SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
- --------------------------------------------------------------------------------
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): January 10, 2002
ECHOSTAR COMMUNICATIONS CORPORATION
(Exact name of registrant as specified in charter)
NEVADA 0-26176 88-0336997
(State or other jurisdiction (Commission (IRS Employer
of incorporation) File Number) Identification No.)
5701 S. SANTA FE DRIVE
LITTLETON, COLORADO 80120
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (303) 723-1000
ITEM 5. OTHER EVENTS
Effective September 27, 2001, EchoStar Communications Corporation
("EchoStar" or "the Company") invested an additional $50 million in StarBand
Communications, Inc. ("StarBand"), increasing its equity interest from
approximately 19% to approximately 32%. EchoStar originally invested $50 million
in StarBand in April 2000. As a result of the increased equity stake, this
investment is now accounted for using the equity method of accounting. As
required by APB Opinion No. 18, the equity method accounting has been
retroactively applied back to April 2000, the date of EchoStar's original
investment in StarBand.
The attached financial information is a retroactive adjustment of the
Company's financial results for the periods from EchoStar's original investment
in April 2000 to June 30, 2001 to give effect to the equity method accounting
adjustments resulting from the increase in EchoStar's equity interest.
The Consolidated Financial Statements as retroactively adjusted may not
be indicative of future financial performance of the Company. The accompanying
notes to the Consolidated Financial Statements should be read in conjunction
with the financial statements.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS
(c) Exhibits
A list of exhibits filed as part of this report is set forth in the
Index to Exhibits, which immediately precedes such exhibits and is incorporated
herein by reference.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused this report to be signed on its behalf
by the undersigned hereunto duly authorized.
ECHOSTAR COMMUNICATIONS CORPORATION
Dated: January 10, 2002 By: /s/ Michael R. McDonnell
----------------------------
Michael R. McDonnell,
Senior Vice President and Chief
Financial Officer
INDEX TO EXHIBITS
EXHIBIT
NUMBER EXHIBIT
------- -------
23.1 Consent of Independent Public Accountants
99.1 Retroactively adjusted Consolidated Financial Statements and
Notes to Consolidated Financial Statements for the Year Ended
December 31, 2000
99.2 Retroactively adjusted Condensed Consolidated Financial
Statements and Notes to Condensed Consolidated Financial
Statements for the Three Months Ended March 31, 2001
99.3 Retroactively adjusted Condensed Consolidated Financial
Statements and Notes to Condensed Consolidated Financial
Statements for the Three and Six Months Ended June 30, 2001
99.4 Retroactively adjusted Financial Information for the Year
Ended December 31, 2000
99.5 Retroactively adjusted Financial Information for the Three
Months Ended March 31, 2001
99.6 Retroactively adjusted Financial Information for the Three and
Six Months Ended June 30, 2001
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference of our report included in this Form 8-K, into the Company's previously
filed Registration Statements, File Nos. 333-68618, 333-49144, 333-31894,
333-88755, 333-80745, 333-37683, 333-66490, 333-59148, 333-31890, 333-95099,
333-74779, 333-51259, 333-48895, 333-36791, 333-36749, 333-22971, 333-11597 and
333-05575.
ARTHUR ANDERSEN LLP
Denver, Colorado,
January 7, 2002.
EXHIBIT 99.1
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
CONSOLIDATED FINANCIAL STATEMENTS:
Report of Independent Public Accountants.................................................................. F-2
Consolidated Balance Sheets at December 31, 1999 and 2000................................................. F-3
Consolidated Statements of Operations and Comprehensive Loss for the years ended December 31, 1998,
1999 and 2000.......................................................................................... F-4
Consolidated Statements of Changes in Stockholders' Deficit for the years ended December 31, 1998, 1999
and 2000............................................................................................... F-5
Consolidated Statements of Cash Flows for the years ended December 31, 1998, 1999 and 2000................ F-6
Notes to Consolidated Financial Statements................................................................ F-7
F-1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To EchoStar Communications Corporation:
We have audited the accompanying consolidated balance sheets of
EchoStar Communications Corporation (a Nevada corporation) and subsidiaries as
of December 31, 1999 and 2000 and the related consolidated statements of
operations and comprehensive loss, changes in stockholders' deficit and cash
flows for each of the three years in the period ended December 31, 2000 (as
retroactively adjusted - see Note 13). These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
EchoStar Communications Corporation and subsidiaries as of December 31, 1999 and
2000, and the consolidated results of their operations and their cash flows for
each of the three years in the period ended December 31, 2000, in conformity
with accounting principles generally accepted in the United States.
ARTHUR ANDERSEN LLP
Denver, Colorado,
March 6, 2001 (except for the retroactive application of equity method
accounting discussed in Note 13, as to which the date is October
25, 2001).
F-2
ECHOSTAR COMMUNICATIONS CORPORATION
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
DECEMBER 31,
--------------------------------
1999 2000
----------- -----------------
ASSETS AS RETROACTIVELY
ADJUSTED (NOTE 13)
Current Assets:
Cash and cash equivalents ................................................. $ 905,299 $ 856,818
Marketable investment securities .......................................... 348,876 607,357
Trade accounts receivable, net of allowance for uncollectible accounts
of $13,109 and $31,241, respectively ..................................... 159,685 278,614
Insurance receivable ...................................................... 106,000 106,000
Inventories ............................................................... 123,630 161,161
Other current assets ...................................................... 40,205 50,656
----------- -----------
Total current assets ......................................................... 1,683,695 2,060,606
Restricted cash and marketable investment securities ......................... 3,000 3,000
Cash reserved for satellite insurance (Note 3) ............................... -- 82,393
Property and equipment, net .................................................. 1,339,939 1,511,303
FCC authorizations, net ...................................................... 722,402 709,984
Other noncurrent assets ...................................................... 149,153 269,549
----------- -----------
Total assets ............................................................ $ 3,898,189 $ 4,636,835
=========== ===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities:
Trade accounts payable .................................................... $ 194,046 $ 226,568
Deferred revenue .......................................................... 181,531 283,895
Accrued expenses .......................................................... 499,265 691,482
Current portion of long-term debt ......................................... 22,067 21,132
----------- -----------
Total current liabilities .................................................... 896,909 1,223,077
Long-term obligations, net of current portion:
9 1/4% Seven Year Notes ................................................... 375,000 375,000
9 3/8% Ten Year Notes ..................................................... 1,625,000 1,625,000
4 7/8% Convertible Notes ................................................. 1,000,000 1,000,000
10 3/8% Seven Year Notes .................................................. -- 1,000,000
1994 Notes, 1996 Notes, 1997 Notes, mortgages and other notes payable,
net of current portion ................................................... 30,605 14,812
Long-term deferred distribution and carriage revenue and other long-term
liabilities .................................................................. 19,093 56,329
----------- -----------
Total long-term obligations, net of current portion .......................... 3,049,698 4,071,141
----------- -----------
Total liabilities ....................................................... 3,946,607 5,294,218
Commitments and Contingencies (Note 9)
Stockholders' Deficit:
6 3/4% Series C Cumulative Convertible Preferred Stock, 908,665 and
218,951 shares issued and outstanding, respectively ...................... 45,434 10,948
Class A Common Stock, $.01 par value, 1,600,000,000 shares authorized,
220,087,230 and 235,749,557 shares issued and outstanding, respectively .. 2,200 2,357
Class B Common Stock, $.01 par value, 800,000,000 shares authorized,
238,435,208 shares issued and outstanding ................................ 2,384 2,384
Class C Common Stock, $.01 par value, 800,000,000 shares authorized, none
outstanding .............................................................. -- --
Additional paid-in capital ................................................ 1,622,538 1,700,367
Deferred stock-based compensation ......................................... (117,780) (58,193)
Accumulated other comprehensive loss ...................................... -- (60,580)
Accumulated deficit ....................................................... (1,603,194) (2,254,666)
----------- -----------
Total stockholders' deficit .................................................. (48,418) (657,383)
----------- -----------
Total liabilities and stockholders' deficit ............................. $ 3,898,189 $ 4,636,835
=========== ===========
See accompanying Notes to Consolidated Financial Statements.
F-3
ECHOSTAR COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(In thousands, except per share amounts)
YEAR ENDED DECEMBER 31,
-----------------------------------------------
1998 1999 2000
----------- ----------- -----------------
REVENUE: AS RETROACTIVELY
ADJUSTED (NOTE 13)
DISH Network:
Subscription television services ..................... $ 669,310 $ 1,344,136 $ 2,346,700
Other ................................................ 13,722 8,467 5,537
----------- ----------- -----------
Total DISH Network ..................................... 683,032 1,352,603 2,352,237
DTH equipment sales and integration services ........... 256,193 184,041 259,830
Satellite services ..................................... 22,366 41,071 61,105
Other .................................................. 21,075 25,126 42,048
----------- ----------- -----------
Total revenue ............................................. 982,666 1,602,841 2,715,220
COSTS AND EXPENSES:
DISH Network Operating Expenses:
Subscriber-related expenses .......................... 296,923 574,828 970,374
Customer service center and other .................... 72,496 117,249 250,704
Satellite and transmission ........................... 25,992 40,598 44,367
----------- ----------- -----------
Total DISH Network operating expenses .................. 395,411 732,675 1,265,445
Cost of sales - DTH equipment and integration services . 173,388 148,427 194,963
Cost of sales - other .................................. 16,496 17,084 32,992
Marketing:
Subscriber promotion subsidies - promotional DTH
equipment .......................................... 243,425 478,122 747,020
Subscriber promotion subsidies - other ............... 29,098 184,238 273,080
Advertising and other ................................ 47,998 64,701 138,540
----------- ----------- -----------
Total marketing expenses ............................... 320,521 727,061 1,158,640
General and administrative ............................. 97,105 150,397 250,425
Non-cash, stock-based compensation ..................... -- 61,060 51,465
Amortization of subscriber acquisition costs ........... 18,869 -- --
Depreciation and amortization .......................... 83,767 113,228 185,356
----------- ----------- -----------
Total costs and expenses .................................. 1,105,557 1,949,932 3,139,286
----------- ----------- -----------
Operating loss ............................................ (122,891) (347,091) (424,066)
Other Income (Expense):
Interest income ........................................ 30,286 26,179 79,733
Interest expense, net of amounts capitalized ........... (167,529) (201,613) (267,990)
Other .................................................. (704) (1,169) (37,448)
----------- ----------- -----------
Total other income (expense) .............................. (137,947) (176,603) (225,705)
----------- ----------- -----------
Loss before income taxes .................................. (260,838) (523,694) (649,771)
Income tax provision, net ................................. (44) (154) (555)
----------- ----------- -----------
Loss before extraordinary charges ......................... (260,882) (523,848) (650,326)
Extraordinary charge for early retirement of debt,
net of tax ............................................ -- (268,999) --
----------- ----------- -----------
Net loss .................................................. $ (260,882) $ (792,847) $ (650,326)
=========== =========== ===========
Change in unrealized gain (loss) on available-for-sale
securities, net of tax ................................. 19 -- (60,580)
----------- ----------- -----------
Comprehensive loss ........................................ $ (260,863) $ (792,847) $ (710,906)
=========== =========== ===========
Net loss attributable to common shareholders (Note 2) ..... $ (296,097) $ (800,100) $ (651,472)
=========== =========== ===========
Weighted-average common shares outstanding ................ 359,856 416,476 471,023
=========== =========== ===========
Basic and diluted loss per common share ................... $ (0.82) $ (1.92) $ (1.38)
=========== =========== ===========
See accompanying Notes to Consolidated Financial Statements.
F-4
ECHOSTAR COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT
(In thousands, except per share amounts)
DEFERRED
STOCK-
COMMON STOCK SERIES A SERIES C BASED ADDITIONAL
------------------ PREFERRED PREFERRED COMPEN- PAID-IN
SHARES AMT. STOCK STOCK SATION CAPITAL
-------- ------- --------- --------- ---------- -----------
Balance, December 31, 1997 .............. 358,480 $ 3,585 $ 19,603 $ 101,529 $ -- $ 223,337
Series A Preferred Stock dividends
(at $0.75 per share) ............... -- -- 1,204 -- -- --
Series B Preferred Stock dividends
payable in-kind .................... -- -- -- -- -- --
Accretion of Series C Preferred
Stock .............................. -- -- -- 7,137 -- --
Issuance of Class A Common Stock:
Exercise of stock options .......... 1,568 16 -- -- -- 2,480
Employee benefits .................. 800 8 -- -- -- 2,283
Employee Stock Purchase Plan ....... 128 -- -- -- -- 371
Unrealized holding gains on
available-for-sale securities,
net ................................ -- -- -- -- -- --
Net loss ............................. -- -- -- -- -- --
-------- ------- --------- --------- ---------- -----------
Balance, December 31, 1998 .............. 360,976 3,609 20,807 108,666 -- 228,471
Series A Preferred Stock dividends
(at $0.75 per share) ............... -- -- 124 -- -- --
Retirement of Series A Preferred
Stock .... ......................... -- -- (20,931) -- -- --
Series B Preferred Stock dividends
payable in-kind .................... -- -- -- -- -- --
Accretion of Series C Preferred
Stock .............................. -- -- -- 6,335 -- --
Series C Preferred Stock dividends
(at $0.84375 per share, per
quarter) ........................... -- -- -- -- -- --
Conversion of Series C Preferred
Stock .............................. 22,832 228 -- (69,567) -- 69,339
Proceeds from Series C Preferred
Stock deposit account .............. 46 -- -- -- -- 953
Issuance of Class A Common Stock:
Acquisition of Media4 .............. 1,376 14 -- -- -- 9,593
News Corporation and MCI
transaction ....................... 68,824 688 -- -- -- 1,123,632
Exercise of stock options .......... 3,868 39 -- -- -- 7,125
Employee benefits .................. 556 6 -- -- -- 3,789
Employee Stock Purchase Plan ....... 44 -- -- -- -- 796
Deferred stock-based compensation .... -- -- -- (178,840) 178,840
Deferred stock-based compensation
recognized ......................... -- -- -- -- 61,060 --
Net loss ............................. -- -- -- -- -- --
-------- ------- --------- --------- ---------- -----------
Balance, December 31, 1999 .............. 458,522 4,584 -- 45,434 (117,780) 1,622,538
Series C Preferred Stock dividends
(at $0.84375 per share, per
quarter) ........................... -- -- -- -- -- --
Conversion of Series C Preferred
Stock .............................. 11,320 113 -- (34,486) -- 34,373
Issuance of Class A Common Stock:
Acquisition of Kelly Broadcasting
Systems .......................... 510 5 -- -- -- 31,551
Exercise of stock options .......... 3,593 36 -- -- -- 10,973
Employee benefits .................. 182 2 -- -- -- 7,282
Employee Stock Purchase Plan ....... 58 1 -- -- -- 1,722
Forfeitures of deferred non-cash,
stock-based compensation ........... -- -- -- -- 6,730 (8,072)
Deferred stock-based compensation
recognized ......................... -- -- -- -- 52,857 --
Unrealized holding gains on
available-for-sale securities,
net ................................ -- -- -- -- -- --
Net loss (As retroactively
adjusted - see Note 13) ............ -- -- -- -- -- --
-------- ------- --------- --------- ---------- -----------
Balance, December 31, 2000 (As
retroactively adjusted - see
Note 13) ............................. 474,185 $ 4,741 $ -- $ 10,948 $ (58,193) $ 1,700,367
======== ======= ========= ========= ========== ===========
ACCUMULATED
DEFICIT AND
UNREALIZED
HOLDING GAINS
(LOSSES) TOTAL
------------- ----------
Balance, December 31, 1997 .............. $ (437,015) $ (88,961)
Series A Preferred Stock dividends
(at $0.75 per share) ............... (1,204) --
Series B Preferred Stock dividends
payable in-kind .................... (26,874) (26,874)
Accretion of Series C Preferred
Stock .............................. (7,137) --
Issuance of Class A Common Stock:
Exercise of stock options .......... -- 2,496
Employee benefits .................. -- 2,291
Employee Stock Purchase Plan ....... -- 371
Unrealized holding gains on
available-for-sale securities,
net ................................ 19 19
Net loss ............................. (260,882) (260,882)
------------- ----------
Balance, December 31, 1998 .............. (733,093) (371,540)
Series A Preferred Stock dividends
(at $0.75 per share) ............... (124) --
Retirement of Series A Preferred
Stock .... ......................... (70,003) (90,934)
Series B Preferred Stock dividends
payable in-kind .................... (241) (241)
Accretion of Series C Preferred
Stock .............................. (6,335) --
Series C Preferred Stock dividends
(at $0.84375 per share, per
quarter) ........................... (553) (553)
Conversion of Series C Preferred
Stock .............................. -- --
Proceeds from Series C Preferred
Stock deposit account .............. 2 955
Issuance of Class A Common Stock:
Acquisition of Media4 .............. -- 9,607
News Corporation and MCI
transaction ....................... -- 1,124,320
Exercise of stock options .......... -- 7,164
Employee benefits .................. -- 3,795
Employee Stock Purchase Plan ....... -- 796
Deferred stock-based compensation .... -- --
Deferred stock-based compensation
recognized ......................... 61,060
Net loss ............................. (792,847) (792,847)
------------- ----------
Balance, December 31, 1999 .............. (1,603,194) (48,418)
Series C Preferred Stock dividends
(at $0.84375 per share, per
quarter) ........................... (1,146) (1,146)
Conversion of Series C Preferred
Stock .............................. -- --
Issuance of Class A Common Stock:
Acquisition of Kelly Broadcasting
Systems .......................... -- 31,556
Exercise of stock options .......... -- 11,009
Employee benefits .................. -- 7,284
Employee Stock Purchase Plan ....... -- 1,723
Forfeitures of deferred non-cash,
stock-based compensation ........... -- (1,342)
Deferred stock-based compensation
recognized ......................... -- 52,857
Unrealized holding gains on
available-for-sale securities,
net ................................ (60,580) (60,580)
Net loss (As retroactively
adjusted - see Note 13) ............ (650,326) (650,326)
------------- ----------
Balance, December 31, 2000 (As
retroactively adjusted - see
Note 13) ............................. $ (2,315,246) $ (657,383)
============= ==========
See accompanying Notes to Consolidated Financial Statements.
F-5
ECHOSTAR COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
YEAR ENDED DECEMBER 31,
-----------------------------------------------
1998 1999 2000
----------- ----------- -----------------
CASH FLOWS FROM OPERATING ACTIVITIES: AS RETROACTIVELY
ADJUSTED (NOTE 13)
Net loss .......................................................... $ (260,882) $ (792,847) $ (650,326)
Adjustments to reconcile net loss to net cash flows
from operating activities:
Extraordinary charge for early retirement of debt .............. -- 268,999 --
Equity in losses of affiliates ................................. -- -- 29,115
Loss on impairment of satellite (Note 3) ....................... -- 13,741 --
Loss on disposal of assets ..................................... -- 9,852 1,374
Loss (gain) on sale of investments ............................. -- (24,439) 3,039
Deferred stock-based compensation recognized ................... -- 61,060 51,465
Depreciation and amortization .................................. 83,767 113,228 185,356
Amortization of subscriber acquisition costs ................... 18,869 -- --
Amortization of debt discount and deferred financing costs ..... 125,724 13,678 6,506
Change in reserve for excess and obsolete inventory ............ 1,341 (1,234) 5,959
Change in long-term deferred satellite services revenue
and other long-term liabilities .............................. 13,856 10,173 37,236
Superstar exclusivity fee ...................................... -- (10,000) 3,611
Other, net ..................................................... 2,291 1,829 6,875
Changes in current assets and current liabilities:
Trade accounts receivable, net ............................... (41,159) (52,452) (111,898)
Inventories .................................................. (55,056) (45,688) (41,851)
Other current assets ......................................... (10,264) (4,091) (8,296)
Trade accounts payable ....................................... 22,136 103,400 27,250
Deferred revenue ............................................. 10,275 48,549 100,776
Accrued expenses ............................................. 72,212 227,729 235,132
----------- ----------- -----------
Net cash flows from operating activities .......................... (16,890) (58,513) (118,677)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of marketable investment securities ..................... (570,096) (541,401) (1,363,884)
Sales of marketable investment securities ......................... 627,860 434,517 1,041,784
Purchases of restricted marketable investment securities .......... -- (5,928) --
Cash reserved for satellite insurance (Note 3) .................... -- -- (82,393)
Funds released from escrow and restricted cash and
marketable investment securities ............................... 116,468 80,585 --
Purchases of property and equipment ............................... (161,140) (91,152) (331,401)
Advances and payments under in-orbit satellite contract ........... -- 67,804 (48,894)
Issuance of notes receivable ...................................... (17,666) -- (8,675)
Investment in Wildblue Communications ............................. -- -- (50,000)
Investment in Replay TV ........................................... -- -- (10,000)
Investment in StarBand Communications ............................. -- -- (50,045)
Other ............................................................. (3,474) (7,251) (8,449)
----------- ----------- -----------
Net cash flows from investing activities .......................... (8,048) (62,826) (911,957)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of 9 1/4% Seven Year Notes ................. -- 375,000 --
Proceeds from issuance of 9 3/8% Ten Year Notes ................... -- 1,625,000 --
Proceeds from issuance of 4 7/8% Convertible Notes ................ -- 1,000,000 --
Proceeds from issuance of 10 3/8% Seven Year Notes ................ -- -- 1,000,000
Debt issuance costs and prepayment premiums ....................... -- (293,987) (9,645)
Retirement of 1994 Notes .......................................... -- (575,674) --
Retirement of 1996 Notes .......................................... -- (501,350) --
Retirement of 1997 Notes .......................................... -- (378,110) --
Retirement of Senior Exchange Notes ............................... -- (228,528) --
Redemption of Series A Preferred Stock ............................ -- (90,934) --
Repayments of mortgage indebtedness and other notes payable ....... (16,552) (22,201) (17,668)
Net proceeds from Class A Common Stock options exercised .......... 2,459 7,164 11,009
Net proceeds from Class A Common Stock issued for Employee
Stock Purchase Plan and proceeds from 6 3/4% Series C
Cumulative Convertible Preferred Stock deposit account ......... 371 1,751 577
Other ............................................................. -- 1,960 (2,120)
----------- ----------- -----------
Net cash flows from financing activities .......................... (13,722) 920,091 982,153
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents .............. (38,660) 798,752 (48,481)
Cash and cash equivalents, beginning of year ...................... 145,207 106,547 905,299
----------- ----------- -----------
Cash and cash equivalents, end of year ............................ $ 106,547 $ 905,299 $ 856,818
=========== =========== ===========
See accompanying Notes to Consolidated Financial Statements.
F-6
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND BUSINESS ACTIVITIES
Principal Business
The operations of EchoStar Communications Corporation ("ECC," and together
with its subsidiaries, or referring to particular subsidiaries in certain
circumstances, "EchoStar" or the "Company") include three interrelated business
units:
o The DISH Network - a direct broadcast satellite ("DBS") subscription
television service in the United States. As of December 31, 2000, we had
approximately 5.26 million DISH Network subscribers.
o EchoStar Technologies Corporation ("ETC") - engaged in the design,
development, distribution and sale of DBS set-top boxes, antennae and
other digital equipment for the DISH Network ("EchoStar receiver
systems"), the design, development and distribution of similar equipment
for international direct-to-home ("DTH") satellite and other 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.
Organization and Legal Structure
In December 1995, ECC merged Dish, Ltd. with a wholly-owned subsidiary
of ECC. During 1999, EchoStar placed ownership of all of its direct broadcast
satellites and related FCC licenses into EchoStar Satellite Corporation.
DirectSat Corporation, Direct Broadcasting Satellite Corporation and EchoStar
Space Corporation were merged into ESC. Dish, Ltd. and EchoStar Satellite
Broadcasting Company were merged into EchoStar DBS Corporation. EchoStar IV and
the related FCC licenses were transferred to ESC. During September 2000,
EchoStar Broadband Corporation was formed for the purposes of issuing new debt.
Contracts for the construction and launch of EchoStar VII, EchoStar VIII and
EchoStar IX are held in EchoStar Orbital Corporation. Substantially all of
EchoStar's operations are conducted by subsidiaries of EBC.
The following table summarizes the organizational structure of EchoStar
and its principal subsidiaries as of December 31, 2000:
REFERRED TO
LEGAL ENTITY HEREIN AS PARENT
- ------------ ----------- --------------
EchoStar Communications Corporation ECC Publicly owned
EchoStar Broadband Corporation EBC ECC
EchoStar DBS Corporation EDBS EBC
EchoStar Orbital Corporation EOC EBC
EchoStar Satellite Corporation ESC EDBS
Echosphere Corporation Echosphere EDBS
EchoStar Technologies Corporation ETC EDBS
F-7
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Significant Risks and Uncertainties
Substantial Leverage. EchoStar is highly leveraged, which makes it
vulnerable to changes in general economic conditions. As of December 31, 2000,
EchoStar had outstanding long-term debt (including both the current and
long-term portions) totaling approximately $4.0 billion. In August 1999,
EchoStar began paying semi-annual interest payments of approximately $94 million
related to its 9 1/4% Senior Notes due 2006 (the "9 1/4% Seven Year Notes") and
its 9 3/8% Senior Notes due 2009 (the "9 3/8% Ten Year Notes"). During July
2000, EchoStar began making semi-annual interest payments on its 4 7/8%
Convertible Subordinated Notes due 2007 (the "4 7/8% Convertible Notes") of
approximately $24 million. Further, beginning in April 2001, EchoStar will have
semi-annual interest payments due on its 10 3/8% Senior Notes due 2007 (the
"10 3/8% Seven Year Notes") of approximately $52 million. EchoStar's ability to
meet its debt service obligations will depend on, among other factors, the
successful execution of its business strategy, which is subject to uncertainties
and contingencies beyond EchoStar's control.
Expected Operating Losses. Since 1996, EchoStar has reported
significant operating and net losses. Improvements in EchoStar's future results
of operations are largely dependent upon its ability to increase its customer
base while maintaining its overall cost structure, controlling subscriber
turnover and effectively managing its subscriber acquisition costs. No assurance
can be given that EchoStar will be effective with regard to these matters. In
addition, EchoStar incurs significant acquisition costs to obtain DISH Network
subscribers. The high cost of obtaining new subscribers magnifies the negative
effects of subscriber turnover.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The accompanying consolidated financial statements include the accounts
of EchoStar and all of its wholly-owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated. EchoStar accounts
for investments in 50% or less owned entities using the equity or cost method,
except for its investments in marketable equity securities, which are carried at
fair value. At December 31, 1998, 1999 and 2000, these equity and cost method
investments were not material to EchoStar's consolidated financial statements.
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.
Stock Splits
On each of July 19, 1999, October 25, 1999 and March 22, 2000, EchoStar
completed a two-for-one split of its outstanding Class A and Class B common
stock. An amount equal to the par value of the common shares issued for the
July, October and March stock splits was transferred from additional paid-in
capital to Class A common stock and Class B common stock. All references to
shares and per share amounts included herein retroactively give effect to the
stock splits completed in July 1999, October 1999 and March 2000.
Foreign Currency Transaction Gains and Losses
The functional currency of EchoStar's foreign subsidiaries is the U.S.
dollar because their sales and purchases are predominantly denominated in that
currency. Transactions denominated in currencies other than U.S. dollars are
recorded based on exchange rates at the time such transactions arise. Subsequent
changes in exchange rates result in transaction gains and losses which are
reflected in income as unrealized (based on period-end translation) or realized
(upon settlement of the transaction). Net transaction gains (losses) during
1998, 1999 and 2000 were not material to EchoStar's results of operations.
F-8
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Statements of Cash Flows Data
The following presents EchoStar's supplemental cash flow statement
disclosure (in thousands):
YEAR ENDED DECEMBER 31,
------------------------------------
1998 1999 2000
---------- ---------- ----------
Cash paid for interest ....................................................... $ 52,293 $ 128,553 $ 211,064
Cash paid for income taxes ................................................... 83 119 641
Capitalized interest ......................................................... 21,678 -- 5,343
8% Series A Cumulative Preferred Stock dividends ............................. 1,204 124 --
12 1/8% Series B Senior Redeemable Exchangeable Preferred Stock dividends
payable in-kind ........................................................... 26,874 241 --
Accretion of 6 3/4% Series C Cumulative Convertible Preferred Stock .......... 7,137 6,335 --
6 3/4% Series C Cumulative Convertible Preferred Stock dividends ............. -- 553 1,146
Satellite vendor financing ................................................... 12,950 -- --
Assets acquired from News Corporation and MCI:
FCC licenses and other .................................................... -- 626,120 --
Satellites ................................................................ -- 451,200 --
Digital broadcast operations center ....................................... -- 47,000 --
Common Stock issued to News Corporation and MCI .............................. -- 1,124,320 --
Class A common stock issued related to acquisition of Kelly Broadcasting
Systems ................................................................. -- -- 31,556
Conversion of 6 3/4% Series C Cumulative Convertible Preferred Stock to
Class A common stock .................................................... -- -- 34,373
Forfeitures of deferred non-cash, stock-based compensation ................... -- -- 8,072
Cash and Cash Equivalents
EchoStar considers all liquid investments purchased with an original
maturity of 90 days or less to be cash equivalents. Cash equivalents as of
December 31, 1999 and 2000 consist of money market funds, corporate notes and
commercial paper; such balances are stated at cost which approximates market
value.
Marketable Investment Securities and Restricted Cash and Marketable Investment
Securities
As of December 31, 1999 and 2000, EchoStar has classified all
marketable investment securities as available-for-sale. The fair market value of
marketable investment securities approximates the carrying value and represents
the quoted market prices at the balance sheet dates. Related unrealized gains
and losses are reported as a separate component of stockholders' deficit, net of
related deferred income taxes, if applicable. The specific identification method
is used to determine cost in computing realized gains and losses. Such
unrealized losses totaled approximately $61 million as of December 31, 2000.
Approximately $17 million of these unrealized losses relate to a decline in the
value of OpenTV. EchoStar acquired that stock in connection with the
establishment of a strategic relationship with OpenTV which did not involve an
investment of cash by EchoStar. In accordance with generally accepted accounting
principles, unrealized losses which represent an "other than temporary
impairment" must be recognized in the statement of operations, establishing a
new cost basis for such investment. No such "other than temporary impairment"
was recognized as of December 31, 2000. However, an "other than temporary
impairment" could be recognized in 2001 if the fair value of such investments do
not increase to their original cost basis.
Restricted cash and marketable investment securities, as reflected in
the accompanying consolidated balance sheets, include restricted cash placed in
trust for the purpose of repaying a note payable as of December 31, 1999 and
2000.
F-9
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
The major components of marketable investment securities and restricted
cash and marketable investment securities are as follow (in thousands):
RESTRICTED CASH AND MARKETABLE
MARKETABLE INVESTMENT SECURITIES INVESTMENT SECURITIES
DECEMBER 31, DECEMBER 31,
-------------------------------- --------------------------------
1999 2000 1999 2000
--------- --------- ---------- ---------
Commercial paper....................... $ 121,802 $ 327,250 $ -- $ --
Corporate notes and bonds.............. 205,930 206,556 -- --
Corporate equity securities............ -- 53,936 -- --
Government bonds....................... 21,144 19,615 -- --
Restricted cash........................ -- -- 3,000 3,000
Accrued interest....................... -- -- -- --
--------- --------- ---------- ---------
$ 348,876 $ 607,357 $ 3,000 $ 3,000
========= ========= ========== =========
As of December 31, 2000, marketable investment securities and
restricted cash and marketable investment securities include debt securities of
$514 million with contractual maturities of one year or less and $40 million
with contractual maturities between one and five years. Actual maturities may
differ from contractual maturities as a result of EchoStar's ability to sell
these securities prior to maturity.
Fair Value of Financial Instruments
Fair values for EchoStar's high-yield debt are based on quoted market
prices. The fair values of EchoStar's mortgages and other notes payable are
estimated using discounted cash flow analyses. The interest rates assumed in
such discounted cash flow analyses reflect interest rates currently being
offered for loans with similar terms to borrowers of similar credit quality.
The following table summarizes the book and fair values of EchoStar's
debt facilities at December 31, 1999 and 2000 (in thousands):
DECEMBER 31, 1999 DECEMBER 31, 2000
-------------------------- --------------------------
BOOK VALUE FAIR VALUE BOOK VALUE FAIR VALUE
------------ ------------ ------------ ------------
9 1/4% Seven Year Notes................... $ 375,000 $ 377,813 $ 375,000 $ 365,625
9 3/8% Ten Year Notes..................... 1,625,000 1,637,188 1,625,000 1,584,375
4 7/8% Convertible Notes.................. 1,000,000 1,227,500 1,000,000 750,000
10 3/8% Seven Year Notes.................. -- -- 1,000,000 985,000
1994 Notes, 1996 Notes, 1997 Notes,
mortgages and other notes payable......... 52,672 49,853 35,944 35,495
Inventories
Inventories are stated at the lower of cost or market value. Cost is
determined using the first-in, first-out method. Proprietary products are
manufactured by outside suppliers to EchoStar's specifications. Manufactured
inventories include materials, labor and manufacturing overhead. Cost of other
inventories includes parts, contract manufacturers' delivered price, assembly
and testing labor, and related overhead, including handling and storage costs.
Inventories consist of the following (in thousands):
F-10
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31,
-----------------------
1999 2000
---------- ----------
Finished goods - DBS............................... $ 63,567 $ 96,362
Raw materials...................................... 35,751 40,247
Finished goods - reconditioned and other........... 19,509 23,101
Work-in-process.................................... 7,666 8,879
Consignment........................................ 1,084 2,478
Reserve for excess and obsolete inventory.......... (3,947) (9,906)
---------- ----------
$ 123,630 $ 161,161
========== ==========
During December 1999, EchoStar provided for losses of $16.6 million,
primarily for component parts and purchase commitments related to its first
generation model 7100 set-top boxes. Production of model 7100 was suspended in
favor of its second generation model 7200 set-top boxes.
Property and Equipment
Property and equipment are stated at cost. Cost includes interest
capitalized of $16 million and $5 million during the years ended December 31,
1998 and 2000, respectively. No interest was capitalized during 1999. The costs
of satellites under construction are capitalized during the construction phase,
assuming the eventual successful launch and in-orbit operation of the satellite.
If a satellite were to fail during launch or while in-orbit, the resultant loss
would be charged to expense in the period such loss was incurred. The amount of
any such loss would be reduced to the extent of insurance proceeds received as a
result of the launch or in-orbit failure. Depreciation is recorded on a
straight-line basis for financial reporting purposes. Repair and maintenance
costs are charged to expense when incurred. Renewals and betterments are
capitalized.
EchoStar reviews its long-lived assets and identifiable intangible
assets for impairment whenever events or changes in circumstances indicate that
the carrying amount of an asset may not be recoverable. For assets which are
held and used in operations, the asset would be impaired if the book value of
the asset exceeded the undiscounted future net cash flows related to the asset.
For those assets which are to be disposed of, the assets would be impaired to
the extent the fair value does not exceed the book value. EchoStar considers
relevant cash flow, estimated future operating results, trends and other
available information including the fair value of frequency rights owned, in
assessing whether the carrying value of assets are recoverable.
FCC Authorizations
FCC authorizations are recorded at cost and amortized using the
straight-line method over a period of 40 years. Such amortization commences at
the time the related satellite becomes operational; capitalized costs are
written off at the time efforts to provide services are abandoned. FCC
authorizations include capitalized interest of $6 million during the year ended
December 31, 1998. No interest was capitalized to FCC authorizations during 1999
or 2000.
Revenue Recognition
Revenue from the provision of DISH Network subscription television
services and satellite services is recognized as revenue in the period such
services are provided. Revenue from sales of digital set-top boxes and related
accessories is recognized upon shipment to customers. Revenue from the provision
of integration services is recognized as revenue in the period the services are
performed.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 or SAB 101, "Views on Selected Revenue Recognition
Issues." SAB 101 provides guidance on applying generally accepted accounting
principles to selected revenue recognition issues. The provisions of SAB 101 and
certain related EITF
F-11
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
consensuses were required to be adopted in the quarter ended December 31, 2000
retroactive to January 1, 2000, with any cumulative effect as of January 1, 2000
reported as a cumulative effect of a change in accounting principle. EchoStar's
adoption of SAB 101 resulted in no recognition of a cumulative effect of a
change in accounting principle.
Subscriber Promotion Subsidies and Subscriber Acquisition Costs
Subscriber promotion subsidies - promotional DTH equipment includes the
cost of Echostar receiver systems distributed to retailers and other
distributors of Echostar's equipment. Subscriber promotion subsidies - other
includes net costs related to various installation promotions and other
promotional incentives. Accordingly, subscriber acquisition costs are generally
expensed as incurred except for under EchoStar's Digital Dynamite Plan which was
initiated during 2000 wherein the Company retains title to the receiver system
equipment resulting in the capitalization and depreciation of such equipment
over its estimated useful life.
Deferred Debt Issuance Costs and Debt Discount
Costs of issuing debt are deferred and amortized to interest expense
over the terms of the respective notes.
Deferred Revenue
Deferred revenue principally consists of prepayments received from
subscribers for DISH Network programming. Such amounts are recognized as revenue
in the period the programming is provided to the subscriber.
Long-Term Deferred Distribution and Carriage Revenue
Long-term deferred distribution and carriage revenue consists of
advance payments from certain content providers for carriage of their signal on
the DISH Network. Such amounts are deferred and recognized as revenue on a
straight-line basis over the related contract terms (up to ten years).
Accrued Expenses
Accrued expenses consist of the following (in thousands):
DECEMBER 31,
-----------------------
1999 2000
--------- ----------
Programming..................................... $ 59,769 $ 176,566
Interest........................................ 81,574 131,999
Royalties and copyright fees.................... 91,387 111,228
Marketing....................................... 88,204 86,861
Advances from News Corporation and MCI for
satellite payments............................ 67,804 18,910
Other........................................... 110,527 165,918
--------- ----------
$ 499,265 $ 691,482
========= ==========
Research and Development Costs
Research and development costs are expensed as incurred. Research and
development costs totaled $8 million, $10 million and $17 million for the years
ended December 31, 1998, 1999, and 2000, respectively.
Comprehensive Loss
The change in unrealized gain (loss) on available-for-sale securities
is the only component of EchoStar's other comprehensive loss. Accumulated other
comprehensive loss presented on the accompanying consolidated balance sheets
consists of the accumulated net unrealized loss on available-for-sale
securities, net of deferred taxes.
F-12
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Basic and Diluted Loss Per Share
Statement of Financial Accounting Standards No. 128, "Earnings Per
Share" ("FAS No. 128") requires entities to present both basic earnings per
share ("EPS") and diluted EPS. Basic EPS excludes dilution and is computed by
dividing income (loss) available to common shareholders by the weighted-average
number of common shares outstanding for the period. Diluted EPS reflects the
potential dilution that could occur if stock options or warrants were exercised
or convertible securities were converted to common stock, resulting in the
issuance of common stock that then would share in any earnings of the Company.
We had net losses for the years ending December 31, 1998, 1999 and 2000.
Therefore, the effect of the common stock equivalents and convertible securities
is excluded from the computation of diluted earnings (loss) per share since the
effect is anti-dilutive.
Earnings per share amounts for all periods are presented below in
accordance with the requirements of FAS No. 128.
YEAR ENDED DECEMBER 31,
----------------------------------------------
1998 1999 2000
---------- ---------- ------------------
AS RETROACTIVELY
ADJUSTED (NOTE 13)
(In thousands, except per share data)
Numerator:
Net loss ..................................................... $ (260,882) $ (792,847) $ (650,326)
8% Series A Cumulative Preferred Stock dividends ............. (1,204) (124) --
12 1/8% Series B Senior Redeemable Exchangeable Preferred
Stock dividends payable in-kind ............................ (26,874) (241) --
Accretion of 6 3/4% Series C Cumulative Convertible
Preferred Stock ............................................ (7,137) (6,335) --
6 3/4% Series C Cumulative Convertible Preferred Stock
dividends .................................................. -- (553) (1,146)
---------- ---------- ----------
Numerator for basic and diluted loss per share - loss
attributable to common shareholders ........................ $ (296,097) $ (800,100) $ (651,472)
========== ========== ==========
Denominator:
Denominator for basic and diluted loss per share -
weighted-average common shares outstanding ................. 359,856 416,476 471,023
========== ========== ==========
Net loss per common share:
Basic and diluted loss per share before extraordinary charge .... $ (0.82) $ (1.28) $ (1.38)
Extraordinary charge for the early retirement of debt ........... -- (0.64) --
---------- ---------- ----------
Basic and diluted loss per share ................................ $ (0.82) $ (1.92) $ (1.38)
========== ========== ==========
Shares of Class A Common Stock issuable upon conversion of:
8% Series A Cumulative Preferred Stock ....................... 12,936 -- --
6 3/4% Series C Cumulative Convertible Preferred Stock ....... 37,720 14,912 3,593
4 7/8% Convertible Subordinated Notes ........................ -- 22,007 22,007
As of December 31, 1998, 1999 and 2000, options to purchase
approximately 11,576,000, 27,844,000 and 25,118,000 shares of Class A common
stock were outstanding, respectively.
Reclassifications
Certain prior year balances in the consolidated financial statements
have been reclassified to conform with the 2000 presentation.
F-13
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following (in thousands):
DECEMBER 31,
LIFE --------------------------
(IN YEARS) 1999 2000
---------- ----------- -----------
EchoStar I............................... 12 $ 201,607 $ 201,607
EchoStar II.............................. 12 228,694 228,694
EchoStar III............................. 12 234,083 234,083
EchoStar IV.............................. 4 89,505 89,505
EchoStar V............................... 12 208,578 208,548
EchoStar VI.............................. 12 -- 243,789
Furniture, fixtures and equipment........ 2-12 243,042 336,033
Buildings and improvements............... 7-40 68,338 78,958
Digital Dynamite Plan equipment.......... 4 -- 62,726
Tooling and other........................ 2 5,812 5,211
Land ................................... -- 6,780 10,083
Vehicles................................. 7 1,119 968
Construction in progress................. -- 319,328 226,454
----------- -----------
Total property and equipment......... 1,606,886 1,926,659
Accumulated depreciation................. (266,947) (415,356)
----------- -----------
Property and equipment, net.......... $ 1,339,939 $ 1,511,303
=========== ===========
Construction in progress consists of the following (in thousands):
DECEMBER 31,
-----------------------
1999 2000
---------- ----------
Progress amounts for satellite construction,
launch, and launch insurance:
EchoStar VI ................................ $ 243,633 $ --
EchoStar VII ............................... -- 76,382
EchoStar VIII .............................. -- 46,487
EchoStar IX ................................ -- 22,215
Digital broadcast operations center ............. 47,000 39,797
Other ........................................... 28,695 41,573
---------- ----------
$ 319,328 $ 226,454
========== ==========
Digital Dynamite Plans
During July 2000, we announced the commencement of our new Digital
Dynamite promotion. The Digital Dynamite plans offer four choices to consumers,
ranging from the use of one EchoStar receiver system and our America's Top 100
programming package for $35.99 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 pay $49.99 up front, which includes the first month's
programming payment. Since the equipment in the Digital Dynamite plans are owned
by us, those equipment costs are capitalized and depreciated over a period of 4
years.
EchoStar III
During the second quarter 2000, two transponder pairs on EchoStar III
malfunctioned. Including the three transponder pairs that malfunctioned during
1998, these anomalies have resulted in the failure of a total of ten
transponders on the satellite to date. While a maximum of 32 transponders can be
operated at any time, the satellite was equipped with a total of 44 transponders
to provide redundancy. As a result of this redundancy and because we
F-14
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
are only licensed by the FCC to operate 11 transponders at the 61.5 degree
orbital location (together with an additional six leased transponders), the
transponder anomalies have not resulted in a loss of service to date. The
satellite manufacturer, Lockheed Martin, has advised us that it believes it has
identified the root cause of the failures, and that while further transponder
failures are possible, based upon the root cause and the operating configuration
of the satellite, Lockheed Martin does not believe it is likely that the
operational capacity of EchoStar III will be reduced below 32 transponders.
Lockheed Martin also believes it is unlikely that our ability to operate at
least the 11 licensed frequencies, and the six leased transponders, on the
satellite will be affected. We will continue to evaluate the performance of
EchoStar III and may be required to modify our loss assessment as new events or
circumstances develop.
EchoStar V
EchoStar V is equipped with a total of 48 transponders, including 16
spares. Two transponders on the satellite have failed, the most recent loss
occurring during July 2000. While the failures have not impacted the operational
capacity of the satellite and the satellite manufacturer has advised that the
anomalies are probably unrelated, until the root cause of the most recent
anomaly is finally determined, there can be no assurance future similar
anomalies will not cause further transponder losses which could reduce
operational capacity.
Satellite Insurance
As a result of the failure of EchoStar IV solar arrays to fully deploy
and the failure of 28 transponders to date, a maximum of approximately 14 of the
44 transponders on EchoStar IV are available for use at this time. Due to the
normal degradation of the solar arrays, the number of available transponders
will further decrease over time. In addition to the transponder and solar array
failures, EchoStar IV experienced anomalies affecting its thermal systems and
propulsion system. There can be no assurance that further material degradation,
or total loss of use, of EchoStar IV will not occur in the immediate future.
In September 1998, EchoStar filed a $219.3 million insurance claim for
a constructive total loss under the launch insurance policies covering EchoStar
IV. The satellite insurance consists of separate identical policies with
different carriers for varying amounts which, in combination, create a total
insured amount of $219.3 million.
The insurance carriers offered EchoStar a total of approximately $88
million, or 40% of the total policy amount, in settlement of the EchoStar IV
insurance claim. The insurers allege that all other impairment to the satellite
occurred after expiration of the policy period and is not covered. EchoStar
strongly disagrees with the position of the insurers and has filed an
arbitration claim against them for breach of contract, failure to pay a valid
insurance claim and bad faith denial of a valid claim, among other things. There
can be no assurance that EchoStar will receive the amount claimed or, if
EchoStar does, that EchoStar will retain title to EchoStar IV with its reduced
capacity.
At the time EchoStar filed its claim in 1998, EchoStar recognized an
impairment loss of $106 million to write-down the carrying value of the
satellite and related costs, and simultaneously recorded an insurance claim
receivable for the same amount. EchoStar continues to believe it will ultimately
recover at least the amount originally recorded and does not intend to adjust
the amount of the receivable until there is greater certainty with respect to
the amount of the final settlement.
As a result of the thermal and propulsion system anomalies, EchoStar
reduced the estimated remaining useful life of EchoStar IV to approximately 4
years during January 2000. This change increased depreciation expense recognized
by EchoStar during the year ending December 31, 2000 by approximately $9.6
million. EchoStar will continue to evaluate the performance of EchoStar IV and
may modify its loss assessment as new events or circumstances develop.
F-15
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
The in-orbit insurance policies for EchoStar I, EchoStar II, and
EchoStar III expired July 25, 2000. The insurers have to date refused to renew
insurance on EchoStar I, EchoStar II and EchoStar III on reasonable terms. Based
on, among other things, the insurance carriers' unanimous refusal to negotiate
reasonable renewal insurance coverage, EchoStar believes that the carriers
colluded and conspired to boycott EchoStar unless EchoStar accepts their offer
to settle the EchoStar IV claim for $88 million.
Based on the carriers' actions, EchoStar has added causes of action in
its EchoStar IV demand for arbitration for breach of the duty of good faith and
fair dealing, and unfair claim practices. Additionally, EchoStar has filed a
lawsuit against the insurance carriers in the United States District Court for
the District of Colorado asserting causes of action for violation of Federal and
State Antitrust laws. While EchoStar believes it is entitled to the full amount
claimed under the EchoStar IV insurance policy and believes the insurance
carriers are in violation of Antitrust laws and have committed further acts of
bad faith in connection with their refusal to negotiate reasonable insurance
coverage on EchoStar's other satellites, there can be no assurance as to the
outcome of these proceedings.
The indentures related to the outstanding senior notes of EDBS contain
restrictive covenants that require EchoStar to maintain satellite insurance with
respect to at least half of the satellites it owns. Insurance coverage is
therefore required for at least three of EchoStar's six satellites currently in
orbit. EchoStar has procured normal and customary launch insurance for EchoStar
VI. This launch insurance policy provides for insurance of $225.0 million. The
EchoStar VI launch insurance policy expires in July 2001. EchoStar is currently
self-insuring EchoStar I, EchoStar II, EchoStar III, EchoStar IV and EchoStar V.
To satisfy insurance covenants related to the outstanding EDBS senior notes, as
of December 31, 2000, EchoStar has reclassified approximately $82 million from
cash and cash equivalents to restricted cash and marketable investment
securities on its balance sheet. The reclassification will continue until such
time, if ever, as the insurers are again willing to insure EchoStar's satellites
on commercially reasonable terms.
4. LONG-TERM DEBT
Debt Redemption
Effective July 14, 2000, we redeemed all of our remaining outstanding
12 7/8% Senior Secured Discount Notes Due 2004 (the "1994 Notes"), 13 1/8%
Senior Secured Discount Notes due 2004 (the "1996 Notes"), 12 1/2% Senior
Secured Notes due 2002 (the "1997 Notes") and 12 1/8% Senior Exchange Notes Due
2004 (the "Exchange Notes") totaling approximately $2.6 million.
9 1/4% Seven and 9 3/8% Ten Year Notes
On January 25, 1999, EDBS sold $375 million principal amount of 9 1/4%
Senior Notes due 2006 (the 9 1/4% Seven Year Notes) and $1.625 billion principal
amount of 9 3/8% Senior Notes due 2009 (the 9 3/8%Ten Year Notes). Interest
accrues at annual rates of 9 1/4% and 9 3/8% on the 9 1/4% Seven Year and 9 3/8%
Ten Year Notes, respectively. Interest on the 9 1/4% Seven and 9 3/8% Ten Year
Notes is payable semi-annually in cash in arrears on February 1 and August 1 of
each year, commencing August 1, 1999.
Concurrently with the closing of the 9 1/4% Seven Year Notes and 9 3/8%
Ten Year Notes offering, EchoStar used approximately $1.658 billion of net
proceeds received from the sale of the 9 1/4% Seven and 9 3/8% Ten Year Notes to
complete tender offers for its outstanding 1994 Notes, 1996 Notes and 1997
Notes. In February 1999, EchoStar used approximately $268 million of net
proceeds received from the sale of the 9 1/4% Seven and 9 3/8% Ten Year Notes to
complete the tender offers related to the 12 1/8% Senior Exchange Notes due
2004, issued on January 4, 1999, in exchange for all issued and outstanding 12
1/8% Series B Senior Redeemable Exchangeable Preferred Stock.
With the exception of certain de minimis domestic and foreign
subsidiaries, the 9 1/4% Seven and 9 3/8% Ten Year Notes are fully,
unconditionally and jointly and severally guaranteed by all subsidiaries of
EDBS. The 9 1/4% Seven and 9 3/8% Ten Year Notes are general senior unsecured
obligations which:
F-16
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
o rank pari passu in right of payment to each other and to all
existing and future senior unsecured obligations;
o rank senior to all existing and future junior obligations; and
o are effectively junior to secured obligations to the extent of the
collateral securing such obligations, including any borrowings
under future secured credit facilities.
Except under certain circumstances requiring prepayment premiums, and
in other limited circumstances, the 9 1/4% Seven and 9 3/8% Ten Year Notes are
not redeemable at EDBS's option prior to February 1, 2003 and February 1, 2004,
respectively. Thereafter, the 9 1/4% Seven Year Notes will be subject to
redemption, at the option of EDBS, in whole or in part, at redemption prices
decreasing from 104.625% during the year commencing February 1, 2003 to 100% on
or after February 1, 2005, together with accrued and unpaid interest thereon to
the redemption date. The 9 3/8% Ten Year Notes will be subject to redemption, at
the option of EDBS, in whole or in part, at redemption prices decreasing from
104.688% during the year commencing February 1, 2004 to 100% on or after
February 1, 2008, together with accrued and unpaid interest thereon to the
redemption date.
The indentures related to the 9 1/4% Seven and 9 3/8% Ten Year Notes
(the "Seven and Ten Year Notes Indentures") contain restrictive covenants that,
among other things, impose limitations on the ability of EDBS to:
o incur additional indebtedness;
o apply the proceeds of certain asset sales;
o create, incur or assume liens;
o create dividend and other payment restrictions with respect to
EDBS's subsidiaries;
o merge, consolidate or sell assets; and
o enter into transactions with affiliates.
In addition, EDBS may pay dividends on its equity securities only if no
default shall have occurred or is continuing under the Seven and Ten Year Notes
Indentures; and after giving effect to such dividend and the incurrence of any
indebtedness (the proceeds of which are used to finance the dividend), EDBSs'
ratio of total indebtedness to cash flow (calculated in accordance with the
Indentures) would not exceed 8.0 to 1.0. Moreover, the aggregate amount of such
dividends generally may not exceed the sum of the difference of cumulative
consolidated cash flow (calculated in accordance with the Indentures) minus 120%
of consolidated interest expense of EDBS (calculated in accordance with the
Indentures), in each case from April 1, 1999 plus an amount equal to 100% of the
aggregate net cash proceeds received by EDBS and its subsidiaries from the
issuance or sale of certain equity interests of EDBS or EchoStar.
In the event of a change of control, as defined in the Seven and Ten
Year Notes Indentures, EDBS will be required to make an offer to repurchase all
of the 9 1/4% Seven and 9 3/8% Ten Year Notes at a purchase price equal to 101%
of the aggregate principal amount thereof, together with accrued and unpaid
interest thereon, to the date of repurchase.
4 7/8% Convertible Notes
On December 2, 1999, EchoStar sold $1 billion principal amount of
4 7/8% Convertible Subordinated Notes due 2007 (the "4 7/8% Convertible Notes").
Interest accrues at an annual rate of 4 7/8% on the 4 7/8% Convertible Notes and
is payable semi-annually in cash, in arrears on January 1 and July 1 of each
year, commencing July 1, 2000.
The 4 7/8% Convertible Notes are general unsecured obligations, which
rank junior in right of payment to:
o all existing and future senior obligations;
o all of EchoStar's secured debts to the extent of the value of the
assets securing those debts; and
o all existing and future debts and other liabilities or EchoStar's
subsidiaries.
Except under certain circumstances requiring prepayment premiums, and
in other limited circumstances, the 4 7/8% Convertible Notes are not redeemable
at EchoStar's option prior to January 1, 2003. Thereafter, the 4 7/8%
Convertible Notes will be subject to redemption, at the option of the Company,
in whole or in part, at redemption prices
F-17
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
decreasing from 102.786% during the year commencing January 1, 2003 to 100% on
or after January 1, 2007, together with accrued and unpaid interest thereon to
the redemption date.
The 4 7/8% Convertible Notes, unless previously redeemed, are
convertible at the option of the holder any time after 90 days following the
date of their original issuance and prior to maturity into shares of our class A
common stock at a conversion price of $45.44 per share.
The indenture related to the 4 7/8% Convertible Notes (the "4 7/8%
Convertible Notes Indenture") contain certain restrictive covenants that do not
impose material limitations on EchoStar.
In the event of a change of control, as defined in the 4 7/8%
Convertible Notes Indenture, EchoStar will be required to make an offer to
repurchase all or any part of the holder's 4 7/8% Convertible Notes at a
purchase price equal to 101% of the aggregate principal amount thereof, together
with accrued and unpaid interest thereon, to the date of repurchase.
10 3/8% Seven Year Notes
On September 25, 2000, our wholly-owned subsidiary, EBC, sold $1
billion principal amount of 10 3/8% Senior Notes due 2007 (the "10 3/8% Seven
Year Notes"). Interest accrues at an annual rate of 10 3/8% on the 10 3/8% Seven
Year Notes and is payable semi-annually in cash, in arrears on April 1 and
October 1 of each year, commencing April 1, 2001. The proceeds of the 10 3/8%
Seven Year Notes will be used primarily by our subsidiaries for the construction
and launch of additional satellites, strategic acquisitions and other general
working capital purposes.
The indenture related to the 10 3/8% Seven Year Notes (the "10 3/8%
Seven Year Notes Indenture") contains certain restrictive covenants that
generally do not impose material limitations on us. Subject to certain
limitations, the 10 3/8% Seven Year Notes Indenture permits EBC to incur
additional indebtedness, including secured and unsecured indebtedness that ranks
on parity with the 10 3/8% Seven Year Notes. Any secured indebtedness will, as
to the collateral securing such indebtedness, be effectively senior to the 10
3/8% Seven Year Notes to the extent of such collateral.
The 10 3/8% Seven Year Notes are:
o general unsecured obligations of EBC;
o ranked equally in right of payment with all of EBC's existing and
future senior debt;
o ranked senior in right of payment to all of EBC's other existing
and future subordinated debt; and
o ranked effectively junior to (i) all liabilities (including trade
payables) of EBC's subsidiaries and (ii) all of EBC's secured
obligations, to the extent of the collateral securing such
obligations, including any borrowings under any of EBC's future
secured credit facilities, if any.
Except under certain circumstances requiring prepayment premiums, and
in other limited circumstances, the 10 3/8% Seven Year Notes are not redeemable
at EchoStar's option prior to October 1, 2004. Thereafter, the 10 3/8% Seven
Year Notes will be subject to redemption, at EchoStar's option, in whole or in
part, at redemption prices decreasing from 105.188% during the year commencing
October 1, 2004 to 100% on or after October 1, 2006, together with accrued and
unpaid interest thereon to the redemption date.
In the event of a change of control, as defined in the 10 3/8% Seven
Year Notes Indenture, EBC will be required to make an offer to repurchase all or
any part of a holder's 10 3/8% Seven Year Notes at a purchase price equal to
101% of the aggregate principal amount thereof, together with accrued and unpaid
interest thereon, to the date of repurchase.
F-18
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Under the terms of the 10 3/8% Seven Year Notes Indenture, EBC has
agreed to cause its subsidiary, EDBS to make an offer to exchange (the "EDBS
Exchange Offer") all of the outstanding 10 3/8% Seven Year Notes for a new class
of notes issued by EDBS as soon as practical following the first date (as
reflected in EDBS' most recent quarterly or annual financial statements) on
which EDBS is permitted to incur indebtedness in an amount equal to the
outstanding principal balance of the 10 3/8% Seven Year Notes under the
"Indebtedness to Cash Flow Ratio" test contained in the indentures (the "EDBS
Indentures") governing the EDBS 9 1/4% Seven Year Notes and 9 3/8% Ten Year
Notes, and such incurrence of indebtedness would not otherwise cause any breach
or violation of, or result in a default under, the terms of the EDBS Indentures.
On October 25, 2000, as contemplated by the terms of the EBC Indenture,
EDBS amended the terms of the EDBS Indentures to provide that the recording of
some or all of the indebtedness represented by the 10 3/8% Seven Year Notes on
the EDBS balance sheet as a result of the application of generally accepted
accounting principles and related rules prior to the completion of the EDBS
Exchange Offer would not be deemed to constitute an incurrence of indebtedness
for certain purposes under the EDBS Indentures. These amendments were approved
by more than a majority in principal amount of each issue of the 9 1/4% Seven
and 9 3/8% Ten Year Notes. The cost of obtaining these consents was immaterial
to EchoStar.
Mortgages and Other Notes Payable
Mortgages and other notes payable consists of the following (in
thousands):
DECEMBER 31,
------------------------
1999 2000
---------- ----------
8.25% note payable for satellite vendor financing for EchoStar I due in
equal monthly installment of $722, including interest, through
February 2001 ................................................................... $ 9,606 $ 2,137
8.25% note payable for satellite vendor financing for EchoStar II due in equal
monthly installments of $562, including interest, through November 2001 ......... 11,909 5,930
8.25% note payable for satellite vendor financing for EchoStar III due in
equal monthly installments of $294, including interest, through October 2002 .... 8,645 5,978
8.25% note payable for satellite vendor financing for EchoStar IV due upon
resolution of satellite insurance claim (Note 3) ................................ 9,409 11,327
Mortgages and other unsecured notes payable due in installments through
November 2015 with interest rates ranging from 4% to 10% ........................ 13,103 10,572
---------- ----------
Total ............................................................................. 52,672 35,944
Less current portion .............................................................. (22,067) (21,132)
---------- ----------
Mortgages and other notes payable, net of current portion ......................... $ 30,605 $ 14,812
========== ==========
Future maturities of EchoStar's outstanding long-term debt are
summarized as follows (in thousands):
RESIDUAL
9 1/4% NOTES,
SEVEN 4 7/8% 10 3/8% MORTGAGES
YEAR 9 3/8% TEN CONVERTIBLE TEN YEAR AND OTHER
NOTES YEAR NOTES NOTES NOTES NOTES PAYABLE TOTAL
--------- ----------- ----------- ----------- ------------- -----------
YEAR ENDING
DECEMBER 31,
2001............ $ -- $ -- $ -- $ -- $ 21,132 $ 21,132
2002............ -- -- -- -- 7,365 7,365
2003............ -- -- -- -- 3,033 3,033
2004............ -- -- -- -- 765 765
2005............ -- -- -- -- 794 794
Thereafter...... 375,000 1,625,000 1,000,000 1,000,000 2,855 4,002,855
--------- ----------- ----------- ----------- ------------- -----------
Total............. $ 375,000 $ 1,625,000 $ 1,000,000 $ 1,000,000 $ 35,944 $ 4,035,944
========= =========== =========== =========== ============= ===========
F-19
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Satellite Vendor Financing
The purchase price for satellites is required to be paid in progress
payments, some of which are non-contingent payments that are deferred until
after the respective satellites are in orbit (satellite vendor financing).
EchoStar utilized $36 million, $28 million, $14 million and $13 million of
satellite vendor financing for EchoStar I, EchoStar II, EchoStar III and
EchoStar IV, respectively. The satellite vendor financing with respect to
EchoStar I and EchoStar II is secured by substantially all assets of EDBS and
its subsidiaries (subject to certain restrictions) and a corporate guarantee of
ECC. The satellite vendor financings for both EchoStar III and EchoStar IV are
secured by an ECC corporate guarantee.
5. INCOME TAXES
As of December 31, 2000, EchoStar had net operating loss carryforwards
("NOLs") for Federal income tax purposes of approximately $2.050 billion. The
NOLs will begin to expire in the year 2012. The use of the NOLs is subject to
statutory and regulatory limitations regarding changes in ownership. Financial
Accounting Standard No. 109, "Accounting for Income Taxes," ("FAS No. 109")
requires that the potential future tax benefit of NOLs be recorded as an asset.
FAS No. 109 also requires that deferred tax assets and liabilities be recorded
for the estimated future tax effects of temporary differences between the tax
basis and book value of assets and liabilities. Deferred tax assets are offset
by a valuation allowance to the extent deemed necessary.
In 2000, EchoStar increased its valuation allowance sufficient to fully
offset net deferred tax assets arising during the year. Realization of net
deferred tax assets is not assured and is principally dependent on generating
future taxable income prior to expiration of the NOLs. Management believes
existing net deferred tax assets in excess of the valuation allowance will, more
likely than not, be realized. EchoStar continuously reviews the adequacy of its
valuation allowance. Future decreases to the valuation allowance will be made
only as changed circumstances indicate that it is more likely than not that the
additional benefits will be realized. Any future adjustments to the valuation
allowance will be recognized as a separate component of EchoStar's provision for
income taxes.
The actual tax (provision) benefit for 1998, 1999 and 2000 are
reconciled to the amounts computed by applying the statutory Federal tax rate to
income before taxes as follows:
YEAR ENDED DECEMBER 31,
----------------------------------------
1998 1999 2000
-------- -------- ------------------
AS RETROACTIVELY
ADJUSTED (NOTE 13)
Statutory rate..................................... 35.0% 35.0% 35.0%
State income taxes, net of Federal benefit......... 1.6 2.3 2.9
Employee stock option exercise and sale ........... -- -- 3.2
Non-deductible interest expense.................... (1.4) (0.3) --
Other.............................................. 0.5 1.3 1.4
Increase in valuation allowance.................... (35.7) (38.3) (42.5)
-------- -------- -------
Total benefit from income taxes................. --% --% --%
======== ======== =======
F-20
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
The components of the (provision for) benefit from income taxes are as
follows (in thousands):
YEAR ENDED DECEMBER 31,
-----------------------------------------
1998 1999 2000
-------- --------- ------------------
AS RETROACTIVELY
ADJUSTED (NOTE 13)
Current (provision) benefit:
Federal............................... $ 15 $ -- $ --
State................................. 18 (45) (80)
Foreign............................... (77) (108) (475)
-------- --------- ---------
(44) (153) (555)
Deferred (provision) benefit:
Federal............................... 86,604 286,195 247,519
State................................. 6,463 27,748 28,809
Increase in valuation allowance....... (93,067) (313,943) (276,328)
-------- --------- ---------
-- -- --
-------- --------- ---------
Total (provision) benefit.......... $ (44) $ (153) $ (555)
======== ========= =========
The temporary differences, which give rise to deferred tax assets and
liabilities as of December 31, 1999 and 2000, are as follows (in thousands):
DECEMBER 31,
--------------------------------
1999 2000
---------- ------------------
AS RETROACTIVELY
ADJUSTED (NOTE 13)
Current deferred tax assets:
Accrued royalties............................................... $ 30,018 $ 36,425
Inventory reserves and cost methods............................. 1,380 3,974
Accrued expenses................................................ 29,846 40,685
Allowance for doubtful accounts................................. 5,636 12,533
Reserve for warranty costs...................................... 78 79
---------- -----------
Total current deferred tax assets................................. 66,958 93,696
Current deferred tax liabilities:
Other........................................................... (68) (40)
---------- -----------
Total current deferred tax liabilities............................ (68) (40)
---------- -----------
Gross current deferred tax assets................................. 66,890 93,656
Valuation allowance............................................... (55,162) (79,194)
---------- -----------
Net current deferred tax assets................................... 11,728 14,462
Noncurrent deferred tax assets:
General business and foreign tax credits........................ 2,504 2,504
Net operating loss carryforwards................................ 528,961 771,748
Incentive plan stock compensation............................... 22,600 38,841
Other........................................................... 9,553 34,763
---------- -----------
Total noncurrent deferred tax assets.............................. 563,618 847,856
Noncurrent deferred tax liabilities:
Depreciation.................................................... (43,459) (77,452)
Other........................................................... (425) (1,108)
---------- -----------
Total noncurrent deferred tax liabilities......................... (43,884) (78,560)
---------- -----------
Gross deferred tax assets......................................... 519,734 769,296
---------- -----------
Valuation allowance............................................... (464,327) (716,623)
---------- -----------
Net noncurrent deferred tax assets................................ 55,407 52,673
---------- -----------
Net deferred tax assets........................................... $ 67,135 $ 67,135
========== ===========
F-21
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
6. STOCKHOLDERS' EQUITY (DEFICIT)
Common Stock
The Class A, Class B and Class C common stock are equivalent in all
respects except voting rights. Holders of Class A and Class C common stock are
entitled to one vote per share and holders of Class B common stock are entitled
to ten votes per share. Each share of Class B and Class C common stock is
convertible, at the option of the holder, into one share of Class A common
stock. Upon a change in control of ECC, each holder of outstanding shares of
Class C common stock is entitled to ten votes for each share of Class C common
stock held. ECC's principal stockholder owns all outstanding Class B common
stock and all other stockholders own Class A common stock. There are no shares
of Class C common stock outstanding.
Series C Cumulative Convertible Preferred Stock
In November 1997, EchoStar issued 2.3 million shares of 6 3/4% Series C
Cumulative Convertible Preferred Stock (the "Series C Preferred Stock") which
resulted in net proceeds to EchoStar of approximately $97 million. Simultaneous
with the issuance of the Series C Preferred Stock, the purchasers of the Series
C Preferred Stock placed approximately $15 million into an account (the "Deposit
Account"). EchoStar recorded proceeds from the issuance of the Series C
Preferred Stock net of the amount placed in the Deposit Account. As of November
2, 1999, proceeds from the issuance of the Series C Preferred Stock were
accreted to the face amount of $115 million. However, as of December 31, 2000,
approximately 2.1 million shares of Series C Preferred Stock have been converted
into approximately 34.2 million shares of EchoStar's class A common stock,
reducing the book value of the Series C Preferred Stock to approximately $11
million. The Deposit Account provided quarterly cash payments of approximately
$0.844 per share of Series C Preferred Stock, from February 1, 1998 until
November 1, 1999.
On November 2, 1999, dividends on the Series C Preferred Stock began to
accrue. Each share of Series C Preferred Stock has a liquidation preference of
$50 per share. Holders of the Series C Preferred Stock are entitled to receive
cumulative dividends at an annual rate of 6 3/4% of the liquidation preference,
payable quarterly in arrears commencing February 1, 2000, or upon conversion.
Dividends may, at the option of EchoStar, be paid in cash, by delivery of fully
paid and nonassessable shares of Class A common stock, or a combination thereof.
Each share of Series C Preferred Stock is convertible at any time, unless
previously redeemed, at the option of the holder thereof, into approximately
16.4 shares of Class A common stock, subject to adjustment upon the occurrence
of certain events. The Series C Preferred Stock is redeemable at any time on or
after November 1, 2000, in whole or in part, at the option of EchoStar, in cash,
by delivery of fully paid and nonassessable shares of Class A common stock, or a
combination thereof, initially at a price of $51.929 per share and thereafter at
prices declining to $50.000 per share on or after November 1, 2004, plus in each
case all accumulated and unpaid dividends to the redemption date.
7. STOCK COMPENSATION PLANS
Stock Incentive Plan
In April 1994, EchoStar adopted a stock incentive plan to provide
incentive to attract and retain officers, directors and key employees. EchoStar
currently has reserved up to 80 million shares of its Class A common stock for
granting awards under its 1995 Stock Incentive Plan and an additional 80 million
shares of its Class A common stock for granting awards under its 1999 Stock
Incentive Plan. In general, stock options granted through December 31, 2000 have
included exercise prices not less than the fair market value of EchoStar's Class
A common stock at the date of grant, and vest, as determined by EchoStar's Board
of Directors, generally at the rate of 20% per year.
During 1999, EchoStar adopted the 1999 Incentive Plan which provided
certain key employees a contingent incentive including stock options and cash.
The payment of these incentives was contingent upon the achievement of certain
financial and other goals of EchoStar. EchoStar met certain of these goals
during 1999. Accordingly, in
F-22
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
1999, EchoStar recorded approximately $179 million of deferred compensation
related to post-grant appreciation of options to purchase approximately 4.2
million shares, granted pursuant to the 1999 Incentive Plan. The related
deferred compensation will be recognized over the five-year vesting period.
During the year ended December 31, 1999 and 2000, EchoStar recognized $61
million and $51 million, respectively, under the 1999 Incentive Plan. The
remainder will be recognized over the remaining vesting period.
Options to purchase an additional 11.2 million shares were granted at
fair market value during 1999 pursuant to the Long Term Incentive Plan. Vesting
of these options is contingent on meeting certain longer-term goals, the
achievement of which can not be reasonably predicted as of December 31, 2000.
Accordingly, no compensation was recorded during 1999 and 2000 related to these
long-term options. EchoStar will continue to evaluate the likelihood of
achieving these long-term goals and will record the related compensation at the
time achievement of these goals becomes probable. During 2000, the Board of
Directors approved a 2000 Incentive Plan. The payment of these incentives was
contingent upon the achievement of certain financial and other goals of
EchoStar. EchoStar did not meet any of these goals in 2000. Accordingly, no cash
incentives were paid and all stock options granted pursuant to the 2000
Incentive Plan were cancelled.
A summary of EchoStar's incentive stock option activity for the years
ended December 31, 1998, 1999 and 2000 is as follows:
1998 1999 2000
------------------------ ----------------------- -----------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
----------- --------- ----------- --------- ----------- ---------
Options outstanding, beginning of ..... 12,196,536 $ 1.88 11,576,120 $ 2.04 27,843,640 $ 6.26
year
Granted ............................... 5,585,080 2.35 20,847,712 7.71 2,942,000 51.56
Exercised ............................. (1,505,456) 1.57 (3,808,114) 1.84 (3,591,209) 3.05
Forfeited ............................. (4,700,040) 2.14 (772,078) 4.92 (2,076,538) 20.78
----------- --------- ----------- --------- ----------- ---------
Options outstanding, end of year ...... 11,576,120 $ 2.04 27,843,640 $ 6.26 25,117,893 $ 10.81
=========== ========= =========== ========= =========== =========
Exercisable at end of year ............ 3,858,424 $ 1.73 2,755,432 $ 1.86 2,911,256 $ 5.49
=========== ========= =========== ========= =========== =========
Exercise prices for options outstanding as of December 31, 2000 are as
follows:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------------------------------------------
NUMBER WEIGHTED- NUMBER
OUTSTANDING AVERAGE EXERCISABLE
AS OF REMAINING WEIGHTED- AS OF WEIGHTED-
RANGE OF DECEMBER 31, CONTRACTUAL AVERAGE DECEMBER 31, AVERAGE
EXERCISE PRICES 2000 LIFE EXERCISE PRICE 2000 EXERCISE PRICE
- --------------------- -------------- ------------- -------------- ------------ --------------
$ 1.167 - $ 2.750 4,047,528 5.28 $ 2.20 1,745,520 $ 2.08
3.000 - 3.434 328,788 6.17 3.01 69,228 3.05
5.486 - 6.600 15,350,932* 8.09 6.00 685,908 6.02
10.203 - 19.180 2,331,645 7.61 12.37 312,200 13.16
22.703 - 22.750 293,000 9.20 22.72 34,400 22.70
33.109 - 36.420 1,320,000 7.61 34.36 -- --
48.750 - 52.750 350,000 9.06 49.09 64,000 48.75
60.125 - 79.000 1,096,000 9.43 65.22 -- --
- --------------------- -------------- ------------- ------- ------------ -------
$1.1667 - $ 79.000 25,117,893 7.63 $ 10.81 2,911,256 $ 5.49
===================== ============== ============= ======= ============ =======
* This amount includes 10.4 million shares outstanding pursuant to the
Long Term Incentive Plan.
F-23
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Accounting for Stock-Based Compensation
EchoStar has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees," ("APB 25") and related
interpretations in accounting for its stock-based compensation plans. Under APB
25, EchoStar generally does not recognize compensation expense on the issuance
of stock under its Stock Incentive Plan because the option terms are typically
fixed and typically the exercise price equals the market price of the underlying
stock on the date of grant. In October 1995, the Financial Accounting Standards
Board issued Financial Accounting Standard No. 123, "Accounting and Disclosure
of Stock-Based Compensation," ("FAS No. 123") which established an alternative
method of expense recognition for stock-based compensation awards to employees
based on fair values. EchoStar elected to not adopt FAS No. 123 for expense
recognition purposes.
Pro forma information regarding net income and earnings per share is
required by FAS No. 123 and has been determined as if EchoStar had accounted for
its stock-based compensation plans using the fair value method prescribed by
that statement. For purposes of pro forma disclosures, the estimated fair value
of the options is amortized to expense over the options' vesting period. All
options are initially assumed to vest. Compensation previously recognized is
reversed to the extent applicable to forfeitures of unvested options. EchoStar's
pro forma net loss attributable to common shares and pro forma basic and diluted
loss per common share were as follows (in thousands, except per share amounts):
YEAR ENDED DECEMBER 31,
------------------------------------------
1998 1999 2000
---------- ---------- ----------------
AS RETROACTIVELY
ADJUSTED
(NOTE 13)
Net loss attributable to common shares...... $ (297,197) $ (749,836) $ (622,925)
========== ========== ==========
Basic and diluted loss per share............ $ (0.83) $ (1.80) $ (1.32)
========== ========== ==========
The pro forma net loss for 1999 and 2000 is less than the loss reported
in the statement of operations because of the $61 million and $51 million
charge, respectively, for the post-grant appreciation of stock-based
compensation, determined under APB 25 and reported by EchoStar, is greater than
the amount of stock-based compensation that would have been reported by EchoStar
under the provisions of FAS No. 123.
The fair value of each option grant was estimated at the date of the
grant using a Black-Scholes option pricing model with the following
weighted-average assumptions:
YEAR ENDED DECEMBER 31,
------------------------------
1998 1999 2000
-------- -------- --------
Risk-free interest rate.......................... 5.64% 5.38% 6.19%
Volatility factor................................ 67% 76% 98%
Dividend yield................................... 0.00% 0.00% 0.00%
Expected term of options......................... 6 years 6 years 6 years
Weighted-average fair value of options granted... $ 1.51 $ 7.14 $ 30.41
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect the
fair value estimate, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of its
stock-based compensation awards.
F-24
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
8. EMPLOYEE BENEFIT PLANS
Employee Stock Purchase Plan
During 1997, the Board of Directors and shareholders approved an
employee stock purchase plan (the "ESPP"), effective beginning October 1, 1997.
Under the ESPP, EchoStar is authorized to issue a total of 800,000 shares of
Class A common stock. Substantially all full-time employees who have been
employed by EchoStar for at least one calendar quarter are eligible to
participate in the ESPP. Employee stock purchases are made through payroll
deductions. Under the terms of the ESPP, employees may not deduct an amount
which would permit such employee to purchase capital stock of EchoStar under all
stock purchase plans of EchoStar at a rate which would exceed $25,000 in fair
market value of capital stock in any one year. The purchase price of the stock
is 85% of the closing price of the Class A common stock on the last business day
of each calendar quarter in which such shares of Class A common stock are deemed
sold to an employee under the ESPP. The ESPP shall terminate upon the first to
occur of (i) October 1, 2007 or (ii) the date on which the ESPP is terminated by
the Board of Directors. During 1998, 1999 and 2000, employees purchased
approximately 128,000, 44,000 and 58,000 shares of Class A common stock through
the ESPP, respectively.
401(k) Employee Savings Plan
EchoStar sponsors a 401(k) Employee Savings Plan (the "401(k) Plan")
for eligible employees. Voluntary employee contributions to the 401(k) Plan may
be matched 50% by EchoStar, subject to a maximum annual contribution by EchoStar
of $1,000 per employee. EchoStar also may make an annual discretionary
contribution to the plan with approval by EchoStar's Board of Directors, subject
to the maximum deductible limit provided by the Internal Revenue Code of 1986,
as amended. EchoStar's cash contributions to the 401(k) Plan totaled $314,000 in
1998 and 1999, and $1.6 million in 2000. Additionally, during 1998, EchoStar
contributed 640,000 shares of its Class A common stock (fair value of
approximately $2 million) to the 401(k) Plan related to its 1997 discretionary
contribution. During 1999, EchoStar contributed 520,000 shares of its Class A
common stock (fair value of approximately $3 million) to the 401(k) Plan related
to its 1998 discretionary contribution. During 2000, EchoStar contributed
120,000 shares of its Class A common stock (fair value of approximately $6
million) to the 401(k) Plan related to its 1999 discretionary contribution.
EchoStar has not yet determined the amount to be contributed during 2001
relating to its 2000 discretionary contribution.
9. OTHER COMMITMENTS AND CONTINGENCIES
Leases
Future minimum lease payments under noncancelable operating leases as
of December 31, 2000, are as follows (in thousands):
YEAR ENDING DECEMBER 31,
2001..................................... $ 10,627
2002..................................... 10,407
2003..................................... 9,369
2004..................................... 4,032
2005..................................... 2,245
Thereafter............................... 4,505
---------
Total minimum lease payments.......... $ 41,185
=========
Total rental expense for operating leases approximated $1 million in
1998, $3 million in 1999 and $5 million in 2000.
F-25
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Purchase Commitments
As of December 31, 2000, EchoStar's purchase commitments totaled
approximately $204 million. The majority of these commitments relate to EchoStar
receiver systems and related components. All of the purchases related to these
commitments are expected to be made during 2001. EchoStar expects to finance
these purchases from existing unrestricted cash balances and future cash flows
generated from operations, if any.
VisionStar
During November 2000, one of EchoStar's wholly owned subsidiaries
purchased a 49.9% interest in VisionStar, Inc. VisionStar holds an FCC license,
and is constructing a Ka-band satellite, to launch into the 113 W.L. orbital
slot. Together with VisionStar EchoStar has requested FCC approval to acquire
control over VisionStar by increasing its ownership of VisionStar to 90%, for a
total purchase price of approximately $2.8 million. EchoStar has also provided
loans to VisionStar totaling less than $10 million to date for the construction
of their satellite and expect to provide additional funding to VisionStar in the
future. EchoStar is not obligated to finance the full remaining cost to
construct and launch the VisionStar satellite, but VisionStar's FCC license
currently requires construction of the satellite to be completed by April 30,
2002 or the license could be revoked. EchoStar currently expects to continue to
fund loans and equity contributions for construction of the satellite in the
near term from cash on hand, and expect that it may spend approximately $79.5
million during 2001 for that purpose subject to, among other things, FCC action.
Patents and Intellectual Property
Many entities, including some of EchoStar's competitors, now have and
may in the future obtain patents and other intellectual property rights that
cover or affect products or services directly or indirectly related to those
that EchoStar offers. EchoStar may not be aware of all patents and other
intellectual property rights that its products may potentially infringe. Damages
in patent infringement cases can include a tripling of actual damages in certain
cases. Further, EchoStar cannot estimate the extent to which it may be required
in the future to obtain licenses with respect to patents held by others and the
availability and cost of any such licenses. Various parties have asserted patent
and other intellectual property rights with respect to components within
EchoStar's direct broadcast satellite system. EchoStar cannot be certain that
these persons do not own the rights they claim, that its products do not
infringe on these rights, that it would be able to obtain licenses from these
persons on commercially reasonable terms or, if it was unable to obtain such
licenses, that it would be able to redesign its products to avoid infringement.
DirecTV
During February 2000 EchoStar filed suit against DirecTV and Thomson
Consumer Electronics/RCA in the Federal District Court of Colorado. The suit
alleges that DirecTV has utilized improper conduct in order to fend off
competition from the DISH Network. According to the complaint, DirecTV has
demanded that certain retailers stop displaying EchoStar's merchandise and has
threatened to cause economic damage to retailers if they continue to offer both
product lines in head-to-head competition. The suit alleges, among other things,
that DirecTV has acted in violation of federal and state anti-trust laws in
order to protect DirecTV's market share. EchoStar is seeking injunctive relief
and monetary damages. On December 8, 2000, EchoStar submitted an Amended
Complaint adding claims against Circuit City, Radio Shack and Best Buy, alleging
that these retailers are engaging in improper conduct that has had an
anti-competitive impact on EchoStar. It is too early in the litigation to make
an assessment of the probable outcome. During October 2000, DirecTV filed a
motion for summary judgment asking that the Court enter judgment in DirecTV's
favor on certain of EchoStar's claims. EchoStar has filed a motion asking the
Court to allow it an opportunity to conduct discovery prior to having to
substantively respond to DirecTV's motion. DirecTV's motion for summary judgment
and EchoStar's motion remain pending.
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
F-26
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
that EchoStar has falsely advertised to consumers about its right to offer
network programming. DirecTV further alleges that EchoStar improperly used
certain marks owned by PrimeStar, now owned by DirecTV. Finally, DirecTV alleges
that EchoStar has been marketing National Football League games in a misleading
manner. The amount of damages DirecTV is seeking is as yet unquantified.
EchoStar intends to vigorously defend against these claims. The case is
currently in discovery. It is too early in the litigation to make an assessment
of the probable outcome.
Fee Dispute
EchoStar had a contingent fee arrangement with the attorneys who
represented EchoStar in the litigation with News Corporation. The contingent fee
arrangement provides for the attorneys to be paid a percentage of any net
recovery obtained by EchoStar in the News Corporation litigation. The attorneys
have asserted that they may be entitled to receive payments totaling hundreds of
millions of dollars under this fee arrangement.
During mid-1999, EchoStar initiated litigation against the attorneys in
the Arapahoe County, Colorado, District Court arguing that the fee arrangement
is void and unenforceable. In December 1999, the attorneys initiated an
arbitration proceeding before the American Arbitration Association. The
litigation has been stayed while the arbitration is ongoing. A two week
arbitration hearing has been set to begin on April 2, 2001. It is not possible
to determine the outcome of arbitration or litigation regarding this fee
dispute. EchoStar is vigorously contesting the attorneys' interpretation of the
fee arrangement, which EchoStar believes significantly overstates the magnitude
of its liability.
WIC Premium Television Ltd.
During July 1998, a lawsuit was filed by WIC Premium Television Ltd.,
an Alberta corporation, in the Federal Court of Canada Trial Division, against
General Instrument Corporation, HBO, Warner Communications, Inc., John Doe,
Showtime, United States Satellite Broadcasting Company, Inc., EchoStar
Communications Corporation, and two of EchoStar's wholly-owned subsidiaries,
EchoSphere Corporation and Dish, Ltd. 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.
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 EchoStar appealed. The Alberta Court also
granted a motion to add more EchoStar parties to the lawsuit. EchoStar Satellite
Corporation, EDBS, 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 of Appeals denied
EchoStar's appeal and the Alberta Court has asserted jurisdiction over all of
the EchoStar defendants. The Court in the Federal action has stayed that case
pending the outcome of the Alberta action. The case is now currently in
discovery. EchoStar intends to vigorously defend the suit. It is too early to
make an assessment of the probable outcome of the litigation or to determine the
extent of any potential liability or damages.
F-27
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Broadcast network programming
Until July 1998, EchoStar obtained distant broadcast network channels
(ABC, NBC, CBS and FOX) for distribution to its customers through PrimeTime 24.
In December 1998, the United States District Court for the Southern District of
Florida entered a nationwide permanent injunction requiring PrimeTime 24 to shut
off distant network channels to many of its customers, and henceforth to sell
those channels to consumers in accordance with certain stipulations in the
injunction.
In October 1998, EchoStar filed a declaratory judgment action against
ABC, NBC, CBS and FOX in Denver Federal Court. EchoStar asked the court to enter
a judgment declaring that its method of providing distant network programming
did not violate the Satellite Home Viewer Act and hence did not infringe the
networks' copyrights. In November 1998, the networks and their affiliate groups
filed a complaint against EchoStar in Miami Federal Court alleging, among other
things, copyright infringement. The court combined the case that EchoStar filed
in Colorado with the case in Miami and transferred it to the Miami court. The
case remains pending in Miami. While the networks have not sought monetary
damages, they have sought to recover attorney fees if they prevail.
In February 1999, the networks filed a "Motion for Temporary
Restraining Order, Preliminary Injunction and Contempt Finding" against DirecTV,
Inc. in Miami related to the delivery of distant network channels to DirecTV
customers by satellite. DirecTV settled this lawsuit with the networks. Under
the terms of the settlement between DirecTV and the networks, some DirecTV
customers were scheduled to lose access to their satellite-provided distant
network channels by July 31, 1999, while other DirecTV customers were to be
disconnected by December 31, 1999. Subsequently, PrimeTime 24 and substantially
all providers of satellite-delivered network programming other than EchoStar
agreed to this cut-off schedule, although EchoStar does not know if they adhered
to this schedule.
In December 1998, the networks filed a Motion for Preliminary
Injunction against EchoStar in the Miami court, and asked the court to enjoin
EchoStar from providing network programming except under limited circumstances.
A preliminary injunction hearing was held on September 21, 1999. The court took
the issues under advisement to consider the networks' request for an injunction,
whether to hear live testimony before ruling upon the request, and whether to
hear argument on why the Satellite Home Viewer Act may be unconstitutional,
among other things.
In March 2000, the networks filed an emergency motion again asking the
court to issue an injunction requiring EchoStar to turn off network programming
to certain of its customers. At that time, the networks also argued that
EchoStar's compliance procedures violate the Satellite Home Viewer Improvement
Act. EchoStar opposed the networks' motion and again asked the court to hear
live testimony before ruling upon the networks' injunction request.
During September 2000, the Court granted the Networks' motion for
preliminary injunction, denied the Network's emergency motion and denied
EchoStar's request to present live testimony and evidence. The Court's original
order required EchoStar to terminate network programming to certain subscribers
"no later than February 15, 1999," and contained other dates which would be
physically impossible to comply with. The order imposes restrictions on
EchoStar's past and future sale of distant ABC, NBC, CBS and Fox channels
similar to those imposed on PrimeTime 24 (and, EchoStar believes, on DirecTV and
others). Some of those restrictions go beyond the statutory requirements imposed
by the Satellite Home Viewer Act and the Satellite Home Viewer Improvement Act.
For these and other reasons EchoStar believes the Court's order is, among other
things, fundamentally flawed, unconstitutional and should be overturned.
However, it is very unusual for a Court of Appeals to overturn a lower court's
order and there can be no assurance whatsoever that it will be overturned.
On October 3, 2000, and again on October 25, 2000, the Court amended
its original preliminary injunction order in an effort to fix some of the errors
in the original order. The twice amended preliminary injunction order required
EchoStar to shut off, by February 15, 2001, all subscribers who are ineligible
to receive distant network
F-28
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
programming under the court's order. EchoStar has appealed the September 2000
preliminary injunction order and the October 3, 2000 amended preliminary
injunction order. On November 22, 2000, the United States Court of Appeals for
the Eleventh Circuit stayed the Florida Court's preliminary injunction order
pending EchoStar's appeal. At that time, the Eleventh Circuit also expedited its
consideration of EchoStar's appeal.
During November 2000, EchoStar filed its appeal brief with the Eleventh
Circuit. During December 2000, the Satellite Broadcasting and Communications
Association submitted an amicus brief in support of EchoStar's appeal. The
Consumer Federation of America and the Media Access Project have also submitted
an amicus brief in support of EchoStar's appeal. The Networks have responded to
EchoStar's appeal brief and the amicus briefs filed by the Consumer Federation
of America and the Media Access Project and the Satellite Broadcasting and
Communications Association. In December 2000, the Department of Justice filed a
motion to intervene with respect to EchoStar's constitutional challenge of the
Satellite Home Viewers Act, and the National Association of Broadcasters filed
an amicus brief in support of the Networks' position in the appeal. During
January 2001, EchoStar filed its reply appeal brief and asked the Eleventh
Circuit for an opportunity to respond to the amicus brief filed by the National
Association of Broadcasters and the brief filed by the Department of Justice. On
January 11, 2001, the Networks advised the Eleventh Circuit that they did not
object to EchoStar's filing a response to the National Association of
Broadcasters' amicus brief or the Department of Justice's brief. On January 19,
2001, EchoStar filed its supplemental brief responding to the Department of
Justice's brief. On January 23, 2001, the Department of Justice filed a motion
to strike EchoStar's supplemental brief or for an opportunity to reply to
EchoStar's supplemental brief. On February 2, 2001, without explanation, the
Eleventh Circuit issued an order striking EchoStar's supplemental reply and
denying EchoStar an opportunity to file a response to the Department of
Justice's motion to intervene. The Eleventh Circuit has currently set oral
argument for the week of April 23, 2001. EchoStar cannot predict when the
Eleventh Circuit will rule on its appeal, but it could be as early as April
2001. EchoStar's appeal effort may not be successful and EchoStar may be
required to comply with the Court's preliminary injunction order on short
notice. The preliminary injunction could force EchoStar to terminate delivery of
distant network channels to a substantial portion of its distant network
subscriber base, which could also cause many of these subscribers to cancel
their subscription to EchoStar's other services. Such terminations would result
in a small reduction in EchoStar's reported average monthly revenue per
subscriber and could result in a temporary increase in churn.
Starsight
During October 2000, Starsight Telecast, Inc., a subsidiary of
Gemstar-TV Guide, filed a suit for patent infringement against EchoStar and
certain of its subsidiaries in the United States District Court for the Western
District of North Carolina, Asheville Division. The suit alleges infringement of
United States Patent No. 4,706,121 ("the `121 patent") which relates to certain
electronic program guide functions. EchoStar has examined this patent and
believes that it is not infringed by any of EchoStar's products or services.
EchoStar is vigorously contesting the suit and has filed counterclaims
challenging both the validity and enforceability of this patent.
In December 2000 EchoStar filed suit against Gemstar - TV Guide
International, Inc. (and certain of its subsidiaries) in the United States
District Court for the District of Colorado alleging violations by Gemstar of
various federal and state anti-trust laws and laws governing unfair competition.
The lawsuit seeks an injunction and monetary damages.
In February 2001, Gemstar filed patent infringement actions against
EchoStar in District Court in Atlanta, Georgia and in the International Trade
commission (ITC). These suits allege infringement of US Patent Nos. 5,252,066,
5,479,268 and 5,809,204 which all relate to certain electronic program guide
functions. In addition, the ITC action alleges infringement of the `121 patent
which is asserted in the North Carolina case. In the Atlanta District Court
case, Gemstar seeks damages and an injunction. Pursuant to Federal law, the
Atlanta case can be stayed pending the resolution of the ITC action. It is also
possible the North Carolina action will be stayed while the ITC case proceeds.
ITC actions typically proceed according to an expedited schedule. EchoStar
expects the ITC action to go to trial by the end of 2001 or early in 2002. A
final decision should be issued by the ITC by mid-2002.
F-29
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
While the ITC cannot award damages, it can issue exclusion orders that would
prevent the importation of articles that are found to infringe the asserted
patents. In addition, it can issue cease and desist orders that would prohibit
the sale of infringing products that had been previously imported. EchoStar has
examined these patents and believe they are not infringed by any of our products
or services. EchoStar will vigorously contest the ITC and Atlanta allegations of
infringement and will, among other things, challenge both the validity and
enforceability of the asserted patents.
During 2000, Superguide Corp. also filed suit against EchoStar, DirecTV
and others in the North Carolina Court, alleging infringement of United States
Patent Nos. 5,038,211, 5,293,357 and 4,751,578 which relate to certain
electronic program guide functions, including the use of electronic program
guides to control VCRs. It is EchoStar's understanding that these patents may be
licensed by Superguide to Gemstar, although Gemstar has not asserted the patents
against EchoStar. EchoStar has examined these patents and believes that they are
not infringed by any of EchoStar's products or services. EchoStar intends to
vigorously defend against this action and assert a variety of counterclaims.
In the event it is ultimately determined that EchoStar infringes on any
of aforementioned patents EchoStar may be subject to substantial damages, and/or
an injunction that could require EchoStar to materially modify certain user
friendly electronic programming guide and related features it currently offers
to consumers. It is too early to make an assessment of the probable outcome of
either suit.
IPPV Enterprises
IPPV Enterprises, LLC and MAAST, Inc. filed a patent infringement suit
against EchoStar in the United States District Court for the District of
Delaware. The suit alleges infringement of 5 patents. The patents disclose
various systems for the implementation of features such as impulse-pay-per view,
parental control and category lock-out. One patent relates to an encryption
technique. Three of the patents have expired. EchoStar is vigorously defending
against the suit based, among other things, on non-infringement, invalidity and
failure to provide notice of alleged infringement.
In the event it is ultimately determined that EchoStar infringes on any
of these patents we may be subject to substantial damages, and/or an injunction
with respect to the two unexpired patents, that could require EchoStar to
materially modify certain user friendly features it currently offer to
consumers. It is too early to make an assessment of the probable outcome of
either suit.
Retailer Class Actions
EchoStar has been sued by retailers in three separate class actions. In
two separate lawsuits, Air Communication & Satellite, Inc. and John DeJong, et.
al. filed lawsuits on October 6, 2000 on behalf of themselves and a class of
persons similarly situated. The plaintiffs are attempting to certify nationwide
classes allegedly brought on behalf of persons, primarily retail dealers, who
were alleged signatories to certain retailer agreements with EchoStar Satellite
Corporation. The plaintiffs are requesting the Court to declare certain
provisions of the alleged agreements invalid and unenforceable, to declare that
certain unilateral changes to the agreements are invalid and unenforceable, and
to award damages for lost commissions and payments, charge backs, and other
compensation. The plaintiffs are alleging breach of contract and breach of the
covenant of good faith and fair dealing and are seeking declaratory relief,
compensatory damages, injunctive relief, and pre-judgment and post-judgment
interest. EchoStar intends to vigorously defend the lawsuit and to assert a
variety of counterclaims. It is too early to make an assessment of the probable
outcome of the litigation or to determine the extent of any potential liability
or damages.
Satellite Dealers Supply, Inc. filed a lawsuit on September 25, 2000,
on behalf of itself and a class of persons similarly situated. The plaintiff is
attempting to certify a nationwide class allegedly brought on behalf of sellers,
installers, and servicers of equipment used to provide satellite who contract
with EchoStar and claims the alleged class has been "subject to improper
chargebacks." The plaintiff alleges that (1) EchoStar charged back
F-30
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
certain fees paid by members of the class to professional installers in
violation of contractual terms; (2) EchoStar manipulated the accounts of
subscribers to deny payments to class members; and (3) EchoStar misrepresented
to class members who owns certain equipment related to provision of satellite
television service. The plaintiff is requesting a permanent injunction and
monetary damages. EchoStar intends to vigorously defend the lawsuit and to
assert a variety of counterclaims. It is too early to make an assessment of the
probable outcome of the litigation or to determine the extent of any potential
liability or damages.
EchoStar is subject to various other legal proceedings and claims which
arise in the ordinary course of business. In the opinion of management, the
amount of ultimate liability with respect to those actions will not materially
affect EchoStar's financial position or results of operations.
Meteoroid Events
Meteoroid events pose a potential threat to all in orbit geosynchronous
satellites including EchoStar's DBS satellites. While the probability that
EchoStar's satellites will be damaged by meteoroids is very small, that
probability increases significantly when the Earth passes through the
particulate stream left behind by various comets.
Due to the current peak in the 11-year solar cycle, increased solar
activity is likely for the next year. Some of these solar storms pose a
potential threat to all in-orbit geosynchronous satellites including EchoStar's
DBS satellites. The probability that the effects from the storms will damage our
satellites or cause service interruptions is generally very small.
Some decommissioned spacecraft are in uncontrolled orbits which pass
through the geostationary belt at various points, and present hazards to
operational spacecraft including EchoStar's DBS satellites. The locations of
these hazards are generally well known and may require EchoStar to perform
maneuvers to avoid collisions.
10. SEGMENT REPORTING
Financial Data by Business Unit (in thousands)
Statement of Financial Accounting Standard No. 131, "Disclosures About
Segments of an Enterprise and Related Information" ("FAS No. 131") establishes
standards for reporting information about operating segments in annual financial
statements of public business enterprises and requires that those enterprises
report selected information about operating segments in interim financial
reports issued to shareholders. Operating segments are components of an
enterprise about which separate financial information is available and regularly
evaluated by the chief operating decision maker(s) of an enterprise. Under this
definition, we are currently operating as three separate business units.
F-31
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
ECHOSTAR
DISH TECHNOLOGIES SATELLITE ELIMINATIONS CONSOLIDATED
NETWORK CORPORATION SERVICES AND OTHER TOTAL
------------ ------------ ------------ ------------ ------------
YEAR ENDED DECEMBER 31, 1998
Revenue ................................ $ 733,382 $ 251,958 $ 23,442 $ (26,116) $ 982,666
Depreciation and amortization .......... 85,107 2,097 26 15,406 102,636
Total expenses ......................... 871,269 193,852 3,495 36,941 1,105,557
EBITDA ................................. (52,781) 60,202 19,973 (47,649) (20,255)
Interest income ........................ 9,280 -- 2 21,004 30,286
Interest expense, net of interest
capitalized ......................... (49,042) (282) -- (118,205) (167,529)
Income tax benefit (provision), net .... 17 (11) -- (50) (44)
Net income (loss) ...................... (199,356) 30,333 18,409 (110,268) (260,882)
YEAR ENDED DECEMBER 31, 1999
Revenue ................................ $ 1,373,789 $ 160,276 $ 47,312 $ 21,464 $ 1,602,841
Depreciation and amortization .......... 97,899 4,434 193 10,702 113,228
Total expenses ......................... 1,622,928 165,238 15,956 145,810 1,949,932
EBITDA ................................. (151,241) (528) 31,549 (52,583) (172,803)
Interest income ........................ 26,205 1 375 (402) 26,179
Interest expense, net of interest
capitalized ......................... (201,356) (253) -- (4) (201,613)
Income tax benefit (provision), net .... -- (46) -- (108) (154)
Net income (loss) ...................... (1,949,914) (31,884) 27,273 1,161,678 (792,847)
YEAR ENDED DECEMBER 31, 2000
AS RETROACTIVELY ADJUSTED (NOTE 13)
Revenue ................................ $ 2,407,554 $ 207,945 $ 55,028 $ 44,693 $ 2,715,220
Depreciation and amortization .......... 160,910 5,338 121 18,987 185,356
Total expenses ......................... 2,746,000 197,073 (1,695) 197,908 3,139,286
EBITDA ................................. (177,535) 16,210 56,844 (82,764) (187,245)
Interest income ........................ 79,724 -- 220 (211) 79,733
Interest expense, net of interest
capitalized ......................... (267,650) (233) -- (107) (267,990)
Income tax benefit (provision), net .... (48) (32) -- (475) (555)
Net income (loss) ...................... (804,696) (155) 52,964 101,561 (650,326)
Geographic Information (in thousands)
UNITED STATES EUROPE TOTAL
------------- -------- -----------
1998
Total revenue*..................... $ 964,503 $ 18,163 $ 982,666
Long-lived assets.................. 978,850 1,498 980,348
1999
Total revenue*..................... $ 1,579,992 $ 22,849 $ 1,602,841
Long-lived assets.................. 2,059,242 3,099 2,062,341
2000
Total revenue*..................... $ 2,667,133 $ 48,087 $ 2,715,220
Long-lived assets.................. 2,217,741 3,546 2,221,287
* Revenues are attributed to geographic regions based upon the location from
which the sale originated.
F-32
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Transactions with Major Customers
During the years ended December 31, 1998, 1999 and 2000, export sales
to two customers together totaled $210 million, $126 million and $187 million,
respectively. These export sales accounted for approximately 21%, 8% and 7% of
EchoStar's total revenue during each of the three years ended December 31, 2000,
respectively. Revenues from these customers are included within the EchoStar
Technologies Corporation business unit.
11. VALUATION AND QUALIFYING ACCOUNTS
EchoStar's valuation and qualifying accounts as of December 31, 1998,
1999 and 2000 are as follows (in thousands):
BALANCE AT CHARGED TO
BEGINNING OF COSTS AND BALANCE AT
YEAR EXPENSES DEDUCTIONS END OF YEAR
------------ ---------- ---------- -----------
YEAR ENDED DECEMBER 31, 1998:
Assets:
Allowance for doubtful accounts....... $ 1,347 $ 10,692 $ (9,043) $ 2,996
Loan loss reserve..................... 1,254 858 (101) 2,011
Reserve for inventory................. 3,840 1,744 (403) 5,181
Liabilities:
Reserve for warranty costs and other.. 710 -- (435) 275
YEAR ENDED DECEMBER 31, 1999:
Assets:
Allowance for doubtful accounts....... $ 2,996 $ 23,481 $ (13,368) $ 13,109
Loan loss reserve..................... 2,011 100 (272) 1,839
Reserve for inventory................. 5,181 1,785 (3,019) 3,947
Liabilities:
Reserve for warranty costs and other.. 275 -- (65) 210
YEAR ENDED DECEMBER 31, 2000:
Assets:
Allowance for doubtful accounts....... $ 13,109 $ 45,985 $ (27,853) $ 31,241
Loan loss reserve..................... 1,839 66 (346) 1,559
Reserve for inventory................. 3,947 6,357 (398) 9,906
Liabilities:
Reserve for warranty costs and other.. 210 -- -- 210
F-33
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
12. QUARTERLY FINANCIAL DATA (UNAUDITED)
EchoStar's quarterly unaudited results of operations are summarized as
follows (in thousands, except per share amounts):
THREE MONTHS ENDED
------------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
---------- ---------- ------------ -----------
(Unaudited)
Year Ended December 31, 1999:
Total revenue ..................... $ 309,576 $ 350,217 $ 428,180 $ 514,868
Operating loss .................... (55,682) (50,989) (79,455) (160,965)
Net loss .......................... (372,331) (76,129) (124,401) (219,986)
Basic and diluted loss per share .. $ (1.03) $ (0.20) $ (0.27) $ (0.48)
Year Ended December 31, 2000
(As retroactively adjusted -
see Note 13):
Total revenue ..................... $ 565,721 $ 646,129 $ 697,972 $ 805,398
Operating loss .................... (142,017) (86,231) (82,082) (113,736)
Net loss .......................... (185,130) (138,963) (142,049) (184,184)
Basic and diluted loss per share .. $ (0.40) $ (0.30) $ (0.30) $ (0.39)
13. SUBSEQUENT EVENTS
Satellite Launches
During February 2001, EchoStar announced an agreement with Lockheed
Martin's International Launch Services to provide launch services for the
EchoStar VII and EchoStar VIII satellites, which also includes options for
launch services for additional satellites. EchoStar VII is expected to launch in
the fourth quarter of 2001 on a Lockheed Martin Atlas III launch vehicle from
Cape Canaveral, Fla. EchoStar VIII is expected to launch during the first
quarter of 2002 on a Russian Proton K launch vehicle from the Baikonur
Cosmodrome in Kazakhstan.
Retroactive Application of Equity Method of Accounting
Effective September 27, 2001, EchoStar invested an additional $50
million in StarBand, increasing its equity interest from approximately 19% to
approximately 32%. If and when construction is commenced for a next generation
satellite to be allocated for StarBand's service, EchoStar's equity interest
would increase to approximately 60%. EchoStar originally invested $50 million in
StarBand in April 2000. As a result of the increased equity stake, this
investment is now accounted for using the equity method of accounting. As
required by APB Opinion No. 18, the equity method accounting has been
retroactively applied back to April 2000, the date of EchoStar's original
investment in StarBand. This retroactive application resulted in an increase in
previously reported net loss and basic and diluted loss per share for each of
the four quarters in the year ended December 31, 2000 as follows (in thousands):
THREE MONTHS ENDED
------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
2000 2000 2000 2000
----------- ---------- ------------- ------------
Net loss.............................. $ -- $ (6,103) $ (11,156) $ (11,856)
=========== ========== ============= ============
Basic and diluted net loss
per common share.................... $ -- $ (0.02) $ (0.02) $ (0.03)
=========== ========== ============= ============
F-34
EXHIBIT 99.2
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -
December 31, 2000 and March 31, 2001 (Unaudited)........................... 1
Condensed Consolidated Statements of Operations for the
three months ended March 31, 2000 and 2001 (Unaudited)..................... 2
Condensed Consolidated Statements of Cash Flows for the
three months ended March 31, 2000 and 2001 (Unaudited)..................... 3
Notes to Condensed Consolidated Financial Statements (Unaudited)............. 4
ECHOSTAR COMMUNICATIONS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
DECEMBER 31, MARCH 31,
2000 2001
------------ -----------
(Unaudited)
AS RETROACTIVELY ADJUSTED
(NOTE 7)
ASSETS
Current Assets:
Cash and cash equivalents ...................................................... $ 856,818 $ 801,081
Marketable investment securities ............................................... 607,357 493,544
Trade accounts receivable, net of allowance for uncollectible accounts of
$31,241 and $21,766, respectively ............................................ 278,614 251,800
Insurance receivable ........................................................... 106,000 106,000
Inventories .................................................................... 161,161 149,243
Other current assets ........................................................... 50,656 50,830
------------ -----------
Total current assets .............................................................. 2,060,606 1,852,498
Restricted cash and marketable investment securities .............................. 3,000 3,000
Cash reserved for satellite insurance (Note 4) .................................... 82,393 78,295
Property and equipment, net ....................................................... 1,511,303 1,619,556
FCC authorizations, net ........................................................... 709,984 705,374
Other noncurrent assets ........................................................... 269,549 202,687
------------ -----------
Total assets ................................................................. $ 4,636,835 $ 4,461,410
============ ===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities:
Trade accounts payable ......................................................... $ 226,568 $ 120,339
Deferred revenue ............................................................... 283,895 330,000
Accrued expenses ............................................................... 691,482 689,594
Current portion of long-term debt .............................................. 21,132 17,375
------------ -----------
Total current liabilities ......................................................... 1,223,077 1,157,308
Long-term obligations, net of current portion:
9 1/4% Seven Year Notes ........................................................ 375,000 375,000
9 3/8% Ten Year Notes .......................................................... 1,625,000 1,625,000
4 7/8% Convertible Notes ...................................................... 1,000,000 1,000,000
10 3/8% Seven Year Notes ....................................................... 1,000,000 1,000,000
Mortgages and other notes payable, net of current portion ...................... 14,812 14,585
Long-term deferred distribution and carriage revenue and other long-term
liabilities .................................................................. 56,329 75,974
------------ -----------
Total long-term obligations, net of current portion ............................... 4,071,141 4,090,559
------------ -----------
Total liabilities ............................................................ 5,294,218 5,247,867
Commitments and Contingencies (Note 5)
Stockholders' Deficit:
6 3/4% Series C Cumulative Convertible Preferred Stock, 218,951 and 199,182
shares issued and outstanding, respectively ................................... 10,948 9,959
Class A Common Stock, $.01 par value, 1,600,000,000 shares authorized,
235,749,557 and 236,360,794 shares issued and outstanding, respectively ....... 2,357 2,364
Class B Common Stock, $.01 par value, 800,000,000 shares authorized,
238,435,208 shares issued and outstanding .................................... 2,384 2,384
Class C common Stock, $.01 par value, 800,000,000 shares authorized, none
outstanding .................................................................. -- --
Additional paid-in capital ..................................................... 1,700,367 1,702,246
Deferred stock-based compensation .............................................. (58,193) (50,137)
Accumulated other comprehensive loss ........................................... (60,580) (28,562)
Accumulated deficit ............................................................ (2,254,666) (2,424,711)
------------ -----------
Total stockholders' deficit ....................................................... (657,383) (786,457)
------------ -----------
Total liabilities and stockholders' deficit .................................. $ 4,636,835 $ 4,461,410
============ ===========
See accompanying Notes to Condensed Consolidated Financial Statements.
1
ECHOSTAR COMMUNICATIONS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
THREE MONTHS ENDED MARCH 31,
----------------------------
2000 2001
------------ ------------
AS
RETROACTIVELY
ADJUSTED
REVENUE: (NOTE 7)
DISH Network:
Subscription television services .............................. $ 476,874 $ 794,448
Other ......................................................... 1,313 2,483
------------ ------------
Total DISH Network .............................................. 478,187 796,931
DTH equipment sales and integration services .................... 62,704 41,019
Other ........................................................... 24,830 23,980
------------ ------------
Total revenue ...................................................... 565,721 861,930
COSTS AND EXPENSES:
DISH Network Operating Expenses:
Subscriber-related expenses ................................... 201,574 316,335
Customer service center and other ............................. 56,049 64,782
Satellite and transmission .................................... 12,476 9,095
------------ ------------
Total DISH Network operating expenses ........................... 270,099 390,212
Cost of sales - DTH equipment and integration services .......... 46,222 28,836
Cost of sales - other ........................................... 8,116 15,929
Marketing:
Subscriber promotion subsidies - promotional DTH
equipment .................................................... 172,138 190,265
Subscriber promotion subsidies - other ........................ 77,949 82,966
Advertising and other ......................................... 23,170 26,927
------------ ------------
Total marketing expenses ........................................ 273,257 300,158
General and administrative ...................................... 55,577 75,672
Non-cash, stock-based compensation .............................. 14,009 7,456
Depreciation and amortization ................................... 40,458 58,850
------------ ------------
Total costs and expenses ........................................... 707,738 877,113
------------ ------------
Operating loss ..................................................... (142,017) (15,183)
Other Income (Expense):
Interest income ................................................. 18,998 24,564
Interest expense ................................................ (61,513) (83,097)
Other ........................................................... (543) (96,102)
------------ ------------
Total other income (expense) ....................................... (43,058) (154,635)
------------ ------------
Loss before income taxes ........................................... (185,075) (169,818)
Income tax provision, net .......................................... (55) (49)
------------ ------------
Net loss ........................................................... (185,130) (169,867)
6 3/4% Series C Cumulative Convertible Preferred Stock
dividends ....................................................... (493) (178)
------------ ------------
Numerator for basic and diluted loss per share - loss
attributable to common shareholders ............................. $ (185,623) $ (170,045)
============ ============
Denominator for basic and diluted loss per share -
weighted-average common shares outstanding ...................... 465,768 474,563
============ ============
Net loss per common share:
Basic and diluted net loss ...................................... $ (0.40) $ (0.36)
============ ============
See accompanying Notes to Condensed Consolidated Financial Statements.
2
ECHOSTAR COMMUNICATIONS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
THREE MONTHS ENDED MARCH 31,
------------------------------
2000 2001
------------ ------------
AS
RETROACTIVELY
ADJUSTED
(NOTE 7)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss .......................................................................... $ (185,130) $ (169,867)
Adjustments to reconcile net loss to net cash flows from operating activities:
Equity in losses of affiliates ................................................. -- 12,826
Deferred stock-based compensation recognized ................................... 13,709 7,456
Loss due to decline in the estimated fair value of strategic investments ....... -- 81,803
Depreciation and amortization .................................................. 40,458 58,850
Amortization of debt discount and deferred financing costs ..................... 1,534 1,878
Employee benefits funded by issuance of Class A Common Stock ................... 7,280 --
Change in reserve for excess and obsolete inventory ............................ 303 679
Change in long-term deferred satellite services revenue and other long-term
liabilities .................................................................. 7,448 19,645
Other, net ..................................................................... 990 1,348
Changes in current assets and current liabilities, net ......................... 8,831 (34,941)
------------ ------------
Net cash flows from operating activities .......................................... (104,577) (20,323)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of marketable investment securities ..................................... (218,888) (706,698)
Sales of marketable investment securities ......................................... 198,107 820,126
Purchases of property and equipment ............................................... (36,900) (148,600)
Change in cash reserved for satellite insurance due to depreciation on related
satellites (Note 4) ............................................................ -- 4,098
Investment in Wildblue Communications ............................................. (50,000) --
Investment in Replay TV ........................................................... (10,000) --
Other ............................................................................. (694) (1,675)
------------ ------------
Net cash flows from investing activities .......................................... (118,375) (32,749)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of mortgage indebtedness and notes payable........................ (4,236) (3,984)
Net proceeds from Class A Common Stock options exercised and Class A Common
Stock issued to Employee Stock Purchase Plan.............................. 2,170 1,497
Other........................................................................ (493) (178)
------------ ------------
Net cash flows from financing activities..................................... (2,559) (2,665)
------------ ------------
Net increase (decrease) in cash and cash equivalents......................... (225,511) (55,737)
Cash and cash equivalents, beginning of period............................... 905,299 856,818
------------ ------------
Cash and cash equivalents, end of period..................................... $ 679,788 $ 801,081
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
6 3/4% Series C Cumulative Convertible Preferred Stock dividends.......... $ -- $ 178
Conversion of 6 3/4% Series C Cumulative Convertible Preferred Stock to
Class A common stock.................................................... -- 989
Forfeitures of deferred non-cash, stock-based compensation................ -- 600
Class A Common Stock issued related to acquisition of Kelly Broadcasting
Systems, Inc........................................................... 31,556 --
See accompanying Notes to Condensed Consolidated Financial Statements.
3
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. ORGANIZATION AND BUSINESS ACTIVITIES
Principal Business
The operations of EchoStar Communications Corporation ("ECC," and together
with its subsidiaries, or referring to particular subsidiaries in certain
circumstances, "EchoStar" or the "Company") include two interrelated business
units (Note 6):
o The DISH Network - a direct broadcast satellite ("DBS") subscription
television service in the United States. As of March 31, 2001, we had
approximately 5.7 million DISH Network subscribers.
o EchoStar Technologies Corporation ("ETC") - engaged in the design,
development, distribution and sale of DBS set-top boxes, antennae and
other digital equipment for the DISH Network ("EchoStar receiver
systems"), the design, development and distribution of similar equipment
for international direct-to-home ("DTH") satellite and other systems and
the provision of uplink center design, construction oversight and other
project integration services for international DTH ventures.
Since 1994, EchoStar has deployed substantial resources to develop the
"EchoStar DBS System." The EchoStar DBS System consists of EchoStar's
FCC-allocated DBS spectrum, six DBS satellites ("EchoStar I," "EchoStar II,"
"EchoStar III," "EchoStar IV," "EchoStar V," and "EchoStar VI"), EchoStar
receiver systems, digital broadcast operations centers, customer service
facilities, and other assets utilized in its operations. EchoStar's principal
business strategy is to continue developing its subscription television service
in the United States to provide consumers with a fully competitive alternative
to cable television service.
2. SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
and with the instructions to Form 10-Q and Article 10 of Regulation S-X for
interim financial information. Accordingly, these statements do not include all
of the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring adjustments) considered necessary
for a fair presentation have been included. All significant intercompany
accounts and transactions have been eliminated in consolidation. Operating
results for the three months ended March 31, 2001 are not necessarily indicative
of the results that may be expected for the year ending December 31, 2001. For
further information, refer to the consolidated financial statements and
footnotes thereto included in EchoStar's Annual Report on Form 10-K for the year
ended December 31, 2000. Certain amounts have been reclassified to conform with
the current year presentation.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses for each reporting
period. Actual results could differ from those estimates.
4
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
(UNAUDITED)
Investment Securities
As of March 31, 2001, EchoStar has classified all marketable investment
securities as available-for-sale. The fair market value of marketable investment
securities approximates the carrying value and represents the quoted market
prices at the balance sheet dates. Related unrealized gains and losses are
reported as a separate component of stockholders' deficit, net of related
deferred income taxes, if applicable. The specific identification method is used
to determine cost in computing realized gains and losses. Such unrealized losses
totaled approximately $29 million as of March 31, 2001. Approximately $19
million of these unrealized losses relate to a decline in the value of OpenTV.
EchoStar acquired that stock in connection with the establishment of a strategic
relationship with OpenTV which did not involve an investment of cash by
EchoStar.
In accordance with generally accepted accounting principles, declines
in the market value of a marketable investment security which are estimated to
be "other than temporary" must be recognized in the statement of operations,
thus establishing a new cost basis for such investment. EchoStar reviewed the
fair value of its marketable investment securities as of March 31, 2001 and
determined that some declines in market value have occurred which may be other
than temporary. As such, EchoStar established a new cost basis for these
securities, and accordingly reduced its previously recorded unrealized loss and
recorded a charge to earnings of approximately $32.4 million during the three
months ended March 31, 2001.
EchoStar also has made strategic equity investments in certain
non-marketable investment securities including Wildblue Communications, StarBand
Communications, VisionStar, Inc. and Replay TV. The original cost basis of
EchoStar's investments in these non-marketable investment securities totaled
approximately $116 million. The securities of these companies are not publicly
traded. EchoStar's ability to create realizable value for its strategic
investments in companies that are not public is dependent on the success of
their business plans and ability to obtain sufficient capital to execute their
business plans. StarBand and Wildblue recently cancelled their planned initial
public stock offerings. As a result of the cancellation of those offerings and
other factors, during the three months ended March 31, 2001, EchoStar recorded a
non-recurring charge of approximately $49.4 million to reduce the carrying value
of certain of these non-marketable investment securities to their estimated fair
values. StarBand and Wildblue need to obtain significant additional capital in
the near term. Absent such funding, additional write-downs of EchoStar's
investments could be necessary.
Comprehensive Income (Loss)
The components of comprehensive loss, net of tax, are as follows (in
thousands):
THREE MONTHS ENDED
MARCH 31,
-----------------------------
2000 2001
---------- ----------------
(Unaudited)
AS RETROACTIVELY
ADJUSTED (NOTE 7)
Net loss...................................................................... $ (185,130) $ (169,867)
Unrealized holding losses on available-for-sale securities arising during
period..................................................................... 1,463 (385)
Reclassification adjustment for impairment losses on available-for-sale
securities included in net loss........................................... -- 32,403
---------- ----------
Comprehensive loss............................................................ $ (183,667) $ (137,849)
========== ==========
Accumulated other comprehensive income presented on the accompanying
condensed consolidated balance sheets consists of the accumulated net unrealized
gains (losses) on available-for-sale securities, net of deferred taxes.
5
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
(UNAUDITED)
Basic and Diluted Loss Per Share
Statement of Financial Accounting Standards No. 128, "Earnings Per
Share" ("FAS No. 128") requires entities to present both basic earnings per
share ("EPS") and diluted EPS. Basic EPS excludes dilution and is computed by
dividing income (loss) available to common shareholders by the weighted-average
number of common shares outstanding for the period. Diluted EPS reflects the
potential dilution that could occur if stock options or warrants were exercised
or convertible securities were converted to common stock, resulting in the
issuance of common stock that then would share in any earnings of the Company.
We had net losses for the three months ending March 31, 2000 and 2001.
Therefore, the effect of the common stock equivalents and convertible securities
is excluded from the computation of diluted earnings (loss) per share since the
effect is anti-dilutive.
As of March 31, 2001 and 2000, options to purchase a total of
approximately 24,825,000 and 27,861,000 shares of Class A common stock were
outstanding, respectively. Approximately 3,269,000 and 5,713,000 shares of Class
A common stock were issuable upon conversion of the 6 3/4% Series C Cumulative
Convertible Preferred Stock as of March 31, 2001 and 2000, respectively. As of
March 31, 2001, the 4 7/8% Convertible Subordinated Notes are convertible into
approximately 22 million shares of Class A common stock.
3. INVENTORIES
Inventories consist of the following (in thousands):
DECEMBER 31, MARCH 31,
2000 2001
------------ -----------
Finished goods - DBS....................................... $ 96,362 $ 88,727
Raw materials.............................................. 40,247 43,195
Finished goods - reconditioned and other................... 23,101 18,905
Work-in-process............................................ 8,879 6,178
Consignment................................................ 2,478 1,465
Reserve for excess and obsolete inventory.................. (9,906) (9,227)
------------ -----------
$ 161,161 $ 149,243
============ ===========
4. SATELLITE INSURANCE
As a result of the failure of EchoStar IV solar arrays to fully deploy
and the failure of 28 transponders to date, a maximum of approximately 14 of the
44 transponders on EchoStar IV are available for use at this time. Due to the
normal degradation of the solar arrays, the number of available transponders
will further decrease over time. In addition to the transponder and solar array
failures, EchoStar IV experienced anomalies affecting its thermal systems and
propulsion system. There can be no assurance that further material degradation,
or total loss of use, of EchoStar IV will not occur in the immediate future.
In September 1998, EchoStar filed a $219.3 million insurance claim for
a constructive total loss under the launch insurance policies covering EchoStar
IV. The satellite insurance consists of separate identical policies with
different carriers for varying amounts which, in combination, create a total
insured amount of $219.3 million.
The insurance carriers offered EchoStar a total of approximately $88
million, or 40% of the total policy amount, in settlement of the EchoStar IV
insurance claim. The insurers allege that all other impairment to the satellite
occurred after expiration of the policy period and is not covered. EchoStar
strongly disagrees with the position of the insurers and has filed an
arbitration claim against them for breach of contract, failure to pay a valid
insurance claim and bad faith denial of a valid claim, among other things. There
can be no assurance that EchoStar will receive the amount claimed or, if
EchoStar does, that EchoStar will retain title to EchoStar IV with its reduced
capacity.
6
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
(UNAUDITED)
At the time EchoStar filed its claim in 1998, EchoStar recognized an
impairment loss of $106 million to write-down the carrying value of the
satellite and related costs, and simultaneously recorded an insurance claim
receivable for the same amount. EchoStar continues to believe it will ultimately
recover at least the amount originally recorded and does not intend to adjust
the amount of the receivable until there is greater certainty with respect to
the amount of the final settlement.
As a result of the thermal and propulsion system anomalies, EchoStar
reduced the estimated remaining useful life of EchoStar IV to approximately 4
years during January 2000. EchoStar will continue to evaluate the performance of
EchoStar IV and may modify its loss assessment as new events or circumstances
develop.
The in-orbit insurance policies for EchoStar I, EchoStar II, and
EchoStar III expired July 25, 2000. The insurers have to date refused to renew
insurance on EchoStar I, EchoStar II and EchoStar III on reasonable terms. Based
on, among other things, the insurance carriers' unanimous refusal to negotiate
reasonable renewal insurance coverage, EchoStar believes that the carriers
colluded and conspired to boycott EchoStar unless EchoStar accepts their offer
to settle the EchoStar IV claim for $88 million.
Based on the carriers' actions, EchoStar has added causes of action in
its EchoStar IV demand for arbitration for breach of the duty of good faith and
fair dealing, and unfair claim practices. Additionally, EchoStar filed a lawsuit
against the insurance carriers in the United States District Court for the
District of Colorado asserting causes of action for violation of Federal and
State Antitrust laws. While EchoStar believes it is entitled to the full amount
claimed under the EchoStar IV insurance policy and believes the insurance
carriers are in violation of Antitrust laws and have committed further acts of
bad faith in connection with their refusal to negotiate reasonable insurance
coverage on EchoStar's other satellites, there can be no assurance as to the
outcome of these proceedings. During March 2001, EchoStar voluntarily dismissed
the antitrust lawsuit without prejudice. EchoStar has the right to re-file an
antitrust action against the insurers again in the future.
The indentures related to the outstanding senior notes of EDBS contain
restrictive covenants that require EchoStar to maintain satellite insurance with
respect to at least half of the satellites it owns. Insurance coverage is
therefore required for at least three of EchoStar's six satellites currently in
orbit. EchoStar has procured normal and customary launch insurance for EchoStar
VI. This launch insurance policy provides for insurance of $225.0 million. The
EchoStar VI launch insurance policy expires in July 2001. EchoStar is currently
self-insuring EchoStar I, EchoStar II, EchoStar III, EchoStar IV and EchoStar V.
To satisfy insurance covenants related to the outstanding EDBS senior notes, as
of March 31, 2001, EchoStar has reclassified approximately $78 million from cash
and cash equivalents to restricted cash and marketable investment securities on
its balance sheet. The reclassification will continue until such time, if ever,
as the insurers are again willing to insure EchoStar's satellites on
commercially reasonable terms. The amount of cash reserved for satellite
insurance will be increased by approximately $60 million in the event EchoStar
has not procured satellite insurance by July 2001. EchoStar believes it has
in-orbit satellite capacity sufficient to expeditiously recover transmission of
most programming in the event one of its in-orbit satellites was to fail.
However, the cash reserved for satellite insurance is not adequate to fund the
construction, launch and insurance for a replacement satellite in the event of a
complete loss of a satellite and programming continuity could not be assured in
the event of multiple satellite losses.
5. COMMITMENTS AND CONTINGENCIES
VisionStar
During November 2000, one of EchoStar's wholly owned subsidiaries
purchased a 49.9% interest in VisionStar, Inc. VisionStar holds an FCC license,
and is constructing a Ka-band satellite, to launch into the 113 W.L. orbital
slot. Together with VisionStar, EchoStar has requested FCC approval to acquire
control over VisionStar by increasing its ownership of VisionStar to 90%, for a
total purchase price of approximately $2.8 million. EchoStar has also provided
loans to VisionStar totaling less than $10 million to date for the construction
of their satellite and expects to provide additional funding to VisionStar in
the future. EchoStar is not obligated to
7
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
(UNAUDITED)
finance the full remaining cost to construct and launch the VisionStar
satellite, but VisionStar's FCC license currently requires construction of the
satellite to be completed by April 30, 2002 or the license could be revoked.
EchoStar currently expects to continue to fund loans and equity contributions
for construction of the satellite in the near term from cash on hand, and
expects that it may spend approximately $79.5 million during 2001 for that
purpose subject to, among other things, FCC action.
DirecTV
During February 2000, EchoStar filed suit against DirecTV and Thomson
Consumer Electronics/RCA in the Federal District Court of Colorado. The suit
alleges that DirecTV has utilized improper conduct in order to fend off
competition from the DISH Network. According to the complaint, DirecTV has
demanded that certain retailers stop displaying EchoStar's merchandise and has
threatened to cause economic damage to retailers if they continue to offer both
product lines in head-to-head competition. The suit alleges, among other things,
that DirecTV has acted in violation of federal and state anti-trust laws in
order to protect DirecTV's market share. EchoStar is seeking injunctive relief
and monetary damages. EchoStar subsequently amended the Complaint adding claims
against Circuit City, Radio Shack and Best Buy, alleging that these retailers
are engaging in improper conduct that has had an anti-competitive impact on
EchoStar. It is too early in the litigation to make an assessment of the
probable outcome. During October 2000, DirecTV filed a motion for summary
judgment asking that the Court enter judgment in DirecTV's favor on certain of
EchoStar's claims. DirecTV's motion for summary judgment remains pending.
The DirecTV defendants filed a counterclaim against EchoStar. DirecTV
alleges that EchoStar tortiously 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. Discovery has been stayed until the next
scheduling conference on June 13, 2001. The amount of damages DirecTV is seeking
is as yet unquantified. However, in an arbitration proceeding related to
DirecTV's allegations with respect to KBS, DirecTV has claimed damages totaling
hundreds of millions of dollars. It is too early in the litigation to make an
assessment of the probable outcome. EchoStar and KBS intend to vigorously defend
against DirecTV's allegations in the litigation and in the arbitration.
Fee Dispute
EchoStar had a contingent fee arrangement with the attorneys who
represented EchoStar in the litigation with News Corporation. The contingent fee
arrangement provides for the attorneys to be paid a percentage of any net
recovery obtained by EchoStar in the News Corporation litigation. The attorneys
have asserted that they may be entitled to receive payments totaling hundreds of
millions of dollars under this fee arrangement.
During mid-1999, EchoStar initiated litigation against the attorneys in
the Arapahoe County, Colorado, District Court arguing that the fee arrangement
is void and unenforceable. In December 1999, the attorneys initiated an
arbitration proceeding before the American Arbitration Association. The
litigation has been stayed while the arbitration is ongoing. The arbitration
hearing commenced April 2, 2001 and continued through April 13, 2001. The
hearing could not be completed during that time period and has been continued
until August 7, 2001, when it will resume until it is presumably completed.
While there can be no assurance that the attorneys will not continue to claim a
right to hundreds of millions of dollars, the damage model the attorneys
presented during the arbitration was for $56 million. EchoStar believes that
even that amount significantly overstates the amount the attorneys should
reasonably be entitled to receive under the fee agreement but it is not possible
for EchoStar to predict what the decision of the three person arbitrator panel
will be with any degree of certainty. EchoStar continues to vigorously contest
the attorneys' interpretation of the fee arrangement, which EchoStar believes
significantly overstates the magnitude of its liability.
8
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
(UNAUDITED)
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
Communications Corporation, and two of EchoStar's wholly-owned subsidiaries,
Echosphere Corporation and Dish, Ltd. 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.
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 EchoStar appealed. The Alberta Court also
granted a motion to add more EchoStar parties to the lawsuit. EchoStar Satellite
Corporation, EDBS, 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 of Appeals denied
EchoStar's appeal and the Alberta Court has asserted jurisdiction over all of
the EchoStar defendants. The Court in the Federal action has stayed that case
pending the outcome of the Alberta action. The case is now currently in
discovery. EchoStar intends to vigorously defend the suit. It is too early to
make an assessment of the probable outcome of the litigation or to determine the
extent of any potential liability or damages.
Broadcast network programming
Until July 1998, EchoStar obtained distant broadcast network channels
(ABC, NBC, CBS and FOX) for distribution to its customers through PrimeTime 24.
In December 1998, the United States District Court for the Southern District of
Florida entered a nationwide permanent injunction requiring PrimeTime 24 to shut
off distant network channels to many of its customers, and henceforth to sell
those channels to consumers in accordance with certain stipulations in the
injunction.
In October 1998, EchoStar filed a declaratory judgment action against
ABC, NBC, CBS and FOX in Denver Federal Court. EchoStar asked the court to enter
a judgment declaring that its method of providing distant network programming
did not violate the Satellite Home Viewer Act and hence did not infringe the
networks' copyrights. In November 1998, the networks and their affiliate groups
filed a complaint against EchoStar in Miami Federal Court alleging, among other
things, copyright infringement. The court combined the case that EchoStar filed
in Colorado with the case in Miami and transferred it to the Miami court. The
case remains pending in Miami. While the networks have not sought monetary
damages, they have sought to recover attorney fees if they prevail.
In February 1999, the networks filed a "Motion for Temporary
Restraining Order, Preliminary Injunction and Contempt Finding" against DirecTV,
Inc. in Miami related to the delivery of distant network channels to DirecTV
customers by satellite. DirecTV settled this lawsuit with the networks. Under
the terms of the settlement between DirecTV and the networks, some DirecTV
customers were scheduled to lose access to their satellite-provided distant
network channels by July 31, 1999, while other DirecTV customers were to be
disconnected by December 31, 1999. Subsequently, PrimeTime 24 and substantially
all providers of satellite-delivered network
9
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
(UNAUDITED)
programming other than EchoStar agreed to this cut-off schedule, although
EchoStar does not know if they adhered to this schedule.
In December 1998, the networks filed a Motion for Preliminary
Injunction against EchoStar in the Miami court, and asked the court to enjoin
EchoStar from providing network programming except under limited circumstances.
A preliminary injunction hearing was held on September 21, 1999. The court took
the issues under advisement to consider the networks' request for an injunction,
whether to hear live testimony before ruling upon the request, and whether to
hear argument on why the Satellite Home Viewer Act may be unconstitutional,
among other things.
In March 2000, the networks filed an emergency motion again asking the
court to issue an injunction requiring EchoStar to turn off network programming
to certain of its customers. At that time, the networks also argued that
EchoStar's compliance procedures violate the Satellite Home Viewer Improvement
Act. EchoStar opposed the networks' motion and again asked the court to hear
live testimony before ruling upon the networks' injunction request.
During September 2000, the Court granted the Networks' motion for
preliminary injunction, denied the Network's emergency motion and denied
EchoStar's request to present live testimony and evidence. The Court's original
order required EchoStar to terminate network programming to certain subscribers
"no later than February 15, 1999," and contained other dates which would be
physically impossible to comply with. The order imposes restrictions on
EchoStar's past and future sale of distant ABC, NBC, CBS and Fox channels
similar to those imposed on PrimeTime 24 (and, EchoStar believes, on DirecTV and
others). Some of those restrictions go beyond the statutory requirements imposed
by the Satellite Home Viewer Act and the Satellite Home Viewer Improvement Act.
For these and other reasons EchoStar believes the Court's order is, among other
things, fundamentally flawed, unconstitutional and should be overturned.
However, it is very unusual for a Court of Appeals to overturn a lower court's
order and there can be no assurance whatsoever that it will be overturned.
On October 3, 2000, and again on October 25, 2000, the Court amended
its original preliminary injunction order in an effort to fix some of the errors
in the original order. The twice amended preliminary injunction order required
EchoStar to shut off, by February 15, 2001, all subscribers who are ineligible
to receive distant network programming under the court's order. EchoStar has
appealed the September 2000 preliminary injunction order and the October 3, 2000
amended preliminary injunction order. On November 22, 2000, the United States
Court of Appeals for the Eleventh Circuit stayed the Florida Court's preliminary
injunction order pending EchoStar's appeal. At that time, the Eleventh Circuit
also expedited its consideration of EchoStar's appeal.
During November 2000, EchoStar filed its appeal brief with the Eleventh
Circuit. During December 2000, the Satellite Broadcasting and Communications
Association submitted an amicus brief in support of EchoStar's appeal. The
Consumer Federation of America and the Media Access Project have also submitted
an amicus brief in support of EchoStar's appeal. The Networks have responded to
EchoStar's appeal brief and the amicus briefs filed by the Consumer Federation
of America and the Media Access Project and the Satellite Broadcasting and
Communications Association. In December 2000, the Department of Justice filed a
motion to intervene with respect to EchoStar's constitutional challenge of the
Satellite Home Viewers Act, and the National Association of Broadcasters filed
an amicus brief in support of the Networks' position in the appeal. During
January 2001, EchoStar filed its reply appeal brief and asked the Eleventh
Circuit for an opportunity to respond to the amicus brief filed by the National
Association of Broadcasters and the brief filed by the Department of Justice. On
January 11, 2001, the Networks advised the Eleventh Circuit that they did not
object to EchoStar's filing a response to the National Association of
Broadcasters' amicus brief or the Department of Justice's brief. On January 19,
2001, EchoStar filed its supplemental brief responding to the Department of
Justice's brief. On January 23, 2001, the Department of Justice filed a motion
to strike EchoStar's supplemental brief or for an opportunity to reply to
EchoStar's supplemental brief. On February 2, 2001, without explanation, the
Eleventh Circuit issued an order striking EchoStar's supplemental reply and
denying EchoStar an opportunity to file a response to the Department of
Justice's motion to intervene. The Eleventh Circuit has currently set oral
argument for May 24, 2001. EchoStar
10
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
(UNAUDITED)
cannot predict when the Eleventh Circuit will rule on its appeal, but it could
be as early as May 2001. EchoStar's appeal effort may not be successful and
EchoStar may be required to comply with the Court's preliminary injunction order
on short notice. The preliminary injunction could force EchoStar to terminate
delivery of distant network channels to a substantial portion of its distant
network subscriber base, which could also cause many of these subscribers to
cancel their subscription to EchoStar's other services. Such terminations would
result in a small reduction in EchoStar's reported average monthly revenue per
subscriber and could result in a temporary increase in churn.
Starsight
During October 2000, Starsight Telecast, Inc., a subsidiary of
Gemstar-TV Guide, filed a suit for patent infringement against EchoStar and
certain of its subsidiaries in the United States District Court for the Western
District of North Carolina, Asheville Division. The suit alleges infringement of
United States Patent No. 4,706,121 (the "121 Patent") which relates to certain
electronic program guide functions. EchoStar has examined this patent and
believes that it is not infringed by any of its products or services.
In December 2000, EchoStar filed suit against Gemstar - TV Guide
International, Inc. (and certain of its subsidiaries) in the United States
District Court for the District of Colorado alleging violations by Gemstar of
various federal and state anti-trust laws and laws governing unfair competition.
The lawsuit seeks an injunction and monetary damages. The Court recently denied
a motion by Gemstar to transfer this case to the Western District of North
Carolina.
In February 2001, Gemstar filed patent infringement actions against
EchoStar in District Court in Atlanta, Georgia and in the International Trade
Commission (ITC). These suits allege infringement of United States Patent Nos.
5,252,066, 5,479,268 and 5,809,204 which all relate to certain electronic
program guide functions. In addition, the ITC action alleges infringement of the
121 Patent which is asserted in the North Carolina case. In the Atlanta District
Court case, Gemstar seeks damages and an injunction. We expect the Atlanta and
North Carolina cases will be stayed pending resolution of the ITC action. ITC
actions typically proceed according to an expedited schedule. EchoStar expects
the ITC action to go to trial by the end of 2001. EchoStar further expects that
the ITC will issue an initial determination by March of 2002 and that a final
determination will be issued by June 2002. While the ITC cannot award damages,
it can issue exclusion orders that would prevent the importation of articles
that are found to infringe the asserted patents. In addition, it can issue cease
and desist orders that would prohibit the sale of infringing products that had
been previously imported. EchoStar has examined these patents and believes they
are not infringed by any of EchoStar's products or services. EchoStar will
vigorously contest the ITC, North Carolina and Atlanta allegations of
infringement and will, among other things, challenge both the validity and
enforceability of the asserted patents.
During 2000, Superguide Corp. also filed suit against EchoStar, DirecTv
and others in the same North Carolina Court, alleging infringement of United
States Patent Nos. 5,038,211, 5,293,357 and 4,751,578 which relate to certain
electronic program guide functions, including the use of electronic program
guides to control VCRs. It is EchoStar's understanding that these patents may be
licensed by Superguide to Gemstar, although Gemstar has not asserted the patents
against EchoStar. Nevertheless, Gemstar was recently added by the Court as a
party to this lawsuit. EchoStar has examined these patents and believes that
they are not infringed by any of its products or services. EchoStar intends to
vigorously defend against this action and assert a variety of counterclaims.
In the event it is ultimately determined that EchoStar infringes on any
of the aforementioned patents EchoStar may be subject to substantial damages,
and/or an injunction that could require EchoStar to materially modify certain
user friendly electronic programming guide and related features it currently
offers to consumers. It is too early to make an assessment of the probable
outcome of the suits.
11
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
(UNAUDITED)
IPPV Enterprises
IPPV Enterprises, LLC and MAAST, Inc. filed a patent infringement suit
against EchoStar in the United States District Court for the District of
Delaware. The suit alleges infringement of 5 patents. The patents disclose
various systems for the implementation of features such as impulse-pay-per view,
parental control and category lock-out. One patent relates to an encryption
technique. Three of the patents have expired. The trial is expected to commence
July 9, 2001. EchoStar is vigorously defending against the suit based, among
other things, on non-infringement, invalidity and failure to provide notice of
alleged infringement.
In the event it is ultimately determined that EchoStar infringes on any
of these patents, EchoStar may be subject to substantial damages, and/or an
injunction with respect to the two unexpired patents, that could require
EchoStar to materially modify certain user friendly features it currently offers
to consumers. It is too early to make an assessment of the probable outcome of
the suit.
Retailer Class Actions
EchoStar has been sued by retailers in three separate class actions. In
two separate lawsuits filed in the District Court, Arapahoe County, State of
Colorado and the United States District Court for the District of Colorado,
respectively, Air Communication & Satellite, Inc. and John DeJong, et. al. filed
lawsuits on October 6, 2000 on behalf of themselves and a class of persons
similarly situated. The plaintiffs are attempting to certify nationwide classes
allegedly brought on behalf of persons, primarily retail dealers, who were
alleged signatories to certain retailer agreements with EchoStar Satellite
Corporation. The plaintiffs are requesting the Court to declare certain
provisions of the alleged agreements invalid and unenforceable, to declare that
certain changes to the agreements are invalid and unenforceable, and to award
damages for lost commissions and payments, charge backs, and other compensation.
The plaintiffs are alleging breach of contract and breach of the covenant of
good faith and fair dealing and are seeking declaratory relief, compensatory
damages, injunctive relief, and pre-judgment and post-judgment interest.
EchoStar intends to vigorously defend against the suits and to assert a variety
of counterclaims. It is too early to make an assessment of the probable outcome
of the litigation or to determine the extent of any potential liability or
damages.
Satellite Dealers Supply, Inc. filed a lawsuit in the United States
District Court for the Eastern District of Texas on September 25, 2000, on
behalf of itself and a class of persons similarly situated. The plaintiff is
attempting to certify a nationwide class on behalf of sellers, installers, and
servicers of satellite equipment who contract with EchoStar and claims the
alleged class has been "subject to improper chargebacks." The plaintiff alleges
that (1) EchoStar charged back certain fees paid by members of the class to
professional installers in violation of contractual terms; (2) EchoStar
manipulated the accounts of subscribers to deny payments to class members; and
(3) EchoStar misrepresented to class members who owns certain equipment related
to the provision of satellite television service. The plaintiff is requesting a
permanent injunction and monetary damages. EchoStar intends to vigorously defend
the lawsuit and to assert a variety of counterclaims. It is too early to make an
assessment of the probable outcome of the litigation or to determine the extent
of any potential liability or damages.
EchoStar is subject to various other legal proceedings and claims which
arise in the ordinary course of business. In the opinion of management, the
amount of ultimate liability with respect to those actions will not materially
affect EchoStar's financial position or results of operations.
Meteoroid Events
Meteoroid events pose a potential threat to all in orbit geosynchronous
satellites including EchoStar's DBS satellites. While the probability that
EchoStar's satellites will be damaged by meteoroids is very small, that
probability increases significantly when the Earth passes through the
particulate stream left behind by various comets.
12
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
(UNAUDITED)
Due to the current peak in the 11-year solar cycle, increased solar
activity is likely for the next year. Some of these solar storms pose a
potential threat to all in-orbit geosynchronous satellites including EchoStar's
DBS satellites. The probability that the effects from the storms will damage our
satellites or cause service interruptions is generally very small.
Some decommissioned spacecraft are in uncontrolled orbits which pass
through the geostationary belt at various points, and present hazards to
operational spacecraft including EchoStar's DBS satellites. The locations of
these hazards are generally well known and may require EchoStar to perform
maneuvers to avoid collisions.
6. SEGMENT REPORTING
Financial Data by Business Unit (in thousands)
Statement of Financial Accounting Standard No. 131, "Disclosures About
Segments of an Enterprise and Related Information" ("FAS No. 131") establishes
standards for reporting information about operating segments in annual financial
statements of public business enterprises and requires that those enterprises
report selected information about operating segments in interim financial
reports issued to shareholders. Operating segments are components of an
enterprise about which separate financial information is available and regularly
evaluated by the chief operating decision maker(s) of an enterprise. During
2000, under this definition, we were operating as three separate business units.
However, beginning 2001, it was determined that the chief operating decision
maker of our Company regularly evaluates the following two separate business
units. All prior year amounts have been restated to conform to the current year
presentation.
ECHOSTAR ELIMINATIONS
DISH TECHNOLOGIES AND OTHER, CONSOLIDATED
NETWORK CORPORATION NET TOTAL
--------- ------------ ------------ ------------
THREE MONTHS ENDED MARCH 31, 2000
Revenue.............................. $ 484,448 $ 52,469 $ 28,804 $ 565,721
Net income (loss).................... (190,764) (4,494) 10,128 (185,130)
THREE MONTHS ENDED MARCH 31, 2001
AS RETROACTIVELY ADJUSTED (NOTE 7)
Revenue.............................. $ 817,991 $ 18,728 $ 25,211 $ 861,930
Net income (loss).................... (224,693) (7,788) 62,614 (169,867)
7. SUBSEQUENT EVENTS
EchoStar VI
EchoStar VI is equipped with a total of 48 transponders, including 16
spares. During April, 2001, EchoStar VI experienced a series of anomalous events
resulting in a temporary interruption of service. The satellite was quickly
restored to normal operations mode. However, spare transponders and a
station-keeping thruster were activated while the anomaly investigation period
proceeds. The satellite is equipped with a substantial number of backup
transponders and thrusters. Consequently, the anomalous events have not impacted
commercial operation of the satellite. However, until the root cause of the most
recent anomaly is finally determined, there can be no assurance future similar
anomalies will not cause further losses which could impact commercial operation
of the satellite.
13
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
(UNAUDITED)
Retroactive Application of Equity Method of Accounting
Effective September 27, 2001, EchoStar invested an additional $50
million in StarBand, increasing its equity interest from approximately 19% to
approximately 32%. If and when construction is commenced for a next generation
satellite to be allocated for StarBand's service, EchoStar's equity interest
would increase to approximately 60%. EchoStar originally invested $50 million in
StarBand in April 2000. As a result of the increased equity stake, this
investment is now accounted for using the equity method of accounting. As
required by APB Opinion No. 18, the equity method accounting has been
retroactively applied back to April 2000, the date of EchoStar's original
investment in StarBand. This retroactive application resulted in an increase in
previously reported net loss and basic and diluted loss per share for the three
months ended March 31, 2001 as follows (in thousands):
THREE MONTHS
ENDED
MARCH 31, 2001
----------------
(Unaudited)
Net loss........................................... $ (2,826)
========
Basic and diluted net loss per common share........ $ (0.01)
========
EXHIBIT 99.3
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -
December 31, 2000 and June 30, 2001 (Unaudited)........................ 1
Condensed Consolidated Statements of Operations for the
three and six months ended June 30, 2000 and 2001 (Unaudited).......... 2
Condensed Consolidated Statements of Cash Flows for the
six months ended June 30, 2000 and 2001 (Unaudited).................... 3
Notes to Condensed Consolidated Financial Statements (Unaudited)......... 4
ECHOSTAR COMMUNICATIONS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
DECEMBER 31, JUNE 30,
2000 2001
------------ -----------
(Unaudited)
AS RETROACTIVELY
ADJUSTED (NOTE 8)
ASSETS
Current Assets:
Cash and cash equivalents ...................................................... $ 856,818 $ 1,492,560
Marketable investment securities ............................................... 607,357 823,307
Trade accounts receivable, net of allowance for uncollectible accounts of
$31,241 and $25,940, respectively ............................................ 278,614 273,689
Insurance receivable ........................................................... 106,000 106,000
Inventories .................................................................... 161,161 150,319
Other current assets ........................................................... 50,656 60,640
------------ -----------
Total current assets .............................................................. 2,060,606 2,906,515
Restricted cash and marketable investment securities .............................. 3,000 2,035
Cash reserved for satellite insurance (Note 4) .................................... 82,393 74,196
Property and equipment, net ....................................................... 1,511,303 1,716,077
FCC authorizations, net ........................................................... 709,984 700,264
Other noncurrent assets ........................................................... 269,549 207,515
------------ -----------
Total assets ................................................................. $ 4,636,835 $ 5,606,602
============ ===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities:
Trade accounts payable ......................................................... $ 226,568 $ 186,515
Deferred revenue ............................................................... 283,895 339,769
Accrued expenses ............................................................... 691,482 734,918
Current portion of long-term debt .............................................. 21,132 15,794
------------ -----------
Total current liabilities ......................................................... 1,223,077 1,276,996
Long-term obligations, net of current portion:
9 1/4% Seven Year Notes ........................................................ 375,000 375,000
9 3/8% Ten Year Notes .......................................................... 1,625,000 1,625,000
10 3/8% Seven Year Notes ...................................................... 1,000,000 1,000,000
4 7/8% Convertible Notes ...................................................... 1,000,000 1,000,000
5 3/4% Convertible Notes ....................................................... -- 1,000,000
Mortgages and other notes payable, net of current portion ...................... 14,812 13,388
Long-term deferred distribution and carriage revenue and other long-term
liabilities .................................................................. 56,329 80,633
------------ -----------
Total long-term obligations, net of current portion ............................... 4,071,141 5,094,021
------------ -----------
Total liabilities ............................................................ 5,294,218 6,371,017
Commitments and Contingencies (Note 5)
Stockholders' Deficit:
6 3/4% Series C Cumulative Convertible Preferred Stock, 218,951 and 111,566
shares issued and outstanding, respectively ................................... 10,948 5,578
Class A Common Stock, $.01 par value, 1,600,000,000 shares authorized,
235,749,557 and 238,446,218 shares issued and outstanding, respectively ....... 2,357 2,384
Class B Common Stock, $.01 par value, 800,000,000 shares authorized,
238,435,208 shares issued and outstanding .................................... 2,384 2,384
Class C common Stock, $.01 par value, 800,000,000 shares authorized, none
outstanding .................................................................. -- --
Additional paid-in capital ..................................................... 1,700,367 1,709,706
Deferred stock-based compensation .............................................. (58,193) (41,680)
Accumulated other comprehensive loss ........................................... (60,580) (12,063)
Accumulated deficit ............................................................ (2,254,666) (2,430,724)
------------ -----------
Total stockholders' deficit ....................................................... (657,383) (764,415)
------------ -----------
Total liabilities and stockholders' deficit .................................. $ 4,636,835 $ 5,606,602
============ ===========
See accompanying Notes to Condensed Consolidated Financial Statements.
1
ECHOSTAR COMMUNICATIONS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
---------------------------- ----------------------------
2000 2001 2000 2001
------------ ------------ ------------ ------------
AS RETROACTIVELY ADJUSTED (NOTE 8)
REVENUE:
DISH Network:
Subscription television services .......................... $ 555,309 $ 883,055 $ 1,032,183 $ 1,677,503
Other ..................................................... 2,169 3,245 3,482 5,728
------------ ------------ ------------ ------------
Total DISH Network .......................................... 557,478 886,300 1,035,665 1,683,231
DTH equipment sales and integration services ................ 60,034 47,159 122,738 88,178
Other ....................................................... 28,617 32,813 53,447 56,793
------------ ------------ ------------ ------------
Total revenue .................................................. 646,129 966,272 1,211,850 1,828,202
COSTS AND EXPENSES:
DISH Network Operating Expenses:
Subscriber-related expenses ............................... 231,450 358,634 433,024 674,969
Customer service center and other ......................... 68,371 69,914 124,420 134,696
Satellite and transmission ................................ 13,895 8,821 26,371 17,916
------------ ------------ ------------ ------------
Total DISH Network operating expenses ....................... 313,716 437,369 583,815 827,581
Cost of sales - DTH equipment and integration services ...... 46,320 31,160 92,542 59,996
Cost of sales -other ........................................ 7,120 22,572 15,236 38,501
Marketing:
Subscriber promotion subsidies - promotional DTH
equipment ............................................... 154,568 105,488 326,706 295,753
Subscriber promotion subsidies - other .................... 73,257 121,366 151,206 204,332
Advertising and other ..................................... 24,471 26,877 47,641 53,804
------------ ------------ ------------ ------------
Total marketing expenses .................................... 252,296 253,731 525,553 553,889
General and administrative .................................. 58,176 87,677 113,753 163,349
Non-cash, stock-based compensation .......................... 13,022 7,011 27,031 14,467
Depreciation and amortization ............................... 41,710 62,839 82,168 121,689
------------ ------------ ------------ ------------
Total costs and expenses ....................................... 732,360 902,359 1,440,098 1,779,472
------------ ------------ ------------ ------------
Operating income (loss) ........................................ (86,231) 63,913 (228,248) 48,730
Other Income (Expense):
Interest income ............................................. 16,947 22,196 35,945 46,760
Interest expense, net of amounts capitalized ................ (61,502) (86,058) (123,015) (169,155)
Other ....................................................... (8,141) (5,858) (8,684) (101,960)
------------ ------------ ------------ ------------
Total other expense ............................................ (52,696) (69,720) (95,754) (224,355)
------------ ------------ ------------ ------------
Loss before income taxes ....................................... (138,927) (5,807) (324,002) (175,625)
Income tax provision, net ...................................... (36) (48) (91) (97)
------------ ------------ ------------ ------------
Net loss ....................................................... (138,963) (5,855) (324,093) (175,722)
6 3/4% Series C Cumulative Convertible Preferred Stock
dividends ................................................... (240) (158) (733) (336)
------------ ------------ ------------ ------------
Numerator for basic and diluted loss per share - loss
attributable to common shareholders ......................... $ (139,203) $ (6,013) $ (324,826) $ (176,058)
============ ============ ============ ============
Denominator for basic and diluted loss per share -
weighted-average common shares outstanding .................. 471,555 475,768 468,661 475,169
============ ============ ============ ============
Basic and diluted net loss per common share ................. $ (0.30) $ (0.01) $ (0.69) $ (0.37)
============ ============ ============ ============
See accompanying Notes to Condensed Consolidated Financial Statements.
2
ECHOSTAR COMMUNICATIONS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
SIX MONTHS ENDED JUNE 30,
-----------------------------------
2000 2001
------------ ------------
AS RETROACTIVELY ADJUSTED (NOTE 8)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss .......................................................................... $ (324,093) $ (175,722)
Adjustments to reconcile net loss to net cash flows from operating activities:
Equity in losses of affiliates ................................................. 6,103 20,930
Deferred stock-based compensation recognized ................................... 27,031 14,467
Loss due to decline in the estimated fair value of strategic investments ....... -- 82,683
Depreciation and amortization .................................................. 82,168 121,689
Amortization of debt discount and deferred financing costs ..................... 3,068 3,756
Employee benefits funded by issuance of Class A Common Stock ................... 7,280 1,200
Change in long-term deferred distribution and carriage revenue and other
long-term liabilities ........................................................ 6,433 24,304
Other, net ..................................................................... 1,958 9,813
Changes in current assets and current liabilities, net ......................... 52,758 51,146
------------ ------------
Net cash flows from operating activities .......................................... (137,294) 154,266
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of marketable investment securities ..................................... (478,825) (1,298,036)
Sales of marketable investment securities ......................................... 422,782 1,097,344
Purchases of property and equipment ............................................... (114,709) (302,276)
Change in cash reserved for satellite insurance due to depreciation on related
satellites (Note 4) ............................................................. -- 8,197
Investment in Wildblue Communications ............................................. (50,000) --
Investment in Replay TV ........................................................... (10,000) --
Investment in StarBand Communications ............................................. (50,045) --
Other ............................................................................. (1,445) (1,497)
------------ ------------
Net cash flows from investing activities .......................................... (282,242) (496,268)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of 5 3/4% Convertible Notes ............................ -- 980,000
Repayments of mortgage indebtedness and notes payable ............................. (7,982) (6,762)
Net proceeds from Class A Common Stock options exercised and Class A Common
Stock issued to Employee Stock Purchase Plan ................................... 9,103 4,843
Other ............................................................................. (732) (337)
------------ ------------
Net cash flows from financing activities .......................................... 389 977,744
------------ ------------
Net (decrease) increase in cash and cash equivalents .............................. (419,147) 635,742
Cash and cash equivalents, beginning of period .................................... 905,299 856,818
------------ ------------
Cash and cash equivalents, end of period .......................................... $ 486,152 $ 1,492,560
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Conversion of 6 3/4% Series C Cumulative Convertible Preferred Stock to
Class A common stock ......................................................... $ 32,879 $ 5,370
Forfeitures of deferred non-cash, stock-based compensation ..................... 5,994 2,046
Class A Common Stock issued related to acquisition of Kelly Broadcasting
Systems, Inc. ................................................................ 31,556 --
See accompanying Notes to Condensed Consolidated Financial Statements.
3
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. ORGANIZATION AND BUSINESS ACTIVITIES
Principal Business
The operations of EchoStar Communications Corporation ("ECC," and together
with its subsidiaries, or referring to particular subsidiaries in certain
circumstances, "EchoStar" or the "Company") include two interrelated business
units (Note 7):
o The DISH Network - a direct broadcast satellite ("DBS") subscription
television service in the United States. As of June 30, 2001, we had
approximately 6.07 million DISH Network subscribers.
o EchoStar Technologies Corporation ("ETC") - engaged in the design,
development, distribution and sale of DBS set-top boxes, antennae and
other digital equipment for the DISH Network ("EchoStar receiver
systems"), the design, development and distribution of similar equipment
for international direct-to-home ("DTH") satellite and other systems and
the provision of uplink center design, construction oversight and other
project integration services for international DTH ventures.
Since 1994, EchoStar has deployed substantial resources to develop the
"EchoStar DBS System." The EchoStar DBS System consists of EchoStar's
FCC-allocated DBS spectrum, six DBS satellites ("EchoStar I," "EchoStar II,"
"EchoStar III," "EchoStar IV," "EchoStar V," and "EchoStar VI"), EchoStar
receiver systems, digital broadcast operations centers, customer service
facilities, and other assets utilized in its operations. EchoStar's principal
business strategy is to continue developing its subscription television service
in the United States to provide consumers with a fully competitive alternative
to cable television service.
2. SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
and with the instructions to Form 10-Q and Article 10 of Regulation S-X for
interim financial information. Accordingly, these statements do not include all
of the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring adjustments) considered necessary
for a fair presentation have been included. All significant intercompany
accounts and transactions have been eliminated in consolidation. Operating
results for the six months ended June 30, 2001 are not necessarily indicative of
the results that may be expected for the year ending December 31, 2001. For
further information, refer to the consolidated financial statements and
footnotes thereto included in EchoStar's Annual Report on Form 10-K for the year
ended December 31, 2000. Certain 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.
Investment Securities
As of June 30, 2001, EchoStar has classified all marketable investment
securities as available-for-sale. The fair market value of marketable investment
securities approximates the carrying value and represents the quoted market
prices at the balance sheet dates. Related unrealized gains and losses are
reported as a separate component of
4
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(UNAUDITED)
stockholders' deficit, net of related deferred income taxes, if applicable. The
specific identification method is used to determine cost in computing realized
gains and losses. Such unrealized losses totaled approximately $12 million as of
June 30, 2001. Approximately $9 million of these unrealized losses relate to a
decline in the value of OpenTV. EchoStar acquired that stock in connection with
the establishment of a strategic relationship with OpenTV which did not involve
an investment of cash by EchoStar.
In accordance with generally accepted accounting principles, declines
in the market value of a marketable investment security which are estimated to
be "other than temporary" must be recognized in the statement of operations,
thus establishing a new cost basis for such investment. EchoStar reviewed the
fair value of its marketable investment securities as of June 30, 2001 and
determined that some declines in market value have occurred which may be other
than temporary. As such, EchoStar established a new cost basis for these
securities, and accordingly reduced its previously recorded unrealized loss and
recorded a charge to earnings of approximately $856,000 during the three months
ended June 30, 2001. During the six months ended June 30, 2001, EchoStar
recorded an aggregate charge to earnings for other than temporary declines of
approximately $33.3 million.
EchoStar also has made strategic equity investments in certain
non-marketable investment securities including Wildblue Communications, StarBand
Communications, VisionStar, Inc. and Replay TV. The original cost basis of
EchoStar's investments in these non-marketable investment securities totaled
approximately $116 million. The securities of these companies are not publicly
traded. EchoStar's ability to create realizable value for its strategic
investments in companies that are not public is dependent on the success of
their business plans and ability to obtain sufficient capital to execute their
business plans. StarBand and Wildblue cancelled their planned initial public
stock offerings. As a result of the cancellation of those offerings and other
factors, during the six months ended June 30, 2001, EchoStar recorded a
non-recurring charge of approximately $49.4 million to reduce the carrying value
of certain of these non-marketable investment securities to their estimated fair
values. StarBand and Wildblue need to obtain significant additional capital in
the near term. Absent such funding, additional write-downs of EchoStar's
investments could be necessary. During July 2001, EchoStar announced its
intention to invest an additional $50 million in StarBand (Note 8).
Comprehensive Income (Loss)
The components of comprehensive loss, net of tax, are as follows (in
thousands):
SIX MONTHS ENDED
JUNE 30,
----------------------------------
2000 2001
---------- ----------
(Unaudited)
AS RETROACTIVELY ADJUSTED (NOTE 8)
Net loss........................................................... $ (324,093) $ (175,722)
Unrealized holding (losses) gains on available-for-sale
securities arising during period................................ (676) 15,258
Reclassification adjustment for impairment losses on
available-for-sale securities included in net loss.............. -- 33,259
---------- ----------
Comprehensive loss................................................. $ (324,769) $ (127,205)
========== ==========
Accumulated other comprehensive loss presented on the accompanying
condensed consolidated balance sheets consists of the accumulated net unrealized
gains (losses) on available-for-sale securities, net of deferred taxes.
5
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(UNAUDITED)
Basic and Diluted Loss Per Share
Statement of Financial Accounting Standards No. 128, "Earnings Per
Share" ("FAS No. 128") requires entities to present both basic earnings per
share ("EPS") and diluted EPS. Basic EPS excludes dilution and is computed by
dividing income (loss) available to common shareholders by the weighted-average
number of common shares outstanding for the period. Diluted EPS reflects the
potential dilution that could occur if stock options or warrants were exercised
or convertible securities were converted to common stock, resulting in the
issuance of common stock that then would share in any earnings of the Company.
As of June 30, 2001 and 2000, options to purchase a total of
approximately 24,206,000 and 25,569,000 shares of Class A common stock were
outstanding, respectively. Approximately 1,831,000 and 4,121,000 shares of Class
A common stock were issuable upon conversion of the 6 3/4% Series C Cumulative
Convertible Preferred Stock, respectively. As of June 30, 2001, the 4 7/8%
Convertible Subordinated Notes and the 5 3/4% Convertible Subordinated Notes
were convertible into approximately 22 million shares and approximately 23
million shares of Class A common stock, respectively.
3. INVENTORIES
Inventories consist of the following (in thousands):
DECEMBER 31, JUNE 30,
2000 2001
------------ ---------
Finished goods - DBS ......................... $ 96,362 $ 83,590
Raw materials ................................ 40,247 42,442
Finished goods - reconditioned and other ..... 23,101 20,195
Work-in-process .............................. 8,879 11,536
Consignment .................................. 2,478 1,697
Reserve for excess and obsolete inventory .... (9,906) (9,141)
------------ ---------
$ 161,161 $ 150,319
============ =========
4. PROPERTY AND EQUIPMENT
EchoStar VI
EchoStar VI is equipped with a total of 48 transponders, including 16
spares. During April, 2001, EchoStar VI experienced a series of anomalous events
resulting in a temporary interruption of service. The satellite was quickly
restored to normal operations mode. As a result of the anomaly, we believe that
one stationkeeping thruster and a pair of transponders are unusable. The
satellite is equipped with a substantial number of backup transponders and
thrusters. EchoStar VI has also experienced anomalies resulting in the loss of
two solar array strings. The satellite has a total of approximately 112 solar
array strings and approximately 106 are required to assure full power
availability for the 12-year design life of the satellite. An investigation of
the anomalies, none of which have impacted commercial operation of the satellite
to date, is continuing. Until the root cause of the anomalies is finally
determined, there can be no assurance future anomalies will not cause further
losses which could impact commercial operation of the satellite.
6
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(UNAUDITED)
Satellite Insurance
As a result of the failure of EchoStar IV solar arrays to fully deploy
and the failure of 28 transponders to date, a maximum of approximately 14 of the
44 transponders on EchoStar IV are available for use at this time. Due to the
normal degradation of the solar arrays, the number of available transponders
will further decrease over time. In addition to the transponder and solar array
failures, EchoStar IV experienced anomalies affecting its thermal systems and
propulsion system. There can be no assurance that further material degradation,
or total loss of use, of EchoStar IV will not occur in the immediate future.
In September 1998, EchoStar filed a $219.3 million insurance claim for
a constructive total loss under the launch insurance policies covering EchoStar
IV. The satellite insurance consists of separate identical policies with
different carriers for varying amounts which, in combination, create a total
insured amount of $219.3 million.
The insurance carriers offered EchoStar a total of approximately $88
million, or 40% of the total policy amount, in settlement of the EchoStar IV
insurance claim. The insurers allege that all other impairment to the satellite
occurred after expiration of the policy period and is not covered. EchoStar
strongly disagrees with the position of the insurers and has filed an
arbitration claim against them for breach of contract, failure to pay a valid
insurance claim and bad faith denial of a valid claim, among other things. There
can be no assurance that EchoStar will receive the amount claimed or, if
EchoStar does, that EchoStar will retain title to EchoStar IV with its reduced
capacity.
At the time EchoStar filed its claim in 1998, EchoStar recognized an
impairment loss of $106 million to write-down the carrying value of the
satellite and related costs, and simultaneously recorded an insurance claim
receivable for the same amount. EchoStar continues to believe it will ultimately
recover at least the amount originally recorded and does not intend to adjust
the amount of the receivable until there is greater certainty with respect to
the amount of the final settlement.
As a result of the thermal and propulsion system anomalies, EchoStar
reduced the estimated remaining useful life of EchoStar IV to approximately 4
years during January 2000. EchoStar will continue to evaluate the performance of
EchoStar IV and may modify its loss assessment as new events or circumstances
develop.
The in-orbit insurance policies for EchoStar I, EchoStar II, and
EchoStar III expired on July 25, 2000. The insurers refused to renew insurance
on EchoStar I, EchoStar II and EchoStar III on reasonable terms. Based on, among
other things, the insurance carriers' unanimous refusal to negotiate reasonable
renewal insurance coverage, EchoStar believes that the carriers colluded and
conspired to boycott EchoStar unless EchoStar accepted their offer to settle the
EchoStar IV claim for $88 million.
Based on the carriers' actions, EchoStar added causes of action in its
EchoStar IV demand for arbitration for breach of the duty of good faith and fair
dealing, and unfair claim practices. Additionally, EchoStar filed a lawsuit
against the insurance carriers in the United States District Court for the
District of Colorado asserting causes of action for violation of Federal and
State antitrust laws. While EchoStar believes it is entitled to the full amount
claimed under the EchoStar IV insurance policy and believes the insurance
carriers are in violation of antitrust laws and have committed further acts of
bad faith in connection with their refusal to negotiate reasonable insurance
coverage on EchoStar's other satellites, there can be no assurance as to the
outcome of these proceedings. During March 2001, EchoStar voluntarily dismissed
the antitrust lawsuit without prejudice. EchoStar has the right to re-file an
antitrust action against the insurers again in the future.
The indentures related to the outstanding senior notes of EDBS contain
restrictive covenants that require EchoStar to maintain satellite insurance with
respect to at least half of the satellites it owns. Insurance coverage is
therefore required for at least three of EchoStar's six satellites currently in
orbit. EchoStar had procured normal and customary launch insurance for EchoStar
VI, which expired on July 14, 2001. As a result, EchoStar is currently
self-insuring EchoStar I, EchoStar II, EchoStar III, EchoStar IV, EchoStar V and
EchoStar VI. To satisfy insurance
7
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(UNAUDITED)
covenants related to the outstanding EDBS senior notes, as of June 30, 2001,
EchoStar had reclassified approximately $74 million from cash and cash
equivalents to restricted cash and marketable investment securities on its
balance sheet. Cash reserved for satellite insurance increased by approximately
$60 million on July 14, 2001 as a result of the expiration of the EchoStar VI
launch insurance policy. The reclassification will continue until such time, if
ever, as EchoStar can again insure its satellites on acceptable terms and for
acceptable amounts. EchoStar believes it has in-orbit satellite capacity
sufficient to expeditiously recover transmission of most programming in the
event one of its in-orbit satellites fails. However, the cash reserved for
satellite insurance is not adequate to fund the construction, launch and
insurance for a replacement satellite in the event of a complete loss of a
satellite. Programming continuity could not be assured in the event of multiple
satellite losses.
5. COMMITMENTS AND CONTINGENCIES
VisionStar
During November 2000, one of EchoStar's wholly-owned subsidiaries
purchased a 49.9% interest in VisionStar, Inc. VisionStar holds an FCC license
for, and is constructing a Ka-band satellite to launch into, the 113 degree
orbital location. Together with VisionStar, EchoStar has requested FCC approval
to acquire control over VisionStar by increasing its ownership of VisionStar to
90%, for a total purchase price of approximately $2.8 million. EchoStar has also
provided loans to VisionStar totaling less than $10 million to date for the
construction of their satellite and expects to provide additional funding to
VisionStar in the future. EchoStar is not obligated to finance the full
remaining cost to construct and launch the VisionStar satellite, but
VisionStar's FCC license currently requires construction of the satellite to be
completed by April 30, 2002 or the license could be revoked. EchoStar currently
expects to continue to fund loans and equity contributions for construction of
the satellite in the near term from cash on hand, and expects that it may spend
approximately $79.5 million during 2001 for that purpose subject to, among other
things, FCC action.
DirecTV
During February 2000, EchoStar filed suit against DirecTV and Thomson
Consumer Electronics/RCA in the Federal District Court of Colorado. The suit
alleges that DirecTV has utilized improper conduct in order to fend off
competition from the DISH Network. According to the complaint, DirecTV has
demanded that certain retailers stop displaying EchoStar's merchandise and has
threatened to cause economic damage to retailers if they continue to offer both
product lines in head-to-head competition. The suit alleges, among other things,
that DirecTV has acted in violation of federal and state antitrust laws in order
to protect DirecTV's market share. EchoStar is seeking injunctive relief and
monetary damages. EchoStar subsequently amended the complaint adding claims
against Circuit City, Radio Shack and Best Buy, alleging that these retailers
are engaging in improper conduct that has had an anti-competitive impact on
EchoStar. It is too early in the litigation to make an assessment of the
probable outcome. During October 2000, DirecTV filed a motion for summary
judgment on certain of EchoStar's claims. DirecTV's motion remains pending.
The DirecTV defendants filed a counterclaim against EchoStar. DirecTV
alleges that EchoStar tortiously 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 trademarks owned by PrimeStar, which is now owned by
DirecTV. Finally, DirecTV alleges that EchoStar has been marketing National
Football League games in a misleading manner. Discovery has been stayed until
the next scheduling conference on August 21, 2001. The amount of damages DirecTV
is seeking is as yet unquantified. However, in an arbitration proceeding related
to DirecTV's allegations with respect to KBS, DirecTV has claimed damages
totaling hundreds of millions of dollars. It is too early in the litigation to
make an assessment of the probable outcome. EchoStar and KBS intend to
vigorously defend against DirecTV's allegations in the litigation. The
arbitration between DirecTV and KBS was held in June 2001, with closing
arguments held on July 3, 2001. On July 10, 2001, the parties submitted
post-hearing briefs. The arbitration
8
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(UNAUDITED)
panel has indicated that a ruling in the arbitration will be issued in late
August or early September 2001. DirecTV has alleged damages in the arbitration
in excess of $200 million.
Fee Dispute
EchoStar had a contingent fee arrangement with the attorneys who
represented EchoStar in the litigation with News Corporation. The contingent fee
arrangement provides for the attorneys to be paid a percentage of any net
recovery obtained by EchoStar in the News Corporation litigation. The attorneys
have asserted that they may be entitled to receive payments totaling hundreds of
millions of dollars under this fee arrangement.
During mid-1999, EchoStar initiated litigation against the attorneys in
the Arapahoe County, Colorado, District Court arguing that the fee arrangement
is void and unenforceable. In December 1999, the attorneys initiated an
arbitration proceeding before the American Arbitration Association. The
litigation has been stayed while the arbitration is ongoing. The arbitration
hearing commenced April 2, 2001 and continued through April 13, 2001. The
hearing could not be completed during that time period and has been continued
until August 7, 2001, when it will resume until it is presumably completed.
While there can be no assurance that the attorneys will not continue to claim a
right to hundreds of millions of dollars, the damage model the attorneys
presented during the arbitration was for $56 million. EchoStar believes that
even that amount significantly overstates the amount the attorneys should
reasonably be entitled to receive under the fee agreement but EchoStar cannot
predict with certainty what the arbitration panel will decide. EchoStar
continues to vigorously contest the attorneys' interpretation of the fee
arrangement, which EchoStar believes significantly overstates the magnitude of
liability.
WIC Premium Television Ltd.
During July 1998, a lawsuit was filed by WIC Premium Television Ltd.,
an Alberta corporation, in the Federal Court of Canada Trial Division, against
General Instrument Corporation, HBO, Warner Communications, Inc., John Doe,
Showtime, United States Satellite Broadcasting Company, Inc., EchoStar
Communications Corporation, and two of EchoStar's wholly-owned subsidiaries,
Echosphere Corporation and Dish, Ltd. EchoStar Satellite Corporation, EchoStar
DBS Corporation, EchoStar Technologies Corporation, and EchoStar Satellite
Broadcast Corporation were subsequently added as defendants. The lawsuit seeks,
among other things, interim and permanent injunctions 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.
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.
The Court in the Alberta action recently denied EchoStar's Motion to
Dismiss, which EchoStar appealed. The Court in the Federal action has stayed
that case pending the outcome of the Alberta action. The case is now currently
in discovery. EchoStar intends to vigorously defend the suit. It is too early to
make an assessment of the probable outcome of the litigation or to determine the
extent of any potential liability or damages.
Broadcast network programming
Until July 1998, EchoStar obtained distant broadcast network channels
(ABC, NBC, CBS and FOX) for distribution to its customers through PrimeTime 24.
In December 1998, the United States District Court for the Southern District of
Florida entered a nationwide permanent injunction requiring PrimeTime 24 to shut
off distant
9
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(UNAUDITED)
network channels to many of its customers, and henceforth to sell those channels
to consumers in accordance with certain stipulations in the injunction.
In October 1998, EchoStar filed a declaratory judgment action against
ABC, NBC, CBS and FOX in Denver Federal Court. EchoStar asked the court to enter
a judgment declaring that its method of providing distant network programming
did not violate the Satellite Home Viewer Act and hence did not infringe the
networks' copyrights. In November 1998, the networks and their affiliate groups
filed a complaint against EchoStar in Miami Federal Court alleging, among other
things, copyright infringement. The court combined the case that EchoStar filed
in Colorado with the case in Miami and transferred it to the Miami court. The
case remains pending in Miami. While the networks have not sought monetary
damages, they have sought to recover attorney fees if they prevail.
In February 1999, the networks filed a "Motion for Temporary
Restraining Order, Preliminary Injunction and Contempt Finding" against DirecTV,
Inc. in Miami related to the delivery of distant network channels to DirecTV
customers by satellite. DirecTV settled this lawsuit with the networks. Under
the terms of the settlement between DirecTV and the networks, some DirecTV
customers were scheduled to lose access to their satellite-provided distant
network channels by July 31, 1999, while other DirecTV customers were to be
disconnected by December 31, 1999. Subsequently, PrimeTime 24 and substantially
all providers of satellite-delivered network programming other than EchoStar
agreed to this cut-off schedule, although EchoStar does not know if they adhered
to this schedule.
In December 1998, the networks filed a Motion for Preliminary
Injunction against EchoStar in the Miami court, and asked the court to enjoin
EchoStar from providing network programming except under limited circumstances.
A preliminary injunction hearing was held on September 21, 1999. The court took
the issues under advisement to consider the networks' request for an injunction,
whether to hear live testimony before ruling upon the request, and whether to
hear argument on why the Satellite Home Viewer Act may be unconstitutional,
among other things.
In March 2000, the networks filed an emergency motion again asking the
court to issue an injunction requiring EchoStar to turn off network programming
to certain of its customers. At that time, the networks also argued that
EchoStar's compliance procedures violate the Satellite Home Viewer Improvement
Act. EchoStar opposed the networks' motion and again asked the court to hear
live testimony before ruling upon the networks' injunction request.
During September 2000, the Court granted the Networks' motion for
preliminary injunction, denied the Network's emergency motion and denied
EchoStar's request to present live testimony and evidence. The Court's original
order required EchoStar to terminate network programming to certain subscribers
"no later than February 15, 1999," and contained other dates with which it would
be physically impossible to comply. The order imposes restrictions on EchoStar's
past and future sale of distant ABC, NBC, CBS and Fox channels similar to those
imposed on PrimeTime 24 (and, EchoStar believes, on DirecTV and others). Some of
those restrictions go beyond the statutory requirements imposed by the Satellite
Home Viewer Act and the Satellite Home Viewer Improvement Act. For these and
other reasons EchoStar believes the Court's order is, among other things,
fundamentally flawed, unconstitutional and should be overturned. However, it is
very unusual for a Court of Appeals to overturn a lower court's order and there
can be no assurance whatsoever that it will be overturned.
On October 3, 2000, and again on October 25, 2000, the Court amended
its original preliminary injunction order in an effort to fix some of the errors
in the original order. The twice amended preliminary injunction order required
EchoStar to shut off, by February 15, 2001, all subscribers who are ineligible
to receive distant network programming under the court's order. EchoStar has
appealed the September 2000 preliminary injunction order and the October 3, 2000
amended preliminary injunction order. On November 22, 2000, the United States
Court of Appeals for the Eleventh Circuit stayed the Florida Court's preliminary
injunction order pending EchoStar's appeal. At that time, the Eleventh Circuit
also expedited its consideration of EchoStar's appeal.
10
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(UNAUDITED)
During November 2000, EchoStar filed its appeal brief with the Eleventh
Circuit. Oral argument before the Eleventh Circuit was held on May 24, 2001. At
the oral argument, the parties agreed to participate in a court supervised
mediation and that the mediator was to report back to the Eleventh Circuit on
July 11, 2001. The Eleventh Circuit indicated that it would not rule on the
pending appeal until after July 11, 2001. Since May 24, 2001, the parties
participated in the court supervised mediation. On July 11, 2001, the mediator
reported to the Eleventh Circuit the status of the parties' mediation efforts.
On July 16, 2001, the Eleventh Circuit issued an order for the parties to engage
in further mediation efforts until August 10, 2001. On August 10, 2001, the
mediator is expected to report to the Eleventh Circuit the status of any
continued mediation efforts by the parties.
EchoStar cannot predict when the Eleventh Circuit will rule on its
appeal, but it will not be before August 10, 2001. EchoStar's appeal effort may
not be successful and EchoStar may be required to comply with the Court's
preliminary injunction order on short notice. The preliminary injunction could
force EchoStar to terminate delivery of distant network channels to a
substantial portion of its distant network subscriber base, which could also
cause many of these subscribers to cancel their subscription to EchoStar's other
services. Management has determined that such terminations would result in a
small reduction in EchoStar's reported average monthly revenue per subscriber
and could result in a temporary increase in churn. If EchoStar loses the case at
trial, the judge could, as one of many possible remedies, prohibit all future
sales of distant network programming by EchoStar, which would have a material
adverse affect on EchoStar's business.
Gemstar
During October 2000, Starsight Telecast, Inc., a subsidiary of
Gemstar-TV Guide International, Inc., filed a suit for patent infringement
against EchoStar and certain of its subsidiaries in the United States District
Court for the Western District of North Carolina, Asheville Division. The suit
alleges infringement of United States Patent No. 4,706,121 (the "121 Patent")
which relates to certain electronic program guide functions. EchoStar has
examined this patent and believes that it is not infringed by any of its
products or services. EchoStar will vigorously defend against this suit.
In December 2000, EchoStar filed suit against Gemstar - TV Guide (and
certain of its subsidiaries) in the United States District Court for the
District of Colorado alleging violations by Gemstar of various federal and state
anti-trust laws and laws governing unfair competition. The lawsuit seeks an
injunction and monetary damages. Gemstar recently filed counterclaims in this
lawsuit alleging infringement of United States Patent Nos. 5,923,362 and
5,684,525 which relate to certain electronic program guide functions. EchoStar
has examined these patents and believes they are not infringed by any of
EchoStar's products or services. EchoStar will vigorously contest these
counterclaims.
In February 2001, Gemstar filed patent infringement actions against
EchoStar in District Court in Atlanta, Georgia and in the International Trade
Commission (ITC). These suits allege infringement of United States Patent Nos.
5,252,066, 5,479,268 and 5,809,204 all of which relate to certain electronic
program guide functions. In addition, the ITC action alleges infringement of the
121 Patent which is asserted in the North Carolina case. In the Atlanta District
Court case, Gemstar seeks damages and an injunction. The North Carolina case has
been stayed pending resolution of the ITC action and EchoStar expects that the
Atlanta action will also be stayed pending resolution of the ITC action. ITC
actions typically proceed according to an expedited schedule. EchoStar expects
the ITC action to go to trial by the end of 2001. EchoStar further expects that
the ITC will issue an initial determination by March of 2002 and that a final
determination will be issued by April 2002. While the ITC cannot award damages,
it can issue exclusion orders that would prevent the importation of articles
that are found to infringe the asserted patents. Portions of EchoStar's
receivers are currently manufactured outside the United States. In addition, it
can issue cease and desist orders that would prohibit the sale of infringing
products that had been previously imported. EchoStar has examined these patents
and believes they are not infringed by any of EchoStar's products or services.
EchoStar will vigorously contest the ITC, North Carolina and Atlanta allegations
of infringement and will, among other things, challenge both the validity and
enforceability of the asserted patents.
11
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(UNAUDITED)
During 2000, Superguide Corp. also filed suit against EchoStar, DirecTv
and others in the same North Carolina Court, alleging infringement of United
States Patent Nos. 5,038,211, 5,293,357 and 4,751,578 which relate to certain
electronic program guide functions, including the use of electronic program
guides to control VCRs. It is EchoStar's understanding that these patents may be
licensed by Superguide to Gemstar. Gemstar has been added as a party to this
case and is now asserting these patents against EchoStar. EchoStar has examined
these patents and believes that they are not infringed by any of its products or
services. A Markman hearing is currently scheduled for July 23, 2001. EchoStar
intends to vigorously defend against this action and assert a variety of
counterclaims.
In the event it is ultimately determined that EchoStar infringes on any
of the aforementioned patents EchoStar may be subject to substantial damages,
including the potential for treble damages, and/or an injunction that could
require EchoStar to materially modify certain user friendly electronic
programming guide and related features it currently offers to consumers. It is
too early to make an assessment of the probable outcome of the suits.
IPPV Enterprises
IPPV Enterprises, LLC and MAAST, Inc. filed a patent infringement suit
against EchoStar, and its conditional access vendor Nagra, in the United States
District Court for the District of Delaware. The suit alleged infringement of 5
patents. The patents disclose various systems for the implementation of features
such as impulse-pay-per view, parental control and category lock-out. One patent
relates to an encryption technique. One patent was subsequently dropped by
plaintiffs. The Court entered summary judgment in favor of EchoStar that the
encryption patent, with respect to which the plaintiffs claimed $80 million in
damages, was not infringed by EchoStar. On July 13, 2001, a jury found that the
remaining three patents were infringed and awarded damages of $15 million. The
jury also found that one of the patents was willfully infringed which means that
the judge is entitled to increase the award of damages. EchoStar intends to
appeal the decision and plaintiffs have indicated they will appeal as well. Any
final award of damages would be split between EchoStar and Nagra in percentages
to be agreed upon between EchoStar and Nagra.
California Actions
A purported class action was filed against EchoStar in the California
State Superior Court for Alameda County during May 2001 by Andrew A. Werby. The
complaint, relating to late fees, alleges unlawful, unfair and fraudulent
business practices in violation of California Business and Professions Code
Section 17200 et seq., false and misleading advertising in violation of
California Business and Professions Code Section 17500, and violation of the
California Consumer Legal Remedies Act. EchoStar has not yet filed a responsive
pleading. It is too early in the litigation to make an assessment of the
probable outcome of the litigation or to determine the extent of any potential
liability or damages. EchoStar intends to deny all liability and intends to
vigorously defend the lawsuit.
A purported class action relating to the use of terms such as "crystal
clear digital video," "CD-quality audio," and "on-screen program guide", and
with respect to the number of channels available in various programming
packages, has also been filed against EchoStar in the California State Superior
Court for Los Angeles County by David Pritikin and by Consumer Advocates, a
nonprofit unincorporated association. The complaint alleges breach of express
warranty and violation of the California Consumer Legal Remedies Act, Civil Code
Sections 1750, et. seq., and the California Business & Professions Code Sections
17500, 17200. EchoStar has filed an answer and the case is currently in
discovery. No motion for class certification has been filed to date. It is too
early in the litigation to make an assessment of the probable outcome of the
litigation or to determine the extent of any potential liability or damages.
EchoStar denies all liability and intends to vigorously defend the lawsuit.
Retailer Class Actions
EchoStar has been sued by retailers in three separate purported class
actions. In two separate lawsuits filed in the District Court, Arapahoe County,
State of Colorado and the United States District Court for the District of
Colorado, respectively, Air Communication & Satellite, Inc. and John DeJong, et.
al. filed lawsuits on October 6, 2000 on behalf of themselves and a class of
persons similarly situated. The plaintiffs are attempting to certify
12
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(UNAUDITED)
nationwide classes allegedly brought on behalf of persons, primarily retail
dealers, who were alleged signatories to certain retailer agreements with
EchoStar Satellite Corporation. The plaintiffs are requesting the Court to
declare certain provisions of the alleged agreements invalid and unenforceable,
to declare that certain changes to the agreements are invalid and unenforceable,
and to award damages for lost commissions and payments, charge backs, and other
compensation. The plaintiffs allege breach of contract and breach of the
covenant of good faith and fair dealing and seek declaratory relief,
compensatory damages, injunctive relief, and pre-judgment and post-judgment
interest. EchoStar intends to vigorously defend against the suits and to assert
a variety of counterclaims. It is too early to make an assessment of the
probable outcome of the litigation or to determine the extent of any potential
liability or damages.
Satellite Dealers Supply, Inc. filed a lawsuit in the United States
District Court for the Eastern District of Texas on September 25, 2000, on
behalf of itself and a class of persons similarly situated. The plaintiff is
attempting to certify a nationwide class on behalf of sellers, installers, and
servicers of satellite equipment who contract with EchoStar and claims the
alleged class has been "subject to improper chargebacks." The plaintiff alleges
that EchoStar: (1) charged back certain fees paid by members of the class to
professional installers in violation of contractual terms; (2) manipulated the
accounts of subscribers to deny payments to class members; and (3)
misrepresented to class members who own certain equipment related to the
provision of satellite television service. The plaintiff is requesting a
permanent injunction and monetary damages. EchoStar intends to vigorously defend
the lawsuit and to assert a variety of counterclaims. It is too early to make an
assessment of the probable outcome of the litigation or to determine the extent
of any potential liability or damages.
EchoStar is subject to various other legal proceedings and claims which
arise in the ordinary course of business. In the opinion of management, the
amount of ultimate liability with respect to those actions will not materially
affect EchoStar's financial position or results of operations.
Meteoroid Events
Meteoroid events pose a potential threat to all in orbit geosynchronous
satellites including EchoStar's DBS satellites. While the probability that
EchoStar's satellites will be damaged by meteoroids is very small, that
probability increases significantly when the Earth passes through the
particulate stream left behind by various comets.
Due to the current peak in the 11-year solar cycle, increased solar
activity is likely for the next year. Some of these solar storms pose a
potential threat to all in-orbit geosynchronous satellites including EchoStar's
DBS satellites. The probability that the effects from the storms will damage our
satellites or cause service interruptions is generally very small.
Some decommissioned spacecraft are in uncontrolled orbits which pass
through the geostationary belt at various points, and present hazards to
operational spacecraft including EchoStar's DBS satellites. The locations of
these hazards are generally well known and may require EchoStar to perform
maneuvers to avoid collisions.
6. LONG - TERM DEBT
5 3/4% Convertible Notes
On May 24, 2001, EchoStar sold $1 billion principal amount of 5 3/4/%
Convertible Subordinated Notes due 2008 (the "5 3/4% Convertible Notes").
Interest accrues at an annual rate of 5 3/4% on the 5 3/4% Convertible Notes and
is payable semi-annually in cash, in arrears on May 15 and November 15 of each
year, commencing November 15, 2001.
The 5 3/4% Convertible Notes are general unsecured obligations, which
rank junior in right of payment to:
o all existing and future senior obligations;
o all of EchoStar's secured debts to the extent of the value of the
assets securing those debts; and
o all existing and future debts and other liabilities or EchoStar's
subsidiaries.
13
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(UNAUDITED)
In addition, the 5 3/4% Convertible Notes rank equal to EchoStar's
4 7/8% Convertible Subordinated Notes due 2007.
Except under certain circumstances requiring prepayment premiums, and
in other limited circumstances, the 5 3/4% Convertible Notes are not redeemable
at EchoStar's option prior to May 15, 2004. Thereafter, the 5 3/4% Convertible
Notes will be subject to redemption, at the option of the Company, in whole or
in part, at redemption prices decreasing from 103.286% during the year
commencing May 15, 2004 to 100% on or after May 15, 2008, together with accrued
and unpaid interest thereon to the redemption date.
The 5 3/4% Convertible Notes, unless previously redeemed, are
convertible at the option of the holder any time after 90 days following the
date of their original issuance and prior to maturity into shares of EchoStar's
class A common stock at a conversion price of $43.29 per share.
The indenture related to the 5 3/4% Convertible Notes (the "5 3/4%
Convertible Notes Indenture") contains certain restrictive covenants that do not
impose material limitations on EchoStar.
In the event of a change of control, as defined in the 5 3/4%
Convertible Notes Indenture, EchoStar will be required to make an offer to
repurchase all or any part of the holder's 5 3/4% Convertible Notes at a
purchase price equal to 101% of the aggregate principal amount thereof, together
with accrued and unpaid interest thereon, to the date of repurchase.
7. SEGMENT REPORTING
Financial Data by Business Unit (in thousands)
Statement of Financial Accounting Standard No. 131, "Disclosures About
Segments of an Enterprise and Related Information" ("FAS No. 131") establishes
standards for reporting information about operating segments in annual financial
statements of public business enterprises and requires that those enterprises
report selected information about operating segments in interim financial
reports issued to shareholders. Operating segments are components of an
enterprise about which separate financial information is available and regularly
evaluated by the chief operating decision maker(s) of an enterprise. During
2000, under this definition, we were operating as three separate business units.
However, beginning 2001, it was determined that the chief operating decision
maker of our Company regularly evaluates the following two separate business
units. All prior year amounts have been restated to conform to the current year
presentation. Eliminations and other primarily consists of intercompany
eliminations. These amounts also consist of revenue and expenses from other
immaterial operating segments for which the disclosure requirements of FAS No.
131 do not apply.
14
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(UNAUDITED)
ECHOSTAR ELIMINATIONS
DISH TECHNOLOGIES AND OTHER, CONSOLIDATED
AS RETROACTIVELY ADJUSTED (NOTE 8) NETWORK CORPORATION NET TOTAL
----------- ------------ ------------ ------------
THREE MONTHS ENDED JUNE 30, 2000
Revenue.............................. $ 572,786 $ 48,045 $ 25,298 $ 646,129
Net income (loss).................... (156,067) 4,139 12,965 (138,963)
THREE MONTHS ENDED JUNE 30, 2001
Revenue.............................. $ 906,590 $ 25,760 $ 33,922 $ 966,272
Net income (loss).................... 25,433 (7,469) (23,819) (5,855)
SIX MONTHS ENDED JUNE 30, 2000
Revenue.............................. $ 1,057,234 $ 100,514 $ 54,102 $ 1,211,850
Net income (loss).................... (346,831) (355) 23,093 (324,093)
SIX MONTHS ENDED JUNE 30, 2001
Revenue.............................. $ 1,724,581 $ 44,488 $ 59,133 $ 1,828,202
Net income (loss).................... (199,260) (15,257) 38,795 (175,722)
8. SUBSEQUENT EVENTS
DirecTV
EchoStar has had discussions with representatives of Hughes Electronics
Corporation and its DirecTV subsidiary concerning the possible spin off of all
or a portion of Hughes and a possible transaction between Hughes and EchoStar.
Hughes and DirecTV management recently informed EchoStar that General Motors is
unwilling to further consider EchoStar's proposal.
EchoStar V
EchoStar V is equipped with a total of three momentum wheels, including
one spare. During July 2001, EchoStar V experienced an anomaly resulting in the
loss of one momentum wheel. The satellite was quickly restored to normal
operations mode. While no further momentum wheel losses are expected, until the
root cause of the anomaly is finally determined, there can be no assurance
future anomalies will not cause further losses which could impact commercial
operation of the satellite. The extent to which the loss of an additional
momentum wheel would impair commercial operation has not yet been finally
determined, but terms for in-orbit insurance, if procured, could be impacted.
Series C Preferred Stock Redemption
Effective July 6, 2001, EchoStar redeemed, for cash, all of its
remaining outstanding 6 3/4% Series C Cumulative Convertible Preferred Stock
(the "Series C Preferred Stock") at a total redemption price of approximately
$2,400 or $51.929 per share.
StarBand
On July 11, 2001, EchoStar announced that, subject, among other things,
to customary regulatory approvals, it intends to increase its equity stake in
StarBand Communications Inc. to approximately 32% and acquire four out of seven
seats on the StarBand Board of Directors. In exchange, EchoStar would invest an
additional $50 million in StarBand. Further, EchoStar would lease transponder
capacity to StarBand from a next generation satellite. In accordance with the
agreement and subject to customary regulatory approvals, EchoStar's equity stake
would increase to approximately 60% upon commencement of the construction of the
next generation satellite. This investment is expected to be accounted for using
the equity method of accounting, which will be retroactively applied during the
third quarter 2001.
15
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(UNAUDITED)
Retroactive Application of Equity Method of Accounting
Effective September 27, 2001, EchoStar invested an additional $50
million in StarBand, increasing its equity interest from approximately 19% to
approximately 32%. If and when construction is commenced for a next generation
satellite to be allocated for StarBand's service, EchoStar's equity interest
would increase to approximately 60%. EchoStar originally invested $50 million in
StarBand in April 2000. As a result of the increased equity stake, this
investment is now accounted for using the equity method of accounting. As
required by APB Opinion No. 18, the equity method accounting has been
retroactively applied back to April 2000, the date of EchoStar's original
investment in StarBand. This retroactive application resulted in an increase in
previously reported net loss and basic and diluted loss per share for the three
and six-month periods ended June 30, 2000 and June 30, 2001 as follows (in
thousands):
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- --------------------
2000 2001 2000 2001
-------- -------- -------- ---------
(Unaudited)
Net loss................................................... $ (6,103) $ (8,104) $ (6,103) $ (10,930)
======== ======== ======== =========
Basic and diluted net loss per common share................ $ (0.02) $ (0.01) $ (0.01) $ (0.02)
======== ======== ======== =========
16
EXHIBIT 99.4
ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated financial data as of and for each of the five
years ended December 31, 2000 have been derived from, and are qualified by
reference to our Consolidated Financial Statements which have been audited by
Arthur Andersen LLP, independent public accountants. This data should be read in
conjunction with our Consolidated Financial Statements and related Notes thereto
for the three years ended December 31, 2000, and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" included elsewhere in
this report.
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------------
1996 1997 1998 1999 2000
------------ ------------ ------------ ------------ ------------
(IN THOUSANDS, EXCEPT SUBSCRIBERS AND PER SHARE
STATEMENTS OF OPERATIONS DATA DATA)
REVENUE:
DISH Network ................................ $ 60,132 $ 344,250 $ 683,032 $ 1,352,603 $ 2,352,237
DTH equipment sales and integration
services .................................. 78,062 91,637 256,193 184,041 259,830
Satellite services .......................... 5,822 11,135 22,366 41,071 61,105
Other ....................................... 54,885 30,396 21,075 25,126 42,048
------------ ------------ ------------ ------------ ------------
Total revenue ................................. 198,901 477,418 982,666 1,602,841 2,715,220
COSTS AND EXPENSES:
DISH Network operating expenses ............. 42,456 193,274 395,411 732,675 1,265,445
Cost of sales - DTH equipment and
integration services ...................... 76,384 61,992 173,388 148,427 194,963
Cost of sales - other ....................... 42,349 23,909 16,496 17,084 32,992
Marketing expenses .......................... 51,520 179,923 320,521 727,061 1,158,640
General and administrative .................. 52,123 69,315 97,105 150,397 250,425
Non-cash, stock-based compensation .......... -- -- -- 61,060 51,465
Depreciation and amortization ............... 43,414 173,276 102,636 113,228 185,356
------------ ------------ ------------ ------------ ------------
Total costs and expenses ...................... 308,246 701,689 1,105,557 1,949,932 3,139,286
------------ ------------ ------------ ------------ ------------
Operating loss ................................ (109,345) (224,271) (122,891) (347,091) (424,066)
Extraordinary charge for early
retirement of debt, net of tax ............ -- -- -- (268,999) --
============ ============ ============ ============ ============
Net loss ...................................... $ (100,986) $ (312,825) $ (260,882) $ (792,847) $ (650,326)
============ ============ ============ ============ ============
Net loss attributable to common shares ........ $ (102,190) $ (321,267) $ (296,097) $ (800,100) $ (651,472)
============ ============ ============ ============ ============
Weighted-average common shares outstanding .... 324,384 335,344 359,856 416,476 471,023
============ ============ ============ ============ ============
Basic and diluted loss per share (1) .......... $ (0.32) $ (0.96) $ (0.82) $ (1.92) $ (1.38)
============ ============ ============ ============ ============
AS OF DECEMBER 31,
---------------------------------------------------------------------------
1996 1997 1998 1999 2000
------------ ------------ ------------ ------------ ------------
BALANCE SHEETS DATA
Cash, cash equivalents and
marketable investment securities ...... $ 58,038 $ 420,514 $ 324,100 $ 1,254,175 $ 1,464,175
Cash reserved for satellite
insurance ............................. -- -- -- -- 82,393
Restricted cash and marketable
investment securities ................. 79,291 187,762 77,657 3,000 3,000
Total assets ............................ 1,141,380 1,805,646 1,806,852 3,898,189 4,636,835
Long-term obligations (less current
portion):
1994 Notes ............................ 437,127 499,863 571,674 1,503 --
1996 Notes ............................ 386,165 438,512 497,955 1,097 --
1997 Notes ............................ -- 375,000 375,000 15 --
9 1/4% Seven Year Notes ............... -- -- -- 375,000 375,000
9 3/8% Ten Year Notes ................. -- -- -- 1,625,000 1,625,000
4 7/8% Convertible Notes .............. -- -- -- 1,000,000 1,000,000
10 3/8% Seven Year Notes .............. -- -- -- -- 1,000,000
Mortgages and other notes
payable, net of current portion ..... 51,428 51,846 43,450 27,990 14,812
Series B Preferred Stock ................ -- 199,164 226,038 -- --
Total stockholders' equity (deficit) .... 61,197 (88,961) (371,540) (48,418) (657,383)
1
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------
1996 1997 1998 1999 2000
---------- ---------- ---------- ---------- ----------
OTHER DATA
DISH Network subscribers .................... 350,000 1,040,000 1,940,000 3,410,000 5,260,000
Average monthly revenue per subscriber ...... $ 35.50 $ 38.50 $ 39.25 $ 42.71 $ 45.33
EBITDA(2) ................................... (65,931) (50,995) (20,255) (172,953) (187,245)
Less amortization of subscriber
acquisition costs ......................... (16,073 (121,735) (18,869) -- --
---------- ---------- ---------- ---------- ----------
EBITDA, as adjusted to exclude
amortization of subscriber acquisition
costs ..................................... (82,004) (172,730) (39,124) (172,953) (187,245)
Net cash flows from:
Operating activities ...................... (27,425) 43 (16,890) (58,513) (118,677)
Investing activities ...................... (287,642) (597,249) (8,048) (62,826) (911,957)
Financing activities ...................... 332,544 703,182 (13,722) 920,091 982,153
- ----------
(1) The loss per share amounts for 1996 have been restated as required to comply
with Statement of Financial Accounting Standards ("FAS") No. 128, "Earnings
Per Share." For further discussion of loss per share and the impact of FAS
No. 128, see Note 2 to our Consolidated Financial Statements.
The loss per share amount in 1999 of $(1.92) includes $(1.28) per share
relating to basic and diluted loss per share before extraordinary charges
and $(0.64) per share relating to the extraordinary charge for early
retirement of debt, net of tax.
(2) We believe it is common practice in the telecommunications industry for
investment bankers and others to use various multiples of current or
projected EBITDA (operating income (loss) plus amortization and
depreciation, and non-cash, stock-based compensation) for purposes of
estimating current or prospective enterprise value and as one of many
measures of operating performance. Conceptually, EBITDA measures the amount
of income generated each period that could be used to service debt, because
EBITDA is independent of the actual leverage employed by the business; but
EBITDA ignores funds needed for capital expenditures and expansion. Some
investment analysts track the relationship of EBITDA to total debt as one
measure of financial strength. However, EBITDA does not purport to represent
cash provided or used by operating activities and should not be considered
in isolation or as a substitute for measures of performance prepared in
accordance with generally accepted accounting principles.
EBITDA differs significantly from cash flows from operating activities
reflected in the consolidated statement of cash flows. Cash flows from
operating activities is net of interest and taxes paid and is a more
comprehensive determination of periodic income on a cash (vs. accrual)
basis, exclusive of non-cash items of income and expenses such as
depreciation and amortization. In contrast, EBITDA is derived from accrual
basis income and is not reduced for cash invested in working capital.
Consequently, EBITDA is not affected by the timing of receivable collections
or when accrued expenses are paid. We are not aware of any uniform standards
for determining EBITDA and believe presentations of EBITDA may not be
calculated consistently by different entities in the same or similar
businesses. EBITDA is shown before and after amortization of subscriber
acquisition costs, which were deferred through September 1997 and amortized
over one year. EBITDA for 1999 and 2000 also excludes approximately $61
million and $51 million in non-cash, stock-based compensation expense
resulting from significant post-grant appreciation of stock options granted
to employees, respectively.
2
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
All statements contained herein, as well as statements made in press
releases and oral statements that may be made by us or by officers, directors or
employees acting on our behalf, that are not statements of historical fact
constitute "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Such forward-looking statements
involve known and unknown risks, uncertainties and other factors that could
cause our actual results to be materially different from historical results or
from any future results expressed or implied by such forward-looking statements.
Among the factors that could cause our actual results to differ materially are
the following: a total or partial loss of one or more satellites due to
operational failures, space debris or otherwise; delays in the construction of
our seventh, eighth or ninth satellites; an unsuccessful deployment of future
satellites; inability to settle outstanding claims with insurers; a decrease in
sales of digital equipment and related services to international direct-to-home
service providers; a decrease in DISH Network subscriber growth; an increase in
subscriber turnover; an increase in subscriber acquisition costs; an inability
to obtain certain retransmission consents; our inability to retain necessary
authorizations from the FCC; an inability to obtain patent licenses from holders
of intellectual property or redesign our products to avoid patent infringement;
an increase in competition from cable as a result of digital cable or otherwise,
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
Year Ended December 31, 2000 Compared to the Year Ended December 31, 1999.
Revenue. Total revenue for the year ended December 31, 2000 was $2.715
billion, an increase of $1.112 billion compared to total revenue for the year
ended December 31, 1999 of $1.603 billion. The increase in total revenue was
primarily attributable to DISH Network subscriber growth. We expect that our
revenues will continue to increase significantly as the number of DISH Network
subscribers increases.
DISH Network subscription television services revenue totaled $2.347
billion for the year ended December 31, 2000, an increase of $1.003 billion
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 added approximately 1.85
million net new subscribers for the year ended December 31, 2000, an increase of
approximately 26% compared to approximately 1.47 million net subscriber
additions during 1999. As of December 31, 2000, we had approximately 5.26
million DISH Network subscribers compared to approximately 3.4 million at
December 31, 1999, an increase of 54%. 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 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.
While there can be no assurance, assuming the U.S. economy continues to grow at
a slow pace, we expect to add approximately 1.5 to 2.0 million net new
subscribers during 2001, and to obtain a majority of all net new DBS
subscribers.
Monthly average revenue per subscriber was approximately $45.33 during
the year ended December 31, 2000 and approximately $42.71 during the same period
in 1999. The increase in monthly average revenue per subscriber is primarily
attributable to a $1.00 price increase in America's Top 100 CD, our most popular
programming package, during May 2000, the increased availability of local
channels by satellite together with the earlier successful
3
introduction of our $39.99 per month America's Top 150 programming package.
During August 2000, we announced a promotion offering consumers free premium
movie channels. Under this promotion, all new subscribers who order either our
America's Top 100 CD or America's Top 150 programming package and any or all of
our four premium movie packages between August 1, 2000 and January 31, 2001,
received those premium movie packages free for three months. This promotion had
a negative impact on monthly average revenue per subscriber since premium movie
package revenue from participating subscribers was deferred until the expiration
of each participating subscriber's free service. While there can be no
assurance, we expect our moderate historical increases in revenue per subscriber
to continue during 2001 and expect to reach monthly average revenue per
subscriber of approximately $50 by the end of December 2001.
For the year ended December 31, 2000, DTH equipment sales and
integration services totaled $260 million, an increase of $76 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.
A significant portion of DTH equipment sales and integration services
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. 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 2001, 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 $61 million during the year ended
December 31, 2000, an increase of $20 million as compared to the same period
during 1999. These revenues principally include fees charged to content
providers for signal carriage and revenues earned from business television, or
BTV customers. The increase in satellite services revenue was primarily
attributable to the addition of new full-time BTV customers and additional sales
of idle satellite capacity to occasional-use customers. As a greater percentage
of our satellite capacity is utilized during 2001 for local network channels and
other programming designed to drive consumer subscriber acquisitions, satellite
services revenues may decline.
In order, among other things, to commence compliance with the
injunction issued against us in our pending litigation with the four major
broadcast networks and their affiliate groups, we have terminated the delivery
of distant network channels to certain of our subscribers. Additionally, the FCC
recently issued rules which impair our ability to deliver certain superstation
channels to our customers. Those rules will increase the cost of our delivery of
superstations, and could require that we terminate the delivery of certain
superstations to a material portion of our subscriber base. In combination,
these terminations would result in a small reduction in average monthly revenue
per subscriber and could increase subscriber turnover. While there can be no
assurance, any such decreases could be offset by increases in average monthly
revenue per subscriber resulting from the delivery of local network channels by
satellite, and increases in other programming offerings.
DISH Network Operating Expenses. DISH Network operating expenses
totaled $1.265 billion during the year ended December 31, 2000, an increase of
$532 million or 73% compared to the same period in 1999. DISH Network operating
expenses represented 54% and 55% of subscription television services revenue
during the years ended December 31, 2000 and 1999, respectively. The increase in
DISH Network operating expenses in total was consistent with, and primarily
attributable to, the increase in the number of DISH Network subscribers. While
there can be no assurance, we expect that our efforts to control costs and
create operating efficiencies will result in a moderate decrease in operating
expenses as a percentage of subscription television services revenue during
2001.
4
Subscriber-related expenses totaled $970 million during the year ended
December 31, 2000, an increase of $395 million compared to the same period in
1999. Such expenses, which include programming expenses, copyright royalties,
residuals currently payable to retailers and distributors, and billing, lockbox
and other variable subscriber expenses, represented 41% and 43% of subscription
television services revenues during the years ended December 31, 2000 and 1999,
respectively. Although we do not currently expect subscriber-related expenses as
a percentage of subscription television services revenue to increase materially
in future periods, there can be no assurance this expense to revenue ratio will
not materially increase.
Customer service center and other expenses principally consist of costs
incurred in the operation of our DISH Network customer service centers, such as
personnel and telephone expenses, as well as other operating expenses related to
our service and installation business. Customer service center and other
expenses totaled $251 million during the year ended December 31, 2000, an
increase of $134 million as compared to the same period in 1999. The increase in
customer service center and other expenses primarily resulted from increased
personnel and telephone expenses to support the growth of the DISH Network and
from operating expenses related to the expansion of our installation and service
business. Customer service center and other expenses totaled 11% of subscription
television services revenue during the year ended December 31, 2000, as compared
to 9% during the same period in 1999. The increase in this expense to revenue
ratio primarily resulted from the on-going construction and start-up costs of
our fifth customer service center in Virginia, our sixth customer service center
in West 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.
We continue to work to automate simple phone responses, and intend to increase
internet based customer assistance in the future, in order to better manage
customer service costs.
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 $44 million during the year ended December 31,
2000, a $3 million increase compared to the same period in 1999. This increase
resulted from higher satellite and other digital broadcast center operating
expenses due to an increase in the number of operational satellites. Satellite
and transmission expenses totaled 2% and 3% of subscription television services
revenue during the years ended December 31, 2000 and 1999, respectively. We
expect satellite and transmission expenses to continue to increase in the future
as additional satellites or digital broadcast centers are placed in service, but
do not expect these expenses to increase as a percentage of subscription
television services revenue.
Cost of sales - DTH equipment and Integration Services. Cost of sales -
DTH equipment and integration services totaled $195 million during the year
ended December 31, 2000, an increase of $47 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 75% and 81% of DTH equipment
revenue, during the years ended December 31, 2000 and 1999, respectively. The
higher margin was principally attributable to a $16.6 million loss provision
recorded during 1999 primarily for component parts and purchase commitments
related to our first generation model 7100 set-top boxes, for which production
was suspended in favor of our second generation model 7200 set-top boxes.
Marketing Expenses. We subsidize the cost and installation of EchoStar
receiver systems in order to attract new DISH Network subscribers. Consequently,
our subscriber acquisition costs are significant. Marketing expenses totaled
$1.159 billion during the year ended December 31, 2000, an increase of $432
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 - promotional DTH equipment includes the cost
related to EchoStar receiver systems distributed to retailers and other
distributors of our equipment. Subscriber promotion subsidies - other includes
net costs related to our free installation promotion and other promotional
incentives. Advertising and other expenses totaled $139 million and $65 million
during the years ended December 31, 2000 and 1999, respectively.
5
During the year ended December 31, 2000, our marketing promotions
included our DISH Network One-Rate Plan, C-band bounty program, Great Rewards
program (PrimeStar bounty), Digital Dynamite Plan, cable bounty and a free
installation program. Our subscriber acquisition costs under these programs are
significantly higher than those under our marketing programs historically.
Under the DISH Network One-Rate Plan, consumers were 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 have made 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). This promotion expired on January 31, 2001.
Under our bounty programs, current cable customers were eligible to
receive a free base-level EchoStar receiver system and free installation. To be
eligible for this program, a subscriber must have made 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.
This promotion expired on January 31, 2001.
During July 2000, we announced the commencement of our new Digital
Dynamite promotion. The Digital Dynamite plans offer four choices to consumers,
ranging from the use of one EchoStar receiver system and our America's Top 100
CD programming package for $35.99 per month, to providing consumers two EchoStar
receiver systems and our America's Top 150 programming package for $49.99 per
month. With each plan, consumers receive in-home-service, must agree to a
one-year commitment and incur a one-time set-up fee of $49.99, which includes
the first month's programming payment.
During February 2001, we announced our Free Now promotion offering all
new subscribers a free base-level EchoStar receiver system and free
installation. To be eligible for this program, a subscriber must provide a valid
major credit card and make a one-year commitment to subscribe to either our
America's Top 150 programming package or our America's Top 100 CD or DISH Latino
Dos programming package plus additional programming totaling at least $39.98 per
month. Although subscriber acquisition costs are materially higher under this
plan compared to historical promotions, customers under this plan generally are
expected to produce materially greater average revenue per subscriber than a
typical DISH Network subscriber. In addition, we believe that these customers
represent lower credit risk and therefore may be marginally less likely to
disconnect their service than other DISH Network subscribers. To the extent that
actual consumer participation levels exceed present expectations, subscriber
acquisition costs may increase. Although there can be no assurance as to the
ultimate duration of the Free Now promotion, we intend to continue it through at
least March 2001.
Under our free installation program all customers who purchase an
EchoStar receiver system from January 2000 through April 2000, from May 24, 2000
to July 31, 2000 and from September 15, 2000 to March 31, 2001, are eligible to
receive a free professional installation. The free installation program was
responsible, in part, for the strong subscriber growth during the first half of
2000.
We subsidize the cost and installation of EchoStar receiver systems in
order to attract new DISH Network subscribers. There is no clear industry
standard used in the calculation of subscriber acquisition costs. Our subscriber
acquisition costs include subscriber promotion subsidies - promotional DTH
equipment, subscriber promotion subsidies - other and DISH Network acquisition
marketing expenses. During the year ended December 31, 2000, our subscriber
acquisition costs totaled approximately $1.155 billion, or approximately $452
per new subscriber activation. Since we retain ownership of the equipment,
amounts capitalized under our Digital Dynamite Plan are not included in our
calculation of these subscriber acquisition costs. Comparatively, our subscriber
acquisition costs during the year ended December 31, 1999 totaled $729 million,
or approximately $385 per new subscriber activation. The increase in our
subscriber acquisition expenses, on a per new subscriber activation basis,
principally resulted from the impact of several marketing promotions to acquire
new subscribers, including most significantly our free installation offer which
was reinstated during September 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 2001 will remain in a range consistent with
our 2000 average of approximately $452 per new subscriber activation.
6
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 Free Now program, or introduce 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 $250 million during the year ended December 31, 2000, an
increase of $100 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 the years ended December 31, 2000 and 1999. Although we expect
G&A expenses as a percentage of total revenue to remain near the current level
or decline modestly in future periods, this expense to revenue ratio could
increase.
Non-cash, Stock-based Compensation. During 1999, we adopted an
incentive plan which provided certain key employees 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
years ended December 31, 2000 and 1999 we recognized $51 million and $61
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:
DECEMBER 31,
1999 2000
-------- --------
Customer service center and other.......................... $ 4,328 $ 1,744
Satellite and transmission................................. 2,308 3,061
General and administrative................................. 54,424 46,660
-------- --------
Total non-cash, stock-based compensation................ $ 61,060 $ 51,465
======== ========
Pre-Marketing Cash Flow. Pre-marketing cash flow is comprised of EBITDA
plus total marketing expenses. Pre-marketing cash flow was $971 million during
the year ended December 31, 2000, an increase of 75% compared to the same period
in 1999. Our pre-marketing cash flow as a percentage of total revenue was 36% in
2000 compared to 35% in 1999. We believe that pre-marketing cash flow can be a
useful measure of operating efficiency for companies in the DBS industry. While
there can be no assurance, we expect that pre-marketing cash flow as a
percentage of total revenue will continue to improve, and will approach 40%
during 2001.
Earnings Before Interest, Taxes, Depreciation and Amortization. EBITDA
is defined as operating income (loss) plus depreciation and amortization, and
non-cash, stock-based compensation. EBITDA was negative $187 million during the
year ended December 31, 2000 compared to negative $173 million during the same
period in 1999. This decline in EBITDA principally resulted from an increase in
DISH Network marketing expenses primarily resulting from increased subscriber
additions. Our calculation of EBITDA for the years ended December 31, 2000 and
1999 does not include approximately $51 million and $61 million, respectively,
of non-cash compensation expense resulting from post-grant appreciation of
employee stock options. While there can be no assurance, we expect to achieve
positive EBITDA for the year ended December 31, 2001. As previously discussed,
to the extent we expand our current marketing promotions and our subscriber
acquisition costs materially increase, our EBITDA results will be negatively
impacted because subscriber acquisition costs are generally expensed as
incurred.
It is important to note that EBITDA and pre-marketing cash flow do not
represent cash provided or used by operating activities. EBITDA and
pre-marketing cash flow should not be considered in isolation or as a substitute
for measures of performance prepared in accordance with generally accepted
accounting principles.
7
Depreciation and Amortization. Depreciation and amortization expenses
aggregated $185 million during the year ended December 31, 2000, a $72 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
EchoStar VI in October 2000 and other depreciable assets placed in service
during 2000 and late 1999.
Other Income and Expense. Other expense, net, totaled $226 million
during the year ended December 31, 2000, an increase of $49 million compared to
the same period in 1999. This increase resulted from our equity in the loss of
StarBand, as well as an increase in interest expense as a result of the issuance
of our 10 3/8% Senior Notes due 2007 in September 2000. This increase in
interest expense was partially offset by an increase in interest income.
Year Ended December 31, 1999 compared to the year ended December 31, 1998.
Revenue. Total revenue for the year ended December 31, 1999 was $1.603
billion, an increase of $620 million compared to total revenue for the year
ended December 31, 1998 of $983 million. The increase in total revenue was
primarily attributable to DISH Network subscriber growth.
DISH Network subscription television services revenue totaled $1.344
billion for the year ended December 31, 1999, an increase of $675 million
compared to the same period in 1998. This increase was directly attributable to
the increase in the number of DISH Network subscribers and higher average
revenue per subscriber. Average DISH Network subscribers for the year ended
December 31, 1999 increased approximately 85% compared to the same period in
1998. As of December 31, 1999, we had approximately 3.4 million DISH Network
subscribers compared to 1.9 million at December 31, 1998. Monthly revenue per
subscriber was approximately $42.71 during the year ended December 31, 1999 and
approximated $39.25 during the same period during 1998. DISH Network
subscription television services revenue principally consists of revenue from
basic, premium and pay-per-view subscription television services.
For the year ended December 31, 1999, DTH equipment sales and
integration services totaled $184 million, a decrease of $72 million compared to
the same period during 1998. 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 expected
decrease in DTH equipment sales and integration services revenue was primarily
attributable to a decrease in demand combined with a decrease in the sales price
of digital set-top boxes attributable to increased competition.
Satellite services revenue totaled $41 million during 1999, an increase
of $19 million as compared to the same period during 1998. These revenues
principally include fees charged to content providers for signal carriage and
revenues earned from business television, or BTV customers. The increase in
satellite services revenue was primarily attributable to increased BTV revenue
due to the addition of new full-time BTV customers.
DISH Network Operating Expenses. DISH Network operating expenses
totaled $733 million during 1999, an increase of $338 million or 85%, compared
to the same period in 1998. The increase in DISH Network operating expenses was
consistent with, and primarily attributable to, the increase in the number of
DISH Network subscribers. DISH Network operating expenses represented 55% and
59% of subscription television services revenue during the years ended December
31, 1999 and 1998, respectively.
Subscriber-related expenses totaled $575 million during 1999, an
increase of $278 million compared to the same period in 1998. Such expenses,
which include programming expenses, copyright royalties, residuals payable to
retailers and distributors, and billing, lockbox and other variable subscriber
expenses, represented 43% of subscription television services revenues during
the year ended December 31, 1999 compared to 44% during the same period in 1998.
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
$117 million during 1999, an increase of $45 million as compared to the same
period in 1998. The increase in customer service center
8
and other expenses resulted from increased personnel and telephone expenses to
support the growth of the DISH Network. Customer service center and other
expenses totaled 9% of subscription television services revenue during 1999, as
compared to 11% during the same period in 1998.
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 $41 million during 1999, a $15 million increase
compared to the same period in 1998. This increase resulted from higher
satellite and other digital broadcast center operating expenses due to an
increase in the number of operational satellites. Satellite and transmission
expenses totaled 3% and 4% of subscription television services revenue during
the year ended December 31, 1999 and 1998, respectively.
Cost of sales - DTH equipment and Integration Services. Cost of sales -
DTH equipment and integration services totaled $148 million during 1999, a
decrease of $25 million compared to the same period in 1998. 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. Cost of sales - DTH equipment and integration services
represented 81% and 68% of DTH equipment revenue, during the years ended
December 31, 1999 and 1998, respectively. The lower margin was principally
attributable to a $16.6 million loss provision primarily for component parts and
purchase commitments related to our first generation model 7100 set-top boxes,
for which production has been suspended in favor of our second generation model
7200 set-top boxes. The write-off partially offset the expected decrease in cost
of sales - DTH equipment and integration services attributable to a decrease in
demand combined with increased competition.
Marketing Expenses. Marketing expenses totaled $727 million during
1999, an increase of $406 million compared to the same period in 1998. The
increase in marketing expenses was primarily attributable to an increase in
subscriber promotion subsidies. Subscriber promotion subsidies - promotional DTH
equipment includes the cost related to EchoStar receiver systems distributed to
retailers and other distributors of our equipment. Subscriber promotion
subsidies - other includes net costs related to our free installation promotion
and other promotional incentives. Advertising and other expenses totaled $65
million and $48 million during the years ended December 31, 1999 and 1998,
respectively.
During 1999, our total subscriber acquisition costs, inclusive of
acquisition marketing expenses, totaled approximately $729 million, or
approximately $385 per new subscriber activation. Comparatively, our subscriber
acquisition costs during the year ended December 31, 1998, inclusive of
acquisition marketing expenses and deferred subscriber acquisition costs,
totaled $317 million, or approximately $285 per new subscriber activation. The
increase in our subscriber acquisition costs, on a per new subscriber activation
basis, principally resulted from the introduction of several aggressive
marketing promotions to acquire new subscribers.
General and Administrative Expenses. General and administrative
expenses totaled $150 million during 1999, an increase of $53 million as
compared to the same period in 1998. The increase in G&A expenses was
principally attributable to increased personnel expenses to support the growth
of the DISH Network. G&A expenses as a percentage of total revenue increased to
9% during the year ended December 31, 1999 compared to 10% during the same
period in 1998.
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 period. Accordingly, during the year ended
December 31, 1999 we recognized $61 million under this performance-based plan.
Pre-Marketing Cash Flow. Pre-marketing cash flow is comprised of EBITDA
plus total marketing expenses. Pre-marketing cash flow was $554 million during
the year ended December 31, 1999, an increase of 85% compared to the same period
in 1998. Our pre-marketing cash flow as a percentage of total revenue was 35% in
1999 compared to 31% in 1998. We believe that pre-marketing cash flow can be a
useful measure of operating efficiency for companies in the DBS industry.
9
Earnings Before Interest, Taxes, Depreciation and Amortization. EBITDA
is defined as operating income (loss) plus depreciation and amortization, and
non-cash, stock-based compensation. EBITDA was negative $173 million during the
year ended December 31, 1999 compared to negative $20 million during the same
period in 1998. EBITDA, as adjusted to exclude amortization of subscriber
acquisition costs, was negative $173 million for the year ended December 31,
1999 compared to negative $39 million for the same period in 1998. This decline
in EBITDA principally resulted from an increase in DISH Network operating and
marketing expenses. Our calculation of EBITDA for the year ended December 31,
1999 does not include approximately $61 million of non-cash compensation expense
resulting from post-grant appreciation of stock options granted to employees.
It is important to note that EBITDA and pre-marketing cash flow do not
represent cash provided or used by operating activities. EBITDA and
pre-marketing cash flow 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 $113 million during 1999, a $10 million increase compared to the same
period in 1998, during which subscriber acquisition costs were amortized.
Commencing October 1997, we instead expensed all of these costs at the time of
sale. The increase in depreciation and amortization expenses principally
resulted from an increase in depreciation related to the commencement of
operation of EchoStar IV in August of 1998, the commencement of operation of
EchoStar V in November 1999 and other depreciable assets placed in service
during 1999, partially offset by subscriber acquisition costs becoming fully
amortized during the third quarter of 1998.
Other Income and Expense. Other expense, net totaled $177 million
during 1999, an increase of $39 million compared to the same period in 1998.
This increase resulted from an increase in interest expense. In January 1999, we
refinanced our outstanding 12 1/2% Senior Secured Notes due 2002 issued in June
1997, our 12 7/8% Senior Secured Discount Notes due 2004 issued in 1994, and our
13 1/8% Senior Secured Discount Notes due 2004 issued in 1996 at more favorable
interest rates and terms. In connection with the refinancing, we consummated an
offering of 9 1/4% Senior Notes due 2006 and 9 3/8% Senior Notes due 2009,
referred to herein as the 9 1/4% Seven Year Notes and 9 3/8% Ten Year Notes.
Although the 9 1/4% Seven Year Notes and 9 3/8% Ten Year Notes have lower
interest rates than the debt securities we repurchased, interest expense
increased by approximately $34 million because we raised additional debt to
cover tender premiums and consent and other fees related to the refinancing.
Extraordinary Charge for Early Retirement of Debt. In connection with
the January 1999 refinancing, we recognized an extraordinary loss of $269
million comprised of debt costs, discounts, tender costs, and premiums paid over
the accreted values of the debt retired.
LIQUIDITY AND CAPITAL RESOURCES
Cash Sources
Since inception, we have financed the development of our EchoStar DBS
system and the related commercial introduction of the DISH Network service
primarily through the sale of equity and debt securities and cash from
operations. From May 1994 through December 31, 2000, we have raised total gross
cash proceeds of approximately $249 million from the sale of our equity
securities and as of December 31, 2000, we had approximately $4.0 billion of
outstanding long-term debt (including current portion).
On September 25, 2000, our wholly-owned subsidiary, EchoStar Broadband
Corporation, sold $1 billion principal amount of 10 3/8% Senior Notes due 2007.
The proceeds of these notes will be used primarily by our subsidiaries for the
construction and launch of additional satellites, strategic acquisitions and
other general working capital purposes.
As of December 31, 2000, our unrestricted cash, cash equivalents and
marketable investment securities totaled $1.464 billion compared to $1.254
billion as of December 31, 1999. For the years ended December 31, 2000, 1999 and
1998, we reported net cash flows from operating activities of negative $119
million, negative $59 million and negative $17 million, respectively. The
increase in net cash flow used in operating activities reflects, among other
things, the
10
significant increase in subscriber acquisition costs associated with our rapid
subscriber growth and our "free installation" promotion.
We expect that our future working capital, capital expenditure and debt
service requirements will be satisfied primarily from existing cash and
investment balances and cash generated from operations. Our ability to generate
positive future operating and net cash flows is dependent upon our ability to
continue to expand our DISH Network subscriber base, retain existing DISH
Network subscribers, and our ability to grow our ETC and Satellite Services
businesses. There can be no assurance that we will be successful in achieving
our goals. The amount of capital required to fund our 2001 working capital and
capital expenditure needs will vary, depending, among other things, on the rate
at which we acquire new subscribers and the cost of subscriber acquisition. Our
working capital and capital expenditure requirements could increase materially
in the event of increased competition for subscription television customers,
significant satellite failures, or in the event of a general economic downturn,
among other factors. These factors could require that we raise additional
capital in the future.
Subscriber Turnover
Our churn for the year ended December 31, 2000 was consistent with our
churn for the same period in 1999. We believe that our percentage churn
continues to be lower than satellite and cable industry averages. While we have
successfully managed churn within a narrow range historically, our maturing
subscriber base, a slowing economy, the effects of rapid growth, bounty programs
offered by competitors and other factors could cause future increases in churn.
Further, impacts from our litigation with the networks in Miami, new FCC rules
governing the delivery of superstations and other factors, could cause us to
terminate delivery of distant network channels and superstations to a material
portion of our subscriber base, which could cause many of those customers to
cancel their subscription to our other services. Any such terminations could
result in a small reduction in average monthly revenue per subscriber and could
result in increased churn. While there can be no assurance, notwithstanding the
issues discussed above we have and expect to be able to continue to manage churn
below industry averages during 2001.
Subscriber Acquisition Costs
As previously described, we subsidize the cost and installation of
EchoStar receiver systems in order to attract new DISH Network subscribers. Our
average subscriber acquisition costs were $452 per new subscriber activation
during the year ended December 31, 2000. Since we retain ownership of the
equipment, amounts capitalized under our Digital Dynamite Plan are not included
in our calculation of these subscriber acquisition costs. 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 2001 will
remain in a range consistent with our 2000 average of approximately $452 per new
subscriber activation. Our subscriber acquisition costs, both in the aggregate
and on a per new subscriber activation basis, may materially increase to the
extent that we continue or expand our Free Now promotion, or introduce other
more aggressive promotions if we determine that they are necessary to respond to
competition, or for other reasons.
Funds necessary to meet subscriber acquisition costs will be satisfied
from existing cash and investment balances to the extent available. We may,
however, be required to raise additional capital in the future to meet these
requirements. If we were required to raise capital today, a variety of debt and
equity funding sources would likely be available to us. However, there can be no
assurance that additional financing will be available on acceptable terms, or at
all, if needed in the future.
Digital Dynamite
During July 2000, we announced the commencement of our new Digital
Dynamite promotion. The Digital Dynamite plans offer four choices to consumers,
ranging from the use of one EchoStar receiver system and our America's Top 100
CD programming package for $35.99 per month, to providing consumers two EchoStar
receiver systems and our America's Top 150 programming package for $49.99 per
month. With each plan, consumers receive in-home-service, must agree to a
one-year commitment and incur a one-time set-up fee of $49.99, which includes
the first month's programming payment. Our Digital Dynamite promotion allows us
to capitalize and depreciate over 4 years equipment costs that would otherwise
be expensed at the time of sale, but also results in increased capital
11
expenditures. Capital expenditures under our Digital Dynamite promotion totaled
approximately $65.4 million for the year ended December 31, 2000.
Conditional Access System
The access control system is central to the security network that
prevents unauthorized viewing of programming. Theft of cable and satellite
programming has been widely reported and our signal encryption has been pirated
and could be further compromised in the future. If other measures are not
successful, it could be necessary to replace the credit card size card that
controls the security of each consumer set top box at a material cost to us.
Intellectual Property
Many entities, including some of our competitors, now have and may in
the future obtain patents and other intellectual property rights that cover or
affect products or services directly or indirectly related to those that we
offer. In general, if a court determines that one or more of our products
infringes on intellectual property held by others, we would be required to cease
developing or marketing those products, to obtain licenses to develop and market
those products from the holders of the intellectual property, or to redesign
those products in such a way as to avoid infringing the patent claims. Various
parties have asserted patent and other intellectual property rights with respect
to components within our direct broadcast satellite system. Certain of these
parties have filed suit against us, including Starsight, Superguide, and IPPV
Enterprises, as previously described. We cannot be certain that these persons do
not own the rights they claim, that our products do not infringe on these
rights, that we would be able to obtain licenses from these persons on
commercially reasonable terms or, if we were unable to obtain such licenses,
that we would be able to redesign our products to avoid infringement.
Obligations and Future Capital Requirements
Semi-annual cash debt service of approximately $94 million related to
our 9 1/4% Senior Notes due 2006 (Seven Year Notes) and our 9 3/8% Senior Notes
due 2009 (Ten Year Notes), is payable in arrears on February 1 and August 1 each
year. Semi-annual cash debt service requirements of approximately $24 million
related to our 4 7/8% Convertible Subordinated Notes due 2007 is payable in
arrears on January 1 and July 1 of each year, commencing July 1, 2000.
Semi-annual cash debt service of approximately $52 million related to our
10 3/8% Senior Notes due 2007 is payable in arrears on April 1 and October 1 of
each year, commencing April 1, 2001. There are no scheduled principal payment or
sinking fund requirements prior to maturity of any of these notes.
The indentures related to our 9 1/4% Senior Notes due 2006 (the "Seven
Year Notes") and our 9 3/8% Senior Notes due 2009 (the "Ten Year Notes")
(collectively, the "Seven and Ten Year Notes Indentures") contain restrictive
covenants that require us to maintain satellite insurance with respect to at
least half of the satellites we own. Insurance coverage is therefore required
for at least three of our six satellites currently in orbit. We have procured
normal and customary launch insurance for EchoStar VI. This launch insurance
policy provides for insurance of $225.0 million. The EchoStar VI launch
insurance policy expires in July 2001. We are currently self-insuring EchoStar
I, EchoStar II, EchoStar III, EchoStar IV and EchoStar V. During 2000, to
satisfy insurance covenants related to the outstanding EchoStar DBS senior
notes, we reclassified the depreciated cost of two of our satellites from cash
and cash equivalents to cash reserved for satellite insurance on our balance
sheet. As of December 31, 2000, cash reserved for satellite insurance totaled
approximately $82 million. The reclassifications will continue until such time,
if ever, as the insurers are again willing to insure our satellites on
commercially reasonable terms.
We utilized $91 million of satellite vendor financing for our first
four satellites. As of December 31, 2000, approximately $25 million of that
satellite vendor financing remained outstanding. The satellite vendor financing
bears interest at 8 1/4% and is payable in equal monthly installments over five
years following launch of the satellite to which it relates. A portion of the
contract price with respect to EchoStar VII is payable over a period of 13 years
following launch with interest at 8%, and a portion of the contract price with
respect to EchoStar VIII and EchoStar IX is payable following launch with
interest at 8%. Those in orbit payments are contingent on the continued health
of the satellite.
12
Dividends on our 6 3/4% Series C Cumulative Convertible Preferred Stock
began to accrue on November 2, 1999. Holders of the Series C Preferred Stock are
entitled to receive cumulative dividends at an annual rate of 6 3/4% of the
Liquidation Preference of $50 per share. Dividends are payable quarterly in
arrears, commencing February 1, 2000, when, as, and if declared by our Board of
Directors. All accumulated and unpaid dividends may, at our option, be paid in
cash, Class A common stock, or a combination thereof upon conversion or
redemption.
During 2001, we anticipate total capital expenditures of between
$600-$900 million depending upon the strength of the economy and other factors.
We expect approximately 40% of that amount to be utilized for satellite
construction and approximately 60% for EchoStar receiver systems in connection
with our Digital Dynamite Plan and for general corporate expansion. Our
anticipated capital expenditures related to the Digital Dynamite promotion may
materially increase to the extent this promotion is successful and to the extent
that we continue or expand our Digital Dynamite promotion.
In addition to our DBS business plan, we have licenses, or applications
pending with the FCC, for a two satellite FSS Ku-band satellite system, a two
satellite FSS Ka-band satellite system, and a proposed modification thereof and
a 6-satellite Low Earth Orbit Mobile system. We will need to raise additional
capital to fully construct these satellites. During February 2000, we announced
agreements for the construction and delivery of three new satellites. Two of
these satellites, EchoStar VII and EchoStar VIII, will be advanced, high-powered
DBS satellites. The third satellite, EchoStar IX, will be a hybrid Ku/Ka-band
satellite.
During November 2000, one of our wholly owned subsidiaries purchased a
49.9% interest in VisionStar, Inc. VisionStar holds an FCC license, and is
constructing a Ka-band satellite, to launch into the 113 W.L. orbital slot.
Together with VisionStar we have requested FCC approval to acquire control over
VisionStar by increasing our ownership of VisionStar to 90%, for a total
purchase price of approximately $2.8 million. We have also provided loans to
VisionStar totaling less than $10 million to date for the construction of their
satellite and expect to provide additional funding to VisionStar in the future.
We are not obligated to finance the full remaining cost to construct and launch
the VisionStar satellite, but VisionStar's FCC license currently requires
construction of the satellite to be completed by April 30, 2002 or the license
could be revoked. We currently expect to continue to fund loans and equity
contributions for construction of the satellite in the near term from cash on
hand, and expect that we may spend approximately $79.5 million during 2001 for
that purpose subject to, among other things, FCC action. In the future we may
fund construction, launch and insurance of the satellite through cash from
operations, public or private debt or equity financing, joint ventures with
others, or from other sources.
We expect that our future working capital, capital expenditure and debt
service requirements will be satisfied from existing cash and investment
balances, and cash generated from operations. Our ability to generate positive
future operating and net cash flows is dependent, among other things, upon our
ability to retain existing DISH Network subscribers, our ability to manage the
growth of our subscriber base, and our ability to grow our ETC and Satellite
Services businesses. During 2000, subscriber growth was strong. To the extent
future subscriber growth exceeds our expectations, it may be necessary for us to
raise additional capital to fund increased working capital requirements. There
may be a number of other factors, some of which are beyond our control or
ability to predict, that could require us to raise additional capital. These
factors include unexpected increases in operating costs and expenses, a defect
in or the loss of any satellite, or an increase in the cost of acquiring
subscribers due to additional competition, among other things. If cash generated
from our operations is not sufficient to meet our debt service requirements or
other obligations, we would be required to obtain cash from other financing
sources. If we were required to raise capital today a variety of debt and equity
funding sources would likely be available to us. However, there can be no
assurance that such financing would be available on terms acceptable to us, or
if available, that the proceeds of such financing would be sufficient to enable
us to meet all of our obligations.
EFFECTS OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 or SAB 101, "Views on Selected Revenue Recognition
Issues." SAB 101 provides guidance on applying generally accepted accounting
principles to selected revenue recognition issues. The provisions of SAB 101 and
certain related EITF consensuses were required to be adopted in the quarter
ended December 31, 2000 retroactive to January 1, 2000, with any cumulative
effect as of January 1, 2000 reported as the cumulative effect of a change in
accounting principle. Our adoption of SAB 101 resulted in no recognition of a
cumulative effect of a change in accounting principle.
13
SEASONALITY
Our revenues vary throughout the year. As is typical in the
subscription television service industry, our first half of the year generally
produces lower new subscriber revenues than the second half of the year. Our
operating results in any period may be affected by the incurrence of advertising
and promotion expenses that do not necessarily produce commensurate revenues in
the short-term until the impact of such advertising and promotion is realized in
future periods.
INFLATION
Inflation has not materially affected our operations during the past
three years. We believe that our ability to increase the prices charged for our
products and services in future periods will depend primarily on competitive
pressures. We do not have any material backlog of our products.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
MARKET RISKS ASSOCIATED WITH FINANCIAL INSTRUMENTS
As of December 31, 2000, our unrestricted cash, cash equivalents and
marketable investment securities had a fair value of $1.464 billion. Of that
amount, a total of $1.374 billion was invested in: (a) cash; (b) debt
instruments of the U.S. Government and its agencies; (c) commercial paper with
an average maturity of less than one year and rated in one of the four highest
rating categories by at least two nationally recognized statistical rating
organizations; and (d) instruments with similar risk characteristics to the
commercial paper described above. The primary purpose of these investing
activities has been to preserve principal until the cash is required to fund
operations. Consequently, the size of this portfolio fluctuates significantly as
cash is raised and used in our business.
The value of certain of the investments in this portfolio can be
impacted by, among other things, the risk of adverse changes in securities and
economic markets generally, as well as the risks related to the performance of
the companies whose commercial paper and other instruments we hold. However, the
high quality of these investments (as assessed by independent rating agencies),
reduces these risks. The value of these investments can also be impacted by
interest rate fluctuations. At December 31, 2000, all of our investments in this
category were in fixed rate instruments or money market type accounts. While an
increase in interest rates would ordinarily adversely impact the fair value of
fixed rate investments, we normally hold these investments to maturity.
Consequently, neither interest rate fluctuations nor other market risks
typically result in significant gains or losses to this portfolio. A decrease in
interest rates has the effect of reducing our future annual interest income from
this portfolio, since funds would be re-invested at lower rates as the
instruments mature. Over time, any net percentage decrease in interest rates
could be reflected in a corresponding net percentage decrease in our interest
income. During 1999 and 2000, the impact of interest rate fluctuations, changed
business prospects and all other factors did not have a material impact on the
fair value of the portfolio, or on our income derived from this portfolio.
We also invest in debt and equity of public and private companies for
strategic business purposes. We had strategic debt and equity investments
totaling approximately $3.9 million at December 31, 1999. As of December 31,
2000, we held strategic debt and equity investments with a fair value of
approximately $90 million. We acquired stock in one of those companies, OpenTV,
in connection with establishment of a strategic relationship which did not
involve the investment of cash by us. None of these investments accounted for
more than 40% of the total fair value of the portfolio. We may make additional
strategic investments in other debt and equity securities in the future.
The fair value of our strategic debt investments can be impacted by
interest rate fluctuations. Absent the effect of other factors, a hypothetical
10% increase in LIBOR would result in a decrease in the fair value of our
investments in these debt instruments of approximately $2 million. The fair
value of our strategic debt and equity investments can also be significantly
impacted by the risk of adverse changes in securities markets generally, as well
as risks related to the performance of the companies whose securities we have
invested in, risks associated with specific industries, and other factors. These
investments are subject to significant fluctuations in fair market value due to
the volatility of the securities markets and of the underlying businesses. A
hypothetical 30% adverse change in the price of our public strategic debt and
equity investments would result in approximately a $9 million decrease in the
fair value of that portfolio.
14
In addition to the $1.464 billion, we have made strategic equity
investments in Wildblue Communications, StarBand Communications, VisionStar,
Inc. and Replay TV totaling approximately $110 million. The securities of these
companies are not publicly traded. StarBand recently announced that it was
canceling its planned initial public stock offering. Our ability to create
realizable value for our strategic investments in companies that are not public
is dependent on the success of their business plans. Among other things, there
is relatively greater risk that those companies may not be able to raise
sufficient capital to fully finance their business plans. Since private markets
are not as liquid as public markets, there is also increased risk that we will
not be able to sell these investments, or that when we desire to sell them that
we will be able to obtain full value for them.
We currently have accumulated net unrealized losses on certain of our
investments as disclosed on our accompanying balance sheets. There can be no
assurance that the accumulated net unrealized losses will not increase or that
some or all of these losses will not have to be recorded as charges to earnings
in future periods. We have not used derivative financial instruments for
speculative purposes. We have not hedged or otherwise protected against the
risks associated with any of our investing or financing activities.
As of December 31, 2000, we estimated the fair value of our fixed-rate
debt and mortgages and other notes payable to be approximately $3.7 billion
using quoted market prices where available, or discounted cash flow analyses.
The fair value of our fixed rate debt and mortgages is affected by fluctuations
in interest rates. A hypothetical 10% decrease in assumed interest rates would
increase the fair value of our debt by approximately $196 million. To the extent
interest rates increase, our costs of financing would increase at such time as
we are required to refinance our debt.
15
EXHIBIT 99.5
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
All statements contained herein, as well as statements made in press
releases and oral statements that may be made by us or by officers, directors or
employees acting on our behalf, that are not statements of historical fact
constitute "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Such forward-looking statements
involve known and unknown risks, uncertainties and other factors that could
cause our actual results to be materially different from historical results or
from any future results expressed or implied by such forward-looking statements.
Among the factors that could cause our actual results to differ materially are
the following: a total or partial loss of one or more satellites due to
operational failures, space debris or otherwise; delays in the construction of
our seventh, eighth or ninth satellites; an unsuccessful deployment of future
satellites; inability to settle outstanding claims with insurers; a decrease in
sales of digital equipment and related services to international direct-to-home
service providers; a decrease in DISH Network subscriber growth; an increase in
subscriber turnover; an increase in subscriber acquisition costs; an inability
to obtain certain retransmission consents; our inability to retain necessary
authorizations from the FCC; an inability to obtain patent licenses from holders
of intellectual property or redesign our products to avoid patent infringement;
an increase in competition from cable as a result of digital cable or otherwise,
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 March 31, 2001 Compared to the Three Months Ended March 31,
2000.
Revenue. Total revenue for the three months ended March 31, 2001 was
$862 million, an increase of $296 million compared to total revenue for the
three months ended March 31, 2000 of $566 million. The increase in total revenue
was primarily attributable to DISH Network subscriber growth. We expect that our
revenues will continue to increase significantly as the number of DISH Network
subscribers increases.
DISH Network subscription television services revenue totaled $794
million for the three months ended March 31, 2001, an increase of $317 million
compared to the same period in 2000. 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 added approximately 460,000
net new subscribers for the three months ended March 31, 2001 compared to
approximately 455,000 net subscriber additions during the same period in 2000.
As of March 31, 2001, we had approximately 5.7 million DISH Network subscribers
compared to approximately 3.9 million at March 31, 2000, an increase of
approximately 48%. The 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. 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. While there can be no assurance, assuming the U.S.
economy continues to grow at a slow pace, we expect to add approximately 1.5 to
2.0 million net new subscribers during 2001, and to obtain a majority of all net
new DBS subscribers.
Monthly average revenue per subscriber was approximately $48.23 during
the three months ended March 31, 2001 and approximately $43.85 during the same
period in 2000. The increase in monthly average revenue
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - CONTINUED
per subscriber is primarily attributable to a $1.00 price increase in America's
Top 100 CD, our most popular programming package, during both May 2000 and
February 2001, the increased availability of local channels by satellite, the
successful introduction of our $39.99 per month America's Top 150 programming
package during April 2000 together with an increase in subscriber penetration in
our higher priced Digital Home Plans. While there can be no assurance, we expect
our moderate historical increases in revenue per subscriber to continue during
2001 and expect to reach monthly average revenue per subscriber of approximately
$50 by the end of December 2001.
For the three months ended March 31, 2001, DTH equipment sales and
integration services totaled $41 million, a decrease of $22 million compared to
the same period during 2000. 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 decrease
in DTH equipment sales and integration services revenue was primarily
attributable to a decrease in international demand for digital set-top boxes as
compared to the same period during 2000.
A significant portion of DTH equipment sales and integration services
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. While we have
binding purchase orders from both providers for 2001, we expect overall demand
for 2001 to be lower than the same period in 2000. As a result, we expect total
DTH equipment sales and integration services revenue to decrease in 2001
compared to 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.
In order, among other things, to commence compliance with the
injunction issued against us in our pending litigation with the four major
broadcast networks and their affiliate groups, we have terminated the delivery
of distant network channels to certain of our subscribers. Additionally, during
2000, the FCC issued rules which impair our ability to deliver certain
superstation channels to our customers. Those rules will increase the cost of
our delivery of superstations, and could require that we terminate the delivery
of certain superstations to a material portion of our subscriber base. In
combination, these terminations would result in a small reduction in average
monthly revenue per subscriber and could increase subscriber turnover. While
there can be no assurance, any such decreases could be offset by increases in
average monthly revenue per subscriber resulting from the delivery of local
network channels by satellite, and increases in other programming offerings.
DISH Network Operating Expenses. DISH Network operating expenses
totaled $390 million during the three months ended March 31, 2001, an increase
of $120 million or 44% compared to the same period in 2000. DISH Network
operating expenses represented 49% and 57% of subscription television services
revenue during the three months ended March 31, 2001 and 2000, respectively. The
increase in DISH Network operating expenses in total was consistent with, and
primarily attributable to, the increase in the number of DISH Network
subscribers. We expect to continue to control costs and create operating
efficiencies. While there can be no assurance, we expect operating expenses as a
percentage of subscription television services revenue to remain near current
levels during the remainder of 2001.
Subscriber-related expenses totaled $316 million during the three
months ended March 31, 2001, an increase of $114 million compared to the same
period in 2000. Such expenses, which include programming expenses, copyright
royalties, residuals currently payable to retailers and distributors, and
billing, lockbox and other variable subscriber expenses, represented 40% and 42%
of subscription television services revenues during the three months ended March
31, 2001 and 2000, respectively. Although we do not currently expect
subscriber-related expenses as a percentage of subscription television services
revenue to increase materially in future periods, there can be no assurance this
expense to revenue ratio will not materially increase.
Customer service center and other expenses principally consist of costs
incurred in the operation of our DISH Network customer service centers, such as
personnel and telephone expenses, as well as other operating expenses related to
our service and installation business. Customer service center and other
expenses totaled $65 million during the three months ended March 31, 2001, an
increase of $9 million as compared to the same period in 2000. The
2
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - CONTINUED
increase in customer service center and other expenses primarily resulted from
increased personnel and telephone expenses to support the growth of the DISH
Network and from operating expenses related to the expansion of our installation
and service business. Customer service center and other expenses totaled 8% of
subscription television services revenue during the three months ended March 31,
2001, as compared to 12% during the same period in 2000. The decrease in this
expense to revenue ratio primarily resulted from the on-going construction and
start-up costs of our fifth customer service center in Virginia and our sixth
customer service center in West Virginia during 2000. While there can be no
assurance, we expect these expenses in total, and as a percentage of
subscription television services revenue, to remain near current levels during
the remainder of 2001. We continue to work to automate simple phone responses,
and intend to increase internet based customer assistance in the future, in
order to better manage customer service costs.
Satellite and transmission expenses include expenses associated with
the operation of our digital broadcast center, contracted satellite telemetry,
tracking and control services, and commercial satellite in-orbit insurance
premiums. Satellite and transmission expenses totaled $9 million during the
three months ended March 31, 2001, a $3 million decrease compared to the same
period in 2000. This decrease resulted from the expiration of the commercial
in-orbit satellite insurance policies for EchoStar I, EchoStar II and EchoStar
III during July 2000. As discussed below, we are currently self-insuring these
satellites. Satellite and transmission expenses totaled 1% and 3% of
subscription television services revenue during the three months ended March 31,
2001 and 2000, respectively. We expect satellite and transmission expenses in
total and as a percentage of subscription television services revenue, to
increase in the future as additional satellites or digital broadcast centers are
placed in service and to the extent we successfully renegotiate commercial
in-orbit insurance.
Cost of sales - DTH equipment and Integration Services. Cost of sales -
DTH equipment and integration services totaled $29 million during the three
months ended March 31, 2001, a decrease of $17 million compared to the same
period in 2000. 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
decrease in cost of sales - DTH equipment and integration services is consistent
with the decrease in DTH equipment sales and integration services revenue. Cost
of sales - DTH equipment and integration services represented 70% and 74% of DTH
equipment revenue, during the three months ended March 31, 2001 and 2000,
respectively.
Marketing Expenses. We subsidize the cost and installation of EchoStar
receiver systems in order to attract new DISH Network subscribers. Consequently,
our subscriber acquisition costs are significant. Marketing expenses totaled
$300 million during the three months ended March 31, 2001, an increase of $27
million compared to the same period in 2000. The increase in marketing expenses
was primarily attributable to an increase in subscriber promotion subsidies.
Subscriber promotion subsidies - promotional DTH equipment includes the cost
related to EchoStar receiver systems distributed to retailers and other
distributors of our equipment. Subscriber promotion subsidies - other includes
net costs related to our free installation promotion and other promotional
incentives. Advertising and other expenses totaled $27 million and $23 million
during the three months ended March 31, 2001 and 2000, respectively.
During the three months ended March 31, 2001, our marketing promotions
included our Digital Home Plan, Free Now and a free installation program. Our
subscriber acquisition costs under these programs are significantly higher than
those under our marketing programs historically.
During July 2000, we announced the commencement of our new Digital
Dynamite promotion. This promotion was re-named the Digital Home Plan effective
February 1, 2001. The Digital Home Plan offers four choices to consumers,
ranging from the use of one EchoStar receiver system and our America's Top 100
CD programming package for $35.99 per month, to providing consumers two EchoStar
receiver systems and our America's Top 150 programming package for $49.99 per
month. With each plan, consumers receive in-home-service, must agree to a
one-year commitment and incur a one-time set-up fee of $49.99, which includes
the first month's programming payment.
During February 2001, we announced our Free Now promotion offering all
new subscribers a free base-level EchoStar receiver system and free
installation. To be eligible for this program, a subscriber must provide a valid
major credit card and make a one-year commitment to subscribe to either our
America's Top 150 programming package or
3
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - CONTINUED
our America's Top 100 CD or DISH Latino Dos programming package plus additional
programming totaling at least $39.98 per month. Subscriber acquisition costs are
materially higher under this plan compared to historical promotions. 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 Free Now promotion, we intend to continue it
through at least May 2001.
We subsidize the cost and installation of EchoStar receiver systems in
order to attract new DISH Network subscribers. There is no clear industry
standard used in the calculation of subscriber acquisition costs. Our subscriber
acquisition costs include subscriber promotion subsidies - promotional DTH
equipment, subscriber promotion subsidies - other and DISH Network acquisition
marketing expenses. During the three months ended March 31, 2001, our subscriber
acquisition costs totaled approximately $297 million, or approximately $432 per
new subscriber activation. Since we retain ownership of the equipment, amounts
capitalized under our Digital Home Plan are not included in our calculation of
these subscriber acquisition costs. Comparatively, our subscriber acquisition
costs during the three months ended March 31, 2000, prior to the introduction of
our Digital Home Plan, totaled $273 million, or approximately $467 per new
subscriber activation. The increase in our total subscriber acquisition expenses
principally resulted from strong DISH Network subscriber growth during the three
months ended March 31, 2001. 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 2001 will remain in a range consistent with our
2000 average of approximately $452 per new subscriber activation.
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 Free Now program, or introduce 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 $76 million during the three months ended March 31, 2001, an
increase of $20 million as compared to the same period in 2000. The increase in
G&A expenses was principally attributable to increased personnel expenses to
support the growth of the DISH Network. G&A expenses represented 9% and 10% of
total revenue during the three months ended March 31, 2001 and 2000,
respectively. Although we expect G&A expenses as a percentage of total revenue
to remain near the current level or decline modestly in future periods, this
expense to revenue ratio could increase.
Non-cash, Stock-based Compensation. During 1999, we adopted an
incentive plan which provided certain key employees with incentives including
stock options. The payment of these incentives was contingent upon our
achievement of certain financial and other goals. We met certain of these goals
during 1999. Accordingly, during 1999, we recorded approximately $179 million of
deferred compensation related to post-grant appreciation of stock options
granted pursuant to the 1999 incentive plan. The related deferred compensation
will be recognized over the five-year vesting period. Accordingly, during the
three months ended March 31, 2001 and 2000 we recognized $7 million and $14
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:
MARCH 31,
2000 2001
---------- ----------
Customer service center and other .............. $ 655 $ 233
Satellite and transmission ..................... 655 466
General and administrative ..................... 12,699 6,757
---------- ----------
Total non-cash, stock-based compensation .... $ 14,009 $ 7,456
========== ==========
4
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - CONTINUED
Pre-Marketing Cash Flow. Pre-marketing cash flow is comprised of EBITDA
plus total marketing expenses. Pre-marketing cash flow was $351 million during
the three months ended March 31, 2001, an increase of 89% compared to the same
period in 2000. Our pre-marketing cash flow as a percentage of total revenue was
approximately 40% during the three months ended March 31, 2001 compared to 33%
during the same period in 2000. We believe that pre-marketing cash flow can help
to measure of operating efficiency for companies in the DBS industry. While
there can be no assurance, we expect pre-marketing cash flow as a percentage of
total revenue to remain near the current level during the remainder of 2001.
Earnings Before Interest, Taxes, Depreciation and Amortization. EBITDA
is defined as operating income (loss), plus depreciation and amortization, and
non-cash, stock-based compensation. EBITDA was $51 million during the three
months ended March 31, 2001, compared to negative $88 million during the same
period in 2000. This improvement in EBITDA was directly attributable to the
increase in the number of DISH Network subscribers and higher average revenue
per subscriber, resulting in recurring revenue which was large enough to support
the cost of new and existing subscribers, together with the introduction of our
Digital Home Plan in July 2000. Our calculation of EBITDA for the three months
ended March 31, 2001 and 2000 does not include approximately $7 million and $14
million, respectively, of non-cash compensation expense resulting from
post-grant appreciation of employee stock options. While there can be no
assurance, we expect to continue to have positive EBITDA for the year ended
December 31, 2001. As previously discussed, to the extent we expand our current
marketing promotions and our subscriber acquisition costs materially increase,
our EBITDA results will be negatively impacted because subscriber acquisition
costs are generally expensed as incurred.
It is important to note that EBITDA and pre-marketing cash flow do not
represent cash provided or used by operating activities. EBITDA and
pre-marketing cash flow 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 $59 million during the three months ended March 31, 2001, a $19
million increase compared to the same period in 2000. The increase in
depreciation and amortization expenses principally resulted from an increase in
depreciation related to the commencement of operation of EchoStar VI in October
2000 and other depreciable assets placed in service during late 2000.
Other Income and Expense. Other expense, net, totaled $155 million
during the three months ended March 31, 2001, an increase of $112 million
compared to the same period in 2000. This increase primarily resulted from
impairment losses on marketable and non-marketable investment securities of
approximately $82 million, as discussed below, our equity in the loss of
affiliates, and from an increase in interest expense as a result of the issuance
of our 10 3/8% Senior Notes due 2007 in September 2000. This increase in
interest expense was partially offset by an increase in interest income.
LIQUIDITY AND CAPITAL RESOURCES
Cash Sources
As of March 31, 2001, our unrestricted cash, cash equivalents and
marketable investment securities totaled $1.295 billion compared to $1.464
billion as of December 31, 2000. For the three months ended March 31, 2001 and
2000, we reported net cash flows from operating activities of negative $20
million and negative $105 million, respectively. The decrease in net cash flow
used in operating activities reflects, among other things, an increase in the
number of DISH Network subscribers and higher average revenue per subscriber,
resulting in recurring revenue which is large enough to support the cost of new
and existing subscribers.
We expect that our future working capital, capital expenditure and debt
service requirements will be satisfied primarily from existing cash and
investment balances and cash generated from operations. Our ability to generate
positive future operating and net cash flows is dependent upon our ability to
continue to expand our DISH Network subscriber base, retain existing DISH
Network subscribers, and our ability to grow our ETC and Satellite Services
5
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - CONTINUED
businesses. There can be no assurance that we will be successful in achieving
our goals. The amount of capital required to fund our remaining 2001 working
capital and capital expenditure needs will vary, depending, among other things,
on the rate at which we acquire new subscribers and the cost of subscriber
acquisition. Our working capital and capital expenditure requirements could
increase materially in the event of increased competition for subscription
television customers, significant satellite failures, or in the event of a
general economic downturn, among other factors. These factors could require that
we raise additional capital in the future.
Subscriber Turnover
Our percentage churn for the three months ended March 31, 2001 was
generally consistent with our percentage churn for the same period in 2000. We
believe that our percentage churn continues to be lower than satellite and cable
industry averages. While we have successfully managed churn within a narrow
range historically, our maturing subscriber base, a slowing economy, the effects
of rapid growth, bounty programs offered by competitors and other factors could
cause future increases in churn. Further, we expect a temporary increase in our
percentage churn during the second quarter of 2001 due in part to price
increases in certain of our programming packages, which went into effect on
February 1, 2001. Finally, impacts from our litigation with the networks in
Miami, new FCC rules governing the delivery of superstations and other factors,
could cause us to terminate delivery of distant network channels and
superstations to a material portion of our subscriber base, which could cause
many of those customers to cancel their subscription to our other services. Any
such terminations could result in a small reduction in average monthly revenue
per subscriber and could result in an increase in our percentage churn. While
there can be no assurance, notwithstanding the issues discussed above we have
and expect to be able to continue to manage our percentage churn below industry
averages during the remainder of 2001.
Subscriber Acquisition Costs
As previously described, we subsidize the cost and installation of
EchoStar receiver systems in order to attract new DISH Network subscribers. Our
average subscriber acquisition costs were $432 per new subscriber activation
during the three months ended March 31, 2001. Since we retain ownership of the
equipment, amounts capitalized under our Digital Home Plan are not included in
our calculation of these subscriber acquisition costs. 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 2001 will remain in a
range consistent with our 2000 average of approximately $452 per new subscriber
activation. Our subscriber acquisition costs, both in the aggregate and on a per
new subscriber activation basis, may materially increase to the extent that we
continue or expand our Free Now promotion, or introduce other more aggressive
promotions if we determine that they are necessary to respond to competition, or
for other reasons.
Funds necessary to meet subscriber acquisition costs will be satisfied
from existing cash and investment balances to the extent available. We may,
however, be required to raise additional capital in the future to meet these
requirements. If we were required to raise capital today, a variety of debt and
equity funding sources would likely be available to us. However, there can be no
assurance that additional financing will be available on acceptable terms, or at
all, if needed in the future.
Digital Home Plan
During July 2000, we announced the commencement of our new Digital
Dynamite promotion, which was re-named the Digital Home Plan effective February
1, 2001. The Digital Home Plan offers four choices to consumers, ranging from
the use of one EchoStar receiver system and our America's Top 100 CD programming
package for $35.99 per month, to providing consumers two EchoStar receiver
systems and our America's Top 150 programming package for $49.99 per month. With
each plan, consumers receive in-home-service, must agree to a one-year
commitment and incur a one-time set-up fee of $49.99, which includes the first
month's programming payment. Our Digital Home Plan promotion allows us to
capitalize and depreciate over 4 years equipment costs that would otherwise be
expensed at the time of sale, but also results in increased capital
expenditures. Capital expenditures under our Digital Home Plan promotion totaled
approximately $62.7 million for the three months ended March 31, 2001.
6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - CONTINUED
Conditional Access System
The access control system is central to the security network that
prevents unauthorized viewing of programming. Theft of cable and satellite
programming has been widely reported and our signal encryption has been pirated
and could be further compromised in the future. Theft of our programming reduces
future potential revenue and increases our net subscriber acquisition costs. If
other measures are not successful, it could be necessary to replace the credit
card size card that controls the security of each consumer set top box at a
material cost to us.
Intellectual Property
Many entities, including some of our competitors, now have and may in
the future obtain patents and other intellectual property rights that cover or
affect products or services directly or indirectly related to those that we
offer. In general, if a court determines that one or more of our products
infringes on intellectual property held by others, we would be required to cease
developing or marketing those products, to obtain licenses to develop and market
those products from the holders of the intellectual property, or to redesign
those products in such a way as to avoid infringing the patent claims. Various
parties have asserted patent and other intellectual property rights with respect
to components within our direct broadcast satellite system. Certain of these
parties have filed suit against us, including Starsight, Superguide, and IPPV
Enterprises, as previously described. We cannot be certain that these persons do
not own the rights they claim, that our products do not infringe on these
rights, that we would be able to obtain licenses from these persons on
commercially reasonable terms or, if we were unable to obtain such licenses,
that we would be able to redesign our products to avoid infringement.
Obligations and Future Capital Requirements
Semi-annual cash debt service of approximately $94 million related to
our 9 1/4% Senior Notes due 2006 (Seven Year Notes) and our 9 3/8% Senior Notes
due 2009 (Ten Year Notes), is payable in arrears on February 1 and August 1 each
year. Semi-annual cash debt service requirements of approximately $24 million
related to our 4 7/8% Convertible Subordinated Notes due 2007 is payable in
arrears on January 1 and July 1 of each year. Semi-annual cash debt service of
approximately $52 million related to our 10 3/8% Senior Notes due 2007 is
payable in arrears on April 1 and October 1 of each year, commencing April 1,
2001. There are no scheduled principal payment or sinking fund requirements
prior to maturity of any of these notes.
The indentures related to our 9 1/4% Senior Notes due 2006 (the "Seven
Year Notes") and our 9 3/8% Senior Notes due 2009 (the "Ten Year Notes")
(collectively, the "Seven and Ten Year Notes Indentures") contain restrictive
covenants that require us to maintain satellite insurance with respect to at
least half of the satellites we own. Insurance coverage is therefore required
for at least three of our six satellites currently in orbit. We have procured
normal and customary launch insurance for EchoStar VI. This launch insurance
policy provides for insurance of $225.0 million. The EchoStar VI launch
insurance policy expires in July 2001. We are currently self-insuring EchoStar
I, EchoStar II, EchoStar III, EchoStar IV and EchoStar V. During 2000, to
satisfy insurance covenants related to the outstanding EchoStar DBS senior
notes, we reclassified the depreciated cost of two of our satellites from cash
and cash equivalents to cash reserved for satellite insurance on our balance
sheet. As of March 31, 2001, cash reserved for satellite insurance totaled
approximately $78 million. The reclassifications will continue until such time,
if ever, as the insurers are again willing to insure our satellites on
commercially reasonable terms. The amount of cash reserved for satellite
insurance will be increased by approximately $60 million in the event we have
not procured satellite insurance by July 2001. We believe we have in-orbit
satellite capacity sufficient to expeditiously recover transmission of most
programming in the event one of our in-orbit satellites was to fail. However,
the cash reserved for satellite insurance is not adequate to fund the
construction, launch and insurance for a replacement satellite in the event of a
complete loss of a satellite and programming continuity could not be assured in
the event of multiple satellite losses.
7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - CONTINUED
We utilized $91 million of satellite vendor financing for our first
four satellites. As of March 31, 2001, approximately $22 million of that
satellite vendor financing remained outstanding. The satellite vendor financing
bears interest at 8 1/4% and is payable in equal monthly installments over five
years following launch of the satellite to which it relates. A portion of the
contract price with respect to EchoStar VII is payable over a period of 13 years
following launch with interest at 8%, and a portion of the contract price with
respect to EchoStar VIII and EchoStar IX is payable following launch with
interest at 8%. Those in orbit payments are contingent on the continued health
of the satellite.
Dividends on our 6 3/4% Series C Cumulative Convertible Preferred Stock
began to accrue on November 2, 1999. Holders of the Series C Preferred Stock are
entitled to receive cumulative dividends at an annual rate of 6 3/4% of the
Liquidation Preference of $50 per share. Dividends are payable quarterly in
arrears, commencing February 1, 2000, when, as, and if declared by our Board of
Directors. All accumulated and unpaid dividends may, at our option, be paid in
cash, Class A common stock, or a combination thereof upon conversion or
redemption.
During the remainder of 2001, we anticipate total capital expenditures
of between $450-$750 million depending upon the strength of the economy and
other factors. We expect approximately 40% of that amount to be utilized for
satellite construction and approximately 60% for EchoStar receiver systems in
connection with our Digital Home Plan and for general corporate expansion. Our
anticipated capital expenditures related to the Digital Home Plan promotion may
materially increase to the extent this promotion is successful and to the extent
that we continue or expand our Digital Home Plan promotion.
In addition to our DBS business plan, we have licenses, or applications
pending with the FCC, for a two satellite FSS Ku-band satellite system and a two
satellite FSS Ka-band satellite system. We will need to raise additional capital
to fully construct these satellites. During February 2000, we announced
agreements for the construction and delivery of three new satellites. Two of
these satellites, EchoStar VII and EchoStar VIII, will be advanced, high-powered
DBS satellites. The third satellite, EchoStar IX, will be a hybrid Ku/Ka-band
satellite.
During November 2000, one of our wholly owned subsidiaries purchased a
49.9% interest in VisionStar, Inc. VisionStar holds an FCC license, and is
constructing a Ka-band satellite, to launch into the 113 W.L. orbital slot.
Together with VisionStar we have requested FCC approval to acquire control over
VisionStar by increasing our ownership of VisionStar to 90%, for a total
purchase price of approximately $2.8 million. We have also provided loans to
VisionStar totaling less than $10 million to date for the construction of their
satellite and expect to provide additional funding to VisionStar in the future.
We are not obligated to finance the full remaining cost to construct and launch
the VisionStar satellite, but VisionStar's FCC license currently requires
construction of the satellite to be completed by April 30, 2002 or the license
could be revoked. We currently expect to continue to fund loans and equity
contributions for construction of the satellite in the near term from cash on
hand, and expect that we may spend approximately $79.5 million during 2001 for
that purpose subject to, among other things, FCC action. In the future we may
fund construction, launch and insurance of the satellite through cash from
operations, public or private debt or equity financing, joint ventures with
others, or from other sources.
We expect that our future working capital, capital expenditure and debt
service requirements will be satisfied from existing cash and investment
balances, and cash generated from operations. Our ability to generate positive
future operating and net cash flows is dependent, among other things, upon our
ability to retain existing DISH Network subscribers, our ability to manage the
growth of our subscriber base, and our ability to grow our ETC and Satellite
Services businesses. During the first quarter of 2001, subscriber growth was
strong. To the extent future subscriber growth exceeds our expectations, it may
be necessary for us to raise additional capital to fund increased working
capital requirements. There may be a number of other factors, some of which are
beyond our control or ability to predict, that could require us to raise
additional capital. These factors include unexpected increases in operating
costs and expenses, a defect in or the loss of any satellite, or an increase in
the cost of acquiring subscribers due to additional competition, among other
things. If cash generated from our operations is not sufficient to meet our debt
service requirements or other obligations, we would be required to obtain cash
from other financing sources. If we were required to raise capital today a
variety of debt and equity funding sources would likely be available to us.
However, there can be no assurance that such financing would be available on
terms acceptable to us, or if available, that the proceeds of such financing
would be sufficient to enable us to meet all of our obligations.
8
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
MARKET RISKS ASSOCIATED WITH FINANCIAL INSTRUMENTS
As of March 31, 2001, our unrestricted cash, cash equivalents and
marketable investment securities had a fair value of $1.295 billion. Of that
amount, a total of $1.204 billion was invested in: (a) cash; (b) debt
instruments of the U.S. Government and its agencies; (c) commercial paper with
an average maturity of less than one year and rated in one of the four highest
rating categories by at least two nationally recognized statistical rating
organizations; and (d) instruments with similar risk characteristics to the
commercial paper described above. The primary purpose of these investing
activities has been to preserve principal until the cash is required to fund
operations. Consequently, the size of this portfolio fluctuates significantly as
cash is raised and used in our business.
The value of certain of the investments in this portfolio can be
impacted by, among other things, the risk of adverse changes in securities and
economic markets generally, as well as the risks related to the performance of
the companies whose commercial paper and other instruments we hold. However, the
high quality of these investments (as assessed by independent rating agencies),
reduces these risks. The value of these investments can also be impacted by
interest rate fluctuations. At March 31, 2001, all of our investments in this
category were in fixed rate instruments or money market type accounts. While an
increase in interest rates would ordinarily adversely impact the fair value of
fixed rate investments, we normally hold these investments to maturity.
Consequently, neither interest rate fluctuations nor other market risks
typically result in significant gains or losses to this portfolio. A decrease in
interest rates has the effect of reducing our future annual interest income from
this portfolio, since funds would be re-invested at lower rates as the
instruments mature. Over time, any net percentage decrease in interest rates
could be reflected in a corresponding net percentage decrease in our interest
income. During the three months ending March 31, 2000 and 2001, the impact of
interest rate fluctuations, changed business prospects and all other factors did
not have a material impact on the fair value of the portfolio, or on our income
derived from this portfolio.
We also invest in debt and equity of public and private companies for
strategic business purposes. As of March 31, 2001, we held strategic debt and
equity investments of public companies with a fair value of approximately $91
million. We acquired stock in one of those companies, OpenTV, in connection with
establishment of a strategic relationship which did not involve the investment
of cash by us. None of these investments accounted for more than 40% of the
total fair value of the portfolio. We may make additional strategic investments
in other debt and equity securities in the future.
The fair value of our strategic debt investments can be impacted by
interest rate fluctuations. Absent the effect of other factors, a hypothetical
10% increase in LIBOR would result in a decrease in the fair value of our
investments in these debt instruments of approximately $8 million. The fair
value of our strategic debt and equity investments can also be significantly
impacted by the risk of adverse changes in securities markets generally, as well
as risks related to the performance of the companies whose securities we have
invested in, risks associated with specific industries, and other factors. These
investments are subject to significant fluctuations in fair market value due to
the volatility of the securities markets and of the underlying businesses. A
hypothetical 10% adverse change in the price of our public strategic debt and
equity investments would result in approximately a $9.1 million decrease in the
fair value of that portfolio.
In accordance with generally accepted accounting principles, declines
in the market value of a marketable investment securities which are estimated to
be "other than temporary" must be recognized in the statement of operations,
thus establishing a new cost basis for such investment. We reviewed the fair
value of our marketable investment securities as of March 31, 2001 and
determined that some declines in market value have occurred which may be other
than temporary. As a result, we established a new cost basis for certain of
these investments, and accordingly reduced our previously recorded unrealized
loss and recorded a charge to earnings of approximately $32.4 million during the
three months ended March 31, 2001. We have not used derivative financial
instruments for speculative purposes. We have not hedged or otherwise protected
against the risks associated with any of our investing or financing activities.
9
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK - CONTINUED
In addition to the $1.295 billion, we have made strategic equity
investments in certain non-marketable investment securities including Wildblue
Communications, StarBand Communications, VisionStar, Inc. and Replay TV. The
original cost basis of our investments in these non-marketable investment
securities totaled approximately $116 million. The securities of these companies
are not publicly traded. Our ability to create realizable value for our
strategic investments in companies that are not public is dependent on the
success of their business plans. Among other things, there is relatively greater
risk that those companies may not be able to raise sufficient capital to fully
finance their business plans and ability to obtain sufficient capital to execute
their business plans. Since private markets are not as liquid as public markets,
there is also increased risk that we will not be able to sell these investments,
or that when we desire to sell them that we will be able to obtain full value
for them. StarBand and Wildblue recently cancelled their planned initial public
stock offerings. As a result of the cancellation of those offerings and other
factors, during the three months ended March 31, 2001, we recorded a
non-recurring charge of approximately $49.4 million to reduce the carrying value
of certain of our non-marketable investment securities to their estimated fair
values. Starband and Wildblue need to obtain significant additional capital in
the near term. Absent such funding, additional write-downs of our investments
could be necessary.
10
EXHIBIT 99.6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
All statements contained herein, as well as statements made in press
releases and oral statements that may be made by us or by officers, directors or
employees acting on our behalf, that are not statements of historical fact
constitute "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Such forward-looking statements
involve known and unknown risks, uncertainties and other factors that could
cause our actual results to be materially different from historical results or
from any future results expressed or implied by such forward-looking statements.
Among the factors that could cause our actual results to differ materially are
the following: a total or partial loss of one or more satellites due to
operational failures, space debris or otherwise; delays in the construction of
our seventh, eighth or ninth satellites; an unsuccessful deployment of future
satellites; inability to settle outstanding claims with insurers; a decrease in
sales of digital equipment and related services to international direct-to-home
service providers; a decrease in DISH Network subscriber growth; an increase in
subscriber turnover; an increase in subscriber acquisition costs; an inability
to obtain certain retransmission consents; our inability to retain necessary
authorizations from the FCC; an inability to obtain patent licenses from holders
of intellectual property or redesign our products to avoid patent infringement;
an increase in competition from cable as a result of digital cable or otherwise,
direct broadcast satellite, other satellite system operators, and other
providers of subscription television services; future acquisitions, business
combinations, strategic partnerships and divestitures; 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, 2001 Compared to the Three Months Ended June 30,
2000.
Revenue. Total revenue for the three months ended June 30, 2001 was
$966 million, an increase of $320 million compared to total revenue for the
three months ended June 30, 2000 of $646 million. The increase in total revenue
was primarily attributable to higher average revenue per subscriber and
continued 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 $883
million for the three months ended June 30, 2001, an increase of $328 million
compared to the same period in 2000. 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 higher average revenue per subscriber and continued DISH Network
subscriber growth. DISH Network added approximately 350,000 net new subscribers
for the three months ended June 30, 2001 compared to approximately 445,000 net
subscriber additions during the same period in 2000. The reduction in net new
subscribers for the quarter ended June 30, 2001 primarily resulted from
increased churn. As of June 30, 2001, we had approximately 6.07 million DISH
Network subscribers compared to approximately 4.3 million at June 30, 2000, an
increase of approximately 41%. 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. While there can be no assurance, assuming the U.S. economy continues
to grow at a slow pace, we expect to add approximately 1.5 to 1.75 million net
new subscribers during 2001, and to obtain a majority of all net new DBS
subscribers. This subscriber guidance has been refined from our previous
estimate of 1.5 to 2.0 million net new subscriber additions during 2001.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - CONTINUED
Monthly average revenue per subscriber was approximately $50.00 during
the three months ended June 30, 2001 and approximately $45.22 during the same
period in 2000. For the six months ended June 30, 2001, our monthly average
revenue per subscriber was approximately $49.00. The increase in monthly average
revenue per subscriber is primarily attributable to $1.00 price increases in
America's Top 100 CD, our most popular programming package, during both May 2000
and February 2001, the increased availability of local channels by satellite,
the successful introduction of our $39.99 per month America's Top 150
programming package during April 2000 together with an increase in subscriber
penetration in our higher priced Digital Home Plans. Anticipated programming
promotions may reduce monthly average revenue per subscriber for new subscriber
additions during the third quarter of 2001. Those reductions would also impact
monthly average revenue per subscriber in total during the third quarter.
For the three months ended June 30, 2001, DTH equipment sales and
integration services revenue totaled $47 million, a decrease of $13 million
compared to the same period during 2000. 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 decrease
in DTH equipment sales and integration services revenue was primarily
attributable to a decrease in demand for digital set-top boxes from our two
primary international customers as compared to the same period during 2000.
A significant portion of DTH equipment sales and integration services
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. While we have
binding purchase orders from both providers for 2001, we expect overall demand
for 2001 to be lower than the same period in 2000. As a result, we expect total
DTH equipment sales and integration services revenue to decrease in 2001
compared to 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.
In order, among other things, to comply with the injunction issued
against us in our pending litigation with the four major broadcast networks and
their affiliate groups, we may terminate the delivery of distant network
channels to certain of our subscribers. Additionally, during 2000, the FCC
issued rules which impair our ability to deliver certain superstation channels
to our customers. Those rules will increase the cost of our delivery of
superstations, and could require that we terminate the delivery of certain
superstations to a material portion of our subscriber base. Further, in the
event our EchoStar VII spot beam satellite is not delivered and launched in
accordance with contractual schedules, or for any other reason is not
operational by January 1, 2002, we could be required to temporarily terminate
delivery of local network channels in specific markets. Such terminations could
be necessary in order to comply with government imposed must carry obligations
to carry all channels in markets where popular channels are carried. In
combination, these terminations would result in a small reduction in average
monthly revenue per subscriber and could increase subscriber churn. 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.
DISH Network Operating Expenses. DISH Network operating expenses
totaled $437 million during the three months ended June 30, 2001, an increase of
$123 million or 39% compared to the same period in 2000. DISH Network operating
expenses represented 50% and 56% of subscription television services revenue
during the three months ended June 30, 2001 and 2000, respectively. The increase
in DISH Network operating expenses in total was consistent with, and primarily
attributable to, the increase in the number of DISH Network subscribers. We
expect to continue to control costs and create operating efficiencies. We would
expect operating expenses as a percentage of subscription television services
revenue to remain near current levels during the remainder of 2001, however
anticipated programming promotions could cause the percentage to increase.
Subscriber-related expenses totaled $359 million during the three
months ended June 30, 2001, an increase of $128 million compared to the same
period in 2000. Such expenses, which include programming expenses, copyright
royalties, residuals currently payable to retailers and distributors, and
billing, lockbox and other variable subscriber expenses, represented 41% and 42%
of subscription television services revenues during the three months
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - CONTINUED
ended June 30, 2001 and 2000, respectively. While there can be no assurance, we
expect subscriber-related expenses as a percentage of subscription television
services revenue to remain near current levels during the remainder of 2001.
Customer service center and other expenses principally consist of costs
incurred in the operation of our DISH Network customer service centers, such as
personnel and telephone expenses, as well as other operating expenses related to
our service and installation business. Customer service center and other
expenses totaled $70 million during the three months ended June 30, 2001, an
increase of $2 million as compared to the same period in 2000. The increase in
customer service center and other expenses primarily resulted from increased
personnel and telephone expenses to support the growth of the DISH Network and
from operating expenses related to the expansion of our installation and service
business. Customer service center and other expenses totaled 8% of subscription
television services revenue during the three months ended June 30, 2001, as
compared to 12% during the same period in 2000. The decrease in this expense to
revenue ratio primarily resulted from the on-going construction and start-up
costs of our fifth customer service center in Virginia and our sixth customer
service center in West Virginia during 2000. While there can be no assurance, we
expect these expenses in total, and as a percentage of subscription television
services revenue, to remain near current levels during the remainder of 2001.
These expenses and percentages could temporarily increase in the future as
additional infrastructure is added to meet future growth. We continue to work to
automate simple telephone responses, and intend to increase internet based
customer assistance in the future, in order to better manage customer service
costs.
Satellite and transmission expenses include expenses associated with
the operation of our digital broadcast center, contracted satellite telemetry,
tracking and control services, and commercial satellite in-orbit insurance
premiums. Satellite and transmission expenses totaled $9 million during the
three months ended June 30, 2001, a $5 million decrease compared to the same
period in 2000. This decrease resulted from the expiration of the commercial
in-orbit satellite insurance policies for EchoStar I, EchoStar II and EchoStar
III during July 2000. As discussed below, we are currently self-insuring these
satellites. Satellite and transmission expenses totaled 1% and 3% of
subscription television services revenue during the three months ended June 30,
2001 and 2000, respectively. We expect satellite and transmission expenses in
total and as a percentage of subscription television services revenue, to
increase in the future as additional satellites or digital broadcast centers are
placed in service and to the extent we successfully place commercial in-orbit
insurance.
Cost of sales - DTH equipment and Integration Services. Cost of sales -
DTH equipment and integration services totaled $31 million during the three
months ended June 30, 2001, a decrease of $15 million compared to the same
period in 2000. 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
decrease in cost of sales - DTH equipment and integration services is consistent
with the decrease in DTH equipment sales and integration services revenue. Cost
of sales - DTH equipment and integration services represented 66% and 77% of DTH
equipment revenue, during the three months ended June 30, 2001 and 2000,
respectively.
Marketing Expenses. We subsidize the cost and installation of EchoStar
receiver systems in order to attract new DISH Network subscribers. Consequently,
our subscriber acquisition costs are significant. Marketing expenses totaled
$254 million during the three months ended June 30, 2001 compared to $252
million for the same period in 2000. Subscriber promotion subsidies -
promotional DTH equipment includes the cost related to EchoStar receiver systems
distributed to retailers and other distributors of our equipment. Subscriber
promotion subsidies - other includes net costs related to our free installation
promotion and other promotional incentives. Advertising and other expenses
totaled $27 million and $24 million during the three months ended June 30, 2001
and 2000, respectively.
During the three months ended June 30, 2001, our marketing promotions
included our Digital Home Plan, Free Now and a free installation program. Our
subscriber acquisition costs under these programs are significantly higher than
those under our marketing programs historically.
During July 2000, we announced the commencement of our new Digital
Dynamite promotion. This promotion was re-named the Digital Home Plan effective
February 1, 2001. The Digital Home Plan offers several choices to consumers,
ranging from the use of one EchoStar receiver system and our America's Top 100
CD
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - CONTINUED
programming package for $35.99 per month, to providing consumers two or more
EchoStar receiver systems and our America's Top 150 programming package for
$49.99 per month. Consumers may also choose from one of our DishPVR Plans which
includes the use of two or more EchoStar receiver systems, one of which includes
a built-in hard drive that allows viewers to pause and record live programming
without the need for video tape. The DishPVR Plans also included either
America's Top 100 CD or DISH Latino Dos programming package for $49.99 per month
or America's Top 150 programming package for $59.99 per month. With each plan,
consumers receive in-home-service, must agree to a one-year commitment and incur
a one-time set-up fee of $49.99, which includes the first month's programming
payment.
During February 2001, we announced our Free Now promotion offering all
new subscribers a free base-level EchoStar receiver system and free
installation. To be eligible for this program, a subscriber must provide a valid
major credit card and make a one-year commitment to subscribe to either our
America's Top 150 programming package or our America's Top 100 CD or DISH Latino
Dos programming package plus additional programming totaling at least $39.98 per
month. Subscriber acquisition costs are materially higher under this plan
compared to historical promotions. To the extent that actual consumer
participation levels increase beyond current levels, subscriber acquisition
costs may increase. Although there can be no assurance as to the ultimate
duration of the Free Now promotion, we intend to continue it through at least
July 2001.
We subsidize the cost and installation of EchoStar receiver systems in
order to attract new DISH Network subscribers. There is no clear industry
standard used in the calculation of subscriber acquisition costs. Our subscriber
acquisition costs include subscriber promotion subsidies - promotional DTH
equipment, subscriber promotion subsidies - other and DISH Network acquisition
marketing expenses. During the three months ended June 30, 2001, our subscriber
acquisition costs totaled approximately $252 million, or approximately $384 per
new subscriber activation. Since we retain ownership of the equipment, amounts
capitalized under our Digital Home Plan are not included in our calculation of
these subscriber acquisition costs. Comparatively, our subscriber acquisition
costs during the three months ended June 30, 2000, prior to the introduction of
our Digital Home Plan, totaled $252 million, or approximately $408 per new
subscriber activation. The decrease in our per new subscriber acquisition cost
primarily resulted from an increase in direct sales and an increase in
penetration of our Digital Home Plans. While there can be no assurance, we
expect total subscriber acquisition costs for the year ended December 31, 2001
to be less than our prior estimate of approximately $450 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 Free Now program, or introduce 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 $88 million during the three months ended June 30, 2001, an
increase of $30 million as compared to the same period in 2000. The increase in
G&A expenses was principally attributable to increased personnel expenses to
support the growth of the DISH Network. G&A expenses represented 9% of total
revenue during each of the three months ended June 30, 2001 and 2000. 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, 2001 and 2000 we recognized $7 million and $13
million, respectively, under this performance-based plan.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - CONTINUED
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:
THREE MONTHS ENDED JUNE 30,
2000 2001
----------- ----------
Customer service center and other.......................... $ 546 $ 388
Satellite and transmission................................. 656 311
General and administrative................................. 11,820 6,312
----------- ----------
Total non-cash, stock-based compensation................ $ 13,002 $ 7,011
=========== ==========
Pre-Marketing Cash Flow. Pre-marketing cash flow is comprised of EBITDA
plus total marketing expenses. Pre-marketing cash flow was $387 million during
the three months ended June 30, 2001, an increase of 75% compared to the same
period in 2000. Our pre-marketing cash flow as a percentage of total revenue was
approximately 40% during the three months ended June 30, 2001 compared to 34%
during the same period in 2000. We believe that pre-marketing cash flow can be a
helpful measure of operating efficiency for companies in the DBS industry. While
there can be no assurance, we expect pre-marketing cash flow as a percentage of
total revenue to remain near the current level during the remainder of 2001.
Earnings Before Interest, Taxes, Depreciation and Amortization. EBITDA
is defined as operating income (loss) plus depreciation and amortization, and
non-cash, stock-based compensation. EBITDA was $134 million during the three
months ended June 30, 2001, compared to negative $31 million during the same
period in 2000. This improvement in EBITDA was directly attributable to the
increase in the number of DISH Network subscribers and higher average revenue
per subscriber, resulting in recurring revenue which was large enough to support
the cost of new and existing subscribers, together with the introduction of our
Digital Home Plan in July 2000. Our calculation of EBITDA for the three months
ended June 30, 2001 and 2000 does not include approximately $7 million and $13
million, respectively, of non-cash compensation expense resulting from
post-grant appreciation of employee stock options. While there can be no
assurance, we expect to continue to have positive EBITDA for the year ended
December 31, 2001. As previously discussed, to the extent we expand our current
marketing promotions and our subscriber acquisition costs materially increase,
our EBITDA results will be negatively impacted because subscriber acquisition
costs are generally expensed as incurred.
It is important to note that EBITDA and pre-marketing cash flow do not
represent cash provided or used by operating activities. EBITDA and
pre-marketing cash flow 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 $63 million during the three months ended June 30, 2001, a $21
million increase compared to the same period in 2000. The increase in
depreciation and amortization expenses principally resulted from an increase in
depreciation related to the commencement of operation of EchoStar VI in October
2000 and other depreciable assets placed in service during late 2000.
Other Income and Expense. Other expense, net, totaled $70 million
during the three months ended June 30, 2001, an increase of $17 million compared
to the same period in 2000. This increase primarily resulted from an increase in
interest expense as a result of the issuance of our 10 3/8% Senior Notes in
September 2000 and the issuance of our 5 3/4% Convertible Subordinated Notes in
late May 2001. This increase in interest expense was partially offset by an
increase in interest income.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - CONTINUED
Six Months Ended June 30, 2001 Compared to the Six Months Ended June 30, 2000.
Revenue. Total revenue for the six months ended June 30, 2001 was
$1.828 billion, an increase of $616 million compared to total revenue for the
six months ended June 30, 2000 of $1.212 billion. The increase in total revenue
was primarily attributable to higher average revenue per subscriber and
continued DISH Network subscriber growth.
DISH Network subscription television services revenue totaled $1.678
billion for the six months ended June 30, 2001, an increase of $646 million
compared to the same period in 2000. This increase was directly attributable to
higher average revenue per subscriber and continued DISH Network subscriber
growth.
For the six months ended June 30, 2001, DTH equipment sales and
integration services revenue totaled $88 million, a decrease of $35 million
compared to the same period during 2000. This decrease in DTH equipment sales
and integration services revenue was primarily attributable to a decrease in
demand for digital set-top boxes from our two primary international customers as
compared to the same period during 2000.
DISH Network Operating Expenses. DISH Network operating expenses
totaled $828 million during the six months ended June 30, 2001, an increase of
$244 million or 42% compared to the same period in 2000. DISH Network operating
expenses represented 49% and 57% of subscription television services revenue
during the six months ended June 30, 2001 and 2000, respectively. The increase
in DISH Network operating expenses in total was consistent with, and primarily
attributable to, the increase in the number of DISH Network subscribers.
Subscriber-related expenses totaled $675 million during the six months
ended June 30, 2001, an increase of $242 million compared to the same period in
2000. Such expenses represented 40% and 42% of subscription television services
revenues during the six months ended June 30, 2001 and 2000, respectively.
Customer service center and other expenses totaled $135 million during
the six months ended June 30, 2001, an increase of $11 million as compared to
the same period in 2000. The increase in customer service center and other
expenses primarily resulted from increased personnel and telephone expenses to
support the growth of the DISH Network and from operating expenses related to
the expansion of our installation and service business. Customer service center
and other expenses totaled 8% of subscription television services revenue during
the six months ended June 30, 2001, as compared to 12% during the same period in
2000. The decrease in this expense to revenue ratio primarily resulted from the
on-going construction and start-up costs of our fifth customer service center in
Virginia and our sixth customer service center in West Virginia during 2000.
Satellite and transmission expenses totaled $18 million during the six
months ended June 30, 2001, a $8 million decrease compared to the same period in
2000. This decrease resulted from the expiration of the commercial in-orbit
satellite insurance policies for EchoStar I, EchoStar II and EchoStar III during
July 2000. As discussed below, we are currently self-insuring these satellites.
Satellite and transmission expenses totaled 1% and 3% of subscription television
services revenue during the six months ended June 30, 2001 and 2000,
respectively.
Cost of sales - DTH equipment and Integration Services. Cost of sales -
DTH equipment and integration services totaled $60 million during the six months
ended June 30, 2001, a decrease of $33 million compared to the same period in
2000. This decrease in cost of sales - DTH equipment and integration services is
consistent with the decrease in DTH equipment sales and integration services
revenue. Cost of sales - DTH equipment and integration services represented 68%
and 75% of DTH equipment revenue, during the six months ended June 30, 2001 and
2000, respectively.
Marketing Expenses. Marketing expenses totaled $554 million during the
six months ended June 30, 2001, an increase of $28 million compared to the same
period in 2000. The increase in marketing expenses was primarily attributable to
an increase in subscriber promotion subsidies. Advertising and other expenses
totaled $54 million and $48 million during the six months ended June 30, 2001
and 2000, respectively.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - CONTINUED
General and Administrative Expenses. General and administrative
expenses totaled $163 million during the six months ended June 30, 2001, an
increase of $49 million as compared to the same period in 2000. 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, 2001 and 2000.
Non-cash, Stock-based Compensation. As a result of substantial
post-grant appreciation of stock options, during the six months ended June 30,
2001 and 2000 we recognized $14 million and $27 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 key
employees who participate in the 1999 incentive plan:
SIX MONTHS ENDED JUNE 30,
2000 2001
---------- ----------
Customer service center and other.......................... $ 1,201 $ 621
Satellite and transmission................................. 1,311 777
General and administrative................................. 24,519 13,069
---------- ----------
Total non-cash, stock-based compensation................ $ 27,031 $ 14,467
========== ==========
Pre-Marketing Cash Flow. Pre-marketing cash flow is comprised of EBITDA
plus total marketing expenses. Pre-marketing cash flow was $739 million during
the six months ended June 30, 2001, an increase of 82% compared to the same
period in 2000. Our pre-marketing cash flow as a percentage of total revenue was
approximately 40% during the six months ended June 30, 2001 compared to 34%
during the same period in 2000.
Earnings Before Interest, Taxes, Depreciation and Amortization. EBITDA
is defined as operating income (loss) plus depreciation and amortization, and
non-cash, stock-based compensation. EBITDA was $185 million during the six
months ended June 30, 2001, compared to negative $119 million during the same
period in 2000. This improvement in EBITDA was directly attributable to the
increase in the number of DISH Network subscribers and higher average revenue
per subscriber, resulting in recurring revenue which was large enough to support
the cost of new and existing subscribers, though not yet adequate to support
interest payments and other non-operating costs, together with the introduction
of our Digital Home Plan in July 2000. Our calculation of EBITDA for the six
months ended June 30, 2001 and 2000 does not include approximately $14 million
and $27 million, respectively, of non-cash compensation expense resulting from
post-grant appreciation of employee stock options.
It is important to note that EBITDA and pre-marketing cash flow do not
represent cash provided or used by operating activities. EBITDA and
pre-marketing cash flow 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 $122 million during the six months ended June 30, 2001, a $40 million
increase compared to the same period in 2000. The increase in depreciation and
amortization expenses principally resulted from an increase in depreciation
related to the commencement of operation of EchoStar VI in October 2000 and
other depreciable assets placed in service during late 2000.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - CONTINUED
Other Income and Expense. Other expense, net, totaled $224 million
during the six months ended June 30, 2001, an increase of $128 million compared
to the same period in 2000. This increase primarily resulted from impairment
losses on marketable and non-marketable investment securities of approximately
$83 million, as discussed below, our equity in the loss of affiliates, and from
an increase in interest expense as a result of the issuance of our 10 3/8%
Senior Notes in September 2000 and the issuance of our 5 3/4% Convertible
Subordinated Notes in late May 2001. This increase in interest expense was
partially offset by an increase in interest income.
LIQUIDITY AND CAPITAL RESOURCES
Cash Sources
On May 31, 2001, we sold $1 billion principal amount of 5 3/4%
Convertible Subordinated Notes due 2008. The net proceeds of the offering are
expected to be used for the construction, launch and insurance of additional
satellites, strategic investments and acquisitions, and other general corporate
purposes.
As of June 30, 2001, our cash, cash equivalents and marketable
investment securities totaled $2.392 billion, including $74 million of cash
reserved for satellite insurance and approximately $2 million of restricted
cash, compared to $1.550 billion, including $82 million of cash reserved for
satellite insurance and $3 million of restricted cash, as of December 31, 2000.
For the six months ended June 30, 2001 and 2000, we reported net cash flows from
operating activities of $154 million and negative $137 million, respectively.
The increase in net cash flow from operating activities reflects, among other
things, an increase in the number of DISH Network subscribers and higher average
revenue per subscriber, resulting in recurring revenue which is large enough to
support the cost of new and existing subscribers, though not yet adequate to
support interest payments and other non-operating costs.
We expect that our future working capital, capital expenditure and debt
service requirements will be satisfied primarily from existing cash and
investment balances and cash generated from operations. Our ability to generate
positive future operating and net cash flows is dependent upon our ability to
continue to expand our DISH Network subscriber base, retain existing DISH
Network subscribers, and our ability to grow our ETC and Satellite Services
businesses. There can be no assurance that we will be successful in achieving
our goals. The amount of capital required to fund our remaining 2001 working
capital and capital expenditure needs will vary, depending, among other things,
on the rate at which we acquire new subscribers and the cost of subscriber
acquisition. Our working capital and capital expenditure requirements could
increase materially in the event of increased competition for subscription
television customers, significant satellite failures, or in the event of a
general economic downturn, among other factors. These factors could require that
we raise additional capital in the future.
Subscriber Turnover
Our percentage churn for the six months ended June 30, 2001 increased
compared to our percentage churn for the same period in 2000. The increase in
our percentage churn during the second quarter of 2001 was due in part to price
increases in certain of our programming packages, which went into effect on
February 1, 2001. We believe that our percentage churn continues to be lower
than satellite and cable industry averages. While we have successfully managed
churn within a narrow range historically, we expect our percentage churn to be
in excess of our historical average percentage churn for the remainder of 2001
as a result of the slowing economy, significant piracy of our competitor's
product, bounty programs offered by competitors, our maturing subscriber base,
and other factors. Finally, impacts from our litigation with the networks in
Miami, new FCC rules governing the delivery of superstations and other factors,
could cause us to terminate delivery of distant network channels and
superstations to a material portion of our subscriber base, which could cause
many of those customers to cancel their subscription to our other services. Any
such terminations could result in a small reduction in average monthly revenue
per subscriber and could result in an increase in our percentage churn. While
there can be no assurance, notwithstanding the issues discussed above we have
and expect to be able to continue to manage our percentage churn below industry
averages during the remainder of 2001.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - CONTINUED
Subscriber Acquisition Costs
As previously described, we subsidize the cost and installation of
EchoStar receiver systems in order to attract new DISH Network subscribers. Our
average subscriber acquisition costs were $408 per new subscriber activation
during the six months ended June 30, 2001. Since we retain ownership of the
equipment, amounts capitalized under our Digital Home Plan are not included in
our calculation of these subscriber acquisition costs. While there can be no
assurance, we expect total subscriber acquisition costs for the year ended
December 31, 2001 to be less than our prior estimate of approximately $450 per
subscriber. Our subscriber acquisition costs, both in the aggregate and on a per
new subscriber activation basis, may materially increase to the extent that we
continue or expand our Free Now promotion, or introduce other more aggressive
promotions if we determine that they are necessary to respond to competition, or
for other reasons.
Funds necessary to meet subscriber acquisition costs will be satisfied
from existing cash and investment balances to the extent available. We may,
however, be required to raise additional capital in the future to meet these
requirements. If we were required to raise capital today, a variety of debt and
equity funding sources would likely be available to us. However, there can be no
assurance that additional financing will be available on acceptable terms, or at
all, if needed in the future.
Digital Home Plan
During July 2000, we announced the commencement of our new Digital
Dynamite promotion, which was re-named the Digital Home Plan effective February
1, 2001. The Digital Home Plan offers four choices to consumers, ranging from
the use of one EchoStar receiver system and our America's Top 100 CD programming
package for $35.99 per month, to providing consumers two or more EchoStar
receiver systems and our America's Top 150 programming package for $49.99 per
month. Consumers may also choose from one of our DishPVR Plans which includes
the use of two or more EchoStar receiver systems, one of which includes a
built-in hard disk drive that allows viewers to pause and record live
programming without the need for video tape. The DishPVR Plans also included
either America's Top 100 CD or DISH Latino Dos programming package for $49.99
per month or America's Top 150 programming package for $59.99 per month. With
each plan, consumers receive in-home-service, must agree to a one-year
commitment and incur a one-time set-up fee of $49.99, which includes the first
month's programming payment. Our Digital Home Plan promotion allows us to
capitalize and depreciate over 4 years equipment costs that would otherwise be
expensed at the time of sale, but also results in increased capital
expenditures. Capital expenditures under our Digital Home Plan promotion totaled
approximately $149.1 million for the six months ended June 30, 2001.
Conditional Access System
The access control system is central to the security network that
prevents unauthorized viewing of programming. Theft of cable and satellite
programming has been widely reported and our signal encryption has been pirated
and could be further compromised in the future. Theft of our programming reduces
future potential revenue and increases our net subscriber acquisition costs. If
other measures are not successful, it could be necessary to replace the credit
card size smart card that controls the security of each consumer set top box at
a material cost to us. In order to combat piracy and to generate additional
future revenue opportunities, we may decide to replace smart cards at any time
in the future. The cost of replacing these smart cards will not have a material
effect on our results of operations.
Intellectual Property
Many entities, including some of our competitors, now have and may in
the future obtain patents and other intellectual property rights that cover or
affect products or services directly or indirectly related to those that we
offer. In general, if a court determines that one or more of our products
infringes on intellectual property held by others, we would be required to cease
developing or marketing those products, to obtain licenses to develop and market
those products from the holders of the intellectual property, or to redesign
those products in such a way as to avoid infringing the patent claims. Material
damage awards, including the potential for triple damages under patent laws,
could also result. Various parties have asserted patent and other intellectual
property rights with respect to components within our
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - CONTINUED
direct broadcast satellite system. Certain of these parties have filed suit
against us, including Starsight, Superguide, and IPPV Enterprises, as previously
described. We cannot be certain that these persons do not own the rights they
claim, that our products do not infringe on these rights, that we would be able
to obtain licenses from these persons on commercially reasonable terms or, if we
were unable to obtain such licenses, that we would be able to redesign our
products to avoid infringement.
Obligations and Future Capital Requirements
Semi-annual cash debt service of approximately $94 million related to
our 9 1/4% Senior Notes due 2006 (Seven Year Notes) and our 9 3/8% Senior Notes
due 2009 (Ten Year Notes), is payable in arrears on February 1 and August 1 each
year. Semi-annual cash debt service requirements of approximately $24 million
related to our 4 7/8% Convertible Subordinated Notes due 2007 is payable in
arrears on January 1 and July 1 of each year. Semi-annual cash debt service of
approximately $52 million related to our 10 3/8% Senior Notes due 2007 is
payable in arrears on April 1 and October 1 of each year. Semi-annual debt
service requirements of approximately $29 million related to our 5 3/4%
Convertible Subordinated Notes due 2008 is payable in arrears on May 15 and
November 15 of each year, commencing November 15, 2001. There are no scheduled
principal payment or sinking fund requirements prior to maturity of any of these
notes.
The indentures related to our 9 1/4% Senior Notes due 2006 (the "Seven
Year Notes") and our 9 3/8% Senior Notes due 2009 (the "Ten Year Notes")
(collectively, the "Seven and Ten Year Notes Indentures") contain restrictive
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 had procured
normal and customary launch insurance for EchoStar VI, which expired on July 14,
2001. As a result, we are currently self-insuring EchoStar I, EchoStar II,
EchoStar III, EchoStar IV, EchoStar V and EchoStar VI. During 2000, to satisfy
insurance covenants related to the outstanding EchoStar DBS senior notes, we
reclassified an amount equal to the depreciated cost of two of our satellites
from cash and cash equivalents to cash reserved for satellite insurance on our
balance sheet. As of June 30, 2001, cash reserved for satellite insurance
totaled approximately $74 million. Cash reserved for satellite insurance
increased by approximately $60 million on July 14, 2001 as a result of the
expiration of the EchoStar VI launch insurance policy. The reclassifications
will continue until such time, if ever, as we can again insure our satellites on
acceptable terms and for acceptable amounts. We believe we have in-orbit
satellite capacity sufficient to expeditiously recover transmission of most
programming in the event one of our in-orbit satellites fails. However, the cash
reserved for satellite insurance is not adequate to fund the construction,
launch and insurance for a replacement satellite in the event of a complete loss
of a satellite. Programming continuity could not be assured in the event of
multiple satellite losses.
We utilized $91 million of satellite vendor financing for our first
four satellites. As of June 30, 2001, approximately $20 million of that
satellite vendor financing remained outstanding. The satellite vendor financing
bears interest at 8 1/4% and is payable in equal monthly installments over five
years following launch of the satellite to which it relates. A portion of the
contract price with respect to EchoStar VII is payable over a period of 13 years
following launch with interest at 8%, and a portion of the contract price with
respect to EchoStar VIII and EchoStar IX is payable following launch with
interest at 8%. Those in orbit payments are contingent on the continued health
of the satellites.
Effective July 6, 2001, we redeemed, for cash, all of our remaining
outstanding 6 3/4% Series C Cumulative Convertible Preferred Stock at a total
redemption price of approximately $2,400 or $51.929 per share.
During the remainder of 2001, we anticipate total capital expenditures
of between $300-$500 million depending upon the strength of the economy and
other factors. We expect as much as 40% of that amount to be utilized for
satellite construction and approximately 60% for EchoStar receiver systems in
connection with our Digital Home Plan and for general corporate expansion. These
percentages could change depending on actual total expenditures for the year.
While the Digital Home Plan is a competitive promotion for consumers who want
multiple receivers, consumers who only want a single receiver tend to be more
attracted to other industry
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - CONTINUED
promotions. Consequently, our anticipated capital expenditures related to the
Digital Home Plan promotion will decrease to the extent those consumers find
other promotions we offer to be more compelling.
In addition to our DBS business plan, we have licenses, or applications
pending with the FCC, for a two satellite FSS Ku-band satellite system and a two
satellite FSS Ka-band satellite system. We will need to raise additional capital
to fully construct these satellites. We are currently funding the construction
phase for three satellites. Two of these satellites, EchoStar VII and EchoStar
VIII, will be advanced, high-powered DBS satellites. The third satellite,
EchoStar IX, will be a hybrid Ku/Ka-band satellite.
During November 2000, one of our wholly-owned subsidiaries purchased a
49.9% interest in VisionStar, Inc. VisionStar holds an FCC license for, and is
constructing a Ka-band satellite to launch into, the 113 W.L. orbital slot.
Together with VisionStar we have requested FCC approval to acquire control over
VisionStar by increasing our ownership of VisionStar to 90%, for a total
purchase price of approximately $2.8 million. We have also provided loans to
VisionStar totaling less than $10 million to date for the construction of their
satellite and expect to provide additional funding to VisionStar in the future.
We are not obligated to finance the full remaining cost to construct and launch
the VisionStar satellite, but VisionStar's FCC license currently requires
construction of the satellite to be completed by April 30, 2002 or the license
could be revoked. There can be no assurance construction of the satellite will
be completed within this time frame. We currently expect to continue to fund
loans and equity contributions for construction of the satellite in the near
term from cash on hand, and expect that we may spend approximately $79.5 million
during 2001 for that purpose subject to, among other things, FCC action. In the
future we may fund construction, launch and insurance of the satellite through
cash from operations, public or private debt or equity financing, joint ventures
with others, or from other sources.
On July 11, 2001, we announced that, subject, among other things, to
customary regulatory approvals, we intend to increase our equity stake in
StarBand Communications Inc. to approximately 32% and acquire four out of seven
seats on the StarBand Board of Directors. In exchange, we would invest an
additional $50 million in StarBand. Further, we would lease transponder capacity
to StarBand from a next generation satellite. In accordance with the agreement
and subject to customary regulatory approvals, our equity stake would increase
to approximately 60% upon commencement of the construction of the next
generation satellite. This investment is expected to be accounted for using the
equity method of accounting, which will be retroactively applied during the
third quarter 2001. In the future we may fund construction, launch and insurance
of satellites through cash from operations, public or private debt or equity
financing, joint ventures with others, or from other sources.
From time to time we evaluate opportunities for strategic investments
or acquisitions that would complement our current services and products, enhance
our technical capabilities or otherwise offer growth opportunities. As a result,
acquisition discussions and offers, and in some cases, negotiations may take
place and future material investments or acquisitions involving cash, debt or
equity securities or a combination thereof may result.
We expect that our future working capital, capital expenditure and debt
service requirements will be satisfied from existing cash and investment
balances, and cash generated from operations. Our ability to generate positive
future operating and net cash flows is dependent, among other things, upon our
ability to retain existing DISH Network subscribers, our ability to manage the
growth of our subscriber base, and our ability to grow our ETC business. To the
extent future subscriber growth exceeds our expectations, it may be necessary
for us to raise additional capital to fund increased working capital
requirements. There may be a number of other factors, some of which are beyond
our control or ability to predict, that could require us to raise additional
capital. These factors include unexpected increases in operating costs and
expenses, a defect in or the loss of any satellite, or an increase in the cost
of acquiring subscribers due to additional competition, among other things. If
cash generated from our operations is not sufficient to meet our debt service
requirements or other obligations, we would be required to obtain cash from
other financing sources. If we were required to raise capital today a variety of
debt and equity funding sources would likely be available to us. However, there
can be no assurance that such financing would be available on terms acceptable
to us, or if available, that the proceeds of such financing would be sufficient
to enable us to meet all of our obligations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
MARKET RISKS ASSOCIATED WITH FINANCIAL INSTRUMENTS
As of June 30, 2001, our unrestricted cash, cash equivalents and
marketable investment securities had a fair value of $2.316 billion. Of that
amount, a total of $2.174 billion was invested in: (a) cash; (b) debt
instruments of the U.S. Government and its agencies; (c) commercial paper with
an average maturity of less than one year and rated in one of the four highest
rating categories by at least two nationally recognized statistical rating
organizations; and (d) instruments with similar risk characteristics to the
commercial paper described above. The primary purpose of these investing
activities has been to preserve principal until the cash is required to fund
operations. Consequently, the size of this portfolio fluctuates significantly as
cash is raised and used in our business.
The value of certain of the investments in this portfolio can be
impacted by, among other things, the risk of adverse changes in securities and
economic markets generally, as well as the risks related to the performance of
the companies whose commercial paper and other instruments we hold. However, the
high quality of these investments (as assessed by independent rating agencies),
reduces these risks. The value of these investments can also be impacted by
interest rate fluctuations. At June 30, 2001, all of our investments in this
category were in fixed rate instruments or money market type accounts. While an
increase in interest rates would ordinarily adversely impact the fair value of
fixed rate investments, we normally hold these investments to maturity.
Consequently, neither interest rate fluctuations nor other market risks
typically result in significant gains or losses to this portfolio. A decrease in
interest rates has the effect of reducing our future annual interest income from
this portfolio, since funds would be re-invested at lower rates as the
instruments mature. Over time, any net percentage decrease in interest rates
could be reflected in a corresponding net percentage decrease in our interest
income. During the six months ending June 30, 2000 and 2001, the impact of
interest rate fluctuations, changed business prospects and all other factors did
not have a material impact on the fair value of the portfolio, or on our income
derived from this portfolio.
We also invest in debt and equity of public and private companies for
strategic and financial purposes. As of June 30, 2001, we held strategic and
financial debt and equity investments of public companies with a fair value of
approximately $142 million. We acquired stock in one of those companies, OpenTV,
in connection with establishment of a strategic relationship which did not
involve the investment of cash by us. None of these investments accounted for
more than 40% of the total fair value of the portfolio. We may make additional
strategic and financial investments in other debt and equity securities in the
future.
The fair value of our strategic debt investments can be impacted by
interest rate fluctuations. Absent the effect of other factors, a hypothetical
10% increase in LIBOR would result in a decrease in the fair value of our
investments in these debt instruments of approximately $40 million. The fair
value of our strategic debt and equity investments can also be significantly
impacted by the risk of adverse changes in securities markets generally, as well
as risks related to the performance of the companies whose securities we have
invested in, risks associated with specific industries, and other factors. These
investments are subject to significant fluctuations in fair market value due to
the volatility of the securities markets and of the underlying businesses. A
hypothetical 10% adverse change in the price of our public strategic debt and
equity investments would result in approximately a $14.2 million decrease in the
fair value of that portfolio.
In accordance with generally accepted accounting principles, declines
in the market value of a marketable investment securities which are estimated to
be "other than temporary" must be recognized in the statement of operations,
thus establishing a new cost basis for such investment. We reviewed the fair
value of our marketable investment securities as of June 30, 2001 and determined
that some declines in market value have occurred which may be other than
temporary. As a result, we established a new cost basis for certain of these
investments, and accordingly reduced our previously recorded unrealized loss and
recorded a charge to earnings of approximately $856,000 during the three months
ended June 30, 2001. During the six months ended June 30, 2001, EchoStar
recorded an aggregate charge to earnings for other than temporary declines of
approximately $33.3 million. We have not used derivative financial instruments
for speculative purposes. We have not hedged or otherwise protected against the
risks associated with any of our investing or financing activities.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK - CONTINUED
In addition to the $2.316 billion, we have made strategic equity
investments in certain non-marketable investment securities including Wildblue
Communications, StarBand Communications, VisionStar, Inc. and Replay TV. The
original cost basis of our investments in these non-marketable investment
securities totaled approximately $116 million. The securities of these companies
are not publicly traded. Our ability to create realizable value for our
strategic investments in companies that are not public is dependent on the
success of their business plans. Among other things, there is relatively greater
risk that those companies may not be able to raise sufficient capital to fully
finance and execute their business plans. Since private markets are not as
liquid as public markets, there is also increased risk that we will not be able
to sell these investments, or that when we desire to sell them that we will not
be able to obtain full value for them. StarBand and Wildblue cancelled their
planned initial public stock offerings. As a result of the cancellation of those
offerings and other factors, during the six months ended June 30, 2001, we
recorded a non-recurring charge of approximately $49.4 million to reduce the
carrying value of certain of our non-marketable investment securities to their
estimated fair values. Starband and Wildblue need to obtain significant
additional capital in the near term. Absent such funding, additional write-downs
of our investments could be necessary. As previously discussed, we intend to
increase our equity stake in StarBand to approximately 32% and acquire four out
of seven seats on the StarBand Board of Directors. In exchange, we would invest
an additional $50 million in StarBand. Further, we would lease transponder
capacity to StarBand from a next generation satellite. In accordance with the
agreement and subject to customary regulatory approvals, our equity stake would
increase to approximately 60% upon commencement of the construction of the next
generation satellite.
