<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 JUNE 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 (I.R.S. Employer
of Incorporation or Organization) Identification No.)
5701 S. SANTA FE DRIVE
LITTLETON, COLORADO 80120
(Address of principal executive offices) (Zip code)
(303) 723-1000
(Registrant's telephone number, including area code)
NOT APPLICABLE
(Former name, former address and former fiscal year,
if changed since last report)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES X NO
--- ---
AS OF AUGUST 9, 2000, REGISTRANT'S OUTSTANDING COMMON STOCK CONSISTED OF
1,000 SHARES OF COMMON STOCK.
THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION
(H)(1)(a) AND (b) OF FORM 10-Q AND IS THEREFORE FILING THIS FORM 10-Q WITH THE
REDUCED DISCLOSURE FORMAT.
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<PAGE> 2
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Item 1. Financial Statements
<S> <C> <C>
Condensed Consolidated Balance Sheets -
December 31, 1999 and June 30, 2000 (Unaudited)................................................ 1
Condensed Consolidated Statements of Operations for the
three and six months ended June 30, 1999 and 2000 (Unaudited).................................. 2
Condensed Consolidated Statements of Cash Flows for the
six months ended June 30, 1999 and 2000 (Unaudited)............................................ 3
Notes to Condensed Consolidated Financial Statements (Unaudited)................................... 4
Item 2. Management's Narrative Analysis of Results of Operations........................................... 12
Item 3. Quantitative and Qualitative Disclosures About Market Risk......................................... None
</TABLE>
PART II - OTHER INFORMATION
<TABLE>
<CAPTION>
<S> <C> <C>
Item 1. Legal Proceedings.................................................................................. 19
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................................................................... 22
</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, JUNE 30,
1999 2000
----------- -----------
(Unaudited)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents ................................................................... $ 159,761 $ 102,479
Marketable investment securities ............................................................ 24,774 4,948
Trade accounts receivable, net of allowance for uncollectible accounts of
$13,109 and $16,249, respectively ........................................................ 157,944 179,393
Insurance receivable ........................................................................ 106,000 106,000
Inventories ................................................................................. 123,184 202,685
Other current assets ........................................................................ 27,027 16,314
----------- -----------
Total current assets ........................................................................... 598,690 611,819
Property and equipment, net .................................................................... 1,314,007 1,300,929
FCC authorizations, net ........................................................................ 722,234 719,038
Other noncurrent assets ........................................................................ 95,276 98,070
----------- -----------
Total assets .............................................................................. $ 2,730,207 $ 2,729,856
=========== ===========
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)
Current Liabilities:
Trade accounts payable ...................................................................... $ 187,703 $ 180,452
Deferred revenue ............................................................................ 181,034 230,246
Accrued expenses ............................................................................ 483,635 574,295
Advances from affiliates, net ............................................................... 272,440 443,716
Current portion of long-term debt ........................................................... 21,017 18,072
----------- -----------
Total current liabilities ...................................................................... 1,145,829 1,446,781
Long-term obligations, net of current portion:
1994 Notes .................................................................................. 1,503 1,503
1996 Notes .................................................................................. 1,097 1,097
1997 Notes .................................................................................. 15 15
Seven Year Notes ............................................................................ 375,000 375,000
Ten Year Notes .............................................................................. 1,625,000 1,625,000
Mortgages and other notes payable, net of current portion ................................... 25,445 20,543
Long-term deferred satellite services revenue and other long-term liabilities ............... 18,812 25,245
----------- -----------
Total long-term obligations, net of current portion ............................................ 2,046,872 2,048,403
----------- -----------
Total liabilities ......................................................................... 3,192,701 3,495,184
Commitments and Contingencies (Note 6)
Stockholder's Equity (Deficit):
Common Stock, $.01 par value, 1,000 shares authorized, issued and
outstanding ................................................................................. -- --
Additional paid-in capital .................................................................. 1,448,324 1,442,329
Deferred stock-based compensation ........................................................... (117,780) (85,454)
Accumulated other comprehensive loss ........................................................ -- (51)
Accumulated deficit ......................................................................... (1,793,038) (2,122,152)
----------- -----------
Total stockholder's equity (deficit) ........................................................... (462,494) (765,328)
----------- -----------
Total liabilities and stockholder's equity (deficit) ...................................... $ 2,730,207 $ 2,729,856
=========== ===========
</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 JUNE 30, SIX MONTHS ENDED JUNE 30,
-------------------------- --------------------------
1999 2000 1999 2000
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
REVENUE:
DISH Network:
Subscription television services ................................ $ 306,668 $ 554,234 $ 567,613 $ 1,030,539
Other ........................................................... 2,243 2,874 4,508 4,808
----------- ----------- ----------- -----------
Total DISH Network ................................................ 308,911 557,108 572,121 1,035,347
DTH equipment sales and integration services ...................... 25,315 58,685 56,508 119,500
Satellite services ................................................ 9,289 14,311 17,238 28,406
C-band and other .................................................. 6,930 12,095 14,913 27,004
----------- ----------- ----------- -----------
Total revenue ........................................................ 350,445 642,199 660,780 1,210,257
COSTS AND EXPENSES:
DISH Network Operating Expenses:
Subscriber-related expenses ..................................... 134,292 234,182 245,724 438,142
Customer service center and other ............................... 24,925 68,340 49,034 124,389
Satellite and transmission ...................................... 10,630 11,590 20,076 23,914
----------- ----------- ----------- -----------
Total DISH Network operating expenses ............................. 169,847 314,112 314,834 586,445
Cost of sales - DTH equipment and integration services ............ 18,803 47,143 41,946 94,071
Cost of sales - C-band and other .................................. 3,384 7,116 7,434 15,231
Marketing:
Subscriber promotion subsidies .................................. 146,110 234,182 276,827 490,208
Advertising and other ........................................... 8,948 24,332 20,629 47,497
----------- ----------- ----------- -----------
Total marketing expenses .......................................... 155,058 258,514 297,456 537,705
General and administrative ........................................ 29,663 51,827 58,295 105,422
Non-cash, stock-based compensation ................................ 1,719 13,022 1,719 27,031
Depreciation and amortization ..................................... 25,256 40,580 49,818 79,923
----------- ----------- ----------- -----------
Total costs and expenses ............................................. 403,730 732,314 771,502 1,445,828
----------- ----------- ----------- -----------
Operating loss ....................................................... (53,285) (90,115) (110,722) (235,571)
Other Income (Expense):
Interest income ................................................... 4,680 2,480 8,046 5,682
Interest expense, net of amounts capitalized ...................... (48,799) (48,599) (99,393) (97,216)
Other ............................................................. (8,510) (1,671) (8,363) (1,950)
----------- ----------- ----------- -----------
Total other income (expense) ......................................... (52,629) (47,790) (99,710) (93,484)
----------- ----------- ----------- -----------
Loss before income taxes ............................................. (105,914) (137,905) (210,432) (329,055)
Income tax provision, net ............................................ (22) (26) (88) (59)
----------- ----------- ----------- -----------
Net loss before extraordinary charges ................................ (105,936) (137,931) (210,520) (329,114)
Extraordinary charge for early retirement of debt, net of tax ........ -- -- (228,733) --
----------- ----------- ----------- -----------
Net loss ............................................................. $ (105,936) $ (137,931) $ (439,253) $ (329,114)
=========== =========== =========== ===========
</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>
SIX MONTHS ENDED JUNE 30,
----------------------------
1999 2000
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss .......................................................................... $ (439,253) $ (329,114)
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 ..................................................... 8,378 1,091
Deferred stock-based compensation recognized ................................... -- 27,031
Depreciation and amortization .................................................. 49,818 79,923
Interest on notes payable to ECC added to principal ............................ 330 --
Amortization of debt discount and deferred financing costs ..................... 11,778 1,640
Change in reserve for excess and obsolete inventory ............................ (383) 345
Change in long-term deferred satellite services revenue and other long-term
liabilities .................................................................... 20,799 6,433
Other, net ..................................................................... -- 497
Changes in current assets and current liabilities .............................. 157,179 36,241
----------- -----------
Net cash flows from operating activities .......................................... 37,379 (175,913)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of marketable investment securities ..................................... (178,133) --
Sales of marketable investment securities ......................................... 98,824 19,775
Funds released from escrow and restricted cash and marketable investment
securities ........................................................................ 77,657 --
Purchases of property and equipment ............................................... (31,785) (64,573)
Other ............................................................................. 160 --
----------- -----------
Net cash flows from investing activities .......................................... (33,277) (44,798)
CASH FLOWS FROM FINANCING ACTIVITIES:
Advances from affiliates .......................................................... 202,263 171,276
Proceeds from issuance of Seven Year Notes ........................................ 375,000 --
Proceeds from issuance of Ten Year Notes .......................................... 1,625,000 --
Debt issuance costs and prepayment premiums ....................................... (233,452) --
Retirement of 1994 Notes .......................................................... (575,674) --
Retirement of 1996 Notes .......................................................... (501,350) --
Retirement of 1997 Notes .......................................................... (378,110) --
Capital contribution to ECC ....................................................... (268,588) --
Repayment of notes payable to ECC ................................................. (60,142) --
Repayments of mortgage indebtedness and notes payable ............................. (11,954) (7,847)
----------- -----------
Net cash flows from financing activities .......................................... 172,993 163,429
----------- -----------
Net increase (decrease) in cash and cash equivalents .............................. 177,095 (57,282)
Cash and cash equivalents, beginning of period .................................... 25,308 159,761
----------- -----------
Cash and cash equivalents, end of period .......................................... $ 202,403 $ 102,479
=========== ===========
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 ........................ -- 5,994
</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 six
months ended June 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 June 30, 2000, we had
approximately 4.3 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"), the design and distribution of similar equipment for
international direct-to-home ("DTH") systems, and the provision of
uplink center design, construction oversight and other project
integration services for international DTH ventures.
o Satellite Services - engaged in the delivery of video, audio and
data services to business television customers and other satellite
users. These services may include satellite uplink services,
satellite transponder space usage, billing, customer service and
other services.
Since 1994, EchoStar has deployed substantial resources to develop the
"EchoStar DBS System." The EchoStar DBS System consists of EchoStar's
FCC-allocated DBS spectrum, 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.
Recent Developments
EchoStar VI was successfully launched on July 14, 2000. EchoStar VI
will be tested at 148(degree) West Longitude before moving to its final orbital
location. Subject to FCC approval, EchoStar VI will operate at 119(degree) West
Longitude and EchoStar I may be moved from the 119(degree) orbital location to
the 148(degree) orbital location. This move would allow EchoStar to enhance its
primary DBS service at the 119(degree) orbital location, and is expected to
increase the number of channels offered to residents of Alaska and Hawaii.
Assuming successful completion of in-orbit testing, EchoStar VI is expected to
commence commercial service during October 2000.
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 six months ended June 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
4
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ECHOSTAR DBS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- Continued
(Unaudited)
consolidated financial statements and footnotes thereto included in our Annual
Report on Form 10-K for the year ended December 31, 1999. Certain prior year
amounts have been reclassified to conform with the current year presentation.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses for each reporting
period. Actual results could differ from those estimates.
Comprehensive Loss
The components of comprehensive loss, net of tax, are as follows (in
thousands):
<TABLE>
<CAPTION>
SIX-MONTHS ENDED
JUNE 30,
-------------------------
1999 2000
---------- ----------
(Unaudited)
<S> <C> <C>
Net loss.......................................................... $ (439,253) $ (329,114)
Change in unrealized loss on available-for-sale securities........ - (51)
---------- ----------
Comprehensive loss................................................ $ (439,253) $ (329,165)
========== ==========
</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.
3. INVENTORIES
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1999 2000
----------- ---------
<S> <C> <C>
Finished goods - DBS ....................... $ 63,054 $ 106,846
Raw materials .............................. 35,751 65,318
Finished goods - reconditioned and other ... 19,509 20,496
Work-in-process ............................ 7,666 13,004
Consignment ................................ 1,084 1,246
Reserve for excess and obsolete inventory .. (3,880) (4,225)
--------- ---------
$ 123,184 $ 202,685
========= =========
</TABLE>
5
<PAGE> 8
ECHOSTAR DBS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- Continued
(Unaudited)
4. ECHOSTAR III
During the three months ended June 30, 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
61.5(degree) WL, where the satellite is located, the transponder anomaly has 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
this 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 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.
5. ACCRUED LIABILITIES
Accrued liabilities consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1999 2000
----------- --------
<S> <C> <C>
Programming ............................ $ 59,769 $140,184
Royalties and copyright fees ........... 87,390 94,710
Marketing .............................. 88,204 90,876
Interest ............................... 78,460 79,150
Advances from News/MCI for Echo VI ..... 67,804 41,810
Other .................................. 102,008 127,565
-------- --------
$483,635 $574,295
======== ========
</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 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.
6
<PAGE> 9
ECHOSTAR DBS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- Continued
(Unaudited)
The News Corporation Limited
EchoStar had a contingent fee arrangement with the attorneys who
represented EchoStar in litigation with News Corporation which was settled
during 1999. 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. EchoStar is vigorously contesting the attorneys' interpretation of
the fee arrangement, which it believes significantly overstates the magnitude of
EchoStar's liability.
During mid-1999, EchoStar initiated litigation against the attorneys in
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 for January 2001. It is too early to determine the outcome of negotiations,
arbitration or litigation regarding this fee dispute.
WIC Premium Television Ltd.
During July 1998, a lawsuit was filed by WIC Premium Television Ltd.,
an Alberta corporation, in the Federal Court of Canada Trial Division, against
General Instrument Corporation, HBO, Warner Communications, Inc., John Doe,
Showtime, United States Satellite Broadcasting Company, Inc., EchoStar, and two
of EchoStar's wholly-owned subsidiaries. The lawsuit seeks, among other things,
an interim and permanent injunction prohibiting the defendants from activating
receivers in Canada and from infringing any copyrights held by WIC. It is too
early to determine whether or when any other lawsuits or claims will be filed.
It is also too early to make an assessment of the probable outcome of the
litigation or to determine the extent of any potential liability or damages.
During September 1998, WIC filed another lawsuit in the Court of
Queen's Bench of Alberta Judicial District of Edmonton against certain
defendants, including EchoStar. WIC is a company authorized to broadcast certain
copyrighted work, such as movies and concerts, to residents of Canada. WIC
alleges that the defendants engaged in, promoted, and/or allowed satellite dish
equipment from the United States to be sold in Canada and to Canadian residents
and that some of the defendants allowed and profited from Canadian residents
purchasing and viewing subscription television programming that is only
authorized for viewing in the United States. The lawsuit seeks, among other
things, an interim and permanent injunction prohibiting the defendants from
importing hardware into Canada and from activating receivers in Canada, together
with damages in excess of $175 million.
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
The national networks and local affiliate stations successfully
challenged, based upon copyright infringement, PrimeTime 24's methods of selling
network programming to consumers. Until July 1998, EchoStar obtained distant
broadcast network channels 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 preventing PrimeTime 24
from selling its programming to consumers unless the programming was sold in
accordance with certain stipulations in the injunction. The national networks in
the Florida litigation have admitted that the permanent
7
<PAGE> 10
ECHOSTAR DBS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(Unaudited)
injunction does not apply to EchoStar. A federal district court in North
Carolina also issued an injunction against PrimeTime 24 prohibiting certain
distant signal retransmissions in the Raleigh area. EchoStar has implemented
Satellite Home Viewer Act compliance procedures which materially restrict the
market for the sale of network channels by EchoStar.
In October 1998, EchoStar filed a declaratory judgment action in the
United States District Court for the District of Colorado against the four major
networks. EchoStar asked the court to enter a judgment declaring that its method
of providing distant network programming does not violate the Satellite Home
Viewer Act and hence does not infringe the networks' copyrights. In November
1998, the four major broadcast networks and their affiliate groups filed a
complaint against EchoStar in federal district court in Miami alleging, among
other things, copyright infringement. The court combined the case that EchoStar
filed in Colorado with the case in Miami and transferred it to the Miami court.
The case remains pending in Miami.
In February 1999, CBS, NBC, Fox and ABC 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. Under the terms of a settlement between DirecTV and the
networks, some DirecTV customers were scheduled to lose access to their
satellite-provided network channels by July 31, 1999, while other DirecTV
customers were to be disconnected by December 31, 1999. Subsequently, PrimeTime
24 and substantially all providers of satellite-delivered network programming
other than EchoStar agreed to this cut-off schedule, although EchoStar did not
know if they adhered to this schedule.
The networks are pursuing a Motion for Preliminary Injunction in the
Miami court, asking the court to enjoin EchoStar from providing network
programming except under very limited circumstances. 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.
The Court did not say when a decision will be made, or whether an additional
hearing will be necessary prior to ruling upon the networks' preliminary
injunction motion. The court has not yet ruled upon the networks' request for an
injunction or indicated whether any additional hearing will be necessary.
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 has opposed the networks' recent motion and again asked the court
to hear live testimony before ruling upon the networks' injunction request. The
judge has not ruled upon the networks' recent motion and has not indicated
whether live testimony will be heard before the networks' most recent motion is
ruled upon.
If this case is decided against EchoStar, or a preliminary injunction
is issued, significant material restrictions on the sale of distant ABC, NBC,
CBS and Fox channels by EchoStar could result, including potentially a
nationwide permanent prohibition on EchoStar's broadcast of ABC, NBC, CBS and
Fox network channels by satellite. The litigation and the Satellite Home Viewer
Improvement Act, among other things, could also cause EchoStar to terminate
delivery of network signals to a material portion of its subscriber base, which
could cause many of these subscribers to cancel their subscription to EchoStar's
other services. While the networks have not sought monetary damages, they have
sought to recover attorney fees if they prevail. EchoStar has sent letters to
some of its subscribers warning that their access to distant broadcast network
channels might be terminated and have terminated ABC, NBC, CBS and Fox
programming to many customers. Such terminations will result in a small
reduction in average monthly revenue per subscriber and could result in
increased subscriber turnover.
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.
8
<PAGE> 11
ECHOSTAR DBS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(Unaudited)
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. SEGMENT REPORTING
The Company adopted Financial Accounting Standard No. 131, "Disclosures
About Segments of an Enterprise and Related Information" ("FAS No. 131")
effective as of the year ended December 31, 1998. FAS No. 131 establishes
standards for reporting information about operating segments in annual financial
statements of public business enterprises and requires that those enterprises
report selected information about operating segments in interim financial
reports issued to shareholders.
<TABLE>
<CAPTION>
ECHOSTAR OTHER
DISH SATELLITE ELIMINATIONS CONSOLIDATED ECHOSTAR
NETWORK ETC SERVICES AND OTHER TOTAL ACTIVITY DBS CORP
------------ ----------- --------- ------------ ------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
SIX MONTHS ENDED JUNE 30, 1999
Revenue ......................... $ 583,653 $ 47,692 $ 19,709 $ 8,739 $ 659,793 $ 987 $ 660,780
Net income (loss) before
extraordinary charges ......... (171,499) (7,255) 11,769 (12,476) (179,461) (31,059) (210,520)
SIX MONTHS ENDED JUNE 30, 2000
Revenue ......................... $ 1,057,234 $ 100,514 $ 33,427 $ 20,675 $ 1,211,850 $ (1,593) $ 1,210,257
Net income (loss) ............... (340,728) (355) 22,781 312 (317,990) (11,124) (329,114)
</TABLE>
8. SUBSEQUENT EVENTS
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"), 13 1/8% 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.
9
<PAGE> 12
ECHOSTAR DBS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(Unaudited)
Digital Dynamite Plans
On July 10, 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 $99, which includes
standard professional installation and first month's payment. Since the
equipment in the Digital Dynamite plans will be owned by us, those equipment
costs will be capitalized and depreciated over a period of 4 years.
EchoStar V
EchoStar V is equipped with a total of 48 transponders, including 16
spares. Two transponders on the satellite have failed, the most recent loss
occurring during July 2000. While the failures have not impacted the operational
capacity of the satellite and the satellite manufacturer has advised that the
anomalies are probably unrelated, until the root cause of the most recent
anomaly is finally determined, there can be no assurance future similar
anomalies will not cause further transponder losses which could reduce
operational capacity.
Satellite Insurance
As a result of the failure of EchoStar IV solar arrays to fully deploy
and the failure of 24 transponders to date, a maximum of approximately 16 of the
44 transponders on EchoStar IV are available for use at this time. Due to the
normal degradation of the solar arrays, the number of available transponders
will further decrease over time. In addition to the transponder and solar array
failures, EchoStar IV experienced anomalies affecting its thermal systems and
propulsion system during 1999. There can be no assurance that further material
degradation, or total loss of use, of EchoStar IV will not occur.
In 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 EchoStar 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 EchoStar's 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 EchoStar
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 1999 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 EchoStar's loss
assessment as new events or circumstances develop.
10
<PAGE> 13
ECHOSTAR DBS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(Unaudited)
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, it is EchoStar's belief 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
EchoStar's EchoStar IV demand for arbitration for breach of the duty of good
faith and fair dealing under Colorado Statutes, and unfair claim practices in
violation of Colorado Statutes. 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 EchoStar is entitled to the full
amount claimed under the EchoStar IV insurance policy and believe the insurance
carriers are in violation of Antitrust laws and have committed further acts of
bad faith in connection with their refusal to negotiate reasonable insurance
coverage on our other satellites, there can be no assurance as to the outcome of
these proceedings.
The indentures related to our 9 1/4% Senior Notes due 2006 (the "Seven
Year Notes") and our 9 3/8% Senior Notes due 2009 (the "Ten Year Notes")
(collectively, the "Seven and Ten Year Notes Indentures") contain restrictive
covenants that require us to maintain satellite insurance with respect to at
least half of the satellites we own. Insurance coverage is therefore required
for at least three of our six satellites currently in orbit. We have procured
normal and customary launch insurance for EchoStar V and EchoStar VI. These
launch insurance policies each provide for insurance of $225.0 million. The
EchoStar V launch insurance policy expires during September 2000. The EchoStar
VI launch insurance policy expires in July 2001. We are currently self-insuring
EchoStar I, EchoStar II, EchoStar III and EchoStar IV. To satisfy insurance
covenants in the Seven and Ten Year Notes Indenture, on July 25, 2000 we
reclassified approximately $60 million from cash and cash equivalents to
restricted cash and marketable investment securities on our balance sheet. The
reclassification will continue until such time, if ever, as the insurers are
again willing to insure our satellites on commercially reasonable terms. A
reclassification equal to the depreciated cost of an additional satellite may be
required after September 2000, if we are unable to obtain in-orbit insurance
after the expiration of the initial period of coverage for EchoStar V.
11
<PAGE> 14
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; an unsuccessful deployment of
our sixth satellite, EchoStar VI; delays in the construction of our seventh,
eighth or ninth 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 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 June 30, 2000 Compared to the Three Months Ended June 30,
1999.
Revenue. Total revenue for the three months ended June 30, 2000 was
$642 million, an increase of $292 million compared to total revenue for the
three months ended June 30, 1999 of $350 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 $554
million for the three months ended June 30, 2000, an increase of $247 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 subscribers for the three
months ended June 30, 2000 increased approximately 34% compared to the same
period in 1999. As of June 30, 2000, we had approximately 4.3 million DISH
Network subscribers compared to 2.6 million at June 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 $45.22 during
the three months ended June 30, 2000 and approximately $41.94 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, and other price increases, 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. While there can be no assurance, we expect more modest
increases in monthly average revenue per subscriber during the remainder of
2000.
12
<PAGE> 15
ITEM 2. MANAGEMENT'S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS - CONTINUED
For the three months ended June 30, 2000, DTH equipment sales and
integration services totaled $59 million, an increase of $34 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 $14 million during the three months
ended June 30, 2000, an increase of $5 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.
In order, among other things, to prepare for a potential adverse result
in our pending litigation with the four major broadcast networks and their
affiliate groups, we have sent letters to some of our subscribers warning that
their access to CBS, NBC, Fox and ABC distant network channels might be
terminated this year. Such terminations would result in a small reduction in
average monthly revenue per subscriber and increased subscriber turnover. While
there can be no assurance, any such decreases could be offset by increases in
average monthly revenue per subscriber resulting from the delivery of local
network channels by satellite, and increases in other programming offerings with
the commencement of operation of EchoStar VI.
DISH Network Operating Expenses. DISH Network operating expenses
totaled $314 million during the three months ended June 30, 2000, an increase of
$144 million or 85%, compared to the same period in 1999. DISH Network operating
expenses represented 57% and 55% of subscription television services revenue
during the three months ended June 30, 2000 and 1999, respectively. The increase
in DISH Network operating expenses in total and as a percentage of subscription
television services revenue was consistent with, and primarily attributable to,
the increase in the number of DISH Network subscribers.
Subscriber-related expenses totaled $234 million during the three
months ended June 30, 2000, an increase of $100 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 42% and 44%
of subscription television services revenues during the three months ended June
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.
13
<PAGE> 16
ITEM 2. MANAGEMENT'S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS - CONTINUED
Customer service center and other expenses principally consist of costs
incurred in the operation of our DISH Network customer service centers, such as
personnel and telephone expenses, as well as subscriber equipment installation
and other operating expenses. Customer service center and other expenses totaled
$68 million during the three months ended June 30, 2000, an increase of $43
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
installation expenses related to the expansion of our installation business.
Customer service center and other expenses totaled 12% of subscription
television services revenue during the three months ended June 30, 2000, as
compared to 8% 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 fourth and fifth customer service centers in Texas and 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 $12 million during the three months ended June 30,
2000, a $1 million increase compared to the same period in 1999. This increase
resulted from higher satellite and other digital broadcast center operating
expenses due to an increase in the number of operational satellites. We expect
satellite and transmission expenses to continue to increase in the future as
additional satellites or digital broadcast centers are placed in service.
Satellite and transmission expenses totaled 2% and 3% of subscription television
services revenue during the three months ended June 30, 2000 and 1999,
respectively.
Cost of sales - DTH equipment and Integration Services. Cost of sales -
DTH equipment and integration services totaled $47 million during the three
months ended June 30, 2000, an increase of $28 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 80% and 74% of DTH
equipment revenue, during the three months ended June 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 $259 million during the three months ended June 30,
2000, an increase of $104 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 $24 million and
$9 million during the three months ended June 30, 2000 and 1999, respectively.
During the three months ended June 30, 2000, our marketing promotions
included our DISH Network One-Rate Plan, C-band bounty program, Great Rewards
program (PrimeStar bounty), cable bounty and a free installation program. Our
subscriber acquisition costs under these programs are significantly higher than
those under our marketing programs historically.
Under the DISH Network One-Rate Plan, consumers are eligible to receive
a rebate of up to $199 on the purchase of certain EchoStar receiver systems. To
be eligible for this rebate, a subscriber must make a one-year commitment to
subscribe to our America's Top 150 programming or our America's Top 100 CD
programming package plus one premium movie package (or equivalent additional
programming). Although subscriber acquisition costs are materially higher under
this plan compared to previous promotions, DISH Network One-Rate Plan customers
generally provide materially greater average revenue per subscriber than a
typical DISH Network subscriber. In addition, we believe that these customers
represent lower credit risk and therefore may be marginally less likely to
14
<PAGE> 17
ITEM 2. MANAGEMENT'S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS - CONTINUED
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 December 2000.
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, and from May 24, 2000 to July 31,
2000 are eligible to receive a free professional installation. The free
installation program was responsible, in part, for the strong subscriber growth
during the first and second quarters of 2000. While there can be no assurance,
we expect that subscriber acquisition costs may be lower during the remainder of
2000 following expiration of the free installation program and commencement of
other less expensive promotional programs including our new Digital Dynamite
plans. That plan provides consumers with the use of up to two receivers plus
installation, in home service and our America's Top 100 CD or America's Top 150
programming packages for only $34.99 to $49.99, plus a $99 up front fee.
During the three months ended June 30, 2000, our total subscriber
acquisition costs, inclusive of acquisition marketing expenses, totaled
approximately $408 per new subscriber activation. Comparatively, our subscriber
acquisition costs during the three months ended June 30, 1999, inclusive of
acquisition marketing expenses, totaled approximately $365 per new subscriber
activation. The increase in our subscriber acquisition costs, on a per new
subscriber activation basis, principally resulted from the impact of several
aggressive marketing promotions to acquire new subscribers, including most
significantly our free installation offer which was reinstated at the end of May
and is scheduled to conclude during the third quarter.
Our per subscriber acquisition costs declined compared to the three
months ended March 31, 2000, as a result, among other things, of the suspension
of our free installation program for approximately one month during the second
quarter 2000, cost saving modifications to our Primestar and C-band bounty in
April 2000, and an increase in direct sales to subscribers during the three
months ended June 30, 2000. The decrease also resulted 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 $4 million for the three months ended June 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 may
average as much as $450 or more 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.
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 $52 million during the three months ended June 30, 2000, an
increase of $22 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
15
<PAGE> 18
ITEM 2. MANAGEMENT'S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS - CONTINUED
Network. G&A expenses represented 8% of total revenue during each of the three
months ended June 30, 2000 and 1999. Although we expect G&A expenses as a
percentage of total revenue to remain near the current level or decline modestly
in future periods, this expense to revenue ratio could increase.
Non-cash, Stock-based Compensation. During 1999, we adopted an
incentive plan which provided certain key employees with incentives including
stock options. The payment of these incentives was contingent upon our
achievement of certain financial and other goals. We met certain of these goals
during 1999. Accordingly, during 1999, we recorded approximately $179 million of
deferred compensation related to post-grant appreciation of stock options
granted pursuant to the 1999 incentive plan. The related deferred compensation
will be recognized over the five-year vesting period. Accordingly, during the
three months ended June 30, 2000 and 1999 we recognized $13 million and $1.7
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 JUNE 30,
1999 2000
------------ -----------
<S> <C> <C>
Customer service center and other.......................... $ 342 $ 546
Satellite and transmission................................. 229 656
General and administrative................................. 1,148 11,820
------------ -----------
Total non-cash, stock-based compensation................ $ 1,719 $ 13,022
============ ============
</TABLE>
EBITDA. EBITDA represents earnings before interest, taxes,
depreciation, amortization, and non-cash, stock-based compensation. EBITDA was
negative $37 million during the three months ended June 30, 2000 compared to
negative $26 million during the same period in 1999. This decline in EBITDA
principally resulted from an increase in subscriber acquisition costs due to the
success of several aggressive marketing promotions to acquire new subscribers,
as well as other previously described factors. It is important to note that
EBITDA does not represent cash provided or used by operating activities.
Further, our calculation of EBITDA for the three months ended June 30, 2000 and
1999 does not include approximately $13 million and $1.7 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
expensed as incurred.
Depreciation and Amortization. Depreciation and amortization expenses
aggregated $41 million during the three months ended June 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 1999.
Other Income and Expense. Other expense, net totaled $48 million during
the three months ended June 30, 2000, a decrease of $5 million compared to the
same period in 1999. This decrease primarily resulted from a loss on disposal of
assets during the three months ended June 30, 1999.
16
<PAGE> 19
ITEM 2. MANAGEMENT'S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS - CONTINUED
Six Months Ended June 30, 2000 Compared to the Six Months Ended June 30, 1999.
Revenue. Total revenue for the six months ended June 30, 2000 was
$1.210 billion, an increase of $549 million compared to total revenue for the
six months ended June 30, 1999 of $661 million. The increase in total revenue
was primarily attributable to DISH Network subscriber growth.
DISH Network subscription television services revenue totaled $1.031
billion for the six months ended June 30, 2000, an increase of $463 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 subscribers for the six months ended June
30, 2000 increased approximately 37% compared to the same period in 1999.
For the six months ended June 30, 2000, DTH equipment sales and
integration services totaled $120 million, an increase of $63 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 $28 million during the six months
ended June 30, 2000, an increase of $11 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 $586 million during the six months ended June 30, 2000, an increase of
$271 million or 86%, compared to the same period in 1999. The increase in DISH
Network operating expenses was consistent with, and primarily attributable to,
the increase in the number of DISH Network subscribers. DISH Network operating
expenses represented 57% and 55% of subscription television services revenue
during the six months ended June 30, 2000 and 1999, respectively. The percentage
increase is primarily attributable to operating inefficiencies resulting from
our rapid growth during the first quarter 2000 including upgrades to our
installation and call center infrastructure.
Subscriber-related expenses totaled $438 million during the six months
ended June 30, 2000, an increase of $192 million compared to the same period in
1999. Such expenses represented 43% of subscription television services revenues
during each of the six months ended June 30, 2000 and 1999.
Customer service center and other expenses totaled $124 million during
the six months ended June 30, 2000, an increase of $75 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 installation expenses related to
the expansion of our installation business. Customer service center and other
expenses totaled 12% of subscription television services revenue during the six
months ended June 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 fourth and fifth customer
service centers in Texas and Virginia, and the continued build-out of our
installation offices nationwide.
Satellite and transmission expenses totaled $24 million during the six
months ended June 30, 2000, a $4 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 4% of
subscription television services revenue during the six months ended June 30,
2000 and 1999, respectively.
Cost of sales - DTH equipment and Integration Services. Cost of sales -
DTH equipment and integration services totaled $94 million during the six months
ended June 30, 2000, an increase of $52 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 79%
and 74% of DTH equipment revenue, during the six months ended June 30, 2000 and
1999,
17
<PAGE> 20
ITEM 2. MANAGEMENT'S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS - CONTINUED
respectively. The increase reflects price pressure resulting from increased
competition from other providers of DTH equipment.
Marketing Expenses. Marketing expenses totaled $538 million during the
six months ended June 30, 2000, an increase of $241 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 $47 million and $21
million during the six months ended June 30, 2000 and 1999, respectively.
General and Administrative Expenses. General and administrative
expenses totaled $105 million during the six months ended June 30, 2000, an
increase of $47 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 six months ended June 30, 2000 and 1999.
Non-cash, Stock-based Compensation. As a result of substantial
post-grant appreciation of stock options, during the six months ended June 30,
2000 and 1999 we recognized $27 million and $1.7 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>
SIX MONTHS ENDED JUNE 30,
1999 2000
-------- --------
<S> <C> <C>
Customer service center and other.......................... $ 342 $ 1,201
Satellite and transmission................................. 229 1,311
General and administrative................................. 1,148 24,519
-------- --------
Total non-cash, stock-based compensation............. ... $ 1,719 $ 27,031
======== ========
</TABLE>
EBITDA. EBITDA represents earnings before interest, taxes,
depreciation, amortization, and non-cash, stock-based compensation. EBITDA was
negative $129 million during the six months ended June 30, 2000 compared to
negative $59 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 six months ended June 30, 2000 and
1999 does not include approximately $27 million and $1.7 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 $80 million during the six months ended June 30, 2000, a $30 million
increase compared to the same period in 1999. The increase in depreciation and
amortization expenses principally resulted from an increase in depreciation
related to the commencement of operation of EchoStar V in November 1999 and
other depreciable assets placed in service during 1999.
Other Income and Expense. Other expense, net totaled $93 million during
the six months ended June 30, 2000, a decrease of $7 million compared to the
same period in 1999. This decrease primarily resulted from a loss on disposal of
assets during the six months ended June 30, 1999 and a decrease in interest
expense during the six months ended June 30, 2000.
18
<PAGE> 21
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 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.
The News Corporation Limited
EchoStar had a contingent fee arrangement with the attorneys who
represented EchoStar in litigation with News Corporation which was settled
during 1999. 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. EchoStar is vigorously contesting the attorneys' interpretation of
the fee arrangement, which it believes significantly overstates the magnitude of
EchoStar's liability.
During mid-1999, EchoStar initiated litigation against the attorneys in
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 for January 2001. It is too early to determine the outcome of negotiations,
arbitration or litigation regarding this fee dispute.
WIC Premium Television Ltd.
During July 1998, a lawsuit was filed by WIC Premium Television Ltd.,
an Alberta corporation, in the Federal Court of Canada Trial Division, against
General Instrument Corporation, HBO, Warner Communications, Inc., John Doe,
Showtime, United States Satellite Broadcasting Company, Inc., EchoStar, and two
of EchoStar's wholly-owned subsidiaries. The lawsuit seeks, among other things,
an interim and permanent injunction prohibiting the defendants from activating
receivers in Canada and from infringing any copyrights held by WIC. It is too
early to determine whether or when any other lawsuits or claims will be filed.
It is also too early to make an assessment of the probable outcome of the
litigation or to determine the extent of any potential liability or damages.
During September 1998, WIC filed another lawsuit in the Court of
Queen's Bench of Alberta Judicial District of Edmonton against certain
defendants, including EchoStar. WIC is a company authorized to broadcast certain
copyrighted work, such as movies and concerts, to residents of Canada. WIC
alleges that the defendants engaged in, promoted, and/or allowed satellite dish
equipment from the United States to be sold in Canada and to Canadian residents
and that some of the defendants allowed and profited from Canadian residents
purchasing and viewing subscription television programming that is only
authorized for viewing in the United States. The lawsuit seeks, among other
things, an interim and permanent injunction prohibiting the defendants from
importing hardware into Canada and from activating receivers in Canada, together
with damages in excess of $175 million.
19
<PAGE> 22
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
The national networks and local affiliate stations successfully
challenged, based upon copyright infringement, PrimeTime 24's methods of selling
network programming to consumers. Until July 1998, EchoStar obtained distant
broadcast network channels 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 preventing PrimeTime 24
from selling its programming to consumers unless the programming was sold in
accordance with certain stipulations in the injunction. The national networks in
the Florida litigation have admitted that the permanent injunction does not
apply to EchoStar. A federal district court in North Carolina also issued an
injunction against PrimeTime 24 prohibiting certain distant signal
retransmissions in the Raleigh area. EchoStar has implemented Satellite Home
Viewer Act compliance procedures which materially restrict the market for the
sale of network channels by EchoStar.
In October 1998, EchoStar filed a declaratory judgment action in the
United States District Court for the District of Colorado against the four major
networks. EchoStar asked the court to enter a judgment declaring that its method
of providing distant network programming does not violate the Satellite Home
Viewer Act and hence does not infringe the networks' copyrights. In November
1998, the four major broadcast networks and their affiliate groups filed a
complaint against EchoStar in federal district court in Miami alleging, among
other things, copyright infringement. The court combined the case that EchoStar
filed in Colorado with the case in Miami and transferred it to the Miami court.
The case remains pending in Miami.
In February 1999, CBS, NBC, Fox and ABC 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. Under the terms of a settlement between DirecTV and the
networks, some DirecTV customers were scheduled to lose access to their
satellite-provided network channels by July 31, 1999, while other DirecTV
customers were to be disconnected by December 31, 1999. Subsequently, PrimeTime
24 and substantially all providers of satellite-delivered network programming
other than EchoStar agreed to this cut-off schedule, although EchoStar did not
know if they adhered to this schedule.
The networks are pursuing a Motion for Preliminary Injunction in the
Miami court, asking the court to enjoin EchoStar from providing network
programming except under very limited circumstances. 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.
The Court did not say when a decision will be made, or whether an additional
hearing will be necessary prior to ruling upon the networks' preliminary
injunction motion. The court has not yet ruled upon the networks' request for an
injunction or indicated whether any additional hearing will be necessary.
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 has opposed the networks' recent motion and again asked the court
to hear live testimony before ruling upon the networks' injunction request. The
judge has not ruled upon the networks' recent motion and has not indicated
whether live testimony will be heard before the networks' most recent motion is
ruled upon.
20
<PAGE> 23
PART II - OTHER INFORMATION
If this case is decided against EchoStar, or a preliminary injunction
is issued, significant material restrictions on the sale of distant ABC, NBC,
CBS and Fox channels by EchoStar could result, including potentially a
nationwide permanent prohibition on EchoStar's broadcast of ABC, NBC, CBS and
Fox network channels by satellite. The litigation and the Satellite Home Viewer
Improvement Act, among other things, could also cause EchoStar to terminate
delivery of network signals to a material portion of its subscriber base, which
could cause many of these subscribers to cancel their subscription to EchoStar's
other services. While the networks have not sought monetary damages, they have
sought to recover attorney fees if they prevail. EchoStar has sent letters to
some of its subscribers warning that their access to distant broadcast network
channels might be terminated and have terminated ABC, NBC, CBS and Fox
programming to many customers. Such terminations will result in a small
reduction in average monthly revenue per subscriber and could result in
increased subscriber turnover.
Satellite Insurance
As a result of the failure of EchoStar IV solar arrays to fully deploy
and the failure of 24 transponders to date, a maximum of approximately 16 of the
44 transponders on EchoStar IV are available for use at this time. Due to the
normal degradation of the solar arrays, the number of available transponders
will further decrease over time. In addition to the transponder and solar array
failures, EchoStar IV experienced anomalies affecting its thermal systems and
propulsion system during 1999. There can be no assurance that further material
degradation, or total loss of use, of EchoStar IV will not occur.
In 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 EchoStar 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 EchoStar's 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 EchoStar
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 1999 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 EchoStar's 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, it is EchoStar's belief 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
EchoStar's EchoStar IV demand for arbitration for breach of the duty of good
faith and fair dealing under Colorado Statutes, and unfair claim practices in
violation of Colorado Statutes. 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 EchoStar is entitled to the full
amount claimed under the EchoStar IV insurance policy
21
<PAGE> 24
PART II - OTHER INFORMATION
and believe the insurance carriers are in violation of Antitrust laws and have
committed further acts of bad faith in connection with their refusal to
negotiate reasonable insurance coverage on our other satellites, there can be no
assurance as to the outcome of these proceedings.
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 second quarter of 2000.
22
<PAGE> 25
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ECHOSTAR COMMUNICATIONS CORPORATION
By: /s/ David K. Moskowitz
---------------------------------------
David K. Moskowitz
Senior Vice President, General Counsel,
Secretary and Director
(Duly Authorized Officer)
By: /s/ Steven B. Schaver
---------------------------------------
Steven B. Schaver
Chief Financial Officer
(Principal Financial Officer)
Date: August 11, 2000
<PAGE> 26
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
