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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _______________ to ________________.
Commission file number: 0-26176
ECHOSTAR COMMUNICATIONS CORPORATION
(Exact name of registrant as specified in its charter)
NEVADA 88-0336997
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
5701 S. SANTA FE
LITTLETON, COLORADO 80120
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (303) 723-1000
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Class A Common Stock, $0.01 par value 6 3/4%
Series C Cumulative Convertible Preferred Stock
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of March 8, 2001, the aggregate market value of Class A Common Stock
held by non-affiliates* of the Registrant approximated $6.8 billion based upon
the closing price of the Class A Common Stock as reported on the Nasdaq National
Market as of the close of business on that date.
As of March 8, 2001, the Registrant's outstanding Common stock
consisted of 236,272,921 shares of Class A Common Stock and 238,435,208 shares
of Class B Common Stock, each $0.01 par value.
DOCUMENTS INCORPORATED BY REFERENCE
The following documents are incorporated into this Form 10-K by
reference:
Portions of the Registrant's definitive Proxy Statement to be filed in
connection with the Annual Meeting of Shareholders of Registrant to be held May
4, 2001 are incorporated by reference in Part III herein.
* Without acknowledging that any individual director or executive officer of
the Company is an affiliate, the shares over which they have voting control
have been included as owned by affiliates solely for purposes of this
computation.
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TABLE OF CONTENTS
PART I
Item 1. Business...................................................................................... 1
Item 2. Properties.................................................................................... 22
Item 3. Legal Proceedings............................................................................. 23
Item 4. Submission of Matters to a Vote of Security Holders........................................... 27
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters......................... 27
Item 6. Selected Financial Data....................................................................... 28
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations......... 30
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.................................... 41
Item 8. Financial Statements and Supplementary Data................................................... 41
Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure.......... 41
PART III
Item 10. Directors and Executive Officers of the Registrant........................................... 42
Item 11. Executive Compensation....................................................................... 42
Item 12. Security Ownership of Certain Beneficial Owners and Management............................... 42
Item 13. Certain Relationships and Related Transactions............................................... 42
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.............................. 43
Signatures................................................................................. 48
Index to Financial Statements.............................................................. F-1
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PART I
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.
ITEM 1. BUSINESS
GENERAL
Our common stock and series C preferred stock are publicly traded on
the Nasdaq National Market under the symbols "DISH" and "DISHP", respectively.
We conduct substantially all of our operations through our subsidiaries. We
operate three business units:
o The DISH Network -- a direct broadcast satellite subscription
television service, which we refer to as DBS, in the United States.
As of December 31, 2000, we had approximately 5.26 million DISH
Network subscribers.
o EchoStar Technologies Corporation -- engaged in the design,
development, distribution and sale of DBS set-top boxes, antennae
and other digital equipment for the DISH Network, which we refer to
as EchoStar receiver systems, the design, development and
distribution of similar equipment for international direct-to-home
satellite and other systems, which we refer to as DTH, 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.
DISH NETWORK
We started offering subscription television services on the DISH
Network in March 1996. As of December 31, 2000, approximately 5.26 million
households subscribed to DISH Network programming services. We now have six DBS
satellites in orbit which enable us to offer over 500 video and audio channels,
together with data services and high definition and interactive TV services, to
consumers across the continental United States through the use of a small
satellite dish. Since we use many of these channels for local programming, no
particular consumer could subscribe to all 500 channels, but all are available
using small 18-20 inch consumer dishes. See "--Government regulation". We
believe that the DISH Network offers programming packages that
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have a better "price-to-value" relationship than packages currently offered by
most other subscription television providers. As of December 31, 2000,
approximately 16 million United States households subscribed to direct broadcast
satellite and other direct-to-home satellite services. We believe that there
continues to be significant unsatisfied demand for high quality, reasonably
priced television programming services.
COMPONENTS OF A DBS SYSTEM
In order to provide programming services to DISH Network subscribers,
we have entered into agreements with video, audio and data programmers, who
deliver their programming content to our digital broadcast operations center in
Cheyenne, Wyoming, via commercial satellites, fiber optics or microwave
transmissions. We monitor those signals for quality, and can add promotional
messages, public service programming or other information. Equipment at our
digital broadcast operations center then digitizes, compresses, encrypts and
combines the signal with other necessary data, such as conditional access
information. We then "uplink" or transmit the signals to one or more of our DBS
satellites where we then broadcast directly to DISH Network subscribers.
In order to receive DISH Network programming, a subscriber needs:
o a satellite antenna, which people sometimes refer to as a "dish,"
and related components;
o an integrated receiver/decoder, which people sometimes refer to as
a "satellite receiver" or "set-top box"; and
o a television set.
Set-top boxes communicate with our authorization center through
telephone lines to report the purchase of pay-per-view movies and other events.
Conditional Access System. We use conditional access technology to
encrypt the programming so only those who pay can receive the programming. We
use microchips placed on credit card-sized access cards, or "smart cards" to
control access to authorized programming content. ECC owns 50% of NagraStar LLC,
a joint venture that provides us with smart cards. NagraStar purchases these
smart cards from Nagra Plus SA, a Swiss company that owns the other 50% of
NagraStar LLC. These smart cards, which we can update or replace periodically,
are a key element in preserving the security of our conditional access system.
When a consumer orders a particular channel, we send a message by satellite that
instructs the smart card to permit decryption of the programming for viewing by
that consumer. The set-top box then decompresses the programming and sends it to
the consumer's television.
The access control system is central to the security network that
prevents unauthorized viewing of programming. It is illegal to create, sell or
otherwise distribute mechanisms or devices to circumvent that encryption.
However, 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. We continue to respond to compromises of our encryption system with
measures intended to make signal theft of our programming commercially
uneconomical. We utilize a variety of tools to continue to accomplish this goal.
Ultimately, 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. If we cannot promptly correct a compromise
in our encryption technology, it would adversely affect our revenue and our
ability to contract for video and audio services provided by programmers.
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Programming. We use a "value-based" strategy in structuring the content
and pricing of programming packages available from the DISH Network. For
example, we currently sell our entry-level "America's Top 50" programming
package, which includes 50 of the most popular cable channels, to consumers in
digital format for $21.99 per month. We estimate cable operators charge over $30
per month, on average, for their entry-level expanded basic service that
typically consists of approximately 55 analog channels. We believe that our
"America's Top 100 CD" programming package, which we currently sell for $30.99
per month, also compares favorably to similar cable television programming. We
believe that our America's Top 100 CD package is similar to an expanded basic
cable package plus a digital music service. Based on cable industry statistics,
we estimate that cable operators would typically charge in excess of $40 per
month for a similar package. In addition to the above mentioned programming
packages, during April 2000 we introduced our "America's Top 150" programming
package for $39.99 per month and during August 2000, we introduced our America's
"Everything" Pak, which combines our America's Top 150 programming package and
all four premium movie packages for $69.99 per month. We believe that these
expanded offerings will help us increase our average revenue per subscriber.
For an additional $4.99 per month, we can add satellite-delivered major
local network channels to any of the above packages for consumers in 34 of the
largest markets in the continental United States. EchoStar VII and EchoStar VIII
will be equipped with spot-beam technology that, even with the imposition of
"must carry" requirements, will allow us to offer local channels to more than 30
major markets across the United States without reducing our current national
programming offerings.
We currently offer four premium movie packages which include up to ten
movie channels per package. Currently consumers can subscribe to a single
premium movie package including ten movie channels for only $10.99 per month. We
believe we offer more premium movie channels than cable at a comparable price.
Currently we offer more than 50 foreign-language channels including
Spanish, Arabic, French, Hindi, Russian, Greek and others. We also offer
foreign-language programming packages. For example, we believe that our "DISH
Latino" package, which includes more than 20 Spanish-language programming
channels for $19.99 per month, is the most complete Spanish-language package
available in the United States. In addition, during October 2000 we introduced
"DISH Latino Dos", our bilingual programming package, which includes more than
20 English and more than 20 Spanish-language programming channels for $30.99 per
month. We believe we deliver the most popular foreign-language programming to
customers in the United States at the best value. We also believe
foreign-language programming is a valuable niche product that attracts a number
of new subscribers who are unable to get similar programming elsewhere.
Internet and High-Speed Data Services. We are expanding our offerings
to include interactive, Internet and high-speed data services. During the first
half of 2001, we intend to offer DISH Network customers an interactive digital
receiver with a built-in hard disk drive that will permit viewers to pause and
record live programs without the need for video tape. We also intend to offer
set-top boxes with a wide variety of innovative interactive television services
and applications.
Through our strategic investment in StarBand Communications (formerly
Gilat-To-Home), we began offering consumers two-way, high-speed satellite
Internet access along with DISH Network satellite television programming via a
single dish in November 2000. We believe this technology is particularly
well-suited for areas without cable or DSL infrastructure. Two-way satellite
service offers significant benefits for consumers, including a persistent or
"always on" connection that saves time over dial-up methods and eliminates the
need for a second phone line. DISH Network customers will need an oblong dish,
approximately 24 inches by 36 inches, and other equipment to take advantage of
two-way Internet satellite service. We currently offer consumers a complete
hardware and services solution for broadband Internet access combined with DISH
Network programming. For new customers who subscribe to a qualifying DISH
Network programming package and commit to one year of StarBand Internet service,
the StarBand hardware is currently offered for $449 and a standard professional
installation starts at $199. We currently offer a bundled price of $99.99 per
month for customers who subscribe to both DISH Network's America's Top 150
programming package and the StarBand Internet service.
In March 2000, we invested $50 million for a less than 20% interest in
Wildblue Communications (formerly iSky, Inc.), a company that expects to offer
high-speed data services at rates of up to 1.5 Mbps, beginning in mid-2002, to
customers throughout the continental U.S. We have signed an agreement whereby we
may jointly develop a single receiver which will allow a customer to receive
both DISH Network video programming and Wildblue Internet access. We are also
seeking additional ways to expand our Internet and high-speed data services that
may include,
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but are not limited to, partnerships with third parties who have particular
expertise in the high speed transmission of digital information. Although there
can be no assurance, we believe we will be able to increase our subscriber base
and our average revenue per subscriber by offering these and other similar
services.
While Ka-band spot beam technology is currently in its infancy, and the
technology might not develop to the point where it is viable, we believe that
spot beam Ka-band satellites could become a cost effective way to offer
consumers high speed two way broadband access in the future. Penetration would
probably be highest in rural and other areas where high speed DSL and cable
modem service is not available. Thus, Ka-band technology might play an important
role in spanning the digital divide. We believe the service might also be
successfully offered in urban and suburban areas as well.
In an effort to continue to position ourselves to exploit this
potential opportunity, 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. Two companies
have filed oppositions to our FCC application alleging that VisionStar has not
met its FCC mandated schedule for construction of its satellite, that our
transaction with VisionStar constitutes prohibited trafficking in bare licenses,
and that our transaction with VisionStar constitutes a premature transfer of
control of the license, among other things. There can be no assurance that the
FCC will not revoke VisionStar's license, rendering our investment worthless.
The FCC could also deny our application to acquire control over VisionStar, or
take other action that will be unfavorable to us.
We have 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.
EchoStar Receiver Systems. EchoStar receiver systems include a small
satellite dish, a digital satellite receiver that descrambles signals for
television viewing, a remote control, and other related components. We offer a
number of set-top box models. Our standard system comes with an infrared remote
control, an on-screen program guide, and the ability to switch between DISH
Network and off-air local programming using the remote control. Our mid-level
model has all of the basic features but also includes a UHF remote control that
allows subscribers to control their EchoStar receiver system from up to 150 feet
away through walls, and a high-speed data port. Our premium model includes
additional features such as on-screen caller identification capability, event
timers to automatically tune into or record selected programming and one-touch
VCR recording. We also offer a variety of specialized receiver systems such as
HDTV receiver systems, receiver systems that include a VCR player and receivers
capable of receiving Internet TV services. In addition, we offer a low cost
`bare bones' receiver designed as a secondary unit for multiple television
locations. DISH Network reception equipment is incompatible with competitors'
systems in the United States.
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Although we internally design and engineer our receiver systems, we do
not manufacture these systems. Rather, we outsource the manufacturing process to
high-volume contract electronics manufacturers. SCI Technology, Inc.
manufactures the majority of our receiver systems. Two other companies account
for the manufacture of the balance of our receiver systems.
Installation. While many consumers have the skills necessary to install
our equipment in their homes, we believe that most installations are best
performed by professionals, and that on time, quality installations are
important to our success. Consequently, we are continuing to expand our
installation business, conducted through our DISH Network Service Corporation
subsidiary. In addition to expanding our internal installation capability, we
are also integrating business partners as external installation providers. Our
external installation business partners are held to DISH Network Service
Corporation service standards to attempt to ensure each DISH Network customer
receives the same quality installation and service. Our offices and external
business partners will be strategically located throughout the continental
United States, in order to enable us to provide service to a greater number of
DISH Network customers throughout the country. Although there can be no
assurance, we believe the continued expansion of our installation business will
decrease wait time on service calls and new installations and help us to better
accommodate anticipated subscriber growth.
Customer Service Centers. We currently own and operate customer service
centers in Thornton, Colorado, Littleton, Colorado, McKeesport, Pennsylvania, El
Paso, Texas, Christiansburg, Virginia and Bluefield, West Virginia. These
centers field all of our customer service calls. Potential and existing
subscribers can call a single telephone number to receive assistance for
hardware, programming, installation and technical support. Due to rapid
subscriber growth and recent marketing promotions, some customers are currently
experiencing longer than desired wait times. 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.
Digital Broadcast Operations Centers. Our principal digital broadcast
operations center is located in Cheyenne, Wyoming. In 1999, we acquired a second
digital broadcast operations center in Gilbert, Arizona. During 2000, we
completed the "build-out" of the Gilbert facility for use as a back up for our
main digital broadcast operations center in Cheyenne. Upon commercial operation
of EchoStar VII and EchoStar VIII, we plan to also begin utilizing the Gilbert
facility as a primary digital broadcast operations center. Almost all of the
functions necessary to provide satellite-delivered services occur at the digital
broadcast operations center. The digital broadcast operations center uses fiber
optic lines and downlink antennas to receive programming and other data at the
center. The digital broadcast operations center uplinks programming content to
our DBS satellites via large uplink antennas. The digital broadcast operations
center also maintains a number of large uplink antennas and other equipment
necessary to modulate and demodulate the programming and data signals. Equipment
at our digital broadcast operations center performs all compression and
encryption of the DISH Network's programming signals.
Subscriber Management. We presently use, and are dependent on, CSG
Systems Incorporated's software system, for all DISH Network subscriber
management and billing functions.
Sales and Marketing. Independent dealers and distributors, retailers
and consumer electronics stores currently sell EchoStar receiver systems and
DISH Network programming services. While we also sell receiver systems and
programming directly, independent dealers are responsible for most of our sales.
These independent dealers are primarily local retailers who specialize in TV and
home entertainment systems.
We intend to enhance consumer awareness of our products by continuing
to form alliances with nationally recognized distributors of other consumer
electronics products. We have formed a strategic alliance with JVC to distribute
our receiver systems under its label through certain of its nationwide
retailers.
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We offer our distributors and retailers a competitive residual
commission program. The program pays qualified distributors and retailers an
activation bonus, and pays active retailers a fixed monthly residual commission
dependent on continued consumer subscription to programming.
We use regional and national broadcast and print advertising to promote
the DISH Network. We also offer point-of-sale literature, product displays,
demonstration kiosks and signage for retail outlets. We provide guides to our
dealers and distributors at nationwide educational seminars and directly by
mail, that describe DISH Network products and services. Our mobile sales and
marketing team visits retail outlets regularly to reinforce training and ensure
that these outlets quickly fulfill point-of-sale needs. Additionally, we
dedicate one DISH Network channel and provide a retailer specific website to
provide information about special services and promotions that we offer from
time to time.
Our future success in the subscription television industry depends on
our ability to acquire and retain DISH Network subscribers, among other factors.
Beginning in 1996, to stimulate subscriber growth we reduced the retail price
charged to consumers for EchoStar receiver systems. Accordingly, since August
1996, we have subsidized the cost of our receiver systems to DISH Network
subscribers. The amount of the subsidy varies depending on many factors.
Periodically we also provide varying levels of other subsidies and incentives to
attract customers, including free or subsidized installations, antennas,
programming and other items. We developed this marketing strategy to rapidly
build our subscriber base, expand retail distribution of our products, and build
consumer awareness of the DISH Network brand. This marketing strategy emphasizes
our long-term business strategy of maximizing future revenue by selling DISH
Network programming to the largest possible subscriber base and rapidly
increasing the size of that subscriber base. Since we subsidize the consumer
up-front costs, we incur significant costs each time we acquire a new
subscriber. Although there can be no assurance, we believe that we will be able
to fully recoup the up-front costs of subscriber acquisition from future
subscription television services revenue.
During July 2000, we announced the commencement of our Digital Dynamite
promotion. The Digital Dynamite plan offers four choices to consumers, ranging
from providing consumers the use of one EchoStar receiver system and the
America's Top 100 programming package for $35.99 per month, to providing
consumers two EchoStar receiver systems and the 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.
We base our marketing promotions on current competitive conditions.
Currently, we offer promotions including free equipment and free installation.
These promotions are designed to entice subscribers to certain other pay TV
services to become DISH Network customers. If competition increases, or we
determine for any other reason that it is necessary to increase our subscriber
acquisition costs to attract new customers, our profitability and costs of
operation could be adversely affected.
Satellites. We presently have six DBS satellites in geostationary orbit
approximately 22,500 miles above the equator. Satellites are located in orbital
positions, or slots, that are designated by their longitude. An orbital position
describes both a physical location and an assignment of spectrum in the
applicable frequency band. The FCC has divided each orbital position into 32
frequency channels. Each transponder on our satellites can exploit one frequency
channel. Through digital compression technology, we can currently transmit
between eight and nine digital video channels from each transponder. The FCC
licensed us to operate 96 DBS frequencies at various orbital positions
including:
o 21 frequencies at the 119 degree orbital location and 29
frequencies at the 110 degree orbital location, both capable of
providing service to the entire continental United States;
o 11 frequencies at the 61.5 degree orbital location, capable of
providing service to the Eastern and Central United States;
o 24 frequencies at the 148 degree orbital location, capable of
providing service to the Western United States;
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o 22 frequencies at the 175 degree orbital location, capable of
providing service to only the most western portion of the United
States; See "-- Government regulation;" and
o 11 additional as yet unassigned frequencies, likely to be made
available at the 175 degree orbital location, but only if certain
regulatory hurdles are met. See "-- Government regulation."
EchoStar I and EchoStar II each have 16 transponders that operate at
130 watts of power. Subject to the anomalies described below, EchoStar III and
EchoStar IV each have 32 transponders that operate at approximately 120 watts
per channel, switchable to 16 transponders operating at over 230 watts per
channel. EchoStar V has 32 transponders that operate at approximately 110 watts
per channel, switchable to 16 transponders operating at approximately 220 watts
per channel. EchoStar VI has 32 transponders that operate at approximately 120
watts per channel, switchable to 16 transponders operating at approximately 240
watts per channel. Each transponder can transmit multiple digital video, audio
and data channels. Each of our satellites has a minimum design life of 12 years.
Most of our core programming is broadcast from EchoStar IV and EchoStar
VI at the 119 degree orbital location. We currently are utilizing the 110 degree
orbital location, where EchoStar V is located, to enhance revenue opportunities
with new value added services for our current and future subscribers.
During the second quarter of 2000, two transponder pairs on EchoStar
III malfunctioned. Including the three transponder pairs that malfunctioned
during 1998, these anomalies have resulted in the failure of a total of ten
transponders on the satellite to date. While a maximum of 32 transponders can be
operated at any time, the satellite was equipped with a total of 44 transponders
to provide redundancy. As a result of this redundancy and because we are only
licensed by the FCC to operate 11 transponders at the 61.5 degree orbital
location, the transponder anomaly has not resulted in a loss of service to date.
The satellite manufacturer, Lockheed Martin, has advised us that it believes it
has identified the root cause of the failures, and that while further
transponder failures are possible, based upon 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 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.
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 has experienced anomalies affecting its thermal systems
and propulsion system. Consequently, the total remaining useful life of EchoStar
IV is currently approximately three years. There can be no assurance that
further material degradation, or total loss of use, of EchoStar IV will not
occur in the immediate future.
EchoStar I, which has been moved to the 148 degree orbital location,
will soon be used to offer business, foreign language and other services to the
Central and Western United States similar to those offered primarily to the
Eastern and Central United Sates from EchoStar III.
Satellites under Construction. EchoStar VII, expected to operate from
the 119 degree orbital location, is being manufactured by Lockheed Martin
Commercial Space Systems. EchoStar VIII, which is expected to operate at the 110
degree orbital location, and EchoStar IX, which is expected to operate at the
121 degree orbital location, are being manufactured by Space Systems/Loral.
EchoStar VII and EchoStar VIII will each be capable of operating 32 DBS
transponders at 120 watts each, switchable to 16 DBS transponders operating at
240 watts each. Both will include spot-beam technology which could allow DISH
Network to offer local channels or other value added services in more than 30
markets across the United States. The spot beam payloads for each satellite have
been designed to work together to maximize the number of local spot markets
served across the United States, while providing mutual backup to offer
increased reliability to customers. However, use of spot beams will reduce the
number of transponders that can be used to provide nationwide coverage. EchoStar
IX will be capable of operating 32 Ku-band transponders at 110 watts each, in
addition to a Ka band payload. We also expect in the near future to commence the
construction phase for EchoStar X. We expect that EchoStar X will have a
combined C-band, Ku-band and Ka-band payload and expect to operate it from the
83 degree orbital location.
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Satellite Launches. During February 2001, we announced an agreement
with Lockheed Martin's International Launch Services division 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.
The first commercial Atlas IIIA launch successfully carried a Eutelsat
payload into geosynchronous transfer orbit during May, 2000. The Atlas III
launch vehicle is available in a single engine centaur Atlas IIIA configuration
and with the dual engine centaur Atlas IIIB configuration that EchoStar will
utilize. It is expected that our satellite launch will be the first flight for
the Atlas IIIB. As a result of the similarity of the Atlas IIIB to the Atlas
IIIA and to other Atlas launch vehicles, and for a variety of other reasons, we
believe the risk associated with the maiden Atlas IIIB flight is significantly
lower than the risk typically associated with the first flight of a rocket.
However, there are risks associated with any satellite launch. The risk of
launch delay, and the risk of launch failure, is usually greater when the rocket
does not have a track record of previously successful flights. To further
minimize the risk, we have retained a consultant familiar with the new launch
vehicle to monitor the launch campaign.
Satellite Insurance. In September 1998, we 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 us 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. We strongly disagree
with the position of the insurers and we have 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 we will receive the amount claimed or, if we do, that we will retain title
to EchoStar IV with its reduced capacity.
At the time we filed our claim in 1998, we 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. We continue to believe we will ultimately recover at least the
amount originally recorded and do 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 thermal and propulsion system anomalies, we reduced the
estimated remaining useful life of EchoStar IV to approximately 4 years during
January 2000. This change increased depreciation expense recognized by us during
the year ending December 31, 2000 by approximately $9.6 million. We will
continue to evaluate the performance of EchoStar IV and may modify our 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, we believe that the carriers colluded and
conspired to boycott us unless we accept their offer to settle the EchoStar IV
claim for $88 million.
Based on the carriers' actions, we have added causes of action in our
EchoStar IV demand for arbitration for breach of the duty of good faith and fair
dealing, and unfair claim practices. Additionally, we have 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 we believe we are entitled to the full amount
claimed under the EchoStar IV insurance policy and believe the insurance
carriers are in violation of Antitrust laws and have committed further acts of
bad faith in connection with their refusal to negotiate reasonable insurance
coverage on our other satellites, there can be no assurance as to the outcome of
these proceedings.
The indentures related to the outstanding EchoStar DBS Corporation
senior notes, 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.
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COMPETITION FOR OUR DISH NETWORK BUSINESS
Our industry is highly competitive. Our competition includes companies
that offer video, audio, data, programming and other entertainment services,
including cable television, wireless cable, direct-to-home satellite, other DBS
companies and companies that are developing new technologies. Many of our
competitors have access to substantially greater financial and marketing
resources than we have. We believe that quality and variety of video, audio and
data programming, quality of picture and service, and cost are the key bases of
competition.
Cable Television. We encounter substantial competition in the
subscription television market from cable television and other land-based
systems. Cable television operators have a large, established customer base, and
may have significant investments in, and access to, programming. Cable
television service is currently available to more than 90% of the approximately
100 million United States television households, and approximately 68% of total
United States households currently subscribe to cable. Cable television
operators currently have an advantage relative to us by providing service to
multiple television sets within the same household at no additional cost for the
programming. Cable operators may obtain a competitive advantage by bundling
their analog video service with expanded digital video services delivered
terrestrially or via satellite, efficient 2-way high speed data transmission,
and/or telephone service on upgraded cable systems. For example, some cable
companies now offer high speed Internet access over their upgraded cable or
fiber optic systems, and AT&T provides telephone service over cable systems.
Recently, some cable companies have been offering free digital cable equipment
and installation, together with as much as $500 cash, to entice consumers to
switch from satellite to cable. While we have not seen any material impact on
our business as a result of these bounties to date, due to these and other
factors, our churn could increase and we may not be able to continue to expand
our subscriber base or to compete effectively against cable television
operators.
In addition, entities such as regional telephone companies, which are
likely to have greater resources than we have, are implementing and supporting
digital video compression over existing telephone lines and digital "wireless
cable." Moreover, mergers, joint ventures, and alliances among franchise,
wireless or private cable television operators, regional Bell operating
companies and others may result in providers capable of offering bundled cable
television and telecommunications services in competition with us. For instance,
AT&T acquired cable operators TCI and MediaOne.
Since a subscriber needs a direct line of sight to the satellite to
receive DBS service, some households are not be able to receive DISH Network
programming as a result of nearby buildings, trees or other obstructions.
Additionally, the cost required to receive DISH Network programming on multiple
television sets may deter some potential customers from switching to DISH
Network service. Furthermore, cable operators pay substantially lower royalty
rates for the retransmission of distant network, local affiliate and
superstation signals than we do.
Other DBS and Direct-to-Home Satellite System Operators. Several other
companies have DBS licenses and can compete with us for home satellite
subscribers. Our primary competitor, DirecTV, operates five DBS satellites and
has 46 frequencies at orbital slots that provide coverage to the entire
continental United States. DirecTV currently offers access to more than 225
channels of combined video and audio programming and, as of December 31, 2000,
had approximately 9.5 million subscribers. DirecTV is, and will be for the
foreseeable future, in an advantageous position with regard to market entry,
programming, such as DirecTV's exclusive sports programming and, possibly,
volume discounts for programming offers. Further, DirecTV hardware and
programming is available for sale in Circuit City, Best Buy and Radio Shack. Our
equipment is not available at these, or most other large consumer electronics
chains. Additionally, DirecTV offers out of market NFL, NBA, NHL and other
sports programming that is not available to our subscribers.
There have been recent reports of discussions and negotiations
involving a possible merger between GMH and The News Corporation Limited. News
Corp. is one of the world's largest media companies with diversified global
operations including the production and distribution of motion pictures and
television programming; television, satellite and cable broadcasting. The effect
such a merger would have on competition is unclear.
Other companies have conditional permits for a comparatively small
number of DBS frequency assignments that could be used to provide service to
portions of the United States. If the number of DBS operators increases in the
future, or if the number of DBS frequency assignments to our existing DBS
competitors increases, DISH Network subscriber growth could be adversely
affected.
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VHF/UHF Broadcasters. Most areas of the United States can receive
traditional terrestrial VHF/ UHF television broadcasts of between three and ten
channels. These broadcasters are often low to medium power operators with a
limited coverage area and provide local, network and syndicated programming. The
local content nature of the programming may be important to the consumer, and
VHF/UHF programming is typically provided free of charge. The FCC has allocated
additional digital spectrum to licensed broadcasters. At least during a
transition period, each existing television station will be able to retain its
present analog frequencies and also transmit programming on a digital channel
that may permit multiple programming services per channel.
ECHOSTAR TECHNOLOGIES CORPORATION
Employees of EchoStar Technologies Corporation, one of our wholly-owned
subsidiaries, internally design and engineer EchoStar receiver systems. Our
satellite receivers have won numerous awards from the Consumer Electronics
Manufacturers Association, dealers, retailers, and industry trade publications.
We outsource the manufacture of EchoStar receiver systems to third parties who
manufacture the receivers in accordance with our specifications.
We created our ETC division in connection with the development of the
DISH Network. We believe that we have an opportunity to grow this business
further in the future. The same employees who design EchoStar receiver systems
for the DISH Network are also involved in designing set-top boxes sold to
international TV customers. Our satellite receivers are designed around the DVB
standard, which is widely used in Europe and Asia. Consequently, international
ETC projects may result in improvements in design and economies of scale in the
production of EchoStar receiver systems for the DISH Network.
In addition to supplying EchoStar receiver systems for the DISH
Network, ETC supplies similar digital satellite receivers to international
satellite TV service operators and a variety of digital and analog receivers to
consumers through our international distribution network. We believe that
direct-to-home satellite service is well-suited for countries without extensive
cable infrastructure. We also offer consulting and integration services to
development stage, international direct-to-home satellite operators, which may
result in sales of receiver systems to these customers. We are actively
soliciting new business for ETC, but we can not provide any assurance in that
regard.
Our two major international customers are Via Digital, a subsidiary of
Telefonica, Spain's largest telephone company, and Bell ExpressVu, a subsidiary
of Bell Canada, Canada's largest telephone company. Our future revenue in this
area depends largely on the success of these operators, which in turn, depends
on other factors, such as the level of consumer acceptance of direct-to-home
satellite TV products and the intensity of competition for international
subscription television subscribers.
ETC's business also includes our Atlanta-based EchoStar Data Networks
Corporation and our UK-based Eldon Technology Limited subsidiaries. EchoStar
Data Networks is a supplier of technology for distributing Internet and other
content over satellite networks. Eldon Technology designs various components of
digital televisions and set-top boxes, strengthening our product design
capabilities for satellite receivers and integrated televisions in both the
international and United States markets.
COMPETITION FOR OUR ETC BUSINESS
We compete with a substantial number of foreign and domestic companies,
many of which have significantly greater resources, financial or otherwise, than
we have. We expect new competitors to enter this market because of rapidly
changing technology. Our ability to anticipate these technological changes and
introduce enhanced products expeditiously will be a significant factor in our
ability to remain competitive. Existing competitors' actions and new entrants
may have a material adverse impact on our revenues. We do not know if we will be
able to successfully introduce new products and technologies on a timely basis
in order to remain competitive.
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SATELLITE SERVICES
Our Satellite Services business unit primarily leases capacity on our
satellites to customers, including international services that broadcast
foreign-language programming to our subscribers, and Fortune 1000 companies that
use our business television service to communicate with employees, customers,
distributors, and suppliers located around the United States.
COMPETITION FOR OUR SATELLITE SERVICES BUSINESS
We compete with a number of other companies, including those using
similar and different technologies, to provide satellite services. Many of these
competitors have substantially greater financial and other resources than we
have. Our principal competitors include, other satellite system operators, cable
television system operators, Internet service providers, and telephone
companies. While there can be no assurance, we believe that we can compete with
these other companies based on our knowledge and experience in the
direct-to-home satellite TV and DBS industry, our technological leadership and
new product capabilities, the quality of our video, audio and data
transmissions, the quality of service provided, and cost.
GOVERNMENT REGULATION
The following summary of regulatory developments and legislation is not
intended to describe all present and proposed government regulation and
legislation affecting the video programming distribution industry. Government
regulations that are currently the subject of judicial or administrative
proceedings, legislative hearings or administrative proposals could change our
industry, in varying degrees. We cannot predict either the outcome of these
proceedings or any potential impact they might have on the industry or on our
operations. This section sets forth a brief summary of regulatory issues
pertaining to our operations.
We are required to obtain authorizations and permits from the FCC and
other similar foreign regulatory agencies to construct, launch and operate our
satellites and other components of our DBS system. Additionally, as a private
operator of a United States satellite system, we are subject to the regulatory
authority of the FCC and the Radio Regulations promulgated by the International
Telecommunication Union. We also have to obtain import and general destination
export licenses from the United States Department of Commerce to receive and
deliver components of direct-to-home satellite TV systems. In addition, the
delivery of satellites and related technical information for the purpose of
launch by foreign launch services providers is subject to strict export control
and prior approval requirements.
FCC PERMITS AND LICENSES
The FCC has jurisdiction and review power over the following general
areas:
o assigning frequencies and authorizations;
o ensuring compliance with the terms and conditions of such
assignments and authorizations, including required timetables for
construction and operation of satellites and other due diligence
requirements;
o authorizing individual satellites and earth stations;
o avoiding interference with other radio frequency emitters; and
o ensuring compliance with applicable provisions of the
Communications Act of 1934.
All of our FCC authorizations are subject to conditions as well as to
the FCC's authority to modify, cancel or revoke them. In addition, all of our
authorizations for satellite systems that are not yet operational are subject to
construction and progress obligations, milestones, reporting and other
requirements. The FCC has indicated that it may revoke, terminate, condition or
decline to extend or renew such authorizations if we fail to comply with
applicable Communications Act requirements. Our conditional license for a
Ku-band satellite system is subject to pending petitions for reconsideration and
cancellation. With respect to our license for the Ka-band system, the FCC
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recently authorized our operation of inter-satellite links for the system and
assigned milestone requirements for the construction, launch and operation of
the satellite system. If we fail to file adequate reports or to demonstrate
progress in the construction of our satellite systems, the FCC has stated that
it may cancel our authorizations for those systems. Our license for our Ka-band
system allows us to use only 500 MHz of Ka-band spectrum in each direction,
while other licensees have been authorized to use 1,000 MHz in each direction.
We have recently filed a modification application to allow us to use additional
spectrum, but we cannot be sure that the FCC will not deny or otherwise fail to
grant that application. We have not filed, or timely filed, all required reports
or other filings, and some of our construction permits have expired, in
connection with our authorized systems with the FCC. We cannot be certain
whether or not the FCC would cancel our authorizations. While we have filed with
the FCC pending requests for extensions of authorizations that have expired, we
cannot be sure how the FCC will rule on these requests.
The FCC issues DBS licenses for ten year periods, which is less than
the useful life of a healthy DBS satellite. Upon expiration of the initial
license term, the FCC has the option to renew a satellite operator's license or
authorize an operator to operate for a period of time on special temporary
authority, or decline to renew the license. If the FCC declined to renew the
operator's license, the operator would be required to cease operations and the
frequencies would revert to the FCC. The FCC usually grants special temporary
authorizations for periods of up to 180 days. These authorizations are usually
subject to several other conditions. We also must obtain FCC authorization to
operate our earth stations, including the earth stations necessary to uplink
programming to our satellites.
We have licenses to operate EchoStar I and EchoStar II at the 119
degree orbital location, which both expire in 2006, a license to operate 11
frequencies on EchoStar III at the 61.5 degree orbital location, which expires
in 2008 and authorizations to launch and operate for 10 years EchoStar V and
EchoStar VI at the 110 degree and 119 degree orbital locations, respectively.
Our authorization at the 148 degree orbital location requires us to construct a
satellite by December 20, 2000 and to utilize all of our FCC-allocated
frequencies at that location by December 20, 2002, or risk losing those
frequencies that we are not using. At the 61.5 degree orbital location we
utilize certain additional channels beyond our licensed channels, under special
temporary authority, which the FCC may refuse to renew, and which is subject to
several restrictive conditions. We also note that the FCC recently extended the
permit of another company (a joint venture of Loral) to construct and launch a
satellite that would use most of these additional channels. If our special
temporary authority to use the channels assigned to that other company does not
expire sooner, it will certainly be terminated if that company does actually
construct and launch a satellite to the 61.5 degree orbital location. Third
parties have opposed, and we expect them to continue to oppose, some of our
authorizations or pending and future requests to the FCC for extensions,
modifications, waivers and approvals.
In conjunction with our plan to provide local-into-local broadcast
service as well as cable programming from the 110 degree orbital location, we
moved EchoStar IV to the 119 degree orbital location in early 2000. The move has
allowed us to transition some of the programming now on EchoStar I and EchoStar
II to EchoStar IV, which can provide service to Alaska and Hawaii from the
orbital location. In connection with that plan, we have also petitioned the FCC
to declare that we have met our due diligence obligations for the 148 degree
orbital location, or alternatively to extend the December 20, 2000 milestone for
that location. The State of Hawaii has opposed that request and there is no
assurance that it will be granted by the FCC. If our request is not granted by
the FCC, our license for the 148 degree orbital location may be revoked or
canceled.
EchoStar VI was successfully launched during July 2000, completed
testing at the 148 degree orbital location and has been moved to its final 119
degree orbital location. We have received FCC authorization to operate EchoStar
IV and EchoStar VI at that location. We have also moved EchoStar I from the 119
degree orbital location to the 148 degree orbital location. EchoStar VI
commenced commercial service during October 2000. In general, our plans have
involved and still involve the relocation of satellites either within or
slightly outside the "cluster" of a particular orbital location, or from one
orbital location to another where we have various types of authorizations. These
changes require FCC approval, and we cannot be sure that we will receive all
needed approvals for our current and future plans. Furthermore, the states of
Alaska and Hawaii have requested the FCC to impose conditions on the license for
EchoStar VI, relating to certain aspects of our service such as prices and
equipment. While the FCC denied these requests for conditions, it cautioned that
it may impose similar requirements as a result of a pending rulemaking. Such
requirements could be very onerous for us. In general, the states of Alaska and
Hawaii
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have expressed views that our service to these states from various orbital
locations does not comply with our FCC-imposed obligations to serve those
states, and we cannot be sure that the FCC will not accept these views. Such
actions would have a material adverse affect on our business. Moreover, because
we cannot meet the geographic service requirements from the 148 degree orbital
location, we had to request and obtain a conditional waiver of these
requirements to allow operation of EchoStar I at the location. As a result, our
current authorization to operate EchoStar I at the 148 degree orbital location
is subject to several conditions that may be onerous.
In a recent decision, the FCC approved a transfer of majority control
over E-Sat, a non-geostationary mobile satellite service license from us to
another company, but warned that this approval is without prejudice to its
investigation of certain complaints relating to E-Sat. We cannot be sure whether
any such investigation will have implications for E-Sat, in which we now have a
minority interest.
IN-ORBIT AUTHORIZATIONS
The telemetry, tracking and control operations of EchoStar I are in an
area of the spectrum called the "C-band." Although the FCC granted us
conditional authority to use these frequencies for telemetry, tracking and
control, in January 1996 a foreign government raised an objection to EchoStar
I's use of these frequencies. We cannot be certain whether that objection will
subsequently require us to relinquish the use of such C-band frequencies for
telemetry, tracking and control purposes. Further, EchoStar II's telemetry,
tracking and control operations are in the "extended" C-band. Our authorization
to use these frequencies expired on January 1, 1999. Although we have timely
applied for extension of that authorization to November 2006, we cannot be sure
that the FCC will grant our request. If we lose the ability to use these
frequencies for controlling either satellite, we would lose the satellite.
Recently, the FCC released a ruling in a rulemaking proceeding that will allow
commercial terrestrial services and hamper future satellite operations in the
"extended" C-band frequencies. This ruling might have negative implications for
us.
INTERNATIONAL TELECOMMUNICATION UNION STANDARDS
Our DBS system also must conform to the ITU broadcasting satellite
service plan. If any of our operations are not consistent with this plan, the
ITU will only provide authorization on a non-interference basis pending
successful modification of the plan or the agreement of all affected
administrations to the non-conforming operations. Accordingly, unless and until
the ITU modifies its broadcasting satellite service plan to include the
technical parameters of DBS applicants' operations, our satellites, along with
those of other DBS operators, must not cause harmful electrical interference to
other assignments that are in conformance with the plan. Further, DBS satellites
are not presently entitled to any protection from other satellites that are in
conformance with the plan. We believe the United States government has filed
modification requests with the ITU for EchoStar I, EchoStar II and EchoStar III.
The ITU has requested certain technical information in order to process the
requested modifications. We have cooperated, and continue to cooperate, with the
FCC in the preparation of its responses to the ITU requests. We cannot predict
when the ITU will act upon these requests for modification or if they will be
granted.
DBS AUTHORIZATIONS AND FREQUENCIES THAT WE COULD LOSE
We also have conditional authorizations for several other DBS and fixed
service satellites that are not operational. One permit for 10 unspecified
western frequencies was set to expire on August 15, 1995. Although we filed a
timely extension request, the FCC has deferred a decision on that request
pending the FCC's analysis of our due diligence for that permit. The FCC has not
yet assigned the frequencies related to that permit because in 1992 it held that
we had not completed contracting for these western assignments - the first prong
of the required diligence - and asked us to submit amended contract
documentation. Although we submitted such documentation, the FCC has not yet
ruled on this matter, and we cannot be sure that the FCC will rule in our favor.
We also have a conditional permit for a total of 11 western frequencies
at the 175 degree orbital location that expired on August 15, 1999. That
expiration date is pursuant to an extension granted by the FCC's International
Bureau in 1996. That extension was subject to the condition that we make
significant progress toward construction and operation of a DBS system
substantially in compliance with, or ahead of, the most recent timetable that we
submitted to the FCC. The FCC's International Bureau also urged us to expedite
construction and launch of additional satellites for our DBS system at these
frequencies. PrimeStar, a DBS provider that DirecTV acquired in
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1999, filed a request with the FCC that is still pending requesting that the FCC
reverse the International Bureau's grant of an extension.
We also have a conditional permit for 11 additional frequencies at the
175 degree orbital location, which was set to expire on November 30, 1998. That
expiration date was pursuant to an extension granted by the FCC's International
Bureau in 1995. When it granted the extension, the FCC reserved the right to
cancel the permit if we failed to progress toward operation of the DBS system in
accordance with the timetable that we submitted to the FCC. That extension also
is subject to a still pending challenge by PrimeStar.
While we have timely filed requests for extension of all the western
permits, we cannot be sure how the FCC will act with respect to these requests.
OTHER LICENSES AND APPLICATIONS
We also have received conditional licenses from the FCC to operate
satellites in the Ka-band and Ku-band and have an application pending for a
system that would use extended Ku-band frequencies (although that application
has remained pending for years). Use of those licenses and conditional
authorizations are subject to certain due technical and due diligence
requirements, including the requirement to construct and launch satellites. The
granting of those licenses has been challenged by parties with interests that
are adverse to ours. Among other things, our conditional license for a Ku-band
satellite system is subject to still pending petitions for reconsideration and
cancellation. The construction, completion and launch milestones for both
Ku-band satellites have expired. We have filed a timely request for the
extension of these milestones for our Ku-band system. With respect to our
license for the Ka-band system, the FCC recently authorized our operation of
inter-satellite links for the system and assigned milestone requirements for the
construction, launch and operation of the satellite system. If we fail to file
adequate reports or to demonstrate progress in the construction of our satellite
systems, the FCC has stated that is may cancel our authorizations for those
systems. Our license for our Ka-band system allows us to use only 500 MHz of
Ka-band spectrum in each direction, while other licensees have been authorized
to use 1,000 MHz in each direction. We have recently filed a modification
application to allow us to use additional spectrum, but we cannot be sure that
the FCC will not deny or otherwise fail to grant that application.
We have also applied to the FCC for authority to obtain control over
VisionStar, Inc., a company that has a license for a Ka-band satellite at
another orbital location. Certain parties have asked the FCC to deny our
application, and we cannot be sure that the FCC will not deny it. If we
successfully construct and launch Ku-band, extended Ku-band and low Ka-band
satellites, we might be able to use those satellites to complement the DISH
Network, or for a variety of other uses. It is possible that the Ku-band and
Ka-band orbital locations requested by us and others could permit construction
of satellites with sufficient power to allow reception of satellite signals by
relatively small dishes. As these projects are in the early stages of
development and are currently being challenged by several companies with
interests adverse to ours, there can be no assurance that the FCC will sustain
these licenses, or grant the pending applications, or that we will be able to
successfully capitalize on any resulting business opportunities.
REGULATIONS
DBS Rules. Once the FCC grants a conditional construction permit, the
permittee must proceed with due diligence in constructing the system. The FCC
has adopted specific milestones that must be met in order to retain the permit,
unless the FCC determines that an extension or waiver is appropriate. Permittees
must file semi-annual reports on the status of their due diligence efforts. The
due diligence milestones require holders of conditional permits to complete
contracting for construction of their systems within one year of grant of the
permit. Additionally, the satellites must be operational within six years of
grant. For permits issued after January 19, 1996, permittees must complete
construction of the first satellite in their system within four years of grant
of the permit. The FCC also may impose other conditions on the grant of the
permit. The holders of new DBS authorizations issued on or after January 19,
1996 must also provide DBS service to Alaska and Hawaii from at least one of
their DBS satellites or they will have to relinquish their western assignments.
We are presently not able to satisfy this requirement from the 148 degree
orbital location. With respect to the EchoStar I satellite, we have received a
waiver of that requirement subject to several onerous conditions. We have also
requested a waiver of that requirement for EchoStar IV operation at the 148
degree orbital location. EchoStar IV currently operates at the 119 degree
orbital
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location. The state of Hawaii has requested many conditions to such a waiver,
and we have opposed several of these conditions. In addition, we are required to
serve Alaska and Hawaii from the 110 degree orbital location. While we believe
that our current plan, which involves the use of our capacity at that location
for local-into-local broadcast as well as other programming, is in compliance
with that requirement, there can be no assurance that the FCC will consider this
plan as complying with the rule. In general, the states of Alaska and Hawaii
have expressed views that our service to these states from various orbital
locations does not comply with our FCC imposed obligations to serve those
states, and we cannot be sure that the FCC will not accept these views.
Subject to applicable regulations governing non-DBS operations, a
licensee may make unrestricted use of its assigned frequencies for non-DBS
purposes during the first five years of the ten-year license term. After the
first five years, the licensee may continue to provide non-DBS service as long
as at it dedicates at least one-half of its total capacity at a given orbital
location to providing DBS service. Further, the FCC indicated its desire to
streamline and revise its rules governing DBS satellites. We cannot be sure
about the content and effect any new DBS rules might have on our business.
Certain Other Communications Act Provisions. As a distributor of
television programming, we are also affected by numerous laws and regulations,
including the Communications Act.
The FCC imposes different rules for "subscription" and "broadcast"
services. We believe that because we offer a subscription programming service,
we are not subject to many of the regulatory obligations imposed upon broadcast
licensees. However, we cannot be certain whether the FCC will find in the future
that we should comply with regulatory obligations as a broadcast licensee with
respect to our current and future operations, and certain parties have requested
that we be treated as a broadcaster. If the FCC determined that we are a
broadcast licensee, the FCC may require us to comply with all regulatory
obligations imposed upon broadcast licensees, which are generally subject to
more burdensome regulation than subscription service providers like us.
Under a requirement of the Cable Act, the FCC imposed public interest
requirements on direct broadcast satellite licensees, such as us, to set aside
four percent of channel capacity exclusively for noncommercial programming for
which we must charge programmers below-cost rates and for which we may not
impose additional charges on subscribers. This could also displace programming
for which we could earn commercial rates and could adversely affect our
financial results. The FCC has not reviewed our methodology for computing the
channel capacity we must set aside or for determining the rates that we charge
public interest programmers, and we cannot be sure that, if the FCC were to
review these methodologies, it would find them in compliance with the public
interest requirements.
Under a requirement of the Telecommunications Act of 1996, the FCC
recently imposed upon broadcasters and certain multichannel video programming
distributors, including us, the responsibility of providing video description
for visually impaired persons. Video description involves the insertion into a
television program of narrated descriptions of settings and actions that are not
otherwise reflected in the dialogue, and is typically provided through the
Secondary Audio Programming (SAP) channel. Commencing April 12, 2002, affected
multichannel video programming distributors like us will be required to provide
video description for a minimum of 50 hours per calendar quarter (roughly four
hours per week) of prime time and/or children's programming on each of any of
the top five national non-broadcast networks they carry. In addition,
distributors will be required to "pass through" any video description they
receive from a broadcast station or non-broadcast network if the multichannel
video programming distributor has the technical capability necessary to do so
associated with the channel on which it distributes the programming with video
description. While the FCC acknowledged that programming networks, and not
multichannel video programming distributors, may actually describe the
programming, it declared that for ease of enforcement and monitoring compliance
it would hold distributors responsible for compliance. We cannot be sure that
these requirements will not impose an excessive burden on us.
The FCC has commenced a rulemaking which seeks to streamline and revise
its rules governing direct broadcast satellite operators. This rulemaking
concerns many new possible direct broadcast satellite rules. There can be no
assurance about the content and effect of any new direct broadcast satellite
rules passed by the FCC, and the new rules may include expanded geographic
service requirements for Alaska, Hawaii and Puerto Rico. The FCC has also
recently released a notice of proposed rulemaking regarding the current
restrictions on the flexibility of DBS companies to provide services other than
DBS, and may change these restrictions.
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Certain Other Rulemakings. The FCC recently proposed to allocate
additional "expansion" spectrum for DBS operators starting in 2007. DirecTV has
filed an application for a satellite system using those expansion frequencies.
Foreign satellite systems also are potential providers of DBS service
within the United States. In May 1996, in its DISCO II proceeding, the FCC
proposed permitting foreign satellite systems to serve the United States if the
home country of the foreign-licensed satellite offers open "effective
competitive opportunities" in the same type of satellite service to United
States licensed satellites. In the February 1997 World Trade Organization
Agreement, the United States offer contained an exemption from market opening
commitments for, among other things, DBS and direct-to-home satellite services.
In November 1997, the FCC released new rules that maintained the effective
competitive opportunities test with respect to foreign-licensed satellites
seeking to provide DBS and direct-to-home satellite services in the United
States. The FCC also established a strong presumption in favor of authorizing
foreign-licensed satellites to provide services other than DBS and
direct-to-home satellite in the United States. The FCC has also reached
bilateral protocols allowing the provision of DBS service by satellites licensed
by Mexico and Argentina.
The FCC has proposed allowing non-geostationary orbit fixed satellite
services to operate on a co-primary basis in the same frequency as DBS and
Ku-based FSS services. If the proposal is adopted, these satellite operations
could provide global high-speed data services. In addition to possible
interference concerns, this would, among other things, create additional
competition for satellite and other services. In the same rulemaking, the FCC
has also requested comment on a request that would allow a terrestrial service
proposed by Northpoint Communications, Inc. to retransmit local television or
other video and data services to DBS subscribers or others in the same DBS
spectrum that we use throughout the United States. Furthermore, the Satellite
Home Viewer Improvement Act of 1999 required the FCC to make a determination by
November 29, 2000 regarding licenses for facilities that will retransmit
broadcast signals to underserved markets by using spectrum otherwise allocated
to commercial use, possibly including DBS spectrum. Northpoint has been allowed
by the FCC to conduct experimental operations in Texas and Washington, D.C. We
have submitted numerous pleadings jointly with DirecTV to the FCC expressing
concern over the Northpoint request, which in our view, may cause potential
harmful and substantial interference to the service provided to DBS' customers.
DirecTV and we have also jointly conducted tests of Northpoint's proposed
technology and have presented our test results, which in our view show harmful
interference from Northpoint's proposed service, and Northpoint has filed
oppositions to our submissions. Furthermore, other entities have now filed
applications similar to the one filed by Northpoint. If Northpoint, or other
entities become authorized to use our spectrum, they could cause harmful and
substantial interference into our service. On December 8, 2000, the FCC released
a Report and Order and Further Notice of Proposed Rulemaking in this proceeding.
Despite our objections, the FCC concluded that a terrestrial
"point-to-multipoint" service can generally share the spectrum with DBS on a no
interference basis - a conclusion that may have a significant adverse impact on
our operation. At the same time, the FCC initiated a further notice of proposed
rulemaking to determine the appropriate interference standards with which such a
terrestrial service must comply. The FCC also requested proposals on how to
process applications for licenses for the new service, and tentatively proposed
excluding satellite companies from such licenses. In addition, appropriations
legislation that was recently enacted requires independent testing of the
Northpoint technology, and creates rural loan guarantees for providers of
certain types of services. The independent tests mandated by statute are
ongoing. The statute set a deadline for completion of the tests, and FCC
officials have reportedly stated that they expect testing to be completed beyond
the statutory deadline. We cannot be sure whether and when these processes will
result in the licensing of Northpoint and/or companies proposing a similar
service to operate in the spectrum licensed to us, what the interference
standards will be, and how significant the interference into our operations will
be.
Distant and Local Broadcast Signals. We believe that our ability to
deliver local programming via satellite into the markets from which the
programming originates helps us attract subscribers who would not otherwise be
willing to purchase satellite systems. Although we have commenced providing
local network service to eligible subscribers in various metropolitan centers,
subject to certain conditions, our ability to provide such a service is limited
as detailed below.
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Satellite Home Viewer Improvement Act and Retransmission Consent. The
Copyright Act, as amended by the Satellite Home Viewer Improvement Act of 1999,
permits satellite retransmission of distant network channels only to "unserved
households." Whether a household qualifies as "unserved" for the purpose of
eligibility to receive a distant network channel depends, in part, on whether
that household can receive a signal of "Grade B intensity" as defined by the
FCC. In February 1999, the FCC released a report and order on these matters.
Although the FCC declined to change the values of Grade B intensity, it adopted
a method for measuring it at particular households. The FCC also endorsed a
method for predicting Grade B intensity at particular households. In addition,
the Satellite Home Viewer Improvement Act enacted in November 1999, instructed
the FCC to establish a predictive model based on the model it had endorsed in
February 1999, and also directed the FCC to ensure that its predictive model
takes account of terrain, building structures and other land cover variations.
The FCC recently issued a report and order that does not adjust the model to
reflect such variations for any VHF stations. Failure to account for these
variations could hamper our ability to retransmit distant network and
superstation signals.
The Satellite Home Viewer Improvement Act of 1999 has also established
a process whereby consumers predicted to be served by a local station may
request that this station waive the unserved household limitation so that the
requesting consumer may receive distant signals by satellite. If the waiver
request is denied, the Satellite Home Viewer Improvement Act of 1999 entitles
the consumer to request an actual test, with the cost to be borne by either us
or the broadcast station depending on the results. The testing process required
by the statute can be very costly for us. The FCC staff has informally raised
questions about how we implement that process. We can provide no assurance that
the FCC will not find that our implementation of the process is not in
compliance with these rules. Furthermore, the FCC has recently identified a
third party organization to examine and propose tester qualification and other
standards for testing. We cannot be sure that this decision will not have an
adverse effect on our ability to test whether a consumer is eligible for distant
signals.
In addition, the Satellite Home Viewer Improvement Act of 1999 could
adversely affect us in several other respects. The legislation prohibits us from
carrying more than two distant signals for each broadcasting network and leaves
the FCC's Grade B intensity standard unchanged without future legislation. The
FCC recently released a report recommending that only minor changes be made to
the Grade B standard, a recommendation that is unfavorable to us. While the
Satellite Home Viewer Improvement Act of 1999 reduces the royalty rate that we
currently pay for superstation and distant network signals, it directs the FCC
to require us (within one year from November 29, 1999) to delete substantial
programming (including sports programming) from these signals. The FCC has
recently released rules implementing that directive, which have become
effective. These requirements may significantly hamper our ability to retransmit
distant network and superstation signals, or may impose burdens upon us that are
so onerous that we may be required to substantially alter, or stop
retransmitting, many or all superstation signals. In addition, the FCC's sports
blackout requirements, which apply to all distant network signals, are very
cumbersome and may require costly upgrades to our system.
For existing customers the new legislation also permits hundreds of
thousands of consumers to continue to receive distant network channels who would
otherwise be required to be disconnected. The new law generally does not,
however, permit consumers predicted to receive a signal of "Grade A" intensity
to continue receiving distant network channels. As a result, we believe hundreds
of thousands of consumers have or could lose access to network channels by
satellite. In anticipation of passage of the legislation, and for other reasons,
we recently ceased providing distant network channels to tens of thousands of
customers. These turn offs, together with others, could result in a temporary
material increase in churn and a small reduction in revenue per subscriber.
Further, broadcasters could seek a permanent injunction on our sales of both
distant and local network channels, which would have a material adverse effect
on our churn, revenue, ability to attract new subscribers, and our business
operations generally.
The Satellite Home Viewer Improvement Act of 1999 generally gives
satellite companies a statutory copyright license to retransmit local-into-local
network programming, subject to obtaining the retransmission consent of the
local network station. Retransmission consent agreements are important to us
because a failure to reach such agreements with broadcasters could have an
adverse effect on our strategy to compete with cable and other satellite
companies, which provide local signals. The Satellite Home Viewer Improvement
Act of 1999 requires broadcasters to negotiate retransmission consent agreements
in good faith. In accordance with the requirements of the Satellite Home Viewer
Improvement Act of 1999, the FCC has promulgated rules governing broadcasters'
good faith negotiation obligation. These rules allow satellite providers to file
complaints with the FCC
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against broadcasters for violating the duty to negotiate retransmission consent
agreements in good faith. Currently, the degree to which the rules will be of
practical benefit to us in our efforts to obtain all necessary retransmission
consent agreements remain unclear. While we have been able to reach
retransmission consent agreements with most of the local network stations we
currently carry, our planned roll-out of local channels in more cities will
require additional agreements, and we cannot be sure that we will secure these
agreements or that we will secure new agreements upon the expiration of our
current retransmission consent agreements, some of which are short term. We have
been unable to conclude a long-term retransmission consent agreement with the
NBC station in San Francisco and the ABC station in Nashville and recently
discontinued transmission of those channels as a result.
Many other provisions of the Satellite Home Viewer Improvement Act of
1999 could adversely affect us. Among other things, the law includes the
imposition of "must carry" requirements on DBS providers. The "must carry" rules
generally would require that commencing in January 2002 satellite distributors
carry all the local broadcast stations in areas they choose to offer local
programming, not just four major networks. Since we have limited capacity, the
number of markets in which we can offer local programming would be reduced by
the "must carry" requirement to carry large numbers of stations in each market
we serve. The legislation also includes provisions which could expose us to
material monetary penalties, and permanent prohibitions on the sale of all local
and distant network channels, based on what could be considered even inadvertent
violations of the legislation, prior law, or the FCC rules. Imposition of these
penalties would have a material adverse effect on our churn, revenue, ability to
attract new subscribers, and our business operations generally. Consistent with
the requirements of the Satellite Home Viewer Improvement Act of 1999, the FCC
has now completed a rulemaking and adopted detailed must-carry rules, including
obligations to also carry several non-commercial stations upon request. We
cannot be sure that the FCC rules will not have a further adverse impact on our
operations.
Opposition to Our Delivery of Distant Signals. Until July 1998, we
obtained distant broadcast network channels (ABC, NBC, CBS and FOX) for
distribution to our 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, we filed a declaratory judgment action against ABC,
NBC, CBS and FOX in Denver Federal Court. We 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 us in Miami Federal Court alleging, among other things,
copyright infringement. The court combined the case that we filed in Colorado
with the case in Miami and transferred it to the Miami court. 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 we do not know if they adhered to this
schedule.
In December 1998, the networks filed a Motion for Preliminary
Injunction against us in the Miami court, and asked the court to enjoin us 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 us to turn off network programming to
certain of its customers. At that time, the networks also argued that our
compliance procedures violate the Satellite Home Viewer Improvement Act. We
opposed the networks' motion and again asked the court to hear live testimony
before ruling upon the networks' injunction request.
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During September 2000, the Court granted the Networks' motion for
preliminary injunction, denied the Network's emergency motion and denied our
request to present live testimony and evidence. The Court's original order
required us 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 our past and future
sale of distant ABC, NBC, CBS and Fox channels similar to those imposed on
PrimeTime 24 (and, we believe, 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 we believe 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
us to shut off, by February 15, 2001, all subscribers who are ineligible to
receive distant network programming under the court's order. We have 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 our appeal. At that time, the Eleventh Circuit also
expedited its consideration of our appeal.
During November 2000, we filed our appeal brief with the Eleventh
Circuit. During December 2000, the Satellite Broadcasting and Communications
Association submitted an amicus brief in support of our appeal. The Consumer
Federation of America and the Media Access Project have also submitted an amicus
brief in support of our appeal. The Networks have responded to our 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 our 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, we filed our 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 our filing a response to the
National Association of Broadcasters' amicus brief or the Department of
Justice's brief. On January 19, 2001, we filed our supplemental brief responding
to the Department of Justice's brief. On January 23, 2001, the Department of
Justice filed a motion to strike our supplemental brief or for an opportunity to
reply to our supplemental brief. On February 2, 2001, without explanation, the
Eleventh Circuit issued an order striking our supplemental reply and denying us
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. We cannot predict when the Eleventh Circuit will rule on our
appeal, but it could be as early as April 2001. Our appeal effort may not be
successful and we may be required to comply with the Court's preliminary
injunction order on short notice. The preliminary injunction could force us to
terminate delivery of distant network channels to a substantial portion of our
distant network subscriber base, which could also cause many of these
subscribers to cancel their subscription to our other services. Such
terminations would result in a small reduction in our reported average monthly
revenue per subscriber and could result in a temporary increase in churn.
Dependence on Cable Act for Program Access. Any change in the Cable Act
and the FCC's rules that permit the cable industry or cable-affiliated
programmers to discriminate against competing businesses, such as ours, in the
sale of programming could adversely affect our ability to acquire programming at
all or to acquire programming on a cost-effective basis. Under the Cable Act and
the FCC's rules, cable-affiliated programmers generally must offer programming
they have developed to all multi-channel video programming distributors on
non-discriminatory terms and conditions. The Cable Act and the FCC's rules also
prohibit some types of exclusive programming contracts. We purchase a
substantial percentage of our programming from cable-affiliated programmers.
Some of these restrictions on cable-affiliated programmers will expire in 2002
unless the FCC extends the rules. While we have filed several complaints with
the FCC alleging discrimination, exclusivity, or refusals to deal, we have had
limited success in convincing the FCC to grant us relief. The FCC has denied or
dismissed many of our complaints, and we believe has generally not shown a
willingness to enforce the program access rules stringently. As a result, we may
be limited in our ability to obtain access (or non-discriminatory access) to
cable-affiliated programming. In addition, the FCC recently modified certain of
its attribution rules that determine
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whether a programmer is affiliated with a cable operator and therefore subject
to the program access obligations. We do not yet know the implications or impact
of these modified rules.
PATENTS AND TRADEMARKS
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. If a
competitor holds intellectual property rights, the entity might be predisposed
to exercise its right to prohibit our use of its intellectual property in our
products and services at any price, thus impacting our competitive position.
We cannot assure you that we are aware of all patents and other
intellectual property rights that our products may potentially infringe. In
addition, patent applications in the United States are confidential until the
Patent and Trademark Office issues a patent and, accordingly, we cannot evaluate
the extent to which our products may infringe claims contained in pending patent
applications. Further, it is often not possible to determine definitively
whether a claim of infringement is valid, absent protracted litigation.
We cannot estimate the extent to which we 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. Those costs, and their impact on net income,
could be material. Damages in patent infringement cases can also include a
tripling of actual damages in certain cases. To the extent that we are required
to pay royalties to third parties to whom we are not currently making payments,
these increased costs of doing business could negatively affect our liquidity
and operating results. Various parties have asserted patent and other
intellectual property rights with respect to components within our direct
broadcast satellite system. 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. We are currently involved
in several patent infringement actions. Among other things, TV Guide/Gemstar has
asserted that we are required to obtain licenses for patents they own at rates
which would require us to pay them over $100 million for past satellite receiver
sales. Gemstar also asserts tens of millions more in royalties each year
prospectively, together with, among other things, the right to substantially all
future potential on screen programming guide banner advertising revenues.
EMPLOYEES
We had approximately 11,000 employees at December 31, 2000, most of
whom are located in the United States. We are not a party to any collective
bargaining agreement and generally consider relations with our employees to be
good.
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EXECUTIVE OFFICERS OF THE REGISTRANT
(FURNISHED IN ACCORDANCE WITH ITEM 401(b) OF REGULATION S-K, PURSUANT TO
GENERAL INSTRUCTION G(3) OF FORM 10-K)
The following table sets forth the name, age and offices with EchoStar
of each of our executive officers, the period during which each executive
officer has served as such, and each executive officer's business experience
during the past five years:
NAME AGE POSITION
- ------------------------------------------ --- --------------------------------------------------
Charles W. Ergen.......................... 48 Chairman, Chief Executive Officer and Director
Michael T. Dugan.......................... 52 President and Chief Operating Officer
James DeFranco............................ 48 Executive Vice President and Director
Steven B. Schaver......................... 47 President of EchoStar International Corporation
David K. Moskowitz........................ 42 Senior Vice President, General Counsel, Secretary
and Director
Soraya Hesabi-Cartwright.................. 40 Executive Vice President of DISH Network
Mark W. Jackson........................... 40 Senior Vice President of EchoStar Technologies
Corporation
Michael R. McDonnell...................... 37 Senior Vice President and Chief Financial Officer
Michael Kelly............................. 39 Senior Vice President of International Programming
Charles W. Ergen. Mr. Ergen has been Chairman of the Board of Directors and
Chief Executive Officer of EchoStar since its formation and, during the past
five years, has held various executive officer and director positions with
EchoStar's subsidiaries. Mr. Ergen, along with his spouse and James DeFranco,
was a co-founder of EchoStar in 1980.
Michael T. Dugan. Mr. Dugan is the President of EchoStar. In that capacity,
Mr. Dugan is responsible for, among other things, all operations at EchoStar.
Until April 2000, he was President of EchoStar Technologies Corporation.
Previously he was the Senior Vice President of the Consumer Products Division of
ECC. Mr. Dugan has been with EchoStar since 1990.
James DeFranco. Mr. DeFranco, currently the Executive Vice President of
EchoStar, has been a Vice President and a Director of EchoStar since its
formation and, during the past five years, has held various executive officer
positions with EchoStar's subsidiaries. Mr. DeFranco, along with Mr. Ergen and
Mr. Ergen's spouse, was a co-founder of EchoStar in 1980.
Steven B. Schaver. Mr. Schaver was named President of EchoStar
International Corporation in April 2000. Mr. Schaver also served as EchoStar's
Chief Financial Officer from February 1996 through August 2000, and served as
EchoStar's Chief Operating Officer from November 1996 until April 2000. From
November 1993 to February 1996, Mr. Schaver was the Vice President of EchoStar's
European and African operations.
David K. Moskowitz. Mr. Moskowitz is the Senior Vice President, Secretary
and General Counsel of EchoStar. Mr. Moskowitz joined EchoStar in March 1990. He
was elected to EchoStar's Board of Directors during 1998. Mr. Moskowitz is
responsible for all legal affairs and certain business functions for EchoStar
and its subsidiaries.
Soraya Hesabi-Cartwright. Ms. Hesabi-Cartwright was named Executive Vice
President of DISH Network in April 2000. Ms. Hesabi-Cartwright served as Senior
Vice President of Human Resources and Customer Service from November 1998 until
April 2000. Ms. Hesabi-Cartwright joined EchoStar in 1994 as Director of Human
Resources and was promoted to Vice President of Human Resources in 1996. During,
1996, Ms. Hesabi-Cartwright transferred to EchoStar's Customer Service Center as
Vice President of Customer Service, where she served until her promotion in
1998.
Mark W. Jackson. Mr. Jackson was named Senior Vice President of EchoStar
Technologies Corporation in April 2000. Mr. Jackson served as Senior Vice
President of Satellite Services from December 1997 until April 2000. From April
1993 until December 1997 Mr. Jackson served as Vice President, Engineering at
EchoStar.
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Michael R. McDonnell. Mr. McDonnell joined EchoStar in August 2000 as Chief
Financial Officer. Mr. McDonnell is responsible for all accounting and finance
functions of the Company. Prior to joining EchoStar, Mr. McDonnell was a Partner
with PricewaterhouseCoopers LLP, serving on engagements for companies in the
technology and information communications industries.
Michael Kelly. Mr. Kelly joined EchoStar in March 2000 as Senior Vice
President of International Programming upon consummation of EchoStar's
acquisition of Kelly Broadcasting Systems, Inc. From January 1991 until March
2000, Mr. Kelly served as President of Kelly Broadcasting Systems, Inc. where he
was responsible for all components of the business, including operations,
finance, and international and domestic business development.
There are no family relationships among the executive officers and
directors of EchoStar or arrangements or understandings between any executive
officer and any other person pursuant to which any executive officer was
selected as such. Pursuant to the Bylaws of EchoStar, executive officers serve
at the discretion of the Board of Directors.
ITEM 2. PROPERTIES
The following table sets forth certain information concerning our
material properties:
SEGMENT(S) USING APPROXIMATE OWNED OR
DESCRIPTION/USE/LOCATION PROPERTY SQUARE FOOTAGE LEASED
- ------------------------------------------------- ------------------ -------------- --------
Corporate headquarters and customer service
center, Littleton, Colorado ............................. All 156,000 Owned
EchoStar Technologies Corporation office and
distribution center, Englewood, Colorado ................ ETC 155,000 Owned
EchoStar Technologies Corporation engineering ETC and Satellite
offices, Englewood, Colorado ............................ Services 57,200 Owned
Digital broadcast operations center, Cheyenne, DISH Network and
Wyoming ................................................. Satellite Services 144,000 Owned
DISH Network and
Digital broadcast operations center, Gilbert, AZ ........... Satellite Services 120,000 Owned
Customer service center, McKeesport, Pennsylvania .......... DISH Network 100,000 Leased
Customer service center, El Paso, Texas .................... DISH Network 100,000 Owned
Customer service center, Christiansburg, Virginia .......... DISH Network 100,000 Leased
Customer service center, Thornton, Colorado ................ DISH Network 55,000 Owned
Customer service center, Bluefield, West Virginia .......... DISH Network 51,000 Owned
Warehouse and distribution center, Denver, Colorado ........ ETC 132,800 Leased
Office and distribution center, Sacramento,
California .............................................. ETC 78,500 Owned
European headquarters and warehouse, Almelo, The
Netherlands ............................................. ETC and Other 53,800 Owned
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ITEM 3. LEGAL PROCEEDINGS
DirecTV
During February 2000 we filed suit against DirecTV and Thomson Consumer
Electronics/RCA in the Federal District Court of Colorado. The suit alleges that
DirecTV has utilized improper conduct in order to fend off competition from the
DISH Network. According to the complaint, DirecTV has demanded that certain
retailers stop displaying our merchandise and has threatened to cause economic
damage to retailers if they 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. We are seeking injunctive relief and monetary damages. On December
8, 2000, we 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 us. It is too early in the
litigation to make an assessment of the probable outcome. During October 2000,
however, DirecTV filed a motion for summary judgment asking that the Court enter
judgment in DirecTV's favor on certain of our claims. We have filed a motion
asking the Court to allow us an opportunity to conduct discovery prior to having
to substantively respond to DirecTV's motion. DirecTV's motion for summary
judgment and our motion remain pending.
The DirecTV defendants filed a counterclaim against us. DirecTV alleges
that we tortuously interfered with a contract that DirecTV allegedly had with
Kelly Broadcasting Systems, Inc. DirecTV alleges that we "merged" with KBS, in
contravention of DirecTV's contract with KBS. DirecTV also alleges that we have
falsely advertised to consumers about our right to offer network programming.
DirecTV further alleges that we improperly used certain marks owned by
PrimeStar, now owned by DirecTV. Finally, DirecTV alleges that we have been
marketing National Football League games in a misleading manner. The amount of
damages DirecTV is seeking is as yet unquantified. We intend to vigorously
defend against these claims. The case is currently in discovery. It is too early
in the litigation to make an assessment of the probable outcome.
Fee Dispute
We had a contingent fee arrangement with the attorneys who represented
us 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 us 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, we 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. We are vigorously
contesting the attorneys' interpretation of the fee arrangement, which we
believe significantly overstates the magnitude of our 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
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Canadian residents and that some of the defendants allowed and profited from
Canadian residents purchasing and viewing subscription television programming
that is only authorized for viewing in the United States. The lawsuit seeks,
among other things, an interim and permanent injunction prohibiting the
defendants from importing hardware into Canada and from activating receivers in
Canada, together with damages in excess of $175 million.
We filed motions to dismiss each of the actions for lack of personal
jurisdiction. The Court in the Alberta action recently denied our Motion to
Dismiss, which we 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 our 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. We intend 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, we obtained distant broadcast network channels (ABC,
NBC, CBS and FOX) for distribution to our 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, we filed a declaratory judgment action against ABC,
NBC, CBS and FOX in Denver Federal Court. We 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 us in Miami Federal Court alleging, among other things,
copyright infringement. The court combined the case that we filed in Colorado
with the case in Miami and transferred it to the Miami court. 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 we do not know if they adhered to this
schedule.
In December 1998, the networks filed a Motion for Preliminary
Injunction against us in the Miami court, and asked the court to enjoin us 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 us to turn off network programming to
certain of its customers. At that time, the networks also argued that our
compliance procedures violate the Satellite Home Viewer Improvement Act. We
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 our
request to present live testimony and evidence. The Court's original order
required us 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 our past and future
sale of distant ABC, NBC, CBS and Fox channels similar to those imposed on
PrimeTime 24 (and,
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we believe, 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 we believe
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
us to shut off, by February 15, 2001, all subscribers who are ineligible to
receive distant network programming under the court's order. We have 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 our appeal. At that time, the Eleventh Circuit also
expedited its consideration of our appeal.
During November 2000, we filed our appeal brief with the Eleventh
Circuit. During December 2000, the Satellite Broadcasting and Communications
Association submitted an amicus brief in support of our appeal. The Consumer
Federation of America and the Media Access Project have also submitted an amicus
brief in support of our appeal. The Networks have responded to our 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 our 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, we filed our 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 our filing a response to the
National Association of Broadcasters' amicus brief or the Department of
Justice's brief. On January 19, 2001, we filed our supplemental brief responding
to the Department of Justice's brief. On January 23, 2001, the Department of
Justice filed a motion to strike our supplemental brief or for an opportunity to
reply to our supplemental brief. On February 2, 2001, without explanation, the
Eleventh Circuit issued an order striking our supplemental reply and denying us
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. We cannot predict when the Eleventh Circuit will rule on our
appeal, but it could be as early as April 2001. Our appeal effort may not be
successful and we may be required to comply with the Court's preliminary
injunction order on short notice. The preliminary injunction could force us to
terminate delivery of distant network channels to a substantial portion of our
distant network subscriber base, which could also cause many of these
subscribers to cancel their subscription to our other services. Such
terminations would result in a small reduction in our 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. We have examined this patent and believe
that it is not infringed by any of our products or services. We are vigorously
contesting the suit and have filed counterclaims challenging both the validity
and enforceability of this patent.
In December 2000, we 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.
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In February 2001, Gemstar filed patent infringement actions against us
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. 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. We expect 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. 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. We have examined these patents and believe they are not
infringed by any of our products or services. We 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 our understanding that these patents may be
licensed by Superguide to Gemstar, although Gemstar has not asserted the patents
against us. We have examined these patents and believe that they are not
infringed by any of our products or services. We intend to vigorously defend
against this action and assert a variety of counterclaims.
In the event it is ultimately determined that we infringe on any of the
aforementioned patents we may be subject to substantial damages, and/or an
injunction that could require us to materially modify certain user friendly
electronic programming guide and related features we 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 us 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. We are 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 we infringe 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 us to materially
modify certain user friendly features we currently offer to consumers. It is too
early to make an assessment of the probable outcome of either suit.
Retailer Class Actions
We have 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. We intend 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.
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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 the us and claims the alleged class has been "subject to improper
chargebacks." The plaintiff alleges that (1) we charged back certain fees paid
by members of the class to professional installers in violation of contractual
terms; (2) we manipulated the accounts of subscribers to deny payments to class
members; and (3) we misrepresented to class members who owns certain equipment
related to the provision of satellite television services. The plaintiff is
requesting a permanent injunction and monetary damages. We intend 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.
We are subject to various other legal proceedings and claims which
arise in the ordinary course of business. In the opinion of management, the
amount of ultimate liability with respect to those actions will not materially
affect our financial position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No items were submitted to a vote of security holders during the fourth
quarter of 2000.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our Class A common stock is quoted on the Nasdaq Stock Market under the
symbol "DISH." The sale prices reflect inter-dealer quotations and do not
include retail markups, markdowns, or commissions. The high and low closing sale
prices of the Class A common stock during 1999 and 2000 on the Nasdaq Stock
Market (as reported by Nasdaq) are set forth below. On each of July 19, 1999,
October 25, 1999 and March 22, 2000, we completed a two-for-one split of our
outstanding common stock. All references to share and per share amounts included
below retroactively give effect to the stock splits competed in July 1999,
October 1999 and March 2000.
1999 High Low
- ---- --------- ---------
First Quarter .................... $ 10.203 $ 5.750
Second Quarter ................... 19.773 10.063
Third Quarter .................... 24.250 14.188
Fourth Quarter ................... 48.750 22.484
2000
- ----
First Quarter .................... $ 79.000 $ 40.719
Second Quarter ................... 74.188 31.188
Third Quarter .................... 53.422 31.625
Fourth Quarter ................... 54.125 22.750
As of March 8, 2001, there were approximately 3,659 holders of record
of our Class A common stock, not including stockholders who beneficially own
Class A common stock held in nominee or street name. As of March 8, 2001, all
238,435,208 outstanding shares of our Class B common stock were held by Charles
W. Ergen, our Chief Executive Officer. There is currently no trading market for
our Class B common stock.
We have never declared or paid any cash dividends on any class of our
common stock and do not expect to declare dividends on our common stock in the
foreseeable future. Payment of any future dividends will depend upon our
earnings and capital requirements, restrictions in our debt facilities, and
other factors the Board of Directors considers appropriate. We currently intend
to retain our earnings, if any, to support future growth and expansion. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources."
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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
----------- ----------- ----------- ----------- -----------
STATEMENTS OF OPERATIONS DATA (IN THOUSANDS, EXCEPT SUBSCRIBERS AND PER SHARE 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) (621,211)
=========== =========== =========== =========== ===========
Net loss attributable to common shares ........ $ (102,190) $ (321,267) $ (296,097) $ (800,100) (622,357)
=========== =========== =========== =========== ===========
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) $ (1.32)
=========== =========== =========== =========== ===========
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 4,665,950
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) (628,268)
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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 (earnings before interest, taxes, depreciation and
amortization) 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 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.
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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
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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.
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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.
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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.
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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
represents earnings before interest, taxes, depreciation, 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.
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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 $197 million
during the year ended December 31, 2000, an increase of $20 million compared to
the same period in 1999. This increase resulted 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.
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 and other expenses
resulted from increased personnel and telephone expenses to support the growth
of the DISH
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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.
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Earnings Before Interest, Taxes, Depreciation and Amortization. EBITDA
represents earnings before interest, taxes, depreciation, 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
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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
expenditures. Capital expenditures under our Digital Dynamite promotion totaled
approximately $65.4 million for the year ended December 31, 2000.
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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.
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.
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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 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.
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.
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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.
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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our Consolidated Financial Statements are included in this report
beginning on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item with respect to the identity and
business experience of our directors is set forth in our Proxy Statement for the
Annual Meeting of Shareholders to be held on May 4, 2001, under the caption
"Election of Directors," which information is hereby incorporated herein by
reference.
The information required by this Item with respect to the identity and
business experience of our executive officers is set forth on page 21 of this
report under the caption "Executive Officers."
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is set forth in our Proxy
Statement for the Annual Meeting of Shareholders to be held on May 4, 2001,
under the caption "Executive Compensation and Other Information," which
information is hereby incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is set forth in our Proxy
Statement for the Annual Meeting of Shareholders to be held on May 4, 2001,
under the captions "Election of Directors" and "Equity Security Ownership,"
which information is hereby incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is set forth in our Proxy
Statement for the Annual Meeting of Shareholders to be held on May 4, 2001,
under the caption "Certain Relationships and Related Transactions," which
information is hereby incorporated herein by reference.
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
(1) Financial Statements PAGE
----
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' Equity 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
(2) Financial Statement Schedules
None. All schedules have been included in the Consolidated Financial
Statements or Notes thereto.
(3) Exhibits
3.1(a)* Amended Restated Articles of Incorporation of EchoStar.
3.1(b)* Bylaws of EchoStar (incorporated by reference to Exhibit
3.1(b) to the Registration Statement on Form S-1 of EchoStar,
Registration No. 33-91276).
3.2(a)* Articles of Incorporation of EchoStar Satellite Broadcasting
Corporation (formerly EchoStar Bridge Corporation, a Colorado
corporation) ("ESBC") (incorporated by reference to Exhibit
3.1(e) to the Registration Statement on Form S-1 of ESBC,
Registration No. 333-3980).
3.2(b)* Bylaws of ESBC (incorporated by reference to Exhibit 3.1(f) to
the Registration Statement on Form S-1 of ESBC, Registration
No. 333-3980).
3.3(a)* Amended and Restated Articles of Incorporation of Dish
(incorporated by reference to Exhibit 3.1(a) to the
Registration Statement on Form S-1 of Dish, Registration No.
33-76450).
3.3(b)* Bylaws of Dish (incorporated by reference to Exhibit 3.1(b) to
the Registration Statement on Form S-1 of Dish, Registration
No. 33-76450).
3.4(a)* Articles of Incorporation of EchoStar DBS Corporation, a
Colorado corporation ("DBS Corp.") (incorporated by reference
to Exhibit 3.4(a) to the Registration Statement on Form S-4 of
DBS Corp., Registration No. 333-31929).
3.4(b)* Bylaws of DBS Corp. (incorporated by reference to Exhibit
3.4(b) to the Registration Statement on Form S-4 of DBS Corp.,
Registration No. 333-31929).
4.1* Warrant Agreement between EchoStar and First Trust, as Warrant
Agent (incorporated by reference to Exhibit 4.2 to the
Registration Statement on Form S-1 of Dish, Registration No.
33-76450).
4.2* Security Agreement in favor of First Trust, as trustee under
the Indenture filed as Exhibit 4.1 hereto (incorporated by
reference to Exhibit 4.3 to the Registration Statement on Form
S-1 of Dish, Registration No. 33-76450).
4.3* Escrow and Disbursement Agreement between Dish and First Trust
(incorporated by reference to Exhibit 4.4 to the Registration
Statement on Form S-1 of Dish, Registration No. 33-76450).
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4.4* Pledge Agreement in favor of First Trust, as trustee under the
Indenture filed as Exhibit 4.1 hereto (incorporated by
reference to Exhibit 4.5 to the Registration Statement on Form
S-1 of Dish, Registration No. 33-76450).
4.5* Intercreditor Agreement among First Trust, Continental Bank,
N.A. and Martin Marietta Corporation ("Martin Marietta")
(incorporated by reference to Exhibit 4.6 to the Registration
Statement on Form S-1 of Dish, Registration No. 33-76450).
4.6* Registration Rights Agreement by and between EchoStar and
Charles W. Ergen (incorporated by reference to Exhibit 4.8 to
the Registration Statement on Form S-1 of EchoStar,
Registration No. 33-91276).
4.7* 6 3/4% Series C Cumulative Convertible Preferred Stock
Certificate of Designation of EchoStar (incorporated by
reference to Exhibit 4.19 to the Registration Statement on
Form S-4 of EchoStar, Registration No. 333-39901).
4.8(a)* Form of Underwriting Agreement for 6 3/4% Series C Cumulative
Convertible Preferred Stock by and between EchoStar, DLJ and
Lehman Brothers (incorporated by reference to Exhibit 1.1 to
Amendment No. 1 to the Registration Statement on Form S-3 of
EchoStar, Registration No. 333-37683).
4.8(b)* Form of Underwriting Agreement for Class A Common Stock by and
between EchoStar, DLJ, BT Alex. Brown Incorporated and
Unterberg Harris (incorporated by reference to Exhibit 1.1 to
Amendment No. 1 to the Registration Statement on Form S-3 of
EchoStar, Registration No. 333-37683).
4.9* Indenture of Trust, relating to DBS Corp.'s 9 1/4% Senior
Notes due 2006 ("Seven Year Notes"), dated as of January 25,
1999, among DBS Corp., the Guarantors (as defined therein) and
U.S. Bank Trust National Association ("U.S. Bank"), as trustee
(incorporated by reference to Exhibit 4.1 to the Registration
Statement on Form S-4 of DBS Corp., Registration No.
333-71345).
4.10* Indenture of Trust, relating to DBS Corp.'s 9 3/8% Senior
Notes due 2009 ("Ten Year Notes"), dated as of January 25,
1999, among DBS Corp., the Guarantors (as defined therein) and
U.S. Bank, as trustee (incorporated by reference to Exhibit
4.3 to the Registration Statement on Form S-4 of DBS Corp.,
Registration No. 333-71345).
4.11* Registration Rights Agreement, relating to the Seven Year
Notes, dated as of January 25, 1999, by and among DBS Corp.,
the Guarantors and the Initial Purchasers (as defined therein)
(incorporated by reference to Exhibit 4.5 to the Registration
Statement on Form S-4 of DBS Corp., Registration No.
333-71345).
4.12* Registration Rights Agreement, relating to the Ten Year Notes,
dated as of January 25, 1999, by and among DBS Corp., the
Guarantors and the Initial Purchasers (as defined therein)
(incorporated by reference to Exhibit 4.6 to the Registration
Statement on Form S-4 of DBS Corp., Registration No.
333-71345).
4.13* Indenture, dated as of December 8, 1999, between EchoStar
Communications Corporation and U.S. Bank Trust National
Association, as trustee, including the form of 4 7/8 %
Convertible Subordinated Note Due 2007 (incorporated by
reference to Exhibit 4.1 to the Registration Statement on Form
S-3 of EchoStar Communications Corporation, Registration No.
333-31894).
4.14* Registration Rights Agreement, relating to the 4 7/8 %
Convertible Subordinated Notes Due 2007, dated as of December
8, 1999, by and among EchoStar Communications Corporation and
the initial purchasers (incorporated by reference to Exhibit
4.2 to the Registration Statement on Form S-3 of EchoStar
Communications Corporation, Registration No. 333-31894).
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4.15* Indenture dated as of September 25, 2000, between EchoStar
Broadband Corporation and U.S. Bank Trust National
Association, as trustee (incorporated by reference to Exhibit
4.1 to the Quarterly Report on Form 10-Q of EchoStar for the
quarter ended September 30, 2000, Commission File No.0-26176).
4.16* Registration Rights Agreement dated as of September 25, 2000,
by and among EchoStar Broadband Corporation, Donaldson, Lufkin
& Jenrette Securities Corporation, Banc of America Securities
LLC, Credit Suisse First Boston Corporation and ING Barings
LLC (incorporated by reference to Exhibit 4.2 to the Quarterly
Report on Form 10-Q of EchoStar for the quarter ended
September 30, 2000, Commission File No.0-26176).
10.1* Key Employee Bonus Plan, dated as of January 1, 1994
(incorporated by reference to Exhibit 10.7 to the Registration
Statement on Form S-1 of Dish, Registration No. 33-76450)**
10.2* Consulting Agreement, dated as of February 17, 1994, between
ESC and Telesat Canada (incorporated by reference to Exhibit
10.8 to the Registration Statement on Form S-1 of Dish,
Registration No. 33-76450).
10.3* Form of Satellite Launch Insurance Declarations (incorporated
by reference to Exhibit 10.10 to the Registration Statement on
Form S-1 of Dish, Registration No. 33-81234).
10.4* Dish 1994 Stock Incentive Plan (incorporated by reference to
Exhibit 10.11 to the Registration Statement on Form S-1 of
Dish, Registration No. 33-76450).**
10.5* Form of Tracking, Telemetry and Control Contract between AT&T
Corp. and ESC (incorporated by reference to Exhibit 10.12 to
the Registration Statement on Form S-1 of Dish, Registration
No. 33-81234).
10.6* Manufacturing Agreement, dated as of March 22, 1995, between
HTS and SCI Technology, Inc. (incorporated by reference to
Exhibit 10.12 to the Registration Statement on Form S-1 of
Dish, Commission File No. 33-81234).
10.7* Statement of Work, dated January 31, 1995 from ESC to DiviCom,
Inc. (incorporated by reference to Exhibit 10.14 to the
Registration Statement on Form S-1 of EchoStar, Registration
No. 33-91276).
10.8* EchoStar 1995 Stock Incentive Plan (incorporated by reference
to Exhibit 10.16 to the Registration Statement on Form S-1 of
EchoStar, Registration No. 33-91276)**
10.9* Satellite Construction Contract, dated as of July 18, 1996,
between EDBS and Lockheed Martin Corporation (incorporated by
reference to Exhibit 10.18 to the Quarterly Report on Form
10-Q of EchoStar for the quarter ended June 30, 1996,
Commission File No. 0-26176).
10.10* Confidential Amendment to Satellite Construction Contract
between DBSC and Martin Marietta, dated as of May 31, 1995
(incorporated by reference to Exhibit 10.14 to the
Registration Statement of Form S-4 of EchoStar, Registration
No. 333-03584).
10.11* Agreement between HTS, ESC and ExpressVu Inc., dated January
8, 1997, as amended (incorporated by reference to Exhibit
10.18 to the Annual Report on Form 10-K of EchoStar for the
year ended December 31, 1996, as amended, Commission File No.
0-26176).
10.12* Amendment No. 9 to Satellite Construction Contract, effective
as of July 18, 1996, between Direct Satellite Broadcasting
Corporation, a Delaware corporation ("DBSC") and Martin
Marrieta Corporation (incorporated by reference to Exhibit
10.1 to the Quarterly Report on Form 10-Q of EchoStar for the
quarterly period ended June 30, 1997, Commission File No.
0-26176).
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10.13* Amendment No. 10 to Satellite Construction Contract, effective
as of May 31, 1996, between DBSC and Lockheed Martin
Corporation (incorporated by reference to Exhibit 10.2 to the
Quarterly Report on Form 10-Q of EchoStar for the quarterly
period ended June 30, 1997, Commission File No. 0-26176).
10.14* OEM Manufacturing, Marketing and Licensing Agreement, dated as
of February 17, 1998, by and among HTS, ESC and Philips
Electronics North America Corporation (incorporated by
reference to Exhibit 10.1 to the Quarterly Report on Form 10-Q
of EchoStar for the quarterly period ended March 31, 1998,
Commission File No. 0-26176).
10.15* Licensing Agreement, dated as of February 23, 1998, by and
among HTS, ESC and VTech Communications Ltd. (incorporated by
reference to Exhibit 10.2 to the Quarterly Report on Form 10-Q
of EchoStar for the quarterly period ended March 31, 1998,
Commission File No. 0-26176).
10.16* Purchase Agreement, dated November 30, 1998, by and among
American Sky Broadcasting, LLC ("ASkyB"), The News Corporation
Limited ("News Corporation"), MCI Telecommunications
Corporation and EchoStar (incorporated by reference to Exhibit
10.1 to the Current Report on Form 8-K filed by EchoStar on
December 1, 1998, Commission File No. 0-26176).
10.17* Voting Agreement, dated November 30, 1998, among EchoStar,
AskyB, News Corporation and MCI Telecommunications Corporation
(incorporated by reference to Exhibit 10.3 to the Current
Report on Form 8-K of EchoStar, filed as of December 1, 1998).
10.18* Agreement to Form NagraStar LLC, dated as of June 23, 1998, by
and between Kudelski S.A., EchoStar and ESC (incorporated by
reference to Exhibit 10.28 to the Annual Report on Form 10-K
of EchoStar for the year ended December 31, 1998, Commission
File No. 0-26176).
10.19* First Amendment, dated June 23, 1999, to the Purchase
Agreement dated November 30, 1998, by and among American Sky
Broadcasting, LLC, The News Corporation Limited, MCI
Telecommunications Corporation, and EchoStar Communications
Corporation (incorporated by reference to Exhibit 10.3 to the
Current Report on Form 8-K of EchoStar, filed as of July 2,
1999, Commission File No. 0-26176).
10.20* Registration Rights Agreement, dated June 24, 1999, by and
among EchoStar Communications Corporation, MCI
Telecommunications Corporation, American Sky Broadcasting,
LLC, and News America Incorporated (incorporated by reference
to Exhibit 10.4 to the Current Report on Form 8-K of EchoStar,
filed as of July 2, 1999, Commission File No. 0-26176).
10.21* Satellite Construction Contract dated as of January 27, 2000,
between EchoStar Orbital Corporation and Lockheed Martin
Corporation (incorporated by reference to Exhibit 10.1 to the
Quarterly Report on Form 10-Q of EchoStar for the quarter
ended March 31, 2000, Commission File No.0-26176).
10.22* Satellite Construction Contract dated as of February 4, 2000,
between EchoStar Orbital Corporation and Space Systems/Loral
Inc. (incorporated by reference to Exhibit 10.2 to the
Quarterly Report on Form 10-Q of EchoStar for the quarter
ended March 31, 2000, Commission File No.0-26176).
10.23* Satellite Construction Contract dated as of February 22, 2000,
between EchoStar Orbital Corporation and Space Systems/Loral
Inc. (incorporated by reference to Exhibit 10.3 to the
Quarterly Report on Form 10-Q of EchoStar for the quarter
ended March 31, 2000, Commission File No.0-26176).
10.24* Agreement dated as of February 22, 2000, between EchoStar
Orbital Corporation and Loral Skynet, a division of Loral
SpaceCom Corporation (incorporated by reference to Exhibit
10.4 to the Quarterly Report on Form 10-Q of EchoStar for the
quarter ended March 31, 2000, Commission File No.0-26176).
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49
21+ Subsidiaries of EchoStar Communications Corporation.
24.1+ Powers of Attorney authorizing signature of O. Nolan Daines
and Raymond L. Friedlob.
- ----------
* Incorporated by reference.
** Constitutes a management contract or compensatory plan or arrangement.
+ Filed herewith.
(b) Reports on Form 8-K
On February 28, 2000, we filed a Current Report on Form 8-K to report a
2-for-1 split of our common stock. Effective March 22, 2000, stockholders of
record at the close of business on March 10, 2000 received one additional share
of common stock for each share they owned on the record date.
On September 12, 2000, we filed a Current Report on Form 8-K to report
that our wholly-owned subsidiary, EchoStar Broadband Corporation, offered $600
million aggregate principal amount of Senior Notes due 2007 in accordance with
Securities and Exchange Commission Rule 144A.
On September 25, 2000, we filed a Current Report on Form 8-K to report
that our wholly-owned subsidiary, EchoStar Broadband Corporation, increased its
previously announced offering of Senior noted due 2007 from $600 million to $1
billion, and that the offering closed September 25, 2000.
47
50
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, EchoStar has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
ECHOSTAR COMMUNICATIONS CORPORATION
By: /s/ Michael R. McDonnell
-------------------------------------------------
Michael R. McDonnell
Senior Vice President and Chief Financial Officer
Date: March 12, 2001
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of EchoStar
and in the capacities and on the dates indicated:
Signature Title Date
- --------- ----- ----
/s/ Charles W. Ergen Chief Executive Officer and Director March 12, 2001
- --------------------------------- (Principal Executive Officer)
Charles W. Ergen
/s/ Michael R. McDonnell Senior Vice President and Chief Financial Officer March 12, 2001
- --------------------------------- (Principal Financial Officer)
Michael R. McDonnell
/s/ James DeFranco Director March 12, 2001
- ---------------------------------
James DeFranco
/s/ David K. Moskowitz Director March 12, 2001
- ---------------------------------
David K. Moskowitz
* Director March 12, 2001
- ---------------------------------
Raymond L. Friedlob
* Director March 12, 2001
- ---------------------------------
O. Nolan Daines
* By: /s/ David K. Moskowitz
-------------------------------
David K. Moskowitz
Attorney-in-Fact
48
51
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
52
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. 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.
F-2
53
ECHOSTAR COMMUNICATIONS CORPORATION
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
DECEMBER 31,
------------------------------------
1999 2000
--------------- ---------------
ASSETS
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 50,827
--------------- ---------------
Total current assets ................................................................ 1,683,695 2,060,777
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 ............................................................. 149,153 298,493
--------------- ---------------
Total assets ................................................................... $ 3,898,189 $ 4,665,950
=============== ===============
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) (2,225,551)
--------------- ---------------
Total stockholders' deficit ......................................................... (48,418) (628,268)
--------------- ---------------
Total liabilities and stockholders' deficit .................................... $ 3,898,189 $ 4,665,950
=============== ===============
See accompanying Notes to Consolidated Financial Statements.
F-3
54
ECHOSTAR COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(In thousands, except per share amounts)
YEAR ENDED DECEMBER 31,
---------------------------------------------------------
1998 1999 2000
--------------- --------------- ---------------
REVENUE:
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) (8,333)
--------------- --------------- ---------------
Total other income (expense) ....................................... (137,947) (176,603) (196,590)
--------------- --------------- ---------------
Loss before income taxes ........................................... (260,838) (523,694) (620,656)
Income tax provision, net .......................................... (44) (154) (555)
--------------- --------------- ---------------
Loss before extraordinary charges .................................. (260,882) (523,848) (621,211)
Extraordinary charge for early retirement of debt, net of tax ...... -- (268,999) --
--------------- --------------- ---------------
Net loss ........................................................... $ (260,882) $ (792,847) $ (621,211)
=============== =============== ===============
Change in unrealized gain (loss) on available-for-sale
securities, net of tax .......................................... 19 -- (60,580)
--------------- --------------- ---------------
Comprehensive loss ................................................. $ (260,863) $ (792,847) $ (681,791)
=============== =============== ===============
Net loss attributable to common shareholders (Note 2) .............. $ (296,097) $ (800,100) $ (622,357)
=============== =============== ===============
Weighted-average common shares outstanding ......................... 359,856 416,476 471,023
=============== =============== ===============
Basic and diluted loss per common share ............................ $ (0.82) $ (1.92) $ (1.32)
=============== =============== ===============
See accompanying Notes to Consolidated Financial Statements.
F-4
55
ECHOSTAR COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT
(In thousands, except per share amounts)
COMMON STOCK SERIES A SERIES C
------------------------- PREFERRED PREFERRED
SHARES AMT. STOCK STOCK
----------- ----------- ----------- -----------
Balance, December 31, 1997 ....................... 358,480 $ 3,585 $ 19,603 $ 101,529
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 -- --
Employee benefits ........................... 800 8 -- --
Employee Stock Purchase Plan ................ 128 -- -- --
Unrealized holding gains on
available-for-sale securities, net .......... -- -- -- --
Net loss ...................................... -- -- -- --
----------- ----------- ----------- -----------
Balance, December 31, 1998 ....................... 360,976 3,609 20,807 108,666
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)
Proceeds from Series C Preferred Stock
deposit account ............................. 46 -- -- --
Issuance of Class A Common Stock:
Acquisition of Media4 ....................... 1,376 14 -- --
News Corporation and MCI transaction ........ 68,824 688 -- --
Exercise of stock options ................... 3,868 39 -- --
Employee benefits ........................... 556 6 -- --
Employee Stock Purchase Plan ................ 44 -- -- --
Deferred stock-based compensation ............. -- -- -- --
Deferred stock-based compensation
recognized .................................. -- -- -- --
Net loss ...................................... -- -- -- --
----------- ----------- ----------- -----------
Balance, December 31, 1999 ....................... 458,522 4,584 -- 45,434
Series C Preferred Stock dividends (at
$0.84375 per share, per quarter) ............ -- -- -- --
Conversion of Series C Preferred Stock ........ 11,320 113 -- (34,486)
Issuance of Class A Common Stock:
Acquisition of Kelly Broadcasting Systems ... 510 5 -- --
Exercise of stock options ................... 3,593 36 -- --
Employee benefits ........................... 182 2 -- --
Employee Stock Purchase Plan ................ 58 1 -- --
Forfeitures of deferred non-cash,
stock-based compensation .................... -- -- -- --
Deferred stock-based compensation
recognized .................................. -- -- -- --
Unrealized holding gains on
available-for-sale securities, net .......... -- -- -- --
Net loss ...................................... -- -- -- --
----------- ----------- ----------- -----------
Balance, December 31, 2000 ....................... 474,185 $ 4,741 $ -- $ 10,948
=========== =========== =========== ===========
DEFERRED ACCUMULATED
STOCK- DEFICIT AND
BASED ADDITIONAL UNREALIZED
COMPEN- PAID-IN HOLDING GAINS
SATION CAPITAL (LOSSES) TOTAL
----------- ----------- ------------- -----------
Balance, December 31, 1997 ....................... $ -- $ 223,337 $ (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 ................... -- 2,480 -- 2,496
Employee benefits ........................... -- 2,283 -- 2,291
Employee Stock Purchase Plan ................ -- 371 -- 371
Unrealized holding gains on
available-for-sale securities, net .......... -- -- 19 19
Net loss ...................................... -- -- (260,882) (260,882)
----------- ----------- ----------- -----------
Balance, December 31, 1998 ....................... -- 228,471 (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 ........ -- 69,339 -- --
Proceeds from Series C Preferred Stock
deposit account ............................. -- 953 2 955
Issuance of Class A Common Stock:
Acquisition of Media4 ....................... -- 9,593 -- 9,607
News Corporation and MCI transaction ........ -- 1,123,632 -- 1,124,320
Exercise of stock options ................... -- 7,125 -- 7,164
Employee benefits ........................... -- 3,789 -- 3,795
Employee Stock Purchase Plan ................ -- 796 -- 796
Deferred stock-based compensation ............. (178,840) 178,840 -- --
Deferred stock-based compensation
recognized .................................. 61,060 -- 61,060
Net loss ...................................... -- -- (792,847) (792,847)
----------- ----------- ----------- -----------
Balance, December 31, 1999 ....................... (117,780) 1,622,538 (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 ........ -- 34,373 -- --
Issuance of Class A Common Stock:
Acquisition of Kelly Broadcasting Systems ... -- 31,551 -- 31,556
Exercise of stock options ................... -- 10,973 -- 11,009
Employee benefits ........................... -- 7,282 -- 7,284
Employee Stock Purchase Plan ................ -- 1,722 -- 1,723
Forfeitures of deferred non-cash,
stock-based compensation .................... 6,730 (8,072) -- (1,342)
Deferred stock-based compensation
recognized .................................. 52,857 -- -- 52,857
Unrealized holding gains on
available-for-sale securities, net .......... -- -- (60,580) (60,580)
Net loss ...................................... -- -- (621,211) (621,211)
----------- ----------- ----------- -----------
Balance, December 31, 2000 ....................... $ (58,193) $ 1,700,367 $(2,286,131) $ (628,268)
=========== =========== =========== ===========
See accompanying Notes to Consolidated Financial Statements.
F-5
56
ECHOSTAR COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
YEAR ENDED DECEMBER 31,
---------------------------------------
1998 1999 2000
----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ............................................................................ $ (260,882) $ (792,847) $ (621,211)
Adjustments to reconcile net loss to net cash flows from operating activities:
Extraordinary charge for early retirement of debt ................................ -- 268,999 --
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
57
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
58
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-
F-8
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ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
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.
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 $60,580 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.
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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
MARKETABLE INVESTMENT AND MARKETABLE
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
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
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):
DECEMBER 31, 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.
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ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
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 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).
F-12
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ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
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.
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.
F-13
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
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
------------ ------------ ------------
(In thousands, except per share data)
Numerator:
Net loss .......................................................... $ (260,882) $ (792,847) $ (621,211)
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) $ (622,357)
============ ============ ============
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) $ (1.32)
Extraordinary charge for the early retirement of debt ................ -- (0.64) --
------------ ------------ ------------
Basic and diluted loss per share ..................................... $ (0.82) $ (1.92) $ (1.32)
============ ============ ============
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.
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
============= =============
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ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
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 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.
F-15
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ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
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.
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
F-16
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ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
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:
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.
F-17
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ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
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 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
F-18
69
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
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.
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.
F-19
70
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
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.
F-20
71
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
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 installments 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
NOTES,
9 1/4% 4 7/8% MORTGAGES
SEVEN 9 3/8% TEN CONVERTIBLE 10 3/8% TEN AND OTHER
YEAR NOTES YEAR NOTES NOTES YEAR 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
============ ============ ============ ============ ============ ============
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.
F-21
72
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
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
-------- -------- --------
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 .......... -- -- 3.3
Non-deductible interest expense .................. (1.4) (0.3) --
Other ............................................ 0.5 1.3 1.6
Increase in valuation allowance .................. (35.7) (38.3) (42.8)
-------- -------- --------
Total benefit from income taxes ............... --% --% --%
======== ======== ========
The components of the (provision for) benefit from income taxes are as
follows (in thousands):
YEAR ENDED DECEMBER 31,
---------------------------------------
1998 1999 2000
--------- --------- ---------
Current (provision) benefit:
Federal ........................................ $ 15 $ -- $ --
State .......................................... 18 (45) (80)
Foreign ........................................ (77) (108) (475)
--------- --------- ---------
(44) (153) (555)
Deferred (provision) benefit:
Federal ........................................ 86,604 286,195 237,744
State .......................................... 6,463 27,748 27,623
Increase in valuation allowance ................ (93,067) (313,943) (265,367)
--------- --------- ---------
-- -- --
--------- --------- ---------
Total (provision) benefit ................... $ (44) $ (153) $ (555)
========= ========= =========
F-22
73
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
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
------------ ------------
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) (79,023)
------------ ------------
Net current deferred tax assets .................. 11,728 14,633
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 23,802
------------ ------------
Total noncurrent deferred tax assets ............. 563,618 836,895
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 ........................ 519,734 758,335
------------ ------------
Valuation allowance .............................. (464,327) (705,833)
------------ ------------
Net noncurrent deferred tax assets ............... 55,407 52,502
------------ ------------
Net deferred tax assets .......................... $ 67,135 $ 67,135
============ ============
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
F-23
74
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
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 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.
F-24
75
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
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
year ................................ 12,196,536 $ 1.88 11,576,120 $ 2.04 27,843,640 $ 6.26
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.
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.
F-25
76
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
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
----------- ----------- -----------
Net loss attributable to common shares ........... $ (297,197) $ (749,836) $ (593,810)
=========== =========== ===========
Basic and diluted loss per share ................. $ (0.83) $ (1.80) $ (1.26)
=========== =========== ===========
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.
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
F-26
77
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
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.
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.
F-27
78
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
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 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
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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.
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
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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 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.
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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. 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
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ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
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 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
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ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
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.
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ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
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.
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
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) ...................... (775,581) (155) 52,964 101,561 (621,211)
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
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.
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
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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:
Total revenue .................................. $ 565,721 $ 646,129 $ 697,972 $ 805,398
Operating loss ................................. (142,017) (86,231) (82,082) (113,736)
Net loss ....................................... (185,130) (132,860) (130,893) (172,328)
Basic and diluted loss per share ............... $ (0.40) $ (0.28) $ (0.28) $ (0.36)
13. SUBSEQUENT EVENTS
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.
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EXHIBIT INDEX
Exhibit No. Description
----------- -----------
3.1(a)* Amended Restated Articles of Incorporation of EchoStar.
3.1(b)* Bylaws of EchoStar (incorporated by reference to Exhibit
3.1(b) to the Registration Statement on Form S-1 of EchoStar,
Registration No. 33-91276).
3.2(a)* Articles of Incorporation of EchoStar Satellite Broadcasting
Corporation (formerly EchoStar Bridge Corporation, a Colorado
corporation) ("ESBC") (incorporated by reference to Exhibit
3.1(e) to the Registration Statement on Form S-1 of ESBC,
Registration No. 333-3980).
3.2(b)* Bylaws of ESBC (incorporated by reference to Exhibit 3.1(f) to
the Registration Statement on Form S-1 of ESBC, Registration
No. 333-3980).
3.3(a)* Amended and Restated Articles of Incorporation of Dish
(incorporated by reference to Exhibit 3.1(a) to the
Registration Statement on Form S-1 of Dish, Registration No.
33-76450).
3.3(b)* Bylaws of Dish (incorporated by reference to Exhibit 3.1(b) to
the Registration Statement on Form S-1 of Dish, Registration
No. 33-76450).
3.4(a)* Articles of Incorporation of EchoStar DBS Corporation, a
Colorado corporation ("DBS Corp.") (incorporated by reference
to Exhibit 3.4(a) to the Registration Statement on Form S-4 of
DBS Corp., Registration No. 333-31929).
3.4(b)* Bylaws of DBS Corp. (incorporated by reference to Exhibit
3.4(b) to the Registration Statement on Form S-4 of DBS Corp.,
Registration No. 333-31929).
4.1* Warrant Agreement between EchoStar and First Trust, as Warrant
Agent (incorporated by reference to Exhibit 4.2 to the
Registration Statement on Form S-1 of Dish, Registration No.
33-76450).
4.2* Security Agreement in favor of First Trust, as trustee under
the Indenture filed as Exhibit 4.1 hereto (incorporated by
reference to Exhibit 4.3 to the Registration Statement on Form
S-1 of Dish, Registration No. 33-76450).
4.3* Escrow and Disbursement Agreement between Dish and First Trust
(incorporated by reference to Exhibit 4.4 to the Registration
Statement on Form S-1 of Dish, Registration No. 33-76450).
88
EXHIBIT INDEX
Exhibit No. Description
----------- -----------
4.4* Pledge Agreement in favor of First Trust, as trustee under the
Indenture filed as Exhibit 4.1 hereto (incorporated by
reference to Exhibit 4.5 to the Registration Statement on Form
S-1 of Dish, Registration No. 33-76450).
4.5* Intercreditor Agreement among First Trust, Continental Bank,
N.A. and Martin Marietta Corporation ("Martin Marietta")
(incorporated by reference to Exhibit 4.6 to the Registration
Statement on Form S-1 of Dish, Registration No. 33-76450).
4.6* Registration Rights Agreement by and between EchoStar and
Charles W. Ergen (incorporated by reference to Exhibit 4.8 to
the Registration Statement on Form S-1 of EchoStar,
Registration No. 33-91276).
4.7* 6 3/4% Series C Cumulative Convertible Preferred Stock
Certificate of Designation of EchoStar (incorporated by
reference to Exhibit 4.19 to the Registration Statement on
Form S-4 of EchoStar, Registration No. 333-39901).
4.8(a)* Form of Underwriting Agreement for 6 3/4% Series C Cumulative
Convertible Preferred Stock by and between EchoStar, DLJ and
Lehman Brothers (incorporated by reference to Exhibit 1.1 to
Amendment No. 1 to the Registration Statement on Form S-3 of
EchoStar, Registration No. 333-37683).
4.8(b)* Form of Underwriting Agreement for Class A Common Stock by and
between EchoStar, DLJ, BT Alex. Brown Incorporated and
Unterberg Harris (incorporated by reference to Exhibit 1.1 to
Amendment No. 1 to the Registration Statement on Form S-3 of
EchoStar, Registration No. 333-37683).
4.9* Indenture of Trust, relating to DBS Corp.'s 9 1/4% Senior
Notes due 2006 ("Seven Year Notes"), dated as of January 25,
1999, among DBS Corp., the Guarantors (as defined therein) and
U.S. Bank Trust National Association ("U.S. Bank"), as trustee
(incorporated by reference to Exhibit 4.1 to the Registration
Statement on Form S-4 of DBS Corp., Registration No.
333-71345).
4.10* Indenture of Trust, relating to DBS Corp.'s 9 3/8% Senior
Notes due 2009 ("Ten Year Notes"), dated as of January 25,
1999, among DBS Corp., the Guarantors (as defined therein) and
U.S. Bank, as trustee (incorporated by reference to Exhibit
4.3 to the Registration Statement on Form S-4 of DBS Corp.,
Registration No. 333-71345).
4.11* Registration Rights Agreement, relating to the Seven Year
Notes, dated as of January 25, 1999, by and among DBS Corp.,
the Guarantors and the Initial Purchasers (as defined therein)
(incorporated by reference to Exhibit 4.5 to the Registration
Statement on Form S-4 of DBS Corp., Registration No.
333-71345).
4.12* Registration Rights Agreement, relating to the Ten Year Notes,
dated as of January 25, 1999, by and among DBS Corp., the
Guarantors and the Initial Purchasers (as defined therein)
(incorporated by reference to Exhibit 4.6 to the Registration
Statement on Form S-4 of DBS Corp., Registration No.
333-71345).
4.13* Indenture, dated as of December 8, 1999, between EchoStar
Communications Corporation and U.S. Bank Trust National
Association, as trustee, including the form of 4 7/8 %
Convertible Subordinated Note Due 2007 (incorporated by
reference to Exhibit 4.1 to the Registration Statement on Form
S-3 of EchoStar Communications Corporation, Registration No.
333-31894).
4.14* Registration Rights Agreement, relating to the 4 7/8 %
Convertible Subordinated Notes Due 2007, dated as of December
8, 1999, by and among EchoStar Communications Corporation and
the initial purchasers (incorporated by reference to Exhibit
4.2 to the Registration Statement on Form S-3 of EchoStar
Communications Corporation, Registration No. 333-31894).
89
EXHIBIT INDEX
Exhibit No. Description
----------- -----------
4.15* Indenture dated as of September 25, 2000, between EchoStar
Broadband Corporation and U.S. Bank Trust National
Association, as trustee (incorporated by reference to Exhibit
4.1 to the Quarterly Report on Form 10-Q of EchoStar for the
quarter ended September 30, 2000, Commission File No.0-26176).
4.16* Registration Rights Agreement dated as of September 25, 2000,
by and among EchoStar Broadband Corporation, Donaldson, Lufkin
& Jenrette Securities Corporation, Banc of America Securities
LLC, Credit Suisse First Boston Corporation and ING Barings
LLC (incorporated by reference to Exhibit 4.2 to the Quarterly
Report on Form 10-Q of EchoStar for the quarter ended
September 30, 2000, Commission File No.0-26176).
10.1* Key Employee Bonus Plan, dated as of January 1, 1994
(incorporated by reference to Exhibit 10.7 to the Registration
Statement on Form S-1 of Dish, Registration No. 33-76450)**
10.2* Consulting Agreement, dated as of February 17, 1994, between
ESC and Telesat Canada (incorporated by reference to Exhibit
10.8 to the Registration Statement on Form S-1 of Dish,
Registration No. 33-76450).
10.3* Form of Satellite Launch Insurance Declarations (incorporated
by reference to Exhibit 10.10 to the Registration Statement on
Form S-1 of Dish, Registration No. 33-81234).
10.4* Dish 1994 Stock Incentive Plan (incorporated by reference to
Exhibit 10.11 to the Registration Statement on Form S-1 of
Dish, Registration No. 33-76450).**
10.5* Form of Tracking, Telemetry and Control Contract between AT&T
Corp. and ESC (incorporated by reference to Exhibit 10.12 to
the Registration Statement on Form S-1 of Dish, Registration
No. 33-81234).
10.6* Manufacturing Agreement, dated as of March 22, 1995, between
HTS and SCI Technology, Inc. (incorporated by reference to
Exhibit 10.12 to the Registration Statement on Form S-1 of
Dish, Commission File No. 33-81234).
10.7* Statement of Work, dated January 31, 1995 from ESC to DiviCom,
Inc. (incorporated by reference to Exhibit 10.14 to the
Registration Statement on Form S-1 of EchoStar, Registration
No. 33-91276).
10.8* EchoStar 1995 Stock Incentive Plan (incorporated by reference
to Exhibit 10.16 to the Registration Statement on Form S-1 of
EchoStar, Registration No. 33-91276)**
10.9* Satellite Construction Contract, dated as of July 18, 1996,
between EDBS and Lockheed Martin Corporation (incorporated by
reference to Exhibit 10.18 to the Quarterly Report on Form
10-Q of EchoStar for the quarter ended June 30, 1996,
Commission File No. 0-26176).
10.10* Confidential Amendment to Satellite Construction Contract
between DBSC and Martin Marietta, dated as of May 31, 1995
(incorporated by reference to Exhibit 10.14 to the
Registration Statement of Form S-4 of EchoStar, Registration
No. 333-03584).
10.11* Agreement between HTS, ESC and ExpressVu Inc., dated January
8, 1997, as amended (incorporated by reference to Exhibit
10.18 to the Annual Report on Form 10-K of EchoStar for the
year ended December 31, 1996, as amended, Commission File No.
0-26176).
10.12* Amendment No. 9 to Satellite Construction Contract, effective
as of July 18, 1996, between Direct Satellite Broadcasting
Corporation, a Delaware corporation ("DBSC") and Martin
Marrieta Corporation (incorporated by reference to Exhibit
10.1 to the Quarterly Report on Form 10-Q of EchoStar for the
quarterly period ended June 30, 1997, Commission File No.
0-26176).
90
EXHIBIT INDEX
Exhibit No. Description
----------- -----------
10.13* Amendment No. 10 to Satellite Construction Contract, effective
as of May 31, 1996, between DBSC and Lockheed Martin
Corporation (incorporated by reference to Exhibit 10.2 to the
Quarterly Report on Form 10-Q of EchoStar for the quarterly
period ended June 30, 1997, Commission File No. 0-26176).
10.14* OEM Manufacturing, Marketing and Licensing Agreement, dated as
of February 17, 1998, by and among HTS, ESC and Philips
Electronics North America Corporation (incorporated by
reference to Exhibit 10.1 to the Quarterly Report on Form 10-Q
of EchoStar for the quarterly period ended March 31, 1998,
Commission File No. 0-26176).
10.15* Licensing Agreement, dated as of February 23, 1998, by and
among HTS, ESC and VTech Communications Ltd. (incorporated by
reference to Exhibit 10.2 to the Quarterly Report on Form 10-Q
of EchoStar for the quarterly period ended March 31, 1998,
Commission File No. 0-26176).
10.16* Purchase Agreement, dated November 30, 1998, by and among
American Sky Broadcasting, LLC ("ASkyB"), The News Corporation
Limited ("News Corporation"), MCI Telecommunications
Corporation and EchoStar (incorporated by reference to Exhibit
10.1 to the Current Report on Form 8-K filed by EchoStar on
December 1, 1998, Commission File No. 0-26176).
10.17* Voting Agreement, dated November 30, 1998, among EchoStar,
AskyB, News Corporation and MCI Telecommunications Corporation
(incorporated by reference to Exhibit 10.3 to the Current
Report on Form 8-K of EchoStar, filed as of December 1, 1998).
10.18* Agreement to Form NagraStar LLC, dated as of June 23, 1998, by
and between Kudelski S.A., EchoStar and ESC (incorporated by
reference to Exhibit 10.28 to the Annual Report on Form 10-K
of EchoStar for the year ended December 31, 1998, Commission
File No. 0-26176).
10.19* First Amendment, dated June 23, 1999, to the Purchase
Agreement dated November 30, 1998, by and among American Sky
Broadcasting, LLC, The News Corporation Limited, MCI
Telecommunications Corporation, and EchoStar Communications
Corporation (incorporated by reference to Exhibit 10.3 to the
Current Report on Form 8-K of EchoStar, filed as of July 2,
1999, Commission File No. 0-26176).
10.20* Registration Rights Agreement, dated June 24, 1999, by and
among EchoStar Communications Corporation, MCI
Telecommunications Corporation, American Sky Broadcasting,
LLC, and News America Incorporated (incorporated by reference
to Exhibit 10.4 to the Current Report on Form 8-K of EchoStar,
filed as of July 2, 1999, Commission File No. 0-26176).
10.21* Satellite Construction Contract dated as of January 27, 2000,
between EchoStar Orbital Corporation and Lockheed Martin
Corporation (incorporated by reference to Exhibit 10.1 to the
Quarterly Report on Form 10-Q of EchoStar for the quarter
ended March 31, 2000, Commission File No.0-26176).
10.22* Satellite Construction Contract dated as of February 4, 2000,
between EchoStar Orbital Corporation and Space Systems/Loral
Inc. (incorporated by reference to Exhibit 10.2 to the
Quarterly Report on Form 10-Q of EchoStar for the quarter
ended March 31, 2000, Commission File No.0-26176).
10.23* Satellite Construction Contract dated as of February 22, 2000,
between EchoStar Orbital Corporation and Space Systems/Loral
Inc. (incorporated by reference to Exhibit 10.3 to the
Quarterly Report on Form 10-Q of EchoStar for the quarter
ended March 31, 2000, Commission File No.0-26176).
10.24* Agreement dated as of February 22, 2000, between EchoStar
Orbital Corporation and Loral Skynet, a division of Loral
SpaceCom Corporation (incorporated by reference to Exhibit
10.4 to the Quarterly Report on Form 10-Q of EchoStar for the
quarter ended March 31, 2000, Commission File No.0-26176).
91
EXHIBIT INDEX
Exhibit No. Description
----------- -----------
21+ Subsidiaries of EchoStar Communications Corporation.
24.1+ Powers of Attorney authorizing signature of O. Nolan Daines
and Raymond L. Friedlob.
- ----------
* Incorporated by reference.
** Constitutes a management contract or compensatory plan or arrangement.
+ Filed herewith.
1
EXHIBIT 21
ECHOSTAR COMMUNICATIONS CORPORATIONS AND SUBSIDIARIES
LIST OF SUBSIDIARIES
As of December 31, 2000
State or Country % of Name Doing Business
Subsidiary of Incorporation Ownership As
- -------------------------------------------------------------------------------------------------
Dish Entertainment Corporation Colorado 100% Dish Entertainment
Dish Factory Direct Corporation Colorado 100% Dish Factory Direct
Dish Network Credit Corporation Colorado 100% DNCC
EchoStar Broadband Corporation Colorado 100% EchoStar Broadband
EchoStar Orbital Corporation Colorado 100%(1) EchoStar Orbital
EchoStar DBS Corporation Colorado 100%(1) EchoStar DBS
EchoStar Engineering Corporation Colorado 100% EchoStar Engineering
EchoStar KuX Corporation Colorado 100% KuX
EchoStar 110 Corporation Colorado 100% EchoStar 110
EchoStar PAC Corporation Colorado 100% EchoStar PAC
EchoStar Real Estate Corporation II Colorado 100% EREC II
EchoStar Real Estate Corporation III Colorado 100% EREC III
Kelly Broadcasting, Inc. New Jersey 100% KBS
OpenStar Corporation Colorado 100% OpenStar
EchoStar VisionStar Corporation Colorado 49.9% EchoStar VisionStar
Echo Acceptance Corporation Colorado 100%(2) EAC
Dish Network Service Corporation f/k/a Colorado 100%(2) DNSC
Dish Installation Network Corporation
Echosphere Corporation Colorado 100%(2) Echosphere
EchoStar International Corporation Colorado 100%(2) EchoStar International
EchoStar North America Corporation f/k/a Colorado 100% EchoStar North America
EchoStar Licensee Corporation
EchoStar Real Estate Corporation Colorado 100%(2) EREC
EchoStar Satellite Corporation Colorado 100%(2) ESC
E-Sat, Inc. Colorado 80%(2) E-Sat
EchoStar Technologies Corporation f/k/a Texas 100%(2) EchoStar Technologies
Houston Tracker Systems, Inc.
Houston Tracker Systems, Inc. Colorado 100%(2) HTS
HT Ventures, Inc. Colorado 100%(2) HTV
EchoStar Data Networks Corporation f/k/a Colorado 100% EchoStar Data Networks
Media4, Inc.
NagraStar LLC Colorado 50% NagraStar
Satellite Communications Operating Corporation Colorado 100% SCOC
Satellite Source, Inc. Colorado 100%(2) Satellite Source
Sky Vista Corporation Colorado 100%(2) Sky Vista
Transponder Encryption Services Corporation Colorado 100% TESC
EchoStar Space Corporation Colorado 100% Space
EchoStar UK Holdings Foreign 100% UK Holdings
Eldon Technology Limited Foreign 100% Eldon
(1) This is a subsidiary of EchoStar Broadband Corporation.
(2) This is a subsidiary of EchoStar DBS Corporation.
1
EXHIBIT 24.1
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints David K. Moskowitz as the true and lawful
attorney-in-fact and agent of the undersigned, with full power of substitution
and resubstitution, for and in the name, place and stead of the undersigned, in
any and all capacities, to sign the Annual Report on Form 10-K of EchoStar
Communications Corporation, a Nevada corporation formed in April 1995, for the
year ended December 31, 2000, and any and all amendments thereto and to file the
same, with all exhibits thereto and other documents in connection therewith,
with the United States Securities and Exchange Commission, and hereby grants to
said attorney-in-fact and agent full power and authority to do and perform each
and every act and thing requisite and necessary to be done in connection
therewith, as fully as to all intents and purposes as the undersigned might or
could do in person, hereby ratifying and confirming all that said
attorney-in-fact and agent, or his substitute, may lawfully do or cause to be
done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Power Attorney has been signed by the following persons in the capacities and on
the date indicated.
Signature Title Date
--------- ----- ----
/s/ Raymond L. Frielob Director March 13, 2001
- ------------------------
Raymond L. Friedlob
/s/ O. Nolan Daines Director March 13, 2001
- ------------------------
O. Nolan Daines
