<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to .
---------------- ----------------
Commission file number 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
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 NOVEMBER 13, 2000, REGISTRANT'S OUTSTANDING COMMON STOCK CONSISTED
OF 3,000 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
<TABLE>
<S> <C>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -
December 31, 1999 and September 30, 2000 (Unaudited)........................................... 1
Condensed Consolidated Statements of Operations for the
three and nine months ended September 30, 1999 and 2000 (Unaudited)............................ 2
Condensed Consolidated Statements of Cash Flows for the
nine months ended September 30, 1999 and 2000 (Unaudited)...................................... 3
Notes to Condensed Consolidated Financial Statements (Unaudited)................................... 4
Item 2. Management's Narrative Analysis of Results of Operations........................................... 13
Item 3. Quantitative and Qualitative Disclosures About Market Risk......................................... None
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.................................................................................. 20
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................................................................... 23
</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, SEPTEMBER 30,
1999 2000
------------ -------------
(Unaudited)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents ...................................................... $ 159,761 $ 107,698
Marketable investment securities ............................................... 24,774 4,971
Trade accounts receivable, net of allowance for uncollectible accounts of
$13,109 and $18,354, respectively ........................................... 157,944 209,015
Insurance receivable ........................................................... 106,000 106,000
Inventories .................................................................... 123,184 188,636
Other current assets ........................................................... 27,027 18,129
------------ ------------
Total current assets .............................................................. 598,690 634,449
Cash reserved for satellite insurance ............................................. -- 89,591
Property and equipment, net ....................................................... 1,314,007 1,311,834
FCC authorizations, net ........................................................... 722,234 714,427
Other noncurrent assets ........................................................... 95,276 96,496
------------ ------------
Total assets ................................................................. $ 2,730,207 $ 2,846,797
============ ============
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)
Current Liabilities:
Trade accounts payable ......................................................... $ 187,703 $ 217,372
Deferred revenue ............................................................... 181,034 252,115
Accrued expenses ............................................................... 483,635 523,862
Advances from affiliates, net .................................................. 272,440 673,358
Current portion of long-term debt .............................................. 21,017 16,145
------------ ------------
Total current liabilities ......................................................... 1,145,829 1,682,852
Long-term obligations, net of current portion:
1994 Notes ..................................................................... 1,503 --
1996 Notes ..................................................................... 1,097 --
1997 Notes ..................................................................... 15 --
9 1/4% Seven Year Notes ........................................................ 375,000 375,000
9 3/8% Ten Year Notes .......................................................... 1,625,000 1,625,000
Mortgages and other notes payable, net of current portion ...................... 25,445 21,098
Long-term deferred satellite services revenue and other long-term liabilities .. 18,812 24,397
------------ ------------
Total long-term obligations, net of current portion ............................... 2,046,872 2,045,495
------------ ------------
Total liabilities ............................................................ 3,192,701 3,728,347
Commitments and Contingencies (Note 6)
Stockholder's Equity (Deficit):
Common Stock, $.01 par value, 3,000 shares authorized, issued and
outstanding .................................................................... -- --
Additional paid-in capital ..................................................... 1,448,324 1,440,252
Deferred stock-based compensation .............................................. (117,780) (71,059)
Accumulated other comprehensive loss ........................................... -- (28)
Accumulated deficit ............................................................ (1,793,038) (2,250,715)
------------ ------------
Total stockholder's equity (deficit) .............................................. (462,494) (881,550)
------------ ------------
Total liabilities and stockholder's equity (deficit) ......................... $ 2,730,207 $ 2,846,797
============ ============
</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 SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------- -------------------------------
1999 2000 1999 2000
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
REVENUE:
DISH Network:
Subscription television services ...................... $ 359,275 $ 614,975 $ 926,888 $ 1,645,514
Other ................................................. 2,116 1,763 6,624 6,571
------------ ------------ ------------ ------------
Total DISH Network ...................................... 361,391 616,738 933,512 1,652,085
DTH equipment sales and integration services ............ 49,348 55,042 105,856 174,542
Satellite services ...................................... 10,835 13,398 28,073 41,804
C-band and other ........................................ 9,685 9,049 24,598 36,053
------------ ------------ ------------ ------------
Total revenue .............................................. 431,259 694,227 1,092,039 1,904,484
COSTS AND EXPENSES:
DISH Network Operating Expenses:
Subscriber-related expenses ........................... 159,022 255,083 404,746 693,225
Customer service center and other ..................... 31,609 60,288 80,643 184,677
Satellite and transmission ............................ 9,948 9,368 30,024 33,282
------------ ------------ ------------ ------------
Total DISH Network operating expenses ................... 200,579 324,739 515,413 911,184
Cost of sales - DTH equipment and integration services .. 35,243 40,612 77,189 134,683
Cost of sales - C-band and other ........................ 4,436 7,121 11,870 22,352
Marketing:
Subscriber promotion subsidies ........................ 184,475 248,955 461,302 739,163
Advertising and other ................................. 19,731 41,308 40,360 88,805
------------ ------------ ------------ ------------
Total marketing expenses ................................ 204,206 290,263 501,662 827,968
General and administrative .............................. 35,244 59,285 93,539 164,707
Non-cash, stock-based compensation ...................... 4,264 11,568 5,983 38,599
Depreciation and amortization ........................... 26,910 43,356 76,728 123,279
------------ ------------ ------------ ------------
Total costs and expenses ................................... 510,882 776,944 1,282,384 2,222,772
------------ ------------ ------------ ------------
Operating loss ............................................. (79,623) (82,717) (190,345) (318,288)
Other Income (Expense):
Interest income ......................................... 2,788 3,119 10,834 8,801
Interest expense, net of amounts capitalized ............ (48,223) (48,278) (147,616) (145,494)
Other ................................................... (1,453) (643) (9,816) (2,593)
------------ ------------ ------------ ------------
Total other income (expense) ............................... (46,888) (45,802) (146,598) (139,286)
------------ ------------ ------------ ------------
Loss before income taxes ................................... (126,511) (128,519) (336,943) (457,574)
Income tax provision, net .................................. (21) (44) (109) (103)
------------ ------------ ------------ ------------
Net loss before extraordinary charges ...................... (126,532) (128,563) (337,052) (457,677)
Extraordinary charge for early retirement of debt, net of
tax ..................................................... -- -- (228,733) --
------------ ------------ ------------ ------------
Net loss ................................................... $ (126,532) $ (128,563) $ (565,785) $ (457,677)
============ ============ ============ ============
</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>
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
1999 2000
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ....................................................................... $ (565,785) $ (457,677)
Adjustments to reconcile net loss to net cash flows from operating activities:
Extraordinary charge for early retirement of debt ........................... 228,733 --
Loss on disposal of assets .................................................. 9,770 1,166
Deferred stock-based compensation recognized ................................ 5,983 38,599
Depreciation and amortization ............................................... 76,728 123,279
Interest on notes payable to ECC added to principal ......................... 330 --
Amortization of debt discount and deferred financing costs .................. 12,621 2,460
Change in reserve for excess and obsolete inventory ......................... (409) 4,748
Change in long-term deferred satellite services revenue and other long-term
liabilities ............................................................... 24,977 5,586
Other, net .................................................................. -- 1,855
Changes in current assets and current liabilities ........................... 102,442 22,868
------------ ------------
Net cash flows from operating activities ....................................... (104,610) (257,116)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of marketable investment securities .................................. (181,148) --
Sales of marketable investment securities ...................................... 152,644 19,775
Cash reserved for satellite insurance (Note 4) ................................. -- (89,591)
Funds released from escrow and restricted cash and marketable investment
securities ..................................................................... 77,657 --
Purchases of property and equipment ............................................ (63,338) (114,215)
Other .......................................................................... (225) --
------------ ------------
Net cash flows from investing activities ....................................... (14,410) (184,031)
CASH FLOWS FROM FINANCING ACTIVITIES:
Non-interest bearing advances from affiliates .................................. 202,511 400,918
Proceeds from issuance of 9 1/4% Seven Year Notes .............................. 375,000 --
Proceeds from issuance of 9 3/8% Ten Year Notes ................................ 1,625,000 --
Debt issuance costs and prepayment premiums .................................... (233,721) --
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 .......................... (17,019) (9,219)
Other .......................................................................... -- (2,615)
------------ ------------
Net cash flows from financing activities ....................................... 167,907 389,084
------------ ------------
Net increase (decrease) in cash and cash equivalents ........................... 48,887 (52,063)
Cash and cash equivalents, beginning of period ................................. 25,308 159,761
------------ ------------
Cash and cash equivalents, end of period ....................................... $ 74,195 $ 107,698
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Assets acquired from News Corporation and MCI:
FCC licenses and other ...................................................... $ 626,120 $ --
Satellites .................................................................. 451,200 --
Digital broadcast operations center ......................................... 47,000 --
Capital contribution from ECC .................................................. 1,124,320 --
Forfeitures of deferred non-cash, stock-based compensation ..................... -- 8,072
</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 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 nine
months ended September 30, 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
September 30, 2000, we had approximately 4.8 million DISH
Network subscribers.
o EchoStar Technologies Corporation ("ETC") -- engaged in the
design, distribution and sale of DBS set-top boxes, antennae
and other digital equipment for the DISH Network ("EchoStar
receiver systems"), and the design and distribution of similar
equipment for international direct-to-home ("DTH") systems.
ETC has also provided uplink center design, construction
oversight and other project integration services for
international DTH ventures.
o Satellite Services -- engaged in the delivery of video, audio
and data services to business television customers and other
satellite users. These services may include satellite uplink
services, satellite transponder space usage, billing, customer
service and other services.
Since 1994, EchoStar has deployed substantial resources to develop the
"EchoStar DBS System." The EchoStar DBS System consists of EchoStar's
FCC-allocated DBS spectrum, six DBS satellites ("EchoStar I," "EchoStar II,"
"EchoStar III," "EchoStar IV," "EchoStar V," and "EchoStar VI"), EchoStar
receiver systems, digital broadcast operations centers, customer service
facilities, and other assets utilized in 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 nine months ended September 30, 2000 are not necessarily
indicative of the results that may be expected for the year ending December 31,
2000. For further information, refer to the consolidated financial statements
and footnotes thereto included in our Annual Report on Form 10-K for the year
ended December 31, 1999. Certain prior year amounts have been reclassified to
conform with the current year presentation.
4
<PAGE> 7
ECHOSTAR DBS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses for each reporting
period. Actual results could differ from those estimates.
Comprehensive Loss
The components of comprehensive loss, net of tax, are as follows (in
thousands):
<TABLE>
<CAPTION>
NINE-MONTHS ENDED
SEPTEMBER 30,
--------------------------
1999 2000
---------- ----------
(Unaudited)
<S> <C> <C>
Net loss .................................................... $ (565,785) $ (457,677)
Change in unrealized loss on available-for-sale securities .. -- (28)
---------- ----------
Comprehensive loss .......................................... $ (565,785) $ (457,705)
========== ==========
</TABLE>
Accumulated other comprehensive loss presented on the accompanying
condensed consolidated balance sheets consists of the accumulated net unrealized
loss on available-for-sale securities, net of deferred taxes.
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities," ("FAS 133"), which was originally required
to be adopted in years beginning after June 15, 1999. In June 2000, the
Financial Accounting Standards Board issued Statement of Financial Accounting
Standards No. 137, "Accounting for Derivative Instruments and Hedging Activities
- Deferral of the Effective Date of FASB No. 133" ("FAS 137"), which defers for
one year the effective date of SFAS 133. We anticipate that the adoption of SFAS
133 will not have a significant effect on our financial condition or results of
operations.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements,"
("SAB 101"), which is required to be adopted in the fourth quarter of 2000 and
applied retroactively for the year. SAB 101 sets forth certain criteria,
including the existence of persuasive evidence of an arrangement, which must be
met in order that revenue be recognized. We are currently evaluating the
potential impact, if any, the adoption of SAB 101 will have on our financial
position and results of operation.
In March 2000, the Financial Accounting Standard Board issued FASB
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation -- an interpretation of APB Opinion No. 25" ("FIN 44"). FIN 44
clarifies the application of APB Opinion No. 25 and among other issues clarifies
the following: the definition of an employee for purposes of applying APB
Opinion No. 25; the criteria for determining whether a plan qualifies as a
noncompensatory plan; the accounting consequence of various modifications to the
terms of previously fixed stock options or awards; and the accounting for an
exchange of stock compensation awards in a business combination. FIN 44 is
effective July 1, 2000, but certain conclusions in FIN 44 cover specific events
that occurred after either December 15, 1998 or January 12, 2000. The
application of FIN 44 has not had a material impact on our financial position or
results of operations.
5
<PAGE> 8
ECHOSTAR DBS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
3. INVENTORIES
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1999 2000
------------ -------------
<S> <C> <C>
Finished goods - DBS ............................. $ 63,054 $ 101,991
Raw materials .................................... 35,751 58,678
Finished goods - reconditioned and other ......... 19,509 23,349
Work-in-process .................................. 7,666 11,823
Consignment ...................................... 1,084 1,423
Reserve for excess and obsolete inventory ........ (3,880) (8,628)
------------ ------------
$ 123,184 $ 188,636
============ ============
</TABLE>
4. PROPERTY AND EQUIPMENT
Digital Dynamite Plans
During July 2000, we announced the commencement of our new Digital
Dynamite promotion. The Digital Dynamite plans offer four choices to consumers,
ranging from the use of one EchoStar receiver system and our America's Top 100
programming package for $34.99 per month, to providing consumers two EchoStar
receiver systems and our America's Top 150 programming package for $49.99 per
month. With each plan, consumers receive in-home-service, must agree to a
one-year commitment and incur a one-time set-up fee of $49, which includes the
first month's programming payment. Since the equipment in the Digital Dynamite
plans are owned by us, those equipment costs are capitalized and depreciated
over a period of 4 years.
EchoStar III
During the second quarter 2000, two transponder pairs on EchoStar III
malfunctioned. Including the three transponder pairs that malfunctioned during
1998, these anomalies have resulted in the failure of a total of ten
transponders on the satellite to date. While a maximum of 32 transponders can be
operated at any time, the satellite was equipped with a total of 44 transponders
to provide redundancy. As a result of this redundancy and because we are only
licensed by the FCC to operate 11 transponders at the 61.5 degree orbital
location (together with an additional six leased transponders), the transponder
anomalies have not resulted in a loss of service to date. The satellite
manufacturer, Lockheed Martin, has advised us that it believes it has identified
the root cause of the failures, and that while further transponder failures are
possible, based upon the root cause and the operating configuration of the
satellite, Lockheed Martin does not believe it is likely that the operational
capacity of EchoStar III will be reduced below 32 transponders. Lockheed Martin
also believes it is unlikely that our ability to operate at least the 11
licensed frequencies, and the six leased transponders, on the satellite will be
affected. We will continue to evaluate the performance of EchoStar III and may
be required to modify our loss assessment as new events or circumstances
develop.
EchoStar V
EchoStar V is equipped with a total of 48 transponders, including 16
spares. Two transponders on the satellite have failed, the most recent loss
occurring during July 2000. While the failures have not impacted the operational
capacity of the satellite and the satellite manufacturer has advised that the
anomalies are probably unrelated, until the root cause of the most recent
anomaly is finally determined, there can be no assurance future similar
anomalies will not cause further transponder losses which could reduce
operational capacity.
6
<PAGE> 9
ECHOSTAR DBS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
Satellite Insurance
As a result of the failure of EchoStar IV solar arrays to fully deploy
and the failure of 26 transponders to date, a maximum of approximately 16 of the
44 transponders on EchoStar IV are available for use at this time. Due to the
normal degradation of the solar arrays, the number of available transponders
will further decrease over time. In addition to the transponder and solar array
failures, EchoStar IV experienced anomalies affecting its thermal systems and
propulsion system. There can be no assurance that further material degradation,
or total loss of use, of EchoStar IV will not occur in the immediate future.
In September 1998, EchoStar filed a $219.3 million insurance claim for
a constructive total loss under the launch insurance policies covering EchoStar
IV. The satellite insurance consists of separate identical policies with
different carriers for varying amounts which, in combination, create a total
insured amount of $219.3 million.
The insurance carriers offered 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. EchoStar
strongly disagrees with the position of the insurers and has filed an
arbitration claim against them for breach of contract, failure to pay a valid
insurance claim and bad faith denial of a valid claim, among other things. There
can be no assurance that EchoStar will receive the amount claimed or, if
EchoStar does, that EchoStar will retain title to EchoStar IV with its reduced
capacity.
At the time EchoStar filed its claim in 1998, EchoStar recognized an
impairment loss of $106 million to write-down the carrying value of the
satellite and related costs, and simultaneously recorded an insurance claim
receivable for the same amount. EchoStar continues to believe it will ultimately
recover at least the amount originally recorded and does not intend to adjust
the amount of the receivable until there is greater certainty with respect to
the amount of the final settlement.
As a result of the thermal and propulsion system anomalies, EchoStar
reduced the estimated remaining useful life of EchoStar IV to approximately 4
years during January 2000. This change will increase depreciation expense to be
recognized by EchoStar during the year ending December 31, 2000 by approximately
$9.6 million. EchoStar will continue to evaluate the performance of EchoStar IV
and may modify its loss assessment as new events or circumstances develop.
The in-orbit insurance policies for EchoStar I, EchoStar II, and
EchoStar III expired July 25, 2000. The insurers have to date refused to renew
insurance on EchoStar I, EchoStar II and EchoStar III on reasonable terms. Based
on, among other things, the insurance carriers' unanimous refusal to negotiate
reasonable renewal insurance coverage, EchoStar believes that the carriers
colluded and conspired to boycott EchoStar unless EchoStar accepts their offer
to settle the EchoStar IV claim for $88 million.
Based on the carriers' actions, EchoStar has added causes of action in
its EchoStar IV demand for arbitration for breach of the duty of good faith and
fair dealing, and unfair claim practices. Additionally, EchoStar has filed a
lawsuit against the insurance carriers in the United States District Court for
the District of Colorado asserting causes of action for violation of Federal and
State Antitrust laws. While EchoStar believes it is entitled to the full amount
claimed under the EchoStar IV insurance policy and believes the insurance
carriers are in violation of Antitrust laws and have committed further acts of
bad faith in connection with their refusal to negotiate reasonable insurance
coverage on EchoStar's other satellites, there can be no assurance as to the
outcome of these proceedings.
The indentures related to the outstanding senior notes of EchoStar DBS
Corporation contain restrictive covenants that require EchoStar to maintain
satellite insurance with respect to at least half of the satellites it owns.
Insurance coverage is therefore required for at least three of EchoStar's six
satellites currently in orbit. EchoStar has procured normal and customary launch
insurance for EchoStar VI. This launch insurance policy provides for insurance
of $225.0 million. The EchoStar VI launch insurance policy expires in July 2001.
EchoStar is currently self-insuring EchoStar I, EchoStar II, EchoStar III,
EchoStar IV and EchoStar V. To satisfy insurance covenants related to our
7
<PAGE> 10
ECHOSTAR DBS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
outstanding EchoStar DBS senior notes, on July 25, 2000, EchoStar reclassified
approximately $60 million from cash and cash equivalents to restricted cash and
marketable investment securities on its balance sheet. In addition, EchoStar
reclassified an amount equal to approximately $30 million, the depreciated cost
of an additional satellite, on September 23, 2000 after the expiration of the
initial period of coverage for EchoStar V. The reclassifications will continue
until such time, if ever, as the insurers are again willing to insure EchoStar's
satellites on commercially reasonable terms.
5. ACCRUED LIABILITIES
Accrued liabilities consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1999 2000
------------ -------------
<S> <C> <C>
Programming ................................ $ 59,769 $ 157,201
Royalties and copyright fees ............... 87,390 90,447
Marketing .................................. 88,204 69,526
Advances from News/MCI for Echo VI ......... 67,804 35,810
Interest ................................... 78,460 33,503
Other ...................................... 102,008 137,375
------------ ------------
$ 483,635 $ 523,862
============ ============
</TABLE>
6. 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's merchandise and has
threatened to cause economic damage to retailers if they continue to offer both
product lines in head-to-head competition. The suit alleges, among other things,
that DirecTV has acted in violation of federal and state anti-trust laws in
order to protect DirecTV's market share. 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 its right to offer network programming. DirecTV 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. It is too early in the litigation to make an
assessment of the probable outcome.
Fee Dispute
EchoStar had a contingent fee arrangement with the attorneys who
represented EchoStar in the litigation with News Corporation. The contingent fee
arrangement provides for the attorneys to be paid a percentage of any net
recovery obtained by EchoStar in the News Corporation litigation. The attorneys
have asserted that they may be entitled to receive payments totaling hundreds of
millions of dollars under this fee arrangement.
During mid-1999, EchoStar initiated litigation against the attorneys in
the Arapahoe County, Colorado, District Court arguing that the fee arrangement
is void and unenforceable. In December 1999, the attorneys initiated an
arbitration proceeding before the American Arbitration Association. The
litigation has been stayed while the
8
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ECHOSTAR DBS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
arbitration is ongoing. A two week arbitration hearing has been set to begin in
late February 2001. It is too early to determine the outcome of negotiations,
arbitration or litigation regarding this fee dispute. EchoStar is vigorously
contesting the attorneys' interpretation of the fee arrangement, which EchoStar
believes significantly overstates the magnitude of its liability.
WIC Premium Television Ltd.
During July 1998, a lawsuit was filed by WIC Premium Television Ltd.,
an Alberta corporation, in the Federal Court of Canada Trial Division, against
General Instrument Corporation, HBO, Warner Communications, Inc., John Doe,
Showtime, United States Satellite Broadcasting Company, Inc., EchoStar, and two
of EchoStar's wholly-owned subsidiaries. The lawsuit seeks, among other things,
an interim and permanent injunction prohibiting the defendants from activating
receivers in Canada and from infringing any copyrights held by WIC. It is too
early to determine whether or when any other lawsuits or claims will be filed.
It is also too early to make an assessment of the probable outcome of the
litigation or to determine the extent of any potential liability or damages.
During September 1998, WIC filed another lawsuit in the Court of
Queen's Bench of Alberta Judicial District of Edmonton against certain
defendants, including EchoStar. WIC is a company authorized to broadcast certain
copyrighted work, such as movies and concerts, to residents of Canada. WIC
alleges that the defendants engaged in, promoted, and/or allowed satellite dish
equipment from the United States to be sold in Canada and to Canadian residents
and that some of the defendants allowed and profited from Canadian residents
purchasing and viewing subscription television programming that is only
authorized for viewing in the United States. The lawsuit seeks, among other
things, an interim and permanent injunction prohibiting the defendants from
importing hardware into Canada and from activating receivers in Canada, together
with damages in excess of $175 million.
EchoStar filed motions to dismiss each of the actions for lack of
personal jurisdiction. The Court in the Alberta action recently denied
EchoStar's Motion to Dismiss, which is currently under appeal. The Alberta Court
also granted a motion to add more EchoStar parties to the lawsuit. EchoStar
Satellite Corporation, EchoStar DBS Corporation, EchoStar Technologies
Corporation, and EchoStar Satellite Broadcast Corporation have been added as
defendants in the litigation. The newly added defendants have also challenged
jurisdiction. The Court in the Federal action has stayed that case before ruling
on EchoStar's motion to dismiss. EchoStar intends to vigorously defend the suits
in the event its motions are denied. It is too early to determine whether or
when any other lawsuits or claims will be filed. It is also too early to make an
assessment of the probable outcome of the litigation or to determine the extent
of any potential liability or damages.
Broadcast network programming
Until July 1998, EchoStar obtained distant broadcast network channels
(ABC, NBC, CBS and FOX) for distribution to its customers through PrimeTime 24.
In December 1998, the United States District Court for the Southern District of
Florida entered a nationwide permanent injunction requiring PrimeTime 24 to shut
off distant network channels to many of its customers, and henceforth to sell
those channels to consumers in accordance with certain stipulations in the
injunction.
In October 1998, EchoStar filed a declaratory judgment action against
ABC, NBC, CBS and FOX in Denver Federal Court. EchoStar asked the court to enter
a judgment declaring that its method of providing distant network programming
did not violate the Satellite Home Viewer Act and hence did not infringe the
networks' copyrights. In November 1998, the networks and their affiliate groups
filed a complaint against EchoStar in Miami Federal Court alleging, among other
things, copyright infringement. The court combined the case that EchoStar filed
in Colorado with the case in Miami and transferred it to the Miami court. The
case remains pending in Miami. While the networks have not sought monetary
damages, they have sought to recover attorney fees if they prevail.
In February 1999, the networks filed a "Motion for Temporary
Restraining Order, Preliminary Injunction and Contempt Finding" against DirecTV,
Inc. in Miami related to the delivery of distant network channels to DirecTV
9
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ECHOSTAR DBS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
customers by satellite. DirecTV settled this lawsuit with the networks. Under
the terms of the settlement between DirecTV and the networks, some DirecTV
customers were scheduled to lose access to their satellite-provided distant
network channels by July 31, 1999, while other DirecTV customers were to be
disconnected by December 31, 1999. Subsequently, PrimeTime 24 and substantially
all providers of satellite-delivered network programming other than EchoStar
agreed to this cut-off schedule, although EchoStar does not know if they adhered
to this schedule.
In December 1998, the networks filed a Motion for Preliminary
Injunction against EchoStar in the Miami court, and asked the court to enjoin
EchoStar from providing network programming except under limited circumstances.
A preliminary injunction hearing was held on September 21, 1999. The court took
the issues under advisement to consider the networks' request for an injunction,
whether to hear live testimony before ruling upon the request, and whether to
hear argument on why the Satellite Home Viewer Act may be unconstitutional,
among other things.
In March 2000, the networks filed an emergency motion again asking the
court to issue an injunction requiring EchoStar to turn off network programming
to certain of its customers. At that time, the networks also argued that
EchoStar's compliance procedures violate the Satellite Home Viewer Improvement
Act. EchoStar opposed the networks' motion and again asked the court to hear
live testimony before ruling upon the networks' injunction request.
On September 29, 2000, the Court granted the Networks' motion for
preliminary injunction, denied the Network's emergency motion and denied
EchoStar's request to present live testimony and evidence. The Court's original
order required EchoStar to terminate network programming to certain subscribers
"no later than February 15, 1999", and contained other dates which would be
physically impossible to comply with. The order imposes restrictions on
EchoStar's past and future sale of distant ABC, NBC, CBS and Fox channels
similar to those imposed on PrimeTime 24 (and, EchoStar believes, on DirecTV and
others). Some of those restrictions go beyond the statutory requirements imposed
by the Satellite Home Viewer Act and the Satellite Home Viewer Improvement Act.
For these and other reasons EchoStar believes the Court's order is, among other
things, fundamentally flawed, unconstitutional and should be overturned.
However, it is very unusual for a Court of Appeals to overturn a lower court's
order and there can be no assurance whatsoever that it will be overturned.
On October 3, 2000, and again on October 25, 2000, the Court amended
its original preliminary injunction order in an effort to fix some of the errors
in the original order. The twice amended preliminary injunction order requires
EchoStar to shut off, by February 15, 2001, all subscribers who are ineligible
to receive distant network programming under the court's order. EchoStar has
appealed the September 29, 2000 preliminary injunction order and the October 3,
2000 amended preliminary injunction order. EchoStar has also asked the United
States Court of Appeals for the Eleventh Circuit to stay the preliminary
injunction orders pending the appeal. The Eleventh Circuit ordered the networks
to file a brief with the Court of Appeals by November 6, 2000, and that EchoStar
respond to that brief by November 9, 2000. Both briefs have been filed.
Additional briefing schedules and rulings from the Miami Court and from the
Court of Appeals could occur at any time. EchoStar's effort to seek a stay of
the preliminary injunction may not be successful and EchoStar may be required to
comply with the dates provided in the Court's preliminary injunction order. The
preliminary injunction could force EchoStar to terminate delivery of distant
network channels to a substantial portion of its distant network subscriber
base, which could also cause many of these subscribers to cancel their
subscription to EchoStar's other services. Such terminations would result in a
small reduction in EchoStar's reported average monthly revenue per subscriber
and could result in a temporary increase in churn.
Starsight
During October 2000, Starsight Telecast, Inc., a subsidiary of Gemstar
- TV Guide, filed a suit for patent infringement against EchoStar and certain of
its subsidiaries in the United States District Court for the Western District of
North Carolina, Asheville Division. The suit alleges infringement of United
States Patent No. 4,706,121 which relates to certain electronic program guide
functions. EchoStar has examined this patent and believes that it is not
infringed by any of EchoStar's products or services. EchoStar intends to
vigorously defend against this action and to assert a variety of counterclaims.
10
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ECHOSTAR DBS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
Superguide Corp. also recently filed suit against EchoStar, DirecTv and
others in the same North Carolina court, alleging infringement of United States
Patent Nos. 5,038,211, 5,293,357 and 4,751,578 which relate to certain
electronic program guide functions, including the use of electronic program
guides to control VCRs. It is EchoStar's understanding that these patents may be
licensed by Superguide to Gemstar, although Gemstar has not asserted the patents
against EchoStar. EchoStar has examined these patents and believes that they are
not infringed by any of EchoStar's products or services. EchoStar intends to
vigorously defend against this action and assert a variety of counterclaims.
In the event it is ultimately determined that EchoStar infringes on any
of these patents EchoStar may be subject to substantial damages, and/or an
injunction that could require EchoStar to materially modify certain user
friendly electronic programming guide and related features it currently offers
to consumers. It is too early to make an assessment of the probable outcome of
either suit.
EchoStar 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 EchoStar's financial position or results of operations.
Meteoroid Events
In November 1998 and 1999, certain meteoroid events occurred as the
Earth's orbit passed through the particulate trail of Comet 55P (Tempel-Tuttle).
Similar meteoroid events are expected to occur again in November 2000. These
meteoroid events pose a potential threat to all in-orbit geosynchronous
satellites including our DBS satellites. While the probability that our
satellites will be damaged by space debris is very small, that probability will
increase by several orders of magnitude during these meteoroid events.
Solar Storms
Due to the current peak in the 11-year solar cycle, increased solar
activity is likely for the next 1 1/2 years. Some of these solar storms pose a
potential threat to all in-orbit geosynchronous satellites including our DBS
satellites. While the probability that the effects from the storms will damage
our satellites or cause service interruptions is generally very small, that
probability will increase by several orders of magnitude during this solar cycle
peak.
7. LONG-TERM DEBT
Debt Redemption
Effective July 14, 2000, we redeemed all of our remaining outstanding
12 7/8% Senior Secured Discount Notes Due 2004 (the "1994 Notes"), 13 1/8%
Senior Secured Discount Notes due 2004 (the "1996 Notes"), 12 1/2% Senior
Secured Notes due 2002 (the "1997 Notes") and 12 1/8% Senior Exchange Notes Due
2004 (the "Exchange Notes") totaling approximately $2.6 million. Aggregate
premium charges of approximately $122,000 related to the redemption of the 1994
Notes, 1996 Notes, 1997 Notes and Exchange Notes were accrued at June 30, 2000.
10 3/8% Seven Year Notes
On September 25, 2000, our direct parent company, EchoStar Broadband
Corporation ("EBC"), sold $1 billion principal amount of 10 3/8% Senior Notes
due 2007 (the "10 3/8% Seven Year Notes"). Interest accrues at an annual rate of
10 3/8% on the 10 3/8% Seven Year Notes and is payable semi-annually in cash, in
arrears on April 1 and October 1 of each year, commencing April 1, 2001. The
proceeds of the 10 3/8% Seven Year Notes will be used primarily by EBC and its
subsidiaries for the construction and launch of additional satellites, strategic
acquisitions and other general working capital purposes.
The indenture related to the 10 3/8% Seven Year Notes (the "10 3/8%
Seven Year Notes Indenture") contains certain restrictive covenants that
generally do not impose material limitations on EBC or us. Subject to certain
limitations, the 10 3/8% Seven Year Notes Indenture permits EBC to incur
additional indebtedness, including secured and unsecured indebtedness that ranks
on parity with the 10 3/8% Seven Year Notes. Any secured indebtedness will, as
to the collateral securing such indebtedness, be effectively senior to the 10
3/8% Seven Year Notes to the extent of such collateral.
The 10 3/8% Seven Year Notes are:
o general unsecured obligations of EBC;
o ranked equally in right of payment with all of EBC's existing and
future senior debt;
o ranked senior in right of payment to all of EBC's other existing
and future subordinated debt; and
o ranked effectively junior to (i) all liabilities (including trade
payables) of EBC's subsidiaries and (ii) all of EBC's secured
obligations, to the extent of the collateral securing such
obligations, including any borrowings under any of EBC's future
secured credit facilities, if any.
Except under certain circumstances requiring prepayment premiums, and
in other limited circumstances, the 10 3/8% Seven Year Notes are not redeemable
at our option prior to October 1, 2004. Thereafter, the 10 3/8% Seven Year Notes
will be subject to redemption, at EBC's option, in whole or in part, at
redemption prices decreasing from 105.188% during the year commencing October 1,
2004 to 100% on or after October 1, 2006, together with accrued and unpaid
interest thereon to the redemption date.
In the event of a change of control, as defined in the 10 3/8% Seven
Year Notes Indenture, EBC will be required to make an offer to repurchase all or
any part of a holder's 10 3/8% Seven Year Notes at a purchase price equal to
101% of the aggregate principal amount thereof, together with accrued and unpaid
interest thereon, to the date of repurchase.
Under the terms of the 10 3/8% Seven Year Notes Indenture, EBC has
agreed to cause us, its wholly-owned subsidiary, to make an offer to exchange
(the "EchoStar DBS Exchange Offer") all of the outstanding 10 3/8% Seven Year
Notes for a new class of notes issued by us as soon as practical following the
first date (as reflected in our most recent quarterly or annual financial
statements) on which we are permitted to incur indebtedness in an amount equal
to the outstanding principal balance of the 10 3/8% Seven Year Notes under the
"Indebtedness to Cash Flow Ratio" test contained in the indentures (the
"EchoStar DBS Indentures") governing our 9 1/4% Senior Notes due 2006 ("Seven
Year Notes") and 9 3/8% Senior Notes due 2009 ("Ten Year Notes") (collectively
the "Seven and Ten Year Notes"), and such incurrence of indebtedness would not
otherwise cause any breach or violation of, or result in a default under, the
terms of the EchoStar DBS Indentures.
On October 25, 2000, as contemplated by the terms of the EBC Indenture,
we amended the terms of the EchoStar DBS Indentures to provide that the
recording of some or all of the indebtedness represented by the 10 3/8% Seven
Year Notes on our balance sheet as a result of the application of generally
accepted accounting principles and related rules prior to the completion of the
EchoStar DBS Exchange Offer would not be deemed to constitute an incurrence of
indebtedness for certain purposes under the EchoStar DBS Indentures. These
amendments were approved by more than a majority in principal amount of each
issue of the Seven and Ten Year Notes. The cost of obtaining these consents was
immaterial to us.
8. SEGMENT REPORTING
Financial Data by Business Unit (in thousands)
Statement of Financial Accounting Standard No. 131, "Disclosures About
Segments of an Enterprise and Related Information" ("FAS No. 131") establishes
standards for reporting information about operating segments in annual financial
statements of public business enterprises and requires that those enterprises
report selected information about operating segments in interim financial
reports issued to shareholders. Operating segments are components of an
enterprise about which separate financial information is available and regularly
evaluated by the chief operating decision maker(s) of an enterprise. Under this
definition, we are currently operating as three separate business units.
11
<PAGE> 14
ECHOSTAR DBS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
<TABLE>
<CAPTION>
ECHOSTAR ECHOSTAR
DISH TECHNOLOGIES SATELLITE ELIMINATIONS CONSOLIDATED
NETWORK CORPORATION SERVICES AND OTHER TOTAL
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
THREE MONTHS ENDED
SEPTEMBER 30, 1999
Revenue .................... $ 365,572 $ 139,195 $ 13,535 $ (90,122) $ 428,180
Net income (loss) before
extraordinary charges ... (155,711) 22,970 7,739 601 (124,401)
THREE MONTHS ENDED
SEPTEMBER 30, 2000
Revenue .................... $ 633,201 $ 40,889 $ 14,021 $ 9,861 $ 697,972
Net income (loss) .......... (139,768) (2,580) 11,109 346 (130,893)
NINE MONTHS ENDED
SEPTEMBER 30, 1999
Revenue .................... $ 949,225 $ 186,887 $ 33,244 $ (81,383) $ 1,087,973
Net income (loss) before
extraordinary charges ... (327,210) 15,715 19,508 (11,875) (303,862)
NINE MONTHS ENDED
SEPTEMBER 30, 2000
Revenue .................... $ 1,690,435 $ 141,403 $ 47,448 $ 30,536 $ 1,909,822
Net income (loss) .......... (480,496) (2,935) 33,890 658 (448,883)
<CAPTION>
OTHER
ECHOSTAR
ACTIVITY DBS CORP
------------ ------------
<S> <C> <C>
THREE MONTHS ENDED
SEPTEMBER 30, 1999
Revenue .................... $ 3,079 $ 431,259
Net income (loss) before
extraordinary charges ... (2,131) (126,532)
THREE MONTHS ENDED
SEPTEMBER 30, 2000
Revenue .................... $ (3,745) $ 694,227
Net income (loss) .......... 2,330 (128,563)
NINE MONTHS ENDED
SEPTEMBER 30, 1999
Revenue .................... $ 4,066 $ 1,092,039
Net income (loss) before
extraordinary charges ... (33,190) (337,052)
NINE MONTHS ENDED
SEPTEMBER 30, 2000
Revenue .................... $ (5,338) $ 1,904,484
Net income (loss) .......... (8,794) (457,677)
</TABLE>
9. SUBSEQUENT EVENTS
EchoStar VI
On October 13, 2000, we announced that EchoStar VI, our sixth direct
broadcast satellite which launched successfully on July 14, 2000, from Cape
Canaveral, Florida, has reached its final orbital location at 119 degrees West
Longitude as assigned under a special temporary authority by the FCC. It now is
broadcasting satellite TV channels to over 4.8 million DISH Network customers
nationwide, including Alaska and Hawaii. To date, all systems on the satellite
are operating normally.
DirecTV
We have previously publicly expressed our desire to negotiate with
General Motors if they decide to spin off all or a portion of their GMH
subsidiary. We believe the enormous synergies that would be created by the
combination of EchoStar and DirecTv would significantly enhance shareholder
value for both companies. However, we were recently informed by DirecTv that GM
is not willing to include EchoStar in future discussions.
12
<PAGE> 15
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 one or more satellites due to
operational failures, space debris or otherwise; delays in the construction of
our seventh, eighth or ninth satellites; an unsuccessful deployment of future
satellites; inability to settle outstanding claims with insurers; a decrease in
sales of digital equipment and related services to international direct-to-home
service providers; a decrease in DISH Network subscriber growth; an increase in
subscriber turnover; an increase in subscriber acquisition costs; an inability
to obtain certain retransmission consents; our inability to retain necessary
authorizations from the FCC; an inability to obtain patent licenses from holders
of intellectual property or redesign our products to avoid patent infringement;
an increase in competition from cable, direct broadcast satellite, other
satellite system operators, and other providers of subscription television
services; the introduction of new technologies and competitors into the
subscription television business; a change in the regulations governing the
subscription television service industry; the outcome of any litigation in which
we may be involved; general business and economic conditions; and other risk
factors described from time to time in our reports and statements filed with the
Securities and Exchange Commission. In addition to statements that explicitly
describe such risks and uncertainties, readers are urged to consider statements
that include the terms "believes," "belief," "expects," "plans," "anticipates,"
"intends" or the like to be uncertain and forward-looking. All cautionary
statements made herein should be read as being applicable to all forward-looking
statements wherever they appear. In this connection, investors should consider
the risks described herein and should not place undue reliance on any
forward-looking statements.
RESULTS OF OPERATIONS
Three Months Ended September 30, 2000 Compared to the Three Months Ended
September 30, 1999.
Revenue. Total revenue for the three months ended September 30, 2000
was $694 million, an increase of $263 million compared to total revenue for the
three months ended September 30, 1999 of $431 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 $615
million for the three months ended September 30, 2000, an increase of $256
million compared to the same period in 1999. DISH Network subscription
television services revenue principally consists of revenue from basic, premium
and pay-per-view subscription television services. This increase was directly
attributable to the increase in the number of DISH Network subscribers and
higher average revenue per subscriber. DISH Network net subscriber additions for
the three months ended September 30, 2000 increased approximately 21% compared
to the same period in 1999. As of September 30, 2000, we had approximately 4.8
million DISH Network subscribers compared to 3.0 million at September 30, 1999.
The strong subscriber growth reflects the impact of aggressive marketing
promotions, including our free installation program, together with increased
interest in satellite television resulting from the availability of local
network channels by satellite, and generally good economic conditions and
positive momentum for the DISH Network. DISH Network subscription television
services revenue will continue to increase to the extent we are successful in
increasing the number of DISH Network subscribers and maintaining or increasing
revenue per subscriber.
Monthly average revenue per subscriber was approximately $45.36 during
the three months ended September 30, 2000 and approximately $43.13 during the
same period in 1999. The increase in monthly average revenue per subscriber is
primarily attributable to a $1.00 price increase in America's Top 100 CD, our
most popular programming package, during May 2000, the increased availability of
local channels by satellite together with the earlier successful introduction of
our $39.99 per month America's Top 150 programming package. During August 2000,
we announced a promotion offering consumers free premium movie channels. Under
this promotion, all new subscribers who order either our America's Top 100 CD or
America's Top 150 programming package and any or all of our four premium movie
packages between August 1, 2000 and January 31, 2001, will receive those premium
movie
13
<PAGE> 16
ITEM 2. MANAGEMENT'S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS - CONTINUED
packages free for three months. This promotion had a negative impact on monthly
average revenue per subscriber since premium movie package revenue from
participating subscribers will be deferred until the expiration of each
participating subscriber's free service. While there can be no assurance, we
expect modest increases in monthly average revenue per subscriber during the
remainder of 2000.
For the three months ended September 30, 2000, DTH equipment sales and
integration services totaled $55 million, an increase of $6 million compared to
the same period during 1999. DTH equipment sales consist of sales of digital
set-top boxes and other digital satellite broadcasting equipment to
international DTH service operators and sales of DBS accessories. This increase
in DTH equipment sales and integration services revenue was primarily
attributable to an increase in international demand for digital set-top boxes as
compared to the same period during 1999.
Substantially all of our EchoStar Technologies Corporation, or ETC,
revenues have resulted from sales to two international DTH providers. We
currently have agreements to provide equipment to DTH service operators in Spain
and Canada. Our future revenue from the sale of DTH equipment and integration
services in international markets depends largely on the success of these DTH
operators and continued demand for our digital set-top boxes. Since our ETC
business currently is economically dependent on these two DTH providers, there
can be no assurance as to total DTH equipment and integration services revenue
for the year ended December 31, 2000. Although we continue to actively pursue
additional distribution and integration service opportunities internationally,
no assurance can be given that any such efforts will be successful.
As previously reported, since 1998, Telefonica's Via Digital, one of
the two DTH service providers described above, has had recurrent discussions and
negotiations for a possible merger with Sogecable's Canal Satelite Digital, one
of its primary competitors. While we are not currently aware of any formal
negotiations between Via Digital and Canal Satelite Digital, there are again
rumors of a potential merger in the marketplace. Although we have binding
purchase orders from Via Digital for deliveries of DTH equipment in 2000, we
cannot predict the impact, if any, eventual consummation of this possible merger
might have on our future sales to Via Digital.
Satellite services revenue totaled $13 million during the three months
ended September 30, 2000, an increase of $2 million as compared to the same
period during 1999. These revenues principally include fees charged to content
providers for signal carriage and revenues earned from business television, or
BTV customers. The increase in satellite services revenue was primarily
attributable to the addition of new full-time BTV customers and additional sales
of idle satellite capacity to occasional-use customers.
In order, among other things, to commence compliance with the
injunction issued against us in our pending litigation with the four major
broadcast networks and their affiliate groups, we have terminated the delivery
of distant network channels to certain of our subscribers. Additionally, the FCC
recently issued rules which impair our ability to deliver certain superstation
channels to our customers. Those rules will increase the cost of our delivery of
superstations, and could require that we terminate the delivery of certain
superstations to a material portion of our subscriber base. In combination,
these terminations would result in a small reduction in average monthly revenue
per subscriber and could increase subscriber turnover. While there can be no
assurance, any such decreases could be offset by increases in average monthly
revenue per subscriber resulting from the delivery of local network channels by
satellite, and increases in other programming offerings with the commencement of
operation of EchoStar VI.
DISH Network Operating Expenses. DISH Network operating expenses
totaled $325 million during the three months ended September 30, 2000, an
increase of $124 million or 62% compared to the same period in 1999. DISH
Network operating expenses represented 53% and 56% of subscription television
services revenue during the three months ended September 30, 2000 and 1999,
respectively. The increase in DISH Network operating expenses in total was
consistent with, and primarily attributable to, the increase in the number of
DISH Network subscribers.
Subscriber-related expenses totaled $255 million during the three
months ended September 30, 2000, an increase of $96 million compared to the same
period in 1999. Such expenses, which include programming expenses, copyright
royalties, residuals currently payable to retailers and distributors, and
billing, lockbox and other variable subscriber expenses, represented 41% and 44%
of subscription television services revenues during the three
14
<PAGE> 17
ITEM 2. MANAGEMENT'S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS - CONTINUED
months ended September 30, 2000 and 1999, respectively. Although we do not
currently expect subscriber-related expenses as a percentage of subscription
television services revenue to increase materially in future periods, there can
be no assurance this expense to revenue ratio will not materially increase.
Customer service center and other expenses principally consist of costs
incurred in the operation of our DISH Network customer service centers, such as
personnel and telephone expenses, as well as other operating expenses related to
our service and installation business. Customer service center and other
expenses totaled $60 million during the three months ended September 30, 2000,
an increase of $28 million as compared to the same period in 1999. The increase
in customer service center and other expenses primarily resulted from increased
personnel and telephone expenses to support the growth of the DISH Network and
from operating expenses related to the expansion of our installation and service
business. Customer service center and other expenses totaled 10% of subscription
television services revenue during the three months ended September 30, 2000, as
compared to 9% during the same period in 1999. The increase in this expense to
revenue ratio primarily resulted from the on-going construction and start-up
costs of our fifth customer service center in Virginia, and the continued
build-out of our installation offices nationwide. These expenses in total, and
as a percentage of subscription television services revenue, may continue to
increase in future periods as we continue to develop and expand our customer
service centers and installation business to provide additional customer support
and help us better accommodate anticipated subscriber growth, resulting in long
term efficiency improvements.
Satellite and transmission expenses include expenses associated with
the operation of our digital broadcast center, contracted satellite telemetry,
tracking and control services, and satellite in-orbit insurance. Satellite and
transmission expenses totaled $9 million during the three months ended September
30, 2000, a $1 million decrease compared to the same period in 1999. Satellite
and transmission expenses totaled 2% and 3% of subscription television services
revenue during the three months ended September 30, 2000 and 1999, respectively.
We expect satellite and transmission expenses to increase in the future as
additional satellites or digital broadcast centers are placed in service, but do
not expect these expenses to increase as a percentage of subscription television
services revenue.
Cost of sales -- DTH equipment and Integration Services. Cost of
sales - DTH equipment and integration services totaled $41 million during the
three months ended September 30, 2000, an increase of $6 million compared to the
same period in 1999. Cost of sales -- DTH equipment and integration services
principally includes costs associated with digital set-top boxes and related
components sold to international DTH operators and DBS accessories. This
increase in cost of sales -- DTH equipment and integration services is
consistent with the increase in DTH equipment sales and integration services
revenue. Cost of sales -- DTH equipment and integration services represented 74%
and 71% of DTH equipment revenue, during the three months ended September 30,
2000 and 1999, respectively. The increase reflects price pressure resulting
from increased competition from other providers of DTH equipment.
Marketing Expenses. We currently subsidize the purchase and
installation of EchoStar receiver systems in order to attract new DISH Network
subscribers. Consequently, our subscriber acquisition costs are significant.
Marketing expenses totaled $290 million during the three months ended September
30, 2000, an increase of $86 million compared to the same period in 1999. The
increase in marketing expenses was primarily attributable to an increase in
subscriber promotion subsidies. Subscriber promotion subsidies include the
excess of transaction costs over transaction proceeds at the time of sale of
EchoStar receiver systems, activation allowances paid to retailers, and other
promotional incentives. Advertising and other expenses totaled $41 million and
$20 million during the three months ended September 30, 2000 and 1999,
respectively.
During the three months ended September 30, 2000, our marketing
promotions included our DISH Network One-Rate Plan, C-band bounty program, Great
Rewards program (PrimeStar bounty), Digital Dynamite Plan, cable bounty and a
free installation program. Our subscriber acquisition costs under these programs
are significantly higher than those under our marketing programs historically.
Under the DISH Network One-Rate Plan, consumers are eligible to receive
a rebate of up to $199 on the purchase of certain EchoStar receiver systems. To
be eligible for this rebate, a subscriber must make a one-year commitment to
subscribe to our America's Top 150 programming or our America's Top 100 CD
programming package plus one premium movie package (or equivalent additional
programming). Although subscriber acquisition
15
<PAGE> 18
ITEM 2. MANAGEMENT'S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS - CONTINUED
costs are materially higher under this plan compared to previous promotions,
DISH Network One-Rate Plan customers generally provide materially greater
average revenue per subscriber than a typical DISH Network subscriber. In
addition, we believe that these customers represent lower credit risk and
therefore may be marginally less likely to disconnect their service than other
DISH Network subscribers. To the extent that actual consumer participation
levels exceed present expectations, subscriber acquisition costs may increase.
Although there can be no assurance as to the ultimate duration of the DISH
Network One-Rate Plan, we intend to continue it through at least January 2001.
Under our bounty programs, current cable customers are eligible to
receive a free base-level EchoStar receiver system and free installation. To be
eligible for this program, a subscriber must make a one-year commitment to
subscribe to either our America's Top 100 CD programming package plus one
premium movie package (or equivalent additional programming) or our America's
Top 150 programming package and prove that they are a current cable customer.
Under our free installation program all customers who purchased an
EchoStar receiver system through April 2000, from May 24, 2000 to July 31, 2000
and from September 15, 2000 to January 31, 2001, are eligible to receive a free
professional installation. The free installation program was responsible, in
part, for the strong subscriber growth during the first half of 2000.
During July 2000, we announced the commencement of our new Digital
Dynamite promotion. The Digital Dynamite plans offer four choices to consumers,
ranging from the use of one EchoStar receiver system and our America's Top 100
CD programming package for $34.99 per month, to providing consumers two EchoStar
receiver systems and our America's Top 150 programming package for $49.99 per
month. With each plan, consumers receive in-home-service, must agree to a
one-year commitment and incur a one-time set-up fee of $49, which includes the
first month's programming payment.
During the three months ended September 30, 2000, our subscriber
acquisition expenses, inclusive of acquisition marketing expenses, totaled
approximately $284 million, or approximately $438 per new subscriber activation.
Comparatively, our subscriber acquisition expenses during the three months ended
September 30, 1999, inclusive of acquisition marketing expenses, totaled $201
million, or approximately $390 per new subscriber activation. The increase in
our subscriber acquisition expenses, on a per new subscriber activation basis,
principally resulted from the impact of several aggressive marketing promotions
to acquire new subscribers, including most significantly our free installation
offer which was reinstated during September and is scheduled to conclude during
January 2001.
Our per subscriber acquisition expenses increased compared to the three
months ended June 30, 2000, as a result, among other things, of the
reinstatement of our free installation program during September 2000 and an
increase in our acquisition marketing expenditures during the three months ended
September 30, 2000. This increase was offset by a decrease resulting from the
limited rollout of our Digital Dynamite promotion, which allows us to capitalize
and depreciate over 4 years equipment costs which would otherwise be expensed at
the time of sale. Capital expenditures under our Digital Dynamite promotion
totaled approximately $22.5 million for the three months ended September 30,
2000. As a result of continuing competition and our plans to attempt to continue
to drive rapid subscriber growth, we expect our per subscriber acquisition costs
for 2000, including costs capitalized under the Digital Dynamite Plan, will
average approximately $450 to $475 for the full year.
Most of our core programming is broadcast from our satellites at the
119 degree orbital location, and almost all of our subscribers have EchoStar
receiver systems that can view programming from that location. With the
commencement of additional services from the 110 degree orbital location
following the successful launch of EchoStar V, our existing subscribers will
need to upgrade their dish and receiver systems in order to take advantage of
the additional services we now offer. To encourage existing subscribers to
upgrade their systems and remain subscribers, we are currently subsidizing
upgrades by existing subscribers to our DISH 500 system, which receives
programming from both the 110 degree and 119 degree orbital locations. The cost
of this program could be significant if utilized by a large number of our
existing subscribers, though upgrades should also result in increased revenue
per subscriber.
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ITEM 2. MANAGEMENT'S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS - CONTINUED
Our subscriber acquisition costs, both in the aggregate and on a per
new subscriber activation basis, may materially increase further to the extent
that we continue or expand our bounty program, our "free system/free
installation" program, the DISH Network One-Rate Plan, or other more aggressive
promotions if we determine that they are necessary to respond to competition, or
for other reasons.
General and Administrative Expenses. General and administrative
expenses totaled $59 million during the three months ended September 30, 2000,
an increase of $24 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% and 8% of
total revenue during the three months ended September 30, 2000 and 1999,
respectively. Although we expect G&A expenses as a percentage of total revenue
to remain near the current level or decline modestly in future periods, this
expense to revenue ratio could increase.
Non-cash, Stock-based Compensation. During 1999, we adopted an
incentive plan which provided certain key employees with incentives including
stock options. The payment of these incentives was contingent upon our
achievement of certain financial and other goals. We met certain of these goals
during 1999. Accordingly, during 1999, we recorded approximately $179 million of
deferred compensation related to post-grant appreciation of stock options
granted pursuant to the 1999 incentive plan. The related deferred compensation
will be recognized over the five-year vesting period. Accordingly, during the
three months ended September 30, 2000 and 1999 we recognized $12 million and $4
million, respectively, under this performance-based plan.
We report all non-cash compensation based on stock option appreciation
as a single expense category in our accompanying statements of operations. The
following table represents the other expense categories in our statements of
operations that would be affected if non-cash, stock-based compensation was
allocated to the same expense categories as the base compensation for key
employees who participate in the 1999 incentive plan:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30,
1999 2000
---------- ----------
<S> <C> <C>
Customer service center and other ................ $ 168 $ 107
Satellite and transmission ....................... 140 985
General and administrative ....................... 3,956 10,476
---------- ----------
Total non-cash, stock-based compensation ...... $ 4,264 $ 11,568
========== ==========
</TABLE>
EBITDA. EBITDA represents earnings before interest, taxes,
depreciation, amortization, and non-cash, stock-based compensation. EBITDA was
negative $28 million during the three months ended September 30, 2000 compared
to negative $48 million during the same period in 1999. This increase in EBITDA
principally resulted from an increase in DISH Network net subscriber additions
and monthly average revenue per subscriber, as well as other previously
described factors. It is important to note that EBITDA does not represent cash
provided or used by operating activities. Further, our calculation of EBITDA for
the three months ended September 30, 2000 and 1999 does not include
approximately $12 million and $4 million, respectively, of non-cash compensation
expense resulting from post-grant appreciation of employee stock options. EBITDA
should not be considered in isolation or as a substitute for measures of
performance prepared in accordance with generally accepted accounting
principles.
As previously discussed, to the extent we expand our current marketing
promotions and our subscriber acquisition costs materially increase, our EBITDA
results will be negatively impacted because subscriber acquisition costs are
generally expensed as incurred.
Depreciation and Amortization. Depreciation and amortization expenses
aggregated $43 million during the three months ended September 30, 2000, a $16
million increase compared to the same period in 1999. The increase in
depreciation and amortization expenses principally resulted from an increase in
depreciation related to the commencement of operation of EchoStar V in November
1999 and other depreciable assets placed in service during 2000 and late 1999.
17
<PAGE> 20
ITEM 2. MANAGEMENT'S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS - CONTINUED
Other Income and Expense. Other expense, net, totaled $46 million
during the three months ended September 30, 2000, a decrease of $1 million
compared to the same period in 1999.
Nine Months Ended September 30, 2000 Compared to the Nine Months Ended September
30, 1999.
Revenue. Total revenue for the nine months ended September 30, 2000 was
$1.904 billion, an increase of $812 million compared to total revenue for the
nine months ended September 30, 1999 of $1.092 million. The increase in total
revenue was primarily attributable to DISH Network subscriber growth.
DISH Network subscription television services revenue totaled $1.646
billion for the nine months ended September 30, 2000, an increase of $719
million compared to the same period in 1999. This increase was directly
attributable to the increase in the number of DISH Network subscribers and
higher average revenue per subscriber. DISH Network net subscriber additions for
the nine months ended September 30, 2000 increased approximately 31% compared to
the same period in 1999.
For the nine months ended September 30, 2000, DTH equipment sales and
integration services totaled $175 million, an increase of $69 million compared
to the same period during 1999. This increase in DTH equipment sales and
integration services revenue was primarily attributable to an increase in
international demand for digital set-top boxes as compared to the same period
during 1999.
Satellite services revenue totaled $42 million during the nine months
ended September 30, 2000, an increase of $14 million as compared to the same
period during 1999. The increase in satellite services revenue was primarily
attributable to the addition of new full-time BTV customers.
DISH Network Operating Expenses. DISH Network operating expenses
totaled $911 million during the nine months ended September 30, 2000, an
increase of $396 million or 77%, compared to the same period in 1999. The
increase in DISH Network operating expenses was consistent with, and primarily
attributable to, the increase in the number of DISH Network subscribers. DISH
Network operating expenses represented 55% and 56% of subscription television
services revenue during the nine months ended September 30, 2000 and 1999,
respectively.
Subscriber-related expenses totaled $693 million during the nine months
ended September 30, 2000, an increase of $288 million compared to the same
period in 1999. Such expenses represented 42% and 44% of subscription television
services revenues during the nine months ended September 30, 2000 and 1999,
respectively.
Customer service center and other expenses totaled $185 million during
the nine months ended September 30, 2000, an increase of $104 million as
compared to the same period in 1999. The increase in customer service center and
other expenses primarily resulted from increased personnel and telephone
expenses to support the growth of the DISH Network and from operating expenses
related to the expansion of our installation and service business. Customer
service center and other expenses totaled 11% of subscription television
services revenue during the nine months ended September 30, 2000, as compared to
9% during the same period in 1999. The increase in this expense to revenue ratio
primarily resulted from the on-going construction and start-up costs of our
fifth customer service center in Virginia, and the continued build-out of our
installation offices nationwide.
Satellite and transmission expenses totaled $33 million during the nine
months ended September 30, 2000, a $3 million increase compared to the same
period in 1999. This increase resulted from higher satellite and other digital
broadcast center operating expenses due to an increase in the number of
operational satellites. Satellite and transmission expenses totaled 2% and 3% of
subscription television services revenue during the nine months ended September
30, 2000 and 1999, respectively.
Cost of sales - DTH equipment and Integration Services. Cost of sales
-- DTH equipment and integration services totaled $135 million during the nine
months ended September 30, 2000, an increase of $58 million compared to the same
period in 1999. This increase in cost of sales -- DTH equipment and integration
services is consistent with the increase in DTH equipment sales and integration
services revenue. Cost of sales -- DTH equipment and integration services
represented 77% and 73% of DTH equipment revenue, during the nine months ended
September 30, 2000 and
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<PAGE> 21
ITEM 2. MANAGEMENT'S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS - CONTINUED
1999, respectively. The increase reflects price pressure resulting from
increased competition from other providers of DTH equipment.
Marketing Expenses. Marketing expenses totaled $828 million during the
nine months ended September 30, 2000, an increase of $326 million compared to
the same period in 1999. The increase in marketing expenses was primarily
attributable to an increase in subscriber promotion subsidies, resulting from
several aggressive marketing promotions. Advertising and other expenses totaled
$89 million and $40 million during the nine months ended September 30, 2000 and
1999, respectively.
General and Administrative Expenses. General and administrative
expenses totaled $165 million during the nine months ended September 30, 2000,
an increase of $71 million as compared to the same period in 1999. The increase
in G&A expenses was principally attributable to increased personnel expenses to
support the growth of the DISH Network. G&A expenses represented 9% of total
revenue during each of the nine months ended September 30, 2000 and 1999.
Non-cash, Stock-based Compensation. As a result of substantial
post-grant appreciation of stock options, during the nine months ended September
30, 2000 and 1999 we recognized $39 million and $6 million, respectively, of the
total remaining deferred stock-based compensation under the 1999 incentive plan.
The remainder will be recognized over the remaining vesting period.
We report all non-cash compensation based on stock option appreciation
as a single expense category in our accompanying statements of operations. The
following table represents the other expense categories in our statements of
operations that would be affected if non-cash, stock-based compensation was
allocated to the same expense categories as the base compensation for certain
key employees who participated in the 1999 incentive plan:
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
1999 2000
------------ ------------
<S> <C> <C>
Customer service center and other ................ $ 510 $ 1,308
Satellite and transmission ....................... 369 2,296
General and administrative ....................... 5,104 34,995
------------ ------------
Total non-cash, stock-based compensation ...... $ 5,983 $ 38,599
============ ============
</TABLE>
EBITDA. EBITDA represents earnings before interest, taxes,
depreciation, amortization, and non-cash, stock-based compensation. EBITDA was
negative $156 million during the nine months ended September 30, 2000, compared
to negative $108 million during the same period in 1999. This decline in EBITDA
principally resulted from an increase in subscriber acquisition costs due to the
success of several aggressive marketing promotions to acquire new subscribers,
as well as other previously described factors. It is important to note that
EBITDA does not represent cash provided or used by operating activities.
Further, our calculation of EBITDA for the nine months ended September 30, 2000
and 1999 does not include approximately $39 million and $6 million,
respectively, of non-cash compensation expense resulting from post-grant
appreciation of employee stock options. EBITDA should not be considered in
isolation or as a substitute for measures of performance prepared in accordance
with generally accepted accounting principles.
Depreciation and Amortization. Depreciation and amortization expenses
aggregated $123 million during the nine months ended September 30, 2000, a $46
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 and the nine
months ended September 30, 2000.
Other Income and Expense. Other expense, net totaled $139 million
during the nine months ended September 30, 2000, a decrease of $8 million
compared to the same period in 1999. This decrease primarily resulted from a
loss on disposal of assets during the nine months ended September 30, 1999 and a
decrease in interest expense during the nine months ended September 30, 2000.
19
<PAGE> 22
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
DirecTV
During February 2000 EchoStar filed suit against DirecTV and Thomson
Consumer Electronics/RCA in the Federal District Court of Colorado. The suit
alleges that DirecTV has utilized improper conduct in order to fend off
competition from the DISH Network. According to the complaint, DirecTV has
demanded that certain retailers stop displaying EchoStar's merchandise and has
threatened to cause economic damage to retailers if they continue to offer both
product lines in head-to-head competition. The suit alleges, among other things,
that DirecTV has acted in violation of federal and state anti-trust laws in
order to protect DirecTV's market share. 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 its right to offer network programming. DirecTV 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. It is too early in the litigation to make an
assessment of the probable outcome.
Fee Dispute
EchoStar had a contingent fee arrangement with the attorneys who
represented EchoStar in the litigation with News Corporation. The contingent fee
arrangement provides for the attorneys to be paid a percentage of any net
recovery obtained by EchoStar in the News Corporation litigation. The attorneys
have asserted that they may be entitled to receive payments totaling hundreds of
millions of dollars under this fee arrangement.
During mid-1999, EchoStar initiated litigation against the attorneys in
the Arapahoe County, Colorado, District Court arguing that the fee arrangement
is void and unenforceable. In December 1999, the attorneys initiated an
arbitration proceeding before the American Arbitration Association. The
litigation has been stayed while the arbitration is ongoing. A two week
arbitration hearing has been set to begin in late February 2001. It is too early
to determine the outcome of negotiations, arbitration or litigation regarding
this fee dispute. EchoStar is vigorously contesting the attorneys'
interpretation of the fee arrangement, which EchoStar believes significantly
overstates the magnitude of its liability.
WIC Premium Television Ltd.
During July 1998, a lawsuit was filed by WIC Premium Television Ltd.,
an Alberta corporation, in the Federal Court of Canada Trial Division, against
General Instrument Corporation, HBO, Warner Communications, Inc., John Doe,
Showtime, United States Satellite Broadcasting Company, Inc., EchoStar, and two
of EchoStar's wholly-owned subsidiaries. The lawsuit seeks, among other things,
an interim and permanent injunction prohibiting the defendants from activating
receivers in Canada and from infringing any copyrights held by WIC. It is too
early to determine whether or when any other lawsuits or claims will be filed.
It is also too early to make an assessment of the probable outcome of the
litigation or to determine the extent of any potential liability or damages.
During September 1998, WIC filed another lawsuit in the Court of
Queen's Bench of Alberta Judicial District of Edmonton against certain
defendants, including EchoStar. WIC is a company authorized to broadcast certain
copyrighted work, such as movies and concerts, to residents of Canada. WIC
alleges that the defendants engaged in, promoted, and/or allowed satellite dish
equipment from the United States to be sold in Canada and to Canadian residents
and that some of the defendants allowed and profited from Canadian residents
purchasing and viewing subscription television programming that is only
authorized for viewing in the United States. The lawsuit seeks, among other
things, an interim and permanent injunction prohibiting the defendants from
importing hardware into Canada and from activating receivers in Canada, together
with damages in excess of $175 million.
20
<PAGE> 23
PART II - OTHER INFORMATION
EchoStar filed motions to dismiss each of the actions for lack of
personal jurisdiction. The Court in the Alberta action recently denied
EchoStar's Motion to Dismiss, which is currently under appeal. The Alberta Court
also granted a motion to add more EchoStar parties to the lawsuit. EchoStar
Satellite Corporation, EchoStar DBS Corporation, EchoStar Technologies
Corporation, and EchoStar Satellite Broadcast Corporation have been added as
defendants in the litigation. The newly added defendants have also challenged
jurisdiction. The Court in the Federal action has stayed that case before ruling
on EchoStar's motion to dismiss. EchoStar intends to vigorously defend the suits
in the event its motions are denied. It is too early to determine whether or
when any other lawsuits or claims will be filed. It is also too early to make an
assessment of the probable outcome of the litigation or to determine the extent
of any potential liability or damages.
Broadcast network programming
Until July 1998, EchoStar obtained distant broadcast network channels
(ABC, NBC, CBS and FOX) for distribution to its customers through PrimeTime 24.
In December 1998, the United States District Court for the Southern District of
Florida entered a nationwide permanent injunction requiring PrimeTime 24 to shut
off distant network channels to many of its customers, and henceforth to sell
those channels to consumers in accordance with certain stipulations in the
injunction.
In October 1998, EchoStar filed a declaratory judgment action against
ABC, NBC, CBS and FOX in Denver Federal Court. EchoStar asked the court to enter
a judgment declaring that its method of providing distant network programming
did not violate the Satellite Home Viewer Act and hence did not infringe the
networks' copyrights. In November 1998, the networks and their affiliate groups
filed a complaint against EchoStar in Miami Federal Court alleging, among other
things, copyright infringement. The court combined the case that EchoStar filed
in Colorado with the case in Miami and transferred it to the Miami court. The
case remains pending in Miami. While the networks have not sought monetary
damages, they have sought to recover attorney fees if they prevail.
In February 1999, the networks filed a "Motion for Temporary
Restraining Order, Preliminary Injunction and Contempt Finding" against DirecTV,
Inc. in Miami related to the delivery of distant network channels to DirecTV
customers by satellite. DirecTV settled this lawsuit with the networks. Under
the terms of the settlement between DirecTV and the networks, some DirecTV
customers were scheduled to lose access to their satellite-provided distant
network channels by July 31, 1999, while other DirecTV customers were to be
disconnected by December 31, 1999. Subsequently, PrimeTime 24 and substantially
all providers of satellite-delivered network programming other than EchoStar
agreed to this cut-off schedule, although EchoStar does not know if they adhered
to this schedule.
In December 1998, the networks filed a Motion for Preliminary
Injunction against EchoStar in the Miami court, and asked the court to enjoin
EchoStar from providing network programming except under limited circumstances.
A preliminary injunction hearing was held on September 21, 1999. The court took
the issues under advisement to consider the networks' request for an injunction,
whether to hear live testimony before ruling upon the request, and whether to
hear argument on why the Satellite Home Viewer Act may be unconstitutional,
among other things.
In March 2000, the networks filed an emergency motion again asking the
court to issue an injunction requiring EchoStar to turn off network programming
to certain of its customers. At that time, the networks also argued that
EchoStar's compliance procedures violate the Satellite Home Viewer Improvement
Act. EchoStar opposed the networks' motion and again asked the court to hear
live testimony before ruling upon the networks' injunction request.
On September 29, 2000, the Court granted the Networks' motion for
preliminary injunction, denied the Network's emergency motion and denied
EchoStar's request to present live testimony and evidence. The Court's original
order required EchoStar to terminate network programming to certain subscribers
"no later than February 15, 1999", and contained other dates which would be
physically impossible to comply with. The order imposes restrictions on
EchoStar's past and future sale of distant ABC, NBC, CBS and Fox channels
similar to those imposed on PrimeTime 24 (and, EchoStar believes, on DirecTV and
others). Some of those restrictions go beyond the statutory requirements imposed
by the Satellite Home Viewer Act and the Satellite Home Viewer Improvement Act.
For these and other reasons EchoStar believes the Court's order is, among other
things, fundamentally flawed, unconstitutional
21
<PAGE> 24
PART II - OTHER INFORMATION
and should be overturned. However, it is very unusual for a Court of Appeals to
overturn a lower court's order and there can be no assurance whatsoever that it
will be overturned.
On October 3, 2000, and again on October 25, 2000, the Court amended
its original preliminary injunction order in an effort to fix some of the errors
in the original order. The twice amended preliminary injunction order requires
EchoStar to shut off, by February 15, 2001, all subscribers who are ineligible
to receive distant network programming under the court's order. EchoStar has
appealed the September 29, 2000 preliminary injunction order and the October 3,
2000 amended preliminary injunction order. EchoStar has also asked the United
States Court of Appeals for the Eleventh Circuit to stay the preliminary
injunction orders pending the appeal. The Eleventh Circuit ordered the networks
to file a brief with the Court of Appeals by November 6, 2000, and that EchoStar
respond to that brief by November 9, 2000. Both briefs have been filed.
Additional briefing schedules and rulings from the Miami Court and from the
Court of Appeals could occur at any time. EchoStar's effort to seek a stay of
the preliminary injunction may not be successful and EchoStar may be required to
comply with the dates provided in the Court's preliminary injunction order. The
preliminary injunction could force EchoStar to terminate delivery of distant
network channels to a substantial portion of its distant network subscriber
base, which could also cause many of these subscribers to cancel their
subscription to EchoStar's other services. Such terminations would result in a
small reduction in EchoStar's reported average monthly revenue per subscriber
and could result in a temporary increase in churn.
Satellite Insurance
As a result of the failure of EchoStar IV solar arrays to fully deploy
and the failure of 26 transponders to date, a maximum of approximately 16 of the
44 transponders on EchoStar IV are available for use at this time. Due to the
normal degradation of the solar arrays, the number of available transponders
will further decrease over time. In addition to the transponder and solar array
failures, EchoStar IV experienced anomalies affecting its thermal systems and
propulsion system. There can be no assurance that further material degradation,
or total loss of use, of EchoStar IV will not occur in the immediate future.
In September 1998, EchoStar filed a $219.3 million insurance claim for
a constructive total loss under the launch insurance policies covering EchoStar
IV. The satellite insurance consists of separate identical policies with
different carriers for varying amounts which, in combination, create a total
insured amount of $219.3 million.
The insurance carriers offered 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. EchoStar
strongly disagrees with the position of the insurers and has filed an
arbitration claim against them for breach of contract, failure to pay a valid
insurance claim and bad faith denial of a valid claim, among other things. There
can be no assurance that EchoStar will receive the amount claimed or, if
EchoStar does, that EchoStar will retain title to EchoStar IV with its reduced
capacity.
At the time EchoStar filed its claim in 1998, EchoStar recognized an
impairment loss of $106 million to write-down the carrying value of the
satellite and related costs, and simultaneously recorded an insurance claim
receivable for the same amount. EchoStar continues to believe it will ultimately
recover at least the amount originally recorded and does not intend to adjust
the amount of the receivable until there is greater certainty with respect to
the amount of the final settlement.
As a result of the thermal and propulsion system anomalies, EchoStar
reduced the estimated remaining useful life of EchoStar IV to approximately 4
years during January 2000. This change will increase depreciation expense to be
recognized by EchoStar during the year ending December 31, 2000 by approximately
$9.6 million. EchoStar will continue to evaluate the performance of EchoStar IV
and may modify its loss assessment as new events or circumstances develop.
The in-orbit insurance policies for EchoStar I, EchoStar II, and
EchoStar III expired July 25, 2000. The insurers have to date refused to renew
insurance on EchoStar I, EchoStar II and EchoStar III on reasonable terms. Based
on, among other things, the insurance carriers' unanimous refusal to negotiate
reasonable renewal insurance
22
<PAGE> 25
PART II - OTHER INFORMATION
coverage, EchoStar believes that the carriers colluded and conspired to boycott
EchoStar unless EchoStar accepts their offer to settle the EchoStar IV claim for
$88 million.
Based on the carriers' actions, EchoStar has added causes of action in
its EchoStar IV demand for arbitration for breach of the duty of good faith and
fair dealing, and unfair claim practices. Additionally, EchoStar has filed a
lawsuit against the insurance carriers in the United States District Court for
the District of Colorado asserting causes of action for violation of Federal and
State Antitrust laws. While EchoStar believes it is entitled to the full amount
claimed under the EchoStar IV insurance policy and believes the insurance
carriers are in violation of Antitrust laws and have committed further acts of
bad faith in connection with their refusal to negotiate reasonable insurance
coverage on EchoStar's other satellites, there can be no assurance as to the
outcome of these proceedings.
Starsight
During October 2000, Starsight Telecast, Inc., a subsidiary of Gemstar
- TV Guide, filed a suit for patent infringement against EchoStar and certain of
its subsidiaries in the United States District Court for the Western District of
North Carolina, Asheville Division. The suit alleges infringement of United
States Patent No. 4,706,121 which relates to certain electronic program guide
functions. EchoStar has examined this patent and believes that it is not
infringed by any of EchoStar's products or services. EchoStar intends to
vigorously defend against this action and to assert a variety of counterclaims.
Superguide Corp. also recently filed suit against EchoStar, DirecTv and
others in the same North Carolina court, alleging infringement of United States
Patent Nos. 5,038,211, 5,293,357 and 4,751,578 which relate to certain
electronic program guide functions, including the use of electronic program
guides to control VCRs. It is EchoStar's understanding that these patents may be
licensed by Superguide to Gemstar, although Gemstar has not asserted the patents
against EchoStar. EchoStar has examined these patents and believes that they are
not infringed by any of EchoStar's products or services. EchoStar intends to
vigorously defend against this action and assert a variety of counterclaims.
In the event it is ultimately determined that EchoStar infringes on any
of these patents EchoStar may be subject to substantial damages, and/or an
injunction that could require EchoStar to materially modify certain user
friendly electronic programming guide and related features it currently offers
to consumers. It is too early to make an assessment of the probable outcome of
either suit.
EchoStar 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 EchoStar's financial position or results of operations.
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 third quarter of 2000.
23
<PAGE> 26
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/ Michael R. McDonnell
-----------------------------------------------
Michael R. McDonnell
Senior Vice President and Chief Financial
Officer
(Principal Financial Officer)
Date: November 14, 2000
<PAGE> 27
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
27+ Financial Data Schedule.
</TABLE>
----------
+ Filed herewith.
