================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
----------
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2002
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 (I.R.S. Employer
of incorporation or organization) Identification No.)
5701 S. SANTA FE DRIVE
LITTLETON, COLORADO 80120
(Address of principal executive offices) (Zip code)
(303) 723-1000
(Registrant's telephone number, including area code)
NOT APPLICABLE
(Former name, former address and former fiscal year,
if changed since last report)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES X NO
--- ---
AS OF APRIL 29, 2002, THE REGISTRANT'S OUTSTANDING COMMON STOCK CONSISTED OF
241,642,584 SHARES OF CLASS A COMMON STOCK AND 238,435,208 SHARES OF CLASS B
COMMON STOCK.
================================================================================
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -
December 31, 2001 and March 31, 2002 (Unaudited)................................................. 1
Condensed Consolidated Statements of Operations for the
three months ended March 31, 2001 and 2002 (Unaudited)........................................... 2
Condensed Consolidated Statements of Cash Flows for the
three months ended March 31, 2001 and 2002 (Unaudited)........................................... 3
Notes to Condensed Consolidated Financial Statements (Unaudited)................................... 4
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.............. 17
Item 3. Quantitative and Qualitative Disclosures About Market Risk......................................... 27
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.................................................................................. 29
Item 2. Changes in Securities and Use of Proceeds.......................................................... 34
Item 3. Defaults Upon Senior Securities.................................................................... None
Item 4. Submission of Matters to a Vote of Security Holders................................................ None
Item 5. Other Information.................................................................................. None
Item 6. Exhibits and Reports on Form 8-K................................................................... 36
ECHOSTAR COMMUNICATIONS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
DECEMBER 31, MARCH 31,
2001 2002
------------ ------------
(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents ................................................... $ 1,677,889 $ 2,319,439
Marketable investment securities ............................................ 1,150,408 2,003,315
Trade accounts receivable, net of allowance for uncollectible accounts of
$22,770 and $22,030, respectively ......................................... 318,128 292,506
Insurance receivable ........................................................ 106,000 106,000
Inventories ................................................................. 190,747 178,153
Other current assets ........................................................ 68,795 77,700
------------ ------------
Total current assets ........................................................... 3,511,967 4,977,113
Restricted cash ................................................................ 1,288 4,249
Cash reserved for satellite insurance (Note 6) ................................. 122,068 175,598
Property and equipment, net .................................................... 1,904,012 1,949,197
FCC authorizations, net ........................................................ 696,409 696,409
Other noncurrent assets ........................................................ 283,942 224,303
------------ ------------
Total assets .............................................................. $ 6,519,686 $ 8,026,869
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities:
Trade accounts payable ...................................................... $ 254,868 $ 237,785
Deferred revenue ............................................................ 359,424 383,135
Accrued expenses ............................................................ 859,293 916,676
Current portion of long-term debt ........................................... 14,782 14,725
------------ ------------
Total current liabilities ...................................................... 1,488,367 1,552,321
Long-term obligations, net of current portion:
9 1/4% Seven Year Notes ..................................................... 375,000 375,000
9 3/8% Ten Year Notes ....................................................... 1,625,000 1,625,000
10 3/8% Seven Year Notes .................................................... 1,000,000 1,000,000
9 1/8% Seven Year Notes ..................................................... 700,000 700,000
4 7/8% Convertible Notes ................................................... 1,000,000 1,000,000
5 3/4% Convertible Notes .................................................... 1,000,000 1,000,000
Mortgages and other notes payable, net of current portion ................... 6,480 21,295
Long-term deferred distribution and carriage revenue and other long-term
liabilities .............................................................. 102,611 105,040
------------ ------------
Total long-term obligations, net of current portion ............................ 5,809,091 5,826,335
------------ ------------
Total liabilities ......................................................... 7,297,458 7,378,656
Commitments and Contingencies (Note 8)
Series D Convertible Preferred Stock and contingent value rights (Note 3) ...... -- 1,510,741
Stockholders' Deficit:
Class A Common Stock, $.01 par value, 1,600,000,000 shares authorized,
241,015,004 and 241,398,381 shares issued and outstanding, respectively ... 2,410 2,414
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 .................................................. 1,709,797 1,740,041
Deferred stock-based compensation ........................................... (25,456) (20,712)
Accumulated other comprehensive loss ........................................ 3,594 (19,147)
Accumulated deficit ......................................................... (2,470,501) (2,567,508)
------------ ------------
Total stockholders' deficit .................................................... (777,772) (862,528)
------------ ------------
Total liabilities and stockholders' deficit ............................... $ 6,519,686 $ 8,026,869
============ ============
The accompanying notes are an integral part of the
consolidated financial statements.
1
ECHOSTAR COMMUNICATIONS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
THREE MONTHS ENDED MARCH 31,
-------------------------------
2001 2002
------------ ------------
REVENUE:
DISH Network:
Subscription television services ........................... $ 794,448 $ 1,016,057
Other ...................................................... 2,483 2,827
------------ ------------
Total DISH Network ........................................... 796,931 1,018,884
DTH equipment sales .......................................... 41,019 57,050
Other ........................................................ 23,980 28,534
------------ ------------
Total revenue ................................................... 861,930 1,104,468
COSTS AND EXPENSES:
DISH Network Operating Expenses:
Subscriber-related expenses ................................ 316,335 408,227
Customer service center and other .......................... 64,782 82,851
Satellite and transmission ................................. 9,095 13,178
------------ ------------
Total DISH Network operating expenses ........................ 390,212 504,256
Cost of sales - DTH equipment ................................ 28,836 39,376
Cost of sales - other ........................................ 15,929 16,201
Marketing:
Subscriber promotion subsidies - cost of sales
(exclusive of depreciation included below) ............... 128,315 100,935
Subscriber promotion subsidies - other ..................... 144,916 133,370
Advertising and other ...................................... 26,927 37,323
------------ ------------
Total marketing expenses ..................................... 300,158 271,628
General and administrative ................................... 75,672 94,525
Non-cash, stock-based compensation ........................... 7,456 1,666
Depreciation and amortization ................................ 58,850 81,537
------------ ------------
Total costs and expenses ........................................ 877,113 1,009,189
------------ ------------
Operating income (loss) ......................................... (15,183) 95,279
Other Income (Expense):
Interest income .............................................. 24,564 29,803
Interest expense ............................................. (83,097) (129,243)
Other ........................................................ (96,102) (34,222)
------------ ------------
Total other income (expense) .................................... (154,635) (133,662)
------------ ------------
Loss before income taxes ........................................ (169,818) (38,383)
Income tax provision, net ....................................... (49) (225)
------------ ------------
Net loss ........................................................ (169,867) (38,608)
6 3/4% Series C Cumulative Convertible Preferred Stock
dividends .................................................... (178) --
Accretion of Series D Convertible Preferred Stock (Note 3) ..... -- (61,860)
Change in valuation of contingent value rights (Note 3) ......... -- 3,461
------------ ------------
Numerator for basic and diluted loss per share - loss
attributable to common shareholders .......................... $ (170,045) $ (97,007)
============ ============
Denominator for basic and diluted loss per share -
weighted-average common shares outstanding ................... 474,563 479,731
============ ============
Net loss per common share:
------------ ------------
Basic and diluted net loss ................................... $ (0.36) $ (0.20)
============ ============
The accompanying notes are an integral part of the
consolidated financial statements.
2
ECHOSTAR COMMUNICATIONS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
THREE MONTHS ENDED MARCH 31,
------------------------------
2001 2002
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss .......................................................................... $ (169,867) $ (38,608)
Adjustments to reconcile net loss to net cash flows from operating activities:
Equity in losses of affiliates ................................................. 12,826 8,012
Realized and unrealized loss (gain) on investments ............................. 81,803 24,051
Deferred stock-based compensation recognized ................................... 7,456 1,666
Recognition of bridge commitment fees from reduction of bridge financing
commitments (Note 7) ......................................................... -- 14,864
Depreciation and amortization .................................................. 58,850 81,537
Amortization of debt discount and deferred financing costs ..................... 1,878 2,937
Change in long-term deferred distribution and carriage revenue and other
long-term liabilities ........................................................ 19,645 2,429
Other, net ..................................................................... 1,724 1,736
Changes in current assets and current liabilities, net ......................... (34,638) 93,212
------------ ------------
Net cash flows from operating activities .......................................... (20,323) 191,836
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of marketable investment securities ..................................... (706,698) (1,383,379)
Sales of marketable investment securities ......................................... 820,126 509,978
Purchases of property and equipment ............................................... (148,600) (102,910)
Cash reserved for satellite insurance (Note 6) .................................... -- (59,680)
Change in cash reserved for satellite insurance due to depreciation on related
satellites (Note 6) ............................................................ 4,098 6,150
Capitalized merger-related costs .................................................. -- (5,448)
Other ............................................................................. (1,675) (344)
------------ ------------
Net cash flows from investing activities .......................................... (32,749) (1,035,633)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of Series D Convertible Preferred Stock ................ -- 1,483,477
Repayments of mortgage indebtedness and notes payable ............................. (3,984) (242)
Net proceeds from Class A Common Stock options exercised and Class A Common
Stock issued to Employee Stock Purchase Plan ................................... 1,497 2,189
Other ............................................................................. (178) (77)
------------ ------------
Net cash flows from financing activities .......................................... (2,665) 1,485,347
------------ ------------
Net increase (decrease) in cash and cash equivalents .............................. (55,737) 641,550
Cash and cash equivalents, beginning of period .................................... 856,818 1,677,889
------------ ------------
Cash and cash equivalents, end of period .......................................... $ 801,081 $ 2,319,439
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
6 3/4% Series C Cumulative Convertible Preferred Stock dividends ............... $ 178 $ --
Conversion of 6 3/4% Series C Cumulative Convertible Preferred Stock to
Class A common stock ......................................................... 989 --
Forfeitures of deferred non-cash, stock-based compensation ..................... 600 3,078
Capitalized interest ........................................................... 4,177 8,740
Satellite vendor financing ..................................................... -- 15,000
The accompanying notes are an integral part of the
consolidated financial statements.
3
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. ORGANIZATION AND BUSINESS ACTIVITIES
Principal Business
The operations of EchoStar Communications Corporation ("ECC," and
together with its subsidiaries, or referring to particular subsidiaries in
certain circumstances, "EchoStar" or the "Company") include two interrelated
business units:
o The DISH Network - a direct broadcast satellite ("DBS")
subscription television service in the United States; and
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") and the design,
development and distribution of similar equipment for
international satellite service providers.
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, seven DBS satellites ("EchoStar I" through "EchoStar
VII"), EchoStar receiver systems, digital broadcast operations centers, customer
service facilities, and other assets utilized in its operations. EchoStar's
principal business strategy is to continue developing its subscription
television service in the United States to provide consumers with a fully
competitive alternative to cable television service.
2. SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
and with the instructions to Form 10-Q and Article 10 of Regulation S-X for
interim financial information. Accordingly, these statements do not include all
of the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring adjustments) considered necessary
for a fair presentation have been included. All significant intercompany
accounts and transactions have been eliminated in consolidation. Operating
results for the three months ended March 31, 2002 are not necessarily indicative
of the results that may be expected for the year ending December 31, 2002. For
further information, refer to the consolidated financial statements and
footnotes thereto included in EchoStar's Annual Report on Form 10-K for the year
ended December 31, 2001 ("2001 10-K"). Certain prior year amounts have been
reclassified to conform with the current year presentation.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses for each reporting
period. Actual results could differ from those estimates.
4
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
Comprehensive Income (Loss)
The components of comprehensive loss, net of tax, are as follows (in
thousands):
THREE MONTHS ENDED
MARCH 31,
--------------------------
2001 2002
---------- ----------
(Unaudited)
Net loss ..................................................................... $ (169,867) $ (38,608)
Unrealized holding losses on available-for-sale securities arising during
period .................................................................... (385) (30,233)
Reclassification adjustment for impairment losses on available-for-sale
securities included in net loss ........................................... 32,403 7,492
---------- ----------
Comprehensive loss ........................................................... $ (137,849) $ (61,349)
========== ==========
Accumulated other comprehensive income presented on the accompanying
condensed consolidated balance sheets consists of the accumulated net unrealized
gains (losses) on available-for-sale securities, net of deferred taxes.
Basic and Diluted Loss Per Share
Statement of Financial Accounting Standards No. 128, "Earnings Per
Share" ("FAS No. 128") requires entities to present both basic earnings per
share ("EPS") and diluted EPS. Basic EPS excludes dilution and is computed by
dividing income (loss) available to common shareholders by the weighted-average
number of common shares outstanding for the period. Diluted EPS reflects the
potential dilution that could occur if stock options or warrants were exercised
or convertible securities were converted to common stock, resulting in the
issuance of common stock that then would share in any earnings of the Company.
We had net losses for the three months ending March 31, 2001 and 2002.
Therefore, the effect of the common stock equivalents and convertible securities
is excluded from the computation of diluted earnings (loss) per share since the
effect is anti-dilutive.
As of March 31, 2001 and 2002, options to purchase a total of
approximately 24,825,000 and 22,164,000 shares of Class A common stock were
outstanding, respectively. As of March 31, 2002, the 4 7/8% Convertible
Subordinated Notes and the 5 3/4% Convertible Subordinated Notes were
convertible into approximately 22 million shares and approximately 23 million
shares of Class A common stock, respectively. In addition, approximately 57.6
million shares of Class A common stock were issuable upon conversion of the
Series D convertible preferred stock as of March 31, 2002.
New Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 142, "Goodwill and Other Intangible
Assets" ("FAS 142"), which requires goodwill and intangible assets with
indefinite useful lives to no longer be amortized but to be tested for
impairment at least annually. Intangible assets that have finite lives will
continue to be amortized over their estimated useful lives. The amortization and
non-amortization provisions of FAS 142 will be applied to all goodwill and
intangible assets acquired after June 30, 2001. Effective January 1, 2002,
EchoStar adopted the provisions of FAS 142 and ceased amortization of goodwill
and intangible assets with indefinite lives, including FCC authorizations. As a
result of the application of FAS 142, amortization expense of $19 million
associated with goodwill and intangible assets with indefinite lives, including
FCC authorizations, will not be charged to the statement of operations in 2002.
In accordance with FAS 142, EchoStar has tested its intangible assets with
indefinite lives, including FCC authorizations, for impairment as of the date of
adoption and determined that there was no impairment.
5
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
3. VIVENDI UNIVERSAL
As previously disclosed in EchoStar's 2001 10-K, in connection with its
purchase of Series D convertible preferred stock during January 2002, Vivendi
Universal received contingent value rights. The maximum payment under the rights
is $225 million if the Hughes merger is completed and the price of EchoStar's
class A common stock is below $26.04 per share during a 20 trading day period
preceding the three-year settlement date specified below, or $525 million if the
Hughes merger is not completed and the price of EchoStar's class A common stock
is below $26.04 per share during a 20 trading day period preceding the 30 month
settlement date specified below. Any amount owing under these rights would be
settled three years after completion of the Hughes merger, except in certain
limited circumstances. In addition, if the Hughes merger is not consummated,
these rights will be settled 30 months after the acquisition of Hughes' 81%
interest in PanAmSat or the termination of the merger agreement and the PanAmSat
stock purchase agreement. The contingent value rights, initially valued at
approximately $30.7 million, were recorded as a charge to retained earnings as
of the date of consummation of the investment on January 22, 2002. The
contingent value rights are periodically adjusted to the current settlement
amount, based on their current estimated fair value, through a charge or credit
to retained earnings. For the three months ended March 31, 2002, EchoStar
recorded a credit to retained earnings of approximately $3.5 million to reduce
the carrying value of the contingent value rights to their current estimated
fair value. The non-cash charges or credits to retained earnings related to
adjustments to the contingent value rights are a component of EchoStar's net
income (loss) available to common shareholders.
In addition, the conversion price for the Series D convertible
preferred stock was set at $26.04 upon execution of the investment agreement on
December 14, 2001. However, the investment was not consummated until January 22,
2002, when the price of EchoStar's class A common stock was $26.58. Since the
price as of the date of consummation of the investment was above the set
conversion price and since consummation of the investment was contingent on
regulatory approval, the Series D preferred stock was deemed to be issued with a
beneficial conversion feature. This feature required the difference between the
conversion price and the price as of the date of consummation to be recorded as
a discount on the Series D convertible preferred stock. The Series D convertible
preferred stock was accreted to its conversion value through a charge to
retained earnings equal to the discount of approximately $31.1 million as of the
date of issuance since the Series D convertible preferred stock is immediately
convertible at the holder's option.
The issuance costs of approximately $16.5 million related to the Series
D convertible preferred stock were recorded as a discount on the Series D
convertible preferred stock. However, since the Series D convertible preferred
stock is redeemable at the holder's option upon a change of control, as defined
in the related agreement, and the redemption price of the Series D convertible
preferred stock exceeds the discounted carrying value, the discount would be
charged to retained earnings to restore the Series D convertible preferred stock
to its redemption value if redemption of the Series D convertible preferred
stock became probable. As of March 31, 2002, redemption of the Series D
convertible preferred stock is not probable and thus no charge to retained
earnings is necessary.
4. MARKETABLE AND NON-MARKETABLE INVESTMENT SECURITIES
EchoStar currently classifies all marketable investment securities as
available-for-sale. The fair market value of the majority of EchoStar's
marketable investment securities approximates the carrying value and represents
the quoted market prices at the balance sheet dates. However, for certain
marketable securities, related unrealized gains and losses are reported as a
separate component of stockholders' deficit, net of related deferred income
taxes, if applicable. The specific identification method is used to determine
cost in computing realized gains and losses. Such unrealized losses totaled
approximately $19 million as of March 31, 2002.
In accordance with generally accepted accounting principles, declines
in the fair market value of a marketable investment security which are estimated
to be "other than temporary" must be recognized in the statement of operations,
thus establishing a new cost basis for such investment. EchoStar evaluates its
marketable investment securities portfolio on a quarterly basis to determine
whether declines in the market value of these securities are other than
temporary. This quarterly evaluation consists of reviewing, among other things,
the fair value of our marketable
6
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
investment securities compared to the carrying value of these securities, the
historical volatility of the price of each security and any market and company
specific factors related to each security. Generally, absent specific factors to
the contrary, declines in the fair value of investments below cost basis for a
period of less than six months are considered to be temporary. Declines in the
fair value of investments for a period of six to nine months are evaluated on a
case by case basis to determine whether any company or market-specific factors
exist which would indicate that such declines are other than temporary. Declines
in the fair value of investments below cost basis for greater than nine months
are considered other than temporary and are recorded as charges to earnings,
absent specific factors to the contrary. As a result of EchoStar's quarterly
evaluations, during the three months ended March 31, 2002 EchoStar recorded an
aggregate charge to earnings for other than temporary declines in the fair
market value of its marketable investment securities of approximately $7
million. This amount does not include realized gains of approximately $12
million on the sales of marketable investment securities. If the fair market
value of EchoStar's marketable securities portfolio does not increase to cost
basis or if EchoStar becomes aware of any market or company specific factors
that indicate that the carrying value of certain of its securities is impaired,
EchoStar may be required to record additional charges to earnings in future
periods equal to the amount of the decline in fair value.
EchoStar also has made strategic equity investments in certain
non-marketable investment securities which are not publicly traded. EchoStar's
ability to create realizable value for its strategic investments in companies
that are not public is dependent on the success of their business and ability to
obtain sufficient capital to execute their business plans. Since private markets
are not as liquid as public markets, there is also increased risk that EchoStar
will not be able to sell these investments, or that when EchoStar desires to
sell them that it will not be able to obtain full value for them. EchoStar has a
strategic investment in StarBand Communications, Inc. StarBand has minimal cash
on hand and has significant vendor and bank obligations. In addition, StarBand's
ability to raise additional capital in the future is currently uncertain, and
attempts to date have been unsuccessful. As a result of these and other factors,
StarBand's independent public accountants have expressed uncertainty as to
StarBand's ability to continue as a going concern in the 2001 StarBand audit
opinion. Further, during April 2002, EchoStar changed its sales and marketing
relationship with StarBand and ceased subsidizing StarBand equipment. StarBand
is therefore currently responsible for any equipment subsidies to its
subscribers, which increases its on-going cash requirements. As a result of
these and other factors, during the quarter ended March 31, 2002, EchoStar
recorded equity-method charges of approximately $8 million and an impairment
charge of approximately $28 million to reduce the carrying value of its StarBand
investment to zero.
5. INVENTORIES
Inventories consist of the following (in thousands):
DECEMBER 31, MARCH 31,
2001 2002
------------ ------------
Finished goods - DBS............................ $ 127,186 $ 111,228
Raw materials................................... 45,725 51,893
Finished goods - reconditioned and other........ 19,548 11,022
Work-in-process................................. 7,924 7,126
Consignment..................................... 3,611 2,079
Reserve for excess and obsolete inventory....... (13,247) (5,195)
------------ ------------
$ 190,747 $ 178,153
============ ============
7
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
6. PROPERTY AND EQUIPMENT
EchoStar III
During January 2002, a transponder pair on EchoStar III failed,
resulting in a temporary interruption of service. The operation of the satellite
was quickly restored. Including the five transponder pairs that malfunctioned in
prior years, these anomalies have resulted in the failure of a total of twelve
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. EchoStar is only licensed by the FCC to operate 11
transponders at the 61.5 degree orbital location (together with an additional
six leased transponders).
Satellite Insurance
As a result of the failure of EchoStar IV solar arrays to fully deploy
and the failure of 30 transponders to date, a maximum of approximately 14 of the
44 transponders on EchoStar IV are available for use at this 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 substantially identical
policies with different carriers for varying amounts that, in combination,
create a total insured amount of $219.3 million. EchoStar's 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
offered to pay only part of the $219.3 million claim because they allege we did
not abide by the exact terms of the insurance policy. The insurers also assert
that EchoStar IV was not a constructive total loss, as that term is defined in
the policy. EchoStar strongly disagrees and filed an arbitration claim against
the insurers 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. Based on
the carriers' failure to pay the amount EchoStar believes is owed under the
policy and their improper attempts to force EchoStar to settle for less than the
full amount of its claim, 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.
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 will have to reduce the amount of the
receivable if a final settlement is reached for less than this amount.
As a result of the thermal and propulsion system anomalies, EchoStar
reduced the estimated remaining useful life of EchoStar IV to approximately 4
years during January 2000. EchoStar will continue to evaluate the performance of
EchoStar IV and may modify its loss assessment as new events or circumstances
develop.
The indentures related to certain of EchoStar DBS Corporation's
("EDBS") senior notes contain restrictive covenants that require EchoStar to
maintain satellite insurance with respect to at least half of the satellites it
owns or leases. In addition, the indenture related to EchoStar Broadband
Corporation's ("EBC") senior notes requires EchoStar to maintain satellite
insurance on the lesser of half of its satellites or three of its satellites.
All of EchoStar's DBS satellites are owned by direct or indirect subsidiaries of
EBC. During the three months ended March 31, 2002, EBC transferred ownership of
EchoStar VII to EDBS, which increased EDBS' total satellite ownership to 7
satellites. Insurance coverage is therefore required for at least four of
EchoStar's seven satellites currently in-orbit. The launch and/or in-orbit
insurance policies for EchoStar I through EchoStar VII have expired. To date
EchoStar has been unable to obtain insurance on any of these satellites on terms
acceptable to EchoStar. As a result, EchoStar is currently self-insuring these
satellites. To satisfy insurance covenants related to EDBS' and EBC's senior
notes, EchoStar has
8
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
reclassified an amount equal to the depreciated cost of four of its satellites
from cash and cash equivalents to cash reserved for satellite insurance on its
balance sheet. As of March 31, 2002, cash reserved for satellite insurance
totaled approximately $176 million. The reclassifications will continue until
such time, if ever, as EchoStar can again insure its satellites on acceptable
terms and for acceptable amounts.
7. BRIDGE FINANCING COMMITMENTS
As previously disclosed in EchoStar's 2001 10-K, EchoStar and Hughes
obtained $5.525 billion in bridge financing commitments for the Hughes merger
and related transactions. That commitment was reduced to $3.325 billion as a
result of the sale of 9 1/8% Senior Notes due 2009 by EDBS on December 28, 2001
and the closing of the $1.5 billion Vivendi investment in EchoStar during
January 2002. In consideration for the bridge financing commitments, EchoStar is
obligated to the lenders for certain non-refundable fees whether or not the
Hughes merger is consummated.
During the three months ended March 31, 2002, approximately $15 million
of deferred commitment fees were expensed upon the closing of the $1.5 billion
equity investment in EchoStar by Vivendi. As a result, approximately $33 million
of deferred commitment fees remain as of March 31, 2002, which will be charged
to interest expense as the bridge commitments are reduced. If the Hughes merger
is not consummated, total remaining commitment fees will be written-off. In the
event that the bridge commitment is drawn, any deferred commitment fees not
previously expensed will be amortized to interest expense in future periods.
A fee of .50% per year on the aggregate bridge financing commitment
outstanding is payable quarterly, in arrears, until the closing of the Hughes
merger, or the termination or expiration of the agreements relating to the
bridge commitments. These fees are expensed as incurred. During the quarter
ended March 31, 2002, we expensed approximately $4 million for these fees.
8. COMMITMENTS AND CONTINGENCIES
WIC Premium Television Ltd.
During July 1998, a lawsuit was filed by WIC Premium Television Ltd.,
an Alberta corporation, in the Federal Court of Canada Trial Division, against
General Instrument Corporation, HBO, Warner Communications, Inc., John Doe,
Showtime, United States Satellite Broadcasting Company, Inc., EchoStar, and two
of EchoStar's wholly-owned subsidiaries, Echosphere Corporation and Dish, Ltd.
EchoStar Satellite Corporation, EchoStar DBS Corporation, EchoStar Technologies
Corporation, and EchoStar Satellite Broadcast Corporation were subsequently
added as defendants. The lawsuit seeks, among other things, interim and
permanent injunctions prohibiting the defendants from activating receivers in
Canada and from infringing any copyrights held by WIC.
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, interim and permanent injunctions prohibiting the defendants from
importing hardware into Canada and from activating receivers in Canada, together
with damages in excess of $175 million.
The Court in the Alberta action denied EchoStar's Motion to Dismiss,
and EchoStar's appeal of such decision. The Court in the Federal action has
stayed that case pending the outcome of the Alberta action. The case is now in
discovery. EchoStar intends to vigorously defend the suit. Recently, the Supreme
Court of Canada ruled that the receipt in Canada of programming from U.S. pay
television providers is prohibited. While EchoStar was not
9
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
a party to that case, the ruling could adversely affect EchoStar's defense. It
is too early to make an assessment of the probable outcome of the litigation or
to determine the extent of any potential liability or damages.
Broadcast network programming
Until July 1998, EchoStar obtained distant broadcast network channels
(ABC, NBC, CBS and FOX) for distribution to its customers through PrimeTime 24.
In December 1998, the United States District Court for the Southern District of
Florida entered a nationwide permanent injunction requiring PrimeTime 24 to shut
off distant network channels to many of its customers, and henceforth to sell
those channels to consumers in accordance with certain stipulations in the
injunction.
In October 1998, EchoStar filed a declaratory judgment action against
ABC, NBC, CBS and FOX in the U.S. District Court for the District of Colorado.
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 ("SHVA") 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 judge presiding over the matter
recently died. As a result, the case was transferred to a judge in Fort
Lauderdale, where the case remains pending. 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. 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 ("SHVIA"). EchoStar
opposed the networks' motion and again asked the court to hear live testimony
before ruling upon the networks' injunction request.
During September 2000, the Court granted the Networks' motion for
preliminary injunction, denied the Network's emergency motion and denied
EchoStar's request to present live testimony and evidence. The Court's original
order required EchoStar to terminate network programming to certain subscribers
"no later than February 15, 1999," and contained other dates with which it would
have been physically impossible to comply. The order imposed 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 went beyond the statutory requirements
imposed by the SHVA and the SHVIA.
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
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
10
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
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.
Oral argument before the Eleventh Circuit was held on May 24, 2001. On
September 17, 2001, the Eleventh Circuit vacated the District Court's nationwide
preliminary injunction, which the Eleventh Circuit had stayed in November 2000.
The Eleventh Circuit also rejected EchoStar's First Amendment challenge to the
SHVA. However, the Eleventh Circuit found that the District Court had made
factual findings that were clearly erroneous and not supported by the evidence,
and that the District Court had misinterpreted and misapplied the law. The
Eleventh Circuit also found that the District Court came to the wrong legal
conclusion concerning the grandfathering provision found in 17 U.S.C. Section
119(d); the Eleventh Circuit reversed the District Court's legal conclusion and
instead found that this grandfathering provision allows subscribers who switch
satellite carriers to continue to receive the distant network programming that
they had been receiving. The Eleventh Circuit issued an order during January
2002, remanding the case to the Florida District Court. On March 26, 2002, the
Florida District Court entered an order, set the trial in the matter for January
13, 2003 and also set a discovery and pretrial schedule. In this order, the
District Court denied certain of EchoStar's outstanding motions to compel
discovery as moot and granted the Networks' motion to compel. On April 17, 2002,
the District Court denied the Networks' motion for preliminary injunction as
moot.
On March 27, 2002, EchoStar, through Harvard Law Professor Lawrence
Tribe, filed its Petition For A Writ Of Certiorari with the United States
Supreme Court, challenging the constitutionality of the SHVA under the First
Amendment. The Networks' response to the Certiorari Petition is due on May 3,
2002. There is no guarantee that the United States Supreme Court will grant
EchoStar's Certiorari Petition or that if the Supreme Court grants EchoStar's
Certiorari Petition, the Supreme Court will render a decision before the January
13, 2003, trial in the District Court. On March 26, 2002, the Florida District
Court also denied EchoStar's request to stay the proceedings and any discovery
pending the resolution of its constitutional challenge. However, the District
Court stated that if the Supreme Court grants EchoStar's Certiorari Petition,
EchoStar may renew its stay request. EchoStar intends to renew its stay request
if the Supreme Court grants its Certiorari Petition.
In April, 2002, EchoStar reached a private settlement with ABC, Inc.,
one of the plaintiffs in the litigation. On April 4, 2002, EchoStar and ABC,
Inc., filed a stipulation of dismissal. On April 16, 2002, the District Court
entered an order dismissing the claims between ABC, Inc. and EchoStar.
If, after a trial, the District Court enters an injunction against
EchoStar, the 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 its other services. Management has determined that such
terminations would result in a small reduction in EchoStar's reported average
monthly revenue per subscriber and could result in a temporary increase in
churn. If EchoStar loses the case at trial, the judge could, as one of many
possible remedies, prohibit all future sales of distant network programming by
EchoStar, which would have a material adverse affect on EchoStar's business.
Gemstar
During October 2000, Starsight Telecast, Inc., a subsidiary of
Gemstar-TV Guide International, Inc., filed a suit for patent infringement
against EchoStar and certain of its subsidiaries in the United States District
Court for the Western District of North Carolina, Asheville Division. The suit
alleges infringement of United States Patent No. 4,706,121 ("the `121 Patent")
which relates to certain electronic program guide functions. EchoStar has
examined this patent and believes that it is not infringed by any of its
products or services. EchoStar will vigorously defend against this suit. On
March 30, 2001, the court stayed this action pending resolution of the
International Trade Commission matter discussed below.
In December 2000, EchoStar filed suit against Gemstar - TV Guide (and
certain of its subsidiaries) in the United States District Court for the
District of Colorado alleging violations by Gemstar of various federal and state
11
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
anti-trust laws and laws governing unfair competition. The lawsuit seeks an
injunction and monetary damages. Gemstar filed counterclaims alleging
infringement of United States Patent Nos. 5,923,362 and 5,684,525 that relate to
certain electronic program guide functions. EchoStar examined these patents and
believes they are not infringed by any of EchoStar's products or services. In
August 2001, the Federal Multi-District Litigation panel combined this suit, for
discovery purposes, with other lawsuits asserting antitrust claims against
Gemstar, which had previously been filed by other plaintiffs. In January 2002,
Gemstar dropped the counterclaims of patent infringement. On March 6, 2002, the
Court denied Gemstar's Motion to Dismiss EchoStar's antitrust claims.
Accordingly, Gemstar was required to file its formal answer, which it did on
March 26, 2002. In its answer, Gemstar asserts new patent infringement
counterclaims regarding U.S. Patent Nos. 4,908,713 and 5,915,068 (which is
expired). These patents relate to onscreen programming of VCRs. EchoStar has
examined these patents and believes that they are not infringed by any of its
products or services.
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 all of which relate to certain electronic program guide
functions. In addition, the ITC action alleges infringement of the `121 Patent
which is asserted in the North Carolina case. In the Atlanta District Court
case, Gemstar seeks damages and an injunction. The North Carolina and Atlanta
cases have been stayed pending resolution of the ITC action. ITC actions
typically proceed according to an expedited schedule. In December 2001, the ITC
held a 15-day hearing before an administrative judge. Prior to the hearing,
Gemstar dropped its allegations regarding Unites States Patent No. 5,252,066
with respect to which EchoStar had asserted substantial allegations of
inequitable conduct. The hearing addressed, among other things, Gemstar's
allegations of patent infringement and respondents' (EchoStar, SCI, Scientific
Atlanta and Pioneer) allegations of patent misuse. A decision by the judge is
expected by June 21, 2002 and a final ruling by the full ITC is expected on or
about September 23, 2002. While the ITC cannot award damages, an adverse
decision in this case could temporarily halt the import of EchoStar receivers
and could require EchoStar to materially modify certain user-friendly electronic
programming guides and related features EchoStar currently offers to consumers.
EchoStar has examined the patents in dispute and believes they are not infringed
by any of its products or services. EchoStar will continue to vigorously contest
the ITC, North Carolina and Atlanta allegations of infringement and will, among
other things, challenge both the validity and enforceability of the asserted
patents. EchoStar is providing a defense and indemnification to SCI in the ITC
and Atlanta cases pursuant to the terms of their contract.
During 2000, Superguide Corp. also filed suit against EchoStar, DirecTV
and others in the United States District Court for the Western District of North
Carolina, Asheville Division, 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.
Superguide seeks injunctive and declaratory relief and damages in an unspecified
amount. It is EchoStar's understanding that these patents may be licensed by
Superguide to Gemstar. Gemstar has been added as a party to this case and is now
asserting these patents against EchoStar. EchoStar has examined these patents
and believes that they are not infringed by any of its products or services. A
Markman ruling was issued by the Court and in response to that ruling EchoStar
has filed motions for summary judgment of non-infringement for each of the
asserted patents. Gemstar has filed a motion for summary judgment of
infringement with respect to the patents. Decisions on these outstanding summary
judgement motions are expected during the summer of 2002. EchoStar will continue
to vigorously defend this case and to press its patent misuse defenses against
Gemstar.
12
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
In the event it is ultimately determined that EchoStar infringes on any
of the aforementioned patents EchoStar may be subject to substantial damages,
including the potential for treble damages, and/or an injunction that could
require EchoStar to materially modify certain user friendly electronic
programming guide and related features it currently offers to consumers. It is
too early to make an assessment of the probable outcome of the suits.
IPPV Enterprises
IPPV Enterprises, LLC and MAAST, Inc. filed a patent infringement suit
against EchoStar, and its conditional access vendor Nagra, in the United States
District Court for the District of Delaware. The suit alleged infringement of
five patents. One patent was subsequently dropped by plaintiffs. Three of the
remaining patents disclose various systems for the implementation of features
such as impulse-pay-per view, parental control and category lock-out. The fourth
remaining patent relates to an encryption technique. The Court entered summary
judgment in EchoStar's favor on the encryption patent. Plaintiffs had claimed
$80 million in damages with respect to the encryption patent. On July 13, 2001,
a jury found that the remaining three patents were infringed and awarded damages
of $15 million. The jury also found that one of the patents was willfully
infringed which means that the judge is entitled to increase the award of
damages. On post-trial motions, the Judge reduced damages to $7.33 million,
found that one of the infringed patents was invalid, and reversed the finding of
willful infringement. In addition, the Judge denied IPPV's request for treble
damages and attorney fees. EchoStar intends to file an appeal. Any final award
of damages would be split between EchoStar and Nagra in percentages to be agreed
upon between EchoStar and Nagra.
California Actions
A purported class action was filed against EchoStar in the California
State Superior Court for Alameda County during May 2001 by Andrew A. Werby. The
complaint, relating to late fees, alleges unlawful, unfair and fraudulent
business practices in violation of California Business and Professions Code
Section 17200 et seq., false and misleading advertising in violation of
California Business and Professions Code Section 17500, and violation of the
California Consumer Legal Remedies Act. On September 24, 2001, EchoStar filed an
answer denying all material allegations of the Complaint. On September 27, 2001,
the Court entered an Order Pursuant to Stipulation for a provisional
certification of the class, for an orderly exchange of information and for
mediation. The provisional Order specifies that the class shall be de-certified
upon notice in the event mediation does not resolve the dispute. The matter is
currently in mediation. It is too early in the litigation to make an assessment
of the probable outcome of the litigation or to determine the extent of any
potential liability or damages. EchoStar intends to deny all liability and to
vigorously defend the lawsuit.
A purported class action relating to the use of terms such as "crystal
clear digital video," "CD-quality audio," and "on-screen program guide", and
with respect to the number of channels available in various programming
packages, has also been filed against EchoStar in the California State Superior
Court for Los Angeles County by David Pritikin and by Consumer Advocates, a
nonprofit unincorporated association. The complaint alleges breach of express
warranty and violation of the California Consumer Legal Remedies Act, Civil Code
Sections 1750, et. seq., and the California Business & Professions Code Sections
17500, 17200. EchoStar has filed an answer AND the case is currently in
discovery. Plaintiffs filed their Motion for Class Certification on January 21,
2002 and EchoStar has filed its opposition. The Court will conduct a hearing on
class certification in early May 2002. It is too early in the litigation to make
an assessment of the probable outcome of the litigation or to determine the
extent of any potential liability or damages. EchoStar denies all liability and
intends to vigorously defend the lawsuit.
Retailer Class Actions
EchoStar has been sued by retailers in three separate purported class
actions. In two separate lawsuits filed in the District Court, Arapahoe County,
State of Colorado and the United States District Court for the District of
Colorado, respectively, Air Communication & Satellite, Inc. and John DeJong, et.
al. filed lawsuits on October 6, 2000 on behalf of themselves and a class of
persons similarly situated. The plaintiffs are attempting to certify
13
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
nationwide classes allegedly brought on behalf of persons, primarily retail
dealers, who were alleged signatories to certain retailer agreements with
EchoStar Satellite Corporation. The plaintiffs are requesting the Courts to
declare certain provisions of the alleged agreements invalid and unenforceable,
to declare that certain changes to the agreements are invalid and unenforceable,
and to award damages for lost commissions and payments, charge backs, and other
compensation. EchoStar intends to vigorously defend against the suits and to
assert a variety of counterclaims. The trial court in the Arapahoe County court
action entered an order prohibiting EchoStar from communicating with members of
the putative class concerning the litigation. EchoStar petitioned the Supreme
Court, and the Supreme Court of Colorado ruled that corrective notice must be
sent to putative class members. 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. A class certification hearing for the Arapahoe County
court action is scheduled for November 1, 2002.
Satellite Dealers Supply, Inc. filed a lawsuit in the United States
District Court for the Eastern District of Texas on September 25, 2000, on
behalf of itself and a class of persons similarly situated. The plaintiff is
attempting to certify a nationwide class on behalf of sellers, installers, and
servicers of satellite equipment who contract with EchoStar and claims the
alleged class has been "subject to improper chargebacks." The plaintiff alleges
that EchoStar: (1) charged back certain fees paid by members of the class to
professional installers in violation of contractual terms; (2) manipulated the
accounts of subscribers to deny payments to class members; and (3)
misrepresented to class members who own certain equipment related to the
provision of satellite television service. On September 18, 2001, the Court
granted EchoStar's Motion to Dismiss for lack of personal jurisdiction.
Plaintiff Satellite Dealers Supply has moved for reconsideration of the Court's
order dismissing the case. 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.
PrimeTime 24 Joint Venture
PrimeTime 24 Joint Venture filed suit against EchoStar during September
1998 seeking damages in excess of $10 million and alleging breach of contract,
wrongful termination of contract, interference with contractual relations,
trademark infringement and unfair competition. EchoStar's motion for summary
judgment was granted with respect to PrimeTime 24's claim of interference with
contractual relations and unfair competition. Plaintiff's motion for summary
judgment was granted with respect to its breach of contract claim for fees
during the period from May 1998 through July 19, 1998. It is ultimately up to a
jury to determine the amount of fees owed for this period. It is too early to
make an assessment of the probable outcome of the remainder of the litigation or
to determine the extent of any additional 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.
Occasionally, increased solar activity poses a potential threat to all
in-orbit geosynchronous satellites including EchoStar's DBS satellites. The
probability that the effects from this activity 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.
14
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
9. 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 currently operate as two separate business units. Prior year
amounts have been adjusted to conform to the current year presentation. The All
Other column consists of revenue and expenses from other operating segments for
which the disclosure requirements of FAS No. 131 do not apply.
ECHOSTAR
DISH TECHNOLOGIES CONSOLIDATED
NETWORK CORPORATION ALL OTHER ELIMINATIONS TOTAL
------------ ------------ ------------ ------------ ------------
THREE MONTHS ENDING MARCH 31, 2001
Revenue........................... $ 817,990 $ 18,728 $ 25,876 $ (664) $ 861,930
Net income (loss)................. (166,550) (7,788) 4,471 -- (169,867)
THREE MONTHS ENDING MARCH 31, 2002
Revenue........................... $ 1,041,673 $ 33,713 $ 30,585 $ (1,503) $ 1,104,468
Net income (loss)................. (42,519) (3,202) 7,113 -- (38,608)
10. SUBSEQUENT EVENTS
EchoStar VII
During April 2002, EchoStar VII, which launched successfully on
February 21, 2002, from Cape Canaveral, Florida, reached its final orbital
location at 119 degrees West Longitude and commenced commercial operation. To
date, all systems on the satellite are operating normally.
15
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
We make "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995 throughout this document. Whenever you
read a statement that is not simply a statement of historical fact (such as when
we describe what we "believe," "expect" or "anticipate" will occur, and other
similar statements), you must remember that our expectations may not be correct,
even though we believe they are reasonable. We do not guarantee that the
transactions and events described in this document will happen as described or
that they will happen at all. You should read this document completely and with
the understanding that actual future results may be materially different from
what we expect. Whether actual results will conform with our expectations and
predictions is subject to a number of risks and uncertainties. The risks and
uncertainties include, but are not limited to: our proposed merger with Hughes
Electronics Corporation may not occur as a result of: (1) the failure to obtain
necessary Internal Revenue Service, which is referred to as the IRS, tax
rulings, antitrust clearance, Federal Communications Commission, or FCC,
approval or the requisite approval from General Motors' stockholders, (2)
shareholder litigation challenging the merger, or (3) the failure to satisfy
other conditions; while we need substantial additional financing, we are highly
leveraged and subject to numerous constraints on our ability to raise additional
debt; we may incur unanticipated costs in connection with the Hughes merger
financing or any refinancings we must undertake or consents we must obtain to
enable us to consummate the Hughes merger; regulatory authorities may impose
burdensome terms on us as a condition of granting their approval of the Hughes
merger or the acquisition of Hughes' interest in PanAmSat, and legislative and
regulatory developments may create unexpected challenges for us; we may not
realize the benefits and synergies we expect from, and may incur unanticipated
costs with respect to, the Hughes merger due to delays, burdensome conditions
imposed by regulatory authorities, difficulties in integrating the businesses or
disruptions in relationships with employees, customers or suppliers; we are
party to various lawsuits which, if adversely decided, could have a significant
adverse impact on our business; we may be unable to obtain patent licenses from
holders of intellectual property or redesign our products to avoid patent
infringement; we may be unable to obtain needed retransmission consents, FCC
authorizations or export licenses; the regulations governing our industry may
change; our satellite launches may be delayed or fail, our satellites may fail
prematurely in orbit, we currently do not have traditional commercial insurance
covering losses incurred from the failure of launches and/or satellites; and we
may be unable to settle outstanding claims with insurers; weakness in the global
economy may harm our business generally, and adverse local political or economic
developments may occur in some of our markets; service interruptions arising
from technical anomalies on some satellites, or caused by war, terrorist
activities or natural disasters, may cause customer cancellations or otherwise
harm our business; we face intense and increasing competition from the cable
television industry, new competitors may enter the subscription television
business, and new technologies may increase competition; DISH Network subscriber
growth may decrease; subscriber turnover may increase; and subscriber
acquisition costs may increase; sales of digital equipment and related services
to international direct-to-home service providers may decrease; future
acquisitions, business combinations, strategic partnerships and divestitures may
involve additional uncertainties; the September 11, 2001 terrorist attacks and
changes in international political conditions as a result of these events may
continue to affect the U.S. and the global economy and may increase other risks;
and we may face other risks described from time to time in periodic reports we
file with the Securities and Exchange Commission. 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.
16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
In this document, the words "we," "our," and "us" refer to EchoStar
Communications Corporation and its subsidiaries, unless the context otherwise
requires. "EDBS" refers to EchoStar DBS Corporation and its subsidiaries and
"EBC" refers to EchoStar Broadband Corporation and its subsidiaries. "General
Motors" or "GM" refers to General Motors Corporation, "Hughes" refers to Hughes
Electronics Corporation, or a holding company that is expected to be formed to
hold all of the stock of Hughes, and "PanAmSat" refers to PanAmSat Corporation,
in each case including their respective subsidiaries, unless the context
otherwise requires We expect that consummation of the Hughes merger and related
transactions and consummation of the PanAmSat acquisition described in our
Annual Report on Form 10-K for the year ended December 31, 2001 would have
material effects on our results of operations and liquidity and capital
resources. Our historical financial information contained in this document does
not give effect to either of these transactions, on a pro forma or any other
basis, and our liquidity and capital resources discussions do not take these
transactions into account. The EchoStar information statement, which we filed
with the Securities and Exchange Commission on March 18, 2002 and expect to
distribute to our common stockholders this summer, includes pro forma financial
information of the combined company as if the Hughes merger was consummated and
for us as if the Pan AmSat acquisition was consummated, each in accordance with
the rules and regulations of the Securities and Exchange Commission. Please see
our Annual Report on Form 10-K for the year ended December 31, 2001 for a
description of how you can obtain a copy of the EchoStar information statement
from the Securities and Exchange Commission.
RESULTS OF OPERATIONS
Three Months Ended March 31, 2002 Compared to Three Month Ended March 31, 2001.
Revenue. Total revenue for the three months ended March 31, 2002 was
$1.104 billion, an increase of $242 million compared to total revenue for the
three months ended March 31, 2001 of $862 million. The increase in total revenue
was primarily attributable to continued DISH Network subscriber growth. Assuming
a continued slow economy, we expect that our revenues will increase 20% to 25%
in 2002 compared to 2001 as the number of DISH Network subscribers increases.
DISH Network subscription television services revenue totaled $1.016
billion for the three months ended March 31, 2002, an increase of $222 million
compared to the same period in 2001. 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 continued DISH Network subscriber growth. DISH Network added
approximately 335,000 net new subscribers for the three months ended March 31,
2002 compared to approximately 460,000 net new subscriber additions during the
same period in 2001. We believe the reduction in net new subscribers for the
three months ended March 31, 2002, compared to the same period in 2001, resulted
from a number of factors, including the continued weak U.S. economy and stronger
competition from digital cable and cable modems. Additionally, as the size of
our subscriber base continues to increase, even if percentage churn remains
constant, increasing numbers of gross new subscribers are required to sustain
net subscriber growth. As of March 31, 2002, we had approximately 7.16 million
DISH Network subscribers compared to approximately 5.7 million at March 31,
2001, an increase of approximately 25%. 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, notwithstanding our
expectation of a continued slow U.S. economy, we expect to end 2002 with more
than 8 million DISH Network subscribers.
Monthly average revenue per subscriber was approximately $48.36 during
the three months ended March 31, 2002 and approximately $48.23 during the same
period in 2001. Monthly average revenue per subscriber for the year ended
December 31, 2001 was approximately $49.32. The decrease in monthly average
revenue per subscriber from the year ended December 31, 2001 is primarily
attributable to our I Like 9 promotion, under which participating subscribers
receive substantially discounted programming for twelve months, and certain of
our current promotions, discussed below, under which new subscribers receive
free programming for the first three months of their term of service. While
there can be no assurance, we expect a modest increase in monthly average
revenue per subscriber during 2002 as compared to 2001.
17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - CONTINUED
Impacts from our litigation with the networks in Florida, FCC rules
governing the delivery of superstations and other factors could cause us to
terminate delivery of distant network channels and superstations to a material
portion of our subscriber base, which could cause many of those customers to
cancel their subscription to our other services. Any such terminations could
result in a small reduction in average monthly revenue per subscriber and could
result in an increase in our percentage churn.
Commencing January 1, 2002, we were required to comply with the
statutory requirement to carry all qualified over the air television stations by
satellite in any market where we carry any local network channels by satellite.
The Media Bureau of the FCC (the "Bureau") recently concluded that we are not in
compliance with "must carry" obligations. While we continue to believe our
practices comply with the law, the Bureau offered a number of remedial actions
we could implement in order to meet their standards. We have already initiated
many of their proposed practices, and intend to take further steps over the next
30 to 60 days which we believe should satisfy the Bureau. However, there can be
no assurance that our remedial actions will ultimately be deemed satisfactory by
the FCC. In the event that our remedial actions are found to be unsatisfactory
by the FCC, we could be forced to reduce the number of markets where we provide
local channels in order to meet their interpretation of "must carry"
obligations. Any reduction in the number of markets we serve in order to comply
with "must carry" requirements for other markets would adversely affect our
operations and could result in a temporary increase in churn. In combination,
these resulting subscriber terminations would result in a small reduction in
average monthly revenue per subscriber and could increase our percentage churn.
For the three months ended March 31, 2002, DTH equipment sales revenue
totaled $57 million, an increase of $16 million compared to the same period
during 2001. DTH equipment sales consist of sales of digital set-top boxes and
other digital satellite broadcasting equipment to international DTH service
operators, sales of StarBand equipment and sales of DBS accessories. The
increase in DTH equipment sales revenue principally resulted from a increase in
sales of digital set-top boxes to Bell ExpressVu, one of our primary
international DTH customers. This increase was partially offset by a decrease in
sales of digital set-top boxes to our other primary international DTH customer,
Via Digital.
A significant portion of DTH equipment sales revenues through 2001
resulted from sales to two international DTH providers, Via Digital in Spain and
Bell ExpressVu in Canada. For 2002, we have binding purchase orders from Bell
ExpressVu and we are actively trying to secure new orders from Via Digital for
delivery starting in the third quarter of 2002. However, we cannot guarantee at
this time that those negotiations will be successful. In addition, our future
revenue from the sale of DTH equipment in international markets depends largely
on the success of these DTH operators and continued demand for our digital
set-top boxes. As a result of these factors, we expect total DTH equipment sales
revenue to decrease in 2002 compared to 2001. 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.
DISH Network Operating Expenses. DISH Network operating expenses
totaled $504 million during the three months ended March 31, 2002, an increase
of $114 million or 29% compared to the same period in 2001. 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. DISH
Network operating expenses represented 50% and 49% of subscription television
services revenue during the three months ended March 31, 2002 and 2001,
respectively. The increase in DISH Network operating expenses as a percentage of
subscription television services revenue primarily resulted from marketing
promotions which offer new subscribers free or substantially discounted
programming, for which we do not receive corresponding programming expense
discounts. We expect to continue to control costs and create operating
efficiencies. While there can be no assurance, we expect operating expenses as a
percentage of subscription television services revenue to remain near current
levels during 2002. See further discussion of components of DISH Network
operating expense below.
18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - CONTINUED
Subscriber-related expenses totaled $408 million during the three
months ended March 31, 2002, an increase of $92 million compared to the same
period in 2001. The increase in total subscriber-related expenses is primarily
attributable to the increase in DISH Network subscribers. Such expenses, which
include programming expenses, copyright royalties, residuals currently payable
to retailers and distributors, and billing, lockbox and other variable
subscriber expenses, represented 40% of subscription television services
revenues during each of the three months ended March 31, 2002 and 2001. While
there can be no assurance, we expect subscriber-related expenses as a percentage
of subscription television services revenue to remain near current levels during
2002.
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 $83 million during the three months ended March 31, 2002, an
increase of $18 million as compared to the same period in 2001. The increase in
customer service center and other expenses primarily resulted from increased
personnel and telephone expenses to support the growth of the DISH Network and
from operating expenses related to the expansion of our installation and service
business. Customer service center and other expenses totaled 8% of subscription
television services revenue during each of the three months ended March 31, 2002
and 2001. While there can be no assurance, we expect these expenses in total,
and as a percentage of subscription television services revenue, to remain near
current levels during 2002. These expenses and percentages could temporarily
increase in the future as additional infrastructure is added to meet future
growth. We continue to work to automate simple telephone responses, and intend
to increase Internet-based customer assistance in the future, in order to better
manage customer service costs.
Satellite and transmission expenses include expenses associated with
the operation of our digital broadcast centers, contracted satellite telemetry,
tracking and control services, and commercial satellite in-orbit insurance
premiums. Satellite and transmission expenses totaled $13 million during the
three months ended March 31, 2002, a $4 million increase compared to the same
period in 2001. Satellite and transmission expenses totaled 1% of subscription
television services revenue during each of the three months ended March 31, 2002
and 2001. We expect satellite and transmission expenses in total and as a
percentage of subscription television services revenue to increase in the future
as additional satellites are placed in service, to the extent we successfully
obtain commercial in-orbit insurance and to the extent we increase the
operations at our digital broadcast centers in order, among other reasons, to
meet the demands of current "must carry" requirements.
Cost of sales - DTH equipment. Cost of sales - DTH equipment totaled
$39 million during the three months ended March 31, 2002, an increase of $10
million compared to the same period in 2001. Cost of sales - DTH equipment
principally includes costs associated with digital set-top boxes and related
components sold to international DTH operators and DBS accessories. The increase
in Cost of sales - DTH equipment principally resulted from a increase in sales
of digital set-top boxes to Bell ExpressVu, one of our primary international DTH
customers. This increase was partially offset by a decrease in sales of digital
set-top boxes to our other primary international DTH customer, Via Digital. Cost
of sales - DTH equipment represented 69% and 70% of DTH equipment revenue,
during the three months ended March 31, 2002 and 2001, respectively.
Marketing Expenses. Generally, under most promotions, we subsidize the
cost and installation of EchoStar receiver systems in order to attract new DISH
Network subscribers. Marketing expenses totaled $272 million during the three
months ended March 31, 2002 compared to $300 million for the same period in
2001. This decrease primarily resulted from a decrease in subscriber promotion
subsidies - cost of sales and Subscriber promotion subsidies - other. Subscriber
promotion subsidies - cost of sales decreased primarily as a result of slower
subscriber growth. The decrease in Subscriber promotion subsidies - other
resulted from slower subscriber growth and changes in our marketing promotions
during the three months ended March 31, 2002 to include promotions which
generally require new subscribers to purchase receivers in order to qualify for
free or substantially discounted programming. Conversely, during the same period
in 2001, our marketing promotions generally offered free receiver systems to new
subscribers. The decrease in total Marketing expense was partially offset by an
increase in advertising expense related to our 2002 marketing promotions.
Subscriber promotion subsidies - cost of sales includes the cost related to
EchoStar receiver systems distributed to retailers and other distributors of our
equipment. Subscriber promotion subsidies - other includes net
19
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - CONTINUED
costs related to our free installation promotion and other promotional
incentives. Advertising and other expenses totaled $37 million and $27 million
during the three months ended March 31, 2002 and 2001, respectively.
During the three months ended March 31, 2002, our marketing promotions
included our I Like 9, Free Dish, 1-2-3 Great TV, free installation program, and
Digital Home Plan, which are described below.
During August 2001, we commenced our I Like 9 promotion. Under this
promotion, subscribers who purchased an EchoStar receiver system for $199 or
higher, received free installation and either our America's Top 100 CD or our
DISH Latino Dos programming package for $9 a month for the first year.
Subscriber acquisition costs are materially lower under this plan compared to
historical promotions. This promotion expired January 31, 2002.
Our Free Dish promotion, under which subscribers receive a free
base-level EchoStar receiver system, was commenced during August 2001. To be
eligible, subscribers must provide a valid major credit card and make a one-year
commitment to subscribe to a qualified programming package. Although there can
be no assurance as to the ultimate duration of the Free Dish promotion, we
intend to continue it through at least July 31, 2002.
During January 2002, we commenced our 1-2-3 Great TV promotion. Under
this promotion, subscribers who purchase one or more receivers, provide a valid
major credit card and make a one-year commitment, receive the first three months
of qualified programming and installation on up to two receivers for free.
Although there can be no assurance as to the ultimate duration of the 1-2-3
Great TV promotion, we intend to continue it through at least July 31, 2002.
Free Installation. 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 the present,
are eligible to receive a free professional installation.
Digital Home Plan. Our Digital Home Plan promotion, introduced during
July 2000, offers several choices to consumers, ranging from the use of one
EchoStar receiver system and our America's Top 50 CD programming package for
$27.99 per month, to providing consumers two or more EchoStar receiver systems
and our America's Top 150 programming package for $50.99 to $60.99 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 through March 31,
2002, included the first three month's of qualified programming payment for
qualified Digital Home Plan programming packages. For consumers who choose the
Digital Home Plan with Dish PVR, which includes the use of one or more EchoStar
receiver systems, one of which includes a built-in hard drive that allows
viewers to pause and record live programming without the need for videotape, the
consumer will incur a one-time set-up fee of $148.99. Since we retain ownership
of equipment issued pursuant to the Digital Home Plan promotion, equipment costs
are capitalized and depreciated over a period of four years. Although there can
be no assurance as to the ultimate duration of the Digital Home Plan promotion,
we intend to continue it through at least July 31, 2002.
Generally, under most promotions, 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 - cost of sales, subscriber promotion subsidies -
other and DISH Network acquisition marketing expenses. During the three months
ended March 31, 2002, our subscriber acquisition costs totaled approximately
$266 million, or approximately $430 per new subscriber activation.
Comparatively, our subscriber acquisition costs during the three months ended
March 31, 2001 totaled approximately $297 million, or approximately $432 per new
subscriber activation. The decrease in our per new subscriber acquisition cost
primarily resulted from an increase in direct sales and changes in our marketing
promotions during the three months ended March 31, 2002 to include promotions
which generally require new subscribers to purchase receivers in order to
qualify for free or substantially discounted programming. Conversely, during the
same period in 2001, our marketing promotions generally offered free receiver
systems to new subscribers. While there can be no assurance, we expect per
subscriber acquisition costs for the year ended December 31, 2002 to be
consistent with costs for the three months ended March 31, 2002, an increase
from our previous guidance of $395 per new subscriber acquisition for the year.
This increase in anticipated per subscriber acquisition costs is primarily the
result of
20
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - CONTINUED
promotions introduced during the first quarter 2002, which are tailored toward
subscribers who desire multiple receivers, resulting in higher equipment
subsidies and increased dealer commissions. While there can be no assurance, we
believe heightened credit procedures we implemented during the quarter, together
with promotions tailored towards subscribers with multiple receivers, will
attract better long-term subscribers than could be obtained through less costly
promotions.
Since we retain ownership of the equipment, amounts capitalized under
our Digital Home Plan are not included in our calculation of these subscriber
acquisition costs. Capital expenditures under our Digital Home Plan promotion
totaled approximately $77 million and $63 million for the three months ended
March 31, 2002 and 2001, respectively. Cash and returned equipment received as a
result of Digital Home Plan customer disconnects totaling approximately $12
million during the three months ended March 31, 2002 also is not included in our
calculation of subscriber acquisition costs. As our Digital Home Plan was not
introduced until July 2000 and requires a one-year commitment, cash and returned
equipment were not material during the three months ended March 31, 2001.
Our subscriber acquisition costs, both in the aggregate and on a per
new subscriber activation basis, may materially increase to the extent that we
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 $95 million during the three months ended March 31, 2002, an
increase of $19 million as compared to the same period in 2001. The increase in
G&A expenses was principally attributable to increased personnel expenses to
support the growth of the DISH Network. G&A expenses represented 9% of total
revenue during each of the three months ended March 31, 2002 and 2001. While
there can be no assurance, we expect G&A expenses as a percentage of total
revenue to remain near current levels in future periods.
Non-cash, Stock-based Compensation. During 1999, we adopted an
incentive plan which provided certain key employees with incentives including
stock options. The payment of these incentives was contingent upon our
achievement of certain financial and other goals. We met certain of these goals
during 1999. Accordingly, during 1999 we recorded approximately $179 million of
deferred compensation related to post-grant appreciation of stock options
granted pursuant to the 1999 incentive plan. The related deferred compensation
will be recognized over the five-year vesting period. Accordingly, during the
three months ended March 31, 2002 we recognized $2 million under this
performance-based plan, a decrease of $5 million compared to the same period in
2001. This decrease is primarily attributable to stock option forfeitures
resulting from employee terminations. The remaining deferred compensation of $21
million, which will be reduced by future forfeitures, if any, will be recognized
over the remaining vesting period.
We report all non-cash compensation based on stock option appreciation
as a single expense category in our accompanying statements of operations. The
following table represents the other expense categories in our statements of
operations that would be affected if non-cash, stock-based compensation was
allocated to the same expense categories as the base compensation for key
employees who participate in the 1999 incentive plan:
MARCH 31,
2001 2002
------------ ------------
(in thousands)
Customer service center and other $ 233 $ 182
Satellite and transmission 466 (554)
General and administrative 6,757 2,038
------------ ------------
Total non-cash, stock-based compensation $ 7,456 $ 1,666
============ ============
Options to purchase an additional 9.4 million shares are outstanding as
of March 31, 2002 and were granted at fair market value during 1999, 2000 and
2001 pursuant to a Long Term Incentive Plan. The weighted-average exercise price
of these options is $8.95. Vesting of these options is contingent on meeting
certain longer-term goals, which may be met upon the consummation of the
proposed merger with Hughes. However, as the achievement of
21
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - CONTINUED
these goals cannot be reasonably predicted as of March 31, 2002, no compensation
was recorded during the three months ended March 31, 2001 and 2002 related to
these long-term options. We 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. Such compensation, if
recorded, could result in material non-cash stock-based compensation expense in
our statements of operations.
Pre-Marketing Cash Flow. Pre-marketing cash flow is comprised of
EBITDA, as defined below, plus total marketing expenses. Pre-marketing cash flow
was $450 million during the three months ended March 31, 2002, an increase of
$99 million or 28% compared to the same period in 2001. Our pre-marketing cash
flow as a percentage of total revenue was approximately 41% during each of the
three months ended March 31, 2002 and 2001. We believe that pre-marketing cash
flow can be a helpful measure of operating efficiency for companies in the DBS
industry. While there can be no assurance, we expect pre-marketing cash flow as
a percentage of total revenue to be approximately 40% during 2002.
Earnings Before Interest, Taxes, Depreciation and Amortization. EBITDA
is defined as operating income (loss) plus depreciation and amortization, and
adjusted for non-cash, stock-based compensation. EBITDA was $178 million during
the three months ended March 31, 2002, compared to $51 million during the same
period in 2001. This improvement in EBITDA was directly attributable to the
increase in the number of DISH Network subscribers resulting in revenue
sufficient to support the cost of new and existing subscribers. Our calculation
of EBITDA for the three months ended March 31, 2002 and 2001 does not include
approximately $2 million and $7 million, respectively, of non-cash compensation
expense resulting from post-grant appreciation of employee stock options. In
addition, EBITDA does not include the impact of amounts capitalized under our
Digital Home Plan of approximately $77 million and $63 million during 2002 and
2001, respectively. While there can be no assurance, we expect EBITDA to
increase approximately 80% to 100% in 2002 compared to 2001. As previously
discussed, to the extent we introduce new marketing promotions and our
subscriber acquisition costs materially increase, our EBITDA results will be
negatively impacted because subscriber acquisition costs are generally expensed
as incurred.
It is important to note that EBITDA and pre-marketing cash flow do not
represent cash provided or used by operating activities. EBITDA and
pre-marketing cash flow should not be considered in isolation or as a substitute
for measures of performance prepared in accordance with generally accepted
accounting principles.
Depreciation and Amortization. Depreciation and amortization expenses
aggregated $82 million during the three months ended March 31, 2002, a $23
million increase compared to the same period in 2001. The increase in
depreciation and amortization expenses principally resulted from an increase in
depreciation related to the Digital Home Plan equipment and other depreciable
assets placed in service during late 2001.
Other Income and Expense. Other expense, net, totaled $134 million
during the three months ended March 31, 2002, a decrease of $21 million compared
to the same period in 2001. This decrease primarily resulted from net losses on
marketable and non-marketable investment securities of approximately $24 million
recorded in 2002 compared to approximately $82 million during 2001. The decrease
in Other expense was partially offset by an increase in interest expense as a
result of the issuance of our 5 3/4% Convertible Subordinated Notes in May 2001,
the issuance of our 9 1/8% Senior Notes in December 2001, and approximately $19
million of bridge financing commitment fees.
Net loss. Net loss was $39 million during the three months ended March
31, 2002, a decrease of $131 million compared to same period in 2001. This
decrease is primarily attributable to the increase in the number of DISH Network
subscribers resulting in revenue sufficient to support the cost of new and
existing subscribers, though not yet adequate to fully support interest payments
and other non-operating costs.
Net loss attributable to common shareholders. Net loss attributable to
common shareholders was $97 million during the three months ended March 31,
2002, a decrease of $73 million compared to same period in 2001. This decrease
is primarily attributable to the decrease in Net loss, as discussed above. The
decrease in Net loss attributable to common shareholders was partially offset by
$58 million of non-cash retained earnings reductions resulting from the
contingent value rights and conversion features associated with the Vivendi
22
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - CONTINUED
equity investment. These items are not a component of Net loss but are included
in Net loss attributable to common shareholders for purposes of computing Net
loss per common share.
LIQUIDITY AND CAPITAL RESOURCES
Cash Sources
As of March 31, 2002, our cash, cash equivalents and marketable
investment securities totaled $4.503 billion, including $176 million of cash
reserved for satellite insurance and approximately $4 million of restricted
cash, compared to $2.952 billion, including $122 million of cash reserved for
satellite insurance and $1 million of restricted cash, as of December 31, 2001.
For the three months ended March 31, 2002 and 2001, we reported net cash flows
from operating activities of $192 million and negative $20 million,
respectively. The $212 million increase in net cash flow from operating
activities reflects, among other things, changes in working capital and an
increase in the number of DISH Network subscribers resulting in revenue
sufficient to support the cost of new and existing subscribers, though not yet
adequate to fully support interest payments and other non-operating costs.
Except with respect to the Hughes merger, if completed, 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. We may, however, be required to raise additional
capital in the future to meet these requirements. However, there can be no
assurance that additional financing will be available on acceptable terms, or at
all, if needed in the future. 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 business. There can be no assurance that we will be
successful in achieving our goals. The amount of capital required to fund our
2002 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, including capitalized costs associated with our Digital
Home Plan. 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
continued general economic downturn, among other factors. These factors could
require that we raise additional capital in the future.
From time to time we evaluate opportunities for strategic investments
or acquisitions that would complement our current services and products, enhance
our technical capabilities or otherwise offer growth opportunities. As a result,
acquisition discussions and offers, and in some cases, negotiations may take
place and future material investments or acquisitions involving cash, debt or
equity securities or a combination thereof may result.
Investment Securities
We currently classify all marketable investment securities as
available-for-sale. In accordance with generally accepted accounting principles,
we adjust the carrying value of our available-for-sale marketable investment
securities to fair market value and report the related temporary unrealized
gains and losses as a separate component of stockholders' deficit. Declines in
the fair market value of a marketable investment security which are estimated to
be "other than temporary" must be recognized in the statement of operations,
thus establishing a new cost basis for such investment. We evaluate our
marketable investment securities portfolio on a quarterly basis to determine
whether declines in the market value of these securities are other than
temporary. This quarterly evaluation consists of reviewing, among other things,
the fair value of our marketable investment securities compared to the carrying
value of these securities, the historical volatility of the price of each
security and any market and company specific factors related to each security.
Generally, absent specific factors to the contrary, declines in the fair value
of investments below cost basis for a period of less than six months are
considered to be temporary. Declines in the fair value of investments for a
period of six to nine months are evaluated on a case by case basis to determine
whether any company or market-specific factors exist which would indicate that
such declines are other than temporary. Declines in the fair value of
investments below cost basis for greater than nine months are considered other
than temporary and are recorded as charges to earnings, absent specific factors
to the contrary.
23
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - CONTINUED
As of March 31, 2002, we recorded unrealized losses of approximately
$19 million as a separate component of stockholders' deficit. During the three
months ended March 31, 2002, we also recorded an aggregate charge to earnings
for other than temporary declines in the fair market value of certain of our
marketable investment securities of approximately $7 million, and established a
new cost basis for these securities. This amount does not include realized gains
of approximately $12 million on the sales of marketable investment securities.
If the fair market value of our marketable securities portfolio does increase to
cost basis or if we become aware of any market or company specific factors that
indicate that the carrying value of certain of our securities is impaired, we
may be required to record additional charges to earnings in future periods equal
to the amount of the decline in fair value.
We have made strategic equity investments in certain non-marketable
investment securities, which we also evaluate on a quarterly basis to determine
whether the carrying value of each investment is impaired. The securities of
these companies are not publicly traded. As such, this quarterly evaluation
consists of reviewing, among other things, company business plans and current
financial statements, if available, for factors which may indicate an impairment
in our investment. Such factors may include, but are not limited to, cash flow
concerns, material litigation, violations of debt covenants and changes in
business strategy. During the quarter ended March 31, 2002, we recorded
equity-method charges of approximately $8 million and an impairment charge of
approximately $28 million to reduce the carrying value of certain non-marketable
investment securities to zero.
Subscriber Turnover
Our percentage churn for the three months ended March 31, 2002 was
consistent with our percentage churn during the three months ended March 31,
2001. While there can be no assurance, we currently expect that our percentage
churn during 2002 will be consistent with our percentage churn during 2001. We
also expect that our churn will continue to be lower than satellite and cable
industry averages. In addition, impacts from our litigation with the networks in
Florida, FCC rules governing the delivery of superstations and other factors
could cause us to terminate delivery of distant network channels and
superstations to a material portion of our subscriber base, which could cause
many of those customers to cancel their subscription to our other services. Any
such terminations could result in a small reduction in average monthly revenue
per subscriber and could result in an increase in our percentage churn.
Commencing January 1, 2002, we were required to comply with the
statutory requirement to carry all qualified over the air television stations by
satellite in any market where we carry any local network channels by satellite.
The Media Bureau of the FCC (the "Bureau") recently concluded that we are not in
compliance with "must carry" obligations. While we continue to believe our
practices comply with the law, the Bureau offered a number of remedial actions
we could implement in order to meet their standards. We have already initiated
many of their proposed practices, and intend to take further steps over the next
30 to 60 days which we believe should satisfy the Bureau. However, there can be
no assurance that our remedial actions will ultimately be deemed satisfactory by
the FCC. In the event that our remedial actions are found to be unsatisfactory
by the FCC, we could be forced to reduce the number of markets where we provide
local channels in order to meet their interpretation of "must carry"
obligations. Any reduction in the number of markets we serve in order to comply
with "must carry" requirements for other markets would adversely affect our
operations and could result in a temporary increase in churn. In combination,
these resulting subscriber terminations would result in a small reduction in
average monthly revenue per subscriber and could increase our percentage churn.
Subscriber Acquisition Costs
As previously described, we generally subsidize the cost and
installation of EchoStar receiver systems in order to attract new DISH Network
subscribers. Our average subscriber acquisition costs were approximately $430
per new subscriber activation during the three months ended March 31, 2002.
While there can be no assurance, we expect per subscriber acquisition costs for
the year ended December 31, 2002 to be consistent with costs for the three
months ended March 31, 2002, and increase from our previous guidance of $395 per
new subscriber acquisition for the
24
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - CONTINUED
year. This increase in anticipated per subscriber acquisition costs is primarily
the result of promotions introduced during the first quarter 2002, which are
tailored towards subscribers who desire multiple receivers, resulting in higher
equipment subsidies and increased dealer commissions. While there can be no
assurance, we believe heightened credit procedures we implemented during the
quarter, together with promotions tailored towards subscribers with multiple
receivers, will attract better long-term subscribers than could be obtained
through less costly promotions. Our subscriber acquisition costs, both in the
aggregate and on a per new subscriber activation basis, may materially increase
to the extent that we introduce other more aggressive promotions if we determine
that they are necessary to respond to competition, or for other reasons.
Since we retain ownership of the equipment, amounts capitalized under
our Digital Home Plan, totaling approximately $77 million for the three months
ended March 31, 2002, are not included in our calculation of these subscriber
acquisition costs. Cash and returned equipment received as a result of Digital
Home Plan customer disconnects totaling approximately $12 million during the
three months ended March 31, 2002, also is not included in our calculation of
subscriber acquisition costs.
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.
Obligations and Future Capital Requirements
The indentures related to certain of EDBS' senior notes contain
restrictive covenants that require us to maintain satellite insurance with
respect to at least half of the satellites we own or lease. In addition, the
indenture related to EBC's senior notes requires us to maintain satellite
insurance on the lesser of half of our satellites or three of our satellites.
All of our DBS satellites are owned by direct or indirect subsidiaries of EBC.
During the three months ended March 31, 2002, EBC transferred ownership of
EchoStar VII to EDBS, which increased EDBS' total satellite ownership to 7
satellites. Insurance coverage is therefore required for at least four of our
seven satellites currently in-orbit. The launch and/or in-orbit insurance
policies for EchoStar I through EchoStar VII have expired. To date we have been
unable to obtain insurance on any of these satellites on terms acceptable to us.
As a result, we are currently self-insuring these satellites. To satisfy
insurance covenants related to EDBS' and EBC's senior notes, we have
reclassified an amount equal to the depreciated cost of four of our satellites
from cash and cash equivalents to cash reserved for satellite insurance on our
balance sheet. As of March 31, 2002, cash reserved for satellite insurance
totaled approximately $176 million. The reclassifications will continue until
such time, if ever, as we can again insure our satellites on acceptable terms
and for acceptable amounts. We believe we have in-orbit satellite capacity
sufficient to expeditiously recover transmission of most programming in the
event one of our in-orbit satellites fails. However, the cash reserved for
satellite insurance is not adequate to fund the construction, launch and
insurance for a replacement satellite in the event of a complete loss of a
satellite. Programming continuity cannot be assured in the event of multiple
satellite losses.
We may not be able to obtain commercial insurance covering the launch
and/or in-orbit operation of EchoStar VIII at rates acceptable to us and for the
full amount necessary to construct, launch and insure a replacement satellite.
In that event, we will be forced to self-insure all or a portion of the launch
and/or in-orbit operation of EchoStar VIII. The manufacturer of EchoStar VIII is
contractually obligated to use their reasonable best efforts to obtain
commercial insurance for the launch and in-orbit operation of EchoStar VIII for
a period of in-orbit operation to be determined and in an amount of up to $225
million. There is no guarantee that they or we will be able to obtain commercial
insurance for the launch and in-orbit operation of EchoStar VIII at reasonable
rates and for the full replacement cost of the satellite.
We utilized $91 million of satellite vendor financing for our first
four satellites. As of March 31, 2002, approximately $14 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
25
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - CONTINUED
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%. As of March 31, 2002, we
utilized approximately $15 million of satellite vendor financing related to
EchoStar VII. These in orbit payments are contingent on the continued health of
the satellites. The satellite vendor financings for EchoStar III, EchoStar IV
and EchoStar VII are secured by an ECC corporate guarantee.
During the remainder of 2002, we anticipate total capital expenditures
of between $400-$650 million depending upon the strength of the economy and
other factors. We expect approximately 25% of that amount to be utilized for
satellite construction and approximately 75% for EchoStar receiver systems in
connection with our Digital Home Plan and for general corporate expansion. These
percentages, as well as the overall expenditures, could change depending on a
variety of factors including Digital Home Plan penetration and the extent we
contract for the construction of additional satellites.
In addition to our DBS business plan, we have licenses, or applications
pending with the FCC, for a two satellite FSS Ku-band satellite system and a two
satellite FSS Ka-band satellite system. We will need to raise additional capital
to complete construction of these satellites. We are currently funding the
construction phase for two satellites. One of these satellites, EchoStar VIII,
will be an advanced, high-powered DBS satellite. The second satellite, EchoStar
IX, will be a hybrid Ku/Ka-band satellite.
We currently own a 90% interest in VisionStar, Inc., which holds an FCC
license at the 113 degree orbital location. VisionStar's FCC license currently
requires construction of the satellite to be completed by April 30, 2002 and the
satellite to be operational by May 31, 2002. We will not complete construction
or launch of the satellite by those dates and have requested an extension of
these milestones from the FCC. Failure to receive an extension, of which there
can be no assurance, will render the license invalid unless the milestones are
extended by the FCC. 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, although
there is no assurance that such funding will be available.
In the future we may fund construction, launch and insurance of
additional satellites through cash from operations, public or private debt or
equity financing, joint ventures with others, or from other sources, although
there is no assurance that such funding will be available.
From time to time we evaluate opportunities for strategic investments
or acquisitions that would complement our current services and products, enhance
our technical capabilities or otherwise offer growth opportunities. As a result,
acquisition discussions and offers, and in some cases, negotiations may take
place and future material investments or acquisitions involving cash, debt or
equity securities or a combination thereof may result.
We expect that our future working capital, capital expenditure and debt
service requirements will be satisfied from existing cash and investment
balances, and cash generated from operations. Our ability to generate positive
future operating and net cash flows is dependent, among other things, upon our
ability to retain existing DISH Network subscribers, our ability to manage the
growth of our subscriber base, and our ability to grow our ETC business. To the
extent future subscriber growth exceeds our expectations, it may be necessary
for us to raise additional capital to fund increased working capital
requirements. There may be a number of other factors, some of which are beyond
our control or ability to predict, that could require us to raise additional
capital. These factors include unexpected increases in operating costs and
expenses, a defect in or the loss of any satellite, or an increase in the cost
of acquiring subscribers due to additional competition, among other things. If
cash generated from our operations is not sufficient to meet our debt service
requirements or other obligations, we would be required to obtain cash from
other financing sources. 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.
26
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
MARKET RISKS ASSOCIATED WITH FINANCIAL INSTRUMENTS
As of March 31, 2002, our unrestricted cash, cash equivalents and
marketable investment securities had a fair value of approximately $4.3 billion.
Of that amount, a total of approximately $4.2 billion was invested in: (a) cash;
(b) debt instruments of the U.S. Government and its agencies; (c) commercial
paper with an average maturity of less than one year and rated in one of the
four highest rating categories by at least two nationally recognized statistical
rating organizations; and (d) instruments with similar risk characteristics to
the commercial paper described above. The primary purpose of these investing
activities has been to preserve principal until the cash is required to fund
operations. Consequently, the size of this portfolio fluctuates significantly as
cash is raised and used in our business.
The value of certain of the investments in this portfolio can be
impacted by, among other things, the risk of adverse changes in securities and
economic markets generally, as well as the risks related to the performance of
the companies whose commercial paper and other instruments we hold. However, the
high quality of these investments (as assessed by independent rating agencies),
reduces these risks. The value of these investments can also be impacted by
interest rate fluctuations. At March 31, 2002, 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. As of March 31, 2002 our marketable securities portfolio balance was
approximately $4.3 billion with an average annual interest rate of approximately
2.3%. A hypothetical 10% decrease in interest rates would result in a decrease
of approximately $10 million in annual interest income.
We also invest in debt and equity of public and private companies for
strategic and financial purposes. As of March 31, 2002, we held strategic and
financial debt and equity investments of public companies with a fair value of
approximately $119 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. We may make additional strategic and
financial investments in other debt and equity securities in the future.
The fair value of our strategic debt investments can be impacted by
interest rate fluctuations. Absent the effect of other factors, a hypothetical
10% increase in LIBOR would result in a decrease in the fair value of our
investments in these debt instruments of approximately $4.8 million. The fair
value of our strategic debt and equity investments can also be significantly
impacted by the risk of adverse changes in securities markets generally, as well
as risks related to the performance of the companies whose securities we have
invested in, risks associated with specific industries, and other factors. These
investments are subject to significant fluctuations in fair market value due to
the volatility of the securities markets and of the underlying businesses. A
hypothetical 10% adverse change in the price of our public strategic debt and
equity investments would result in approximately a $11.9 million decrease in the
fair value of that portfolio.
In accordance with generally accepted accounting principles, declines
in the fair market value of a marketable investment security which are estimated
to be "other than temporary" must be recognized in the statement of operations,
thus establishing a new cost basis for such investment. We evaluate our
marketable investment securities portfolio on a quarterly basis to determine
whether declines in the market value of these securities are other than
temporary. This quarterly evaluation consists of reviewing, among other things,
the fair value of our marketable investment securities compared to the carrying
value of these securities and any market and company specific factors related to
each security. Generally, absent specific factors to the contrary, declines in
the fair value of investments below cost basis for a period of less than six
months are considered to be temporary. Declines in the fair value of investments
for a period of six to nine months are evaluated on a case by case basis to
determine whether any company or market-specific factors exist which would
indicate that such declines are other than temporary. Declines in the fair value
of investments below cost basis for greater than nine months are considered
other than temporary and are recorded as charges to earnings, absent specific
factors to the contrary. During the three months ended March 31, 2002, we
recorded an aggregate charge to earnings for other than
27
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK - CONTINUED
temporary declines in the fair market value of certain of our marketable
investment securities of approximately $7 million, and established a new cost
basis for these securities. This amount does not include realized gains of
approximately $12 million on the sales of marketable investment securities. In
addition, we have recorded unrealized losses totaling approximately $19 million
as of March 31, 2002. If the fair market value of our marketable securities
portfolio does not increase to cost basis or if we become aware of any market or
company specific factors that indicate that the carrying value of certain of our
securities is impaired, we may be required to record an additional charge to
earnings in future periods equal to the amount of the decline in fair value.
In addition to the $4.3 billion, we also have made strategic equity
investments in certain non-marketable investment securities which are not
publicly traded. Our ability to create realizable value for our strategic
investments in companies that are not public is dependent on the success of
their business and ability to obtain sufficient capital to execute their
business plans. Since private markets are not as liquid as public markets, there
is also increased risk that we will not be able to sell these investments, or
that when we desire to sell them that we will not be able to obtain full value
for them. We have a strategic investment in StarBand Communications, Inc.
StarBand has minimal cash on hand and has significant vendor and bank
obligations. In addition, StarBand's ability to raise additional capital in the
future is currently uncertain, and attempts to date have been unsuccessful. As a
result of these and other factors, StarBand's independent public accountants
have expressed uncertainty as to StarBand's ability to continue as a going
concern in the 2001 StarBand audit opinion. Further, during April 2002, we
changed our sales and marketing relationship with StarBand and ceased
subsidizing StarBand equipment. StarBand is therefore currently responsible for
any equipment subsidies to its subscribers, which increases its on-going cash
requirements. As a result of these and other factors, during the quarter ended
March 31, 2002, we recorded equity-method charges of approximately $8 million
and an impairment charge of approximately $28 million to reduce the carrying
value of StarBand to zero.
As of March 31, 2002, we estimated the fair value of our fixed-rate
debt and mortgages and other notes payable to be approximately $5.6 billion
using quoted market prices where available, or 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 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 $227 million. To the extent interest rates increase, our costs of
financing would increase at such time as we are required to refinance our debt.
As of March 31, 2002, a hypothetical 10% increase in assumed interest rates
would increase our annual interest expense by approximately $46 million.
We have not used derivative financial instruments for speculative
purposes. We have not hedged or otherwise protected against the risks associated
with any of our investing or financing activities.
28
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
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., us, and two of our
wholly-owned subsidiaries, Echosphere Corporation and Dish, Ltd. EchoStar
Satellite Corporation, EchoStar DBS Corporation, EchoStar Technologies
Corporation, and EchoStar Satellite Broadcast Corporation were subsequently
added as defendants. The lawsuit seeks, among other things, interim and
permanent injunctions prohibiting the defendants from activating receivers in
Canada and from infringing any copyrights held by WIC.
During September 1998, WIC filed another lawsuit in the Court of
Queen's Bench of Alberta Judicial District of Edmonton against certain
defendants, including us. 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, interim and permanent injunctions prohibiting the defendants from
importing hardware into Canada and from activating receivers in Canada, together
with damages in excess of $175 million.
The Court in the Alberta action denied our Motion to Dismiss, and our
appeal of such decision. 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. Recently, the Supreme Court
of Canada ruled that the receipt in Canada of programming from U.S. pay
television providers is prohibited. While we were not a party to that case, the
ruling could adversely affect our defense. 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 its customers through PrimeTime 24. In
December 1998, the United States District Court for the Southern District of
Florida entered a nationwide permanent injunction requiring PrimeTime 24 to shut
off distant network channels to many of its customers, and henceforth to sell
those channels to consumers in accordance with certain stipulations in the
injunction.
In October 1998, we filed a declaratory judgment action against ABC,
NBC, CBS and FOX in the U.S. District Court for the District of Colorado. 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
("SHVA") 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 judge presiding over the matter recently
died. As a result, the case was transferred to a judge in Fort Lauderdale, where
the case remains pending. 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 us agreed to
this cut-off schedule, although we do not know if they adhered to this schedule.
29
PART II - OTHER INFORMATION
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. 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 ("SHVIA"). 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 with which it would have been
physically impossible to comply. The order imposed 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 went beyond the statutory requirements imposed by the SHVA and the
SHVIA.
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 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.
Oral argument before the Eleventh Circuit was held on May 24, 2001. On
September 17, 2001, the Eleventh Circuit vacated the District Court's nationwide
preliminary injunction, which the Eleventh Circuit had stayed in November 2000.
The Eleventh Circuit also rejected our First Amendment challenge to the SHVA.
However, the Eleventh Circuit found that the District Court had made factual
findings that were clearly erroneous and not supported by the evidence, and that
the District Court had misinterpreted and misapplied the law. The Eleventh
Circuit also found that the District Court came to the wrong legal conclusion
concerning the grandfathering provision found in 17 U.S.C. Section 119(d); the
Eleventh Circuit reversed the District Court's legal conclusion and instead
found that this grandfathering provision allows subscribers who switch satellite
carriers to continue to receive the distant network programming that they had
been receiving. The Eleventh Circuit issued an order during January 2002,
remanding the case to the Florida District Court. On March 26, 2002, the Florida
District Court entered an order, set the trial in the matter for January 13,
2003 and also set a discovery and pretrial schedule. In this order, the District
Court denied certain of our outstanding motions to compel discovery as moot and
granted the Networks' motion to compel. On April 17, 2002, the District Court
denied the Networks' motion for preliminary injunction as moot.
On March 27, 2002, we, through Harvard Law Professor Lawrence Tribe,
filed our Petition For A Writ Of Certiorari with the United States Supreme
Court, challenging the constitutionality of the SHVA under the First Amendment.
The Networks' response to the Certiorari Petition is due on May 3, 2002. There
is no guarantee that the United States Supreme Court will grant our Certiorari
Petition or that if the Supreme Court grants our Certiorari Petition, the
Supreme Court will render a decision before the January 13, 2003, trial in the
District Court. On March 26, 2002, the Florida District Court also denied our
request to stay the proceedings and any discovery pending the resolution of our
constitutional challenge. However, the District Court stated that if the Supreme
Court grants our Certiorari Petition, we may renew our stay request. We intend
to renew our stay request if the Supreme Court grants our Certiorari Petition.
In April, 2002, we reached a private settlement with ABC, Inc., one of
the plaintiffs in the litigation. On April 4, 2002, we and ABC, Inc., filed a
stipulation of dismissal. On April 16, 2002, the District Court entered an order
dismissing the claims between ABC, Inc. and us.
30
PART II - OTHER INFORMATION
If, after a trial, the District Court enters an injunction against us,
the injunction could force us 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 its other
services. Management has determined that 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. If we lose the case at trial, the judge
could, as one of many possible remedies, prohibit all future sales of distant
network programming by us, which would have a material adverse affect on our
business.
Gemstar
During October 2000, Starsight Telecast, Inc., a subsidiary of
Gemstar-TV Guide International, Inc., filed a suit for patent infringement
against us and certain of our 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 will vigorously defend against this suit. On March 30, 2001, the court stayed
this action pending resolution of the International Trade Commission matter
discussed below.
In December 2000, we filed suit against Gemstar - TV Guide (and certain
of its subsidiaries) in the United States District Court for the District of
Colorado alleging violations by Gemstar of various federal and state anti-trust
laws and laws governing unfair competition. The lawsuit seeks an injunction and
monetary damages. Gemstar filed counterclaims alleging infringement of United
States Patent Nos. 5,923,362 and 5,684,525 that relate to certain electronic
program guide functions. We examined these patents and believe they are not
infringed by any of our products or services. In August 2001, the Federal
Multi-District Litigation panel combined this suit, for discovery purposes, with
other lawsuits asserting antitrust claims against Gemstar, which had previously
been filed by other plaintiffs. In January 2002, Gemstar dropped the
counterclaims of patent infringement. On March 6, 2002, the Court denied
Gemstar's Motion to Dismiss our antitrust claims. Accordingly, Gemstar was
required to file its formal answer which it did on March 26, 2002. In its
answer, Gemstar asserts new patent infringement counterclaims regarding U.S.
Patent Nos. 4,908,713 and 5,915,068 (which is expired). These patents relate to
onscreen programming of VCRs. We have examined these patents and believe that
they are not infringed by any of our products or services.
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 all of which relate to certain electronic program guide
functions. In addition, the ITC action alleges infringement of the `121 Patent
which is asserted in the North Carolina case. In the Atlanta District Court
case, Gemstar seeks damages and an injunction. The North Carolina and Atlanta
cases have been stayed pending resolution of the ITC action. ITC actions
typically proceed according to an expedited schedule. In December 2001, the ITC
held a 15-day hearing before an administrative judge. Prior to the hearing,
Gemstar dropped its allegations regarding Unites States Patent No. 5,252,066
with respect to which we had asserted substantial allegations of inequitable
conduct. The hearing addressed, among other things, Gemstar's allegations of
patent infringement and respondents' (SCI, Scientific Atlanta, Pioneer and us)
allegations of patent misuse. A decision by the judge is expected by June 21,
2002 and a final ruling by the full ITC is expected on or about September 23,
2002. While the ITC cannot award damages, an adverse decision in this case could
temporarily halt the import of our receivers and could require us to materially
modify certain user-friendly electronic programming guides and related features
we currently offer to consumers. We have examined the patents in dispute and
believe they are not infringed by any of our products or services. We will
continue to vigorously contest the ITC, North Carolina and Atlanta allegations
of infringement and will, among other things, challenge both the validity and
enforceability of the asserted patents. We are providing a defense and
indemnification to SCI in the ITC and Atlanta cases pursuant to the terms of
their contract.
During 2000, Superguide Corp. also filed suit against us, DirecTV and
others in the United States District Court for the Western District of North
Carolina, Asheville Division, 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
31
PART II - OTHER INFORMATION
use of electronic program guides to control VCRs. Superguide seeks injunctive
and declaratory relief and damages in an unspecified amount. It is our
understanding that these patents may be licensed by Superguide to Gemstar.
Gemstar has been added as a party to this case and is now asserting these
patents against us. We have examined these patents and believe that they are not
infringed by any of our products or services. A Markman ruling was issued by the
Court and in response to that ruling we have filed motions for summary judgment
of non-infringement for each of the asserted patents. Gemstar has filed a motion
for summary judgment of infringement with respect to the patents. Decisions on
these outstanding summary judgement motions are expected during the summer of
2002. We will continue vigorously defend this case and to press our patent
misuse defenses against Gemstar.
In the event it is ultimately determined that we infringe on any of the
aforementioned patents we may be subject to substantial damages, including the
potential for treble damages, and/or an injunction that could require us to
materially modify certain user friendly electronic programming guide and related
features we currently offer to consumers. It is too early to make an assessment
of the probable outcome of the suits.
IPPV Enterprises
IPPV Enterprises, LLC and MAAST, Inc. filed a patent infringement suit
against us, and our conditional access vendor Nagra, in the United States
District Court for the District of Delaware. The suit alleged infringement of
five patents. One patent was subsequently dropped by plaintiffs. Three of the
remaining patents disclose various systems for the implementation of features
such as impulse-pay-per view, parental control and category lock-out. The fourth
remaining patent relates to an encryption technique. The Court entered summary
judgment in our favor on the encryption patent. Plaintiffs had claimed $80
million in damages with respect to the encryption patent. On July 13, 2001, a
jury found that the remaining three patents were infringed and awarded damages
of $15 million. The jury also found that one of the patents was willfully
infringed which means that the judge is entitled to increase the award of
damages. On post-trial motions, the Judge reduced damages to $7.33 million,
found that one of the infringed patents was invalid, and reversed the finding of
willful infringement. In addition, the Judge denied IPPV's request for treble
damages and attorney fees. We intend to file an appeal. Any final award of
damages would be split between us and Nagra in percentages to be agreed upon
between us and Nagra.
California Actions
A purported class action was filed against us in the California State
Superior Court for Alameda County during May 2001 by Andrew A. Werby. The
complaint, relating to late fees, alleges unlawful, unfair and fraudulent
business practices in violation of California Business and Professions Code
Section 17200 et seq., false and misleading advertising in violation of
California Business and Professions Code Section 17500, and violation of the
California Consumer Legal Remedies Act. On September 24, 2001, we filed an
answer denying all material allegations of the Complaint. On September 27, 2001,
the Court entered an Order Pursuant to Stipulation for a provisional
certification of the class, for an orderly exchange of information and for
mediation. The provisional Order specifies that the class shall be de-certified
upon notice in the event mediation does not resolve the dispute. The matter is
currently in mediation. It is too early in the litigation to make an assessment
of the probable outcome of the litigation or to determine the extent of any
potential liability or damages. We intend to deny all liability and to
vigorously defend the lawsuit.
A purported class action relating to the use of terms such as "crystal
clear digital video," "CD-quality audio," and "on-screen program guide", and
with respect to the number of channels available in various programming
packages, has also been filed against us in the California State Superior Court
for Los Angeles County by David Pritikin and by Consumer Advocates, a nonprofit
unincorporated association. The complaint alleges breach of express warranty and
violation of the California Consumer Legal Remedies Act, Civil Code Sections
1750, et. seq., and the California Business & Professions Code Sections 17500,
17200. We have filed an answer and the case is currently in discovery.
Plaintiffs filed their Motion for Class Certification on January 21, 2002 and we
have filed our opposition. The Court will conduct a hearing on class
certification in early May 2002. It is too early in the litigation to make an
assessment of the probable outcome of the litigation or to determine the extent
of any potential liability or damages. We deny all liability and intend to
vigorously defend the lawsuit.
32
PART II - OTHER INFORMATION
Retailer Class Actions
We have been sued by retailers in three separate purported class
actions. In two separate lawsuits filed in the District Court, Arapahoe County,
State of Colorado and the United States District Court for the District of
Colorado, respectively, Air Communication & Satellite, Inc. and John DeJong, et.
al. filed lawsuits on October 6, 2000 on behalf of themselves and a class of
persons similarly situated. The plaintiffs are attempting to certify 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 Courts to declare certain
provisions of the alleged agreements invalid and unenforceable, to declare that
certain changes to the agreements are invalid and unenforceable, and to award
damages for lost commissions and payments, charge backs, and other compensation.
We intend to vigorously defend against the suits and to assert a variety of
counterclaims. The trial court in the Arapahoe County court action entered an
order prohibiting us from communicating with members of the putative class
concerning the litigation. We petitioned the Supreme Court, and the Supreme
Court of Colorado ruled that corrective notice must be sent to putative class
members. 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. A
class certification hearing for the Arapahoe County court action is scheduled
for November 1, 2002.
Satellite Dealers Supply, Inc. filed a lawsuit in the United States
District Court for the Eastern District of Texas on September 25, 2000, on
behalf of itself and a class of persons similarly situated. The plaintiff is
attempting to certify a nationwide class on behalf of sellers, installers, and
servicers of satellite equipment who contract with us and claim the alleged
class has been "subject to improper chargebacks." The plaintiff alleges that we:
(1) charged back certain fees paid by members of the class to professional
installers in violation of contractual terms; (2) manipulated the accounts of
subscribers to deny payments to class members; and (3) misrepresented to class
members who own certain equipment related to the provision of satellite
television service. On September 18, 2001, the Court granted our Motion to
Dismiss for lack of personal jurisdiction. Plaintiff Satellite Dealers Supply
has moved for reconsideration of the Court's order dismissing the case. 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.
PrimeTime 24 Joint Venture
PrimeTime 24 Joint Venture filed suit against us during September 1998
seeking damages in excess of $10 million and alleging breach of contract,
wrongful termination of contract, interference with contractual relations,
trademark infringement and unfair competition. Our motion for summary judgment
was granted with respect to PrimeTime 24's claim of interference with
contractual relations and unfair competition. Plaintiff's motion for summary
judgment was granted with respect to its breach of contract claim for fees
during the period from May 1998 through July 19, 1998. It is ultimately up to a
jury to determine the amount of fees owed for this period. It is too early to
make an assessment of the probable outcome of the remainder of the litigation or
to determine the extent of any additional potential liability or damages.
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 substantially identical
policies with different carriers for varying amounts that, in combination,
create a total insured amount of $219.3 million. Our insurance carriers offered
it a total of approximately $88 million, or 40% of the total policy amount, in
settlement of the EchoStar IV insurance claim. The insurers offered to pay only
part of the $219.3 million claim because they allege we did not abide by the
exact terms of the insurance policy. The insurers also assert that EchoStar IV
was not a constructive total loss, as that term is defined in the policy. We
strongly disagree and filed an arbitration claim against the insurers 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. Based on the carriers' failure to pay the amount we
believe is owed under the policy and their improper attempts to force us to
settle for less than the full amount of its claim, 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. With respect to our
arbitration claims, we are hopeful they will be resolved, and we believe it is
probable that we will receive a substantial portion of the benefits due.
33
PART II - OTHER INFORMATION
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 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
STRATEGIC ALLIANCE WITH VIVENDI UNIVERSAL AND SALE OF SERIES D CONVERTIBLE
PREFERRED STOCK
On January 22, 2002, a subsidiary of Vivendi acquired 5,760,479 shares
of our Series D convertible preferred stock for $1.5 billion, or approximately
$260.40 per share. The $1.48 billion of net cash proceeds received is expected
to provide a portion of the funding for the proposed merger with Hughes and
related transactions. Each share of the Series D preferred stock has the same
economic (other than liquidation) and voting rights as ten shares of our class A
common stock into which it is convertible and has a liquidation preference equal
to approximately $260.40 per share. Immediately prior to consummation of the
Hughes merger, or as described in our agreement with Vivendi if the Hughes
merger is not consummated, the Series D preferred stock will convert into shares
of our class A common stock, which will then be exchanged for shares of class A
common stock of the surviving corporation in the Hughes merger. The Series D
preferred stock is also convertible into shares of our class A common stock at
any time at the option of the holder and automatically upon the occurrence of
certain other specified events.
In connection with the purchase of the Series D convertible preferred
stock, Vivendi also received contingent value rights, intended to provide
protection against certain downward price movement in the class A common stock
to be issued upon conversion of the Series D convertible preferred stock. The
maximum payment under the rights is $225 million if the Hughes merger is
completed and the price of our class A common stock is below $26.04 per share
during a 20 trading day period preceding the three-year settlement date
specified below, or $525 million if the Hughes merger is not completed and the
price of our class A common stock is below $26.04 per share during a 20 trading
day period preceding the 30 month settlement date specified below. Any amount
owing under these rights would be settled three years after completion of the
Hughes merger, except in certain limited circumstances. In addition, if the
Hughes merger is not consummated, these rights will be settled 30 months after
the acquisition of Hughes' 81% interest in PanAmSat or the termination of the
merger agreement and the PanAmSat stock purchase agreement. The contingent value
rights, initially valued at approximately $30.7 million, were recorded as a
charge to retained earnings as of the date of consummation of the investment on
January 22, 2002. The contingent value rights are periodically adjusted to the
current settlement amount, based on their current estimated fair value, through
a charge or credit to retained earnings. For the three months ended March 31,
2002, we recorded a credit to retained earnings of approximately $3.5 million to
reduce the carrying value of the contingent value rights to their current
estimated fair value.
In addition, the conversion price for the Series D convertible
preferred stock was set at $26.04 upon execution of the investment agreement on
December 14, 2001. However, the investment was not consummated until January 22,
2002, when the price of EchoStar's class A common stock was $26.58. Since the
price as of the date of consummation of the investment was above the set
conversion price and since consummation of the investment was contingent on
regulatory approval, the Series D preferred stock was deemed to be issued with a
beneficial conversion feature. This feature required the difference between the
conversion price and the price as of the date of consummation to be recorded as
a discount on the Series D convertible preferred stock. The Series D convertible
preferred stock was accreted to its conversion value through a charge to
retained earnings equal to the discount of approximately $31.1 million as of the
date of issuance since the Series D convertible preferred stock is immediately
convertible at the holder's option.
The issuance costs of approximately $16.5 million related to the Series
D convertible preferred stock were recorded as a discount on the Series D
convertible preferred stock. However, since the Series D convertible preferred
stock is redeemable at the holder's option upon a change of control, as defined
in the related agreement, and the redemption price of the Series D convertible
preferred stock exceeds the discounted carrying value, the discount would be
charged to retained earnings to restore the Series D convertible preferred stock
to its redemption value if redemption of the Series D convertible preferred
stock became probable. As of March 31, 2002, redemption of the Series D
convertible preferred stock is not probable and thus no charge to retained
earnings is necessary.
34
PART II - OTHER INFORMATION
We filed copies or forms of certain of the definitive agreements
relating to the Vivendi investment with the Securities and Exchange Commission
on a Current Report on Form 8-K on both December 21, 2001 and January 23, 2002.
You may read and copy any of these agreements that we filed at the SEC's public
reference rooms in Washington, D.C., New York, New York and Chicago, Illinois.
Please call the SEC at 1-800-SEC-0330 for further information on the public
reference rooms. These agreements are also available to you free of charge at
the SEC's website at http://www.sec.gov.
In addition, Vivendi and we announced an eight-year strategic alliance
in which Vivendi will develop and provide our DISH Network customers in the U.S.
a variety of programming and interactive television services.
As part of this alliance, Vivendi plans to offer our DISH Network
customers five new non-exclusive channels of basic and niche programming
content. Vivendi will also offer expanded pay-per-view and video-on-demand
movies. These services are expected to begin to launch in the fall of 2002.
Customary fees per subscriber will be paid by us. Vivendi and we also intend to
work together on a programming initiative to develop new non-exclusive
satellite-delivered broadband channels featuring interactive games, movies,
sports, education, and music to be launched within a three-year period following
consummation of the agreement.
Also as part of the alliance, we will integrate Vivendi's advanced,
interactive middleware technology, MediaHighway, a Canal+Technology, as a
non-exclusive middleware solution that will provide DISH Network customers using
personal video recorders unique interactive television services, such as movies
from Vivendi and music from Universal Music Group.
As part of this alliance, Jean-Marie Messier, Chairman and CEO of
Vivendi, became a member of our Board of Directors, and he is expected to
continue as a director following our proposed Hughes merger.
35
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
10.1+ Contingent Value Rights Agreement, dated January 22, 2002,
between EchoStar Communications Corporation and Vivendi
Universal, S. A.
10.2+ Registration Rights Agreement, dated January 22, 2002, between
EchoStar Communications Corporation and Vivendi Universal, S.
A.
10.3+ Modification No. 11 to the Satellite Contract (EchoStar VII -
119 degree West Longitude) dated February 7, 2002, between
Lockheed Martin Corporation and EchoStar Orbital Corporation.
10.4+ Contract Amendment No. 1 to the Launch Services contract,
dated January 10, 2002, between Lockheed Martin's
International Launch Services and EchoStar Orbital
Corporation.
10.5+ Memorandum OEM Manufacturing Agreement, dated January 9, 2002,
between EchoStar Satellite Corporation, EchoStar Technologies
Corporation and Thomson multimedia, Inc.
10.6+ Amendment No. 1 to Memorandum OEM Manufacturing Agreement,
dated January 9, 2002, between EchoStar Satellite Corporation,
EchoStar Technologies Corporation and Thomson multimedia, Inc.
10.7+ Amendment No. 2 to Memorandum OEM Manufacturing Agreement,
dated January 9, 2002, between EchoStar Satellite Corporation,
EchoStar Technologies Corporation and Thomson multimedia, Inc.
10.8+ Amendment No. 3 to Memorandum OEM Manufacturing Agreement,
dated January 9, 2002, between EchoStar Satellite Corporation,
EchoStar Technologies Corporation and Thomson multimedia, Inc.
----------
+ Filed herewith.
** Certain provisions have been omitted and filed separately with
the Securities and Exchange Commission pursuant to a request
for confidential treatment. A conforming electronic copy is
being filed herewith.
(b) Reports on Form 8-K.
On January 10, 2002, we filed a Current Report on Form 8-K to report
the financial information which gives effect to the retroactive adjustment of
the Company's financial results for the periods from our original investment in
StarBand Communications Inc during April 2000 to June 30, 2001, to give effect
to the equity method of accounting adjustments resulting from the increase in
our equity interest in StarBand.
On January 23, 2002, we filed a Current Report on Form 8-K to announce
that on January 22, 2002, we closed the previously announced $1.5 billion
Vivendi Universal equity investment in EchoStar in which Vivendi Universal
received 5,760,479 newly issued shares of EchoStar Series D Mandatorily
Convertible Participating Preferred Stock at an issue price of approximately
$260.40 per share.
36
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ECHOSTAR COMMUNICATIONS CORPORATION
By: /s/ David K. Moskowitz
---------------------------------------------
David K. Moskowitz
Senior Vice President, General Counsel,
Secretary and Director
(Duly Authorized Officer)
By: /s/ Michael R. McDonnell
---------------------------------------------
Michael R. McDonnell
Senior Vice President and
Chief Financial Officer
(Principal Financial Officer)
Date: May 2, 2002
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
------- -----------
10.1+ Contingent Value Rights Agreement, dated January 22, 2002,
between EchoStar Communications Corporation and Vivendi
Universal, S. A.
10.2+ Registration Rights Agreement, dated January 22, 2002, between
EchoStar Communications Corporation and Vivendi Universal, S.
A.
10.3+ Modification No. 11 to the Satellite Contract (EchoStar VII -
119 degree West Longitude) dated February 7, 2002, between
Lockheed Martin Corporation and EchoStar Orbital Corporation.
10.4+ Contract Amendment No. 1 to the Launch Services contract,
dated January 10, 2002, between Lockheed Martin's
International Launch Services and EchoStar Orbital
Corporation.
10.5+ Memorandum OEM Manufacturing Agreement, dated January 9, 2002,
between EchoStar Satellite Corporation, EchoStar Technologies
Corporation and Thomson multimedia, Inc.
10.6+ Amendment No. 1 to Memorandum OEM Manufacturing Agreement,
dated January 9, 2002, between EchoStar Satellite Corporation,
EchoStar Technologies Corporation and Thomson multimedia, Inc.
10.7+ Amendment No. 2 to Memorandum OEM Manufacturing Agreement,
dated January 9, 2002, between EchoStar Satellite Corporation,
EchoStar Technologies Corporation and Thomson multimedia, Inc.
10.8+ Amendment No. 3 to Memorandum OEM Manufacturing Agreement,
dated January 9, 2002, between EchoStar Satellite Corporation,
EchoStar Technologies Corporation and Thomson multimedia, Inc.
----------
+ Filed herewith.
** Certain provisions have been omitted and filed separately with
the Securities and Exchange Commission pursuant to a request
for confidential treatment. A conforming electronic copy is
being filed herewith.