation, we incur significant costs each time we acquire a new
subscriber. During the past several months, we have experienced an increase in
subscriber acquisition costs primarily caused by our free system and free
installation promotion. However, our monthly revenue per subscriber has not
increased to the same extent. Although there can be no assurance, we believe
that we will be able to fully recoup the up-front costs of subscriber
acquisition from future subscription television services revenue. 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.
There can be no assurance that additional financing will be available on
acceptable terms, or at all.
Repositioning Costs
We previously indicated that in connection with the launch of EchoStar
V and EchoStar VI we expected to incur material one-time expenses, primarily
during 2000, associated with repositioning existing subscribers' satellite
dishes from the 119 (degrees) WL orbital location to the 110 (degrees) WL
orbital location. We have now decided to utilize the 110 (degrees) WL orbital
location, where EchoStar V and EchoStar VI will be located, to enhance revenue
opportunities with new value added services for our current and future
subscribers, and to maintain our primary DBS service at the 119 (degrees)
orbital location. Consequently, while we still expect to incur costs to upgrade
some subscribers to dishes capable of receiving
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signals from both the 110 (degrees) WL and 119 (degrees) WL orbital locations,
these costs are not expected to be as significant during 2000 as previously
planned.
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
Interest accrues at the rate of 9 1/4% and 9 3/8% on the seven and ten
year notes, respectively. Interest on the seven and ten year notes is payable
semi-annually in cash in arrears on February 1 and August 1 of each year,
commencing August 1, 1999. Although the seven and ten year notes have lower
interest rates than the debt securities we repurchased, reported interest
expense will increase because we raised additional debt to cover tender premiums
and consent and other fees related to the refinancing.
Interest accrues at an annual rate of 4 7/8% on the convertible notes.
Interest on the convertible notes is payable semi-annually in cash, in arrears
on January 1 and July 1 of each year, commencing July 1, 2000.
Future Capital Requirements
As of December 31, 1999, we had approximately $3.1 billion of
outstanding long-term debt (including current portion), which includes $2.6
million of 1994 notes, 1996 notes, 1997 notes, and Senior Exchange notes which
remain outstanding. We are required to retire these remaining notes when they
mature, and the indentures governing the 1994, 1996 and 1997 notes will remain
outstanding (although substantially all of the restrictive covenants have been
eliminated) until each series of notes has been retired in full. Additionally,
our semi-annual cash debt service requirements of approximately $94 million
related to the seven and ten year notes commenced in August 1999. Our
semi-annual cash debt service requirements of approximately $24 million related
to the convertible notes will commence in July 2000. There are no scheduled
principal payment or sinking fund requirements prior to maturity of these notes.
We utilized $91 million of satellite vendor financing for our first
four satellites. As of December 31, 1999, approximately $40 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.
Dividends on our 6 3/4% Series C Cumulative Convertible Preferred Stock
began to accrue on November 2, 1999, and 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 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.
During 2000, we anticipate total capital expenditures of approximately
$350-$450 million. This amount includes approximately $200-$250 million related
to the construction and launch of EchoStar VI, EchoStar VII, EchoStar VIII and
EchoStar IX, approximately $50-$100 million related to EchoStar receiver systems
to be provided under our leasing program and $50 million for capital
expenditures related to the build-out of our digital broadcast centers.
As a result of the anomalies experienced by EchoStar IV and in order to
fully exploit certain of our remaining FCC-allocated DBS frequencies, we have
deployed and intend to deploy additional DBS satellites. Upon consummation of
the 110 acquisition we acquired two additional DBS satellites, EchoStar V and
EchoStar VI. EchoStar V was successfully launched and deployed in September
1999. However, there can be no assurance that
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EchoStar VI will be launched and deployed successfully. We are also evaluating
other contingency plans. There can be no assurance that net insurance proceeds
will be sufficient to fully cover the costs to deploy replacement DBS
satellites.
In addition to our DBS business plan, we have licenses, or applications
pending with the FCC, for a two satellite FSS Ku-band satellite system, a two
satellite FSS Ka-band satellite system, and a proposed modification thereof and
a Low Earth Orbit Mobile-Satellite Service 6-satellite system. We will need to
raise additional capital to fully construct these satellites. 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.
The amount of capital required to fund our 2000 working capital and
capital expenditure needs will vary, dependent upon the growth rate of the Dish
Network, our subscriber acquisition costs, and our ability to expand our other
business units. During 1999, subscriber growth exceeded our expectations. To the
extent the subscriber growth rate continues to exceed our expectations, it may
be necessary for us to raise additional capital to fund increased working
capital requirements. In addition, our working capital and capital expenditure
requirements could increase materially in the event of increased competition for
subscription television customers, significant satellite failures, or general
economic downturn, among other factors.
We expect that our future working capital, capital expenditure and debt
service requirements will be satisfied from existing cash and investment
balances, and cash generated from operations. Our ability to generate positive
future operating and net cash flows is dependent, among other things, upon our
ability to continue to rapidly expand our DISH Network subscriber base, retain
existing DISH Network subscribers, and our ability to grow our ETC and Satellite
Services businesses. 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. There can be no assurance that such financing
would be available on terms acceptable to us, or if available, that the proceeds
of such financing would be sufficient to enable us to meet all of our
obligations.
YEAR 2000 READINESS DISCLOSURE
As of March 10, 2000 we have experienced no material Year 2000 related
problems with any of our computer systems. Both our internal financial and
administrative systems and our service-delivery systems successfully completed
Year 2000 tests in the early hours of January 1, 2000. Although no material
anomalies are expected, we will continue to review all systems for any Year 2000
anomalies.
EFFECTS OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
None.
INFLATION
Inflation has not materially affected our operations during the past
three years. We believe that our ability to increase the prices charged for our
products and services in future periods will depend primarily on competitive
pressures. We do not have any material backlog of our products.
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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
MARKET RISKS ASSOCIATED WITH FINANCIAL INSTRUMENTS
Interest Rate Risk. Our exposure to market risk for changes in interest
rates relates to our debt obligations and cash and marketable investment
securities (unrestricted and restricted) portfolio.
As of December 31, 1999, we estimated the fair value of our fixed-rate
debt and mortgages and other notes payable to be approximately $3 billion using
quoted market prices where available, or discounted cash flow analyses. The
market risk associated with our debt and redeemable preferred stock is the
potential increase in fair value resulting from a decrease in interest rates. A
10% decrease in assumed interest rates would increase the fair value of our debt
by approximately $130 million.
Based on our average balance of cash and cash equivalents and
restricted and unrestricted marketable investment securities during 1999, a 10%
decrease in the average interest rate experienced in 1999 would not materially
impact our annual interest income.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our Consolidated Financial Statements are included in this report
beginning on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item with respect to the identity and
business experience of our directors is set forth in our Proxy Statement for the
Annual Meeting of Shareholders to be held on April 28, 2000, under the caption
"Election of Directors," which information is hereby incorporated herein by
reference.
The information required by this Item with respect to the identity and
business experience of our executive officers is set forth on page 20 of this
report under the caption "Executive Officers."
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is set forth in our Proxy
Statement for the Annual Meeting of Shareholders to be held on April 28, 2000,
under the caption "Executive Compensation and Other Information," which
information is hereby incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is set forth in our Proxy
Statement for the Annual Meeting of Shareholders to be held on April 28, 2000,
under the captions "Election of Directors" and "Equity Security Ownership,"
which information is hereby incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is set forth in our Proxy
Statement for the Annual Meeting of Shareholders to be held on April 28, 2000,
under the caption "Certain Relationships and Related Transactions," which
information is hereby incorporated herein by reference.
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
<TABLE>
<CAPTION>
(1) Financial Statements PAGE
----
<S> <C>
Report of Independent Public Accountants.......................................................... F-2
Consolidated Balance Sheets at December 31, 1998 and 1999......................................... F-3
Consolidated Statements of Operations and Comprehensive Loss for the years ended December 31,
1997, 1998 and 1999............................................................................ F-4
Consolidated Statements of Changes in Stockholders' Equity for the years ended December 31,
1997, 1998 and 1999............................................................................ F-5
Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1998 and 1999........ F-6
Notes to Consolidated Financial Statements........................................................ F-7
</TABLE>
(2) Financial Statement Schedules
None. All schedules have been included in the Consolidated Financial
Statements or Notes thereto.
(3) Exhibits
3.1(a)[] Amended Restated Articles of Incorporation of EchoStar.
3.1(b)* Bylaws of EchoStar (incorporated by reference to Exhibit
3.1(b) to the Registration Statement on Form S-1 of
EchoStar, Registration No. 33-91276).
3.2(a)* Articles of Incorporation of EchoStar Satellite
Broadcasting Corporation (formerly EchoStar Bridge
Corporation, a Colorado corporation) ("ESBC") (incorporated
by reference to Exhibit 3.1(e) to the Registration
Statement on Form S-1 of ESBC, Registration No. 333-3980).
3.2(b)* Bylaws of ESBC (incorporated by reference to Exhibit 3.1(f)
to the Registration Statement on Form S-1 of ESBC,
Registration No. 333-3980).
3.3(a)* Amended and Restated Articles of Incorporation of Dish
(incorporated by reference to Exhibit 3.1(a) to the
Registration Statement on Form S-1 of Dish, Registration
No. 33-76450).
3.3(b)* Bylaws of Dish (incorporated by reference to Exhibit 3.1(b)
to the Registration Statement on Form S-1 of Dish,
Registration No. 33-76450).
3.4(a)* Articles of Incorporation of EchoStar DBS Corporation, a
Colorado corporation ("DBS Corp.") (incorporated by
reference to Exhibit 3.4(a) to the Registration Statement
on Form S-4 of DBS Corp., Registration No. 333-31929).
3.4(b)* Bylaws of DBS Corp. (incorporated by reference to Exhibit
3.4(b) to the Registration Statement on Form S-4 of DBS
Corp., Registration No. 333-31929).
4.1* Indenture of Trust between Dish and First Trust National
Association ("First Trust"), as trustee (incorporated by
reference to Exhibit 4.1 to the Registration Statement on
Form S-1 of Dish, Registration No. 33-76450).
4.2* Warrant Agreement between EchoStar and First Trust, as
Warrant Agent (incorporated by reference to Exhibit 4.2 to
the Registration Statement on Form S-1 of Dish,
Registration No. 33-76450).
4.3* Security Agreement in favor of First Trust, as trustee
under the Indenture filed as Exhibit 4.1 hereto
(incorporated by reference to Exhibit 4.3 to the
Registration Statement on Form S-1 of Dish, Registration
No. 33-76450).
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4.4* Escrow and Disbursement Agreement between Dish and First
Trust (incorporated by reference to Exhibit 4.4 to the
Registration Statement on Form S-1 of Dish, Registration
No. 33-76450).
4.5* Pledge Agreement in favor of First Trust, as trustee under
the Indenture filed as Exhibit 4.1 hereto (incorporated by
reference to Exhibit 4.5 to the Registration Statement on
Form S-1 of Dish, Registration No. 33-76450).
4.6* Intercreditor Agreement among First Trust, Continental
Bank, N.A. and Martin Marietta Corporation ("Martin
Marietta") (incorporated by reference to Exhibit 4.6 to the
Registration Statement on Form S-1 of Dish, Registration
No. 33-76450).
4.7* Series A Preferred Stock Certificate of Designation of
EchoStar (incorporated by reference to Exhibit 4.7 to the
Registration Statement on Form S-1 of EchoStar,
Registration No. 33-91276).
4.8* Registration Rights Agreement by and between EchoStar and
Charles W. Ergen (incorporated by reference to Exhibit 4.8
to the Registration Statement on Form S-1 of EchoStar,
Registration No. 33-91276).
4.9* Indenture of Trust between ESBC and First Trust, as trustee
(incorporated by reference to Exhibit 4.9 to the Annual
Report on Form 10-K of EchoStar for the year ended December
31, 1995, Commission File No. 0-26176).
4.10* Security Agreement of ESBC in favor of First Trust, as
trustee under the Indenture filed as Exhibit 4.9 hereto
(incorporated by reference to Exhibit 4.10 to the Annual
Report on Form 10-K of EchoStar for the year ended December
31, 1995, Commission File No. 0-26176).
4.11* Escrow and Disbursement Agreement between ESBC and First
Trust (incorporated by reference to Exhibit 4.11 to the
Annual Report on Form 10-K of EchoStar for the year ended
December 31, 1995, Commission File No. 0-26176).
4.12* Pledge Agreement of ESBC in favor of First Trust, as
trustee under the Indenture filed as Exhibit 4.9 hereto
(incorporated by reference to Exhibit 4.12 to the Annual
Report on Form 10-K of EchoStar for the year ended December
31, 1995, Commission File No. 0-26176).
4.13* Pledge Agreement of EchoStar in favor of First Trust, as
trustee under the Indenture filed as Exhibit 4.9 hereto
(incorporated by reference to Exhibit 4.13 to the Annual
Report on Form 10-K of EchoStar for the year ended December
31, 1995, Commission File No. 0-26176).
4.14* Registration Rights Agreement by and between ESBC,
EchoStar, Dish, MergerCo and Donaldson, Lufkin & Jenrette
Securities Corporation (incorporated by reference to
Exhibit 4.14 to the Annual Report on Form 10-K of EchoStar
for the year ended December 31, 1995, Commission File No.
0-26176).
4.15* Registration Rights Agreement, dated as of June 25, 1997,
by and among DBS Corp., EchoStar Communications
Corporation, a Nevada corporation formed in April 1995
("EchoStar"), EchoStar Satellite Broadcasting Corporation,
a Colorado corporation, Dish, Ltd. (formerly EchoStar
Communications Corporation, a Nevada corporation formed in
December 1993), Donaldson, Lufkin & Jenrette Securities
Corporation ("DLJ") and Lehman Brothers Inc. ("Lehman
Brothers") (incorporated by reference to Exhibit 4.15 to
the Registration Statement on Form S-4 of DBS Corp.,
Registration No. 333-31929).
4.16* Indenture of Trust, dated as of June 25, 1997, between DBS
Corp. and First Trust National Association ("First Trust"),
as trustee (incorporated by reference to Exhibit 4.16 to
Amendment No. 1 to the Registration Statement on Form S-4
of DBS Corp., Registration No. 333-31929).
40
<PAGE> 43
4.17* 12 1/8% Series B Senior Redeemable Exchangeable Preferred
Stock Certificate of Correction for the Certificate of
Designation of EchoStar (incorporated by reference to
Exhibit 4.17 to Amendment No. 1 to the Registration
Statement on Form S-3 of EchoStar, Registration No.
333-37683).
4.18* Registration Rights Agreement, dated as of October 2, 1997,
by and among EchoStar, DLJ and Lehman Brothers
(incorporated by reference to Exhibit 4.18 to Amendment No.
1 to the Registration Statement on Form S-3 of EchoStar,
Registration No. 333-37683).
4.19* 6 3/4% Series C Cumulative Convertible Preferred Stock
Certificate of Designation of EchoStar (incorporated by
reference to Exhibit 4.19 to the Registration Statement on
Form S-4 of EchoStar, Registration No. 333-39901).
4.20* Form of Deposit Agreement between EchoStar and American
Securities Transfer & Trust, Inc. (incorporated by
reference to Exhibit 4.20 to Amendment No. 1 to the
Registration Statement on Form S-3 of EchoStar,
Registration No. 333-37683).
4.21(a)* Form of Underwriting Agreement for 6 3/4% Series C
Cumulative Convertible Preferred Stock by and between
EchoStar, DLJ and Lehman Brothers (incorporated by
reference to Exhibit 1.1 to Amendment No. 1 to the
Registration Statement on Form S-3 of EchoStar,
Registration No. 333-37683).
4.21(b)* Form of Underwriting Agreement for Class A Common Stock by
and between EchoStar, DLJ, BT Alex. Brown Incorporated and
Unterberg Harris (incorporated by reference to Exhibit 1.1
to Amendment No. 1 to the Registration Statement on Form
S-3 of EchoStar, Registration No. 333-37683).
4.22* Form of Indenture for EchoStar's 12 1/8% Senior Exchange
Notes due 2004 (incorporated by reference to Exhibit 4.8 to
the Quarterly Report on Form 10-Q of EchoStar for the
quarterly period ended September 30, 1997, Commission File
No. 0-26176).
4.23* Indenture of Trust, relating to DBS Corp.'s 12 1/4% Senior
Notes due 2006 ( the "Seven Year Notes"), dated as of
January 25, 1999, among DBS Corp., the Guarantors (as
defined therein) and U.S. Bank Trust National Association
("U.S. Bank"), as trustee (incorporated by reference to
Exhibit 4.1 to the Registration Statement on Form S-4 of
DBS Corp., Registration No. 333-71345).
4.24* Indenture of Trust, relating to DBS Corp.'s 12 3/8% Senior
Notes due 2009 ( the "Ten Year Notes"), dated as of January
25, 1999, among DBS Corp., the Guarantors (as defined
therein) and U.S. Bank, as trustee (incorporated by
reference to Exhibit 4.3 to the Registration Statement on
Form S-4 of DBS Corp., Registration No. 333-71345).
4.25* Registration Rights Agreement, relating to the Seven Year
Notes, dated as of January 25, 1999, by and among DBS
Corp., the Guarantors and the Initial Purchasers (as
defined therein) (incorporated by reference to Exhibit 4.5
to the Registration Statement on Form S-4 of DBS Corp.,
Registration No. 333-71345).
4.26* Registration Rights Agreement, relating to the Ten Year
Notes, dated as of January 25, 1999, by and among DBS
Corp., the Guarantors and the Initial Purchasers (as
defined therein) (incorporated by reference to Exhibit 4.6
to the Registration Statement on Form S-4 of DBS Corp.,
Registration No. 333-71345).
4.27* Indenture, dated as of December 8, 1999, between EchoStar
Communications Corporation and U.S. Bank Trust National
Association, as trustee, including the form of 4 7/8%
Convertible Subordinated Note Due 2007 (incorporated by
reference to Exhibit 4.1 to the Registration Statement on
Form S-3 of EchoStar Communications Corporation,
Registration No. 333-31894).
41
<PAGE> 44
4.28 Registration Rights Agreement, relating to the 4 7/8%
Convertible Subordinated Notes Due 2007, dated as of
December 8, 1999, by and among EchoStar Communications
Corporation and the initial purchasers (incorporated by
reference to Exhibit 4.2 to the Registration Statement on
Form S-3 of EchoStar Communications Corporation,
Registration No. 333-31894).
10.1(a)* Satellite Construction Contract, dated as of February 6,
1990, between EchoStar Satellite Corporation ("ESC") and
Martin Marietta as successor to General Electric Company,
Astro-Space Division ("General Electric") (incorporated by
reference to Exhibit 10.1(a) to the Registration Statement
on Form S-1 of Dish, Registration No. 33-76450).
10.1(b)* First Amendment to the Satellite Construction Contract,
dated as of October 2, 1992, between ESC and Martin
Marietta as successor to General Electric (incorporated by
reference to Exhibit 10.1(b) to the Registration Statement
on Form S-1 of Dish, Registration No. 33-76450).
10.1(c)* Second Amendment to the Satellite Construction Contract,
dated as of October 30, 1992, between ESC and Martin
Marietta as successor to General Electric (incorporated by
reference to Exhibit 10.1(c) to the Registration Statement
on Form S-1 of Dish, Registration No. 33-76450).
10.1(d)* Third Amendment to the Satellite Construction Contract,
dated as of April 1, 1993, between ESC and Martin Marietta
(incorporated by reference to Exhibit 10.1(d) to the
Registration Statement on Form S-1 of Dish, Registration
No. 33-76450).
10.1(e)* Fourth Amendment to the Satellite Construction Contract,
dated as of August 19, 1993, between ESC and Martin
Marietta (incorporated by reference to Exhibit 10.1(e) to
the Registration Statement on Form S-1 of Dish,
Registration No. 33-76450).
10.1(f)* Form of Fifth Amendment to the Satellite Construction
Contract, between ESC and Martin Marietta (incorporated by
reference to Exhibit 10.1(f) to the Registration Statement
on Form S-1 of Dish, Registration No. 33-81234).
10.1(g)* Sixth Amendment to the Satellite Construction Contract,
dated as of June 7, 1994, between ESC and Martin Marietta
(incorporated by reference to Exhibit 10.1(g) to the
Registration Statement on Form S-1 of Dish, Registration
No. 33-81234).
10.1(h)* Eighth Amendment to the Satellite Construction Contract,
dated as of July 18, 1996, between ESC and Martin Marietta
(incorporated by reference to Exhibit 10.1(h) to the
Quarterly Report on Form 10-Q of EchoStar for the quarter
ended June 30, 1996, Commission File No. 0-26176).
10.2* Key Employee Bonus Plan, dated as of January 1, 1994
(incorporated by reference to Exhibit 10.7 to the
Registration Statement on Form S-1 of Dish, Registration
No. 33-76450)**
10.3* Consulting Agreement, dated as of February 17, 1994,
between ESC and Telesat Canada (incorporated by reference
to Exhibit 10.8 to the Registration Statement on Form S-1
of Dish, Registration No. 33-76450).
10.4* Form of Satellite Launch Insurance Declarations
(incorporated by reference to Exhibit 10.10 to the
Registration Statement on Form S-1 of Dish, Registration
No. 33-81234).
10.5* Dish 1994 Stock Incentive Plan (incorporated by reference
to Exhibit 10.11 to the Registration Statement on Form S-1
of Dish, Registration No. 33-76450).**
10.6* Form of Tracking, Telemetry and Control Contract between
AT&T Corp. and ESC (incorporated by reference to Exhibit
10.12 to the Registration Statement on Form S-1 of Dish,
Registration No. 33-81234).
10.7* Manufacturing Agreement, dated as of March 22, 1995,
between HTS and SCI Technology, Inc. (incorporated by
reference to Exhibit 10.12 to the Registration Statement on
Form S-1 of Dish, Commission File No. 33-81234).
42
<PAGE> 45
10.8* Statement of Work, dated January 31, 1995 from ESC to
DiviCom, Inc. (incorporated by reference to Exhibit 10.14
to the Registration Statement on Form S-1 of EchoStar,
Registration No. 33-91276).
10.9* Launch Services Contract, dated as of June 2, 1995, by and
between EchoStar Space Corporation and
Lockheed-Khrunichev-Energia International, Inc.
(incorporated by reference to Exhibit 10.15 to the
Registration Statement on Form S-1 of EchoStar,
Registration No. 33-91276).
10.10* EchoStar 1995 Stock Incentive Plan (incorporated by
reference to Exhibit 10.16 to the Registration Statement on
Form S-1 of EchoStar, Registration No. 33-91276)**
10.11(a)* Eighth Amendment to Satellite Construction Contract, dated
as of February 1, 1994, between DirectSat Corporation and
Martin Marietta (incorporated by reference to Exhibit
10.17(a) to the Quarterly Report on Form 10-Q of EchoStar
for the quarter ended June 30, 1996, Commission File No.
0-26176).
10.12(b)* Ninth Amendment to Satellite Construction Contract, dated
as of February 1, 1994, between DirectSat Corporation and
Martin Marietta (incorporated by reference to Exhibit 10.15
to the Registration Statement of Form S-4 of EchoStar,
Registration No. 333-03584).
10.13(c)* Tenth Amendment to Satellite Construction Contract, dated
as of July 18, 1996, between DirectSat Corporation and
Martin Marietta (incorporated by reference to Exhibit
10.17(b) to the Quarterly Report on Form 10-Q of EchoStar
for the quarter ended June 30, 1996, Commission File No.
0-26176).
10.14* Satellite Construction Contract, dated as of July 18, 1996,
between EDBS and Lockheed Martin Corporation (incorporated
by reference to Exhibit 10.18 to the Quarterly Report on
Form 10-Q of EchoStar for the quarter ended June 30, 1996,
Commission File No. 0-26176).
10.15* Confidential Amendment to Satellite Construction Contract
between DBSC and Martin Marietta, dated as of May 31, 1995
(incorporated by reference to Exhibit 10.14 to the
Registration Statement of Form S-4 of EchoStar,
Registration No. 333-03584).
10.16* Agreement between HTS, ESC and ExpressVu Inc., dated
January 8, 1997, as amended (incorporated by reference to
Exhibit 10.18 to the Annual Report on Form 10-K of EchoStar
for the year ended December 31, 1996, as amended,
Commission File No. 0-26176).
10.17* Amendment No. 9 to Satellite Construction Contract,
effective as of July 18, 1996, between Direct Satellite
Broadcasting Corporation, a Delaware corporation ("DBSC")
and Martin Marrieta Corporation (incorporated by reference
to Exhibit 10.1 to the Quarterly Report on Form 10-Q of
EchoStar for the quarterly period ended June 30, 1997,
Commission File No. 0-26176).
10.18* Amendment No. 10 to Satellite Construction Contract,
effective as of May 31, 1996, between DBSC and Lockheed
Martin Corporation (incorporated by reference to Exhibit
10.2 to the Quarterly Report on Form 10-Q of EchoStar for
the quarterly period ended June 30, 1997, Commission File
No. 0-26176).
10.19* Contract for Launch Services, dated April 5, 1996, between
Lockheed Martin Commercial Launch Services, Inc. and
EchoStar Space Corporation (incorporated by reference to
Exhibit 10.3 to the Quarterly Report on Form 10-Q of
EchoStar for the quarterly period ended June 30, 1997,
Commission File No. 0-26176).
10.20* OEM Manufacturing, Marketing and Licensing Agreement, dated
as of February 17, 1998, by and among HTS, ESC and Philips
Electronics North America Corporation (incorporated by
reference to Exhibit 10.1 to the Quarterly Report on Form
10-Q of EchoStar for the quarterly period ended March 31,
1998, Commission File No. 0-26176).
43
<PAGE> 46
10.21* Licensing Agreement, dated as of February 23, 1998, by and
among HTS, ESC and VTech Communications Ltd. (incorporated
by reference to Exhibit 10.2 to the Quarterly Report on
Form 10-Q of EchoStar for the quarterly period ended March
31, 1998, Commission File No. 0-26176).
10.22* Purchase Agreement, dated November 30, 1998, by and among
American Sky Broadcasting, LLC ("ASkyB"), The News
Corporation Limited ("News Corporation"), MCI
Telecommunications Corporation and EchoStar (incorporated
by reference to Exhibit 10.1 to the Current Report on Form
8-K filed by EchoStar on December 1, 1998, Commission File
No. 0-26176).
10.23* Voting Agreement, dated November 30, 1998, among EchoStar,
AskyB, News Corporation and MCI Telecommunications
Corporation (incorporated by reference to Exhibit 10.3 to
the Current Report on Form 8-K of EchoStar, filed as of
December 1, 1998).
10.24* Agreement to Form NagraStar LLC, dated as of June 23, 1998,
by and between Kudelski S.A., EchoStar and ESC
(incorporated by reference to Exhibit 10.28 to the Annual
Report on Form 10-K of EchoStar for the year ended December
31, 1998, Commission File No. 0-26176).
10.25* First Amendment, dated June 23, 1999, to the Purchase
Agreement dated November 30, 1998, by and among American
Sky Broadcasting, LLC, The News Corporation Limited, MCI
Telecommunications Corporation, and EchoStar Communications
Corporation (incorporated by reference to Exhibit 10.3 to
the Current Report on Form 8-K of EchoStar, filed as of
July 2, 1999, Commission File No. 0-26176).
10.26* Registration Rights Agreement, dated June 24, 1999, by and
among EchoStar Communications Corporation, MCI
Telecommunications Corporation, American Sky Broadcasting,
LLC, and News America Incorporated (incorporated by
reference to Exhibit 10.4 to the Current Report on Form 8-K
of EchoStar, filed as of July 2, 1999, Commission File No.
0-26176).
21[] Subsidiaries of EchoStar Communications Corporation.
24.1[] Powers of Attorney authorizing signature of O. Nolan Daines
and Raymond L. Friedlob.
27[] Financial Data Schedule.
- -------------------
* Incorporated by reference.
** Constitutes a management contract or compensatory plan or arrangement.
[] Filed herewith.
(b) Reports on Form 8-K
On January 5, 1999, we filed a Current Report on Form 8-K to report
that we had commenced a cash tender offer to purchase any and all of our
outstanding 12 1/8% Senior Exchange Notes due 2004 that were issued on January
4, 1999 in exchange for all of our 12 1/8% Series B Senior Redeemable
Exchangeable Preferred Stock due 2004. The tender offer was part of a plan to
refinance our existing indebtedness at more favorable interest rates and terms
which was successfully executed during the first quarter of 1999.
On May 26, 1999, we filed a Current Report on Form 8-K to report that
on May 25, 1999 we announced a 2-for-1 split of our common stock, which was
approved by our Board of Directors. Effective July 19, 1999, stockholders of
record at the close of business on July 1, 1999 are entitled to one additional
share of common stock for each share they own on the record date.
On July 2, 1999, we filed a Current Report on Form 8-K to report that
on June 24, 1999, we acquired certain high-power direct broadcast satellite
assets from News Corporation and MCI in exchange for 34,412,464 shares of our
Class A common stock.
44
<PAGE> 47
On October 7, 1999, we filed a Current Report on Form 8-K to report
that on that day we announced a 2-for-1 split of our common stock, which was
approved by our Board of Directors. Effective October 25, 1999, stockholders of
record at the close of business on October 18, 1999 are entitled to one
additional share of common stock for each share they own on the record date.
On December 20, 1999, we filed a Current Report on Form 8-K to report
that on December 6, 1999 we announced that the initial purchasers of our 4 7/8%
Convertible Subordinated Notes have exercise their over-allotment option to
purchase an additional $250 million of Convertible Subordinated Notes.
On December 20, 1999, we elected to file by Current Report on Form 8-K
certain exhibits in connection with our Registration Statement on Form S-3,
Registration No. 333-88755, as amended by Amendment No. 1.
45
<PAGE> 48
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, EchoStar has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
ECHOSTAR COMMUNICATIONS CORPORATION
By: /s/ Steven B. Schaver
-----------------------------------------
Steven B. Schaver
Chief Financial Officer
Date: March 13, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of EchoStar
and in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ Charles W. Ergen Chief Executive Officer, President and Director March 13, 2000
- --------------------------------- (Principal Executive Officer)
Charles W. Ergen
/s/ Steven B. Schaver Chief Financial Officer March 13, 2000
- --------------------------------- (Principal Financial Officer)
Steven B. Schaver
/s/ James DeFranco Director March 13, 2000
- ---------------------------------
James DeFranco
/s/ David K. Moskowitz Director March 13, 2000
- ---------------------------------
David K. Moskowitz
* Director March 13, 2000
- ---------------------------------
Raymond L. Friedlob
* Director March 13, 2000
- ---------------------------------
O. Nolan Daines
</TABLE>
* By: /s/ David K. Moskowitz
--------------------------------
David K. Moskowitz
Attorney-in-Fact
46
<PAGE> 49
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
CONSOLIDATED FINANCIAL STATEMENTS:
Report of Independent Public Accountants.................................................................. F-2
Consolidated Balance Sheets at December 31, 1998 and 1999................................................. F-3
Consolidated Statements of Operations and Comprehensive Loss for the years ended December 31, 1997,
1998 and 1999.......................................................................................... F-4
Consolidated Statements of Changes in Stockholders' Equity for the years ended December 31, 1997, 1998
and 1999............................................................................................... F-5
Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1998 and 1999................ F-6
Notes to Consolidated Financial Statements................................................................ F-7
</TABLE>
F-1
<PAGE> 50
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To EchoStar Communications Corporation:
We have audited the accompanying consolidated balance sheets of EchoStar
Communications Corporation (a Nevada corporation) and subsidiaries, as described
in Note 1, as of December 31, 1998 and 1999, and the related consolidated
statements of operations and comprehensive loss, changes in stockholders' equity
and cash flows for each of the three years in the period ended December 31,
1999. These financial statements are the responsibility of the Companies'
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of EchoStar
Communications Corporation and subsidiaries as of December 31, 1998 and 1999,
and the consolidated results of their operations and their cash flows for each
of the three years in the period ended December 31, 1999, in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Denver, Colorado,
March 10, 2000.
F-2
<PAGE> 51
ECHOSTAR COMMUNICATIONS CORPORATION
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1998 1999
----------- -----------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents ..................................................................... $ 106,547 $ 905,299
Marketable investment securities .............................................................. 217,553 348,876
Trade accounts receivable, net of allowance for uncollectible accounts of
$2,996 and $13,109, respectively ............................................................ 107,233 159,685
Insurance receivable .......................................................................... -- 106,000
Inventories ................................................................................... 76,708 123,630
Other current assets .......................................................................... 29,804 40,205
----------- -----------
Total current assets ............................................................................. 537,845 1,683,695
Restricted Assets:
Insurance receivable (Note 3) ................................................................. 106,000 --
Interest and satellite escrows ................................................................ 77,657 --
Restricted cash and marketable investment securities .......................................... -- 3,000
----------- -----------
Total restricted assets .......................................................................... 183,657 3,000
Property and equipment, net ...................................................................... 876,914 1,339,939
FCC authorizations, net .......................................................................... 103,434 722,402
Other noncurrent assets .......................................................................... 105,002 149,153
----------- -----------
Total assets ................................................................................ $ 1,806,852 $ 3,898,189
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Trade accounts payable ........................................................................ $ 90,646 $ 194,046
Deferred revenue .............................................................................. 132,982 181,531
Accrued expenses .............................................................................. 184,470 499,265
Current portion of long-term debt ............................................................. 22,679 22,067
----------- -----------
Total current liabilities ........................................................................ 430,777 896,909
Long-term obligations, net of current portion:
1994 Notes .................................................................................... 571,674 1,503
1996 Notes .................................................................................... 497,955 1,097
1997 Notes .................................................................................... 375,000 15
Seven Year Notes .............................................................................. -- 375,000
Ten Year Notes ................................................................................ -- 1,625,000
Convertible Notes ............................................................................. -- 1,000,000
Mortgages and other notes payable, net of current portion ..................................... 43,450 27,990
Long-term deferred satellite services revenue and other long-term liabilities ................. 33,498 19,093
----------- -----------
Total long-term obligations, net of current portion .............................................. 1,521,577 3,049,698
----------- -----------
Total liabilities ........................................................................... 1,952,354 3,946,607
12 1/8% Series B Senior Redeemable Exchangeable Preferred Stock, $.01 par value,
900,000 shares authorized; 225,301 and no shares issued and
outstanding, respectively ..................................................................... 226,038 --
Commitments and Contingencies (Note 10)
Stockholders' Equity (Deficit):
Preferred Stock (Note 7) ...................................................................... 129,473 45,434
Class A Common Stock, $.01 par value, 800,000,000 shares authorized,
61,269,520 and 110,043,615 shares issued and outstanding, respectively ....................... 613 1,100
Class B Common Stock, $.01 par value, 400,000,000 shares authorized,
119,217,604 shares issued and outstanding ................................................... 1,192 1,192
Class C Common Stock, $.01 par value, 400,000,000 shares authorized, none
outstanding ................................................................................. --
Additional paid-in capital .................................................................... 230,275 1,624,830
Deferred stock-based compensation ............................................................. -- (117,780)
Accumulated deficit ........................................................................... (733,093) (1,603,194)
----------- -----------
Total stockholders' equity (deficit) ............................................................. (371,540) (48,418)
----------- -----------
Total liabilities and stockholders' equity (deficit) ........................................ $ 1,806,852 $ 3,898,189
=========== ===========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-3
<PAGE> 52
ECHOSTAR COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------
1997 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
REVENUE:
DISH Network:
Subscription television services ............................ $ 298,883 $ 669,310 $ 1,344,136
Other ....................................................... 45,367 13,722 8,467
----------- ----------- -----------
Total DISH Network ............................................ 344,250 683,032 1,352,603
DTH equipment sales and integration services .................. 91,637 256,193 184,041
Satellite services ............................................ 11,135 22,366 41,071
C-band and other .............................................. 30,396 21,075 25,126
----------- ----------- -----------
Total revenue .................................................... 477,418 982,666 1,602,841
COSTS AND EXPENSES:
DISH Network Operating Expenses:
Subscriber-related expenses ................................. 143,574 296,923 574,828
Customer service center and other ........................... 35,137 72,496 121,576
Satellite and transmission .................................. 14,563 25,992 42,906
----------- ----------- -----------
Total DISH Network operating expenses ......................... 193,274 395,411 739,310
Cost of sales - DTH equipment and integration services ........ 61,992 173,388 148,427
Cost of sales - C-band and other .............................. 23,909 16,496 17,084
Marketing:
Subscriber promotion subsidies .............................. 145,061 272,523 662,360
Advertising and other ....................................... 34,862 47,998 64,701
----------- ----------- -----------
Total marketing expenses ...................................... 179,923 320,521 727,061
General and administrative .................................... 69,315 97,105 204,822
Amortization of subscriber acquisition costs .................. 121,735 18,869 --
Depreciation and amortization ................................. 51,541 83,767 113,228
----------- ----------- -----------
Total costs and expenses ......................................... 701,689 1,105,557 1,949,932
----------- ----------- -----------
Operating loss ................................................... (224,271) (122,891) (347,091)
Other Income (Expense):
Interest income ............................................... 17,251 30,286 26,179
Interest expense, net of amounts capitalized .................. (104,192) (167,529) (201,613)
Other ......................................................... (1,467) (704) (1,169)
----------- ----------- -----------
Total other income (expense) ..................................... (88,408) (137,947) (176,603)
----------- ----------- -----------
Loss before income taxes ......................................... (312,679) (260,838) (523,694)
Income tax provision, net ........................................ (146) (44) (154)
----------- ----------- -----------
Net loss before extraordinary charges ............................ (312,825) (260,882) (523,848)
Extraordinary charge for early retirement of debt, net of tax .... -- -- (268,999)
----------- ----------- -----------
Net loss ......................................................... $ (312,825) $ (260,882) $ (792,847)
=========== =========== ===========
Change in unrealized gain (loss) on available-for-sale
securities, net of tax ........................................ (8) 19 --
----------- ----------- -----------
Comprehensive loss ............................................... $ (312,833) $ (260,863) $ (792,847)
=========== =========== ===========
Net loss attributable to common shareholders (Note 2) ............ $ (321,267) $ (296,097) $ (800,100)
=========== =========== ===========
Weighted-average common shares outstanding ....................... 167,672 179,928 208,238
=========== =========== ===========
Basic and diluted loss per share ................................. $ (1.92) $ (1.65) $ (3.84)
=========== =========== ===========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-4
<PAGE> 53
ECHOSTAR COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
DEFERRED
STOCK-
COMMON STOCK SERIES A SERIES C BASED
--------------------- PREFERRED PREFERRED COMPEN-
SHARES AMT. STOCK STOCK SATION
------- ----------- --------- ----------- -----------
(Notes 1 and 7)
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1996 ....................... 163,680 $ 1,637 $ 18,399 $ -- $ --
8% Series A Cumulative Preferred Stock
("Series A Preferred Stock") dividends
(at $0.75 per share) ........................ -- -- 1,204 -- --
12 1/8% Series B Senior Redeemable
Exchangeable Preferred Stock ("Series B
Preferred Stock") dividends payable
in-kind ..................................... -- -- -- -- --
Issuance of 6 3/4% Series C Cumulative
Convertible Preferred Stock ("Series C
Preferred Stock"), net of issuance costs
of $3,778 ................................... -- -- -- 100,455 --
Accretion of Series C Preferred Stock ......... -- -- -- 1,074 --
Issuance of Class A Common Stock:
Acquisition of DBSC ......................... 2,596 26 -- -- --
Exercise of stock options and warrants ...... 392 4 -- -- --
Secondary public offering, net of stock
issuance costs of $2,648 .................. 13,580 136 -- -- --
Employee benefits ........................... 56 1 -- -- --
Employee Stock Purchase Plan ................ 16 -- -- -- --
Cancellation of Class A Common Stock to
foreclose on convertible subordinated
debentures from DBSI ........................ (1,080) (11) -- -- --
Unrealized holding losses on
available-for-sale securities, net .......... -- -- -- -- --
Net loss ...................................... -- -- -- -- --
------- ----------- --------- ----------- -----------
Balance, December 31, 1997 ....................... 179,240 1,793 19,603 101,529 --
Series A Preferred Stock dividends (at
$0.75 per share) ............................ -- -- 1,204 -- --
Series B Preferred Stock dividends payable
in-kind ..................................... -- -- -- -- --
Accretion of Series C Preferred Stock ......... -- -- -- 7,137 --
Issuance of Class A Common Stock:
Exercise of stock options ................... 784 8 -- -- --
Employee benefits ........................... 400 4 -- -- --
Employee Stock Purchase Plan ................ 64 -- -- -- --
Unrealized holding gains on
available-for-sale securities, net .......... -- -- -- -- --
Net loss ...................................... -- -- -- -- --
------- ----------- --------- ----------- -----------
Balance, December 31, 1998 ....................... 180,488 1,805 20,807 108,666 --
Series A Preferred Stock dividends (at
$0.75 per share) ............................ -- -- 124 -- --
Retirement of Series A Preferred Stock ........ -- -- (20,931) -- --
Series B Preferred Stock dividends payable
in-kind ..................................... -- -- -- -- --
Accretion of Series C Preferred Stock ......... -- -- -- 6,335 --
Series C Preferred Stock dividends (at
$0.84375 per share, per quarter) ............ -- -- -- -- --
Conversion of Series C Preferred Stock ........ 11,416 114 -- (69,567) --
Proceeds from Series C Preferred Stock
deposit account ............................. 23 -- -- -- --
Issuance of Class A Common Stock:
Acquisition of Media4 ....................... 688 7 -- -- --
News Corporation and MCI transaction ........ 34,412 344 -- -- --
Exercise of stock options ................... 1,934 19 -- -- --
Employee benefits ........................... 278 3 -- -- --
Employee Stock Purchase Plan ................ 22 -- -- -- --
Deferred stock-based compensation ............. -- -- -- -- (178,840)
Deferred stock-based compensation
recognized .................................. -- -- -- -- 61,060
Net loss ...................................... -- -- -- -- --
------- ----------- --------- ----------- -----------
Balance, December 31, 1999 ....................... 229,261 $ 2,292 $ -- $ 45,434 $ (117,780)
======= =========== ========= =========== ===========
<CAPTION>
ACCUMULATED
DEFICIT AND
ADDITIONAL UNREALIZED
PAID-IN HOLDING GAINS
CAPITAL (LOSSES) TOTAL
----------- ----------- -----------
<S> <C> <C> <C>
Balance, December 31, 1996 ....................... $ 156,901 $ (115,740) $ 61,197
8% Series A Cumulative Preferred Stock
("Series A Preferred Stock") dividends
(at $0.75 per share) ........................ -- (1,204) --
12 1/8% Series B Senior Redeemable
Exchangeable Preferred Stock ("Series B
Preferred Stock") dividends payable
in-kind ..................................... -- (6,164) (6,164)
Issuance of 6 3/4% Series C Cumulative
Convertible Preferred Stock ("Series C
Preferred Stock"), net of issuance costs
of $3,778 ................................... (3,778) -- 96,677
Accretion of Series C Preferred Stock ......... -- (1,074) --
Issuance of Class A Common Stock:
Acquisition of DBSC ......................... 12,005 -- 12,031
Exercise of stock options and warrants ...... 941 -- 945
Secondary public offering, net of stock
issuance costs of $2,648 .................. 63,114 -- 63,250
Employee benefits ........................... 351 -- 352
Employee Stock Purchase Plan ................ 63 -- 63
Cancellation of Class A Common Stock to
foreclose on convertible subordinated
debentures from DBSI ........................ (4,468) -- (4,479)
Unrealized holding losses on
available-for-sale securities, net .......... -- (8) (8)
Net loss ...................................... -- (312,825) (312,825)
----------- ----------- -----------
Balance, December 31, 1997 ....................... 225,129 (437,015) (88,961)
Series A Preferred Stock dividends (at
$0.75 per share) ............................ -- (1,204) --
Series B Preferred Stock dividends payable
in-kind ..................................... -- (26,874) (26,874)
Accretion of Series C Preferred Stock ......... -- (7,137) --
Issuance of Class A Common Stock:
Exercise of stock options ................... 2,488 -- 2,496
Employee benefits ........................... 2,287 -- 2,291
Employee Stock Purchase Plan ................ 371 -- 371
Unrealized holding gains on
available-for-sale securities, net .......... -- 19 19
Net loss ...................................... -- (260,882) (260,882)
----------- ----------- -----------
Balance, December 31, 1998 ....................... 230,275 (733,093) (371,540)
Series A Preferred Stock dividends (at
$0.75 per share) ............................ -- (124) --
Retirement of Series A Preferred Stock ........ -- (70,003) (90,934)
Series B Preferred Stock dividends payable
in-kind ..................................... -- (241) (241)
Accretion of Series C Preferred Stock ......... -- (6,335) --
Series C Preferred Stock dividends (at
$0.84375 per share, per quarter) ............ -- (553) (553)
Conversion of Series C Preferred Stock ........ 69,453 -- --
Proceeds from Series C Preferred Stock
deposit account ............................. 953 2 955
Issuance of Class A Common Stock:
Acquisition of Media4 ....................... 9,600 -- 9,607
News Corporation and MCI transaction ........ 1,123,976 -- 1,124,320
Exercise of stock options ................... 7,145 -- 7,164
Employee benefits ........................... 3,792 -- 3,795
Employee Stock Purchase Plan ................ 796 -- 796
Deferred stock-based compensation ............. 178,840 -- --
Deferred stock-based compensation
recognized .................................. -- 61,060
Net loss ...................................... -- (792,847) (792,847)
----------- ----------- -----------
Balance, December 31, 1999 ....................... $ 1,624,830 $(1,603,194) $ (48,418)
=========== =========== ===========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-5
<PAGE> 54
ECHOSTAR COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------
1997 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss .......................................................................... $ (312,825) $ (260,882) $ (792,847)
Adjustments to reconcile net loss to net cash flows from operating activities:
Extraordinary charge for early retirement of debt .............................. -- -- 268,999
Loss on impairment of satellite (Note 3) ....................................... -- -- 13,741
Loss on disposal of assets ..................................................... -- -- 9,852
Gain on sale of investments .................................................... -- -- (24,439)
Deferred stock-based compensation recognized ................................... -- -- 61,060
Depreciation and amortization .................................................. 51,541 83,767 113,228
Amortization of subscriber acquisition costs ................................... 121,735 18,869 --
Amortization of debt discount and deferred financing costs ..................... 83,221 125,724 13,678
Change in reserve for excess and obsolete inventory ............................ (1,823) 1,341 (1,234)
Change in long-term deferred satellite services revenue and other long-term
liabilities .................................................................. 12,056 13,856 10,173
Superstar exclusivity fee ...................................................... -- -- (10,000)
Other, net ..................................................................... 421 2,291 1,829
Changes in current assets and current liabilities:
Trade accounts receivable, net ............................................... (52,558) (41,159) (52,452)
Inventories .................................................................. 51,597 (55,056) (45,688)
Subscriber acquisition costs ................................................. (72,475) -- --
Other current assets ......................................................... 10,969 (10,264) (4,091)
Trade accounts payable ....................................................... 26,708 22,136 103,400
Deferred revenue ............................................................. 18,612 10,275 48,549
Accrued expenses ............................................................. 62,864 72,212 227,729
----------- ----------- -----------
Net cash flows from operating activities .......................................... 43 (16,890) (58,513)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of marketable investment securities ..................................... (308,006) (570,096) (541,401)
Sales of marketable investment securities ......................................... 51,513 627,860 434,517
Purchases of restricted marketable investment securities .......................... (1,145) -- (5,928)
Funds released from escrow and restricted cash and marketable investment
securities ..................................................................... 120,215 116,468 80,585
Offering proceeds and investment earnings placed in escrow ........................ (227,561) (6,343) --
Purchases of property and equipment ............................................... (232,058) (161,140) (91,152)
Advances from News Corporation and MCI for satellite payments ..................... -- -- 67,804
Issuance of notes receivable ...................................................... -- (17,666) --
Payments received on note receivable .............................................. -- 3,170 1,000
Investment in Eldon Technology Limited ............................................ -- -- (5,639)
Other ............................................................................. (207) (301) (2,612)
----------- ----------- -----------
Net cash flows from investing activities .......................................... (597,249) (8,048) (62,826)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of Class A Common Stock ................................ 63,250 -- --
Net proceeds from issuance of 1997 Notes .......................................... 362,500 -- --
Proceeds from issuance of Seven Year Notes ........................................ -- -- 375,000
Proceeds for issuance of Ten Year Notes ........................................... -- -- 1,625,000
Proceeds for issuance of Convertible Notes ........................................ -- -- 1,000,000
Debt issuance costs and prepayment premiums ....................................... -- -- (293,987)
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)
Net proceeds from issuance of 12 1/8% Series B Senior Redeemable Exchangeable
Preferred Stock ................................................................ 193,000 -- --
Net proceeds from issuance of 6 3/4% Series C Cumulative Convertible Preferred
Stock .......................................................................... 96,677 -- --
Repayments of mortgage indebtedness and other notes payable ....................... (13,253) (16,552) (22,201)
Net proceeds from Class A Common Stock options exercised .......................... 945 2,459 7,164
Net proceeds from Class A Common Stock issued for Employee Stock Purchase Plan
and proceeds from 6 3/4% Series C Cumulative Convertible Preferred Stock
deposit account ................................................................ 63 371 1,751
Other ............................................................................. -- -- 1,960
----------- ----------- -----------
Net cash flows from financing activities .......................................... 703,182 (13,722) 920,091
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents .............................. 105,976 (38,660) 798,752
Cash and cash equivalents, beginning of year ...................................... 39,231 145,207 106,547
----------- ----------- -----------
Cash and cash equivalents, end of year ............................................ $ 145,207 $ 106,547 $ 905,299
=========== =========== ===========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-6
<PAGE> 55
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND BUSINESS ACTIVITIES
Principal Business
The operations of EchoStar Communications Corporation ("ECC," and together
with its subsidiaries, or referring to particular subsidiaries in certain
circumstances, "EchoStar" or the "Company") include three interrelated business
units:
o The DISH Network - a direct broadcast satellite ("DBS") subscription
television service in the United States. As of December 31, 1999,
EchoStar had approximately 3.4 million DISH Network subscribers.
o EchoStar Technologies Corporation ("ETC") - engaged in the design of
DBS set-top boxes, antennae and other digital equipment for the DISH
Network ("EchoStar receiver systems"), and the design and distribution
of similar equipment for direct-to-home ("DTH") projects of others
internationally, together with the provision of uplink center design,
construction oversight and other project integration services for
international DTH ventures.
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, EchoStar has deployed substantial resources to develop the
"EchoStar DBS System." The EchoStar DBS System consists of EchoStar's
FCC-allocated DBS spectrum, DBS satellites ("EchoStar I," "EchoStar II,"
"EchoStar III," "EchoStar IV," and "EchoStar V"), digital satellite receivers,
digital broadcast operations centers, customer service facilities, and other
assets utilized in its operations. EchoStar's principal business strategy is to
continue developing its subscription television service in the United States to
provide consumers with a fully competitive alternative to cable television
service.
Organization and Legal Structure
In December 1995, ECC merged Dish, Ltd. with a wholly-owned subsidiary of
ECC. During the first quarter of 1999, EchoStar placed ownership of all of its
direct broadcast satellites and related FCC licenses into EchoStar Satellite
Corporation ("ESC"). DirectSat Corporation, Direct Broadcasting Satellite
Corporation ("DBSC") and EchoStar Space Corporation ("Space") were merged into
ESC. Dish, Ltd. and EchoStar Satellite Broadcasting Company ("ESBC") were merged
into EchoStar DBS Corporation ("DBS Corp"). EchoStar IV and the related FCC
licenses were transferred to ESC. Substantially all of EchoStar's operations are
conducted by subsidiaries of DBS Corp.
The following table summarizes the organizational structure of EchoStar and
its principal subsidiaries as of December 31, 1999:
<TABLE>
<CAPTION>
REFERRED TO
LEGAL ENTITY HEREIN AS PARENT
- ----------------------------------- ---------- --------------
<S> <C> <C>
EchoStar Communications Corporation ECC Publicly owned
EchoStar DBS Corporation DBS Corp ECC
EchoStar Satellite Corporation ESC DBS Corp
Echosphere Corporation Echosphere DBS Corp
EchoStar Technologies Corporation ETC DBS Corp
</TABLE>
F-7
<PAGE> 56
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Significant Risks and Uncertainties
Substantial Leverage. EchoStar is highly leveraged, which makes it
vulnerable to changes in general economic conditions. As of December 31, 1999,
EchoStar had outstanding long-term debt (including both the current and
long-term portions) totaling approximately $3.1 billion. In August 1999,
EchoStar began paying semi-annual cash debt service payments of approximately
$94 million related to its 9 1/4% Senior Notes due 2006 (the "Seven Year Notes")
and its 9 3/8% Senior Notes due 2009 (the "Ten Year Notes"). Further, beginning
in July 2000, EchoStar will have semi-annual interest payments due on its 4 7/8%
Convertible Subordinated Notes due 2007 (the "Convertible Notes") of
approximately $24 million. EchoStar's ability to meet its debt service
obligations will depend on, among other factors, the successful execution of its
business strategy, which is subject to uncertainties and contingencies beyond
EchoStar's control.
Expected Operating Losses. Since 1996, EchoStar has reported significant
operating and net losses. Improvements in EchoStar's future results of
operations are largely dependent upon its ability to increase its customer base
while maintaining its overall cost structure, controlling subscriber turnover
and effectively managing its subscriber acquisition costs. No assurance can be
given that EchoStar will be effective with regard to these matters. In addition,
EchoStar incurs significant acquisition costs to obtain DISH Network
subscribers. The high cost of obtaining new subscribers magnifies the negative
effects of subscriber turnover.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
EchoStar accounts for investments in 50% or less owned entities using the
equity method. At December 31, 1997, 1998 and 1999, these investments were not
material to EchoStar's consolidated financial statements. All significant
intercompany accounts and transactions have been eliminated.
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.
Stock Splits
On each of July 19, 1999 and October 25, 1999, EchoStar completed a
two-for-one split of its outstanding Class A and Class B common stock. An amount
equal to the par value of the common shares issued for the July and October
stock splits was transferred from additional paid-in capital to Class A common
stock and Class B common stock. On February 28, 2000 we announced a two-for-one
split of our outstanding class A and class B common stock effective March 22,
2000 to shareholders of record as of the close of business on March 10, 2000.
All references to shares included herein retroactively give effect to the stock
splits competed in July and October of 1999, but not the announced March 22,
2000 stock split.
Foreign Currency Transaction Gains and Losses
The functional currency of EchoStar's foreign subsidiaries is the U.S.
dollar because their sales and purchases are predominantly denominated in that
currency. Transactions denominated in currencies other than U.S. dollars are
recorded based on exchange rates at the time such transactions arise. Subsequent
changes in exchange rates result in transaction gains and losses which are
reflected in income as unrealized (based on period-end translation) or realized
(upon settlement of the transaction). Net transaction gains (losses) during
1997, 1998 and 1999 were not material to EchoStar's results of operations.
F-8
<PAGE> 57
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Statements of Cash Flows Data
The following presents EchoStar's supplemental cash flow statement
disclosure (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------
1997 1998 1999
---------- ---------- ----------
<S> <C> <C> <C>
Cash paid for interest ......................................................... $ 5,073 $ 52,293 $ 128,553
Cash paid for income taxes ..................................................... 209 83 119
Capitalized interest ........................................................... 43,169 21,678 --
8% Series A Cumulative Preferred Stock dividends ............................... 1,204 1,204 124
12 1/8% Series B Senior Redeemable Exchangeable Preferred Stock dividends
payable in-kind ............................................................. 6,164 26,874 241
Accretion of 6 3/4% Series C Cumulative Convertible Preferred Stock ............ 1,074 7,137 6,335
6 3/4% Series C Cumulative Convertible Preferred Stock dividends ............... -- -- 553
Class A Common Stock cancelled to foreclose on convertible subordinated
debentures from DBSI ........................................................ 4,479 -- --
Satellite vendor financing ..................................................... 14,400 12,950 --
Other notes payable ............................................................ 5,322 -- --
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
The purchase price of DBSC was allocated as follows in the related purchase
accounting:
EchoStar III satellite under construction ................................... 51,241 -- --
FCC authorizations .......................................................... 16,243 -- --
Notes receivable from DBSC, including accrued interest of $3,382 ............ (49,369) -- --
Investment in DBSC .......................................................... (4,044) -- --
Accounts payable and accrued expenses ....................................... (1,540) -- --
Other notes payable ......................................................... (500) -- --
Common stock and additional paid-in capital ................................. (12,031) -- --
</TABLE>
Cash and Cash Equivalents
EchoStar considers all liquid investments purchased with an original
maturity of 90 days or less to be cash equivalents. Cash equivalents as of
December 31, 1998 and 1999 consist of money market funds, corporate notes and
commercial paper; such balances are stated at cost which equates to market
value.
Marketable Investment Securities and Restricted Cash and Marketable Investment
Securities
As of December 31, 1998 and 1999, EchoStar has classified all marketable
investment securities as available-for-sale. The fair market value of marketable
investment securities approximates the carrying value and represents the quoted
market prices at the balance sheet dates. Related unrealized gains and losses
are reported as a separate component of stockholders' equity, net of related
deferred income taxes, if applicable. The specific identification method is used
to determine cost in computing realized gains and losses.
Restricted cash and marketable investment securities, as reflected in the
accompanying consolidated balance sheets, include cash restricted by the
indenture related to the 1997 Notes, plus investment earnings thereon and
restricted cash placed in trust for the purpose of repaying a note payable, as
of December 31, 1998 and 1999, respectively.
F-9
<PAGE> 58
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
The major components of marketable investment securities and restricted
cash and marketable investment securities are as follow (in thousands):
<TABLE>
<CAPTION>
MARKETABLE INVESTMENT RESTRICTED CASH AND MARKETABLE
SECURITIES INVESTMENT SECURITIES
DECEMBER 31, DECEMBER 31,
--------------------- ---------------------
1998 1999 1998 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Commercial paper ............. $ 87,099 $121,802 $ 8,424 $ --
Corporate notes and bonds .... 84,520 205,930 54,360 --
Government bonds ............. 45,934 21,144 14,517 --
Restricted cash .............. -- -- -- 3,000
Accrued interest ............. -- -- 356 --
-------- -------- -------- --------
$217,553 $348,876 $ 77,657 $ 3,000
======== ======== ======== ========
</TABLE>
Marketable investment securities and restricted cash and marketable
investment securities include debt securities of $329 million with contractual
maturities of one year or less, $16 million with contractual maturities between
one and five years and $3 million with contractual maturities greater than five
years. Actual maturities may differ from contractual maturities as a result of
EchoStar's ability to sell these securities prior to maturity.
Fair Value of Financial Instruments
Fair values for EchoStar's 1994 Notes, 1996 Notes, 1997 Notes, Seven Year
Notes, Ten Year Notes, Convertible Notes, and Series B Preferred Stock are based
on quoted market prices. The fair values of EchoStar's mortgages and other notes
payable are estimated using discounted cash flow analyses. The interest rates
assumed in such discounted cash flow analyses reflect interest rates currently
being offered for loans with similar terms to borrowers of similar credit
quality.
The following table summarizes the book and fair values of EchoStar's debt
facilities and Series B Preferred Stock at December 31, 1998 and 1999 (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1998 DECEMBER 31, 1999
------------------------- -------------------------
BOOK VALUE FAIR VALUE BOOK VALUE FAIR VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
1994 Notes ............................ $ 571,674 $ 636,480 $ 1,503 $ 1,503
1996 Notes ............................ 497,955 580,000 1,097 1,097
1997 Notes ............................ 375,000 431,250 15 15
Seven Year Notes ...................... -- -- 375,000 377,813
Ten Year Notes ........................ -- -- 1,625,000 1,637,188
Convertible Notes ..................... -- -- 1,000,000 1,227,500
Mortgages and other notes payable ..... 66,129 61,975 50,057 47,238
12 1/8% Series B Senior Redeemable
Exchangeable Preferred Stock ....... 226,038 259,944 -- --
</TABLE>
F-10
<PAGE> 59
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Inventories
Inventories are stated at the lower of cost or market value. Cost is
determined using the first-in, first-out method. Proprietary products are
manufactured by outside suppliers to EchoStar's specifications. Manufactured
inventories include materials, labor and manufacturing overhead. Cost of other
inventories includes parts, contract manufacturers' delivered price, assembly
and testing labor, and related overhead, including handling and storage costs.
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1998 1999
--------- ---------
<S> <C> <C>
Finished goods - DBS ......................................... $ 44,936 $ 63,567
Raw materials ................................................ 8,473 35,751
Finished goods - reconditioned and other ..................... 18,406 19,509
Work-in-process .............................................. 2,420 7,666
Consignment .................................................. 7,654 1,084
Reserve for excess and obsolete inventory .................... (5,181) (3,947)
--------- ---------
$ 76,708 $ 123,630
========= =========
</TABLE>
During December 1999, EchoStar provided for losses of $16.6 million,
primarily for component parts and purchase commitments related to its first
generation model 7100 set-top boxes. Production of model 7100 has been suspended
in favor of its second generation model 7200 set-top boxes.
Property and Equipment
Property and equipment are stated at cost. Cost includes interest
capitalized of $32 million and $16 million during the years ended December 31,
1997 and 1998, respectively. No interest was capitalized during 1999. The costs
of satellites under construction are capitalized during the construction phase,
assuming the eventual successful launch and in-orbit operation of the satellite.
If a satellite were to fail during launch or while in-orbit, the resultant loss
would be charged to expense in the period such loss was incurred. The amount of
any such loss would be reduced to the extent of insurance proceeds received as a
result of the launch or in-orbit failure. Depreciation is recorded on a
straight-line basis for financial reporting purposes. Repair and maintenance
costs are charged to expense when incurred. Renewals and betterments are
capitalized.
EchoStar reviews its long-lived assets and identifiable intangible assets
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. For assets which are held
and used in operations, the asset would be impaired if the book value of the
asset exceeded the undiscounted future net cash flows related to the asset. For
those assets which are to be disposed of, the assets would be impaired to the
extent the fair value does not exceed the book value. EchoStar considers
relevant cash flow, estimated future operating results, trends and other
available information including the fair value of frequency rights owned, in
assessing whether the carrying value of assets are recoverable.
FCC Authorizations
FCC authorizations are recorded at cost and amortized using the
straight-line method over a period of 40 years. Such amortization commences at
the time the related satellite becomes operational; capitalized costs are
written off at the time efforts to provide services are abandoned. FCC
authorizations include interest capitalized of $11 million and $6 million during
the years ended December 31, 1997 and 1998, respectively.
F-11
<PAGE> 60
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Revenue Recognition
Revenue from the provision of DISH Network subscription television services
and satellite services is recognized as revenue in the period such services are
provided. Revenue from sales of digital set-top boxes and related accessories is
recognized upon shipment to customers. Revenue from the provision of integration
services is recognized as revenue in the period the services are performed.
Subscriber Promotion Subsidies and Subscriber Acquisition Costs
In August 1996, EchoStar began selling its receiver systems below
manufactured cost to consumers conditioned upon the consumer's one-year prepaid
subscription to the DISH Network's America's Top 50 CD programming package. From
August 1996 through September 1997, the excess of EchoStar's aggregate costs
(equipment, programming and other) over proceeds from equipment sales and
prepaid programming was expensed ("subscriber promotion subsidies") upon
shipment of the equipment. Remaining costs were deferred ("subscriber
acquisition costs") and amortized over the term of the prepaid subscription
(normally one year). Effective October 1997, promotional programs changed and
new subscribers were not required to prepay for a year of programming.
Consequently, EchoStar began expensing subscriber acquisition costs as incurred.
As of December 31, 1998, all previously deferred costs were fully amortized.
During November 1999, EchoStar entered into an exclusive multi-year
agreement with Superstar/Netlink Group ("Superstar"), a subsidiary of TV Guide,
Inc., to convert its current and inactive C-band subscribers to EchoStar's DBS
services. Under the terms of the agreement, Superstar will actively solicit its
C-band subscribers to convert to EchoStar's DBS services and will not provide
its subscriber lists to cable providers or other DBS providers. In exchange, in
December 1999, EchoStar paid Superstar a $10,000,000 exclusivity fee. In
addition, EchoStar will incur substantial subscriber acquisition costs,
including payments to Superstar and the retailer, and for equipment and other
incentives to the consumer for each Superstar subscriber who actually converts
to and remains a subscriber to our DBS Services. The exclusivity fee will be
amortized to expense as subscribers projected to be converted are activated for
DISH Network services.
Deferred Debt Issuance Costs and Debt Discount
Costs of issuing debt are deferred and amortized to interest expense over
the terms of the respective notes. Prior to being refinanced during January
1999, the original issue discounts related to the 1994 Notes and the 1996 Notes
were being accreted to interest expense so as to reflect a constant rate of
interest on the accreted balance of the 1994 Notes and the 1996 Notes.
Deferred Revenue
Deferred revenue principally consists of prepayments received from
subscribers for DISH Network programming. Such amounts are recognized as revenue
in the period the programming is provided to the subscriber.
Long-Term Deferred Satellite Services Revenue
Long-term deferred satellite services revenue consists of advance payments
from certain content providers for carriage of their signal on the DISH Network.
Such amounts are deferred and recognized as revenue on a straight-line basis
over the related contract terms (up to ten years).
F-12
<PAGE> 61
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Accrued Expenses
Accrued expenses consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1998 1999
-------- --------
<S> <C> <C>
Royalties and copyright fees .............................................. $ 53,746 $ 91,387
Marketing ................................................................. 33,463 88,204
Interest .................................................................. 24,918 81,574
Programming ............................................................... 35,472 59,769
Advances from News Corporation and MCI for satellite payments ............. -- 67,804
Other ..................................................................... 36,871 110,527
-------- --------
$184,470 $499,265
======== ========
</TABLE>
Advertising Costs
Advertising costs, exclusive of subscriber promotion subsidies, are
expensed as incurred and totaled $35 million, $48 million and $65 million for
the years ended December 31, 1997, 1998 and 1999, respectively.
Research and Development Costs
Research and development costs are expensed as incurred. Research and
development costs totaled $6 million, $8 million and $10 million for the years
ended December 31, 1997, 1998, and 1999, respectively.
Comprehensive Loss
The change in unrealized gain (loss) on available-for-sale securities is
the only component of EchoStar's other comprehensive loss. Accumulated other
comprehensive loss presented on the accompanying 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
Earnings per share amounts for all periods are presented below in
accordance with the requirements of FAS No. 128.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1997 1998 1999
--------- --------- ---------
(In thousands, except per share data)
<S> <C> <C> <C>
Numerator:
Net loss ....................................................... $(312,825) $(260,882) $(792,847)
8% Series A Cumulative Preferred Stock dividends ............... (1,204) (1,204) (124)
12 1/8% Series B Senior Redeemable Exchangeable Preferred
Stock dividends payable in-kind .............................. (6,164) (26,874) (241)
Accretion of 6 3/4% Series C Cumulative Convertible
Preferred Stock .............................................. (1,074) (7,137) (6,335)
6 3/4% Series C Cumulative Convertible Preferred Stock
dividends .................................................... -- -- (553)
--------- --------- ---------
Numerator for basic and diluted loss per share - loss
attributable to common shareholders .......................... $(321,267) $(296,097) $(800,100)
========= ========= =========
Denominator:
Denominator for basic and diluted loss per share -
weighted-average common shares outstanding ................... 167,672 179,928 208,238
========= ========= =========
Net loss per common share:
Basic and diluted loss per share before extraordinary charge ...... $ (1.92) $ (1.65) $ (2.55)
Extraordinary charge for the early retirement of debt ............. -- -- $ (1.29)
--------- --------- ---------
Basic and diluted loss per share .................................. $ (1.92) $ (1.65) $ (3.84)
========= ========= =========
Shares of Class A Common Stock issuable upon conversion of:
8% Series A Cumulative Preferred Stock ......................... 6,468 6,468 --
6 3/4% Series C Cumulative Convertible Preferred Stock ......... 18,860 18,860 7,456
4 7/8% Convertible Subordinated Notes .......................... -- -- 11,004
</TABLE>
F-13
<PAGE> 62
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
As of December 31, 1997, 1998 and 1999, options to purchase approximately
6,100,000, 5,788,000 and 13,922,000 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 that are convertible into shares of Class A common
stock also are excluded from the calculation of diluted loss per share as they
are antidilutive.
Reclassifications
Certain prior year balances in the consolidated financial statements have
been reclassified to conform with the 1999 presentation.
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
LIFE ----------------------------
(IN YEARS) 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
EchoStar I ........................... 12 $ 201,607 $ 201,607
EchoStar II .......................... 12 228,694 228,694
EchoStar III ......................... 12 234,083 234,083
EchoStar IV .......................... 10 105,005 89,505
EchoStar V ........................... 12 -- 208,578
Furniture, fixtures and equipment .... 2-12 182,747 243,042
Buildings and improvements ........... 7-40 60,867 68,338
Land ................................. -- 6,563 6,780
Tooling and other .................... 2 5,552 5,812
Vehicles ............................. 7 1,288 1,119
Construction in progress ............. -- 18,329 319,328
----------- -----------
Total property and equipment ..... 1,044,735 1,606,886
Accumulated depreciation ............. (167,821) (266,947)
----------- -----------
Property and equipment, net ...... $ 876,914 $ 1,339,939
=========== ===========
</TABLE>
Construction in progress consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1998 1999
-------- --------
<S> <C> <C>
Progress amounts for satellite construction, launch, and launch
insurance:
EchoStar VI ................................................... $ -- $243,633
Digital broadcast operations center ................................ -- 47,000
Other .............................................................. 18,329 28,695
-------- --------
$ 18,329 $319,328
======== ========
</TABLE>
EchoStar IV Impairment
As a result of the failure of EchoStar IV solar arrays to fully deploy and
the unrelated failure of 20 transponders to date, a maximum of approximately 16
of the 44 transponders on EchoStar IV are currently available for use at this
time. Due to the normal degradation of the solar arrays, the number of available
transponders may further decrease over time. Based on current data from Lockheed
Martin, we expect that at least
F-14
<PAGE> 63
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
10 high power transponders or 5 extra-high power transponders will probably be
available over the remaining useful life of the satellite, absent significant
additional transponder problems or other failures.
In addition to transponder failures, EchoStar IV experienced anomalies
affecting its heating systems and fuel system during 1999. As a result of the
heating system and fuel system anomalies, the remaining useful life of EchoStar
IV has been reduced to less than 10 years. Accordingly, as of November 1, 1999,
EchoStar prospectively revised the remaining useful life of EchoStar IV. This
change, after the additional loss provision discussed below, increased
EchoStar's net loss for 1999 by approximately $357,000.
During September 1998, EchoStar recorded a $106 million provision for loss
in connection with the partial failure of EchoStar IV solar arrays to deploy.
During December 1999, EchoStar recorded an additional $13.7 million provision
for loss related to the reduction in the remaining useful life of EchoStar IV.
The aggregate loss provision of $119.7 million represented EchoStar's estimate,
at December 31, 1999, of the asset impairment attributable to lost transmission
capacity on EchoStar IV resulting from the solar array anomaly described above.
EchoStar also recorded a $106 million gain, during September 1998, attributable
to an anticipated insurance claim receivable that it believes is probable of
receipt. While there can be no assurance as to the amount of the final insurance
settlement, EchoStar believes that it will receive insurance proceeds at least
equal to the $106 million receivable recorded. To the extent that it appears
probable that EchoStar will receive insurance proceeds in excess of the $106
million currently recorded and that no further provision for loss is necessary,
a gain will be recognized for the incremental amount in the period that the
amount of the final settlement can be reasonably estimated.
In September 1998, EchoStar filed a $219.3 million insurance claim for a
constructive total loss under the launch insurance policy related to EchoStar
IV. However, if the Company receive $219.3 million for a constructive total loss
on the satellite, the insurers would obtain the sole right to the benefits of
salvage from EchoStar IV under the terms of the launch insurance policy.
Although we believe we have suffered a total loss of EchoStar IV under that
definition in the launch insurance policy, we intend to negotiate a settlement
with the insurers to compensate us for the reduced satellite transmission
capacity and allow us to retain title to the asset.
The satellite insurance policy for EchoStar IV consists of separate
identical policies with different carriers for varying amounts which, in
combination, create a total insured amount of $219.3 million. Two of the
participants in EchoStar's insurance line have notified EchoStar they believe
that its alleged delay in providing required insurance claim information may
reduce their obligation to pay any settlement related to the claim. One carrier
recently asserted it has no obligation to pay. EchoStar strongly disagrees with
the position taken by those insurers and continues to believe that the EchoStar
IV insurance claim will be resolved in a manner satisfactory to EchoStar.
However, there can be no assurance that EchoStar will receive the amount claimed
or, if it does, that EchoStar will retain title to EchoStar IV with its reduced
capacity. EchoStar met with its insurance carriers in November 1999 and is
continuing discussions to resolve its claim.
While there can be no assurance, we do not currently expect a material
adverse impact on short or medium term satellite operations. We will continue to
evaluate the performance of EchoStar IV and may modify our loss assessment as
new events or circumstances develop.
4. LONG-TERM DEBT
Tender Offers
Tender offers for EchoStar's 12 7/8% Senior Secured Discount Notes due June
1, 2004, (the "1994 Notes"), 13 1/8% Senior Secured Discount Notes due 2004,
(the "1996 Notes") and 13 1/8% Senior Secured Discount Notes due 2004, (the
"1997 Notes") were consummated on January 25, 1999. The tender offers were
funded with proceeds from the offering of the Seven Year Notes and the Ten Year
Notes. Except for residual aggregate non-tendered debt of approximately $2.6
million, the 1994 Notes, 1996 Notes and the 1997 Notes that
F-15
<PAGE> 64
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
were outstanding at December 31, 1998 were retired in connection with closing of
the tender offers and the concurrent sale of the Seven and Ten Year Notes.
Additionally, substantially all of the restrictive covenants contained in each
of the respective indentures were removed upon closing of the tender offers. As
a result of the January 1999 refinancing, an extraordinary loss of $269 million
was recognized, comprised of deferred debt costs, discounts, tender costs, and
premiums paid over the accreted values of the debt retired. A brief summary of
the terms of the residual notes outstanding follows.
1994 Notes
In June 1994, Dish, Ltd. issued the 1994 Notes and Common Stock Warrants
(the "Warrants") (collectively, the "1994 Notes Offering"). The 1994 Notes
Offering resulted in net proceeds to Dish, Ltd. of $323 million. The 1994 Notes
bear interest at a rate of 12 7/8% computed on a semi-annual bond equivalent
basis. Interest on the 1994 Notes will not be payable in cash prior to June 1,
1999, with the 1994 Notes accreting to a principal value at stated maturity of
$1,000 per bond (an aggregate of approximately $1.5 million for the bonds not
tendered) by that date. Commencing in December 1999, interest on the 1994 Notes
will be payable in cash on December 1 and June 1 of each year. The remaining
balance of 1994 Notes matures on June 1, 2004.
1996 Notes
In March 1996, ESBC issued the 1996 Notes (the "1996 Notes Offering"). The
1996 Notes Offering resulted in net proceeds to ESBC of approximately $337
million. The 1996 Notes bear interest at a rate of 13 1/8%, computed on a
semi-annual bond equivalent basis. Interest on the 1996 Notes will not be
payable in cash prior to March 15, 2000, with the 1996 Notes accreting to a
principal amount at stated maturity of $1,000 per bond (an aggregate of
approximately $1.1 million for the bonds not tendered) by that date. Commencing
in September 2000, interest on the 1996 Notes will be payable in cash on
September 15 and March 15 of each year. The 1996 Notes that remain outstanding
following the Tender Offers mature on March 15, 2004.
1997 Notes
In June 1997, DBS Corp issued the 1997 Notes (the "1997 Notes Offering").
The 1997 Notes Offering resulted in net proceeds to DBS Corp of approximately
$363 million. Interest accrues on the 1997 Notes at a rate of 12 1/2% and is
payable in cash semi-annually on January 1 and July 1 of each year, commencing
January 1, 1998. Approximately $109 million of the net proceeds of the 1997
Notes Offering was placed in the Interest Escrow to fund the first five
semi-annual interest payments (through January 1, 2000). Additionally,
approximately $112 million of the net proceeds of the 1997 Notes Offering was
placed in the Satellite Escrow to fund the construction, launch and insurance of
EchoStar IV. The 1997 Notes that remain outstanding following the Tender Offers
mature on July 1, 2002.
Seven and Ten Year Notes
On January 25, 1999, DBS Corp sold $375 million principal amount of 9 1/4%
Senior Notes due 2006 (the Seven Year Notes) and $1.625 billion principal amount
of 9 3/8% Senior Notes due 2009 (the Ten Year Notes). Interest accrues at annual
rates of 9 1/4% and 9 3/8% on the Seven Year and Ten Year Notes, respectively.
Interest on the Seven and Ten Year Notes is payable semi-annually in cash in
arrears on February 1 and August 1 of each year, commencing August 1, 1999.
Concurrently with the closing of the Seven and Ten Year Notes offering,
EchoStar used approximately $1.658 billion of net proceeds received from the
sale of the Seven and Ten Year Notes to complete tender offers for its
outstanding 1994 Notes, 1996 Notes and 1997 Notes. In February 1999, EchoStar
used approximately $268 million of net proceeds received from the sale of the
Seven and Ten Year Notes to complete the tender offers related to the 12 1/8%
Senior Exchange Notes due 2004, (the "Senior Exchange Notes") issued on January
4, 1999, in exchange for all issued and outstanding 12 1/8% Series B Senior
Redeemable Exchangeable Preferred Stock ("Series B Preferred Stock").
F-16
<PAGE> 65
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
With the exception of certain de minimis domestic and foreign subsidiaries,
the Seven and Ten Year Notes are fully, unconditionally and jointly and
severally guaranteed by all subsidiaries of DBS Corp, (collectively, the "Seven
and Ten Year Notes Guarantors"). The Seven and Ten Year Notes are general senior
unsecured obligations which:
o rank pari passu in right of payment to each other and to all existing
and future senior unsecured obligations;
o rank senior to all existing and future junior obligations; and
o are effectively junior to secured obligations to the extent of the
collateral securing such obligations, including any borrowings under
future secured credit facilities.
Except under certain circumstances requiring prepayment premiums, and in
other limited circumstances, the Seven and Ten Year Notes are not redeemable at
DBS Corp's option prior to February 1, 2003 and February 1, 2004, respectively.
Thereafter, the Seven Year Notes will be subject to redemption, at the option of
DBS Corp, in whole or in part, at redemption prices decreasing from 104.625%
during the year commencing February 1, 2003 to 100% on or after February 1,
2005, together with accrued and unpaid interest thereon to the redemption date.
The Ten Year Notes will be subject to redemption, at the option of DBS Corp, in
whole or in part, at redemption prices decreasing from 104.688% during the year
commencing February 1, 2004 to 100% on or after February 1, 2008, together with
accrued and unpaid interest thereon to the redemption date.
The indentures related to the Seven and Ten Year Notes (the "Seven and Ten
Year Notes Indentures") contain restrictive covenants that, among other things,
impose limitations on the ability of DBS Corp to:
o incur additional indebtedness;
o apply the proceeds of certain asset sales;
o create, incur or assume liens;
o create dividend and other payment restrictions with respect to DBS
Corp's subsidiaries;
o merge, consolidate or sell assets; and
o enter into transactions with affiliates.
In addition, DBS Corp may pay dividends on its equity securities only if no
default shall have occurred or is continuing under the Seven and Ten Year Notes
Indentures; and after giving effect to such dividend and the incurrence of any
indebtedness (the proceeds of which are used to finance the dividend), DBS
Corps's ratio of total indebtedness to cash flow (calculated in accordance with
the Indentures) would not exceed 8.0 to 1.0. Moreover, the aggregate amount of
such dividends generally may not exceed the sum of the difference of cumulative
consolidated cash flow (calculated in accordance with the Indentures) minus 120%
of consolidated interest expense of DBS Corp (calculated in accordance with the
Indentures), in each case from April 1, 1999 plus an amount equal to 100% of the
aggregate net cash proceeds received by DBS Corp and its subsidiaries from the
issuance or sale of certain equity interests of DBS Corp or EchoStar.
In the event of a change of control, as defined in the Seven and Ten Year
Notes Indentures, DBS Corp will be required to make an offer to repurchase all
of the Seven and Ten Year Notes at a purchase price equal to 101% of the
aggregate principal amount thereof, together with accrued and unpaid interest
thereon, to the date of repurchase.
Convertible Notes
On December 2, 1999, EchoStar sold $1 billion principal amount of 4 7/8%
Convertible Subordinated Notes due 2007 (the "Convertible Notes"). Interest
accrues at an annual rate of 4 7/8% on the Convertible Notes and is payable
semi-annually in cash, in arrears on January 1 and July 1 of each year,
commencing July 1, 2000.
The Convertible Notes are general unsecured obligations, which rank junior
in right of payment to:
o all existing and future senior obligations;
o all of EchoStar's secured debts to the extent of the value of the
assets securing those debts; and
F-17
<PAGE> 66
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
o all existing and future debts and other liabilities or EchoStar's
subsidiaries.
Except under certain circumstances requiring prepayment premiums, and in
other limited circumstances, the Convertible Notes are not redeemable at
EchoStar's option prior to January 1, 2003. Thereafter, the Convertible Notes
will be subject to redemption, at the option of the Company, in whole or in
part, at redemption prices decreasing from 102.786% during the year commencing
January 1, 2003 to 100% on or after January 1, 2007, together with accrued and
unpaid interest thereon to the redemption date.
The Convertible Notes, unless previously redeemed, are convertible at the
option of the holder any time after 90 days following the date of their original
issuance and prior to maturity into shares of our class A common stock at a
conversion price of $90.88 per share.
The indenture related to the Convertible Notes (the "Convertible Notes
Indenture") contain certain restrictive covenants that do not impose material
limitations on EchoStar.
In the event of a change of control, as defined in the Convertible Notes
Indenture, EchoStar will be required to make an offer to repurchase all or any
part of the holder's Convertible Notes at a purchase price equal to 101% of the
aggregate principal amount thereof, together with accrued and unpaid interest
thereon, to the date of repurchase.
Mortgages and Other Notes Payable
Mortgages and other notes payable consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1998 1999
-------- --------
<S> <C> <C>
8.25% note payable for satellite vendor financing for EchoStar I due in equal
monthly installments of $722, including interest, through February 2001 ................... $ 17,137 $ 9,606
8.25% note payable for satellite vendor financing for EchoStar II due in equal
monthly installments of $562, including interest, through November 2001 ................... 17,416 11,909
8.25% note payable for satellite vendor financing for EchoStar III due in
equal monthly installments of $294, including interest, through October 2002 .............. 12,183 8,645
8.25% note payable for satellite vendor financing for EchoStar IV due in equal
monthly installments of $264, including interest, through May 2003 ........................ 12,950 9,409
Mortgages and other unsecured notes payable due in installments through
November 2009 with interest rates ranging from 4% to 10% .................................. 6,443 10,488
-------- --------
Total ....................................................................................... 66,129 50,057
Less current portion ........................................................................ (22,679) (22,067)
-------- --------
Mortgages and other notes payable, net of current portion ................................... $ 43,450 $ 27,990
======== ========
</TABLE>
Future maturities of EchoStar's outstanding long-term debt are summarized
as follows (in thousands):
<TABLE>
<CAPTION>
RESIDUAL
NOTES,
SEVEN TEN MORTGAGES
YEAR YEAR CONVERTIBLE AND OTHER
NOTES NOTES NOTES NOTES PAYABLE TOTAL
---------- ---------- ---------- ------------- ----------
<S> <C> <C> <C> <C> <C>
YEAR ENDING DECEMBER 31,
2000 .................... $ -- $ -- $ -- $ 22,067 $ 22,067
2001 .................... -- -- -- 14,826 14,826
2002 .................... -- -- -- 7,131 7,131
2003 .................... -- -- -- 1,960 1,960
2004 .................... -- -- -- 3,308 3,308
Thereafter .............. 375,000 1,625,000 1,000,000 3,380 3,003,380
---------- ---------- ---------- ---------- ----------
Total ...................... $ 375,000 $1,625,000 $1,000,000 $ 52,672 $3,052,672
========== ========== ========== ========== ==========
</TABLE>
F-18
<PAGE> 67
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Satellite Vendor Financing
The purchase price for satellites is required to be paid in progress
payments, some of which are non-contingent payments that are deferred until
after the respective satellites are in orbit (satellite vendor financing).
EchoStar utilized $36 million, $28 million, $14 million and $13 million of
satellite vendor financing for EchoStar I, EchoStar II, EchoStar III and
EchoStar IV, respectively. The satellite vendor financing with respect to
EchoStar I and EchoStar II is secured by substantially all assets of DBS Corp
and its subsidiaries (subject to certain restrictions) and a corporate guarantee
of ECC. The satellite vendor financings for both EchoStar III and EchoStar IV
are secured by an ECC corporate guarantee.
5. INCOME TAXES
As of December 31, 1999, EchoStar had net operating loss carryforwards
("NOLs") for Federal income tax purposes of approximately $1.483 billion. The
NOLs will begin to expire in the year 2012. The use of the NOLs is subject to
statutory and regulatory limitations regarding changes in ownership. Financial
Accounting Standard No. 109, "Accounting for Income Taxes," ("FAS No. 109")
requires that the potential future tax benefit of NOLs be recorded as an asset.
FAS No. 109 also requires that deferred tax assets and liabilities be recorded
for the estimated future tax effects of temporary differences between the tax
basis and book value of assets and liabilities. Deferred tax assets are offset
by a valuation allowance to the extent deemed necessary.
In 1999, EchoStar increased its valuation allowance sufficient to fully
offset net deferred tax assets arising during the year. Realization of net
deferred tax assets is not assured and is principally dependent on generating
future taxable income prior to expiration of the NOLs. Management believes
existing net deferred tax assets in excess of the valuation allowance will, more
likely than not, be realized. EchoStar continuously reviews the adequacy of its
valuation allowance. Future decreases to the valuation allowance will be made
only as changed circumstances indicate that it is more likely than not that the
additional benefits will be realized. Any future adjustments to the valuation
allowance will be recognized as a separate component of EchoStar's provision for
income taxes.
The actual tax (provision) benefit for 1997, 1998 and 1999 are reconciled
to the amounts computed by applying the statutory Federal tax rate to income
before taxes as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1997 1998 1999
----- ----- -----
<S> <C> <C> <C>
Statutory rate ...................................... 35.0% 35.0% 35.0%
State income taxes, net of Federal benefit .......... 1.6 1.6 2.3
Research and development and foreign tax credits .... 0.7 -- --
Non-deductible interest expense ..................... (0.5) (1.4) (0.3)
Other ............................................... (0.8) 0.5 1.3
Increase in valuation allowance ..................... (36.0) (35.7) (38.3)
----- ----- -----
Total benefit from income taxes .................. --% --% --%
===== ===== =====
</TABLE>
F-19
<PAGE> 68
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
The temporary differences, which give rise to deferred tax assets and
liabilities as of December 31, 1998 and 1999, are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1998 1999
--------- ---------
<S> <C> <C>
Current deferred tax assets:
Accrued royalties ....................................................... $ 15,971 $ 30,018
Inventory reserves and cost methods ..................................... 1,759 1,380
Accrued expenses ........................................................ 9,976 29,846
Allowance for doubtful accounts ......................................... 1,945 5,636
Reserve for warranty costs .............................................. 101 78
--------- ---------
Total current deferred tax assets ......................................... 29,752 66,958
Current deferred tax liabilities:
Subscriber acquisition costs and other .................................. -- 68
--------- ---------
Total current deferred tax liabilities .................................... -- 68
--------- ---------
Gross current deferred tax assets ......................................... 29,752 66,890
Valuation allowance ....................................................... (22,429) (55,162)
--------- ---------
Net current deferred tax assets ........................................... 7,323 11,728
Noncurrent deferred tax assets:
General business and foreign tax credits ................................ 2,072 2,504
Net operating loss carryforwards ........................................ 147,097 551,561
Amortization of original issue discount on 1994 Notes and 1996 Notes .... 105,095 --
Other ................................................................... 13,000 9,553
--------- ---------
Total noncurrent deferred tax assets ...................................... 267,264 563,618
Noncurrent deferred tax liabilities:
Depreciation ............................................................ (24,013) (43,459)
Other ................................................................... (322) (425)
--------- ---------
Total noncurrent deferred tax liabilities ................................. (24,335) (43,884)
--------- ---------
Gross deferred tax assets ................................................. 242,929 519,734
--------- ---------
Valuation allowance ....................................................... (183,117) (464,327)
--------- ---------
Net noncurrent deferred tax assets ........................................ 59,812 55,407
--------- ---------
Net deferred tax assets ................................................... $ 67,135 $ 67,135
========= =========
</TABLE>
The components of the (provision for) benefit from income taxes are as
follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1997 1998 1999
--------- --------- ---------
<S> <C> <C> <C>
Current (provision) benefit:
Federal ............................ $ (373) $ 15 $ --
State .............................. (9) 18 (45)
Foreign ............................ (137) (77) (108)
--------- --------- ---------
(519) (44) (153)
Deferred (provision) benefit:
Federal ............................ 104,992 86,604 286,195
State .............................. 7,860 6,463 27,748
Increase in valuation allowance .... (112,479) (93,067) (313,943)
--------- --------- ---------
373 -- --
--------- --------- ---------
Total (provision) benefit ....... $ (146) $ (44) $ (153)
========= ========= =========
</TABLE>
F-20
<PAGE> 69
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
6. SERIES B PREFERRED STOCK
On January 4, 1999, EchoStar commenced an offer to exchange all, but not
less than all, of the shares of Series B Preferred Stock then outstanding for
12 1/8% Senior Exchange Notes due 2004. As previously described in Note 4,
EchoStar closed its tender offer for the Senior Exchange Notes during February
1999. The Senior Exchange Notes not tendered (approximately $5,000) continue to
bear interest at a rate of 12 1/8% per annum, payable semi-annually in arrears
on April 1 and October 1 of each year, commencing with the first such date to
occur after the date of the exchange. Interest on the Senior Exchange Notes may,
at the option of EchoStar, be paid in cash or by issuing additional Senior
Exchange Notes in an aggregate principal amount equal to the amount of such
interest. The Senior Exchange Notes that remain outstanding following the tender
offer mature on July 1, 2004.
7. STOCKHOLDERS' EQUITY (DEFICIT)
Common Stock
The Class A, Class B and Class C common stock are equivalent in all
respects except voting rights. Holders of Class A and Class C common stock are
entitled to one vote per share and holders of Class B common stock are entitled
to ten votes per share. Each share of Class B and Class C common stock is
convertible, at the option of the holder, into one share of Class A common
stock. Upon a change in control of ECC, each holder of outstanding shares of
Class C common stock is entitled to ten votes for each share of Class C common
stock held. ECC's principal stockholder owns all outstanding Class B common
stock and all other stockholders own Class A common stock. There are no shares
of Class C common stock outstanding.
Preferred Stock
Preferred Stock consists of the following (in thousands, except share
data):
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1998 1999
-------- --------
<S> <C> <C>
Preferred Stock, 20,000,000 shares authorized (inclusive of 900,000 shares
designated as Series B Preferred Stock, see Note 6):
8% Series A Cumulative Preferred Stock, 1,616,681 and no shares issued
and outstanding, including cumulative accrued dividends of $5,755 and ....................
none, respectively ....................................................................... $ 20,807 $ --
6 3/4% Series C Cumulative Convertible Preferred Stock, 2,300,000 and
908,665 shares issued and outstanding, respectively ...................................... 108,666 45,434
-------- --------
Total Preferred Stock ........................................................................... $129,473 $ 45,434
======== ========
</TABLE>
8% Series A Cumulative Preferred Stock
On February 8, 1999, EchoStar repurchased all outstanding shares of its
Series A Preferred Stock at $13.153 per share (the average of the preceding 20
trading day closing price of EchoStar's Class A common stock). The total
repurchase price was approximately $91 million, including accrued dividends of
approximately $6 million. The carrying value of the Series A Preferred Stock,
including accrued dividends, as of the date of repurchase was approximately $21
million. All of the shares of Series A Preferred Stock were owned by Charles W.
Ergen, President and CEO, and James DeFranco, Executive Vice President.
F-21
<PAGE> 70
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Series C Cumulative Convertible Preferred Stock
In November 1997, EchoStar issued 2.3 million shares of 6 3/4% Series C
Cumulative Convertible Preferred Stock (the "Series C Preferred Stock") which
resulted in net proceeds to EchoStar of approximately $97 million. Simultaneous
with the issuance of the Series C Preferred Stock, the purchasers of the Series
C Preferred Stock placed approximately $15 million into an account (the "Deposit
Account"). EchoStar recorded proceeds from the issuance of the Series C
Preferred Stock net of the amount placed in the Deposit Account. As of November
2, 1999, proceeds from the issuance of the Series C Preferred Stock have been
accreted to the face amount of $115 million. However, as of December 31, 1999,
approximately 1.4 million shares of Series C Preferred Stock have been converted
into approximately 11.0 million shares of EchoStar's class A common stock,
reducing the book value of the Series C Preferred Stock to approximately $45
million. The Deposit Account provided quarterly cash payments of approximately
$0.844 per share of Series C Preferred Stock (the "Quarterly Return Amount"),
from February 1, 1998 until November 1, 1999.
On November 2, 1999, dividends on the Series C Preferred Stock began to
accrue. Each share of Series C Preferred Stock has a liquidation preference of
$50 per share. 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,
payable quarterly in arrears commencing February 1, 2000, or upon conversion.
Dividends may, at the option of EchoStar, be paid in cash, by delivery of fully
paid and nonassessable shares of Class A common stock, or a combination thereof.
Each share of Series C Preferred Stock is convertible at any time, unless
previously redeemed, at the option of the holder thereof, into approximately 8.2
shares of Class A common stock, subject to adjustment upon the occurrence of
certain events. The Series C Preferred Stock is redeemable at any time on or
after November 1, 2000, in whole or in part, at the option of EchoStar, in cash,
by delivery of fully paid and nonassessable shares of Class A common stock, or a
combination thereof, initially at a price of $51.929 per share and thereafter at
prices declining to $50.000 per share on or after November 1, 2004, plus in each
case all accumulated and unpaid dividends to the redemption date.
8. STOCK COMPENSATION PLANS
Stock Incentive Plan
In April 1994, EchoStar adopted a stock incentive plan to provide incentive
to attract and retain officers, directors and key employees. EchoStar currently
has reserved up to 40 million shares of its Class A common stock for granting
awards under its 1995 Stock Incentive Plan and an additional 40 million shares
of its Class A common stock for granting awards under its 1999 Stock Incentive
Plan. In general, stock options granted through December 31, 1999 have included
exercise prices not less than the fair market value of EchoStar's Class A common
stock at the date of grant, and vest, as determined by EchoStar's Board of
Directors, generally at the rate of 20% per year.
During 1999, EchoStar adopted the 1999 Incentive Plan which provided
certain key employees a contingent incentive including stock options and cash.
The payment of these incentives was contingent upon the achievement of certain
financial and other goals of EchoStar. EchoStar met certain of these goals
during 1999. Accordingly, EchoStar accrued $675,000 related to cash incentives
to be paid. EchoStar also recorded approximately $179 million of deferred
compensation related to post-grant appreciation of options to purchase
approximately 2.1 million shares, granted pursuant to the 1999 Incentive Plan.
The related deferred compensation will be recognized over the five-year vesting
period. As a result of substantial post-grant appreciation of options, variable
plan accounting principles require that EchoStar recognize during 1999, $61
million of the total of $179 million of deferred Stock-based compensation under
this performance based plan. The remainder will be recognized over the remaining
vesting period.
Options to purchase an additional 5.6 million shares were granted at fair
market value during 1999 pursuant to the Long Term Incentive Plan. Vesting of
these options is contingent on meeting certain longer-term goals, the
achievement of which can not be reasonably predicted as of December 31, 1999.
Accordingly, no compensation was recorded during 1999 related to these long-term
options. EchoStar will continue to evaluate the likelihood of achieving these
long-term goals and will record the related compensation at the time achievement
of these goals becomes probable. The Board of Directors has approved a 2000
Incentive Plan. Any future payments under this plan are contingent upon the
achievement of certain financial and other goals.
F-22
<PAGE> 71
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
A summary of EchoStar's incentive stock option activity for the years ended
December 31, 1997, 1998 and 1999 is as follows:
<TABLE>
<CAPTION>
1997 1998 1999
------------------------- ------------------------- -------------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
----------- ---------- ----------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding, beginning of
year .............................. 4,101,092 $ 3.57 6,098,268 $ 3.75 5,788,060 $ 4.07
Granted .............................. 3,118,200 4.26 2,792,540 4.70 10,423,856 15.42
Repriced ............................. 1,023,176 4.25 -- -- -- --
Exercised ............................ (392,632) 2.41 (752,728) 3.13 (1,904,057) 3.67
Forfeited ............................ (1,751,568) 4.87 (2,350,020) 4.27 (386,039) 9.84
----------- ------ ----------- ------ ----------- ------
Options outstanding, end of year ..... 6,098,268 $ 3.75 5,788,060 $ 4.07 13,921,820 $12.51
=========== ====== =========== ====== =========== ======
Exercisable at end of year ........... 1,388,036 $ 3.04 1,929,212 $ 3.46 1,377,716 $ 3.71
=========== ====== =========== ====== =========== ======
</TABLE>
Exercise prices for options outstanding as of December 31, 1999 are as
follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------------------- --------------------------------
NUMBER WEIGHTED- NUMBER
OUTSTANDING AVERAGE EXERCISABLE
AS OF REMAINING WEIGHTED- AS OF WEIGHTED-
RANGE OF DECEMBER 31, CONTRACTUAL AVERAGE DECEMBER 31, AVERAGE
EXERCISE PRICES 1999 LIFE EXERCISE PRICE 1999 EXERCISE PRICE
- ------------------- ------------ ----------- -------------- ------------ --------------
<S> <C> <C> <C> <C> <C>
$ 2.333 - $ 2.967 509,759 2.79 $ 2.37 482,795 $ 2.33
4.250 - 4.573 2,509,249 5.51 4.27 814,814 4.27
5.500 - 6.868 658,198 6.62 5.70 73,318 5.92
8.243 - 10.00 204,036 7.21 9.97 2,327 8.24
10.973 - 13.200 8,410,426 8.61 12.01 4,462 11.39
20.406 - 20.406 1,034,152 7.29 20.41 -- --
38.360 - 38.360 288,000 9.50 38.36 -- --
45.407 - 45.407 128,000 9.75 45.41 -- --
97.500 - 97.500 180,000 10.00 97.50 -- --
- ------------------- ---------- ----- -------- --------- -------
$ 2.333 - $ 97.500 13,921,820 7.67 $ 12.51 1,377,716 $ 3.71
=================== ========== ===== ======== ========= =======
</TABLE>
On July 1, 1997, the Board of Directors approved a repricing of
substantially all outstanding options with an exercise price greater than $4.25
per share of Class A common stock to $4.25 per share. The Board of Directors
would not typically consider reducing the exercise price of previously granted
options. However, these options were repriced due to the occurrence of certain
events beyond the reasonable control of the employees of EchoStar which
significantly reduced the incentive these options were intended to create. The
fair market value of the Class A common stock was $3.81 on the date of the
repricing. Options to purchase approximately 1,024,000 shares of Class A common
stock were affected by this repricing.
Accounting for Stock-Based Compensation
EchoStar has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," ("APB 25") and related
interpretations in accounting for its stock-based compensation plans. Under APB
25, EchoStar generally does not recognize compensation expense on the issuance
of stock under its Stock Incentive Plan because the option terms are typically
fixed and typically the exercise price equals the market price of the underlying
stock on the date of grant. In October 1995, the Financial Accounting Standards
Board issued Financial Accounting Standard No. 123, "Accounting and Disclosure
of Stock-Based Compensation,"
F-23
<PAGE> 72
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
("FAS No. 123") which established an alternative method of expense recognition
for stock-based compensation awards to employees based on fair values. EchoStar
elected to not adopt FAS No. 123 for expense recognition purposes.
Pro forma information regarding net income and earnings per share is
required by FAS No. 123 and has been determined as if EchoStar had accounted for
its stock-based compensation plans using the fair value method prescribed by
that statement. For purposes of pro forma disclosures, the estimated fair value
of the options is amortized to expense over the options' vesting period. All
options are initially assumed to vest. Compensation previously recognized is
reversed to the extent applicable to forfeitures of unvested options. EchoStar's
pro forma net loss attributable to common shares and pro forma basic and diluted
loss per common share were as follows (in thousands, except per share amounts):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------
1997 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
Net loss attributable to common shares ... $ (323,371) $ (297,197) $ (749,836)
=========== =========== ===========
Basic and diluted loss per share ......... $ (1.93) $ (1.65) $ (3.60)
=========== =========== ===========
</TABLE>
The pro forma net loss for 1999 is less than the loss reported in the
statement of operations because the $61 million charge for the post-grant
appreciation of stock-based compensation, determined under APB 25 and reported
by EchoStar, is greater than the amount of stock-based compensation that would
have been reported by EchoStar under the provisions of FAS No. 123.
The fair value of each option grant was estimated at the date of the grant
using a Black-Scholes option pricing model with the following weighted-average
assumptions:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1997 1998 1999
------- ------- -------
<S> <C> <C> <C>
Risk-free interest rate ........................... 6.09% 5.64% 5.38%
Volatility factor ................................. 68% 67% 76%
Dividend yield .................................... 0.00% 0.00% 0.00%
Expected term of options .......................... 6 years 6 years 6 years
Weighted-average fair value of options granted .... $ 2.60 $ 3.01 $ 14.27
</TABLE>
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect the
fair value estimate, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of its
stock-based compensation awards.
9. EMPLOYEE BENEFIT PLANS
Employee Stock Purchase Plan
During 1997, the Board of Directors and shareholders approved an employee
stock purchase plan (the "ESPP"), effective beginning October 1, 1997. Under the
ESPP, EchoStar is authorized to issue a total of 400,000 shares of Class A
common stock. Substantially all full-time employees who have been employed by
EchoStar for at least one calendar quarter are eligible to participate in the
ESPP. Employee stock purchases are made through payroll deductions. Under the
terms of the ESPP, employees may not deduct an amount which would permit such
F-24
<PAGE> 73
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
employee to purchase capital stock of EchoStar under all stock purchase plans of
EchoStar at a rate which would exceed $25,000 in fair market value of capital
stock in any one year. The purchase price of the stock is 85% of the closing
price of the Class A common stock on the last business day of each calendar
quarter in which such shares of Class A common stock are deemed sold to an
employee under the ESPP. The ESPP shall terminate upon the first to occur of (i)
October 1, 2007 or (ii) the date on which the ESPP is terminated by the Board of
Directors. During 1997, 1998 and 1999, employees purchased approximately 16,000,
64,000 and 22,000 shares of Class A common stock through the ESPP, respectively.
401(k) Employee Savings Plan
EchoStar sponsors a 401(k) Employee Savings Plan (the "401(k) Plan") for
eligible employees. Voluntary employee contributions to the 401(k) Plan may be
matched 50% by EchoStar, subject to a maximum annual contribution by EchoStar of
$1,000 per employee. EchoStar also may make an annual discretionary contribution
to the plan with approval by EchoStar's Board of Directors, subject to the
maximum deductible limit provided by the Internal Revenue Code of 1986, as
amended. EchoStar's cash contributions to the 401(k) Plan totaled $329,000 in
1997, and $314,000 in 1998 and 1999. Additionally, during 1998, EchoStar
contributed 320,000 shares of its Class A common stock (fair value of
approximately $2 million) to the 401(k) Plan related to its 1997 discretionary
contribution. During 1999, EchoStar contributed 260,000 shares of its Class A
common stock (fair value of approximately $3 million) to the 401(k) Plan related
to its 1998 discretionary contribution. During 2000, EchoStar expects to
contribute approximately 60,000 shares of its Class A common stock (fair value
of approximately $6 million) to the 401(k) Plan related to its 1999
discretionary contribution.
10. OTHER COMMITMENTS AND CONTINGENCIES
Leases
Future minimum lease payments under noncancelable operating leases as of
December 31, 1999, are as follows (in thousands):
<TABLE>
<S> <C>
YEAR ENDING DECEMBER 31,
2000..................................................... $ 6,662
2001..................................................... 6,565
2002..................................................... 5,912
2003..................................................... 4,996
2004..................................................... 2,195
Thereafter............................................... 5,760
--------
Total minimum lease payments.......................... $ 32,090
========
</TABLE>
Total rental expense for operating leases approximated $1 million in 1997
and 1998 and $3 million in 1999.
Purchase Commitments
As of December 31, 1999, EchoStar's purchase commitments totaled
approximately $209 million. The majority of these commitments relate to EchoStar
receiver systems and related components. All of the purchases related to these
commitments are expected to be made during 2000. EchoStar expects to finance
these purchases from existing unrestricted cash balances and future cash flows
generated from operations, if any.
Patents and Intellectual Property
Many entities, including some of EchoStar's competitors, now have and may
in the future obtain patents and other intellectual property rights that cover
or affect products or services directly or indirectly related to those
F-25
<PAGE> 74
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
that EchoStar offers. EchoStar may not be aware of all patents and other
intellectual property rights that its products may potentially infringe. Damages
in patent infringement cases can include a tripling of actual damages in certain
cases. Further, EchoStar cannot estimate the extent to which it may be required
in the future to obtain licenses with respect to patents held by others and the
availability and cost of any such licenses. Various parties have asserted patent
and other intellectual property rights with respect to components within
EchoStar's direct broadcast satellite system. EchoStar cannot be certain that
these persons do not own the rights they claim, that its products do not
infringe on these rights, that it would be able to obtain licenses from these
persons on commercially reasonable terms or, if it was unable to obtain such
licenses, that it would be able to redesign its products to avoid infringement.
F-26
<PAGE> 75
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DirecTV
During February 2000 EchoStar filed suit against DirecTV and Thomson
Consumer Electronics/RCA in the Federal District Court of Colorado. The suit
alleges that DirecTV has utilized improper conduct in order to fend off
competition from the DISH Network. According to the complaint, DirecTV has
demanded that certain retailers stop displaying EchoStar merchandise and has
threatened to cause economic damage to retailers if they continued to offer both
product lines in head-to-head competition. The suit alleges that DirecTV has
acted in violation of federal and state anti-trust laws in order to protect
DirecTV's market share. EchoStar is seeking injunctive relief and monetary
damages. It is too early in the litigation to make an assessment of the probable
outcome.
The News Corporation Limited
During February 1997, News Corporation agreed to acquire approximately 50%
of the outstanding capital stock of EchoStar. During late April 1997,
substantial disagreements arose between the parties regarding their obligations
under this agreement. Those substantial disagreements led to litigation which
the parties subsequently settled. In connection with the News Corporation
litigation, EchoStar has a contingent fee arrangement with the attorneys who
represented EchoStar in that litigation, which provides for the attorneys to be
paid a percentage of any net recovery obtained 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.
EchoStar is vigorously contesting the attorneys' interpretation of the fee
arrangement, which it believes significantly overstates the magnitude of its
liability. EchoStar also believes that the fee arrangement is void and
unenforceable because the attorneys who represented EchoStar are seeking a fee
that it believes is unreasonable and excessive, among other things. If EchoStar
is unable to resolve this fee dispute with the attorneys, it would be resolved
through arbitration or litigation. During mid-1999, EchoStar initiated
litigation against the attorneys in the District Court, Arapahoe County,
Colorado, arguing that the fee arrangement is void and unenforceable. EchoStar
has also asserted claims for breach of fiduciary duty, constructive fraud,
breach of the fee arrangement, and misappropriation of trade secrets against the
attorneys. In December 1999, the attorneys initiated an arbitration proceeding
before the American Arbitration Association. 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.
F-27
<PAGE> 76
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
EchoStar filed motions to dismiss each of the actions for lack of personal
jurisdiction. The Court in the Alberta court action recently denied its Motion
to Dismiss. 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 court action has stayed
that case before ruling on EchoStar's motion to dismiss. EchoStar intends to
vigorously defend the suits in the event its 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
Under the Satellite Home Viewer Act, the determination of whether a
household qualifies as "unserved" for the purpose of eligibility to receive a
distant network channel depends, in part, on whether that household can receive
a signal of "Grade B intensity" as defined by the FCC.
During 1998, the national networks and local affiliate stations challenged,
based upon copyright infringement, PrimeTime 24's methods of selling network
programming to consumers. Historically, we obtained distant broadcast network
signals for distribution to our customers through PrimeTime 24. The United
States District Court for the Southern District of Florida entered a nationwide
permanent injunction preventing PrimeTime 24 from selling its programming to
consumers unless the programming was sold in accordance with certain
stipulations in the injunction. The injunction covers distributors as well. The
plaintiffs in the Florida litigation informed us they considered us a
distributor for purposes of that injunction. A federal district court in North
Carolina also issued an injunction against PrimeTime 24 prohibiting certain
distant signal retransmissions in the Raleigh area. The Fourth Circuit Court of
Appeals recently affirmed the North Carolina Court's decision. 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, EchoStar filed a declaratory judgment action in the United
States District Court for the District of Colorado against the four major
networks. EchoStar asked the court to enter a judgment declaring that 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 EchoStar in federal court in Miami alleging, among other
things, copyright infringement. The court combined the case that EchoStar filed
in Colorado with the case in Miami and transferred it to the Miami court.
In February 1999, CBS, NBC, Fox and ABC filed a "Motion for Temporary
Restraining Order, Preliminary Injunction and Contempt Finding" against DirecTV
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.
The networks are pursuing a Motion for Preliminary Injunction in the Miami
Court, asking the Court to enjoin EchoStar from providing network programming
except under very limited circumstances. In general, the networks want EchoStar
to turn off programming to its customers on the same schedule agreed to by
DirecTV.
A preliminary injunction hearing was held during September 1999. The Court
took the issues under advisement to consider the networks' request for an
injunction, whether to hear live testimony before ruling upon
F-28
<PAGE> 77
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
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 on the networks' preliminary injunction motion.
If this case is decided against EchoStar, or a preliminary injunction is
issued, significant material restrictions on the sale of distant ABC, NBC, CBS
and Fox channels by EchoStar could result, including potentially a nationwide
permanent prohibition on its broadcast of ABC, NBC, CBS and Fox network channels
by satellite. The litigation and the new legislation discussed above, among
other things, could also require EchoStar 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 EchoStar's other services.
While the networks have not sought monetary damages, they have sought to recover
attorney fees if they prevail. EchoStar has sent letters to some of its
subscribers warning that their access to distant broadcast network channels
might be terminated soon and have terminated ABC, NBC, CBS and Fox programming
to many customers.
In November 1999, Congress passed new legislation regarding the satellite
delivery of network programming and it was signed into law by President Clinton.
This new law has the potential of reducing the number of customers whose network
channels EchoStar may otherwise be required to terminate as the law
"grandfathers" in many subscribers.
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.
11. SUMMARY FINANCIAL INFORMATION FOR SUBSIDIARY GUARANTORS
With the exception of certain de minimis domestic and foreign subsidiaries
(collectively, the "Non-Guarantors"), the Seven and Ten Year Notes are fully,
unconditionally and jointly and severally guaranteed by all subsidiaries of DBS
Corp.
The combined assets, stockholders' equity, net loss and operating cash
flows of the Non-Guarantors represent less than 1% of the combined and
consolidated assets, stockholders' equity, net loss and operating cash flows of
DBS Corp, including the non-guarantors during both 1998 and 1999. Summarized
combined and consolidated financial information for DBS Corp is as follows (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------
1997 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue ................................................... $ 475,877 $ 985,909 $ 1,606,291
Expenses .................................................. 700,104 1,116,764 1,959,860
----------- ----------- -----------
Operating loss ............................................ (224,227) (130,855) (353,569)
Other income (expense) .................................... (98,941) (163,449) (208,716)
----------- ----------- -----------
Net loss before taxes ..................................... (323,168) (294,304) (562,285)
Income tax benefit (provision), net ....................... (146) (72) (131)
----------- ----------- -----------
Net loss before extraordinary charges ..................... (323,314) (294,376) (562,416)
Extraordinary charge for early retirement of debt, net
of tax ................................................. -- -- (228,733)
----------- ----------- -----------
Net loss .................................................. $ (323,314) $ (294,376) $ (791,149)
=========== =========== ===========
</TABLE>
F-29
<PAGE> 78
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1998 1999
----------- -----------
<S> <C> <C>
BALANCE SHEETS DATA:
Current assets ................................................................ $ 241,582 $ 591,939
Property and equipment, net ................................................... 853,818 1,579,636
Other noncurrent assets ....................................................... 374,773 558,632
----------- -----------
Total assets .................................................................. $ 1,470,173 $ 2,730,207
=========== ===========
Current liabilities ........................................................... $ 477,062 $ 1,206,889
Long-term liabilities ......................................................... 1,581,249 2,046,872
Stockholder's equity (deficit) ................................................ (588,138) (523,554)
----------- -----------
Total liabilities and stockholder's equity (deficit) .......................... $ 1,470,173 $ 2,730,207
=========== ===========
</TABLE>
12. SEGMENT REPORTING
Business Unit Descriptions
The operations of EchoStar include three interrelated business units:
o The DISH Network - a DBS subscription television service in the United
States.
o EchoStar Technologies Corporation - the design, distribution and sale
of EchoStar receiver systems for the DISH Network as well as for
direct-to-home projects of other internationally, together with the
provision of uplink center design, construction oversight and other
project integration services for international direct-to-home
ventures.
o Satellite Services - engaged in the delivery of video, audio and data
services to business television customers and other satellite users.
These services my include satellite uplink services, satellite
transponder space usage, billing, customer service and other services.
The accounting policies for the above business units are the same as those
described in the summary of significant accounting policies for the consolidated
entity. EchoStar accounts for intersegment sales and transfers at cost. All
other revenue and expenses from segments below the quantitative thresholds are
attributable to sales of C-band equipment and other corporate administrative
functions. Only those assets and measures of profit and loss that are included
in the measure of assets and profit and loss used by EchoStar's chief operating
decision maker are reported.
Financial Data by Business Unit
<TABLE>
<CAPTION>
ECHOSTAR
DISH TECHNOLOGIES SATELLITE ELIMINATIONS CONSOLIDATED
NETWORK CORPORATION SERVICES AND OTHER TOTAL
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1997
Revenue ................................ $ 378,377 $ 82,609 $ 3,458 $ 12,974 $ 477,418
Depreciation and amortization .......... 158,992 1,659 -- 12,625 173,276
Total expenses ......................... 569,998 73,081 329 58,281 701,689
EBITDA ................................. (32,629) 11,186 3,129 (32,681) (50,995)
Interest income ........................ 10,114 180 -- 6,957 17,251
Interest expense ....................... 27,503 -- -- 76,689 104,192
Income tax provision, net .............. (7) (32) -- (107) (146)
Net income (loss) ...................... (231,223) 4,378 2,889 (88,869) (312,825)
YEAR ENDED DECEMBER 31, 1998
Revenue ................................ $ 733,382 $ 251,958 $ 23,442 $ (26,116) $ 982,666
Depreciation and amortization .......... 85,107 2,097 26 15,406 102,636
Total expenses ......................... 871,269 193,852 3,495 36,941 1,105,557
EBITDA ................................. (52,781) 60,202 19,973 (47,649) (20,255)
Interest income ........................ 9,280 -- 2 21,004 30,286
Interest expense ....................... 49,042 282 -- 118,205 167,529
Income tax benefit (provision), net .... 17 (11) -- (50) (44)
Net income (loss) ...................... (199,356) 30,333 18,409 (110,268) (260,882)
YEAR ENDED DECEMBER 31, 1999
Revenue ................................ $ 1,373,789 $ 160,276 $ 47,312 $ 21,464 $ 1,602,841
Depreciation and amortization .......... 97,899 4,434 193 10,702 113,228
Total expenses ......................... 1,622,928 165,238 15,956 145,810 1,949,932
EBITDA ................................. (151,241) (528) 31,549 (52,733) (172,953)
Interest income ........................ 26,205 1 375 (402) 26,179
Interest expense ....................... (201,356) (253) -- (4) (201,613)
Income tax benefit (provision), net .... -- (46) -- (108) (154)
Net income (loss) ...................... (1,949,914) (31,884) 27,273 1,161,678 (792,847)
</TABLE>
F-30
<PAGE> 79
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Geographic Information
<TABLE>
<CAPTION>
OTHER
UNITED STATES EUROPE INTERNATIONAL TOTAL
------------- ---------- ------------- ----------
<S> <C> <C> <C> <C>
1997
Total revenue* ........ $ 447,977 $ 20,592 $ 8,849 $ 477,418
Long-lived assets ..... 972,909 1,217 121 974,247
1998
Total revenue* ........ $ 964,503 $ 18,163 $ -- $ 982,666
Long-lived assets ..... 978,850 1,498 -- 980,348
1999
Total revenue* ........ $1,579,992 $ 22,849 $ -- $1,602,841
Long-lived assets ..... 2,059,242 3,099 -- 2,062,341
</TABLE>
* Revenues are attributed to geographic regions based upon the location from
which the sale originated.
Transactions with Major Customers
During 1999, export sales to two customers together totaled $126 million
and accounted for approximately 8% of EchoStar's total revenue. Revenues from
these customers are included within the EchoStar Technologies Corporation
business unit. Complete or partial loss of one or both of these customers would
have a material adverse effect on EchoStar's results of operations.
13. VALUATION AND QUALIFYING ACCOUNTS
EchoStar's valuation and qualifying accounts as of December 31, 1997, 1998
and 1999 are as follows (in thousands):
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO
BEGINNING OF COSTS AND BALANCE AT
YEAR EXPENSES DEDUCTIONS END OF YEAR
-------- -------- ---------- -----------
<S> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1997:
Assets:
Allowance for doubtful accounts ........... $ 1,494 $ 4,343 $ (4,490) $ 1,347
Loan loss reserve ......................... 644 714 (104) 1,254
Reserve for inventory ..................... 5,663 1,650 (3,473) 3,840
Liabilities:
Reserve for warranty costs and other ...... 763 -- (53) 710
YEAR ENDED DECEMBER 31, 1998:
Assets:
Allowance for doubtful accounts ........... $ 1,347 $ 10,692 $ (9,043) $ 2,996
Loan loss reserve ......................... 1,254 858 (101) 2,011
Reserve for inventory ..................... 3,840 1,744 (403) 5,181
Liabilities:
Reserve for warranty costs and other ...... 710 -- (435) 275
YEAR ENDED DECEMBER 31, 1999:
Assets:
Allowance for doubtful accounts ........... $ 2,996 $ 23,481 $(13,368) $ 13,109
Loan loss reserve ......................... 2,011 100 (272) 1,839
Reserve for inventory ..................... 5,181 1,785 (3,019) 3,947
Liabilities:
Reserve for warranty costs and other ...... 275 -- (65) 210
</TABLE>
F-31
<PAGE> 80
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
14. QUARTERLY FINANCIAL DATA (UNAUDITED)
EchoStar's quarterly results of operations are summarized as follows (in
thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
--------- --------- ------------ -----------
<S> <C> <C> <C> <C>
Year Ended December 31, 1998:
Total revenue ....................... $ 214,439 $ 245,838 $ 235,407 $ 286,982
Operating loss ...................... (21,165) (16,244) (15,350) (70,132)
Net loss ............................ (49,886) (45,717) (51,971) (113,308)
Basic and diluted loss per share .... $ (0.33) $ (0.30) $ (0.34) $ (0.68)
Year Ended December 31, 1999:
Total revenue ....................... $ 309,576 $ 350,217 $ 428,180 $ 514,868
Operating loss ...................... (55,682) (50,989) (79,455) (160,965)
Net loss ............................ (372,331) (76,129) (124,401) (219,986)
Basic and diluted loss per share .... $ (2.07) $ (0.40) $ (0.55) $ (0.97)
</TABLE>
The portion of the revenue received from certain Satellite Services
customers, over and above guaranteed minimum channel lease payments, has been
reclassified to subscription television services for each of the first three
quarters. The total amount of the reclassification was approximately $9.6
million. The related expense items have been similarly reclassified.
15. SUBSEQUENT EVENTS
On February 1, 2000 EchoStar filed suit against DirecTV and Thomson
Consumer Electronics/RCA in the Federal District Court of Colorado. The suit
alleges that DirecTV has utilized improper conduct in order to fend off
competition. According to the complaint, DirecTV has demanded that certain
retailers stop displaying EchoStar merchandise and has threatened to cause
economic damage to retailers if they continued to offer both product lines in
head-to-head competition. The suit alleges that DirecTV has acted in violation
of federal and state anti-trust laws in order to protect DirecTV's market share.
EchoStar is seeking injunctive relief and monetary damages. It is too early in
the litigation to make an assessment of the probable outcome.
During February 2000, EchoStar announced the formation of a joint venture
with OpenTV Corp. intended to offer DISH Network customers and other video
platforms around the world a low cost, interactive digital receiver with a
built-in hard disk drive that will permit viewers to pause and record live
programs without the need for video tape. The new set-top box is expected to be
available during the fourth quarter of 2000. In connection with formation of the
joint venture, OpenTV and EchoStar licensed certain intellectual property rights
to the joint venture and EchoStar was issued 2,252,252 shares of OpenTV common
Stock. The shares of OpenTV common Stock are subject to forfeiture if EchoStar
fails to activate the OpenTV system in at least 500,000 set top boxes on or
before February 23, 2003.
During February 2000, EchoStar also 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.
Both will include spot-beam technology which could allow DISH Network to offer
local channels or other value added services in as many as 60 or more markets
across the United States. The third satellite, EchoStar IX, will be a hybrid
Ku/Ka-band satellite, which may provide EchoStar with increased opportunities to
attract business customers and may provide DISH Network customers with expanded
services such as Internet, data and potentially two-way wireless communications.
On February 28, 2000 EchoStar announced a two-for-one split of its
outstanding class A and class B common stock effective March 22, 2000 to
shareholders of record as of the close of business on March 10, 2000.
F-32
<PAGE> 81
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
------ -----------
<S> <C>
3.1(a)[] Amended Restated Articles of Incorporation of EchoStar.
3.1(b)* Bylaws of EchoStar (incorporated by reference to Exhibit
3.1(b) to the Registration Statement on Form S-1 of
EchoStar, Registration No. 33-91276).
3.2(a)* Articles of Incorporation of EchoStar Satellite
Broadcasting Corporation (formerly EchoStar Bridge
Corporation, a Colorado corporation) ("ESBC") (incorporated
by reference to Exhibit 3.1(e) to the Registration
Statement on Form S-1 of ESBC, Registration No. 333-3980).
3.2(b)* Bylaws of ESBC (incorporated by reference to Exhibit 3.1(f)
to the Registration Statement on Form S-1 of ESBC,
Registration No. 333-3980).
3.3(a)* Amended and Restated Articles of Incorporation of Dish
(incorporated by reference to Exhibit 3.1(a) to the
Registration Statement on Form S-1 of Dish, Registration
No. 33-76450).
3.3(b)* Bylaws of Dish (incorporated by reference to Exhibit 3.1(b)
to the Registration Statement on Form S-1 of Dish,
Registration No. 33-76450).
3.4(a)* Articles of Incorporation of EchoStar DBS Corporation, a
Colorado corporation ("DBS Corp.") (incorporated by
reference to Exhibit 3.4(a) to the Registration Statement
on Form S-4 of DBS Corp., Registration No. 333-31929).
3.4(b)* Bylaws of DBS Corp. (incorporated by reference to Exhibit
3.4(b) to the Registration Statement on Form S-4 of DBS
Corp., Registration No. 333-31929).
4.1* Indenture of Trust between Dish and First Trust National
Association ("First Trust"), as trustee (incorporated by
reference to Exhibit 4.1 to the Registration Statement on
Form S-1 of Dish, Registration No. 33-76450).
4.2* Warrant Agreement between EchoStar and First Trust, as
Warrant Agent (incorporated by reference to Exhibit 4.2 to
the Registration Statement on Form S-1 of Dish,
Registration No. 33-76450).
4.3* Security Agreement in favor of First Trust, as trustee
under the Indenture filed as Exhibit 4.1 hereto
(incorporated by reference to Exhibit 4.3 to the
Registration Statement on Form S-1 of Dish, Registration
No. 33-76450).
</TABLE>
<PAGE> 82
<TABLE>
<S> <C>
4.4* Escrow and Disbursement Agreement between Dish and First
Trust (incorporated by reference to Exhibit 4.4 to the
Registration Statement on Form S-1 of Dish, Registration
No. 33-76450).
4.5* Pledge Agreement in favor of First Trust, as trustee under
the Indenture filed as Exhibit 4.1 hereto (incorporated by
reference to Exhibit 4.5 to the Registration Statement on
Form S-1 of Dish, Registration No. 33-76450).
4.6* Intercreditor Agreement among First Trust, Continental
Bank, N.A. and Martin Marietta Corporation ("Martin
Marietta") (incorporated by reference to Exhibit 4.6 to the
Registration Statement on Form S-1 of Dish, Registration
No. 33-76450).
4.7* Series A Preferred Stock Certificate of Designation of
EchoStar (incorporated by reference to Exhibit 4.7 to the
Registration Statement on Form S-1 of EchoStar,
Registration No. 33-91276).
4.8* Registration Rights Agreement by and between EchoStar and
Charles W. Ergen (incorporated by reference to Exhibit 4.8
to the Registration Statement on Form S-1 of EchoStar,
Registration No. 33-91276).
4.9* Indenture of Trust between ESBC and First Trust, as trustee
(incorporated by reference to Exhibit 4.9 to the Annual
Report on Form 10-K of EchoStar for the year ended December
31, 1995, Commission File No. 0-26176).
4.10* Security Agreement of ESBC in favor of First Trust, as
trustee under the Indenture filed as Exhibit 4.9 hereto
(incorporated by reference to Exhibit 4.10 to the Annual
Report on Form 10-K of EchoStar for the year ended December
31, 1995, Commission File No. 0-26176).
4.11* Escrow and Disbursement Agreement between ESBC and First
Trust (incorporated by reference to Exhibit 4.11 to the
Annual Report on Form 10-K of EchoStar for the year ended
December 31, 1995, Commission File No. 0-26176).
4.12* Pledge Agreement of ESBC in favor of First Trust, as
trustee under the Indenture filed as Exhibit 4.9 hereto
(incorporated by reference to Exhibit 4.12 to the Annual
Report on Form 10-K of EchoStar for the year ended December
31, 1995, Commission File No. 0-26176).
4.13* Pledge Agreement of EchoStar in favor of First Trust, as
trustee under the Indenture filed as Exhibit 4.9 hereto
(incorporated by reference to Exhibit 4.13 to the Annual
Report on Form 10-K of EchoStar for the year ended December
31, 1995, Commission File No. 0-26176).
4.14* Registration Rights Agreement by and between ESBC,
EchoStar, Dish, MergerCo and Donaldson, Lufkin & Jenrette
Securities Corporation (incorporated by reference to
Exhibit 4.14 to the Annual Report on Form 10-K of EchoStar
for the year ended December 31, 1995, Commission File No.
0-26176).
4.15* Registration Rights Agreement, dated as of June 25, 1997,
by and among DBS Corp., EchoStar Communications
Corporation, a Nevada corporation formed in April 1995
("EchoStar"), EchoStar Satellite Broadcasting Corporation,
a Colorado corporation, Dish, Ltd. (formerly EchoStar
Communications Corporation, a Nevada corporation formed in
December 1993), Donaldson, Lufkin & Jenrette Securities
Corporation ("DLJ") and Lehman Brothers Inc. ("Lehman
Brothers") (incorporated by reference to Exhibit 4.15 to
the Registration Statement on Form S-4 of DBS Corp.,
Registration No. 333-31929).
4.16* Indenture of Trust, dated as of June 25, 1997, between DBS
Corp. and First Trust National Association ("First Trust"),
as trustee (incorporated by reference to Exhibit 4.16 to
Amendment No. 1 to the Registration Statement on Form S-4
of DBS Corp., Registration No. 333-31929).
</TABLE>
<PAGE> 83
<TABLE>
<S> <C>
4.17* 12 1/8% Series B Senior Redeemable Exchangeable Preferred
Stock Certificate of Correction for the Certificate of
Designation of EchoStar (incorporated by reference to
Exhibit 4.17 to Amendment No. 1 to the Registration
Statement on Form S-3 of EchoStar, Registration No.
333-37683).
4.18* Registration Rights Agreement, dated as of October 2, 1997,
by and among EchoStar, DLJ and Lehman Brothers
(incorporated by reference to Exhibit 4.18 to Amendment No.
1 to the Registration Statement on Form S-3 of EchoStar,
Registration No. 333-37683).
4.19* 6 3/4% Series C Cumulative Convertible Preferred Stock
Certificate of Designation of EchoStar (incorporated by
reference to Exhibit 4.19 to the Registration Statement on
Form S-4 of EchoStar, Registration No. 333-39901).
4.20* Form of Deposit Agreement between EchoStar and American
Securities Transfer & Trust, Inc. (incorporated by
reference to Exhibit 4.20 to Amendment No. 1 to the
Registration Statement on Form S-3 of EchoStar,
Registration No. 333-37683).
4.21(a)* Form of Underwriting Agreement for 6 3/4% Series C
Cumulative Convertible Preferred Stock by and between
EchoStar, DLJ and Lehman Brothers (incorporated by
reference to Exhibit 1.1 to Amendment No. 1 to the
Registration Statement on Form S-3 of EchoStar,
Registration No. 333-37683).
4.21(b)* Form of Underwriting Agreement for Class A Common Stock by
and between EchoStar, DLJ, BT Alex. Brown Incorporated and
Unterberg Harris (incorporated by reference to Exhibit 1.1
to Amendment No. 1 to the Registration Statement on Form
S-3 of EchoStar, Registration No. 333-37683).
4.22* Form of Indenture for EchoStar's 12 1/8% Senior Exchange
Notes due 2004 (incorporated by reference to Exhibit 4.8 to
the Quarterly Report on Form 10-Q of EchoStar for the
quarterly period ended September 30, 1997, Commission File
No. 0-26176).
4.23* Indenture of Trust, relating to DBS Corp.'s 12 1/4% Senior
Notes due 2006 ( the "Seven Year Notes"), dated as of
January 25, 1999, among DBS Corp., the Guarantors (as
defined therein) and U.S. Bank Trust National Association
("U.S. Bank"), as trustee (incorporated by reference to
Exhibit 4.1 to the Registration Statement on Form S-4 of
DBS Corp., Registration No. 333-71345).
4.24* Indenture of Trust, relating to DBS Corp.'s 12 3/8% Senior
Notes due 2009 ( the "Ten Year Notes"), dated as of January
25, 1999, among DBS Corp., the Guarantors (as defined
therein) and U.S. Bank, as trustee (incorporated by
reference to Exhibit 4.3 to the Registration Statement on
Form S-4 of DBS Corp., Registration No. 333-71345).
4.25* Registration Rights Agreement, relating to the Seven Year
Notes, dated as of January 25, 1999, by and among DBS
Corp., the Guarantors and the Initial Purchasers (as
defined therein) (incorporated by reference to Exhibit 4.5
to the Registration Statement on Form S-4 of DBS Corp.,
Registration No. 333-71345).
4.26* Registration Rights Agreement, relating to the Ten Year
Notes, dated as of January 25, 1999, by and among DBS
Corp., the Guarantors and the Initial Purchasers (as
defined therein) (incorporated by reference to Exhibit 4.6
to the Registration Statement on Form S-4 of DBS Corp.,
Registration No. 333-71345).
4.27* Indenture, dated as of December 8, 1999, between EchoStar
Communications Corporation and U.S. Bank Trust National
Association, as trustee, including the form of 4 7/8%
Convertible Subordinated Note Due 2007 (incorporated by
reference to Exhibit 4.1 to the Registration Statement on
Form S-3 of EchoStar Communications Corporation,
Registration No. 333-31894).
</TABLE>
<PAGE> 84
<TABLE>
<S> <C>
4.28 Registration Rights Agreement, relating to the 4 7/8%
Convertible Subordinated Notes Due 2007, dated as of
December 8, 1999, by and among EchoStar Communications
Corporation and the initial purchasers (incorporated by
reference to Exhibit 4.2 to the Registration Statement on
Form S-3 of EchoStar Communications Corporation,
Registration No. 333-31894).
10.1(a)* Satellite Construction Contract, dated as of February 6,
1990, between EchoStar Satellite Corporation ("ESC") and
Martin Marietta as successor to General Electric Company,
Astro-Space Division ("General Electric") (incorporated by
reference to Exhibit 10.1(a) to the Registration Statement
on Form S-1 of Dish, Registration No. 33-76450).
10.1(b)* First Amendment to the Satellite Construction Contract,
dated as of October 2, 1992, between ESC and Martin
Marietta as successor to General Electric (incorporated by
reference to Exhibit 10.1(b) to the Registration Statement
on Form S-1 of Dish, Registration No. 33-76450).
10.1(c)* Second Amendment to the Satellite Construction Contract,
dated as of October 30, 1992, between ESC and Martin
Marietta as successor to General Electric (incorporated by
reference to Exhibit 10.1(c) to the Registration Statement
on Form S-1 of Dish, Registration No. 33-76450).
10.1(d)* Third Amendment to the Satellite Construction Contract,
dated as of April 1, 1993, between ESC and Martin Marietta
(incorporated by reference to Exhibit 10.1(d) to the
Registration Statement on Form S-1 of Dish, Registration
No. 33-76450).
10.1(e)* Fourth Amendment to the Satellite Construction Contract,
dated as of August 19, 1993, between ESC and Martin
Marietta (incorporated by reference to Exhibit 10.1(e) to
the Registration Statement on Form S-1 of Dish,
Registration No. 33-76450).
10.1(f)* Form of Fifth Amendment to the Satellite Construction
Contract, between ESC and Martin Marietta (incorporated by
reference to Exhibit 10.1(f) to the Registration Statement
on Form S-1 of Dish, Registration No. 33-81234).
10.1(g)* Sixth Amendment to the Satellite Construction Contract,
dated as of June 7, 1994, between ESC and Martin Marietta
(incorporated by reference to Exhibit 10.1(g) to the
Registration Statement on Form S-1 of Dish, Registration
No. 33-81234).
10.1(h)* Eighth Amendment to the Satellite Construction Contract,
dated as of July 18, 1996, between ESC and Martin Marietta
(incorporated by reference to Exhibit 10.1(h) to the
Quarterly Report on Form 10-Q of EchoStar for the quarter
ended June 30, 1996, Commission File No. 0-26176).
10.2* Key Employee Bonus Plan, dated as of January 1, 1994
(incorporated by reference to Exhibit 10.7 to the
Registration Statement on Form S-1 of Dish, Registration
No. 33-76450)**
10.3* Consulting Agreement, dated as of February 17, 1994,
between ESC and Telesat Canada (incorporated by reference
to Exhibit 10.8 to the Registration Statement on Form S-1
of Dish, Registration No. 33-76450).
10.4* Form of Satellite Launch Insurance Declarations
(incorporated by reference to Exhibit 10.10 to the
Registration Statement on Form S-1 of Dish, Registration
No. 33-81234).
10.5* Dish 1994 Stock Incentive Plan (incorporated by reference
to Exhibit 10.11 to the Registration Statement on Form S-1
of Dish, Registration No. 33-76450).**
10.6* Form of Tracking, Telemetry and Control Contract between
AT&T Corp. and ESC (incorporated by reference to Exhibit
10.12 to the Registration Statement on Form S-1 of Dish,
Registration No. 33-81234).
10.7* Manufacturing Agreement, dated as of March 22, 1995,
between HTS and SCI Technology, Inc. (incorporated by
reference to Exhibit 10.12 to the Registration Statement on
Form S-1 of Dish, Commission File No. 33-81234).
</TABLE>
<PAGE> 85
<TABLE>
<S> <C>
10.8* Statement of Work, dated January 31, 1995 from ESC to
DiviCom, Inc. (incorporated by reference to Exhibit 10.14
to the Registration Statement on Form S-1 of EchoStar,
Registration No. 33-91276).
10.9* Launch Services Contract, dated as of June 2, 1995, by and
between EchoStar Space Corporation and
Lockheed-Khrunichev-Energia International, Inc.
(incorporated by reference to Exhibit 10.15 to the
Registration Statement on Form S-1 of EchoStar,
Registration No. 33-91276).
10.10* EchoStar 1995 Stock Incentive Plan (incorporated by
reference to Exhibit 10.16 to the Registration Statement on
Form S-1 of EchoStar, Registration No. 33-91276)**
10.11(a)* Eighth Amendment to Satellite Construction Contract, dated
as of February 1, 1994, between DirectSat Corporation and
Martin Marietta (incorporated by reference to Exhibit
10.17(a) to the Quarterly Report on Form 10-Q of EchoStar
for the quarter ended June 30, 1996, Commission File No.
0-26176).
10.12(b)* Ninth Amendment to Satellite Construction Contract, dated
as of February 1, 1994, between DirectSat Corporation and
Martin Marietta (incorporated by reference to Exhibit 10.15
to the Registration Statement of Form S-4 of EchoStar,
Registration No. 333-03584).
10.13(c)* Tenth Amendment to Satellite Construction Contract, dated
as of July 18, 1996, between DirectSat Corporation and
Martin Marietta (incorporated by reference to Exhibit
10.17(b) to the Quarterly Report on Form 10-Q of EchoStar
for the quarter ended June 30, 1996, Commission File No.
0-26176).
10.14* Satellite Construction Contract, dated as of July 18, 1996,
between EDBS and Lockheed Martin Corporation (incorporated
by reference to Exhibit 10.18 to the Quarterly Report on
Form 10-Q of EchoStar for the quarter ended June 30, 1996,
Commission File No. 0-26176).
10.15* Confidential Amendment to Satellite Construction Contract
between DBSC and Martin Marietta, dated as of May 31, 1995
(incorporated by reference to Exhibit 10.14 to the
Registration Statement of Form S-4 of EchoStar,
Registration No. 333-03584).
10.16* Agreement between HTS, ESC and ExpressVu Inc., dated
January 8, 1997, as amended (incorporated by reference to
Exhibit 10.18 to the Annual Report on Form 10-K of EchoStar
for the year ended December 31, 1996, as amended,
Commission File No. 0-26176).
10.17* Amendment No. 9 to Satellite Construction Contract,
effective as of July 18, 1996, between Direct Satellite
Broadcasting Corporation, a Delaware corporation ("DBSC")
and Martin Marrieta Corporation (incorporated by reference
to Exhibit 10.1 to the Quarterly Report on Form 10-Q of
EchoStar for the quarterly period ended June 30, 1997,
Commission File No. 0-26176).
10.18* Amendment No. 10 to Satellite Construction Contract,
effective as of May 31, 1996, between DBSC and Lockheed
Martin Corporation (incorporated by reference to Exhibit
10.2 to the Quarterly Report on Form 10-Q of EchoStar for
the quarterly period ended June 30, 1997, Commission File
No. 0-26176).
10.19* Contract for Launch Services, dated April 5, 1996, between
Lockheed Martin Commercial Launch Services, Inc. and
EchoStar Space Corporation (incorporated by reference to
Exhibit 10.3 to the Quarterly Report on Form 10-Q of
EchoStar for the quarterly period ended June 30, 1997,
Commission File No. 0-26176).
10.20* OEM Manufacturing, Marketing and Licensing Agreement, dated
as of February 17, 1998, by and among HTS, ESC and Philips
Electronics North America Corporation (incorporated by
reference to Exhibit 10.1 to the Quarterly Report on Form
10-Q of EchoStar for the quarterly period ended March 31,
1998, Commission File No. 0-26176).
</TABLE>
<PAGE> 86
<TABLE>
<S> <C>
10.21* Licensing Agreement, dated as of February 23, 1998, by and
among HTS, ESC and VTech Communications Ltd. (incorporated
by reference to Exhibit 10.2 to the Quarterly Report on
Form 10-Q of EchoStar for the quarterly period ended March
31, 1998, Commission File No. 0-26176).
10.22* Purchase Agreement, dated November 30, 1998, by and among
American Sky Broadcasting, LLC ("ASkyB"), The News
Corporation Limited ("News Corporation"), MCI
Telecommunications Corporation and EchoStar (incorporated
by reference to Exhibit 10.1 to the Current Report on Form
8-K filed by EchoStar on December 1, 1998, Commission File
No. 0-26176).
10.23* Voting Agreement, dated November 30, 1998, among EchoStar,
AskyB, News Corporation and MCI Telecommunications
Corporation (incorporated by reference to Exhibit 10.3 to
the Current Report on Form 8-K of EchoStar, filed as of
December 1, 1998).
10.24* Agreement to Form NagraStar LLC, dated as of June 23, 1998,
by and between Kudelski S.A., EchoStar and ESC
(incorporated by reference to Exhibit 10.28 to the Annual
Report on Form 10-K of EchoStar for the year ended December
31, 1998, Commission File No. 0-26176).
10.25* First Amendment, dated June 23, 1999, to the Purchase
Agreement dated November 30, 1998, by and among American
Sky Broadcasting, LLC, The News Corporation Limited, MCI
Telecommunications Corporation, and EchoStar Communications
Corporation (incorporated by reference to Exhibit 10.3 to
the Current Report on Form 8-K of EchoStar, filed as of
July 2, 1999, Commission File No. 0-26176).
10.26* Registration Rights Agreement, dated June 24, 1999, by and
among EchoStar Communications Corporation, MCI
Telecommunications Corporation, American Sky Broadcasting,
LLC, and News America Incorporated (incorporated by
reference to Exhibit 10.4 to the Current Report on Form 8-K
of EchoStar, filed as of July 2, 1999, Commission File No.
0-26176).
21[] Subsidiaries of EchoStar Communications Corporation.
24.1[] Powers of Attorney authorizing signature of O. Nolan Daines
and Raymond L. Friedlob.
27[] Financial Data Schedule.
</TABLE>
- -------------------
* Incorporated by reference.
** Constitutes a management contract or compensatory plan or arrangement.
[] Filed herewith.
<PAGE> 1
EXHIBIT 3.1
ARTICLES OF INCORPORATION OF
ECHOSTAR COMMUNICATIONS CORPORATION
(incorporating all amendments)
ARTICLE I
Name
The name of the corporation shall be ECHOSTAR COMMUNICATIONS CORPORATION
(the "Corporation").
ARTICLE II
Period of Duration
The Corporation shall exist in perpetuity, from and after the date of
filing of its original Articles of Incorporation with the Secretary of State of
the State of Nevada unless dissolved according to law.
ARTICLE III
Purposes
The purpose for which this Corporation is organized is to engage in any
lawful acts and activities for which corporations may be organized under the
laws of the State of Nevada and to exercise any powers permitted to corporations
under the laws of the State of Nevada.
ARTICLE IV
Capital
1. Authorized Capital Stock. The total number of shares of capital stock
which the Corporation is authorized to issue shall be 420,000,000 shares,
consisting of 400,000,000 shares of common stock, par value $0.01 per share
("Common Stock"), and 20,000,000 shares of preferred stock, par value $0.01 per
share ("Preferred Stock").
2. Common Stock. (a) Of the 400,000,000 shares of authorized Common Stock,
200,000,000 shares shall be designated Class A Common Stock ("Class A Common
Stock"), 100,000,000 shares shall be designated Class B Common Stock ("Class B
Common Stock"), and 100,000,000 shares shall be designated Class C Common Stock
("Class C Common Stock").
3. Preferred Stock. The Board of Directors of the Corporation is hereby
authorized to provide, by resolution or resolutions adopted by such Board, for
the issuance of Preferred Stock from time to time in one or more classes and/or
series, to
<PAGE> 2
establish the number of shares of each such class or series, and to fix the
powers, designations, preferences and relative, participating, optional or other
rights, if any, and the qualifications, limitations or restrictions thereof, of
any of the shares of each such class or series, all to the full extent permitted
by the Nevada General Corporation Law, or any successor law(s) of the State of
Nevada. Without limiting the generality of the foregoing, the Board of Directors
is authorized to provide that shares of a class or series of Preferred Stock:
(1) are entitled to cumulative, partially cumulative or
noncumulative dividends or other distributions payable in cash, capital
stock or indebtedness of the Corporation or other property, at such times
and in such amounts as are set forth in the Board resolutions
establishing such class or series or as are determined in a manner
specified in such resolutions;
(2) are entitled to a preference with respect to payment of
dividends over one or more other classes and/or series of capital stock
of the Corporation;
(3) are entitled to a preference with respect to any
distribution of assets of the Corporation its liquidation, dissolution or
winding up over one or more other classes and/or series of capital stock
of the Corporation in such amount as is set forth in the Board
resolutions establishing such class or series or as is determined in a
manner specified in such resolutions;
(4) are redeemable or exchangeable at the option of the
Corporation and/or on a mandatory basis for cash, capital stock or
indebtedness of the Corporation or other property, at such times or upon
the occurrence of such events, and at such prices, as are set forth in
the Board resolutions establishing such class or series or as are
determined in a manner specified in such resolutions;
(5) are entitled to the benefits of such sinking fund, if any,
as is required to be established by the Corporation for the redemption
and/or purchase of such shares by the Board resolutions establishing such
class or series;
(6) are convertible at the option of the holders thereof into
shares of any other class or series of capital stock of the Corporation,
at such times or upon the occurrence of such events, and upon such terms,
as are set forth in the Board resolutions establishing such class or
series or as are determined in a manner specified in such resolutions;
(7) are exchangeable at the option of the holders thereof for
cash, capital stock or indebtedness of the Corporation or other property,
at such times or upon the occurrence of such events, and at such prices,
as are set forth in the Board resolutions establishing such class or
series or as are determined in a manner specified in such resolutions;
<PAGE> 3
(8) are entitled to such voting rights, if any, as are
specified in the Board resolutions establishing such class or series
(including, without limiting the generality of the foregoing, the right
to elect one or more directors voting alone as a single class or series
or together with one or more other classes and/or series of Preferred
Stock, if so specified by such Board resolutions) at all times or upon
the occurrence of specified events; and
(9) are subject to restrictions on the issuance of additional
shares of Preferred Stock of such class or series or of any other class
or series, or on the reissuance of shares of Preferred Stock of such
class or series or of any other class or series, or on increases or
decreases in the number of authorized shares of Preferred Stock of such
class or series or of any other class or series.
Without limiting the generality of the foregoing authorizations, any of the
voting powers, designations, preferences, rights and qualifications, limitations
or restrictions of a class or series of Preferred Stock may be made dependent
upon facts ascertainable outside the Board resolutions establishing such class
or series, all to the full extent permitted by the Nevada General Corporation
Law. Unless otherwise specified in the Board resolutions establishing a class or
series of Preferred Stock, holders of a class or series of Preferred Stock shall
not be entitled to cumulate their votes in any election of directors in which
they are entitled to vote and shall not be entitled to any preemptive rights to
acquire shares of any class or series of capital stock of the Corporation.
ARTICLE V
Voting and Conversion Rights
1. Voting Rights.
(a) Except as otherwise required by law or, in any Preferred
Stock Statement and Certificate of Designations, Preferences and Rights
("Certificate of Designations"), with respect to all matters upon which
stockholders are entitled to vote or to which stockholders are entitled to give
consent, the holders of any outstanding shares of Class A Common Stock, Class B
Common Stock, Class C Common Stock and Preferred Stock shall vote together
without regard to class, and every holder of any outstanding shares of the Class
A Common Stock and Class C Common Stock held by such holder; every holder of any
outstanding shares of Class B Common Stock shall be entitled to cast ten votes
in person or by proxy for each share of Class B Common Stock held by such
holder; and every holder of any outstanding shares of Preferred Stock shall be
entitled to cast, in person or by proxy for each share of Preferred Stock held
by such holder, the number of votes specified in the applicable Certificate of
Designations; provided however, in the event of a "Change in Control" of the
Corporation, the holders of any outstanding shares of Class C Common Stock shall
be entitled to cast ten votes in person or by proxy for each share of Class C
Common Stock held by such holder. As used herein, a "Change of Control" of the
Corporation means: (i) any transaction or series of transactions, the result of
which is that the Principals and their Related Parties (as such
<PAGE> 4
terms are hereinafter defined), or an entity controlled by the Principals and
their Related Parties, cease to be the "beneficial owners" (as defined in Rule
13(d) (3) under the Securities Exchange Act of 1934) of at least 30% of the
total equity interests of the Corporation and to have the voting power to elect
at least a majority of the Board of Directors of the Corporation; or (ii) the
first day on which a majority of the members of the Board of Directors of the
Corporation are not continuing directors. "Principals" means Charles W. Ergen,
James DeFranco, and David K. Moskowitz. "Related Parties" means, with respect to
any Principal: (y) the spouse and each immediate family member of such
Principal; and (z) each trust, corporation, partnership or other entity of which
such Principal beneficially holds an 80% or more controlling interest.
(b) A quorum for the purpose of shareholder meeting shall
consist of a majority of the voting power of EchoStar. If a quorum is present,
the effective vote of a majority of the voting power represented at the meeting
and entitled to vote on the subject matter shall be the act of the shareholders,
unless the vote of a greater proportion or number is required by any provisions
contained in the NGCL. Notwithstanding any provisions contained in the NGCL
requiring the vote of shares possessing two-thirds of the voting power of
EchoStar to take action, absent a provision herein to the contrary, in the case
of such provisions the affirmative vote of a majority of the voting power shall
be the act of the shareholders.
(c) Holders of Common Stock shall not be entitled to cumulate
their votes in the election of directors and shall not be entitled to any
preemptive rights to acquire shares of any class or series of capital stock of
the Corporation. Subject to any preferential rights of holders of Preferred
Stock, holders of Common Stock shall be entitled to receive their pro rata
shares, based upon the number of shares of Common Stock held by them, of such
dividends or other distributions as may be declared by the Board of Directors
from time to time and of any distribution of the assets of the Corporation upon
its liquidation, dissolution or winding up, whether voluntary or involuntary.
2. Conversion Rights.
(a) Each share of Class B Common Stock and Class C Common
Stock Shall be convertible at the option of the holder thereof into Class A
Common Stock of the Corporation in accordance with this Article V. In order to
exercise the conversion privilege, a holder of Class B Common Stock or Class C
Common Stock shall surrender the certificate evidencing such Class B Common
Stock or Class C Common Stock to the Corporation at its principal office, duly
endorsed to the Corporation and accompanied by written notice to the Corporation
that the holder thereof elects to convert a specified portion or all of such
shares. Class B Common Stock or Class C Common Stock converted at the option of
the holder shall be deemed to have been converted on the day of surrender of the
certificate representing such shares for conversion in accordance with the
foregoing provisions, and at such time the rights of the holder of such Class B
Common Stock or Class C Common Stock, as such holder, shall cease and such
holder shall be treated for all purposes as the record holder of Class A Common
Stock issuable
<PAGE> 5
upon conversion. As promptly as practicable on or after the conversion date, the
Corporation shall issue and mail or deliver to such holder a certificate or
certificates for the number of Class A Common Stock issuable upon conversion,
computed to the nearest one hundredth of a full share, and a certificate or
certificates for the balance of Class B Common Stock or Class C Common Stock
surrendered, if any, not so converted into Class A Common Stock.
(b) The Class B Common Stock and Class C Common Stock
shall be convertible into one share of Class A Common Stock for each share of
Class B Common Stock or Class C Common Stock so converted (the "Conversion
Rate"). In the event the Corporation shall at any time subdivide or split its
outstanding Class A Common Stock, into a greater number of shares or declare any
dividend payable in Class A Common Stock, the Conversion Rate in effect
immediately prior to such subdivision, split or dividend shall be
proportionately increased, and conversely, in case the outstanding Class A
Common Stock of the Corporation shall be combined into a smaller number of
shares, the Conversion Rate in effect immediately prior to such combination
shall be proportionately decreased.
(c) Upon any adjustment of the Conversion Rate then
and in each such case the Corporation shall give written notice thereof, by
first-class mail, postage prepaid, addressed to the registered holders of Class
B Common Stock and Class C Common Stock at the addresses of such holders as
shown on the books of the Corporation, which notice shall state the Conversion
Rate resulting from such adjustment and the increase or decrease, if any, in the
number of shares receivable at such price upon the conversion of Class B Common
Stock or Class C Common Stock, setting forth in reasonable detail the method of
calculation and the facts upon which such calculation is based.
(d) The holders of Class B Common Stock and Class C
Common Stock shall have the following rights to certain properties received by
the holders of Class A Common Stock:
(i) In case the Corporation shall
declare a dividend or distribution upon Class A Common Stock payable
other than in cash out of earnings or surplus or other than in Class A
Common Stock, then thereafter each holder of Class B Common Stock or
Class C Common Stock upon the conversion thereof will be entitled to
receive the number of shares of Class A Common Stock into which such
Class B Common Stock or Class C Common Stock shall be converted, and, in
addition and without payment therefor, the property which such holder
would have received as a dividend if continuously since the record date
for any such dividend or distribution such holder: (A) had been the
record holder of the number of Class A Common Stock then received; and
(B) had retained all dividends or distributions originating directly or
indirectly from such Class A Common Stock.
(ii) If any capital reorganization
or reclassification of the capital stock of the Corporation, or
consolidation or merger of the Corporation with another corporation, or
the sale of all or substantially all of its assets to another
<PAGE> 6
corporation shall be effected in such a way that holders of Class A
Common Stock shall be entitled to receive stock, securities or assets
with respect to or in exchange for a Class A Common, then, as a condition
of such reorganization, reclassification, consolidation, merger or sale,
lawful and adequate provision shall be made whereby the holders of Class
B Common Stock and Class C Common Stock shall thereafter have the right
to receive, in lieu of Class A Common Stock of the Corporation
immediately theretofore receivable upon the conversion of such Class B
Common Stock and Class C Common Stock, such shares of stock, securities
or assets as may be issued or payable with respect to or in exchange for
a number of outstanding Class A Common Stock equal to the number of Class
A Common Stock immediately theretofore receivable upon the conversion or
such Class B Common Stock and Class C Common Stock had such
reorganization, reclassification, consolidation, merger or sale not taken
place, and in any such case appropriate provision shall be made with
respect to the rights and interests of the holders of the Class B Common
Stock and Class C Common Stock to the end that the provisions hereof
(including without limitation provisions for adjustments of the
Conversion Rate and of the number of shares receivable upon the
conversion of such Class B Common Stock and Class C Common Stock) shall
thereafter be applicable, as nearly as may be, in relation to any shares
of stock, securities or assets thereafter receivable upon the conversion
of such Class B Common Stock and Class C Common Stock. The Corporation
shall not effect any such reorganization, reclassification,
consolidation, merger or sale, unless prior to the consummation thereof
the surviving corporation (if other than the Corporation), the
corporation resulting from such consolidation or the corporation
purchasing such assets shall assume by written instrument executed and
mailed to the registered holders of the Class B Common Stock and Class C
Common Stock at the last address of such holders appearing on the books
of the Corporation, the obligation to deliver to such holders such shares
of stock, securities or assets as, in accordance with the foregoing
provisions, such holders may be entitled to receive.
(e) In case at any time:
(iii) the Corporation shall pay any
dividend payable in stock upon Class A Common Stock or make any
distribution (other than regular cash dividends to the holders of Class A
Common Stock); or
(iv) the Corporation shall offer for
subscription pro rata to the holders of Class A Common Stock any
additional shares of stock of any class or other rights; or
(v) there shall be any capital
reorganization, reclassification of the capital stock of the Corporation,
or consolidation or merger of the Corporation with, or sale of all or
substantially all of its assets, to another corporation (provided
however, that this provision shall not be applicable to the merger or
consolidation of the Corporation with or into another corporation if,
following such merger or consolidation, the shareholders of the
Corporation
<PAGE> 7
immediately prior to such merger or consolidation own at least 80% of the
equity of the combined entity); or
(vi) there shall be a voluntary or
involuntary dissolution, liquidation or winding up of the Corporation;
then, in any one or more of the aforesaid cases, the Corporation shall give
written notice, by first-class mail, postage prepaid, addressed to the holders
of Class B Common Stock and Class C Common Stock at the addresses of such
holders as shown on the books of the Corporation, of the date on which: (A) the
books of the Corporation shall close or a record shall be taken for such
dividend, distribution or subscription rights; or (B) such reorganization,
reclassification, consolidation, merger, sale, dissolution, liquidation or
winding up shall take place, as the case may be. Such notice shall also specify
the date as of which the holders of Class A Common Stock of record shall
participate in such dividend, distribution, or subscription rights, or shall be
entitled to exchange their Class A Common Stock for securities or other property
deliverable upon such reorganization, reclassification, consolidation, merger,
sale, dissolution, liquidation or winding up, as the case may be. Such written
notice shall be given at least 20 days prior to the action in question and not
less than 20 days prior to the record date or the date on which the
Corporation's transfer books are closed in respect thereto.
ARTICLE VI
Board of Directors
The name and addresses of the first board of directors, which shall be
three (3) in number, are as follows:
NAME ADDRESS
---- -------
Charles W. Ergen 5701 S. Santa Fe Drive
Littleton, CO 80102
James DeFranco 5701 S. Santa Fe Drive
Littleton, CO 80120
R. Scott Zimmer 5701 S. Santa Fe Drive
Littleton, CO 80120
The number of directors shall be increased or decreased as prescribed by
the Bylaws of the Corporation.
<PAGE> 8
ARTICLE VII
Right of Directors to Contract with Corporation
The following provisions are inserted for the management of the business
and for the conduct of the affairs of the Corporation, and the same are in
furtherance of and not in limitation of the powers conferred by law.
1. No contract or other transaction between this Corporation and one or
more of its directors or any other corporation, firm, association, or entity in
which one or more of its directors are directors or officers or are financially
interested shall be either void or voidable solely because of such relationship
or interest or solely because such directors are present at the meeting of the
Board of Directors or a committee thereof which authorizes, approves or ratifies
such contract or transaction or solely because their votes are counted for such
purpose if:
(a) The material facts as to such
relationship or interest and as to the contract or transaction are
disclosed or are otherwise known to the Board of Directors or committee
and the Board or committee authorizes, approves, or ratifies such
contract or transaction by the affirmative vote of a majority of the
disinterested directors, even though such directors are less than a
quorum; or
(b) The material facts of such relationship
or interest and as to the contract or transaction are disclosed or are
otherwise known to the shareholders entitled to vote thereon and they
authorize, approve or ratify such contract or transaction by vote or
written consent; or
(c) The contract or transaction is fair and
reasonable to the Corporation.
2. Common or interested directors may be counted in determining the
presence of a quorum at a meeting of the Board of Directors or a committee
thereof which authorizes, approves or ratifies such contract or transaction.
ARTICLE VIII
Corporate Opportunity
The officers, directors and other members of management of this Corporation
shall be subject to the doctrine of "corporate opportunities" only insofar as it
applies to business opportunities in which this Corporation has expressed an
interest as determined from time to time by this Corporation's Board of
Directors as evidenced by resolutions appearing in the Corporation's minutes.
Once such areas of interest are delineated, all such business opportunities
within such areas of interest which come to the attention of the officers,
directors and other members of management of this Corporation shall be offered
first to the Corporation. In the event the Corporation declines to pursue any or
all such business opportunities, the officers, directors and other members of
management of this Corporation shall be free to engage in such areas of interest
on their own and this doctrine shall not limit the right of any officer,
director or other member of management of this Corporation to continue a
business existing prior to the time that such area of interest is
<PAGE> 9
designated by the Corporation. This provision shall not be construed to release
any employee of this Corporation (other than an officer, director or member of
management) from any duties which he may have to this Corporation.
ARTICLE IX
Indemnification of Officers, Directors and Others
1. To the full extent permitted by the NGCL, the Corporation shall
indemnify any person who was or is a party or is threatened to be made a party
to any threatened, pending or completed action, suit in proceeding, whether
civil, criminal, administrative or investigative and whether formal or informal
(other than an action by or in the right of the Corporation) by reason of the
fact that he is or was a director, officer, employee, fiduciary or agent of the
Corporation, or is or was serving at the request of the Corporation as a
director, officer, employee, fiduciary or agent of another corporation,
partnership, joint venture, trust, employee benefit plan or other enterprise,
against expenses (including attorneys' fees), judgements, fines an amounts paid
in settlement actually and reasonably incurred by him in connection with such
action, suit or proceeding, if he conducted himself in good faith and in a
manner he reasonably believed to be in or not opposed to the best interests of
the Corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful, The termination of any
action, suit or proceeding by judgment, order, settlement, or conviction, or
upon a plea of nolo contendere or its equivalent, shall not, of itself, create a
presumption that the person did not act in good faith and in a manner which he
reasonably believed to be in or not opposed to the best interests of the
Corporation and, with respect to any criminal action or proceeding, had no
reasonable cause to believe that his conduct was unlawful.
2. The Corporation shall indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action or
suit by or in the right of the Corporation to procure a judgment in its favor by
reason of the fact that he is or was a director, officer, employee, fiduciary or
agent of the Corporation, or is or was serving at the request of the Corporation
as a director, officer, employee or agent of another corporation, partnership,
joint venture, trust, employee benefit plan or other enterprise against expenses
(including attorneys fees) actually and reasonably incurred by him in connection
with the defense or settlement of such action or suit if he acted in good faith
and in a manner he reasonably believed to be in or not opposed to the best
interests of the Corporation and except that no indemnification shall be made in
respect of any claim, issue or matter as to which such person shall have been
adjudged to be liable for negligence or misconduct in the performance of his
duty to the Corporation unless and only to the extent that the court in which
such action or suit was brought shall determine upon application that, despite
the adjudication of liability but in view of all circumstances of the case, such
person is fairly and reasonably entitled to indemnity for such expenses which
such court shall deem proper.
<PAGE> 10
3. To the extent that a director, officer, employee, fiduciary or agent of
a corporation has been wholly successful on the merits or otherwise in defense
of any action, suit or proceeding referred to in paragraphs 1 and 2 of this
Article, or in defense of any claim, issue or matter therein, he shall be
indemnified against expenses (including attorneys fees) actually and reasonably
incurred by him in connection therewith.
4. Any indemnification under paragraphs 1 and 2 of this Article IX (unless
ordered by a court) shall be made by the Corporation only as authorized in the
specific case upon a determination that indemnification of the director,
officer, employee, fiduciary or agent is proper in the circumstances because he
has met the applicable standard of conduct set forth in paragraphs 1 and 2. Such
determination shall be made: (1) by the Board of Directors by a majority vote of
a quorum consisting of directors who were not parties to such action, suit or
proceeding; or (2) if such quorum is not obtainable, or, even if obtainable a
quorum of disinterested directors so directs, by independent legal counsel in a
written opinion; or (3) by the shareholders.
5. Expenses (including attorneys fees) incurred in defending a civil or
criminal action, suit or proceeding may be paid by the Corporation in advance of
the final disposition of such action, suit or proceeding as authorized in the
manner provided in paragraph 4 of this Article IX upon receipt of an undertaking
by or on behalf of the director, officer, employee, fiduciary or agent to repay
such amount unless it shall ultimately be determined that he is entitled to be
indemnified by the Corporation.
6. The Corporation shall have the power to purchase and maintain insurance
on behalf of any person who is or was a director, officer, employee, fiduciary
or agent of the Corporation, or is or was serving at the request of the
Corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust, employee benefit plan or other enterprise,
against any liability asserted against him and incurred by him in any such
capacity or arising out of his status as such, whether or not the Corporation
would have the power to indemnify him against such liability under the
provisions of this Article IX.
7. In addition to the forgoing, the Corporation shall have the power to
indemnify current or former directors, officer, employees and agents to the
fullest extent provided by law.
ARTICLE X
Director Liability
To the fullest extent permitted by the Nevada General Corporation Law, as the
same exists or may hereafter be amended, a director of this Corporation shall
not be liable to the Corporation or its shareholders for monetary damages for
breach of fiduciary duty as a director.
<PAGE> 11
ARTICLE XI
Incorporator
The name and address of the sole incorporator of the Corporation is as follows:
Gregory S. Brown, and his address is 303 East 17th Avenue, Suite 1100, Denver,
Colorado 80203.
ARTICLE XII
Registered Office and Registered Agent
The address of the registered office of the Corporation is One East First
Street, Reno, Nevada 89501. The name of the Corporation's resident agent at that
address is The Corporation Trust Company of Nevada. Either the registered office
or the registered agent may be changed in the manner permitted by law.
<PAGE> 1
EXHIBIT 21
ECHOSTAR COMMUNICATIONS CORPORATIONS AND SUBSIDIARIES
LIST OF SUBSIDIARIES
As of December 31, 1999
<TABLE>
<CAPTION>
State or Country % of Name Doing Business
Subsidiary of Incorporation Ownership As
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Dish Entertainment Corporation Colorado 100% Dish Entertainment
Dish Factory Direct Corporation Colorado 100% Dish Factory Direct
Dish Network Credit Corporation Colorado 100% DNCC
EchoStar DBS Corporation Colorado 100% EchoStar DBS
EchoStar Engineering Corporation Colorado 100% EchoStar Engineering
EchoStar KuX Corporation Colorado 100% KuX
EchoStar 110 Corporation Colorado 100% EchoStar 110
EchoStar PAC Corporation Colorado 100% EchoStar PAC
EchoStar Real Estate Corporation II Colorado 100% EREC II
Echo Acceptance Corporation Colorado 100%(1) EAC
Dish Network Service Corporation f/k/a Colorado 100%(1) DNSC
Dish Installation Network Corporation
Echosphere Corporation Colorado 100%(1) Echosphere
EchoStar International Corporation Colorado 100%(1) EchoStar International
EchoStar North America Corporation f/k/a Colorado 100% EchoStar North America
EchoStar Licensee Corporation
EchoStar Real Estate Corporation Colorado 100%(1) EREC
EchoStar Satellite Corporation Colorado 100%(1) ESC
E-Sat, Inc. Colorado 80%(1) E-Sat
EchoStar Technologies Corporation f/k/a Texas 100%(1) EchoStar Technologies
Houston Tracker Systems, Inc.
Houston Tracker Systems, Inc. Colorado 100%(1) HTS
HT Ventures, Inc. Colorado 100%(1) HTV
EchoStar Data Networks Corporation f/k/a Colorado 100% EchoStar Data Networks
Media4, Inc.
NagraStar LLC Colorado 50% NagraStar
Satellite Communications Operating Corporation Colorado 100% SCOC
Satellite Source, Inc. Colorado 100%(1) Satellite Source
Sky Vista Corporation Colorado 100%(1) Sky Vista
Transponder Encryption Services Corporation Colorado 100% TESC
EchoStar Space Corporation Colorado 100% Space
EchoStar UK Holdings Foreign 100% UK Holdings
Eldon Technology Limited Foreign 100% Eldon
</TABLE>
(1) This is a subsidiary of EchoStar DBS Corporation
<PAGE> 1
EXHIBIT 24.1
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints David K. Moskowitz as the true and lawful
attorney-in-fact and agent of the undersigned, with full power of substitution
and resubstitution, for and in the name, place and stead of the undersigned, in
any and all capacities, to sign the Annual Report on Form 10-K of EchoStar
Communications Corporation, a Nevada corporation formed in April 1995, for the
year ended December 31, 1999, and any and all amendments thereto and to file the
same, with all exhibits thereto and other documents in connection therewith,
with the United States Securities and Exchange Commission, and hereby grants to
said attorney-in-fact and agent full power and authority to do and perform each
and every act and thing requisite and necessary to be done in connection
therewith, as fully as to all intents and purposes as the undersigned might or
could do in person, hereby ratifying and confirming all that said
attorney-in-fact and agent, or his substitute, may lawfully do or cause to be
done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Power Attorney has been signed by the following persons in the capacities and on
the date indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ RAYMOND L. FRIEDLOB Director March 13, 2000
- ------------------------
Raymond L. Friedlob
/s/ O. NOLAN DAINES Director March 13, 2000
- ------------------------
O. Nolan Daines
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF ECHOSTAR COMMUNICATION CORPORATION AS OF AND FOR THE
YEAR ENDED DECEMBER 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 905,299
<SECURITIES> 348,876
<RECEIVABLES> 159,658
<ALLOWANCES> 13,109
<INVENTORY> 123,630
<CURRENT-ASSETS> 1,683,695
<PP&E> 1,339,939
<DEPRECIATION> 266,947
<TOTAL-ASSETS> 3,898,189
<CURRENT-LIABILITIES> 896,909
<BONDS> 3,002,620
0
45,434
<COMMON> 2,292
<OTHER-SE> (96,144)
<TOTAL-LIABILITY-AND-EQUITY> 3,898,189
<SALES> 1,561,770
<TOTAL-REVENUES> 1,602,841
<CGS> 904,821<F1>
<TOTAL-COSTS> 1,949,932<F2>
<OTHER-EXPENSES> 176,603
<LOSS-PROVISION> 23,481
<INTEREST-EXPENSE> 201,613
<INCOME-PRETAX> (523,694)
<INCOME-TAX> (154)
<INCOME-CONTINUING> (523,848)
<DISCONTINUED> 0
<EXTRAORDINARY> (268,999)
<CHANGES> 0
<NET-INCOME> (792,847)
<EPS-BASIC> (3.84)
<EPS-DILUTED> (3.84)
<FN>
<F1>Includes programming revenue.
<F2>Includes cost of programming.
</FN>
</TABLE>
