<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 MARCH 31, 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 333-31929
ECHOSTAR DBS CORPORATION
(Exact Name of Registrant as Specified in its Charter)
COLORADO 84-1328967
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
5701 S. SANTA FE DRIVE
LITTLETON, COLORADO 80120
(Address of principal executive offices) (Zip code)
(303) 723-1000
(Registrant's telephone number, including area code)
NOT APPLICABLE
(Former name, former address and former fiscal year,
if changed since last report)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES [X] NO [ ]
AS OF MAY 5, 2000, 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.
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<PAGE> 2
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
<TABLE>
<S> <C>
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -
December 31, 1999 and March 31, 2000 (Unaudited)............................................... 1
Condensed Consolidated Statements of Operations for the
three months ended March 31, 1999 and 2000 (Unaudited)......................................... 2
Condensed Consolidated Statements of Cash Flows for the
three months ended March 31, 1999 and 2000 (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.................................................................................. 15
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................................................................... 17
</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> 3
ECHOSTAR DBS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1999 2000
------------ ------------
ASSETS (Unaudited)
<S> <C> <C>
Current Assets:
Cash and cash equivalents ................................................... $ 159,761 $ 106,241
Marketable investment securities ............................................ 24,774 9,923
Trade accounts receivable, net of allowance for uncollectible accounts of
$13,109 and $16,182, respectively ......................................... 157,944 153,764
Insurance receivable ........................................................ 106,000 106,000
Inventories ................................................................. 123,184 151,318
Other current assets ........................................................ 27,027 32,025
------------ ------------
Total current assets ........................................................... 598,690 559,271
Property and equipment, net .................................................... 1,314,007 1,291,206
FCC authorizations, net ........................................................ 722,234 723,648
Other noncurrent assets ........................................................ 95,276 95,546
------------ ------------
Total assets .............................................................. $ 2,730,207 $ 2,669,671
============ ============
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)
Current Liabilities:
Trade accounts payable ...................................................... 187,703 151,839
Deferred revenue ............................................................ 181,034 210,414
Accrued expenses ............................................................ 483,635 522,788
Advances from affiliates, net ............................................... 272,440 353,558
Current portion of long-term debt ........................................... 21,017 19,932
------------ ------------
Total current liabilities ...................................................... 1,145,829 1,258,531
Long-term obligations, net of current portion:
1994 Notes .................................................................. 1,503 1,503
1996 Notes .................................................................. 1,097 1,097
1997 Notes .................................................................. 15 15
Seven Year Notes ............................................................ 375,000 375,000
Ten Year Notes .............................................................. 1,625,000 1,625,000
Mortgages and other notes payable, net of current portion ................... 25,445 22,313
Long-term deferred satellite services revenue and other
long-term liabilities ..................................................... 18,812 26,260
------------ ------------
Total long-term obligations, net of current portion ............................ 2,046,872 2,051,188
------------ ------------
Total liabilities ......................................................... 3,192,701 3,309,719
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 .................................................. 1,448,324 1,448,324
Deferred stock-based compensation ........................................... (117,780) (104,071)
Accumulated other comprehensive income ...................................... -- (81)
Accumulated deficit ......................................................... (1,793,038) (1,984,220)
------------ ------------
Total stockholder's equity (deficit) ........................................... (462,494) (640,048)
------------ ------------
Total liabilities and stockholder's equity (deficit) ...................... $ 2,730,207 $ 2,669,671
============ ============
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
1
<PAGE> 4
ECHOSTAR DBS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------
1999 2000
------------ ------------
<S> <C> <C>
REVENUE:
DISH Network:
Subscription television services ....................... $ 260,945 $ 476,305
Other .................................................. 2,265 1,934
--------- ---------
Total DISH Network ....................................... 263,210 478,239
DTH equipment sales and integration services ............. 31,193 60,815
Satellite services ....................................... 7,949 14,095
C-band and other ......................................... 7,983 14,909
--------- ---------
Total revenue ............................................... 310,335 568,058
COSTS AND EXPENSES:
DISH Network Operating Expenses:
Subscriber-related expenses ............................ 111,432 203,960
Customer service center and other ...................... 24,109 56,049
Satellite and transmission ............................. 9,446 12,324
--------- ---------
Total DISH Network operating expenses .................... 144,987 272,333
Cost of sales - DTH equipment and integration services ... 23,143 46,928
Cost of sales - C-band and other ......................... 4,050 8,115
Marketing:
Subscriber promotion subsidies ......................... 130,717 256,026
Advertising and other .................................. 11,681 23,165
--------- ---------
Total marketing expenses ................................. 142,398 279,191
General and administrative ............................... 28,632 53,595
Non-cash, stock-based compensation ....................... -- 14,009
Depreciation and amortization ............................ 24,562 39,343
--------- ---------
Total costs and expenses .................................... 367,772 713,514
--------- ---------
Operating loss .............................................. (57,437) (145,456)
Other Income (Expense):
Interest income .......................................... 3,366 3,202
Interest expense, net of amounts capitalized ............. (50,594) (48,617)
Other .................................................... 147 (279)
--------- ---------
Total other income (expense) ................................ (47,081) (45,694)
--------- ---------
Loss before income taxes .................................... (104,518) (191,150)
Income tax provision, net ................................... (66) (33)
--------- ---------
Net loss before extraordinary charges ....................... (104,584) (191,183)
Extraordinary charge for early retirement of debt,
net of tax ................................................ (228,733) --
--------- ---------
Net loss .................................................... $(333,317) $(191,183)
========= =========
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
2
<PAGE> 5
ECHOSTAR DBS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------
1999 2000
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ..................................................................... $ (333,317) $ (191,183)
Adjustments to reconcile net loss to net cash flows from operating activities:
Extraordinary charge for early retirement of debt ......................... 228,733 --
Deferred stock-based compensation recognized .............................. -- 13,709
Depreciation and amortization ............................................. 24,562 39,343
Interest on notes payable to ECC added to principal ....................... 330 --
Amortization of debt discount and deferred financing costs ................ 10,973 820
Change in reserve for excess and obsolete inventory ....................... (405) 305
Change in long-term deferred satellite services revenue and other long-term
liabilities .................................................................. 5,728 7,448
Other, net ................................................................ -- 1,007
Changes in current assets and current liabilities ......................... 65,612 1,415
----------- -----------
Net cash flows from operating activities ..................................... 2,216 (127,136)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of marketable investment securities ................................ (149,558) --
Sales of marketable investment securities .................................... 18,465 14,770
Funds released from escrow and restricted cash and marketable investment
securities ................................................................... 77,657 --
Purchases of property and equipment .......................................... (8,171) (18,055)
Other ........................................................................ 121 --
----------- -----------
Net cash flows from investing activities ..................................... (61,486) (3,285)
CASH FLOWS FROM FINANCING ACTIVITIES:
Advances from affiliates ..................................................... 191,876 81,118
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 ........................ (4,956) (4,217)
----------- -----------
Net cash flows from financing activities ..................................... 169,604 76,901
----------- -----------
Net increase (decrease) in cash and cash equivalents ......................... 110,334 (53,520)
Cash and cash equivalents, beginning of period ............................... 25,308 159,761
----------- -----------
Cash and cash equivalents, end of period ..................................... $ 135,642 $ 106,241
=========== ===========
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
3
<PAGE> 6
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. 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, 2000. Substantially all
of EchoStar's operations are conducted by subsidiaries of DBS Corp. The
operations of EchoStar include three interrelated business units:
o The DISH Network - a direct broadcast satellite ("DBS")
subscription television service in the United States. As of March
31, 2000, EchoStar had approximately 3.9 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
direct-to-home ("DTH") projects of others internationally, together
with the provision of uplink center design, construction oversight
and other project integration services for international DTH
ventures.
o Satellite Services - engaged in the delivery of video, audio and
data services to business television customers and other satellite
users. These services may include satellite uplink services,
satellite transponder space usage, billing, customer service and
other services.
Since 1994, EchoStar has deployed substantial resources to develop the
"EchoStar DBS System." The EchoStar DBS System consists of EchoStar's
FCC-allocated DBS spectrum, DBS satellites ("EchoStar I," "EchoStar II,"
"EchoStar III," "EchoStar IV," and "EchoStar V"), digital satellite receivers,
digital broadcast operations centers, customer service facilities, and other
assets utilized in its operations. EchoStar's principal business strategy is to
continue developing its subscription television service in the United States to
provide consumers with a fully competitive alternative to cable television
service.
Recent Developments
During March 2000, EchoStar acquired Kelly Broadcasting Systems, Inc.
("KBS"), a New Jersey based provider of international and foreign-language
programming in the United States. In connection with the acquisition, EchoStar
issued approximately 510,000 shares of its Class A common stock and paid $3.5
million in cash, for 100% ownership of KBS.
During March 2000, EchoStar completed a $50 million investment in iSKY
Inc. Pursuant to the investment agreement, following the launch of iSKY's
service, currently anticipated during late 2001, EchoStar would distribute the
iSKY satellite Internet service along with DISH Network satellite TV service
through its retailers nationwide. With this investment, EchoStar acquired a
11.03% interest in iSKY and received warrants which, subject to reaching certain
iSKY customer targets through the DISH Network, could increase its stake up to
19.26% on an outstanding basis.
4
<PAGE> 7
ECHOSTAR DBS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
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, 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 combined and consolidated financial statements
and footnotes thereto included in the Company's 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.
3. INVENTORIES
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1999 2000
------------ ------------
(Unaudited)
<S> <C> <C>
Raw materials ........................... $ 35,751 $ 61,774
Finished goods - DBS .................... 63,054 54,393
Finished goods - reconditioned and other 19,509 25,281
Work-in-process ......................... 7,666 13,220
Consignment ............................. 1,084 835
Reserve for excess and obsolete inventory (3,880) (4,185)
------------ ------------
$ 123,184 $ 151,318
============ ============
</TABLE>
4. ECHOSTAR IV IMPAIRMENT
As a result of the failure of EchoStar IV solar arrays to fully deploy
and the failure of 22 transponders to date, a maximum of approximately 16 of the
44 transponders on EchoStar IV are currently available for use at this time. Due
to the normal degradation of the solar arrays, the number of available
transponders may further decrease over time. Based on current data from Lockheed
Martin, we expect that at least 10 high power transponders or 5 extra-high power
transponders will probably be available over the remaining useful life of the
satellite, absent significant additional transponder problems or other failures.
In addition to transponder failures, EchoStar IV experienced anomalies
affecting its heating systems and fuel system during 1999. As a result of the
heating system and fuel system anomalies, the estimated remaining useful life of
EchoStar IV has been reduced to approximately 4 years. This change increased
EchoStar's net loss for the three months ended March 31, 2000 by approximately
$2.4 million.
5
<PAGE> 8
ECHOSTAR DBS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
During September 1998, EchoStar recorded a $106 million provision for
loss in connection with the partial failure of EchoStar IV solar arrays to
deploy. During December 1999, EchoStar recorded an additional $13.7 million
provision for loss. The aggregate loss provision of $119.7 million represented
EchoStar's estimate, at December 31, 1999, of the asset impairment attributable
to lost transmission capacity on EchoStar IV resulting from the solar array
anomaly described above. EchoStar also recorded a $106 million gain, during
September 1998, attributable to an anticipated insurance claim receivable that
it believes is probable of receipt. While there can be no assurance as to the
amount of the final insurance settlement, EchoStar believes that it will receive
insurance proceeds at least equal to the $106 million receivable recorded. To
the extent that it appears probable that EchoStar will receive insurance
proceeds in excess of the $106 million currently recorded and that no further
provision for loss is necessary, a gain will be recognized for the incremental
amount in the period that the amount of the final settlement can be reasonably
estimated.
In September 1998, EchoStar filed a $219.3 million insurance claim for
a constructive total loss under the launch insurance policy related to EchoStar
IV. However, if the Company receives $219.3 million for a constructive total
loss on the satellite, the insurers would obtain the sole right to the benefits
of salvage from EchoStar IV under the terms of the launch insurance policy.
Although we believe we have suffered a total loss of EchoStar IV under that
definition in the launch insurance policy, we intend to negotiate a settlement
with the insurers to compensate us for the reduced satellite transmission
capacity and allow us to retain title to the asset.
The satellite insurance policy for EchoStar IV consists of separate
identical policies with different carriers for varying amounts which, in
combination, create a total insured amount of $219.3 million. Two of the
participants in EchoStar's insurance line have notified EchoStar they believe
that its alleged delay in providing required insurance claim information may
reduce their obligation to pay any settlement related to the claim.
During April 2000, the insurance carriers offered EchoStar 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 by the policy. EchoStar strongly disagrees with the position of the
insurers. As a result, EchoStar filed for arbitration to resolve its insurance
claim for constructive total loss with respect to the EchoStar IV satellite.
There can be no assurance that EchoStar will receive the amount claimed or, if
it does, that EchoStar will retain title to EchoStar IV with its reduced
capacity.
While there can be no assurance, we do not currently expect a material
adverse impact on short term satellite operations. We will continue to evaluate
the performance of EchoStar IV and may modify our loss assessment as new events
or circumstances develop.
5. COMMITMENTS AND CONTINGENCIES
DirecTV
During February 2000 EchoStar filed suit against DirecTV and Thomson
Consumer Electronics/RCA in the Federal District Court of Colorado. The suit
alleges that DirecTV has utilized improper conduct in order to fend off
competition from the DISH Network. According to the complaint, DirecTV has
demanded that certain retailers stop displaying EchoStar merchandise and has
threatened to cause economic damage to retailers if they continued to offer both
product lines in head-to-head competition. The suit alleges, among other things,
that DirecTV has acted in violation of federal and state anti-trust laws in
order to protect DirecTV's market share. EchoStar is seeking injunctive relief
and monetary damages. It is too early in the litigation to make an assessment of
the probable outcome.
The DirecTV defendants filed a counterclaim against EchoStar. DirecTV
alleges that EchoStar tortuously interfered with a contract that DirecTV
allegedly had with Kelly Broadcasting Systems, Inc. (KBS). DirecTV alleges that
EchoStar "merged" with KBS, in contravention of DirecTV's contract with KBS.
DirecTV also alleges that EchoStar has falsely advertised to consumers about
EchoStar's right to offer network programming. DirecTV
6
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ECHOSTAR DBS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
further alleges that EchoStar improperly used certain marks owned by PrimeStar,
now owned by DirecTV. Finally, DirecTV alleges that EchoStar has been marketing
National Football League games in a misleading manner. The amount of damages
DirecTV is seeking is as yet unquantified. EchoStar intends to vigorously defend
against these claims. The case is currently in discovery.
The News Corporation Limited
During February 1997, News Corporation agreed to acquire approximately
50% of our outstanding capital stock. During late April 1997, substantial
disagreements arose between the parties regarding their obligations under this
agreement. Those substantial disagreements led to litigation which the parties
subsequently settled. In connection with the News Corporation litigation, we
have a contingent fee arrangement with the attorneys who represented us in that
litigation, which provides for the attorneys to be paid a percentage of any net
recovery obtained in the News Corporation litigation. The attorneys have
asserted that they may be entitled to receive payments totaling hundreds of
millions of dollars under this fee arrangement. We are vigorously contesting the
attorneys' interpretation of the fee arrangement, which we believe significantly
overstates the magnitude of our liability. We also believe that the fee
arrangement is void and unenforceable because the attorneys who represented us
are seeking a fee that we believe is unreasonable and excessive, among other
things. If we are unable to resolve this fee dispute with the attorneys, it
would be resolved through arbitration or litigation. During mid-1999, we
initiated litigation against the attorneys in the District Court, Arapahoe
County, Colorado, arguing that the fee arrangement is void and unenforceable. In
December 1999, the attorneys initiated an arbitration proceeding before the
American Arbitration Association. It is too early to determine the outcome of
negotiations, arbitration or litigation regarding this fee dispute.
WIC Premium Television Ltd.
During July 1998, a lawsuit was filed by WIC Premium Television Ltd.,
an Alberta corporation, in the Federal Court of Canada Trial Division, against
General Instrument Corporation, HBO, Warner Communications, Inc., John Doe,
Showtime, United States Satellite Broadcasting Company, Inc., EchoStar, and two
of EchoStar's wholly-owned subsidiaries. The lawsuit seeks, among other things,
an interim and permanent injunction prohibiting the defendants from activating
receivers in Canada and from infringing any copyrights held by WIC. It is too
early to determine whether or when any other lawsuits or claims will be filed.
It is also too early to make an assessment of the probable outcome of the
litigation or to determine the extent of any potential liability or damages.
During September 1998, WIC filed another lawsuit in the Court of
Queen's Bench of Alberta Judicial District of Edmonton against certain
defendants, including EchoStar. WIC is a company authorized to broadcast certain
copyrighted work, such as movies and concerts, to residents of Canada. WIC
alleges that the defendants engaged in, promoted, and/or allowed satellite dish
equipment from the United States to be sold in Canada and to Canadian residents
and that some of the defendants allowed and profited from Canadian residents
purchasing and viewing subscription television programming that is only
authorized for viewing in the United States. The lawsuit seeks, among other
things, an interim and permanent injunction prohibiting the defendants from
importing hardware into Canada and from activating receivers in Canada, together
with damages in excess of $175 million.
We filed motions to dismiss each of the actions for lack of personal
jurisdiction. The Court in the Alberta action recently denied our Motion to
Dismiss. The Alberta Court also granted a motion to add more EchoStar parties to
the lawsuit. EchoStar Satellite Corporation, EchoStar DBS Corporation, EchoStar
Technologies Corporation, and EchoStar Satellite Broadcast Corporation have been
added as defendants in the litigation. The newly added defendants have also
challenged jurisdiction. The Court in the Federal 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.
7
<PAGE> 10
ECHOSTAR DBS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
Broadcast network programming
Under the Satellite Home Viewer Act, the determination of whether a
household qualifies as "unserved" for the purpose of eligibility to receive a
distant network channel depends, in part, on whether that household can receive
a signal of "Grade B intensity" as defined by the FCC.
During 1998, the national networks and local affiliate stations
challenged, based upon copyright infringement, PrimeTime 24's methods of selling
network programming to consumers. Historically, we obtained distant broadcast
network signals for distribution to our customers through PrimeTime 24. The
United States District Court for the Southern District of Florida entered a
nationwide permanent injunction preventing PrimeTime 24 from selling its
programming to consumers unless the programming was sold in accordance with
certain stipulations in the injunction. The injunction covers distributors as
well. The plaintiffs in the Florida litigation informed us they considered us a
distributor for purposes of that injunction. A federal district court in North
Carolina also issued an injunction against PrimeTime 24 prohibiting certain
distant signal retransmissions in the Raleigh area. The Fourth Circuit Court of
Appeals recently affirmed the North Carolina Court's decision. We have
implemented Satellite Home Viewer Act compliance procedures which materially
restrict the market for the sale of network channels by us.
In October 1998, we filed a declaratory judgment action in the United
States District Court for the District of Colorado against the four major
networks. We asked the court to enter a judgment declaring that our method of
providing distant network programming does not violate the Satellite Home Viewer
Act and hence does not infringe the networks' copyrights. In November 1998, the
four major broadcast networks and their affiliate groups filed a complaint
against us in federal court in Miami alleging, among other things, copyright
infringement. The court combined the case that we filed in Colorado with the
case in Miami and transferred it to the Miami court.
In February 1999, CBS, NBC, Fox and ABC filed a "Motion for Temporary
Restraining Order, Preliminary Injunction and Contempt Finding" against DirecTV
in Miami related to the delivery of distant network channels to DirecTV
customers by satellite. Under the terms of a settlement between DirecTV and the
networks, some DirecTV customers were scheduled to lose access to their
satellite-provided network channels by July 31, 1999, while other DirecTV
customers were to be disconnected by December 31, 1999. Subsequently, PrimeTime
24 and substantially all providers of satellite-delivered network programming
other than us agreed to this cut-off schedule.
The networks are pursuing a Motion for Preliminary Injunction in the
Miami Court, asking the Court to enjoin us from providing network programming
except under very limited circumstances, and to turn off network programming to
many of our customers.
A preliminary injunction hearing was held during September 1999. The
Court took the issues under advisement to consider the networks' request for an
injunction, whether to hear live testimony before ruling upon the request, and
whether to hear argument on why the Satellite Home Viewer Act may be
unconstitutional, among other things. The Court did not say when a decision will
be made, or whether an additional hearing will be necessary prior to ruling on
the networks' preliminary injunction motion. Additional motions and affidavits
have been filed with the Court over the past several months and a ruling
adverse, or favorable, to us could issue at any time.
If this case is decided against us, or a preliminary injunction is
issued, significant material restrictions on the sale of distant ABC, NBC, CBS
and Fox channels by us could result, including potentially a nationwide
permanent prohibition on our broadcast of ABC, NBC, CBS and Fox network channels
by satellite. The litigation and the new legislation discussed above, among
other things, could also require us to terminate delivery of network signals to
a material portion of our subscriber base, which could cause many of these
subscribers to cancel their subscription to our other services. While the
networks have not sought monetary damages, they have sought to recover attorney
fees
8
<PAGE> 11
ECHOSTAR DBS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
if they prevail. We have sent letters to some of our subscribers warning that
their access to distant broadcast network channels might be terminated soon and
have terminated ABC, NBC, CBS and Fox programming to many customers.
In November 1999, Congress passed new legislation regarding the
satellite delivery of network programming and it was signed into law by
President Clinton. This new law has the potential of reducing the number of
customers whose network channels EchoStar may otherwise be required to
terminate, as the law "grandfathers" many subscribers to continue to receive
network channels by satellite.
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>
ECHOSTAR OTHER
DISH SATELLITE ELIMINATIONS CONSOLIDATED ECHOSTAR
NETWORK ETC SERVICES AND OTHER TOTAL ACTIVITY DBS CORP
--------- --------- --------- ------------ ------------ --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
THREE MONTHS ENDED MARCH 31, 1999
Revenue ....................... $ 269,189 $ 26,517 $ 9,110 $ 4,760 $ 309,576 $ 759 $ 310,335
Net income (loss) before
extraordinary charges ....... (495,439) (3,776) 4,962 390,921 (103,332) (1,252) (104,584)
THREE MONTHS ENDED MARCH 31, 2000
Revenue ....................... $ 484,448 $ 52,469 $ 17,661 $ 11,143 $ 565,721 $ 2,337 $ 568,058
Net income (loss) ............. (534,017) (4,494) 11,062 342,319 (185,130) (6,053) (191,183)
</TABLE>
7. SUBSEQUENT EVENTS
During April 2000, EchoStar announced an investment of $50 million in
Gilat-To-Home Inc. Gilat-To-Home, a joint venture whose partners now include
EchoStar, Gilat Satellite Networks Ltd., and Microsoft, plans to provide
consumer, two-way satellite, broadband Internet service later this year. With
the investment, EchoStar will hold approximately a 17.6% stake in Gilat-To-Home.
EchoStar and Gilat previously announced an agreement to jointly offer
consumers two-way, Ku-band, high-speed satellite Internet access along with DISH
Network satellite television programming via a single small consumer dish. Under
the terms of the agreement, EchoStar will distribute the Gilat-To-Home broadband
satellite Internet service powered by MSN along with DISH Network satellite TV
service through its retailers nationwide. The Gilat-To-Home services are
expected to be available during late 2000.
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<PAGE> 12
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; an unsuccessful launch or deployment of our
sixth satellite, EchoStar VI; delays in the construction of our seventh, eighth
or ninth satellites; a decrease in sales of digital equipment and related
services to international direct-to-home or DTH service providers; a decrease in
DISH Network subscriber growth; an increase in subscriber turnover; an increase
in subscriber acquisition costs; an inability to obtain certain retransmission
consents; our inability to retain necessary authorizations from the FCC; an
increase in competition from cable, direct broadcast satellite, other satellite
system operators, and other providers of subscription television services; the
introduction of new technologies and competitors into the subscription
television business; a change in the regulations governing the subscription
television service industry; the outcome of any litigation in which we may be
involved; general business and economic conditions; and other risk factors
described from time to time in our reports filed with the Securities and
Exchange Commission. In addition to statements that explicitly describe such
risks and uncertainties, readers are urged to consider statements that include
the terms "believes," "belief," "expects," "plans," "anticipates," "intends" or
the like to be uncertain and forward-looking. All cautionary statements made
herein should be read as being applicable to all forward-looking statements
wherever they appear. In this connection, investors should consider the risks
described herein and should not place undue reliance on any forward-looking
statements.
RESULTS OF OPERATIONS
Three Months Ended March 31, 2000 Compared to the Three Months Ended March 31,
1999.
Revenue. Total revenue for the three months ended March 31, 2000 was
$568 million, an increase of $258 million compared to total revenue for the
three months ended March 31, 1999 of $310 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 $476
million for the three months ended March 31, 2000, an increase of $215 million
compared to the same period in 1998. This increase was directly attributable to
the increase in the number of DISH Network subscribers and higher average
revenue per subscriber. DISH Network subscribers for the three months ended
March 31, 2000 increased approximately 71% compared to the same period in 1999.
As March 31, 2000, we had approximately 3.9 million DISH Network subscribers
compared to 2.3 million at March 31, 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, together with generally
good economic conditions and positive momentum for the DISH Network generally.
Monthly revenue per subscriber was approximately $43.85 during the three months
ended March 31, 2000 and approximately $41.50 during the same period during
1999. DISH Network subscription television services revenue principally consists
of revenue from basic, premium and pay-per-view subscription television
services. DISH Network subscription television services revenue will continue to
increase to the extent we are successful in increasing the number of DISH
Network subscribers and maintaining or increasing revenue per subscriber.
For the three months ended March 31, 2000, DTH equipment sales and
integration services totaled $61 million, an increase of $30 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.
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<PAGE> 13
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. We
currently have agreements to provide equipment to DTH service operators in Spain
and Canada. As a result, our ETC business currently is economically dependent on
these two DTH providers. Our future revenue from the sale of DTH equipment and
integration services in international markets depends largely on the success of
these DTH operators and continued demand for our digital set-top boxes. Although
there can be no assurance, we expect that our DTH equipment and integration
services revenue for the year ended December 31, 2000 will approximate DTH
equipment and integration services revenue during 1999. Although we continue to
actively pursue additional distribution and integration service opportunities
internationally, no assurance can be given that any such efforts will be
successful.
As previously reported, since 1998, Telefonica, one of the two DTH
service providers described above, has had recurrent discussions and
negotiations for a possible merger with Sogecable (Canal Plus Satellite), one of
its primary competitors. While we are not currently aware of any formal
negotiations between Telefonica and Canal Plus Satellite, there are again rumors
of a potential merger in the marketplace. Although we have binding purchase
orders from Telefonica for deliveries of DTH equipment in 2000, we cannot
predict the impact, if any, eventual consummation of this possible merger might
have on our future sales to Telefonica.
Satellite services revenue totaled $14 million during the three months
ended March 31, 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 increased BTV revenue due to the addition of new full-time BTV
customers. Satellite services revenue for the year ended December 31, 2000 is
expected to increase as compared to the year ended December 31, 1999, to the
extent we are successful in increasing the number of our BTV customers and
developing and implementing new services.
In order, among other things, to prepare for a potential adverse result
in our pending litigation with the four major broadcast networks and their
affiliate groups, we have sent letters to some of our subscribers warning that
their access to CBS, NBC, Fox and ABC distant network channels might be
terminated this year. Such terminations would result in a small reduction in
average monthly revenue per subscriber and possibly increased subscriber
turnover. While there can be no assurance, any such decreases could be offset by
increases in average monthly revenue per subscriber resulting from the delivery
of local network channels by satellite, and increases in other programming
offerings that will follow the launch of EchoStar VI this summer.
DISH Network Operating Expenses. DISH Network operating expenses
totaled $272 million during the three months ended March 31, 2000, an increase
of $127 million or 88%, compared to the same period in 1999. The increase in
DISH Network operating expenses was consistent with, and primarily attributable
to, the increase in the number of DISH Network subscribers. DISH Network
operating expenses represented 57% and 56% of subscription television services
revenue during the three months ended March 31, 2000 and 1999, respectively. The
percentage increase is primarily attributable to operating inefficiencies
resulting from our rapid growth including upgrades to our installation and call
center infrastructure. We believe these issues will be resolved shortly and will
provide long term efficiency improvement.
Subscriber-related expenses totaled $204 million during the three
months ended March 31, 2000, an increase of $93 million compared to the same
period in 1999. Such expenses, which include programming expenses, copyright
royalties, residuals currently payable to retailers and distributors, and
billing, lockbox and other variable subscriber expenses, represented 43% of
subscription television services revenues during each of the three months ended
March 31, 2000 and 1999. Although we do not currently expect subscriber-related
expenses as a percentage of subscription television services revenue to increase
materially in future periods, there can be no assurance this expense to revenue
ratio will not materially increase.
Customer service center and other expenses principally consist of costs
incurred in the operation of our DISH Network customer service centers, such as
personnel and telephone expenses, as well as subscriber equipment installation
and other operating expenses. Customer service center and other expenses totaled
$56 million during the three months ended March 31, 2000, an increase of $32
million as compared to the same period in 1999. The increase
11
<PAGE> 14
ITEM 2. MANAGEMENT'S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS - CONTINUED
in customer service center and other expenses primarily resulted from increased
personnel and telephone expenses to support the growth of the DISH Network and
from installation expenses related to the expansion of our installation
business. Customer service center and other expenses totaled 12% of subscription
television services revenue during the three months ended March 31, 2000, as
compared to 9% during the same period in 1999. 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 $12 million during the three months ended March
31, 2000, a $3 million increase compared to the same period in 1999. This
increase resulted from higher satellite and other digital broadcast center
operating expenses due to an increase in the number of operational satellites.
We expect satellite and transmission expenses to continue to increase in the
future as additional satellites or digital broadcast centers are placed in
service. Satellite and transmission expenses totaled 3% and 4% of subscription
television services revenue during the three months ended March 31, 2000 and
1999, respectively.
Cost of sales - DTH equipment and Integration Services. Cost of sales -
DTH equipment and integration services totaled $47 million during the three
months ended March 31, 2000, an increase of $24 million compared to the same
period in 1999. Cost of sales - DTH equipment and integration services
principally includes costs associated with digital set-top boxes and related
components sold to international DTH operators and DBS accessories. This
increase in cost of sales - DTH equipment and integration services is consistent
with the increase in DTH equipment sales and integration services revenue. Cost
of sales - DTH equipment and integration services represented 77% and 74% of DTH
equipment revenue, during the three months ended March 31, 2000 and 1999,
respectively. The increase reflects price pressure resulting from increased
competition from other providers of DTH equipment.
Marketing Expenses. Marketing expenses totaled $279 million during the
three months ended March 31, 2000, an increase of $137 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 $23 million and $12 million during the three months ended March
31, 2000 and 1999, respectively.
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. In connection with our plans to encourage as
many new subscribers as possible to be ready for the additional services that
will become available at the 110(Degree) WL orbital location, and as a result of
continuing competition and our plans to attempt to continue to drive rapid
subscriber growth, we expect our subscriber acquisition costs for 2000 may
average as much as $450 or more for the full year.
During the three months ended March 31, 2000, our marketing promotions
included our DISH Network One-Rate Plan, C-band bounty program, Great Rewards
program (PrimeStar bounty), cable bounty and a free installation program. Our
subscriber acquisition costs under these programs are significantly higher than
those under our marketing programs historically.
Under the DISH Network One-Rate Plan, consumers are eligible to receive
a rebate that ranges from $100 up to $299 on the purchase of certain EchoStar
receiver systems. To be eligible for this rebate, a subscriber must make a
one-year commitment to subscribe to our America's Top 100 CD programming package
plus additional channels. The amount of the monthly programming commitment
determines the amount of the rebate. Although subscriber acquisition costs are
materially higher under this plan compared to previous promotions, DISH Network
One-Rate Plan customers generally provide materially greater average revenue per
subscriber than a typical DISH Network subscriber. In addition, we believe that
these customers represent lower credit risk and therefore may be marginally less
likely to disconnect their service than other DISH Network subscribers. To the
extent that actual consumer participation levels
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<PAGE> 15
ITEM 2. MANAGEMENT'S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS - CONTINUED
exceed present expectations, subscriber acquisition costs may increase. Although
there can be no assurance as to the ultimate duration of the DISH Network
One-Rate Plan, it will continue through at least July 2000.
Under our bounty programs, current cable, C-band and PrimeStar
customers are eligible to receive a free base-level EchoStar receiver system and
free installation. In addition, PrimeStar customers are eligible to receive six
months of our America's Top 40 programming or our DISH Latino programming (both
packages retail for $19.99 per month) without charge. A subscriber must make a
one-year commitment to subscribe to either our America's Top 40, our DISH Latino
programming package or our America's Top 100 CD programming package and prove
that they are a current cable, C-band or PrimeStar customer to be eligible for
these programs.
Under our free installation program all customers who purchase an
EchoStar receiver system through April 30, 2000 are eligible to receive a free
professional installation. The free installation program was responsible, in
part, for the strong subscriber growth during the first quarter of 2000. The
free installation program was also largely responsible for the increase in
subscriber acquisition costs during the first quarter. While there can be no
assurance, we expect that subscriber acquisition costs may be lower during the
remainder of 2000 following expiration of the free installation program and
commencement of other less expensive programs including our new Digital Home
Plan. That plan provides consumers with the use of two receivers plus
installation, in home service and our America's Top 150 programming package for
only $49.99, plus a $99 up front fee.
During the three months ended March 31, 2000, our total subscriber
acquisition costs, inclusive of acquisition marketing expenses, totaled
approximately $273 million, or approximately $467 per new subscriber activation.
Comparatively, our subscriber acquisition costs during the three months ended
March 31, 1999, inclusive of acquisition marketing expenses, totaled $142
million, or approximately $355 per new subscriber activation. The increase in
our subscriber acquisition costs, on a per new subscriber activation basis,
principally resulted from the impact of several aggressive marketing promotions
to acquire new subscribers, including most significantly our free installation
offer which commenced in January and is scheduled to conclude during the second
quarter.
In connection with the launch of EchoStar V and EchoStar VI, we will
utilize the 110(Degree) orbital location to enhance revenue opportunities with
new value added services for our current and future subscribers, and maintain
our primary DBS service at the 119(Degree) orbital location. Our existing
subscribers will need to upgrade their dish and receiver systems in order to
take advantage of all of the services we offer. To encourage existing
subscribers to upgrade their systems and remain subscribers, we are currently
subsidizing upgrades by existing subscribers to our DISH 500 system. The cost of
this program could be significant if utilized by a large number of our existing
subscribers. The anticipated date for the launch of EchoStar VI, previously
scheduled for June 2000, is now expected in July as a result of a delay of an
Atlas launch scheduled prior to EchoStar VI.
Our subscriber acquisition costs, both in the aggregate and on a per
new subscriber activation basis, may materially increase further to the extent
that we continue or expand our bounty programs, our "free system/free
installation" program, or the DISH Network One-Rate Plan, or if we determine
that other more aggressive promotions are necessary to respond to competition,
or for other reasons.
General and Administrative Expenses. General and administrative
expenses totaled $54 million during the three months ended March 31, 2000, an
increase of $25 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 March 31, 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 a contingent incentive
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, 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. As a result of substantial
post-grant appreciation of options, during the three months ended
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<PAGE> 16
ITEM 2. MANAGEMENT'S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS - CONTINUED
March 31, 2000 we recognized $14 million of the total of $179 million of
deferred stock-based compensation under this performance based plan. The
remainder will be recognized over the remaining vesting period.
EBITDA. EBITDA represents earnings before interest, taxes,
depreciation, amortization, and non-cash, stock-based compensation. EBITDA was
negative $92 million during the three months ended March 31, 2000 compared to
negative $33 million during the same period in 1999. This decline in EBITDA
principally resulted from an increase in subscriber acquisition costs due to the
success of several aggressive marketing promotions to acquire new subscribers,
as well as other previously described factors. It is important to note that
EBITDA does not represent cash provided or used by operating activities.
Further, our calculation of EBITDA for the three months ended March 31, 2000
does not include approximately $14 million of non-cash compensation expense
resulting from post-grant appreciation of employee stock options. EBITDA should
not be considered in isolation or as a substitute for measures of performance
prepared in accordance with generally accepted accounting principles.
As previously discussed, to the extent we expand our current marketing
promotions and our subscriber acquisition costs materially increase, our EBITDA
results will be negatively impacted because subscriber acquisition costs are
expensed as incurred.
Depreciation and Amortization. Depreciation and amortization expenses
aggregated $39 million during the three months ended March 31, 2000, a $14
million increase compared to the same period in 1999. The increase in
depreciation and amortization expenses principally resulted from an increase in
depreciation related to the commencement of operation of EchoStar V in November
1999 and other depreciable assets placed in service during 1999.
Other Income and Expense. Other expense, net totaled $46 million during
the three months ended March 31, 2000, a decrease of $1 million compared to the
same period in 1999. This decrease resulted from an increase in interest income
partially offset by an increase in interest expense.
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<PAGE> 17
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 continued 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., or KBS. DirecTV alleges that we "merged" with
KBS, in contravention of DirecTV's contract with KBS. DirecTV also alleges that
we have falsely advertised to consumers about our right to offer network
programming. DirecTV further alleges that we improperly used certain marks owned
by PrimeStar, now owned by DirecTV. Finally, DirecTV alleges that we have been
marketing National Football League games in a misleading manner. The amount of
damages DirecTV is seeking is as yet unquantified. We intend to vigorously
defend against these claims. The case is currently in discovery.
The News Corporation Limited
During February 1997, News Corporation agreed to acquire approximately
50% of our outstanding capital stock. During late April 1997, substantial
disagreements arose between the parties regarding their obligations under this
agreement. Those substantial disagreements led to litigation which the parties
subsequently settled. In connection with the News Corporation litigation, we
have a contingent fee arrangement with the attorneys who represented us in that
litigation, which provides for the attorneys to be paid a percentage of any net
recovery obtained in the News Corporation litigation. The attorneys have
asserted that they may be entitled to receive payments totaling hundreds of
millions of dollars under this fee arrangement. We are vigorously contesting the
attorneys' interpretation of the fee arrangement, which we believe significantly
overstates the magnitude of our liability. We also believe that the fee
arrangement is void and unenforceable because the attorneys who represented us
are seeking a fee that we believe is unreasonable and excessive, among other
things. If we are unable to resolve this fee dispute with the attorneys, it
would be resolved through arbitration or litigation. During mid-1999, we
initiated litigation against the attorneys in the District Court, Arapahoe
County, Colorado, arguing that the fee arrangement is void and unenforceable. In
December 1999, the attorneys initiated an arbitration proceeding before the
American Arbitration Association. It is too early to determine the outcome of
negotiations, arbitration or litigation regarding this fee dispute.
WIC Premium Television Ltd.
During July 1998, a lawsuit was filed by WIC Premium Television Ltd.,
an Alberta corporation, in the Federal Court of Canada Trial Division, against
General Instrument Corporation, HBO, Warner Communications, Inc., John Doe,
Showtime, United States Satellite Broadcasting Company, Inc., EchoStar, and two
of EchoStar's wholly-owned subsidiaries. The lawsuit seeks, among other things,
an interim and permanent injunction prohibiting the defendants from activating
receivers in Canada and from infringing any copyrights held by WIC. It is too
early to determine whether or when any other lawsuits or claims will be filed.
It is also too early to make an assessment of the probable outcome of the
litigation or to determine the extent of any potential liability or damages.
During September 1998, WIC filed another lawsuit in the Court of
Queen's Bench of Alberta Judicial District of Edmonton against certain
defendants, including EchoStar. WIC is a company authorized to broadcast certain
copyrighted work, such as movies and concerts, to residents of Canada. WIC
alleges that the defendants engaged in, promoted, and/or allowed satellite dish
equipment from the United States to be sold in Canada and to Canadian residents
and that some of the defendants allowed and profited from Canadian residents
purchasing and viewing subscription television programming that is only
authorized for viewing in the United States. The lawsuit
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<PAGE> 18
PART II - OTHER INFORMATION
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. 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
Under the Satellite Home Viewer Act, the determination of whether a
household qualifies as "unserved" for the purpose of eligibility to receive a
distant network channel depends, in part, on whether that household can receive
a signal of "Grade B intensity" as defined by the FCC.
During 1998, the national networks and local affiliate stations
challenged, based upon copyright infringement, PrimeTime 24's methods of selling
network programming to consumers. Historically, we obtained distant broadcast
network signals for distribution to our customers through PrimeTime 24. The
United States District Court for the Southern District of Florida entered a
nationwide permanent injunction preventing PrimeTime 24 from selling its
programming to consumers unless the programming was sold in accordance with
certain stipulations in the injunction. The injunction covers distributors as
well. The plaintiffs in the Florida litigation informed us they considered us a
distributor for purposes of that injunction. A federal district court in North
Carolina also issued an injunction against PrimeTime 24 prohibiting certain
distant signal retransmissions in the Raleigh area. The Fourth Circuit Court of
Appeals recently affirmed the North Carolina Court's decision. We have
implemented Satellite Home Viewer Act compliance procedures which materially
restrict the market for the sale of network channels by us.
In October 1998, we filed a declaratory judgment action in the United
States District Court for the District of Colorado against the four major
networks. We asked the court to enter a judgment declaring that our method of
providing distant network programming does not violate the Satellite Home Viewer
Act and hence does not infringe the networks' copyrights. In November 1998, the
four major broadcast networks and their affiliate groups filed a complaint
against us in federal court in Miami alleging, among other things, copyright
infringement. The court combined the case that we filed in Colorado with the
case in Miami and transferred it to the Miami court.
In February 1999, CBS, NBC, Fox and ABC filed a "Motion for Temporary
Restraining Order, Preliminary Injunction and Contempt Finding" against DirecTV
in Miami related to the delivery of distant network channels to DirecTV
customers by satellite. Under the terms of a settlement between DirecTV and the
networks, some DirecTV customers were scheduled to lose access to their
satellite-provided network channels by July 31, 1999, while other DirecTV
customers were to be disconnected by December 31, 1999. Subsequently, PrimeTime
24 and substantially all providers of satellite-delivered network programming
other than us agreed to this cut-off schedule.
The networks are pursuing a Motion for Preliminary Injunction in the
Miami Court, asking the Court to enjoin us from providing network programming
except under very limited circumstances, and to turn off network programming to
many of our customers.
A preliminary injunction hearing was held during September 1999. The
Court took the issues under advisement to consider the networks' request for an
injunction, whether to hear live testimony before ruling upon the request, and
whether to hear argument on why the Satellite Home Viewer Act may be
unconstitutional, among other things. The Court did not say when a decision will
be made, or whether an additional hearing will be necessary prior to ruling on
the networks' preliminary injunction motion. Additional motions and affidavits
have
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been filed with the Court over the past several months and a ruling adverse, or
favorable to us could be issued at any time.
If this case is decided against us, or a preliminary injunction is
issued, significant material restrictions on the sale of distant ABC, NBC, CBS
and Fox channels by us could result, including potentially a nationwide
permanent prohibition on our broadcast of ABC, NBC, CBS and Fox network channels
by satellite. The litigation and the new legislation discussed above, among
other things, could also require us to terminate delivery of network signals to
a material portion of our subscriber base, which could cause many of these
subscribers to cancel their subscription to our other services. While the
networks have not sought monetary damages, they have sought to recover attorney
fees if they prevail. We have sent letters to some of our subscribers warning
that their access to distant broadcast network channels might be terminated soon
and have terminated ABC, NBC, CBS and Fox programming to many customers.
In November 1999, Congress passed new legislation regarding the
satellite delivery of network programming and it was signed into law by
President Clinton. This new law has the potential of reducing the number of
customers whose network channels EchoStar may otherwise be required to
terminate, as the law "grandfathers" many subscribers to continue to receive
network channels by satellite.
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 2000.
17
<PAGE> 20
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 5, 2000
<PAGE> 21
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
<S> <C>
27 Financial Data Schedule.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM (A) THE
FINANCIAL STATEMENTS OF ECHOSTAR DBS CORPORATION AS OF AND FOR THE THREE MONTHS
ENDED MARCH 31, 2000 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH (B)
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 106,241
<SECURITIES> 9,923
<RECEIVABLES> 153,764
<ALLOWANCES> 16,182
<INVENTORY> 151,318
<CURRENT-ASSETS> 559,271
<PP&E> 1,291,206
<DEPRECIATION> 298,638
<TOTAL-ASSETS> 2,669,671
<CURRENT-LIABILITIES> 1,258,531
<BONDS> 2,044,860
0
0
<COMMON> 0
<OTHER-SE> (640,048)
<TOTAL-LIABILITY-AND-EQUITY> 2,669,671
<SALES> 553,963<F1>
<TOTAL-REVENUES> 568,058
<CGS> 327,376<F2>
<TOTAL-COSTS> 713,514
<OTHER-EXPENSES> 45,694
<LOSS-PROVISION> 11,811
<INTEREST-EXPENSE> 48,617
<INCOME-PRETAX> (191,150)
<INCOME-TAX> (33)
<INCOME-CONTINUING> (191,183)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (191,183)
<EPS-BASIC> 0
<EPS-DILUTED> 0
<FN>
<F1>INCLUDES PROGRAMMING REVENUE.
<F2>INCLUDES COSTS OF PROGRAMMING.
</FN>
</TABLE>
