<PAGE>
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 MARCH 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to ________________.
Commission file number 333-31929
ECHOSTAR DBS CORPORATION
(Exact Name of Registrant as Specified in its Charter)
COLORADO 84-1328967
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
5701 S. SANTA FE DRIVE
LITTLETON, COLORADO 80120
(Address of principal executive offices) (Zip code)
(303) 723-1000
(Registrant's telephone number, including area code)
NOT APPLICABLE
(Former name, former address and former fiscal year,
if changed since last report)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SEC TION 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 MAY 14, 1998, REGISTRANT'S OUTSTANDING COMMON STOCK CONSISTED OF
1,000 SHARES OF COMMON STOCK.
THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION
(H)(1)(a) AND (b) OF FORM 10-Q AND IS THEREFORE FILING THIS FORM 10-Q WITH
THE REDUCED DISCLOSURE FORMAT.
<PAGE>
TABLE OF CONTENTS
PART I -- FINANCIAL INFORMATION
<TABLE>
<S> <C>
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -
December 31, 1998 and March 31, 1999 (Unaudited)................ 1
Condensed Consolidated Statements of Operations for the
three months ended March 31, 1998 and 1999 (Unaudited).......... 2
Condensed Consolidated Statements of Cash Flows for the
three months ended March 31, 1998 and 1999 (Unaudited).......... 3
Notes to Condensed Consolidated Financial Statements (Unaudited).. 4
Item 2. Management's Narrative Analysis of Results of Operations.......... 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk........ None
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings................................................. 17
Item 2. Changes in Securities and Use of Proceeds......................... *
Item 3. Defaults Upon Senior Securities................................... *
Item 4. Submission of Matters to a Vote of Security Holders............... *
Item 5. Other Information................................................. None
Item 6. Exhibits and Reports on Form 8-K.................................. 19
</TABLE>
- -----------------------------
* This item has been omitted pursuant to the reduced disclosure format as
set forth in General Instruction (H)(1)(a) and (b) of Form 10-Q.
<PAGE>
ECHOSTAR DBS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
<TABLE>
<CAPTION>
December 31, March 31,
1998 1999
---------------------------
<S> <C> <C>
ASSETS (Unaudited)
Current Assets:
Cash and cash equivalents.................................... $ 25,308 $ 135,642
Marketable investment securities............................. 7,000 138,093
Trade accounts receivable, net of allowance for
uncollectible accounts of $2,996 and $3,909, respectively.. 107,743 104,773
Insurance receivable......................................... -- 106,000
Inventories.................................................. 76,708 58,777
Other current assets......................................... 24,823 25,733
---------------------------
Total current assets........................................... 241,582 569,018
Restricted Assets:
Interest and satellite escrows and other restricted cash and
marketable investment securities........................... 77,657 --
Insurance receivable......................................... 106,000 --
---------------------------
Total restricted assets........................................ 183,657 --
Property and equipment, net.................................... 853,818 838,082
FCC authorizations, net........................................ 103,266 102,611
Deferred tax assets............................................ 60,638 63,572
Other noncurrent assets........................................ 27,212 30,832
---------------------------
Total assets............................................... $ 1,470,173 $ 1,604,115
---------------------------
---------------------------
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)
Current Liabilities:
Trade accounts payable....................................... $ 90,562 $ 92,089
Deferred revenue............................................. 132,857 145,578
Accrued expenses............................................. 176,158 206,935
Advances from affiliates, net................................ 54,805 246,681
Current portion of long-term debt............................ 22,679 22,764
---------------------------
Total current liabilities...................................... 477,061 714,047
Long-term obligations, net of current portion:
1994 Notes................................................... 571,674 1,503
1996 Notes................................................... 497,955 1,097
1997 Notes................................................... 375,000 15
Seven Year Notes............................................. -- 375,000
Ten Year Notes............................................... -- 1,625,000
Mortgages and other notes payable, net of current portion.... 43,450 38,409
Notes payable to ECC, including accumulated interest......... 59,812 --
Long-term deferred satellite services revenue and other
long-term liabilities...................................... 33,358 39,086
---------------------------
Total long-term obligations, net of current portion............ 1,581,249 2,080,110
---------------------------
Total liabilities.......................................... 2,058,310 2,794,157
Commitments and Contingencies (Note 5)
Stockholder's Equity (Deficit):
Common Stock, $.01 par value, 1,000 shares authorized,
issued and outstanding..................................... -- --
Additional paid-in capital................................... 145,164 145,164
Accumulated deficit.......................................... (733,301) (1,335,206)
---------------------------
Total stockholder's equity (deficit)........................... (588,137) (1,190,042)
---------------------------
Total liabilities and stockholder's equity (deficit)....... $ 1,470,173 $ 1,604,115
---------------------------
---------------------------
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
1
<PAGE>
ECHOSTAR DBS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended March 31,
------------------------------
1998 1999
------------------------------
<S> <C> <C>
REVENUE:
DISH Network:
Subscription television services........................ $ 128,541 $ 260,801
Other................................................... 6,184 2,265
------------------------------
Total DISH Network........................................ 134,725 263,066
DTH equipment sales and integration services.............. 66,816 31,193
Satellite services........................................ 4,595 7,821
C-band and other.......................................... 7,888 7,983
------------------------------
Total revenue............................................... 214,024 310,063
COSTS AND EXPENSES:
DISH Network Operating Expenses:
Subscriber-related expenses............................. 63,809 111,160
Customer service center and other....................... 11,733 24,109
Satellite and transmission.............................. 5,252 9,446
------------------------------
Total DISH Network operating expenses..................... 80,794 144,715
Cost of sales -- DTH equipment and integration services... 47,251 23,143
Cost of sales -- C-band and other......................... 5,942 4,050
Marketing:
Subscriber promotion subsidies.......................... 44,835 130,717
Advertising and other................................... 8,249 11,681
------------------------------
Total marketing expenses.................................. 53,084 142,398
General and administrative................................ 19,294 28,632
Amortization of subscriber acquisition costs.............. 10,971 --
Depreciation and amortization............................. 18,370 24,562
------------------------------
Total costs and expenses.................................... 235,706 367,500
------------------------------
Operating loss.............................................. (21,682) (57,437)
Other Income (Expense):
Interest income........................................... 3,359 3,366
Interest expense, net of amounts capitalized.............. (38,660) (50,594)
Other..................................................... (107) 147
------------------------------
Total other income (expense)................................ (35,408) (47,081)
------------------------------
Loss before income taxes.................................... (57,090) (104,518)
Income tax provision, net................................... (171) (66)
------------------------------
Net loss before extraordinary charges....................... (57,261) (104,584)
Extraordinary charge for early retirement of debt, net
of tax.................................................... -- (228,733)
------------------------------
Net loss.................................................... $ (57,261) $ (333,317)
------------------------------
------------------------------
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
2
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ECHOSTAR DBS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended March 31,
--------------------------------
1998 1999
--------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss................................................... $ (57,261) $ (333,317)
Adjustments to reconcile net loss to net cash flows from
operating activities:
Extraordinary charge for early retirement of debt........ -- 228,733
Depreciation and amortization............................ 18,370 24,562
Amortization of subscriber acquisition costs............. 10,971 --
Interest on notes payable to ECC added to principal...... 1,286 330
Amortization of debt discount and deferred financing
costs.................................................. 27,803 10,973
Change in reserve for excess and obsolete inventory...... (33) (405)
Change in long-term deferred satellite services revenue
and other long-term liabilities........................ 2,964 5,728
Changes in current assets and current liabilities........ (30,940) 65,612
--------------------------------
Net cash flows from operating activities................... (26,840) 2,216
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of marketable investment securities.............. (1,970) (149,558)
Sales of marketable investment securities.................. -- 18,465
Funds released from escrow and restricted cash and
marketable investment securities......................... 27,219 77,657
Investment earnings placed in escrow....................... (2,275) --
Advances to affiliates..................................... (5,422) --
Purchases of property and equipment........................ (19,900) (8,171)
Other...................................................... (794) 121
--------------------------------
Net cash flows from investing activities................... (3,142) (61,486)
CASH FLOWS FROM FINANCING ACTIVITIES:
Advances from affiliates................................... -- 191,876
Proceeds from issuance of Seven Year Notes................. -- 375,000
Proceeds from issuance of Ten Year Notes................... -- 1,625,000
Debt issuance costs and prepayment premiums................ -- (233,452)
Retirement of 1994 Notes................................... -- (575,674)
Retirement of 1996 Notes................................... -- (501,350)
Retirement of 1997 Notes................................... -- (378,110)
Capital contribution to ECC................................ -- (268,588)
Repayment of notes payable to ECC.......................... -- (60,142)
Repayments of mortgage indebtedness and notes payable...... (4,025) (4,956)
--------------------------------
Net cash flows from financing activities................... (4,025) 169,604
--------------------------------
Net (decrease) increase in cash and cash equivalents....... (34,007) 110,334
Cash and cash equivalents, beginning of period............. 62,059 25,308
--------------------------------
Cash and cash equivalents, end of period................... $ 28,052 $ 135,642
--------------------------------
--------------------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Capitalized interest, including amounts due from
affiliates............................................. $ 7,943 $ --
Accrued capital expenditures............................. 10,653 --
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
3
<PAGE>
ECHOSTAR DBS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. ORGANIZATION AND BUSINESS ACTIVITIES
PRINCIPAL BUSINESS
EchoStar DBS Corporation ("DBS Corp," or the "Company"), is a
wholly-owned subsidiary of EchoStar Communications Corporation ("ECC" and
together with its subsidiaries "EchoStar"), a publicly traded company on the
Nasdaq National Market. During March 1999, EchoStar received approval from
the Federal Communications Commission ("FCC") to reorganize certain of its
direct and indirect wholly-owned subsidiaries in order to streamline its
organization and operations. During the first quarter of 1999, EchoStar
placed ownership of all of its direct broadcast satellites and related FCC
licenses into EchoStar Satellite Corporation ("ESC"). DirectSat Corporation,
Direct Broadcasting Satellite Corporation ("DBSC") and EchoStar Space
Corporation ("Space") were merged into ESC. Dish, Ltd., and EchoStar
Satellite Broadcasting Company ("ESBC") were merged into the Company.
EchoStar IV and the related FCC licenses were transferred to ESC. The
accompanying financial statements retroactively reflect this reorganization.
Unless otherwise stated herein, or the context otherwise requires,
references herein to EchoStar shall include ECC, DBS Corp and all direct and
indirect wholly-owned subsidiaries thereof. DBS Corp's management refers
readers of this Quarterly Report on Form 10-Q to EchoStar's Quarterly Report
on Form 10-Q for the three months ended March 31, 1999. Substantially all of
EchoStar's operations are conducted by subsidiaries of DBS Corp. The
operations of EchoStar include three interrelated business units:
- THE DISH NETWORK -- a direct broadcast satellite ("DBS") subscription
television service in the United States. As of March 31, 1999, EchoStar
had approximately 2.3 million DISH Network subscribers.
- ECHOSTAR TECHNOLOGIES CORPORATION ("ETC") -- engaged in the design,
distribution and sale of DBS set-top boxes, antennae and other digital
equipment for the DISH Network ("EchoStar receiver systems"), and the
design and distribution of similar equipment for direct-to-home ("DTH")
projects of others internationally, together with the provision of
uplink center design, construction oversight and other project
integration services for international DTH ventures.
- SATELLITE SERVICES -- engaged in the delivery of video, audio and data
services to business television customers and other satellite users.
These services may include satellite uplink services, satellite
transponder space usage, billing, customer service and other services.
Since 1994, EchoStar has deployed substantial resources to develop the
"EchoStar DBS System." The EchoStar DBS System consists of EchoStar's
FCC-allocated DBS spectrum, DBS satellites ("EchoStar I," "EchoStar II,
"EchoStar III," and "EchoStar IV"), digital satellite receivers, digital
broadcast operations center, customer service facilities, and other assets
utilized in its operations. EchoStar's principal business strategy is to
continue developing its subscription television service in the United States
to provide consumers with a fully competitive alternative to cable television
service.
2. SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles and
with the instructions to Form 10-Q and Article 10 of Regulation S-X for
interim financial information. Accordingly, these statements do not include
all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring adjustments)
considered necessary for a fair presentation have been included. All
significant intercompany accounts and transactions have been eliminated in
consolidation. Operating results for the three months ended March 31, 1999
are not necessarily indicative of the results that may be expected for the
year ending December 31, 1999. For further information, refer to the
combined and consolidated financial
4
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ECHOSTAR DBS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(Unaudited)
statements and footnotes thereto included in the Company's Annual Report on
Form 10-K for the year ended December 31, 1998. Certain prior year amounts
have been reclassified to conform with the current year presentation.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses for each reporting period.
Actual results could differ from those estimates.
3. INVENTORIES
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
December 31, March 31,
1998 1999
------------------------
<S> <C> <C>
DBS receiver components.................... $27,050 $29,895
EchoStar receiver systems.................. 45,025 20,420
Consigned DBS receiver components.......... 6,073 9,567
Finished goods - analog DTH equipment...... 2,656 2,785
Spare parts and other...................... 1,085 886
Reserve for excess and obsolete inventory.. (5,181) (4,776)
------------------------
$76,708 $58,777
------------------------
------------------------
</TABLE>
4. LONG-TERM DEBT
On January 25, 1999, the Company sold $375 million principal amount of
9 1/4% Senior Notes due 2006 (the "Seven Year Notes") and $1.625 billion
principal amount of 9 3/8% Senior Notes due 2009 (the "Ten Year Notes," and
together with the Seven Year Notes, the "Notes"). Concurrently with the
closing of these offerings, the Company used approximately $1.658 billion of
net proceeds received from the sale of the Notes to complete tender offers
for the outstanding 12 7/8% Senior Secured Discount Notes due June 1, 2004
issued by Dish, Ltd. ("the 1994 Notes"), the 13 1/8% Senior Secured Discount
Notes due 2004 issued by ESBC ("the 1996 Notes") and the 12 1/2% Senior
Secured Notes due 2002 issued by the Company ("the 1997 Notes"). In February
1999, ECC used approximately $268 million of net proceeds received from the
sale of the Notes to complete a tender offer related to the 12 1/8% Senior
Preferred Exchange Notes due 2004, issued on January 4, 1999, in exchange for
all of its issued and outstanding 12 1/8% Series B Senior Redeemable
Exchangeable Preferred Stock. Substantially all of the restrictive covenants
contained in each of the respective indentures were removed upon closing of
the tender offers. The consummation of the tender offers resulted in a
one-time extraordinary charge to the Company's net income of $229 million
(approximately $203 million of tender premiums and consent fees and
approximately $26 million associated with the write-off of unamortized
deferred financing costs and other transaction-related costs).
5. COMMITMENTS AND CONTINGENCIES
THE NEWS CORPORATION LIMITED
During February 1997, EchoStar and News Corporation Limited ("News
Corporation") announced an agreement pursuant to which, among other things,
News Corporation agreed to acquire approximately 50% of the outstanding
capital stock of EchoStar. News Corporation also agreed to make available
for use by EchoStar the DBS permit for 28 frequencies at the 110DEG. West
Longitude ("WL") orbital slot purchased by MCI Telecommunications
Corporation/WorldCom ("MCI") for more than $682 million following a 1996 FCC
auction (the "110 acquisition"). During late April 1997, substantial
disagreements arose between the parties regarding their obligations under
this
5
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ECHOSTAR DBS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(Unaudited)
agreement. Those substantial disagreements led the parties to litigation.
In mid-1997, EchoStar filed a complaint seeking specific performance of this
agreement and damages, including lost profits. News Corporation filed an
answer and counterclaims seeking unspecified damages, denying all of the
material allegations and asserting numerous defenses. Discovery commenced in
July 1997, and the case was set for trial commencing March 1999. In
connection with the pending 110 acquisition, the litigation between EchoStar
and News Corporation has been stayed and will be dismissed with prejudice
upon closing or if the transaction is terminated for reasons other than the
breach by, or failure to fill a condition within the control of, News
Corporation or MCI.
In connection with the News Corporation litigation that arose in 1997,
EchoStar has a contingent fee arrangement with its attorneys, which provides
for the attorneys to be paid a percentage of any net recovery obtained in its
dispute with News Corporation. The lawyers have asserted that they may be
entitled to receive payments in excess of $80 million to $100 million under
this fee arrangement in connection with the settlement of the dispute with
News Corporation. EchoStar intends to vigorously contest the lawyers'
interpretation of the fee arrangement, which it believes significantly
overstates the magnitude of its liability thereunder. If the lawyers and
EchoStar are unable to resolve this fee dispute under the fee arrangement,
the fee dispute would be resolved through arbitration. It is too early to
determine the outcome of negotiations or arbitration regarding this fee
dispute.
WIC PREMIUM TELEVISION LTD.
On July 28, 1998, a lawsuit was filed by WIC Premium Television Ltd.
("WIC"), an Alberta corporation, in the Federal Court of Canada Trial
Division, against certain defendants which include: General Instrument
Corporation, HBO, Warner Communications, Inc., John Doe, Showtime, United
States Satellite Broadcasting Corporation, ECC and two of ECC's wholly-owned
subsidiaries, Dish, Ltd. and Echosphere Corporation ("Echosphere"). 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 and/or claims will be filed. It is also too early
to make an assessment of the probable outcome of the litigation or to
determine the extent of any potential liability or damages.
On September 28, 1998, WIC filed another lawsuit in the Court of Queen's
Bench of Alberta Judicial District of Edmonton against certain defendants,
which also include ECC, Dish, Ltd. and Echosphere. WIC is a company
authorized to broadcast certain copyrighted work, such as movies and
concerts, to residents of Canada. WIC alleges that the defendants engaged
in, promoted, and/or allowed satellite dish equipment from the United States
to be sold in Canada and to Canadian residents and that some of the
defendants allowed and profited from Canadian residents purchasing and
viewing subscription television programming that is only authorized for
viewing in the United States. The lawsuit seeks, among other things, interim
and permanent injunction prohibiting the defendants from importing hardware
into Canada and from activating receivers in Canada and damages in excess of
the equivalent of US $175 million. It is too early to determine whether or
when any other lawsuits and/or claims will be filed. It is also too early to
make an assessment of the probable outcome of the litigation or to determine
the extent of any potential liability or damages.
BROADCAST NETWORK PROGRAMMING
Section 119 of the Satellite Home Viewer Act authorizes EchoStar to
provide satellite-delivered network channels to customers who qualify as
"unserved households," defined in the Satellite Home Viewer Act as, consumers
who, among other things, "cannot receive, through the use of a conventional
outdoor rooftop receiving antenna, an over-the-air signal of Grade B
intensity (as defined by the FCC) of a primary network station affiliated
with that network." Historically, EchoStar obtained distant broadcast
network signals for distribution to its customers through PrimeTime 24, Joint
Venture ("PrimeTime 24"). PrimeTime 24 also distributed network signals to
certain of EchoStar's competitors in the satellite industry.
The national networks and local affiliate stations recently challenged
PrimeTime 24's methods of selling network programming to consumers based upon
copyright infringement. The United States District Court for the
6
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ECHOSTAR DBS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(Unaudited)
Southern District of Florida entered a nationwide permanent injunction
preventing PrimeTime 24 from selling its programming to consumers unless the
programming was sold in accordance with certain stipulations in the
injunction. The injunction covers "distributors" as well. The plaintiffs in
the Florida litigation informed EchoStar that it considered EchoStar a
"distributor" for purposes of that injunction. A federal district court in
North Carolina has also issued an injunction against PrimeTime 24 prohibiting
certain distant signal retransmissions in the Raleigh area. Other copyright
litigation against PrimeTime 24 is pending.
EchoStar ceased delivering PrimeTime 24 programming in July 1998, and
began uplinking and distributing network channels directly. EchoStar has also
implemented Satellite Home Viewer Act Section 119 compliance procedures which
materially restrict the market for the sale of network channels by EchoStar.
On October 19, 1998, EchoStar filed a declaratory judgment action in the
United States District Court for the District of Colorado against the four
major networks. EchoStar asked the court to enter a judgment declaring that
its method of providing distant network programming does not violate the
Satellite Home Viewer Act and hence does not infringe the networks'
copyrights. On November 5, 1998, the four major broadcast networks and their
affiliate groups filed a complaint in federal court in Miami alleging, among
other things, copyright infringement against EchoStar. The plaintiffs in
that action have also requested the issuance of a preliminary injunction
against EchoStar. The case filed by EchoStar was subsequently combined with
and transferred to the Miami court.
On February 24, 1999, CBS, NBC, Fox, and ABC filed a "Motion for
Temporary Restraining Order, Preliminary Injunction, and Contempt Finding"
against DIRECTV, Inc. ("DIRECTV") in Miami relating to the delivery of
distant network channels to DIRECTV customers by satellite. On March 12,
1999, DIRECTV and the four networks announced that they had reached a
settlement of that dispute. Under the terms of the settlement, DIRECTV
customers predicted to receive a strong signal (Grade A intensity) from their
local stations will lose access to their satellite provided network channels
by June 30, 1999, while DIRECTV customers predicted to receive a weaker, but
allegedly adequate signal (Grade B intensity) from their local stations will
be disconnected by December 31, 1999. Subsequently, PrimeTime 24 and
substantially all providers of satellite delivered network programming other
than EchoStar agreed to this cut off schedule.
The Networks are currently pursuing a Motion for Preliminary Injunction
in the Miami Court, asking that Court to enjoin EchoStar from providing
network programming except under very limited circumstances. In general, the
networks want EchoStar to turn off programming to its customers on the same
schedule as agreed to by DIRECTV. EchoStar intends to vigorously contest the
issuance of such an injunction. In the event of a decision adverse to
EchoStar in this case, significant material restrictions on the sale of
distant ABC, NBC, CBS and Fox channels by EchoStar could result. Among other
things, EchoStar could be required to terminate delivery of network signals
to a material portion of its subscriber base. While the Networks have not
sought monetary damages, they have sought to recover attorneys fees should
they prevail. EchoStar has commenced sending letters to some of its
subscribers warning that their access to distant broadcast network channels
might be terminated commencing in June of this year. Such terminations would
result in a small reduction in average monthly revenue per subscriber. While
there can be no assurance, any such decrease could be offset by increases in
average monthly revenue per subscriber resulting from the delivery of local
network channels by satellite, and increases in programming offerings that
will follow the scheduled launches of EchoStar V and EchoStar VI later this
year. While there can be no assurance, legislation pending in the Senate
would, if passed into law, reduce the number of customers whose network
channels EchoStar may otherwise be required to terminate.
The Company is subject to various other legal proceedings and claims
which arise in the ordinary course of business. In the opinion of
management, the amount of ultimate liability with respect to those actions
will not materially affect the Company's financial position or results of
operations.
7
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ECHOSTAR DBS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(Unaudited)
METEOROID EVENTS
In November 1998 certain meteoroid events occurred as the earth's orbit
passed through the particulate trail of Comet 55P (Tempel-Tuttle). The
Company believes that its DBS satellites did not incur any significant damage
as a result of these events. Similar meteoroid events are expected to occur
again in November 1999. These meteoroid events continue to pose a potential
threat to all in-orbit geosynchronous satellites, including the Company's DBS
satellites. While the probability that the Company's spacecraft will be
damaged by space debris is very small, that probability will increase by
several orders of magnitude during the November 1999 meteoroid events. The
Company is presently evaluating the potential effects that the November 1999
meteoroid events may have on its DBS satellites. While there can be no
assurance, due to its excess satellite capacity, The Company does not expect
to experience an interruption of service due to any potential damage
resulting from these meteoroid events.
6. SEGMENT REPORTING
The Company adopted Financial Accounting Standard No. 131, "Disclosures
About Segments of an Enterprise and Related Information" ("FAS No. 131")
effective as of the year ended December 31, 1998. FAS No. 131 establishes
standards for reporting information about operating segments in annual
financial statements of public business enterprises and requires that those
enterprises report selected information about operating segments in interim
financial reports issued to shareholders.
<TABLE>
<CAPTION>
DBS CORP,
ECHOSTAR OTHER AFFILIATES
DISH SATELLITE ELIMINATIONS CONSOLIDATED ECHOSTAR AND
NETWORK ETC SERVICES AND OTHER TOTAL ACTIVITY SUBSIDIARIES
--------- ---------- --------- -------------- ------------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
THREE MONTHS ENDED MARCH 31, 1998
Revenue............................ $ 141,869 $ 63,778 $ 4,856 $ 3,936 $ 214,439 $ (415) $ 214,024
Net income (loss).................. (38,735) 8,586 4,219 (23,956) (49,886) (7,375) (57,261)
THREE MONTHS ENDED MARCH 31, 1999
Revenue............................ $ 280,776 $ 26,995 $ 9,145 $ (7,552) $ 309,364 $ 699 $ 310,063
Net income (loss) before
extraordinary charges............ (107,322) (3,625) 5,013 2,602 (103,332) (1,252) (104,584)
</TABLE>
7. SUBSEQUENT EVENTS
8
<PAGE>
ECHOSTAR DBS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(Unaudited)
ECHOSTAR IV
As previously announced, the south solar array on EchoStar IV did not
properly deploy subsequent to the launch of EchoStar IV on May 8, 1998. This
anomaly resulted in a reduction of power available to operate the satellite.
The solar array anomaly limits EchoStar to the operation of approximately 18
transponders as of May 13, 1999. Available power will continue to decline
over the next several years, resulting in continuing reductions in the number
of available transponders. Approximately 16 transponders should be available
for the entire life of the satellite. In addition, an unrelated anomaly
discovered during the third quarter of 1998 resulted in the failure of six
transponders during 1998. The satellite is equipped with a total of 44
transponders. 24 operating transponders are necessary to fully utilize
EchoStar's 24 frequencies at 148DEG. WL, where the satellite is located. In
September 1998, EchoStar filed a $219.3 million insurance claim for a total
constructive loss (as defined in the launch insurance policy) related to
EchoStar IV. That claim is pending.
During May 1999, EchoStar IV experienced additional anomalies. An
investigation of those anomalies, affecting transponders, heating systems and
fuel lines but which have not caused material reductions in functionality to
date, is continuing. It is not yet possible to conclude whether the
additional anomalies will result in further reductions of satellite
functionality in the future. While there can be no assurance, EchoStar does
not currently expect short or medium term satellite operations to be
materially adversely impacted. EchoStar has not completed its assessment of
the additional impairment, if any, to EchoStar IV, but currently believes
that insurance proceeds will be sufficient to offset any additional
write-down of satellite assets that may be required because of lost
functionality caused by these anomalies. However, no assurance can be
provided as to the ultimate amount that may be received from the insurance
claim, or that coverage will be available. EchoStar will continue to
evaluate the performance of EchoStar IV and may modify its loss assessment as
new events or circumstances develop.
As a result of the recent anomalies experienced by EchoStar IV, EchoStar
has instructed its broker to notify its insurance carriers of additional
occurrences under the terms of the EchoStar IV launch insurance policy. The
EchoStar IV launch insurance policy provides for insurance of $219.3 million
covering the period from launch of the satellite (May 8, 1998) through May 8,
1999. Due to the anomalies experienced by EchoStar IV and the pending claim
for a total constructive loss, EchoStar did not obtain in-orbit insurance on
EchoStar IV. Consequently, in the event EchoStar's pending insurance claim
is not resolved to its satisfaction, EchoStar IV will not be insured should
further losses occur in the future.
9
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ITEM 2. MANAGEMENT'S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS
ALL STATEMENTS CONTAINED HEREIN, AS WELL AS STATEMENTS MADE IN PRESS
RELEASES AND ORAL STATEMENTS THAT MAY BE MADE BY US OR BY OFFICERS, DIRECTORS
OR EMPLOYEES ACTING ON OUR BEHALF, THAT ARE NOT STATEMENTS OF HISTORICAL FACT
CONSTITUTE "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995. SUCH FORWARD-LOOKING STATEMENTS
INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES AND OTHER FACTORS THAT COULD
CAUSE OUR ACTUAL RESULTS TO BE MATERIALLY DIFFERENT FROM HISTORICAL RESULTS
OR FROM ANY FUTURE RESULTS EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING
STATEMENTS. AMONG THE FACTORS THAT COULD CAUSE OUR ACTUAL RESULTS TO DIFFER
MATERIALLY ARE THE FOLLOWING: A TOTAL OR PARTIAL LOSS OF A SATELLITE DUE TO
OPERATIONAL FAILURES, SPACE DEBRIS OR OTHERWISE; A DECREASE IN SALES OF
DIGITAL EQUIPMENT AND RELATED SERVICES TO INTERNATIONAL DIRECT-TO-HOME OR DTH
SERVICE PROVIDERS; A DECREASE IN DISH NETWORK SUBSCRIBER GROWTH; AN INCREASE
IN SUBSCRIBER TURNOVER; AN INCREASE IN SUBSCRIBER ACQUISITION COSTS; AN
UNEXPECTED PRODUCT SHORTAGE; IMPEDIMENTS TO THE RETRANSMISSION OF LOCAL OR
DISTANT BROADCAST NETWORK SIGNALS WHICH COULD RESULT FROM PENDING LITIGATION
OR LEGISLATION; LOWER THAN EXPECTED DEMAND FOR OUR DELIVERY OF LOCAL
BROADCAST NETWORK SIGNALS; AN UNEXPECTED BUSINESS INTERRUPTION DUE TO THE
FAILURE OF THIRD-PARTIES TO REMEDIATE YEAR 2000 ISSUES; OUR INABILITY TO
RETAIN NECESSARY AUTHORIZATIONS FROM THE FCC; AN INCREASE IN COMPETITION FROM
CABLE, DIRECT BROADCAST SATELLITE, OTHER SATELLITE SYSTEM OPERATORS, AND
OTHER PROVIDERS OF SUBSCRIPTION TELEVISION SERVICES; THE INTRODUCTION OF NEW
TECHNOLOGIES AND COMPETITORS INTO THE SUBSCRIPTION TELEVISION BUSINESS; A
MERGER OF EXISTING DBS COMPETITORS; A CHANGE IN THE REGULATIONS GOVERNING THE
SUBSCRIPTION TELEVISION SERVICE INDUSTRY; THE OUTCOME OF ANY LITIGATION IN
WHICH WE MAY BE INVOLVED; FAILURE TO CONSUMMATE THE TRANSACTION WITH NEWS
CORPORATION LIMITED AND MCI TELECOMMUNICATIONS CORPORATION/WORLDCOM,
REFERRED TO AS THE 110 ACQUISITION; GENERAL BUSINESS AND ECONOMIC CONDITIONS;
AND OTHER RISK FACTORS DESCRIBED FROM TIME TO TIME IN OUR REPORTS FILED WITH
THE SECURITIES AND EXCHANGE COMMISSION. IN ADDITION TO STATEMENTS THAT
EXPLICITLY DESCRIBE SUCH RISKS AND UNCERTAINTIES, READERS ARE URGED TO
CONSIDER STATEMENTS THAT INCLUDE THE TERMS "BELIEVES," "BELIEF," "EXPECTS,"
"PLANS," "ANTICIPATES," "INTENDS" OR THE LIKE TO BE UNCERTAIN AND
FORWARD-LOOKING. ALL CAUTIONARY STATEMENTS MADE HEREIN SHOULD BE READ AS
BEING APPLICABLE TO ALL FORWARD-LOOKING STATEMENTS WHEREVER THEY APPEAR. IN
THIS CONNECTION, INVESTORS SHOULD CONSIDER THE RISKS DESCRIBED HEREIN AND
SHOULD NOT PLACE UNDUE RELIANCE ON ANY FORWARD-LOOKING STATEMENTS.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1999 COMPARED TO THE THREE MONTHS ENDED MARCH 31,
1998.
REVENUE. Total revenue for the three months ended March 31, 1999 was $310
million, an increase of $96 million compared to total revenue for the three
months ended March 31, 1998 of $214 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 $261
million for the three months ended March 31, 1999, an increase of $132
million or 103% compared to the same period in 1998. This increase was
directly attributable to the increase in the number of DISH Network
subscribers and higher average revenue per subscriber. Average DISH Network
subscribers for the three months ended March 31, 1999 increased approximately
87% compared to the same period in 1998. As of March 31, 1999, we had
approximately 2.3 million DISH Network subscribers compared to 1.2 million at
March 31, 1998. Monthly revenue per subscriber approximated $41 and $38
during the three months ended March 31, 1999 and 1998, respectively. DISH
Network subscription television services revenue principally consists of
revenue from basic, premium and pay-per-view subscription television
services. DISH Network subscription television services will continue to
increase to the extent we are successful in increasing the number of DISH
Network subscribers and maintaining or increasing revenue per subscriber.
During the three months ended March 31, 1999 and 1998, our subscriber
turnover (which represents the number of subscriber disconnects during the
period, divided by the weighted-average number of subscribers during the
period) was approximately 1% per month.
For the three months ended March 31, 1999, DTH equipment sales and
integration services totaled $31 million, a decrease of $36 million compared
to 1998. DTH equipment sales consist of sales of digital set-top boxes and
other digital satellite broadcasting equipment by us to international DTH
service operators. We currently have agreements to provide equipment to DTH
service operators in Spain and Canada. This expected decrease in DTH
equipment sales and integration services revenue was primarily attributable
to a decrease in demand combined with a decrease in the sales price of
digital set-top boxes attributable to increased competition.
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ITEM 2. MANAGEMENT'S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS -- CONTINUED
Substantially all of our EchoStar Technologies Corporation or ETC
revenues have resulted from sales to two international DTH providers. As a
result, our ETC business currently is economically dependent on these two DTH
providers. Our future revenue from the sale of DTH equipment and integration
services in international markets depends largely on the success of these DTH
operators and continued demand for our digital set-top boxes. Due to the
continued decrease in the sales price of digital set-top boxes and increasing
competition, we expect that our DTH equipment and integration services
revenue will decline during the remainder of 1999 as compared to 1998. DTH
equipment and integration services revenue may decline as much as 50% during
the remainder of 1999 as compared to 1998.
During July 1998, Telefonica, one of the two DTH service providers
described above, announced its intention to merge with Sogecable (Canal Plus
Satellite), one of its primary competitors. In October 1998, Telefonica
announced that the merger negotiations had been suspended. Subsequently,
negotiations between Telefonica and Canal Plus Satellite were resumed and
again suspended. Although we have binding purchase orders from Telefonica
for 1999 deliveries of DTH equipment, we cannot yet predict the impact, if
any, consummation of this merger might have on our future sales to
Telefonica. As part of the 110 acquisition, we expect to receive a minimum
order from a subsidiary of News Corporation for 500,000 set-top boxes.
Although we continue to actively pursue additional distribution and
integration service opportunities internationally, no assurance can be given
that any such additional negotiations will be successful.
Satellite services revenue totaled $8 million during the three months
ended March 31, 1999, an increase of $3 million as compared to the same
period during 1998. These revenues principally include fees charged to
content providers for signal carriage and revenues earned from business
television, or BTV customers. The increase in satellite services revenue was
primarily attributable to increased BTV revenue due to the addition of new
full-time BTV customers. Satellite services revenue is expected to increase
during the remainder of 1999 to the extent we are successful in increasing
the number of our BTV customers and developing and implementing new services.
In order, among other things, to prepare for a potential adverse result
in our pending litigation with the four major broadcast networks and their
affiliate groups, we have commenced sending letters to some of our
subscribers warning that their access to CBS, NBC, Fox and ABC distant
network channels might be terminated commencing in June of this year. Such
terminations would result in a small reduction in average monthly revenue per
subscriber. While there can be no assurance, any such decreases could be
offset by increases in average monthly revenue per subscriber resulting from
the delivery of local network channels by satellite, and increases in
programming offerings that will follow the scheduled launches of EchoStar V
and EchoStar VI later this year. While there can be no assurance,
legislation pending in the Senate would, if passed into law, reduce the
number of customers whose network channels we may otherwise be required to
terminate.
DISH NETWORK OPERATING EXPENSES. DISH Network operating expenses totaled
$145 million during the three months ended March 31, 1999, an increase of $64
million or 79%, compared to the same period in 1998. The increase in DISH
Network operating expenses was consistent with, and primarily attributable
to, the increase in the number of DISH Network subscribers. DISH Network
operating expenses represented 55% and 63% of subscription television
services revenue during the three months ended March 31, 1999 and 1998,
respectively.
Subscriber-related expenses totaled $111 million during the three months
ended March 31, 1999, an increase of $47 million compared to the same period
in 1998. Such expenses, which include programming expenses, copyright
royalties, residuals payable to retailers and distributors, and billing,
lockbox and other variable subscriber expenses, represented 43% of
subscription television services revenues during the three months ended March
31, 1999 compared to 50% during the same period in 1998. The decrease in
subscriber-related expenses as a percentage of subscription television
services revenue resulted primarily from a decrease in programming expenses
11
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ITEM 2. MANAGEMENT'S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS -- CONTINUED
on a per subscriber basis, which resulted from a change in product mix
combined with price discounts received from certain content providers.
Although we expect subscriber-related expenses as a percentage of
subscription television services revenue to remain near this level in future
periods, this expense to revenue ratio could increase.
Customer service center and other expenses principally consist of costs
incurred in the operation of our DISH Network customer service centers, such
as personnel and telephone expenses, as well as subscriber equipment
installation and other operating expenses. Customer service center and other
expenses totaled $24 million during the three months ended March 31, 1999, an
increase of $12 million as compared to the same period in 1998. The increase
in customer service center and other expenses resulted from increased
personnel and telephone expenses to support the growth of the DISH Network.
Customer service center and other expenses totaled 9% of subscription
television services revenue during each of the three months ended March 31,
1999 and 1998. Although we expect customer service center and other expenses
as a percentage of subscription television services revenue to remain near
this level in future periods, this expense to revenue ratio could increase.
Satellite and transmission expenses include expenses associated with the
operation of our digital broadcast center, contracted satellite telemetry,
tracking and control services, and satellite in-orbit insurance. Satellite
and transmission expenses totaled $9 million during the three months ended
March 31, 1999, a $4 million increase compared to the same period in 1998.
This increase resulted from higher satellite and other digital broadcast
center operating expenses due to an increase in the number of operational
satellites. We expect satellite and transmission expenses to continue to
increase in the future as additional satellites are placed in service.
However, we expect that satellite and transmission expenses as a percentage
of subscription television services revenue may decline to the extent we are
successful in increasing the number of DISH Network subscribers and
maintaining or increasing revenue per subscriber.
COST OF SALES -- DTH EQUIPMENT AND INTEGRATION SERVICES. Cost of sales --
DTH equipment and integration services totaled $23 million during the three
months ended March 31, 1999, a decrease of $24 million compared to the same
period in 1998. This decrease is consistent with the decrease in DTH
equipment revenue. Cost of sales -- DTH equipment and integration services
principally includes costs associated with digital set-top boxes and related
components sold to international DTH operators. As a percentage of DTH
equipment revenue, cost of sales represented 74% and 71% during the three
months ended March 31, 1999 and 1998, respectively. We expect that cost of
sales may increase as a percentage of DTH equipment revenue in the future,
due to price pressure resulting from increased competition from other
providers of DTH equipment.
MARKETING EXPENSES. Marketing expenses totaled $142 million during the
three months ended March 31, 1999, an increase of $89 million or 168%,
compared to the same period in 1998. The increase in marketing expenses was
primarily attributable to an increase in subscriber promotion subsidies.
Subscriber promotion subsidies include the excess of transaction costs over
transaction proceeds at the time of sale of EchoStar receiver systems,
activation allowances paid to retailers, and other promotional incentives.
Advertising and other expenses totaled $12 million during the three months
ended March 31, 1999, an increase of $4 million over the same period in 1998.
During the three months ended March 31, 1999, our subscriber acquisition
costs, inclusive of acquisition marketing expenses, totaled $142 million, or
approximately $355 per new subscriber activation. Comparatively, our
subscriber acquisition costs during the three months ended March 31, 1998,
inclusive of acquisition marketing expenses and deferred subscriber
acquisition costs, totaled $51 million, or approximately $250 per new
subscriber activation. The increase in our subscriber acquisition costs, on
a per new subscriber activation basis, principally resulted from the
introduction of several aggressive marketing promotions to acquire new
subscribers.
During the first quarter of 1999, we introduced the PrimeStar bounty
program and enhanced our DISH Network One-Rate Plan. Our subscriber
acquisition costs under these programs are significantly higher than those
under our other marketing programs. Under the enhanced DISH Network One-Rate
Plan, consumers are eligible to receive a rebate that ranges from $100 up to
$298 on the purchase of certain EchoStar receiver systems. To be eligible
for this rebate, a subscriber must make a one-year commitment to subscribe to
our America's Top 100 CD programming package plus additional channels. The
amount of the monthly programming commitment determines the amount of the
rebate. Although subscriber acquisition costs are materially higher under
this plan compared to previous
12
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ITEM 2. MANAGEMENT'S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS -- CONTINUED
promotions, DISH Network One-Rate Plan customers generally provide materially
greater average revenue per subscriber than a typical DISH Network
subscriber. In addition, we believe that these customers represent lower
credit risk and therefore may be marginally less likely to disconnect their
service than other DISH Network subscribers. Under the enhanced DISH Network
One-Rate Plan, we presently expect the participation rate to increase to
approximately 30% to 40% of new subscriber activations during the duration of
the promotion. To the extent that actual consumer participation levels
exceed present expectations, subscriber acquisition costs may materially
increase. Although there can be no assurance as to the ultimate duration of
the DISH Network One-Rate Plan, it will continue through at least July 1999.
Under our PrimeStar bounty program, current PrimeStar customers are
eligible to receive a free base-level EchoStar receiver system, free
installation and six months of our America's Top 40 programming (which
retails for $19.99 per month) without charge. A subscriber must make a
one-year commitment to subscribe to either our America's Top 40 or our
America's Top 100 CD programming package and prove that they are a current
PrimeStar customer to be eligible for this program.
Based upon our current promotions we do not expect a material change in
subscriber acquisition costs during the second quarter of 1999. To the
extent that we expand the PrimeStar bounty program and the DISH Network
One-Rate Plan, our subscriber acquisition costs, both in aggregate and on a
per new subscriber activation basis, may materially increase.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
totaled $29 million during the three months ended March 31, 1999, an increase
of $10 million as compared to the same period in 1998. The increase in G&A
expenses was principally attributable to increased personnel expenses to
support the growth of the DISH Network. G&A expenses as a percentage of
total revenue represented 9% during the each of the three months ended March
31, 1999 and 1998. Although we expect that G&A expenses as a percentage of
total revenue to remain near this level or decline modestly in future
periods, this expense to revenue ratio could increase.
EARNINGS BEFORE INTEREST, TAXES, DEPRECIATION AND AMORTIZATION
("EBITDA"). EBITDA was negative $33 million and negative $3 million, during
the three months ended March 31, 1999 and 1998, respectively. EBITDA, as
adjusted to exclude amortization of subscriber acquisition costs, was
negative $33 million for the three months ended March 31, 1999 compared to $8
million for the same period in 1998. This decline in EBITDA principally
resulted from a decrease in DTH equipment revenue and an increase in
subscriber promotion subsidies. It is important to note that EBITDA does not
represent cash provided or used by operating activities and should not be
considered in isolation or as a substitute for measures of performance
prepared in accordance with generally accepted accounting principles.
As previously discussed, to the extent we expand our current marketing
promotions and our subscriber acquisition costs materially increase, our
EBITDA results will be negatively impacted because subscriber acquisition
costs are expensed as incurred.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expenses
including amortization of subscriber acquisition costs, aggregated $25
million during the three months ended March 31, 1999, a $4 million decrease
compared to the same period in 1998. The decrease in depreciation and
amortization expenses principally resulted from subscriber acquisition costs
no longer being amortized, partially offset by an increase in depreciation
related to the commencement of operation of EchoStar IV in August of 1998 and
other depreciable assets placed in service during 1998.
OTHER INCOME AND EXPENSE. Other expense, net totaled $47 million during
the three months ended March 31, 1999, an increase of $12 million as compared
to the same period in 1998. The increase in other expense resulted primarily
from interest expense associated with our 9 1/4% Senior Notes due 2006, and
our 9 3/8% Senior Notes due 2009, both issued in January 1999, partially
offset by a decrease in interest expense associated with our 12 1/2% Senior
Secured Notes due 2002 issued in June 1997, our 12 7/8% Senior Secured
Discount Notes due 2004 issued in 1994, and our 13 1/8% Senior Secured
Discount Notes due 2004 issued in 1996.
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ITEM 2. MANAGEMENT'S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS -- CONTINUED
YEAR 2000 READINESS DISCLOSURE
We have assessed and continue to assess the impact of the Year 2000 issue
on our computer systems and operations. The Year 2000 issue exists because
many computer systems and applications currently use two-digit date fields to
designate a year. Thus, as the century date approaches, date sensitive
systems may recognize the year 2000 as 1900 or not at all. The inability to
recognize or properly treat the year 2000 may cause computer systems to
process critical financial and operational information incorrectly. If our
Year 2000 remediation plan is not successful or is not completed in a timely
manner, the Year 2000 issue could significantly disrupt our ability to
transact business with our customers and suppliers, and could have a material
impact on our operations. Even if our Year 2000 remediation plan is
successful or completed on time, there can be no assurance that the systems
of other companies with which our systems interact will be timely converted,
or that any such failure to convert by another company would not have an
adverse effect on our business or operations.
We have established a five-phase plan to address potential Year 2000
issues:
- INVENTORY -- the identification of all relevant hardware and software
to establish the scope of subsequent testing;
- ASSESSMENT -- the process of evaluating the current level of Ye ar
2000 readiness of all components identified in the inventory phase,
defining actions necessary to retire, replace or otherwise correct all
non-conforming components and estimating resources and timelines required
by action plans;
- REMEDIATION -- the correction of previously identified Year 2000 issues;
- VALIDATION/TESTING -- the evaluation of each component's performance as
the date is rolled forward to January 1, 2000 and other dates and times
relating to the Year 2000 issue; and
- IMPLEMENTATION -- the process of updating components and correcting Year
2000 issues in the production operating environment of a system.
In connection with this effort, we have segregated our computer systems
and corresponding Year 2000 readiness risk into three categories: internal
financial and administrative systems, service-delivery systems, and
third-party systems.
INTERNAL FINANCIAL AND ADMINISTRATIVE SYSTEMS
With respect to our internal financial and administrative systems, we
have completed the inventory phase of the Year 2000 readiness plan by
identifying all systems with potential Year 2000 problems. We are currently
in the process of assessing these systems by communicating with our outside
software and hardware vendors and reviewing their certifications of Year 2000
readiness, as well as reviewing internal custom programming codes. We expect
to have the assessment phase substantially completed by the end of May 1999.
Upon completion of the assessment phase, we will begin the remediation
and validation/testing phases. During the remediation phase, we will attempt
to correct all problems detected while performing the assessment phase.
During the validation/testing phase, we will create a parallel environment of
all internal and administrative systems. We will run tests on the parallel
environment to assess its reaction to changes in dates and times relating to
the Year 2000 issue. We currently expect the remediation and
validation/testing phases to be complete by the end of August 1999.
Once all known problems are corrected within the parallel environment, we
will make changes to the actual operating environment of our internal
financial and administrative systems during the implementation phase. We
currently expect to complete the implementation phase by mid October 1999.
While we presently believe that our internal financial and administrative
systems are Year 2000 ready, we will not be able to certify our Year 2000
readiness until the successful completion of the implementation phase. As
new technology and software are integrated into our financial and
administrative systems we will perform additional testing to attempt to
ensure continued Year 2000 readiness.
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ITEM 2. MANAGEMENT'S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS -- CONTINUED
SERVICE-DELIVERY SYSTEMS
We have defined service-delivery systems as all internal systems
necessary to deliver DISH Network programming to our subscribers. During the
inventory phase we initially identified our set-top boxes, compression and
conditional access systems at our digital broadcast center, DBS satellites
and third-party billing system as systems with potential Year 2000 issues.
Given the interdependent nature of the receiver and broadcast systems
used to deliver our service, we previously implemented a smaller, offline
version of our overall system to aid in the evaluation and test of hardware
and software changes that normally occur over time. This system gives us the
ability to perform "real-time" testing of the various elements of the system
by simulating the year 2000 rollover, and confirming system operation. This
ability to perform accurate offline simulations has provided a tremendous
benefit to our Year 2000 test process.
We have completed initial testing of our set-top receivers. During these
tests, the dates in the broadcast system, and hence the set-top receivers
were rolled forward to each of the dates and times affected by the Year 2000
issue. We deemed these initial tests successful, as no problems were
detected during thorough testing of the set-top receivers when the dates were
rolled forward. These tests also affirm the integrity of the broadcast
systems supplying the set-top receivers with critical operational system
information. As new technology and software are integrated into our set-top
receivers, we will perform additional testing to attempt to ensure continued
Year 2000 readiness.
In addition to the practical testing performed above, we have completed
an independent inventory and assessment of the systems at our digital
broadcast center and are currently in the remediation phase of our Year 2000
readiness plan. The remediation phase of the plan is expected to be complete
by July 1999. We expect to perform validation and testing of communications
between our digital broadcast center and our DBS satellites during the third
quarter of 1999. The validation and testing of our digital broadcast center
is not expected to cause interruption of programming to DISH Network
subscribers.
During the assessment of our DBS satellites, we determined that our
satellites do not operate under a calendar-driven system. Therefore, we do
not expect changes in dates and times to affect the operation of our DBS
satellites.
We are currently working with the vendor of our third-party billing
system to attempt to ensure its Year 2000 readiness. This vendor has
indicated it has completed all remediation activities and is currently in the
final stages of testing/validation. Subsequent to completion of its
testing/validation activities, the vendor has indicated it will contractually
certify its Year 2000 readiness during the second quarter of 1999, however we
can not provide any assurance in this regard.
THIRD-PARTY SYSTEMS
We also are currently assessing our vulnerability to unexpected business
interruptions due to the failure of third-parties to remediate Year 2000
readiness issues associated with products or services on which our business
relies. In connection with this assessment, we sent letters to third-party
business partners, suppliers and vendors which we deemed significant
requesting that they certify their Year 2000 readiness. To date, we have
received responses from approximately 70% of these vendors. We are presently
in the process of contacting our critical suppliers and vendors who have
either not responded or have not responded adequately to our requests for
proof of certification and will continue to follow-up on unresolved issues
thereafter. There can be no assurance that third-parties who have responded,
or will respond, to our request regarding Year 2000 readiness have responded,
or will respond, accurately or satisfactorily, or that anticipated Year 2000
actions set forth in their responses will be properly conducted.
CONTINGENCY PLANNING
We also are involved in limited contingency planning. In the event that
previously undetected Year 2000 issues arise, contingency plans will be used
to try to mitigate potential system problems. Our internal financial and
administrative and service-delivery contingency plan includes making back-up
copies of certain systems as well as using standby power generators at our
digital broadcasting center. With respect to other third-party systems, we
will continue to contact our critical vendors in order to obtain
certification of their Year 2000 readiness. However, no
15
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ITEM 2. MANAGEMENT'S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS -- CONTINUED
assurance can be made that such contingency plans will resolve any Year 2000
problems that may occur, in a manner which is satisfactory or desirable to us.
COSTS
We have not yet determined the full cost of our Year 2000 readiness plan
and its related impact on our financial condition. In the ordinary course of
business, we have made capital expenditures over the past few years to
improve our systems, for reasons other than Year 2000 remediation. Because
these upgrades also resulted in improved Year 2000 readiness, replacement and
remediation costs have not been material. We currently have budgeted
$300,000 for the completion of our Year 2000 readiness plan. While there can
be no assurance, we believe our costs to successfully mitigate the Year 2000
issue will not be material to our operations. No assurance can be made,
however, as to the total cost for the Year 2000 plan until the plan has been
completed.
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PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
THE NEWS CORPORATION LIMITED
During February 1997, EchoStar and News Corporation announced an
agreement pursuant to which, among other things, News Corporation agreed to
acquire approximately 50% of the outstanding capital stock of EchoStar. News
Corporation also agreed to make available for use by EchoStar the DBS permit
for 28 frequencies at the 110DEG. WL orbital slot purchased by MCI for
more than $682 million following a 1996 FCC auction. During late April 1997,
substantial disagreements arose between the parties regarding their
obligations under this agreement. Those substantial disagreements led the
parties to litigation. In mid-1997, EchoStar filed a complaint seeking
specific performance of this agreement and damages, including lost profits.
News Corporation filed an answer and counterclaims seeking unspecified
damages, denying all of the material allegations and asserting numerous
defenses. Discovery commenced in July 1997, and the case was set for trial
commencing March 1999. In connection with the pending 110 acquisition, the
litigation between EchoStar and News Corporation will be stayed and has been
dismissed with prejudice upon closing or if the transaction is terminated for
reasons other than the breach by, or failure to fill a condition within the
control of, News Corporation or MCI.
In connection with the News Corporation litigation that arose in 1997,
EchoStar has a contingent fee arrangement with its attorneys, which provides
for the attorneys to be paid a percentage of any net recovery obtained in its
dispute with News Corporation. The lawyers have asserted that they may be
entitled to receive payments in excess of $80 million to $100 million under
this fee arrangement in connection with the settlement of the dispute with
News Corporation. EchoStar intends to vigorously contest the lawyers'
interpretation of the fee arrangement, which it believes significantly
overstates the magnitude of its liability thereunder. If the lawyers and
EchoStar are unable to resolve this fee dispute under the fee arrangement,
the fee dispute would be resolved through arbitration. It is too early to
determine the outcome of negotiations or arbitration regarding this fee
dispute.
WIC PREMIUM TELEVISION LTD.
On July 28, 1998, a lawsuit was filed by WIC Premium Television Ltd., an
Alberta corporation, in the Federal Court of Canada Trial Division, against
certain defendants which include: General Instrument Corporation, HBO, Warner
Communications, Inc., John Doe, Showtime, United States Satellite
Broadcasting Corporation, EchoStar Communications Corporation or ECC and two
of ECC's wholly-owned subsidiaries, Dish, Ltd. and Echosphere Corporation.
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 and/or claims will be filed. It is also too early
to make an assessment of the probable outcome of the litigation or to
determine the extent of any potential liability or damages.
On September 28, 1998, WIC filed another lawsuit in the Court of Queen's
Bench of Alberta Judicial District of Edmonton against certain defendants,
which also include ECC, Dish, Ltd. and Echosphere. WIC is a company
authorized to broadcast certain copyrighted work, such as movies and
concerts, to residents of Canada. WIC alleges that the defendants engaged
in, promoted, and/or allowed satellite dish equipment from the United States
to be sold in Canada and to Canadian residents and that some of the
defendants allowed and profited from Canadian residents purchasing and
viewing subscription television programming that is only authorized for
viewing in the United States. The lawsuit seeks, among other things, interim
and permanent injunction prohibiting the defendants from importing hardware
into Canada and from activating receivers in Canada and damages in excess of
the equivalent of US $175 million. It is too early to determine whether or
when any other lawsuits and/or claims will be filed. It is also too early to
make an assessment of the probable outcome of the litigation or to determine
the extent of any potential liability or damages.
BROADCAST NETWORK PROGRAMMING
Section 119 of the Satellite Home Viewer Act authorizes EchoStar to
provide satellite-delivered network channels to customers who qualify as
"unserved households," defined in the Satellite Home Viewer Act as, consumers
who, among other things, "cannot receive, through the use of a conventional
outdoor rooftop receiving
17
<PAGE>
PART II -- OTHER INFORMATION
antenna, an over-the-air signal of Grade B intensity, as defined by the FCC,
of a primary network station affiliated with that network." Historically,
EchoStar obtained distant broadcast network signals for distribution to its
customers through PrimeTime 24, Joint Venture. PrimeTime 24 also distributed
network signals to certain of EchoStar's competitors in the satellite
industry.
The national networks and local affiliate stations recently challenged
PrimeTime 24's methods of selling network programming to consumers based upon
copyright infringement. The United States District Court for the Southern
District of Florida entered a nationwide permanent injunction preventing
PrimeTime 24 from selling its programming to consumers unless the programming
was sold in accordance with certain stipulations in the injunction. The
injunction covers "distributors" as well. The plaintiffs in the Florida
litigation informed EchoStar that it considered EchoStar a "distributor" for
purposes of that injunction. A federal district court in North Carolina has
also issued an injunction against PrimeTime 24 prohibiting certain distant
signal retransmissions in the Raleigh area. Other copyright litigation
against PrimeTime 24 is pending.
EchoStar ceased delivering PrimeTime 24 programming in July 1998, and
began uplinking and distributing network channels directly. EchoStar has also
implemented Satellite Home Viewer Act Section 119 compliance procedures which
materially restrict the market for the sale of network channels by EchoStar.
On October 19, 1998, EchoStar filed a declaratory judgment action in the
United States District Court for the District of Colorado against the four
major networks. EchoStar asked the court to enter a judgment declaring that
its method of providing distant network programming does not violate the
Satellite Home Viewer Act and hence does not infringe the networks'
copyrights. On November 5, 1998, the four major broadcast networks and their
affiliate groups filed a complaint in federal court in Miami alleging, among
other things, copyright infringement against EchoStar. The plaintiffs in
that action have also requested the issuance of a preliminary injunction
against EchoStar. The case filed by EchoStar was subsequently combined with
and transferred to the Miami court.
On February 24, 1999, CBS, NBC, Fox, and ABC filed a "Motion for
Temporary Restraining Order, Preliminary Injunction, and Contempt Finding"
against DIRECTV, Inc. in Miami relating to the delivery of distant network
channels to DIRECTV customers by satellite. On March 12, 1999, DIRECTV and
the four networks announced that they had reached a settlement of that
dispute. Under the terms of the settlement, DIRECTV customers predicted to
receive a strong signal (Grade A intensity) from their local stations will
lose access to their satellite provided network channels by June 30, 1999,
while DIRECTV customers predicted to receive a weaker, but allegedly adequate
signal (Grade B intensity) from their local stations will be disconnected by
December 31, 1999. Subsequently, PrimeTime 24 and substantially all
providers of satellite delivered network programming other than EchoStar
agreed to this cut off schedule.
The Networks are currently pursuing a Motion for Preliminary Injunction
in the Miami Court, asking that Court to enjoin EchoStar from providing
network programming except under very limited circumstances. In general, the
networks want EchoStar to turn off programming to its customers on the same
schedule as DIRECTV has agreed to. EchoStar intends to vigorously contest
the issuance of such an injunction. In the event of a decision adverse to
EchoStar in this case, significant material restrictions on the sale of
distant ABC, NBC, CBS and Fox channels by EchoStar could result. Among other
things, EchoStar could be required to terminate delivery of network signals
to a material portion of its subscriber base. While the Networks have not
sought monetary damages, they have sought to recover attorney fees should
they prevail. EchoStar has commenced sending letters to some of its
subscribers warning that their access to distant broadcast network channels
might be terminated commencing in June of this year. Such terminations would
result in a small reduction in average monthly revenue per subscriber. While
there can be no assurance, any such decrease could be offset by increases in
average monthly revenue per subscriber resulting from the delivery of local
network channels by satellite, and increases in programming offerings that
will follow the scheduled launches of EchoStar V and EchoStar VI later this
year. While there can be no assurance, legislation pending in the Senate
would, if passed into law, reduce the number of customers whose network
channels EchoStar may otherwise be required to terminate.
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.
18
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS.
27+ Financial Data Schedule.
- --------------------------------
+ Filed herewith.
(b) REPORTS ON FORM 8-K.
No reports on Form 8-K were filed during the first quarter of 1999.
19
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ECHOSTAR DBS CORPORATION
By: /s/ DAVID K. MOSKOWITZ
--------------------------------------------------------------
David K. Moskowitz
Senior Vice President, General Counsel, Secretary and Director
(DULY AUTHORIZED OFFICER)
By: /s/ STEVEN B. SCHAVER
--------------------------------------------------------------
Steven B. Schaver
Chief Financial Officer
(PRINCIPAL FINANCIAL OFFICER)
Date: May 17, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF ECHOSTAR DBS CORPORATION AS OF AND FOR THE THREE MONTHS
ENDED MARCH 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THOSE
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 135,642
<SECURITIES> 138,093
<RECEIVABLES> 104,773
<ALLOWANCES> 3,909
<INVENTORY> 58,777
<CURRENT-ASSETS> 569,018
<PP&E> 838,082
<DEPRECIATION> 191,111
<TOTAL-ASSETS> 1,604,115
<CURRENT-LIABILITIES> 714,047
<BONDS> 2,041,024
0
0
<COMMON> 0
<OTHER-SE> (1,190,042)
<TOTAL-LIABILITY-AND-EQUITY> 1,604,115
<SALES> 302,242<F1>
<TOTAL-REVENUES> 310,063
<CGS> 171,908<F2>
<TOTAL-COSTS> 367,500
<OTHER-EXPENSES> 47,081
<LOSS-PROVISION> 3,358
<INTEREST-EXPENSE> 50,594
<INCOME-PRETAX> (104,518)
<INCOME-TAX> 66
<INCOME-CONTINUING> (104,584)
<DISCONTINUED> 0
<EXTRAORDINARY> (228,733)
<CHANGES> 0
<NET-INCOME> (333,317)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<FN>
<F1>INCLUDES SALES OF PROGRAMMING.
<F2>INCLUDES COSTS OF PROGRAMMING.
</FN>
</TABLE>
