<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to .
--------------- ----------------
Commission File Number: 0-26176
ECHOSTAR COMMUNICATIONS CORPORATION
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
NEVADA 88-0336997
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
5701 S. SANTA FE DRIVE
LITTLETON, COLORADO 80120
(Address of principal executive offices) (Zip code)
</TABLE>
(303) 723-1000
(Registrant's telephone number, including area code)
NOT APPLICABLE
(Former name, former address and former fiscal
year, if changed since last report)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES [X] NO [ ]
AS OF NOVEMBER 9, 2000, THE REGISTRANT'S OUTSTANDING COMMON STOCK CONSISTED
OF 234,987,978 SHARES OF CLASS A COMMON STOCK AND 238,435,208 SHARES OF CLASS B
COMMON STOCK.
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<PAGE> 2
TABLE OF CONTENTS
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -
December 31, 1999 and September 30, 2000 (Unaudited)............................................. 1
Condensed Consolidated Statements of Operations for the
three and nine months ended September 30, 1999 and 2000 (Unaudited).............................. 2
Condensed Consolidated Statements of Cash Flows for the
nine months ended September 30, 1999 and 2000 (Unaudited)........................................ 3
Notes to Condensed Consolidated Financial Statements (Unaudited)................................... 4
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.............. 14
Item 3. Quantitative and Qualitative Disclosures About Market Risk......................................... None
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.................................................................................. 24
Item 2. Changes in Securities and Use of Proceeds.......................................................... None
Item 3. Defaults Upon Senior Securities.................................................................... None
Item 4. Submission of Matters to a Vote of Security Holders................................................ None
Item 5. Other Information.................................................................................. None
Item 6. Exhibits and Reports on Form 8-K................................................................... 27
</TABLE>
<PAGE> 3
ECHOSTAR COMMUNICATIONS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1999 2000
------------ ------------
(Unaudited)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents ...................................................... $ 905,299 $ 1,242,211
Marketable investment securities ............................................... 348,876 378,233
Trade accounts receivable, net of allowance for uncollectible accounts of
$13,109 and $25,227, respectively .............................................. 159,685 227,335
Insurance receivable ........................................................... 106,000 106,000
Inventories .................................................................... 123,630 190,196
Other current assets ........................................................... 40,205 42,213
----------- -----------
Total current assets .............................................................. 1,683,695 2,186,188
Restricted cash and marketable investment securities .............................. 3,000 3,000
Cash reserved for satellite insurance ............................................. 89,591
Property and equipment, net ....................................................... 1,339,939 1,413,216
FCC authorizations, net ........................................................... 722,402 714,595
Other noncurrent assets ........................................................... 149,153 293,050
----------- -----------
Total assets ................................................................. $ 3,898,189 $ 4,699,640
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Trade accounts payable ......................................................... $ 194,046 $ 238,863
Deferred revenue ............................................................... 181,531 254,693
Accrued expenses ............................................................... 499,265 557,011
Current portion of long-term debt .............................................. 22,067 17,145
----------- -----------
Total current liabilities ......................................................... 896,909 1,067,712
Long-term obligations, net of current portion:
1994 Notes ..................................................................... 1,503 --
1996 Notes ..................................................................... 1,097 --
1997 Notes ..................................................................... 15 --
9 1/4% Seven Year Notes ........................................................ 375,000 375,000
9 3/8% Ten Year Notes .......................................................... 1,625,000 1,625,000
Convertible Notes .............................................................. 1,000,000 1,000,000
10 3/8% Seven Year Notes ...................................................... -- 1,000,000
Mortgages and other notes payable, net of current portion ...................... 27,990 24,416
Long-term deferred satellite services revenue and other long-term liabilities .. 19,093 24,679
----------- -----------
Total long-term obligations, net of current portion ............................... 3,049,698 4,049,095
----------- -----------
Total liabilities ............................................................ 3,946,607 5,116,807
Commitments and Contingencies (Note 6)
Stockholders' Equity (Deficit):
6 3/4% Series C Cumulative Convertible Preferred Stock, 908,665 and 248,576
shares issued and outstanding, respectively .................................. 45,434 12,429
Class A Common Stock, $.01 par value, 1,600,000,000 shares authorized,
220,087,230 and 234,734,073 shares issued and outstanding, respectively ...... 2,200 2,347
Class B Common Stock, $.01 par value, 800,000,000 shares authorized,
238,435,208 shares issued and outstanding .................................... 2,384 2,384
Class C Common Stock, $.01 par value, 800,000,000 shares authorized, none
outstanding .................................................................. -- --
Additional paid-in capital ..................................................... 1,622,538 1,696,586
Deferred stock-based compensation .............................................. (117,780) (71,059)
Accumulated other comprehensive loss ........................................... -- (6,829)
Accumulated deficit ............................................................ (1,603,194) (2,053,025)
----------- -----------
Total stockholders' equity (deficit) .............................................. (48,418) (417,167)
----------- -----------
Total liabilities and stockholders' equity (deficit) ......................... $ 3,898,189 $ 4,699,640
=========== ===========
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
1
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ECHOSTAR COMMUNICATIONS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------- ---------------------------
1999 2000 1999 2000
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
REVENUE:
DISH Network:
Subscription television services ....................... $ 359,502 $ 616,283 $ 927,299 $ 1,648,466
Other .................................................. 1,866 998 6,290 4,480
----------- ----------- ----------- -----------
Total DISH Network ....................................... 361,368 617,281 933,589 1,652,946
DTH equipment sales and integration services ............. 48,809 54,496 108,551 177,234
Satellite services ....................................... 11,006 17,075 28,325 50,685
C-band and other ......................................... 6,997 9,120 17,508 28,957
----------- ----------- ----------- -----------
Total revenue ............................................... 428,180 697,972 1,087,973 1,909,822
COSTS AND EXPENSES:
DISH Network Operating Expenses:
Subscriber-related expenses ............................ 157,348 252,752 400,765 685,776
Customer service center and other ...................... 31,609 60,293 80,643 184,713
Satellite and transmission ............................. 10,407 12,504 30,482 38,875
----------- ----------- ----------- -----------
Total DISH Network operating expenses .................... 199,364 325,549 511,890 909,364
Cost of sales - DTH equipment and integration services ... 34,405 40,187 75,927 132,729
Cost of sales - C-band and other ......................... 4,435 7,126 11,878 22,362
Marketing:
Subscriber promotion subsidies ......................... 180,891 246,379 451,464 724,291
Advertising and other .................................. 19,742 41,449 40,398 89,090
----------- ----------- ----------- -----------
Total marketing expenses ................................. 200,633 287,828 491,862 813,381
General and administrative ............................... 36,693 63,285 97,718 177,038
Non-cash, stock-based compensation ....................... 4,264 11,568 5,983 38,599
Depreciation and amortization ............................ 27,841 44,511 78,841 126,679
----------- ----------- ----------- -----------
Total costs and expenses .................................... 507,635 780,054 1,274,099 2,220,152
----------- ----------- ----------- -----------
Operating loss .............................................. (79,455) (82,082) (186,126) (310,330)
Other Income (Expense):
Interest income .......................................... 4,913 14,971 17,855 50,916
Interest expense, net of amounts capitalized ............. (48,224) (62,633) (149,532) (185,648)
Other .................................................... (1,614) (1,095) 14,050 (3,676)
----------- ----------- ----------- -----------
Total other expense ......................................... (44,925) (48,757) (117,627) (138,408)
----------- ----------- ----------- -----------
Loss before income taxes .................................... (124,380) (130,839) (303,753) (448,738)
Income tax provision, net ................................... (21) (54) (109) (145)
----------- ----------- ----------- -----------
Net loss before extraordinary charges ....................... (124,401) (130,893) (303,862) (448,883)
Extraordinary charge for early retirement of debt, net of
tax ...................................................... -- -- (268,999) --
----------- ----------- ----------- -----------
Net loss .................................................... (124,401) (130,893) (572,861) (448,883)
8% Series A Cumulative Preferred Stock dividends ........... -- -- (124) --
12 1/8% Series B Senior Redeemable Exchangeable Preferred
Stock dividends payable in-kind .......................... -- -- (241) --
Accretion of 6 3/4% Series C Cumulative Convertible
Preferred Stock ............................................. (1,942) -- (5,661) --
6 3/4% Series C Cumulative Convertible Preferred Stock
dividends ................................................ -- (215) -- (948)
----------- ----------- ----------- -----------
Numerator for basic and diluted loss per share - loss
attributable to common shareholders ...................... $ (126,343) $ (131,108) (578,887) $ (449,831)
=========== =========== =========== ===========
Denominator for basic and diluted loss per share -
weighted-average common shares outstanding ............... 455,406 473,013 402,584 470,122
=========== =========== =========== ===========
Net loss per common share:
Basic and diluted loss per share before extraordinary
charge ................................................. $ (0.28) $ (0.28) $ (0.77) $ (0.96)
Extraordinary charge ..................................... -- -- (0.67) --
----------- ----------- ----------- -----------
Basic and diluted net loss ............................... $ (0.28) $ (0.28) $ (1.44) $ (0.96)
=========== =========== =========== ===========
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
2
<PAGE> 5
ECHOSTAR COMMUNICATIONS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------------
1999 2000
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ......................................................................... $ (572,861) $ (448,883)
Adjustments to reconcile net loss to net cash flows from operating activities:
Extraordinary charge for early retirement of debt ............................. 268,999 --
Deferred stock-based compensation recognized .................................. 5,983 38,599
Loss on disposal of assets .................................................... 9,770 1,167
Depreciation and amortization ................................................. 78,841 126,679
Amortization of debt discount and deferred financing costs .................... 12,684 4,624
Employee benefits funded by issuance of Class A Common Stock .................. 3,580 7,280
Change in reserve for excess and obsolete inventory ........................... (302) 4,745
Change in long-term deferred satellite services revenue and other long-term
liabilities ................................................................. 24,978 5,586
Other, net .................................................................... 280 1,883
Changes in current assets and current liabilities, net ........................ 101,442 34,792
----------- -----------
Net cash flows from operating activities ......................................... (66,606) (223,528)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of marketable investment securities .................................... (245,913) (713,621)
Sales of marketable investment securities ........................................ 383,488 677,661
Purchases of restricted marketable investment securities ......................... (2,928) --
Cash reserved for satellite insurance (Note 4) ................................... -- (89,591)
Funds released from escrow and restricted cash and marketable investment
securities ..................................................................... 77,657 --
Purchases of property and equipment .............................................. (65,269) (186,662)
Investment in Eldon Technology Limited ........................................... (6,041) --
Investment in iSKY, Inc. ......................................................... -- (50,000)
Investment in Replay TV .......................................................... -- (10,000)
Investment in Gilat .............................................................. -- (50,045)
Other ............................................................................ (3,565) (1,748)
----------- -----------
Net cash flows from investing activities ......................................... 137,429 (424,006)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of 9 1/4% Seven Year Notes ................................ 375,000 --
Proceeds from issuance of 9 3/8% Ten Year Notes .................................. 1,625,000 --
Proceeds from issuance of 10 3/8% Seven Year Notes ............................... -- 989,375
Debt issuance costs and prepayment premiums ...................................... (273,987) --
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) --
Repayments of mortgage indebtedness and notes payable ............................ (17,019) (11,783)
Net proceeds from Class A Common Stock options exercised and Class A Common
Stock issued under the Employee Stock Purchase Plan ........................... 7,003 10,422
Other ............................................................................ -- (3,568)
----------- -----------
Net cash flows from financing activities ......................................... (58,599) 984,446
----------- -----------
Net increase in cash and cash equivalents ........................................ 12,224 336,912
Cash and cash equivalents, beginning of period ................................... 106,547 905,299
----------- -----------
Cash and cash equivalents, end of period ......................................... $ 118,771 $ 1,242,211
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Other notes payable ............................................................. $ 2,928 $ --
8% Series A Cumulative Preferred Stock dividends ................................. 124 --
12 1/8% Series B Senior Redeemable Exchangeable Preferred Stock dividends
payable in-kind ................................................................ 241 --
Accretion of 6 3/4% Series C Cumulative Convertible Preferred Stock .............. 5,661 --
Class A common stock issued related to acquisition of Kelly Broadcasting
Systems, Inc. .................................................................. -- 31,556
Conversion of 6 3/4% Series C Cumulative Convertible Preferred Stock to Class A
common stock ................................................................... -- 33,005
Forfeitures of deferred non-cash, stock-based compensation ....................... -- 8,072
Assets acquired from News Corporation and MCI:
FCC licenses and other ........................................................ 626,120 --
Satellites .................................................................... 451,200 --
Digital broadcast operations center ........................................... 47,000 --
Common stock issued to News Corporation and MCI .................................. 1,124,320 --
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
3
<PAGE> 6
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. ORGANIZATION AND BUSINESS ACTIVITIES
Principal Business
The operations of EchoStar Communications Corporation include three
interrelated business units:
o The DISH Network - a direct broadcast satellite ("DBS") subscription
television service in the United States. As of September 30, 2000, we
had approximately 4.8 million DISH Network subscribers.
o EchoStar Technologies Corporation ("ETC") - engaged in the design,
distribution and sale of DBS set-top boxes, antennae and other digital
equipment for the DISH Network ("EchoStar receiver systems"), and the
design and distribution of similar equipment for international
direct-to-home ("DTH") systems. ETC has also provided uplink center
design, construction oversight and other project integration services
for international DTH ventures.
o Satellite Services - engaged in the delivery of video, audio and data
services to business television customers and other satellite users.
These services may include satellite uplink services, satellite
transponder space usage, billing, customer service and other services.
Since 1994, we have deployed substantial resources to develop the "EchoStar
DBS System." The EchoStar DBS System consists of our FCC-allocated DBS spectrum,
six DBS satellites ("EchoStar I," "EchoStar II," "EchoStar III," "EchoStar IV,"
"EchoStar V," and "EchoStar VI"), EchoStar receiver systems, digital broadcast
operations centers, customer service facilities, and other assets utilized in
our operations. Our principal business strategy is to continue developing our
subscription television service in the United States to provide consumers with a
fully competitive alternative to cable television service.
2. SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles and
with the instructions to Form 10-Q and Article 10 of Regulation S-X for interim
financial information. Accordingly, these statements do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring adjustments) considered necessary for a fair
presentation have been included. All significant intercompany accounts and
transactions have been eliminated in consolidation. Operating results for the
nine months ended September 30, 2000 are not necessarily indicative of the
results that may be expected for the year ending December 31, 2000. For further
information, refer to the consolidated financial statements and footnotes
thereto included in our Annual Report on Form 10-K for the year ended December
31, 1999. Certain prior year amounts have been reclassified to conform with the
current year presentation.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses for each reporting
period. Actual results could differ from those estimates.
4
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ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(Unaudited)
Comprehensive Loss
The components of comprehensive loss, net of tax, are as follows (in
thousands):
<TABLE>
<CAPTION>
NINE-MONTHS ENDED
SEPTEMBER 30,
-------------------------
1999 2000
---------- ----------
(Unaudited)
<S> <C> <C>
Net loss..................................................... $ (572,861) $ (448,883)
Change in unrealized loss on available-for-sale securities... -- (6,829)
---------- ----------
Comprehensive loss........................................... $ (572,861) $ (455,712)
========== ==========
</TABLE>
Accumulated other comprehensive loss presented on the accompanying
condensed consolidated balance sheets consists of the accumulated net unrealized
loss on available-for-sale securities, net of deferred taxes.
Basic and Diluted Loss Per Share
Statement of Financial Accounting Standards No. 128, "Earnings Per Share"
("FAS No. 128") requires entities to present both basic earnings per share
("EPS") and diluted EPS. Basic EPS excludes dilution and is computed by dividing
income (loss) available to common shareholders by the weighted-average number of
common shares outstanding for the period. Diluted EPS reflects the potential
dilution that could occur if stock options or warrants were exercised or
convertible securities were converted to common stock, resulting in the issuance
of common stock that then would share in any earnings of the Company. We had net
losses for the three and nine month periods ending September 30, 1999 and 2000.
Therefore, the effect of the common stock equivalents and convertible securities
is excluded from the computation of diluted earnings (loss) per share since the
effect is anti-dilutive.
As of September 30, 1999 and 2000, options to purchase a total of
approximately 25,428,000 and 24,915,000 shares of Class A common stock were
outstanding, respectively. Approximately 34,204,000 and 4,079,000 shares of
Class A common stock were issuable upon conversion of the 6 3/4% Series C
Cumulative Convertible Preferred Stock as of September 30, 1999 and 2000,
respectively. As of September 30, 2000, the 4 7/8% Convertible Subordinated
Notes are convertible into approximately 22 million shares of Class A common
stock.
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities," ("FAS 133"), which was originally required to be
adopted in years beginning after June 15, 1999. In June 2000, the Financial
Accounting Standards Board issued Statement of Financial Accounting Standards
No. 137, "Accounting for Derivative Instruments and Hedging Activities -
Deferral of the Effective Date of FASB No. 133" ("FAS 137"), which defers for
one year the effective date of SFAS 133. We anticipate that the adoption of SFAS
133 will not have a significant effect on the financial condition or results of
operations of the Company.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements,"
("SAB 101"), which is required to be adopted in the fourth quarter of 2000 and
applied retroactively for the year. SAB 101 sets forth certain criteria,
including the existence of persuasive evidence of an arrangement, which must be
met in order that revenue be recognized. We are currently evaluating the
potential impact, if any, the adoption of SAB 101 will have on our financial
position and results of operation.
5
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ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(Unaudited)
In March 2000, the Financial Accounting Standard Board issued FASB
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation - an interpretation of APB Opinion No. 25" ("FIN 44"). FIN 44
clarifies the application of APB Opinion No. 25 and among other issues clarifies
the following: the definition of an employee for purposes of applying APB
Opinion No. 25; the criteria for determining whether a plan qualifies as a
noncompensatory plan; the accounting consequence of various modifications to the
terms of previously fixed stock options or awards; and the accounting for an
exchange of stock compensation awards in a business combination. FIN 44 is
effective July 1, 2000, but certain conclusions in FIN 44 cover specific events
that occurred after either December 15, 1998 or January 12, 2000. The
application of FIN 44 has not had a material impact on our financial position or
results of operations.
3. INVENTORIES
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1999 2000
------------ ------------
<S> <C> <C>
Finished goods - DBS ....................... $ 63,567 $ 103,439
Raw materials .............................. 35,751 58,854
Finished goods - reconditioned and other ... 19,509 23,349
Work-in-process ............................ 7,666 11,823
Consignment ................................ 1,084 1,423
Reserve for excess and obsolete inventory .. (3,947) (8,692)
------------ ------------
$ 123,630 $ 190,196
============ ============
</TABLE>
4. PROPERTY AND EQUIPMENT
Digital Dynamite Plans
During July 2000, we announced the commencement of our new Digital Dynamite
promotion. The Digital Dynamite plans offer four choices to consumers, ranging
from the use of one EchoStar receiver system and our America's Top 100
programming package for $34.99 per month, to providing consumers two EchoStar
receiver systems and our America's Top 150 programming package for $49.99 per
month. With each plan, consumers receive in-home-service, must agree to a
one-year commitment and incur a one-time set-up fee of $49, which includes the
first month's programming payment. Since the equipment in the Digital Dynamite
plans are owned by us, those equipment costs are capitalized and depreciated
over a period of 4 years.
EchoStar III
During the second quarter 2000, two transponder pairs on EchoStar III
malfunctioned. Including the three transponder pairs that malfunctioned during
1998, these anomalies have resulted in the failure of a total of ten
transponders on the satellite to date. While a maximum of 32 transponders can be
operated at any time, the satellite was equipped with a total of 44 transponders
to provide redundancy. As a result of this redundancy and because we are only
licensed by the FCC to operate 11 transponders at the 61.5 degree orbital
location (together with an additional six leased transponders), the transponder
anomalies have not resulted in a loss of service to date. The satellite
manufacturer, Lockheed Martin, has advised us that it believes it has identified
the root cause of the failures, and that while further transponder failures are
possible, based upon the root cause and the operating configuration of the
satellite, Lockheed Martin does not believe it is likely that the operational
capacity of EchoStar III will be reduced below 32 transponders. Lockheed Martin
also believes it is unlikely that our ability to operate at least the 11
licensed frequencies,and the six leased transponders, on the satellite will be
affected. We will continue to evaluate the performance of EchoStar III and may
be required to modify our loss assessment as new events or circumstances
develop.
6
<PAGE> 9
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(Unaudited)
EchoStar V
EchoStar V is equipped with a total of 48 transponders, including 16
spares. Two transponders on the satellite have failed, the most recent loss
occurring during July 2000. While the failures have not impacted the operational
capacity of the satellite and the satellite manufacturer has advised that the
anomalies are probably unrelated, until the root cause of the most recent
anomaly is finally determined, there can be no assurance future similar
anomalies will not cause further transponder losses which could reduce
operational capacity.
Satellite Insurance
As a result of the failure of EchoStar IV solar arrays to fully deploy and
the failure of 26 transponders to date, a maximum of approximately 16 of the 44
transponders on EchoStar IV are available for use at this time. Due to the
normal degradation of the solar arrays, the number of available transponders
will further decrease over time. In addition to the transponder and solar array
failures, EchoStar IV experienced anomalies affecting its thermal systems and
propulsion system. There can be no assurance that further material degradation,
or total loss of use, of EchoStar IV will not occur in the immediate future.
In September 1998, we filed a $219.3 million insurance claim for a
constructive total loss under the launch insurance policies covering EchoStar
IV. The satellite insurance consists of separate identical policies with
different carriers for varying amounts which, in combination, create a total
insured amount of $219.3 million.
The insurance carriers offered us a total of approximately $88 million, or
40% of the total policy amount, in settlement of the EchoStar IV insurance
claim. The insurers allege that all other impairment to the satellite occurred
after expiration of the policy period and is not covered. We strongly disagree
with the position of the insurers and we have filed an arbitration claim against
them for breach of contract, failure to pay a valid insurance claim and bad
faith denial of a valid claim, among other things. There can be no assurance
that we will receive the amount claimed or, if we do, that we will retain title
to EchoStar IV with its reduced capacity.
At the time we filed our claim in 1998, we recognized an impairment loss of
$106 million to write-down the carrying value of the satellite and related
costs, and simultaneously recorded an insurance claim receivable for the same
amount. We continue to believe we will ultimately recover at least the amount
originally recorded and do not intend to adjust the amount of the receivable
until there is greater certainty with respect to the amount of the final
settlement.
As a result of the thermal and propulsion system anomalies, we reduced the
estimated remaining useful life of EchoStar IV to approximately 4 years during
January 2000. This change will increase depreciation expense to be recognized by
us during the year ending December 31, 2000 by approximately $9.6 million. We
will continue to evaluate the performance of EchoStar IV and may modify our loss
assessment as new events or circumstances develop.
The in-orbit insurance policies for EchoStar I, EchoStar II, and EchoStar
III expired July 25, 2000. The insurers have to date refused to renew insurance
on EchoStar I, EchoStar II and EchoStar III on reasonable terms. Based on, among
other things, the insurance carriers' unanimous refusal to negotiate reasonable
renewal insurance coverage, we believe that the carriers colluded and conspired
to boycott us unless we accept their offer to settle the EchoStar IV claim for
$88 million.
Based on the carriers' actions, we have added causes of action in our
EchoStar IV demand for arbitration for breach of the duty of good faith and fair
dealing, and unfair claim practices. Additionally, we have filed a lawsuit
against the insurance carriers in the United States District Court for the
District of Colorado asserting causes of action for violation of Federal and
State Antitrust laws. While we believe we are entitled to the full amount
claimed under the EchoStar IV insurance policy and believe the insurance
carriers are in violation of Antitrust laws and have committed further acts of
bad faith in connection with their refusal to negotiate reasonable insurance
coverage on our other satellites, there can be no assurance as to the outcome of
these proceedings.
7
<PAGE> 10
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(Unaudited)
The indentures related to the outstanding senior notes of our EchoStar DBS
Corporation subsidiary contain restrictive covenants that require us to maintain
satellite insurance with respect to at least half of the satellites we own.
Insurance coverage is therefore required for at least three of our six
satellites currently in orbit. We have procured normal and customary launch
insurance for EchoStar VI. This launch insurance policy provides for insurance
of $225.0 million. The EchoStar VI launch insurance policy expires in July 2001.
We are currently self-insuring EchoStar I, EchoStar II, EchoStar III, EchoStar
IV and EchoStar V. To satisfy insurance covenants related to the outstanding
EchoStar DBS senior notes, on July 25, 2000, EchoStar DBS reclassified
approximately $60 million from cash and cash equivalents to restricted cash and
marketable investment securities on its balance sheet. In addition, EchoStar DBS
reclassified an amount equal to approximately $30 million, the depreciated cost
of an additional satellite, on September 23, 2000 after the expiration of the
initial period of coverage for EchoStar V. The reclassifications will continue
until such time, if ever, as the insurers are again willing to insure our
satellites on commercially reasonable terms.
5. ACCRUED LIABILITIES
Accrued liabilities consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1999 2000
------------ ------------
<S> <C> <C>
Programming ......................... $ 59,769 $ 157,200
Royalties and copyright fees ........ 81,574 92,807
Marketing ........................... 91,387 69,526
Interest ............................ 88,205 47,124
Advances from News/MCI for Echo VI .. 67,804 35,810
Other ............................... 110,526 154,544
------------ ------------
$ 499,265 $ 557,011
============ ============
</TABLE>
6. COMMITMENTS AND CONTINGENCIES
DirecTV
During February 2000 we filed suit against DirecTV and Thomson Consumer
Electronics/RCA in the Federal District Court of Colorado. The suit alleges that
DirecTV has utilized improper conduct in order to fend off competition from the
DISH Network. According to the complaint, DirecTV has demanded that certain
retailers stop displaying our merchandise and has threatened to cause economic
damage to retailers if they continue to offer both product lines in head-to-head
competition. The suit alleges, among other things, that DirecTV has acted in
violation of federal and state anti-trust laws in order to protect DirecTV's
market share. We are seeking injunctive relief and monetary damages. It is too
early in the litigation to make an assessment of the probable outcome.
The DirecTV defendants filed a counterclaim against us. DirecTV alleges
that we tortuously interfered with a contract that DirecTV allegedly had with
Kelly Broadcasting Systems, Inc. ("KBS"). DirecTV alleges that we "merged" with
KBS, in contravention of DirecTV's contract with KBS. DirecTV also alleges that
we have falsely advertised to consumers about our right to offer network
programming. DirecTV further alleges that we improperly used certain marks owned
by PrimeStar, now owned by DirecTV. Finally, DirecTV alleges that we have been
marketing National Football League games in a misleading manner. The amount of
damages DirecTV is seeking is as yet unquantified. We intend to vigorously
defend against these claims. The case is currently in discovery. It is too early
in the litigation to make an assessment of the probable outcome.
8
<PAGE> 11
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(Unaudited)
Fee Dispute
We had a contingent fee arrangement with the attorneys who represented us
in the litigation with News Corporation. The contingent fee arrangement provides
for the attorneys to be paid a percentage of any net recovery obtained by us in
the News Corporation litigation. The attorneys have asserted that they may be
entitled to receive payments totaling hundreds of millions of dollars under this
fee arrangement.
During mid-1999, we initiated litigation against the attorneys in the
Arapahoe County, Colorado, District Court arguing that the fee arrangement is
void and unenforceable. In December 1999, the attorneys initiated an arbitration
proceeding before the American Arbitration Association. The litigation has been
stayed while the arbitration is ongoing. A two week arbitration hearing has been
set to begin in late February 2001. It is too early to determine the outcome of
negotiations, arbitration or litigation regarding this fee dispute. We are
vigorously contesting the attorneys' interpretation of the fee arrangement,
which we believe significantly overstates the magnitude of our liability.
WIC Premium Television Ltd.
During July 1998, a lawsuit was filed by WIC Premium Television Ltd., an
Alberta corporation, in the Federal Court of Canada Trial Division, against
General Instrument Corporation, HBO, Warner Communications, Inc., John Doe,
Showtime, United States Satellite Broadcasting Company, Inc., EchoStar, and two
of EchoStar's wholly-owned subsidiaries. The lawsuit seeks, among other things,
an interim and permanent injunction prohibiting the defendants from activating
receivers in Canada and from infringing any copyrights held by WIC. It is too
early to determine whether or when any other lawsuits or claims will be filed.
It is also too early to make an assessment of the probable outcome of the
litigation or to determine the extent of any potential liability or damages.
During September 1998, WIC filed another lawsuit in the Court of Queen's
Bench of Alberta Judicial District of Edmonton against certain defendants,
including EchoStar. WIC is a company authorized to broadcast certain copyrighted
work, such as movies and concerts, to residents of Canada. WIC alleges that the
defendants engaged in, promoted, and/or allowed satellite dish equipment from
the United States to be sold in Canada and to Canadian residents and that some
of the defendants allowed and profited from Canadian residents purchasing and
viewing subscription television programming that is only authorized for viewing
in the United States. The lawsuit seeks, among other things, an interim and
permanent injunction prohibiting the defendants from importing hardware into
Canada and from activating receivers in Canada, together with damages in excess
of $175 million.
We filed motions to dismiss each of the actions for lack of personal
jurisdiction. The Court in the Alberta action recently denied our Motion to
Dismiss, which is currently under appeal. The Alberta Court also granted a
motion to add more EchoStar parties to the lawsuit. EchoStar Satellite
Corporation, EchoStar DBS Corporation, EchoStar Technologies Corporation, and
EchoStar Satellite Broadcast Corporation have been added as defendants in the
litigation. The newly added defendants have also challenged jurisdiction. The
Court in the Federal action has stayed that case before ruling on our motion to
dismiss. We intend to vigorously defend the suits in the event our motions are
denied. It is too early to determine whether or when any other lawsuits or
claims will be filed. It is also too early to make an assessment of the probable
outcome of the litigation or to determine the extent of any potential liability
or damages.
Broadcast network programming
Until July 1998, we obtained distant broadcast network channels (ABC, NBC,
CBS and FOX) for distribution to our customers through PrimeTime 24. In December
1998, the United States District Court for the Southern District of Florida
entered a nationwide permanent injunction requiring PrimeTime 24 to shut off
distant network channels to many of its customers, and henceforth to sell those
channels to consumers in accordance with certain stipulations in the injunction.
9
<PAGE> 12
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(Unaudited)
In October 1998, we filed a declaratory judgment action against ABC, NBC,
CBS and FOX in Denver Federal Court. We asked the court to enter a judgment
declaring that our method of providing distant network programming did not
violate the Satellite Home Viewer Act and hence did not infringe the networks'
copyrights. In November 1998, the networks and their affiliate groups filed a
complaint against us in Miami Federal Court alleging, among other things,
copyright infringement. The court combined the case that we filed in Colorado
with the case in Miami and transferred it to the Miami court. The case remains
pending in Miami. While the networks have not sought monetary damages, they have
sought to recover attorney fees if they prevail.
In February 1999, the networks filed a "Motion for Temporary Restraining
Order, Preliminary Injunction and Contempt Finding" against DirecTV, Inc. in
Miami related to the delivery of distant network channels to DirecTV customers
by satellite. DirecTV settled this lawsuit with the networks. Under the terms of
the settlement between DirecTV and the networks, some DirecTV customers were
scheduled to lose access to their satellite-provided distant network channels by
July 31, 1999, while other DirecTV customers were to be disconnected by December
31, 1999. Subsequently, PrimeTime 24 and substantially all providers of
satellite-delivered network programming other than us agreed to this cut-off
schedule, although we do not know if they adhered to this schedule.
In December 1998, the networks filed a Motion for Preliminary Injunction
against us in the Miami court, and asked the court to enjoin us from providing
network programming except under limited circumstances. A preliminary injunction
hearing was held on September 21, 1999. The court took the issues under
advisement to consider the networks' request for an injunction, whether to hear
live testimony before ruling upon the request, and whether to hear argument on
why the Satellite Home Viewer Act may be unconstitutional, among other things.
In March 2000, the networks filed an emergency motion again asking the
court to issue an injunction requiring us to turn off network programming to
certain of our customers. At that time, the networks also argued that our
compliance procedures violate the Satellite Home Viewer Improvement Act. We
opposed the networks' motion and again asked the court to hear live testimony
before ruling upon the networks' injunction request.
On September 29, 2000, the Court granted the Networks' motion for
preliminary injunction, denied the Network's emergency motion and denied our
request to present live testimony and evidence. The Court's original order
required EchoStar to terminate network programming to certain subscribers "no
later than February 15, 1999", and contained other dates which would be
physically impossible to comply with. The order imposes restrictions on our past
and future sale of distant ABC, NBC, CBS and Fox channels similar to those
imposed on PrimeTime 24 (and, we believe, on DirecTV and others). Some of those
restrictions go beyond the statutory requirements imposed by the Satellite Home
Viewer Act and the Satellite Home Viewer Improvement Act. For these and other
reasons we believe the Court's order is, among other things, fundamentally
flawed, unconstitutional and should be overturned. However, it is very unusual
for a Court of Appeals to overturn a lower court's order and there can be no
assurance whatsoever that it will be overturned.
On October 3, 2000, and again on October 25, 2000, the Court amended its
original preliminary injunction order in an effort to fix some of the errors in
the original order. The twice amended preliminary injunction order requires us
to shut off, by February 15, 2001, all subscribers who are ineligible to receive
distant network programming under the court's order. We have appealed the
September 29, 2000 preliminary injunction order and the October 3, 2000 amended
preliminary injunction order. We have also asked the United States Court of
Appeals for the Eleventh Circuit to stay the preliminary injunction orders
pending the appeal. The Eleventh Circuit ordered the networks to file a brief
with the Court of Appeals by November 6, 2000, and that we respond to that brief
by November 9, 2000. Both briefs have been filed. Additional briefing schedules
and rulings from the Miami Court and from the Court of Appeals could occur at
any time. Our effort to seek a stay of the preliminary injunction may not be
successful and we may be required to comply with the dates provided in the
Court's preliminary injunction order. The preliminary injunction could force us
to terminate delivery of distant network channels to a substantial portion of
our distant network subscriber base, which could also cause many of these
subscribers to cancel their subscription to our other services. Such
terminations would result in a small reduction in our reported average monthly
revenue per subscriber and could result in a temporary increase in churn.
10
<PAGE> 13
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(Unaudited)
Starsight
During October 2000, Starsight Telecast, Inc., a subsidiary of Gemstar - TV
Guide, filed a suit for patent infringement against us and certain of our
subsidiaries in the United States District Court for the Western District of
North Carolina, Asheville Division. The suit alleges infringement of United
States Patent No. 4,706,121 which relates to certain electronic program guide
functions. We have examined this patent and believe that it is not infringed by
any of our products or services. We intend to vigorously defend against this
action and to assert a variety of counterclaims.
Superguide Corp. also recently filed suit against us, DirecTv and others
in the same North Carolina court, alleging infringement of United States Patent
Nos. 5,038,211, 5,293,357 and 4,751,578 which relate to certain electronic
program guide functions, including the use of electronic program guides to
control VCRs. It is our understanding that these patents may be licensed by
Superguide to Gemstar, although Gemstar has not asserted the patents against
us. We have examined these patents and believe that they are not infringed by
any of our products or services. We intent to vigorously defend against this
action and assert a variety of counterclaims.
In the event it is ultimately determined that we infringe on any of these
patents we may be subject to substantial damages, and/or an injunction that
could require us to materially modify certain user friendly electronic
programming guide and related features we currently offer to consumers. It is
too early to make an assessment of the probable outcome of either suit.
We are subject to various other legal proceedings and claims which arise in
the ordinary course of business. In the opinion of management, the amount of
ultimate liability with respect to those actions will not materially affect our
financial position or results of operations.
Meteoroid Events
In November 1998 and 1999, certain meteoroid events occurred as the Earth's
orbit passed through the particulate trail of Comet 55P (Tempel-Tuttle). Similar
meteoroid events are expected to occur again in November 2000. These meteoroid
events pose a potential threat to all in-orbit geosynchronous satellites
including our DBS satellites. While the probability that our satellites will be
damaged by space debris is very small, that probability will increase by several
orders of magnitude during these meteoroid events.
Solar Storms
Due to the current peak in the 11-year solar cycle, increased solar
activity is likely for the next 1 1/2 years. Some of these solar storms pose a
potential threat to all in-orbit geosynchronous satellites including our DBS
satellites. While the probability that the effects from the storms will damage
our satellites or cause service interruptions is generally very small, that
probability will increase by several orders of magnitude during this solar cycle
peak.
7. LONG-TERM DEBT
Debt Redemption
Effective July 14, 2000, we redeemed all of our remaining outstanding
12 7/8% Senior Secured Discount Notes Due 2004 (the "1994 Notes"), 13 1/8%
Senior Secured Discount Notes due 2004 (the "1996 Notes"), 12 1/2% Senior
Secured Notes due 2002 (the "1997 Notes") and 12 1/8% Senior Exchange Notes Due
2004 (the "Exchange Notes") totaling approximately $2.6 million. Aggregate
premium charges of approximately $122,000 related to the redemption of the 1994
Notes, 1996 Notes, 1997 Notes and Exchange Notes were accrued at June 30, 2000.
10 3/8% Seven Year Notes
On September 25, 2000, our wholly-owned subsidiary, EchoStar Broadband
Corporation ("EBC"), sold $1 billion principal amount of 10 3/8% Senior Notes
due 2007 (the "10 3/8% Seven Year Notes"). Interest accrues at an annual rate of
10 3/8% on the 10 3/8% Seven Year Notes and is payable semi-annually in cash, in
arrears on April 1 and October 1 of each year, commencing April 1, 2001. The
proceeds of the 10 3/8% Seven Year Notes will be used primarily by our
subsidiaries for the construction and launch of additional satellites, strategic
acquisitions and other general working capital purposes.
11
<PAGE> 14
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(Unaudited)
The indenture related to the 10 3/8% Seven Year Notes (the "10 3/8% Seven
Year Notes Indenture") contains certain restrictive covenants that generally do
not impose material limitations on us. Subject to certain limitations, the
10 3/8% Seven Year Notes Indenture permits EBC to incur additional indebtedness,
including secured and unsecured indebtedness that ranks on parity with the
10 3/8% Seven Year Notes. Any secured indebtedness will, as to the collateral
securing such indebtedness, be effectively senior to the 10 3/8% Seven Year
Notes to the extent of such collateral.
The 10 3/8% Seven Year Notes are:
o general unsecured obligations of EBC;
o ranked equally in right of payment with all of EBC's existing and
future senior debt;
o ranked senior in right of payment to all of EBC's other existing and
future subordinated debt; and
o ranked effectively junior to (i) all liabilities (including trade
payables) of EBC's subsidiaries and (ii) all of EBC's secured
obligations, to the extent of the collateral securing such
obligations, including any borrowings under any of EBC's future
secured credit facilities, if any.
Except under certain circumstances requiring prepayment premiums, and in
other limited circumstances, the 10 3/8% Seven Year Notes are not redeemable at
our option prior to October 1, 2004. Thereafter, the 10 3/8% Seven Year Notes
will be subject to redemption, at our option, in whole or in part, at redemption
prices decreasing from 105.188% during the year commencing October 1, 2004 to
100% on or after October 1, 2006, together with accrued and unpaid interest
thereon to the redemption date.
In the event of a change of control, as defined in the 10 3/8% Seven Year
Notes Indenture, EBC will be required to make an offer to repurchase all or any
part of a holder's 10 3/8% Seven 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.
Under the terms of the 10 3/8% Seven Year Notes Indenture, EBC has agreed
to cause its subsidiary, EchoStar DBS Corporation to make an offer to exchange
(the "EchoStar DBS Exchange Offer") all of the outstanding 10 3/8% Seven Year
Notes for a new class of notes issued by EchoStar DBS as soon as practical
following the first date (as reflected in EchoStar DBS' most recent quarterly or
annual financial statements) on which EchoStar DBS is permitted to incur
indebtedness in an amount equal to the outstanding principal balance of the
10 3/8% Seven Year Notes under the "Indebtedness to Cash Flow Ratio" test
contained in the indentures (the "EchoStar DBS Indentures") governing the
EchoStar DBS 9 1/4% Senior Notes due 2006 ("Seven Year Notes") and 9 3/8% Senior
Notes due 2009 ("Ten Year Notes") (collectively the "Seven and Ten Year Notes"),
and such incurrence of indebtedness would not otherwise cause any breach or
violation of, or result in a default under, the terms of the EchoStar DBS
Indentures.
On October 25, 2000, as contemplated by the terms of the EBC Indenture,
EchoStar DBS amended the terms of the EchoStar DBS Indentures to provide that
the recording of some or all of the indebtedness represented by the 10 3/8%
Seven Year Notes on the EchoStar DBS balance sheet as a result of the
application of generally accepted accounting principles and related rules prior
to the completion of the EchoStar DBS Exchange Offer would not be deemed to
constitute an incurrence of indebtedness for certain purposes under the EchoStar
DBS Indentures. These amendments were approved by more than a majority in
principal amount of each issue of the Seven and Ten Year Notes. The cost of
obtaining these consents was immaterial to us.
8. SEGMENT REPORTING
Financial Data by Business Unit (in thousands)
Statement of Financial Accounting Standard No. 131, "Disclosures About
Segments of an Enterprise and Related Information" ("FAS No. 131") establishes
standards for reporting information about operating segments in annual financial
statements of public business enterprises and requires that those enterprises
report selected information
12
<PAGE> 15
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(Unaudited)
about operating segments in interim financial reports issued to shareholders.
Operating segments are components of an enterprise about which separate
financial information is available and regularly evaluated by the chief
operating decision maker(s) of an enterprise. Under this definition, we are
currently operating as three separate business units.
<TABLE>
<CAPTION>
ECHOSTAR
DISH TECHNOLOGIES SATELLITE ELIMINATIONS CONSOLIDATED
NETWORK CORPORATION SERVICES AND OTHER TOTAL
----------- ------------ ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
THREE MONTHS ENDED SEPTEMBER 30,
1999
Revenue ...................... $ 365,572 $ 139,195 $ 13,535 $ (90,122) $ 428,180
Net income (loss) before
extraordinary charges ..... (155,711) 22,970 7,739 601 (124,401)
THREE MONTHS ENDED SEPTEMBER 30,
2000
Revenue ...................... $ 633,201 $ 40,889 $ 14,021 $ 9,861 $ 697,972
Net income (loss) ............ (139,768) (2,580) 11,109 346 (130,893)
NINE MONTHS ENDED SEPTEMBER 30,
1999
Revenue ...................... $ 949,225 $ 186,887 $ 33,244 $ (81,383) $ 1,087,973
Net income (loss) before
extraordinary charges ..... (327,210) 15,715 19,508 (11,875) (303,862)
NINE MONTHS ENDED SEPTEMBER 30,
2000
Revenue ...................... $ 1,690,435 $ 141,403 $ 47,448 $ 30,536 $ 1,909,822
Net income (loss) ............ (480,496) (2,935) 33,890 658 (448,883)
</TABLE>
9. SUBSEQUENT EVENTS
EchoStar VI
On October 13, 2000, we announced that EchoStar VI, our sixth direct
broadcast satellite which launched successfully on July 14, 2000, from Cape
Canaveral, Florida, has reached its final orbital location at 119 degrees West
Longitude as assigned under a special temporary authority by the FCC. It now is
broadcasting satellite TV channels to over 4.8 million DISH Network customers
nationwide, including Alaska and Hawaii. To date, all systems on the satellite
are operating normally.
DirecTV
We have previously publicly expressed our desire to negotiate with General
Motors if they decide to spin off all or a portion of their GMH subsidiary. We
believe the enormous synergies that would be created by the combination of
EchoStar and DirecTv would significantly enhance shareholder value for both
companies. However, we were recently informed by DirecTv that GM is not willing
to include EchoStar in future discussions.
13
<PAGE> 16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
All statements contained herein, as well as statements made in press
releases and oral statements that may be made by us or by officers, directors or
employees acting on our behalf, that are not statements of historical fact
constitute "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Such forward-looking statements
involve known and unknown risks, uncertainties and other factors that could
cause our actual results to be materially different from historical results or
from any future results expressed or implied by such forward-looking statements.
Among the factors that could cause our actual results to differ materially are
the following: a total or partial loss of one or more satellites due to
operational failures, space debris or otherwise; delays in the construction of
our seventh, eighth or ninth satellites; an unsuccessful deployment of future
satellites; inability to settle outstanding claims with insurers; a decrease in
sales of digital equipment and related services to international direct-to-home
service providers; a decrease in DISH Network subscriber growth; an increase in
subscriber turnover; an increase in subscriber acquisition costs; an inability
to obtain certain retransmission consents; our inability to retain necessary
authorizations from the FCC; an inability to obtain patent licenses from holders
of intellectual property or redesign our products to avoid patent infringement;
an increase in competition from cable, direct broadcast satellite, other
satellite system operators, and other providers of subscription television
services; the introduction of new technologies and competitors into the
subscription television business; a change in the regulations governing the
subscription television service industry; the outcome of any litigation in which
we may be involved; general business and economic conditions; and other risk
factors described from time to time in our reports and statements filed with the
Securities and Exchange Commission. In addition to statements that explicitly
describe such risks and uncertainties, readers are urged to consider statements
that include the terms "believes," "belief," "expects," "plans," "anticipates,"
"intends" or the like to be uncertain and forward-looking. All cautionary
statements made herein should be read as being applicable to all forward-looking
statements wherever they appear. In this connection, investors should consider
the risks described herein and should not place undue reliance on any
forward-looking statements.
RESULTS OF OPERATIONS
Three Months Ended September 30, 2000 Compared to the Three Months Ended
September 30, 1999.
Revenue. Total revenue for the three months ended September 30, 2000 was
$698 million, an increase of $270 million compared to total revenue for the
three months ended September 30, 1999 of $428 million. The increase in total
revenue was primarily attributable to DISH Network subscriber growth. We expect
that our revenues will continue to increase as the number of DISH Network
subscribers increases.
DISH Network subscription television services revenue totaled $616 million
for the three months ended September 30, 2000, an increase of $256 million
compared to the same period in 1999. DISH Network subscription television
services revenue principally consists of revenue from basic, premium and
pay-per-view subscription television services. This increase was directly
attributable to the increase in the number of DISH Network subscribers and
higher average revenue per subscriber. DISH Network net subscriber additions for
the three months ended September 30, 2000 increased approximately 21% compared
to the same period in 1999. As of September 30, 2000, we had approximately 4.8
million DISH Network subscribers compared to 3.0 million at September 30, 1999.
The strong subscriber growth reflects the impact of aggressive marketing
promotions, including our free installation program, together with increased
interest in satellite television resulting from the availability of local
network channels by satellite, and generally good economic conditions and
positive momentum for the DISH Network. DISH Network subscription television
services revenue will continue to increase to the extent we are successful in
increasing the number of DISH Network subscribers and maintaining or increasing
revenue per subscriber.
Monthly average revenue per subscriber was approximately $45.36 during the
three months ended September 30, 2000 and approximately $43.13 during the same
period in 1999. The increase in monthly average revenue per subscriber is
primarily attributable to a $1.00 price increase in America's Top 100 CD, our
most popular programming package, during May 2000, the increased availability of
local channels by satellite together with the earlier successful introduction of
our $39.99 per month America's Top 150 programming package. During August 2000,
we announced a promotion offering consumers free premium movie channels. Under
this promotion, all new subscribers who order either our America's Top 100 CD or
America's Top 150 programming package and any or all of
14
<PAGE> 17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - CONTINUED
our four premium movie packages between August 1, 2000 and January 31, 2001,
will receive those premium movie packages free for three months. This promotion
had a negative impact on monthly average revenue per subscriber since premium
movie package revenue from participating subscribers will be deferred until the
expiration of each participating subscriber's free service. While there can be
no assurance, we expect modest increases in monthly average revenue per
subscriber during the remainder of 2000.
For the three months ended September 30, 2000, DTH equipment sales and
integration services totaled $54 million, an increase of $5 million compared to
the same period during 1999. DTH equipment sales consist of sales of digital
set-top boxes and other digital satellite broadcasting equipment to
international DTH service operators and sales of DBS accessories. This increase
in DTH equipment sales and integration services revenue was primarily
attributable to an increase in international demand for digital set-top boxes as
compared to the same period during 1999.
Substantially all of our EchoStar Technologies Corporation, or ETC,
revenues have resulted from sales to two international DTH providers. We
currently have agreements to provide equipment to DTH service operators in Spain
and Canada. Our future revenue from the sale of DTH equipment and integration
services in international markets depends largely on the success of these DTH
operators and continued demand for our digital set-top boxes. Since our ETC
business currently is economically dependent on these two DTH providers, there
can be no assurance as to total DTH equipment and integration services revenue
for the year ended December 31, 2000. Although we continue to actively pursue
additional distribution and integration service opportunities internationally,
no assurance can be given that any such efforts will be successful.
As previously reported, since 1998, Telefonica's Via Digital, one of the
two DTH service providers described above, has had recurrent discussions and
negotiations for a possible merger with Sogecable's Canal Satelite Digital, one
of its primary competitors. While we are not currently aware of any formal
negotiations between Via Digital and Canal Satelite Digital, there are again
rumors of a potential merger in the marketplace. Although we have binding
purchase orders from Via Digital for deliveries of DTH equipment in 2000, we
cannot predict the impact, if any, eventual consummation of this possible merger
might have on our future sales to Via Digital.
Satellite services revenue totaled $17 million during the three months
ended September 30, 2000, an increase of $6 million as compared to the same
period during 1999. These revenues principally include fees charged to content
providers for signal carriage and revenues earned from business television, or
BTV customers. The increase in satellite services revenue was primarily
attributable to the addition of new full-time BTV customers and additional sales
of idle satellite capacity to occasional-use customers.
In order, among other things, to commence compliance with the injunction
issued against us in our pending litigation with the four major broadcast
networks and their affiliate groups, we have terminated the delivery of distant
network channels to certain of our subscribers. Additionally, the FCC recently
issued rules which impair our ability to deliver certain superstation channels
to our customers. Those rules will increase the cost of our delivery of
superstations, and could require that we terminate the delivery of certain
superstations to a material portion of our subscriber base. In combination,
these terminations would result in a small reduction in average monthly revenue
per subscriber and could increase subscriber turnover. While there can be no
assurance, any such decreases could be offset by increases in average monthly
revenue per subscriber resulting from the delivery of local network channels by
satellite, and increases in other programming offerings with the commencement of
operation of EchoStar VI.
DISH Network Operating Expenses. DISH Network operating expenses totaled
$326 million during the three months ended September 30, 2000, an increase of
$127 million or 63% compared to the same period in 1999. DISH Network operating
expenses represented 53% and 55% of subscription television services revenue
during the three months ended September 30, 2000 and 1999, respectively. The
increase in DISH Network operating expenses in total was consistent with, and
primarily attributable to, the increase in the number of DISH Network
subscribers.
Subscriber-related expenses totaled $253 million during the three months
ended September 30, 2000, an increase of $96 million compared to the same period
in 1999. Such expenses, which include programming
15
<PAGE> 18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - CONTINUED
expenses, copyright royalties, residuals currently payable to retailers and
distributors, and billing, lockbox and other variable subscriber expenses,
represented 41% and 44% of subscription television services revenues during the
three months ended September 30, 2000 and 1999, respectively. Although we do not
currently expect subscriber-related expenses as a percentage of subscription
television services revenue to increase materially in future periods, there can
be no assurance this expense to revenue ratio will not materially increase.
Customer service center and other expenses principally consist of costs
incurred in the operation of our DISH Network customer service centers, such as
personnel and telephone expenses, as well as other operating expenses related to
our service and installation business. Customer service center and other
expenses totaled $60 million during the three months ended September 30, 2000,
an increase of $28 million as compared to the same period in 1999. The increase
in customer service center and other expenses primarily resulted from increased
personnel and telephone expenses to support the growth of the DISH Network and
from operating expenses related to the expansion of our installation and service
business. Customer service center and other expenses totaled 10% of subscription
television services revenue during the three months ended September 30, 2000, as
compared to 9% during the same period in 1999. The increase in this expense to
revenue ratio primarily resulted from the on-going construction and start-up
costs of our fifth customer service center in Virginia, and the continued
build-out of our installation offices nationwide. These expenses in total, and
as a percentage of subscription television services revenue, may continue to
increase in future periods as we continue to develop and expand our customer
service centers and installation business to provide additional customer support
and help us better accommodate anticipated subscriber growth, resulting in long
term efficiency improvements.
Satellite and transmission expenses include expenses associated with the
operation of our digital broadcast center, contracted satellite telemetry,
tracking and control services, and satellite in-orbit insurance. Satellite and
transmission expenses totaled $13 million during the three months ended
September 30, 2000, a $3 million increase compared to the same period in 1999.
This increase resulted from higher satellite and other digital broadcast center
operating expenses due to an increase in the number of operational satellites.
Satellite and transmission expenses totaled 2% and 3% of subscription television
services revenue during the three months ended September 30, 2000 and 1999,
respectively. We expect satellite and transmission expenses to continue to
increase in the future as additional satellites or digital broadcast centers are
placed in service, but do not expect these expenses to increase as a percentage
of subscription television services revenue.
Cost of sales - DTH equipment and Integration Services. Cost of sales - DTH
equipment and integration services totaled $40 million during the three months
ended September 30, 2000, an increase of $6 million compared to the same period
in 1999. Cost of sales - DTH equipment and integration services principally
includes costs associated with digital set-top boxes and related components sold
to international DTH operators and DBS accessories. This increase in cost of
sales - DTH equipment and integration services is consistent with the increase
in DTH equipment sales and integration services revenue. Cost of sales - DTH
equipment and integration services represented 74% and 70% of DTH equipment
revenue, during the three months ended September 30, 2000 and 1999,
respectively. The increase reflects price pressure resulting from increased
competition from other providers of DTH equipment.
Marketing Expenses. We currently subsidize the purchase and installation of
EchoStar receiver systems in order to attract new DISH Network subscribers.
Consequently, our subscriber acquisition costs are significant. Marketing
expenses totaled $288 million during the three months ended September 30, 2000,
an increase of $87 million compared to the same period in 1999. The increase in
marketing expenses was primarily attributable to an increase in subscriber
promotion subsidies. Subscriber promotion subsidies include the excess of
transaction costs over transaction proceeds at the time of sale of EchoStar
receiver systems, activation allowances paid to retailers, and other promotional
incentives. Advertising and other expenses totaled $41 million and $20 million
during the three months ended September 30, 2000 and 1999, respectively.
During the three months ended September 30, 2000, our marketing promotions
included our DISH Network One-Rate Plan, C-band bounty program, Great Rewards
program (PrimeStar bounty), Digital Dynamite Plan, cable bounty and a free
installation program. Our subscriber acquisition costs under these programs are
significantly higher than those under our marketing programs historically.
16
<PAGE> 19
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - CONTINUED
Under the DISH Network One-Rate Plan, consumers are eligible to receive a
rebate of up to $199 on the purchase of certain EchoStar receiver systems. To be
eligible for this rebate, a subscriber must make a one-year commitment to
subscribe to our America's Top 150 programming or our America's Top 100 CD
programming package plus one premium movie package (or equivalent additional
programming). Although subscriber acquisition costs are materially higher under
this plan compared to previous promotions, DISH Network One-Rate Plan customers
generally provide materially greater average revenue per subscriber than a
typical DISH Network subscriber. In addition, we believe that these customers
represent lower credit risk and therefore may be marginally less likely to
disconnect their service than other DISH Network subscribers. To the extent that
actual consumer participation levels exceed present expectations, subscriber
acquisition costs may increase. Although there can be no assurance as to the
ultimate duration of the DISH Network One-Rate Plan, we intend to continue it
through at least January 2001.
Under our bounty programs, current cable customers are eligible to receive
a free base-level EchoStar receiver system and free installation. To be eligible
for this program, a subscriber must make a one-year commitment to subscribe to
either our America's Top 100 CD programming package plus one premium movie
package (or equivalent additional programming) or our America's Top 150
programming package and prove that they are a current cable customer.
Under our free installation program all customers who purchased an EchoStar
receiver system through April 2000, from May 24, 2000 to July 31, 2000 and from
September 15, 2000 to January 31, 2001, are eligible to receive a free
professional installation. The free installation program was responsible, in
part, for the strong subscriber growth during the first half of 2000.
During July 2000, we announced the commencement of our new Digital Dynamite
promotion. The Digital Dynamite plans offer four choices to consumers, ranging
from the use of one EchoStar receiver system and our America's Top 100 CD
programming package for $34.99 per month, to providing consumers two EchoStar
receiver systems and our America's Top 150 programming package for $49.99 per
month. With each plan, consumers receive in-home-service, must agree to a
one-year commitment and incur a one-time set-up fee of $49, which includes the
first month's programming payment.
During the three months ended September 30, 2000, our subscriber
acquisition expenses, inclusive of acquisition marketing expenses, totaled
approximately $284 million, or approximately $438 per new subscriber activation.
Comparatively, our subscriber acquisition expenses during the three months ended
September 30, 1999, inclusive of acquisition marketing expenses, totaled $201
million, or approximately $390 per new subscriber activation. The increase in
our subscriber acquisition expenses, on a per new subscriber activation basis,
principally resulted from the impact of several aggressive marketing promotions
to acquire new subscribers, including most significantly our free installation
offer which was reinstated during September and is scheduled to conclude during
January 2001.
Our per subscriber acquisition expenses increased compared to the three
months ended June 30, 2000, as a result, among other things, of the
reinstatement of our free installation program during September 2000 and an
increase in our acquisition marketing expenditures during the three months ended
September 30, 2000. This increase was offset by a decrease resulting from the
limited rollout of our Digital Dynamite promotion, which allows us to capitalize
and depreciate over 4 years equipment costs which would otherwise be expensed at
the time of sale. Capital expenditures under our Digital Dynamite promotion
totaled approximately $22.5 million for the three months ended September 30,
2000. As a result of continuing competition and our plans to attempt to continue
to drive rapid subscriber growth, we expect our per subscriber acquisition costs
for 2000, including costs capitalized under the Digital Dynamite Plan, will
average approximately $450 to $475 for the full year.
Most of our core programming is broadcast from our satellites at the 119
degree orbital location, and almost all of our subscribers have EchoStar
receiver systems that can view programming from that location. With the
commencement of additional services from the 110 degree orbital location
following the successful launch of EchoStar V, our existing subscribers will
need to upgrade their dish and receiver systems in order to take advantage of
the additional services we now offer. To encourage existing subscribers to
upgrade their systems and remain subscribers, we are currently subsidizing
upgrades by existing subscribers to our DISH 500 system, which receives
17
<PAGE> 20
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - CONTINUED
programming from both the 110 degree and 119 degree orbital locations. The cost
of this program could be significant if utilized by a large number of our
existing subscribers, though upgrades should also result in increased revenue
per subscriber.
Our subscriber acquisition costs, both in the aggregate and on a per new
subscriber activation basis, may materially increase further to the extent that
we continue or expand our bounty program, our "free system/free installation"
program, the DISH Network One-Rate Plan, or other more aggressive promotions if
we determine that they are necessary to respond to competition, or for other
reasons.
General and Administrative Expenses. General and administrative expenses
totaled $63 million during the three months ended September 30, 2000, an
increase of $26 million as compared to the same period in 1999. The increase in
G&A expenses was principally attributable to increased personnel expenses to
support the growth of the DISH Network. G&A expenses represented 9% of total
revenue during each of the three months ended September 30, 2000 and 1999.
Although we expect G&A expenses as a percentage of total revenue to remain near
the current level or decline modestly in future periods, this expense to revenue
ratio could increase.
Non-cash, Stock-based Compensation. During 1999, we adopted an incentive
plan which provided certain key employees with incentives including stock
options. The payment of these incentives was contingent upon our achievement of
certain financial and other goals. We met certain of these goals during 1999.
Accordingly, during 1999, we recorded approximately $179 million of deferred
compensation related to post-grant appreciation of stock options granted
pursuant to the 1999 incentive plan. The related deferred compensation will be
recognized over the five-year vesting period. Accordingly, during the three
months ended September 30, 2000 and 1999 we recognized $12 million and $4
million, respectively, under this performance-based plan.
We report all non-cash compensation based on stock option appreciation as a
single expense category in our accompanying statements of operations. The
following table represents the other expense categories in our statements of
operations that would be affected if non-cash, stock-based compensation was
allocated to the same expense categories as the base compensation for key
employees who participate in the 1999 incentive plan:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
----------------------------
1999 2000
------------ ------------
<S> <C> <C>
Customer service center and other ............ $ 168 $ 107
Satellite and transmission ................... 140 985
General and administrative ................... 3,956 10,476
------------ ------------
Total non-cash, stock-based compensation .. $ 4,264 $ 11,568
============ ============
</TABLE>
EBITDA. EBITDA represents earnings before interest, taxes, depreciation,
amortization, and non-cash, stock-based compensation. EBITDA was negative $26
million during the three months ended September 30, 2000 compared to negative
$47 million during the same period in 1999. This increase in EBITDA principally
resulted from an increase in DISH Network net subscriber additions and monthly
average revenue per subscriber, as well as other previously described factors.
It is important to note that EBITDA does not represent cash provided or used by
operating activities. Further, our calculation of EBITDA for the three months
ended September 30, 2000 and 1999 does not include approximately $12 million and
$4 million, respectively, of non-cash compensation expense resulting from
post-grant appreciation of employee stock options. EBITDA should not be
considered in isolation or as a substitute for measures of performance prepared
in accordance with generally accepted accounting principles.
As previously discussed, to the extent we expand our current marketing
promotions and our subscriber acquisition costs materially increase, our EBITDA
results will be negatively impacted because subscriber acquisition costs are
generally expensed as incurred.
Depreciation and Amortization. Depreciation and amortization expenses
aggregated $45 million during the three months ended September 30, 2000, a $17
million increase compared to the same period in 1999. The increase in
18
<PAGE> 21
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - CONTINUED
depreciation and amortization expenses principally resulted from an increase in
depreciation related to the commencement of operation of EchoStar V in November
1999 and other depreciable assets placed in service during 2000 and late 1999.
Other Income and Expense. Other expense, net, totaled $49 million during
the three months ended September 30, 2000, an increase of $4 million compared to
the same period in 1999. This increase resulted from an increase in interest
expense partially offset by an increase in interest income.
Nine Months Ended September 30, 2000 Compared to the Nine Months Ended September
30, 1999.
Revenue. Total revenue for the nine months ended September 30, 2000 was
$1.910 billion, an increase of $822 million compared to total revenue for the
nine months ended September 30, 1999 of $1.088 million. The increase in total
revenue was primarily attributable to DISH Network subscriber growth.
DISH Network subscription television services revenue totaled $1.648
billion for the nine months ended September 30, 2000, an increase of $721
million compared to the same period in 1999. This increase was directly
attributable to the increase in the number of DISH Network subscribers and
higher average revenue per subscriber. DISH Network net subscriber additions for
the nine months ended September 30, 2000 increased approximately 31% compared to
the same period in 1999.
For the nine months ended September 30, 2000, DTH equipment sales and
integration services totaled $177 million, an increase of $68 million compared
to the same period during 1999. This increase in DTH equipment sales and
integration services revenue was primarily attributable to an increase in
international demand for digital set-top boxes as compared to the same period
during 1999.
Satellite services revenue totaled $51 million during the nine months ended
September 30, 2000, an increase of $23 million as compared to the same period
during 1999. The increase in satellite services revenue was primarily
attributable to the addition of new full-time BTV customers.
DISH Network Operating Expenses. DISH Network operating expenses totaled
$909 million during the nine months ended September 30, 2000, an increase of
$397 million or 78%, compared to the same period in 1999. The increase in DISH
Network operating expenses was consistent with, and primarily attributable to,
the increase in the number of DISH Network subscribers. DISH Network operating
expenses represented 55% of subscription television services revenue during each
of the nine months ended September 30, 2000 and 1999.
Subscriber-related expenses totaled $686 million during the nine months
ended September 30, 2000, an increase of $285 million compared to the same
period in 1999. Such expenses represented 42% and 43% of subscription television
services revenues during the nine months ended September 30, 2000 and 1999,
respectively.
Customer service center and other expenses totaled $185 million during the
nine months ended September 30, 2000, an increase of $104 million as compared to
the same period in 1999. The increase in customer service center and other
expenses primarily resulted from increased personnel and telephone expenses to
support the growth of the DISH Network and from operating expenses related to
the expansion of our installation and service business. Customer service center
and other expenses totaled 11% of subscription television services revenue
during the nine months ended September 30, 2000, as compared to 9% during the
same period in 1999. The increase in this expense to revenue ratio primarily
resulted from the on-going construction and start-up costs of our fifth customer
service center in Virginia, and the continued build-out of our installation
offices nationwide.
Satellite and transmission expenses totaled $39 million during the nine
months ended September 30, 2000, a $9 million increase compared to the same
period in 1999. This increase resulted from higher satellite and other digital
broadcast center operating expenses due to an increase in the number of
operational satellites. Satellite and transmission expenses totaled 2% and 3% of
subscription television services revenue during the nine months ended September
30, 2000 and 1999, respectively.
19
<PAGE> 22
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - CONTINUED
Cost of sales - DTH equipment and Integration Services. Cost of sales - DTH
equipment and integration services totaled $133 million during the nine months
ended September 30, 2000, an increase of $57 million compared to the same period
in 1999. This increase in cost of sales - DTH equipment and integration services
is consistent with the increase in DTH equipment sales and integration services
revenue. Cost of sales - DTH equipment and integration services represented 75%
and 70% of DTH equipment revenue, during the nine months ended September 30,
2000 and 1999, respectively. The increase reflects price pressure resulting from
increased competition from other providers of DTH equipment.
Marketing Expenses. Marketing expenses totaled $813 million during the nine
months ended September 30, 2000, an increase of $321 million compared to the
same period in 1999. The increase in marketing expenses was primarily
attributable to an increase in subscriber promotion subsidies, resulting from
several aggressive marketing promotions. Advertising and other expenses totaled
$89 million and $40 million during the nine months ended September 30, 2000 and
1999, respectively.
General and Administrative Expenses. General and administrative expenses
totaled $177 million during the nine months ended September 30, 2000, an
increase of $79 million as compared to the same period in 1999. The increase in
G&A expenses was principally attributable to increased personnel expenses to
support the growth of the DISH Network. G&A expenses represented 9% of total
revenue during each of the nine months ended September 30, 2000 and 1999.
Non-cash, Stock-based Compensation. As a result of substantial post-grant
appreciation of stock options, during the nine months ended September 30, 2000
and 1999 we recognized $39 million and $6 million, respectively, of the total
remaining deferred stock-based compensation under the 1999 incentive plan. The
remainder will be recognized over the remaining vesting period.
We report all non-cash compensation based on stock option appreciation as a
single expense category in our accompanying statements of operations. The
following table represents the other expense categories in our statements of
operations that would be affected if non-cash, stock-based compensation was
allocated to the same expense categories as the base compensation for certain
key employees who participated in the 1999 incentive plan:
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
1999 2000
------------ ------------
<S> <C> <C>
Customer service center and other ............ $ 510 $ 1,308
Satellite and transmission ................... 369 2,296
General and administrative ................... 5,104 34,995
------------ ------------
Total non-cash, stock-based compensation .. $ 5,983 $ 38,599
============ ============
</TABLE>
EBITDA. EBITDA represents earnings before interest, taxes, depreciation,
amortization, and non-cash, stock-based compensation. EBITDA was negative $145
million during the nine months ended September 30, 2000, compared to negative
$101 million during the same period in 1999. This decline in EBITDA principally
resulted from an increase in subscriber acquisition costs due to the success of
several aggressive marketing promotions to acquire new subscribers, as well as
other previously described factors. It is important to note that EBITDA does not
represent cash provided or used by operating activities. Further, our
calculation of EBITDA for the nine months ended September 30, 2000 and 1999 does
not include approximately $39 million and $6 million, respectively, of non-cash
compensation expense resulting from post-grant appreciation of employee stock
options. EBITDA should not be considered in isolation or as a substitute for
measures of performance prepared in accordance with generally accepted
accounting principles.
Depreciation and Amortization. Depreciation and amortization expenses
aggregated $127 million during the nine months ended September 30, 2000, a $48
million increase compared to the same period in 1999. The increase in
depreciation and amortization expenses principally resulted from an increase in
depreciation related to the
20
<PAGE> 23
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - CONTINUED
commencement of operation of EchoStar V in November 1999 and other depreciable
assets placed in service during 1999 and the nine months ended September 30,
2000.
Other Income and Expense. Other expense, net totaled $138 million during
the nine months ended September 30, 2000, an increase of $20 million compared to
the same period in 1999. This increase resulted from an increase in interest
expense partially offset by an increase in interest income.
LIQUIDITY AND CAPITAL RESOURCES
Cash Sources
On September 25, 2000, our wholly-owned subsidiary, EchoStar Broadband
Corporation, sold $1 billion principal amount of 10 3/8% Senior Notes due 2007.
The proceeds of these notes will be used primarily by our subsidiaries for the
construction and launch of additional satellites, strategic acquisitions and
other general working capital purposes.
As of September 30, 2000, our unrestricted cash, cash equivalents and
marketable investment securities totaled $1.620 billion compared to $1.254
billion as of December 31, 1999. For the nine months ended September 30, 2000
and 1999, we reported net cash flows from operating activities of negative $224
million and negative $67 million, respectively. The increase in net cash flow
used in operating activities reflects, among other things, the significant
increase in subscriber acquisition costs associated with our rapid subscriber
growth and our "free installation" promotion, and the build up of our inventory
to prepare for historically strong subscriber additions during the third and
fourth quarter.
The $1.620 billion total included approximately $326 million of investment
grade securities, $46 million of equity securities of NASDAQ national market and
NYSE companies, and approximately $6 million of high yield debt securities of
public companies. As of September 30, 2000, these investments were classified as
available-for-sale and therefore carried at fair value, which is net of
approximately $7 million of accumulated net unrealized losses which were
recorded as a component of accumulated other comprehensive loss in stockholders'
equity. Our equity investments carry risks related, among other things, to all
of the factors that can result in adverse changes in securities markets
generally, as well as risks related to the performance of the companies whose
securities we have invested in, risks associated with specific industries, and
other factors. In addition to the foregoing risks, the debt securities are
subject to interest rate risks. In general, as interest rates rise, the market
value of high yield debt securities decreases, though the market prices for high
yield debt securities are sometimes more significantly impacted by the
performance of the company and other equity risks, than by interest rates. We
have not hedged or otherwise protected against the risks associated with our
investment in any of these securities. Excluded from these amounts at September
30, 2000, are investments in Wildblue Communications (formerly iSky, Inc.),
StarBand Communications (formerly Gilat-to-Home) and Replay TV totaling $110
million. Since these companies are not publicly traded, the value of our
investments will depend on the success of their business plans over time. We may
make additional investments in other debt and equity securities in the future.
We expect that our future working capital, capital expenditure and debt
service requirements will be satisfied primarily from existing cash and
investment balances and cash generated from operations. Our ability to generate
positive future operating and net cash flows is dependent upon our ability to
continue to rapidly expand our DISH Network subscriber base, retain existing
DISH Network subscribers, and our ability to grow our ETC and Satellite Services
businesses. There can be no assurance that we will be successful in achieving
our goals. The amount of capital required to fund our 2000 working capital and
capital expenditure needs will vary, depending, among other things, on the rate
at which we acquire new subscribers and the cost of subscriber acquisition. Our
working capital and capital expenditure requirements could increase materially
in the event of increased competition for subscription television customers,
significant satellite failures, or in the event of a general economic downturn,
among other factors. These factors could require that we raise additional
capital in the future.
Subscriber Turnover
We believe that our percentage churn, which has not increased during the
nine months ended September 30, 2000 as compared to the same period during 1999,
continues to be lower than satellite and cable industry averages. While we have
successfully managed churn within a narrow range historically, our maturing
subscriber base, the effects of rapid growth, and other factors could cause
future increases in churn. Further, impacts from our litigation with the
networks in Miami, new FCC rules governing the delivery of superstations and
other factors, could cause us to terminate delivery of distant network channels
and superstations to a material portion of our subscriber base, which could
cause many of those customers to cancel their subscription to our other
services. Any such terminations could result in a small reduction in average
monthly revenue per subscriber and could result in increased churn. While there
can be no assurance, notwithstanding the issues discussed above we have and
expect to be able to continue to manage churn below industry averages during
2000.
21
<PAGE> 24
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - CONTINUED
Subscriber Acquisition Costs
As previously described, we subsidize the purchase and installation of
EchoStar receiver systems in order to attract new DISH Network subscribers.
Consequently, our subscriber acquisition costs are significant. Our average
subscriber acquisition expenses were $437 during the nine months ended September
30, 2000. Our Digital Dynamite promotion allows us to capitalize and depreciate
over 4 years equipment costs that would otherwise be expensed at the time of
sale, but also results in increased capital expenditures. Capital expenditures
under our Digital Dynamite promotion totaled approximately $26.5 million for the
nine months ended September 30, 2000. As a result of continuing competition and
our plans to attempt to continue to drive rapid subscriber growth, we expect our
per subscriber acquisition costs for 2000, including costs capitalized under the
Digital Dynamite Plan, will average approximately $450 to $475 for the full
year. Our subscriber acquisition costs, both in the aggregate and on a per new
subscriber activation basis, may materially increase to the extent that we
continue or expand our bounty program, our "free system/free installation"
program, the DISH Network One-Rate Plan, or other more aggressive promotions if
we determine that they are necessary to respond to competition, or for other
reasons.
Funds necessary to meet subscriber acquisition costs will be satisfied from
existing cash and investment balances to the extent available. We may, however,
be required to raise additional capital in the future to meet these
requirements, particularly if our Digital Dynamite promotion gains wide
acceptance. If we were required to raise capital today, a variety of debt and
equity funding sources would likely be available to us. However, there can be no
assurance that additional financing will be available on acceptable terms, or at
all, if needed in the future.
Conditional Access System
The access control system is central to the security network that prevents
unauthorized viewing of programming. Theft of cable and satellite programming
has been widely reported and our signal encryption has been pirated and could be
further compromised in the future. If other measures are not successful, it
could be necessary to replace the credit card size card that controls the
security of each consumer set top box at a material cost to us.
Intellectual Property
Many entities, including some of our competitors, now have and may in the
future obtain patents and other intellectual property rights that cover or
affect products or services directly or indirectly related to those that we
offer. In general, if a court determines that one or more of our products
infringes on intellectual property held by others, we would be required to cease
developing or marketing those products, to obtain licenses to develop and market
those products from the holders of the intellectual property, or to redesign
those products in such a way as to avoid infringing the patent claims. Various
parties have asserted patent and other intellectual property rights with respect
to components within our direct broadcast satellite system. Certain of these
parties have filed suit against us, including Starsight and Superguide, as
described below. We cannot be certain that these persons do not own the rights
they claim, that our products do not infringe on these rights, that we would be
able to obtain licenses from these persons on commercially reasonable terms or,
if we were unable to obtain such licenses, that we would be able to redesign our
products to avoid infringement.
Obligations and Future Capital Requirements
Semi-annual cash debt service requirements of approximately $94 million
related to our 9 1/4% Senior Notes due 2006 (Seven Year Notes) and our 9 3/8%
Senior Notes due 2009 (Ten Year Notes), is payable in arrears on February 1 and
August 1 each year. Semi-annual cash debt service requirements of approximately
$24 million related to our 4 7/8% Convertible Subordinated Notes due 2007 is
payable in arrears on January 1 and July 1 of each year, commencing July 1,
2000. Semi-annual cash debt service requirements of approximately $52 million
related to our 10 3/8% Senior Notes due 2007 is payable in arrears on April 1
and October 1 of each year, commencing April 1, 2001. There are no scheduled
principal payment or sinking fund requirements prior to maturity of any of these
notes.
The indentures related to our 9 1/4% Senior Notes due 2006 (the "Seven Year
Notes") and our 9 3/8% Senior Notes due 2009 (the "Ten Year Notes")
(collectively, the "Seven and Ten Year Notes Indentures") contain restrictive
22
<PAGE> 25
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - CONTINUED
covenants that require us to maintain satellite insurance with respect to at
least half of the satellites we own. Insurance coverage is therefore required
for at least three of our six satellites currently in orbit. We have procured
normal and customary launch insurance for EchoStar VI. This launch insurance
policy provides for insurance of $225.0 million. The EchoStar VI launch
insurance policy expires in July 2001. We are currently self-insuring EchoStar
I, EchoStar II, EchoStar III, EchoStar IV and EchoStar V. To satisfy insurance
covenants related to the outstanding EchoStar DBS senior notes, on July 25,
2000, EchoStar DBS reclassified approximately $60 million from cash and cash
equivalents to restricted cash and marketable investment securities on its
balance sheet. In addition, EchoStar DBS reclassified an amount equal to
approximately $30 million, the depreciated cost of an additional satellite, on
September 23, 2000 after the expiration of the initial period of coverage for
EchoStar V. The reclassifications will continue until such time, if ever, as the
insurers are again willing to insure our satellites on commercially reasonable
terms.
We utilized $91 million of satellite vendor financing for our first four
satellites. As of September 30, 2000, approximately $31 million of that
satellite vendor financing remained outstanding. The satellite vendor financing
bears interest at 8 1/4% and is payable in equal monthly installments over five
years following launch of the satellite to which it relates. A portion of the
contract price with respect to EchoStar VII is payable over a period of 13 years
following launch with interest at 8%, and a portion of the contract price with
respect to EchoStar VIII and EchoStar IX is payable following launch with
interest at 8%. Those in orbit payments are contingent on the continued health
of the satellite.
Dividends on our 6 3/4% Series C Cumulative Convertible Preferred Stock
began to accrue on November 2, 1999. Holders of the Series C Preferred Stock are
entitled to receive cumulative dividends at an annual rate of 6 3/4% of the
Liquidation Preference of $50 per share. Dividends are payable quarterly in
arrears, commencing February 1, 2000, when, as, and if declared by our Board of
Directors. All accumulated and unpaid dividends may, at our option, be paid in
cash, Class A common stock, or a combination thereof upon conversion or
redemption. We declared a cash dividend of approximately $208,000 or $0.84375
per share, payable on November 1, 2000 to Series C Preferred Stock shareholders
of record on October 20, 2000.
During the remainder of 2000, we anticipate total capital expenditures of
approximately $125-$210 million. This amount includes approximately $75-$100
million related to the construction and launch of EchoStar VII, EchoStar VIII
and EchoStar IX, approximately $30-$80 million or more related to EchoStar
receiver systems to be provided under our Digital Dynamite promotion and $20-30
million for capital expenditures related to general corporate expansion.
In addition to our DBS business plan, we have licenses, or applications
pending with the FCC, for a two satellite FSS Ku-band satellite system, a two
satellite FSS Ka-band satellite system, and a proposed modification thereof and
a 6-satellite Low Earth Orbit Mobile system. We will need to raise additional
capital to fully construct these satellites. We recently announced agreements
for the construction and delivery of three new satellites. Two of these
satellites, EchoStar VII and EchoStar VIII, will be advanced, high-powered DBS
satellites. The third satellite, EchoStar IX, will be a hybrid Ku/Ka-band
satellite.
We expect that our future working capital, capital expenditure and debt
service requirements will be satisfied from existing cash and investment
balances, and cash generated from operations. Our ability to generate positive
future operating and net cash flows is dependent, among other things, upon our
ability to retain existing DISH Network subscribers, our ability to manage the
growth of our subscriber base, and our ability to grow our ETC and Satellite
Services businesses. During the first nine months of 2000, subscriber growth was
strong. To the extent future subscriber growth exceeds our expectations, it may
be necessary for us to raise additional capital to fund increased working
capital requirements. There may be a number of other factors, some of which are
beyond our control or ability to predict, that could require us to raise
additional capital. These factors include unexpected increases in operating
costs and expenses, a defect in or the loss of any satellite, or an increase in
the cost of acquiring subscribers due to additional competition, among other
things. If cash generated from our operations is not sufficient to meet our debt
service requirements or other obligations, we would be required to obtain cash
from other financing sources. If we were required to raise capital today a
variety of debt and equity funding sources would likely be available to us.
However, there can be no assurance that such financing would be available on
terms acceptable to us, or if available, that the proceeds of such financing
would be sufficient to enable us to meet all of our obligations.
23
<PAGE> 26
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
DirecTV
During February 2000 we filed suit against DirecTV and Thomson Consumer
Electronics/RCA in the Federal District Court of Colorado. The suit alleges that
DirecTV has utilized improper conduct in order to fend off competition from the
DISH Network. According to the complaint, DirecTV has demanded that certain
retailers stop displaying our merchandise and has threatened to cause economic
damage to retailers if they continue to offer both product lines in head-to-head
competition. The suit alleges, among other things, that DirecTV has acted in
violation of federal and state anti-trust laws in order to protect DirecTV's
market share. We are seeking injunctive relief and monetary damages. It is too
early in the litigation to make an assessment of the probable outcome.
The DirecTV defendants filed a counterclaim against us. DirecTV alleges
that we tortuously interfered with a contract that DirecTV allegedly had with
Kelly Broadcasting Systems, Inc. ("KBS"). DirecTV alleges that we "merged" with
KBS, in contravention of DirecTV's contract with KBS. DirecTV also alleges that
we have falsely advertised to consumers about our right to offer network
programming. DirecTV further alleges that we improperly used certain marks owned
by PrimeStar, now owned by DirecTV. Finally, DirecTV alleges that we have been
marketing National Football League games in a misleading manner. The amount of
damages DirecTV is seeking is as yet unquantified. We intend to vigorously
defend against these claims. The case is currently in discovery. It is too early
in the litigation to make an assessment of the probable outcome.
Fee Dispute
We had a contingent fee arrangement with the attorneys who represented us
in the litigation with News Corporation. The contingent fee arrangement provides
for the attorneys to be paid a percentage of any net recovery obtained by us in
the News Corporation litigation. The attorneys have asserted that they may be
entitled to receive payments totaling hundreds of millions of dollars under this
fee arrangement.
During mid-1999, we initiated litigation against the attorneys in the
Arapahoe County, Colorado, District Court arguing that the fee arrangement is
void and unenforceable. In December 1999, the attorneys initiated an arbitration
proceeding before the American Arbitration Association. The litigation has been
stayed while the arbitration is ongoing. A two week arbitration hearing has been
set to begin in late February 2001. It is too early to determine the outcome of
negotiations, arbitration or litigation regarding this fee dispute. We are
vigorously contesting the attorneys' interpretation of the fee arrangement,
which we believe significantly overstates the magnitude of our liability.
WIC Premium Television Ltd.
During July 1998, a lawsuit was filed by WIC Premium Television Ltd.,
an Alberta corporation, in the Federal Court of Canada Trial Division, against
General Instrument Corporation, HBO, Warner Communications, Inc., John Doe,
Showtime, United States Satellite Broadcasting Company, Inc., EchoStar, 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.
24
<PAGE> 27
PART II - OTHER INFORMATION
We filed motions to dismiss each of the actions for lack of personal
jurisdiction. The Court in the Alberta action recently denied our Motion to
Dismiss, which is currently under appeal. The Alberta Court also granted a
motion to add more EchoStar parties to the lawsuit. EchoStar Satellite
Corporation, EchoStar DBS Corporation, EchoStar Technologies Corporation, and
EchoStar Satellite Broadcast Corporation have been added as defendants in the
litigation. The newly added defendants have also challenged jurisdiction. The
Court in the Federal action has stayed that case before ruling on our motion to
dismiss. We intend to vigorously defend the suits in the event our motions are
denied. It is too early to determine whether or when any other lawsuits or
claims will be filed. It is also too early to make an assessment of the probable
outcome of the litigation or to determine the extent of any potential liability
or damages.
Broadcast network programming
Until July 1998, we obtained distant broadcast network channels (ABC, NBC,
CBS and FOX) for distribution to our customers through PrimeTime 24. In December
1998, the United States District Court for the Southern District of Florida
entered a nationwide permanent injunction requiring PrimeTime 24 to shut off
distant network channels to many of its customers, and henceforth to sell those
channels to consumers in accordance with certain stipulations in the injunction.
In October 1998, we filed a declaratory judgment action against ABC, NBC,
CBS and FOX in Denver Federal Court. We asked the court to enter a judgment
declaring that our method of providing distant network programming did not
violate the Satellite Home Viewer Act and hence did not infringe the networks'
copyrights. In November 1998, the networks and their affiliate groups filed a
complaint against us in Miami Federal Court alleging, among other things,
copyright infringement. The court combined the case that we filed in Colorado
with the case in Miami and transferred it to the Miami court. The case remains
pending in Miami. While the networks have not sought monetary damages, they have
sought to recover attorney fees if they prevail.
In February 1999, the networks filed a "Motion for Temporary Restraining
Order, Preliminary Injunction and Contempt Finding" against DirecTV, Inc. in
Miami related to the delivery of distant network channels to DirecTV customers
by satellite. DirecTV settled this lawsuit with the networks. Under the terms of
the settlement between DirecTV and the networks, some DirecTV customers were
scheduled to lose access to their satellite-provided distant network channels by
July 31, 1999, while other DirecTV customers were to be disconnected by December
31, 1999. Subsequently, PrimeTime 24 and substantially all providers of
satellite-delivered network programming other than us agreed to this cut-off
schedule, although we do not know if they adhered to this schedule.
In December 1998, the networks filed a Motion for Preliminary Injunction
against us in the Miami court, and asked the court to enjoin us from providing
network programming except under limited circumstances. A preliminary injunction
hearing was held on September 21, 1999. The court took the issues under
advisement to consider the networks' request for an injunction, whether to hear
live testimony before ruling upon the request, and whether to hear argument on
why the Satellite Home Viewer Act may be unconstitutional, among other things.
In March 2000, the networks filed an emergency motion again asking the
court to issue an injunction requiring us to turn off network programming to
certain of our customers. At that time, the networks also argued that our
compliance procedures violate the Satellite Home Viewer Improvement Act. We
opposed the networks' motion and again asked the court to hear live testimony
before ruling upon the networks' injunction request.
On September 29, 2000, the Court granted the Networks' motion for
preliminary injunction, denied the Network's emergency motion and denied our
request to present live testimony and evidence. The Court's original order
required EchoStar to terminate network programming to certain subscribers "no
later than February 15, 1999", and contained other dates which would be
physically impossible to comply with. The order imposes restrictions on our past
and future sale of distant ABC, NBC, CBS and Fox channels similar to those
imposed on PrimeTime 24 (and, we believe, on DirecTV and others). Some of those
restrictions go beyond the statutory requirements imposed by the Satellite Home
Viewer Act and the Satellite Home Viewer Improvement Act. For these and other
reasons we believe the Court's order is, among other things, fundamentally
flawed, unconstitutional and should be overturned. However,
25
<PAGE> 28
PART II - OTHER INFORMATION
it is very unusual for a Court of Appeals to overturn a lower court's order and
there can be no assurance whatsoever that it will be overturned.
On October 3, 2000, and again on October 25, 2000, the Court amended its
original preliminary injunction order in an effort to fix some of the errors in
the original order. The twice amended preliminary injunction order requires us
to shut off, by February 15, 2001, all subscribers who are ineligible to receive
distant network programming under the court's order. We have appealed the
September 29, 2000 preliminary injunction order and the October 3, 2000 amended
preliminary injunction order. We have also asked the United States Court of
Appeals for the Eleventh Circuit to stay the preliminary injunction orders
pending the appeal. The Eleventh Circuit ordered the networks to file a brief
with the Court of Appeals by November 6, 2000, and that we respond to that brief
by November 9, 2000. Both briefs have been filed. Additional briefing schedules
and rulings from the Miami Court and from the Court of Appeals could occur at
any time. Our effort to seek a stay of the preliminary injunction may not be
successful and we may be required to comply with the dates provided in the
Court's preliminary injunction order. The preliminary injunction could force us
to terminate delivery of distant network channels to a substantial portion of
our distant network subscriber base, which could also cause many of these
subscribers to cancel their subscription to our other services. Such
terminations would result in a small reduction in our reported average monthly
revenue per subscriber and could result in a temporary increase in churn.
Satellite Insurance
As a result of the failure of EchoStar IV solar arrays to fully deploy and
the failure of 26 transponders to date, a maximum of approximately 16 of the 44
transponders on EchoStar IV are available for use at this time. Due to the
normal degradation of the solar arrays, the number of available transponders
will further decrease over time. In addition to the transponder and solar array
failures, EchoStar IV experienced anomalies affecting its thermal systems and
propulsion system during 1999. There can be no assurance that further material
degradation, or total loss of use, of EchoStar IV will not occur in the
immediate future.
In September 1998, we filed a $219.3 million insurance claim for a
constructive total loss under the launch insurance policies covering EchoStar
IV. The satellite insurance consists of separate identical policies with
different carriers for varying amounts which, in combination, create a total
insured amount of $219.3 million.
The insurance carriers offered us a total of approximately $88 million, or
40% of the total policy amount, in settlement of the EchoStar IV insurance
claim. The insurers allege that all other impairment to the satellite occurred
after expiration of the policy period and is not covered. We strongly disagree
with the position of the insurers and we have filed an arbitration claim against
them for breach of contract, failure to pay a valid insurance claim and bad
faith denial of a valid claim, among other things. There can be no assurance
that we will receive the amount claimed or, if we do, that we will retain title
to EchoStar IV with its reduced capacity.
At the time we filed our claim in 1998, we recognized an impairment loss of
$106 million to write-down the carrying value of the satellite and related
costs, and simultaneously recorded an insurance claim receivable for the same
amount. We continue to believe we will ultimately recover at least the amount
originally recorded and do not intend to adjust the amount of the receivable
until there is greater certainty with respect to the amount of the final
settlement.
As a result of the 1999 thermal and propulsion system anomalies, we reduced
the estimated remaining useful life of EchoStar IV to approximately 4 years
during January 2000. This change will increase depreciation expense to be
recognized by us during the year ending December 31, 2000 by approximately $9.6
million. We will continue to evaluate the performance of EchoStar IV and may
modify our loss assessment as new events or circumstances develop.
The in-orbit insurance policies for EchoStar I, EchoStar II, and EchoStar
III expired July 25, 2000. The insurers have to date refused to renew insurance
on EchoStar I, EchoStar II and EchoStar III on reasonable terms. Based on, among
other things, the insurance carriers' unanimous refusal to negotiate reasonable
renewal insurance coverage, we believe that the carriers colluded and conspired
to boycott us unless we accept their offer to settle the EchoStar IV claim for
$88 million.
26
<PAGE> 29
PART II - OTHER INFORMATION
Based on the carriers' actions, we have added causes of action in our
EchoStar IV demand for arbitration for breach of the duty of good faith and fair
dealing, and unfair claim practices. Additionally, we have filed a lawsuit
against the insurance carriers in the United States District Court for the
District of Colorado asserting causes of action for violation of Federal and
State Antitrust laws. While we believe we are entitled to the full amount
claimed under the EchoStar IV insurance policy and believe the insurance
carriers are in violation of Antitrust laws and have committed further acts of
bad faith in connection with their refusal to negotiate reasonable insurance
coverage on our other satellites, there can be no assurance as to the outcome of
these proceedings.
Starsight
During October 2000, Starsight Telecast, Inc., a subsidiary of Gemstar - TV
Guide, filed a suit for patent infringement against us and certain of our
subsidiaries in the United States District Court for the Western District of
North Carolina, Asheville Division. The suit alleges infringement of United
States Patent No. 4,706,121 which relates to certain electronic program guide
functions. We have examined this patent and believe that it is not infringed by
any of our products or services. We intend to vigorously defend against this
action and to assert a variety of counterclaims.
Superguide Corp. also recently filed suit against us, DirecTv and others
in the same North Carolina court, alleging infringement of United States Patent
Nos. 5,038,211, 5,293,357 and 4,751,578 which relate to certain electronic
program guide functions, including the use of electronic program guides to
control VCRs. It is our understanding that these patents may be licensed by
Superguide to Gemstar, although Gemstar has not asserted the patents against
us. We have examined these patents and believe that they are not infringed by
any or our products or services. We intend to vigorously defend against this
action and assert a variety of counterclaims.
In the event it is ultimately determined that we infringe on any of these
patents we may be subject to substantial damages, and/or an injunction that
could require us to materially modify certain user friendly electronic
programming guide and related features we currently offer to consumers. It is
too early to make an assessment of the probable outcome of either suit.
We are subject to various other legal proceedings and claims which arise in
the ordinary course of business. In the opinion of management, the amount of
ultimate liability with respect to those actions will not materially affect our
financial position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
<TABLE>
<S> <C>
4.1+ Indenture, dated as of September 25, 2000, between EchoStar
Broadband Corporation and U.S. Bank Trust National
Association, as trustee.
4.2+ Registration Rights Agreement, dated as of September 25, 2000,
by and among EchoStar Broadband Corporation, Donaldson, Lufkin
& Jenrette Securities Corporation, Banc of America Securities
LLC, Credit Suisse First Boston Corporation and ING Barings
LLC.
27+ Financial Data Schedule.
</TABLE>
------------
+ Filed herewith.
(b) Reports on Form 8-K.
On September 12, 2000, we filed a Current Report on Form 8-K to report that
our wholly-owned subsidiary, EchoStar Broadband Corporation, offered $600
million aggregate principal amount of Senior Notes due 2007 in accordance with
Securities and Exchange Commission Rule 144A.
On September 25, 2000, we filed a Current Report on Form 8-K to report that
our wholly-owned subsidiary, EchoStar Broadband Corporation, increased its
previously announced offering of Senior noted due 2007 from $600 million to $1
billion, and that the offering closed September 25, 2000.
27
<PAGE> 30
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ECHOSTAR COMMUNICATIONS CORPORATION
By: /s/ David K. Moskowitz
-----------------------------
David K. Moskowitz
Senior Vice President, General
Counsel, Secretary and Director
(Duly Authorized Officer)
By: /s/ Michael R. McDonnell
-----------------------------
Michael R. McDonnell
Senior Vice President and Chief
Financial Officer
(Principal Financial Officer)
Date: November 14, 2000
<PAGE> 31
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
4.1+ Indenture, dated as of September 25, 2000, between EchoStar
Broadband Corporation and U.S. Bank Trust National
Association, as trustee.
4.2+ Registration Rights Agreement, dated as of September 25, 2000,
by and among EchoStar Broadband Corporation, Donaldson, Lufkin
& Jenrette Securities Corporation, Banc of America Securities
LLC, Credit Suisse First Boston Corporation and ING Barings
LLC.
27+ Financial Data Schedule.
</TABLE>
----------
+ Filed herewith.
