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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _______________ to ________________.
Commission file number: 0-26176
ECHOSTAR COMMUNICATIONS CORPORATION
(Exact name of registrant as specified in its charter)
NEVADA 88-0336997
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5701 S. SANTA FE DRIVE
LITTLETON, COLORADO 80120
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (303) 723-1000
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Class A
Common Stock, $0.01 par value Act:
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
As of February 25, 2002, the aggregate market value of Class A Common
Stock held by non-affiliates* of the Registrant approximated $5.2 billion based
upon the closing price of the Class A Common Stock as reported on the Nasdaq
National Market as of the close of business on that date.
As of February 25, 2002, the Registrant's outstanding Common stock
consisted of 241,282,817 shares of Class A Common Stock and 238,435,208 shares
of Class B Common Stock, each $0.01 par value.
DOCUMENTS INCORPORATED BY REFERENCE
The following documents are incorporated into this Form 10-K by
reference:
Portions of the Registrant's definitive Proxy Statement to be filed in
connection with the Annual Meeting of Shareholders of Registrant to be held May
6, 2002 are incorporated by reference in Part III herein.
* Without acknowledging that any individual director or executive officer of
the Company is an affiliate, the shares over which they have voting control
have been included as owned by affiliates solely for purposes of this
computation.
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TABLE OF CONTENTS
PART I
Disclosure regarding forward-looking statements ............................... 1
Item 1. Business ............................................................ 2
Item 2. Properties .......................................................... 28
Item 3. Legal Proceedings ................................................... 29
Item 4. Submission of Matters to a Vote of Security Holders ................. 35
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters ................................................. 36
Item 6. Selected Financial Data ............................................. 37
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations ........................................... 38
Item 7A. Quantitative and Qualitative Disclosures About Market Risk .......... 56
Item 8. Financial Statements and Supplementary Data ......................... 57
Item 9. Changes In and Disagreements with Accountants on Accounting and
Financial Disclosure ................................................ 57
PART III
Item 10. Directors and Executive Officers of the Registrant .................. 58
Item 11. Executive Compensation .............................................. 58
Item 12. Security Ownership of Certain Beneficial Owners and Management ...... 58
Item 13. Certain Relationships and Related Transactions ...................... 58
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K ..... 59
Signatures ........................................................ 65
Index to Financial Statements .....................................F-1
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.
PART I
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.
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ITEM 1. BUSINESS
OVERVIEW
Our common stock is publicly traded on the Nasdaq National Market under
the symbol "DISH". We conduct substantially all of our operations through our
subsidiaries. We operate two business units:
o The DISH Network -- a direct broadcast satellite subscription
television service, which we refer to as DBS, in the United
States. As of December 31, 2001, we had approximately 6.83 million
DISH Network subscribers; and
o EchoStar Technologies Corporation -- engaged in the design,
development, distribution and sale of DBS set-top boxes, antennae
and other digital equipment for the DISH Network, which we refer
to as EchoStar receiver systems, and the design, development and
distribution of similar equipment for international satellite
service providers, which we refer to as DTH.
RECENT DEVELOPMENTS
THE PROPOSED MERGER WITH HUGHES
On October 28, 2001, we signed definitive agreements with Hughes and
General Motors, which is Hughes' parent corporation, relating to our merger with
Hughes in a stock-for-stock transaction. Hughes, through its DIRECTV subsidiary,
is a provider of satellite-based entertainment information and communications
services for the home and business markets, including video, data, voice,
multimedia and Internet service, including DBS Services. Hughes also owns an
approximately 81% equity interest in PanAmSat, a global provider of video and
data broadcasting services through 21 satellites it owns and operates.
The following description of the Hughes merger and related transactions
and the PanAmSat acquisition summarizes the terms of a series of detailed
agreements. We filed copies of these agreements with the Securities and Exchange
Commission on October 31, 2001 on a Current Report on Form 8-K. A more detailed
description of the Hughes merger and related transactions and the PanAmSat
acquisition will be contained within an information statement on Schedule 14C of
us, which we refer to as the EchoStar information statement and which is
expected to be filed by us with the SEC in the middle of March 2002. We expect
to distribute the information statement to our common stockholders this summer.
You may read and copy any document that we file 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.
Our SEC filings are also available to you free of charge at the SEC's website at
http://www.sec.gov.
The surviving corporation in the merger will carry the EchoStar name
and will provide DBS services in the United States and Latin America, primarily
under the DIRECTV brand name. It will also provide global fixed satellite
services and other broadband communication services. The merger is subject to
the prior separation of Hughes from GM by way of a recapitalization of Hughes
and split-off of Hughes from GM. As a result of these transactions, the Hughes
holding company would become an independent, publicly owned company, separate
from GM. This is a condition to our obligation to complete the merger.
Immediately following the Hughes split-off, the businesses of Hughes and
EchoStar would be combined in the merger. Pursuant to the merger, we would merge
with and into the Hughes holding company to form New EchoStar.
The board of directors of New EchoStar will consist of eleven members,
as mutually agreed by Hughes and EchoStar, eight of whom are current directors
and/or officers of EchoStar and three of whom are current directors and/or
officers of Hughes. Charles W. Ergen will be the Chairman of the Board and Chief
Executive Officer of New EchoStar.
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Three classes of New EchoStar common stock would be outstanding
immediately after the merger:
o Class A common stock, which would be distributed to holders of
our class A common stock in the merger. Holders of our class A
common stock would receive 1/0.73, or about 1.3699, shares of New
EchoStar class A common stock in exchange for each share of our
class A common stock they own at the time of the merger;
o Class B common stock, which would be distributed to holders of
our class B common stock in the merger. A trust controlled by Mr.
Ergen owns all of the outstanding shares of our class B common
stock. Holders of our class B common stock would receive 1/0.73,
or about 1.3699, shares of New EchoStar class B common stock in
exchange for each share of our class B common stock they own at
the time of the merger; and
o Class C common stock, which would be distributed to holders of GM
class H common stock in the Hughes split-off. Holders of GM class
H common stock would receive one share of New EchoStar class C
common for each share of GM class H common stock they own at the
time of the Hughes split-off.
Immediately after the completion of the Hughes merger, based on certain
assumptions about a number of variables, the New EchoStar class A common stock
is expected to represent approximately 25.6% of the outstanding common stock of
New EchoStar (representing approximately 6.0% of the voting power of New
EchoStar), the New EchoStar class B common stock is expected to represent
approximately 16.4% of the outstanding common stock of New EchoStar
(representing approximately 38.7% of the voting power of New EchoStar), and the
New EchoStar class C common stock is expected to represent approximately 58.0%
of the outstanding common stock of New EchoStar (representing approximately
55.3% of the voting power of New EchoStar). The actual outstanding shares and
voting power percentages immediately after the completion of the merger could
vary materially from the estimated amounts due to changes in the outcomes of
various assumptions.
The recapitalization and split-off of Hughes is subject to the approval
of the common stockholders of General Motors. GM common stockholders will be
asked to approve the recapitalization and split-off by a stockholder consent
solicitation statement included in a registration statement on Form S-4 of the
Hughes holding company, which will also include the related prospectus and our
information statement. The merger with Hughes has already received all required
stockholder approvals, including approval by GM, as the sole stockholder of
Hughes, and approval by a trust controlled by Mr. Ergen, the holder of our
common stock representing approximately 90% of the voting power of us.
The proposed transactions also are subject to anti-trust clearance and
approval by the Federal Communications Commission. In addition, the transactions
are contingent upon the receipt of a favorable ruling from the IRS that the
separation of Hughes from GM will be tax-free to GM and its stockholders for
U.S. federal income tax purposes and are subject to various other conditions.
While there can be no assurance, the transactions are currently expected to
close in the second half of 2002.
Consummation of the Hughes merger and related transactions will require
at least $7.025 billion of cash. At the time of signing of the merger agreement,
we had approximately $1.5 billion of available cash on hand, and obtained $5.525
billion in bridge financing commitments for the Hughes merger and related
transactions. These commitments have been reduced to $3.325 billion as a result
of the sale of $700 million of 9 1/8% senior notes by EDBS and $1.5 billion of
our series D preferred stock to Vivendi. Any other financings we complete prior
to closing of the Hughes merger will generally further reduce the bridge
financing commitments dollar-for-dollar. The remaining approximately $3.325
billion of required cash, is expected to come from new cash raised by us, Hughes
or a subsidiary of Hughes on or prior to the closing of the merger through
public or private debt or equity offerings, bank debt or a combination thereof.
The amount of such cash that could be raised by us prior to completion of the
Hughes merger is severely restricted. Our agreements with GM and Hughes prohibit
us from raising any additional equity capital beyond the $1.5 billion Vivendi
investment. The prohibition will likely continue for two years following
completion of the Hughes merger, absent possible favorable IRS rulings or
termination of the Hughes merger. Further, our agreements with GM and Hughes
place substantial restrictions on our ability to raise additional debt prior to
the closing of the Hughes merger.
If Hughes cannot complete the merger with us, we may be required to
purchase Hughes' interest in PanAmSat, merge with PanAmSat or make a tender
offer for all of PanAmSat's shares and may also be required to pay a $600
million termination fee to Hughes. If we purchase the Hughes interest in
PanAmSat rather than undertaking the merger or the tender offer, we must make
offers for all PanAmSat shares that remain outstanding. We expect that our
acquisition of Hughes' interest in PanAmSat, which would be at a price of $22.47
per share, together with our assumed purchase of the remaining outstanding
PanAmSat shares and our payment of the termination fee to GM would require at
least $3.4 billion of cash and approximately $600 million of our class A common
stock. We
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expect that we would meet this cash requirement by utilizing a portion of cash
on hand.
Our Reasons for the Merger
Our primary objective is to continue to provide a leading multi-channel
subscription television service, to expand our DBS subscriber base, and to
further develop as an integrated full service satellite company. Our planned
merger with Hughes will help facilitate this objective. We plan to:
Integrate DIRECTV and our networks: We intend to integrate DIRECTV and
our networks to realize economies of scale and to offer enhanced services by:
o eliminating duplicative programming and utilizing reclaimed
broadcast spectrum to deliver more program and service offerings;
o standardizing DIRECTV and our set-top boxes to offer a common
service platform to customers and reduce the cost of set-top
boxes;
o combining and improving the two distribution networks; and
o consolidating satellite uplink, customer service and other
facilities and infrastructure.
Generating substantial cost and revenue synergies: We believe the
combined companies can generate cost synergies by:
o reducing subscriber acquisition costs by, among other things,
standardizing and reducing the cost of set-top boxes;
o reducing churn through better control of piracy, by offering
increased services and creating increased customer loyalty;
o reducing programming costs as a result of our larger combined
subscriber base; and
o eliminating duplicative overhead.
We also believe the combined companies can generate revenue synergies
by:
o introducing local-to-local service in all markets;
o expanding two-way high-speed satellite Internet consumer and
business offerings by providing broadband Internet services at
more attractive pricing;
o expanding new high definition television, video-on-demand,
pay-per-view, educational programming and other programming
offerings; and
o generating new sources of local and national advertising revenue.
Expand two-way high-speed satellite Internet access offerings: We plan
to expand "always-on" two-way high-speed Internet access to consumers and
businesses. Our broadband offering could play an important role in spanning the
"digital divide" between urban and suburban customers who have multiple choices
for high-speed Internet access, and rural customers who have few or no choices
for high-speed Internet access. We also believe this service could be successful
in urban and suburban markets.
Improve the operating performance of PanAmSat: We intend to increase
PanAmSat's profitability by:
o increasing satellite capacity utilization;
o creating comprehensive service packages including encryption,
customer care and other services
o exploring new markets; and
o implementing cost savings.
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Leverage Hughes' and our combined research and developments efforts: We
plan to leverage the engineering capabilities of the combined companies to
expand the features and functionality of their satellite receiver systems. These
features will include a wide variety of innovative interactive television
services and applications. In addition, we will continue to enhance our
satellite-based broadband communications platform.
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. 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 any downward price movements 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 falls below $26.04 per
share on the date specified below, or $525 million if the Hughes merger is not
completed and the price of our class A common stock falls below $26.04 per share
on the 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.
We filed copies or forms of certain of the definitive agreements
relating to the Vivendi investment with the Securities and Exchange Commission
on December 21, 2001 on a Current Report on Form 8-K. 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, has become a member of our Board of Directors, and he will continue as
a director following our proposed Hughes merger.
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ECHOSTAR VII
EchoStar VII was launched on February 21, 2002 from Cape Canaveral,
Florida. EchoStar VII will be tested at the 129 degree orbital location and will
then be moved to the 119 degree orbital location for commercial service.
Assuming successful completion of in-orbit testing, EchoStar VII is expected to
commence commercial service at the 119 degree orbital location during the second
quarter of 2002. EchoStar VII is planned to replace the capacity of the EchoStar
IV satellite, which has experienced a series of anomalies materially impacting
its functionality. Operating from the 119 degree orbital location, EchoStar VII,
assuming successful completion of in-orbit testing, will also provide local
channels by satellite to consumers in Alaska and Hawaii. EchoStar VII, together
with EchoStar VIII which is expected to launch this summer, will also improve
spectrum efficiency, enhance the quality of video channels for all DISH Network
customers, provide a broader array of programming choices to consumers in Alaska
and Hawaii, and increase in-orbit backup capacity.
DISH NETWORK
We started offering subscription television services on the DISH
Network in March 1996. As of December 31, 2001, the DISH Network had
approximately 6.83 million subscribers. We now have seven DBS satellites in
orbit that enable us to offer over 500 video and audio channels, together with
limited data services and high definition and interactive TV services, to
consumers across the contiguous United States. We believe that the DISH Network
offers programming packages that have a better "price-to-value" relationship
than packages currently offered by most other subscription television providers.
As of December 31, 2001, there were approximately 18.4 million subscribers to
DBS and other direct-to-home satellite services in the United States. We believe
that there are more than 88 million total pay television subscribers in the
United States, and that there continues to be significant unsatisfied demand for
high quality, reasonably priced television programming services.
COMPONENTS OF A DBS SYSTEM
In order to provide programming services to DISH Network subscribers,
we have entered into agreements with video, audio and data programmers, who
deliver their programming content to our digital broadcast operations centers in
Cheyenne, Wyoming and Gilbert, Arizona, via commercial satellites, fiber optics
or microwave transmissions. We monitor those signals for quality, and can add
promotional messages, public service programming or other information. Equipment
at our digital broadcast operations centers then digitizes, compresses, encrypts
and combines the signal with other necessary data, such as conditional access
information. We then "uplink" or transmit the signals to one or more of our DBS
satellites which we then broadcast directly to DISH Network subscribers.
In order to receive DISH Network programming, a subscriber needs:
o a satellite antenna, which people sometimes refer to as a "dish,"
and related components;
o an integrated receiver/decoder, which people sometimes refer to as
a "satellite receiver" or "set-top box"; and
o a television set.
Set-top boxes communicate with our authorization center through
telephone lines to, among other things, report the purchase of pay-per-view
movies and other events.
Conditional Access System. We use conditional access technology to
encrypt the programming so only those who pay can receive the programming. We
use microchips embedded in credit card-sized access cards, or "smart cards" to
control access to authorized programming content. We own 50% of NagraStar LLC, a
joint venture that provides us with smart cards. Nagra USA owns the other 50% of
NagraStar. NagraStar purchases these smart cards from Nagra Plus SA, a Swiss
company. These smart cards, which we can update or replace periodically, are a
key element in preserving the security of our conditional access system. When a
consumer orders a particular channel, we send a message by satellite that
instructs the smart card to permit decryption of the programming for viewing by
that consumer. The set-top box then decompresses the programming and sends it to
the consumer's television.
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The delivery of subscription programming requires the use of encryption
technology to assure that only those who pay can receive the programming. It is
illegal to create, sell or otherwise distribute mechanisms or devices to
circumvent that encryption. Theft of subscription television programming has
been widely reported and our signal encryption has been pirated and could be
further compromised in the future. Theft of our programming reduces future
potential revenue and increases our net subscriber acquisition costs. We
continue to respond to compromises of our encryption system with measures
intended to make signal theft of our programming commercially uneconomical. We
utilize a variety of tools to continue to accomplish this goal. If we cannot
promptly correct a compromise in our encryption technology, it would adversely
affect our ability to contract for video and audio services provided by
programmers.
Programming. We use a "value-based" strategy in structuring the content
and pricing of programming packages available from the DISH Network. For
example, we currently sell our entry-level "America's Top 50" programming
package, which includes 50 of the most popular video channels, to consumers in
digital format for $22.99 per month. We estimate cable operators charge over $30
per month, on average, for their entry-level expanded basic service that
typically consists of approximately 55 analog channels. We believe that our
"America's Top 100 CD" programming package, which we currently sell for $31.99
per month, also compares favorably to similar cable television programming. We
believe that our America's Top 100 CD package is similar to an expanded basic
cable package plus a digital music service. Based on cable industry statistics,
we estimate that cable operators would typically charge in excess of $40 per
month for a similar package. In addition to the above mentioned programming
packages, we also offer our "America's Top 150" programming package for $40.99
per month and our America's "Everything" Pak, which combines our America's Top
150 programming package and all four premium movie packages for $72.99 per
month.
For an additional $5.99 per month, we can add satellite-delivered local
channels to any of the above packages for consumers in 36 of the largest markets
in the continental United States. The use of spot-beam technology on EchoStar
VII, in conjunction with the operation of EchoStar VIII, which is expected to
launch this summer, would enable us to increase the number of markets where we
provide local channels by satellite, but will reduce the number of channels that
could otherwise be offered ubiquitously across the United States.
We currently offer four premium movie packages which include up to ten
movie channels per package. Currently consumers can subscribe to a single
premium movie package including ten movie channels for only $11.99 per month. We
believe we offer more premium movie channels than cable typically offers at a
comparable price.
Currently, we offer more than 50 foreign-language channels including
Spanish, Arabic, French, Hindi, Russian, Greek and others. We also offer
foreign-language programming packages. For example, we believe that our "DISH
Latino" package, which includes more than 20 Spanish-language programming
channels for $20.99 per month, is the most complete Spanish-language package
available in the United States. We also offer "DISH Latino Dos", our bilingual
programming package, which includes more than 20 English and more than 20
Spanish-language programming channels for $31.99 per month. In addition, during
January 2002, we introduced "DISH Latino Max", which includes more than 60
English and more than 20 Spanish-language programming channels for $39.99 per
month. We believe we deliver the most popular foreign-language programming to
customers in the United States at the best value. We also believe
foreign-language programming is a valuable niche product that attracts a number
of new subscribers who are unable to get similar programming elsewhere.
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EchoStar Receiver Systems. EchoStar receiver systems include a small
satellite dish, a digital satellite receiver that unscrambles signals for
television viewing, a remote control, and other related components. We offer a
number of set-top box models. Our standard system comes with an infrared
universal remote control, an on-screen interactive program guide and V-chip type
technology for parental control. Our premium model includes a hard disk drive
enabling additional features such as personal video recording of up to 35 hours
of programming, an infrared, UHF universal remote, and an expansion port for
future upgradeability. We also offer a variety of specialized products such as
HDTV receivers. DISH Network reception equipment is incompatible with
competitors' systems in the United States.
Although we internally design and engineer our receiver systems, we
outsource manufacturing to high-volume contract electronics manufacturers.
Sanmina-SCI Corporation (formerly known as SCI Systems, Inc.), a high-volume
contract electronics manufacturer, is the primary manufacturer of our receiver
systems. JVC also manufactures some of our receiver systems. In addition, during
January 2002, we signed an agreement with Thomson Multimedia, S.A., a French
company, to manufacture DISH Network compatible satellite TV receiver under the
RCA brand name. Thomson anticipates commencing production by mid-year 2002.
Installation. While many consumers have the skills necessary to install
our equipment in their homes, we believe that most installations are best
performed by professionals, and that on time, quality installations are
important to our success. Consequently, we are continuing to expand our
installation business, conducted through our DISH Network Service Corporation
subsidiary. In addition to expanding our internal installation capability, we
also utilize independent installation providers. Independent installers are held
to DISH Network Service Corporation service standards to attempt to ensure each
DISH Network customer receives the same quality
8
installation and service. Our offices and independent installers are
strategically located throughout the continental United States, in order to
enable us to provide service to a greater number of DISH Network customers
throughout the country. Although there can be no assurance, we believe the
continued expansion of our installation business will help continue to improve
quality control, decrease wait time on service calls and new installations and
help us to better accommodate anticipated subscriber growth.
Customer Service Centers. We currently own and operate customer service
centers in Thornton, Colorado, Littleton, Colorado, McKeesport, Pennsylvania, El
Paso, Texas, Christiansburg, Virginia and Bluefield, West Virginia. These
centers field all of our customer service calls. Potential and existing
subscribers can call a single telephone number to receive assistance for
hardware, programming, installation and technical support. We continue to work
to automate simple phone responses and to increase internet-based customer
assistance, in order to better manage customer service costs.
Digital Broadcast Operations Centers. Our principal digital broadcast
operations center is located in Cheyenne, Wyoming. In 1999, we acquired a second
digital broadcast operations center in Gilbert, Arizona. During 2000, we
completed the first phase of the "build-out" of the Gilbert facility for use as
a back up for our main digital broadcast operations center in Cheyenne. In order
to comply with "must-carry" rules, effective January 1, 2002 (see "-Government
Regulation"), we began utilizing the Gilbert facility as an additional digital
broadcast operations center. Upon commercial operation of EchoStar VII and
EchoStar VIII, we plan on expanding the role of the Gilbert facility. Almost all
of the functions necessary to provide satellite-delivered services occur at the
digital broadcast operations centers. The digital broadcast operations centers
use fiber optic lines and downlink antennas to receive programming and other
data. The digital broadcast operations centers uplink programming content to our
DBS satellites via large uplink antennas. The digital broadcast operations
centers also maintain a number of large uplink antennas and other equipment
necessary to modulate and demodulate the programming and data signals. Equipment
at our digital broadcast operations centers perform substantially all
compression and all encryption of the DISH Network's programming signals.
Subscriber Management. We presently use, and are dependent on, CSG
Systems Incorporated's software system, for all DISH Network subscriber
management and billing functions.
Sales and Marketing. Independent dealers and distributors, retailers
and consumer electronics stores currently sell EchoStar receiver systems and
DISH Network programming services. While we also sell receiver systems and
programming directly, independent dealers are responsible for most of our sales.
These independent dealers are primarily local retailers who specialize in TV and
home entertainment systems. In addition, beginning in 2002, RadioShack
Corporation will sell EchoStar receiver systems and DISH Network programming
services through its more than 5,000 stores and dealers nationwide.
We intend to enhance consumer awareness of our products by continuing
to form alliances with nationally recognized distributors of other consumer
electronics products. We currently have an agreement with JVC to distribute our
receiver systems under its label through certain of its nationwide retailers.
We offer our distributors and retailers a competitive residual
commission program. The program pays qualified distributors and retailers an
activation bonus, and pays active retailers a fixed monthly residual commission
dependent on continued consumer subscription to programming.
We use regional and national broadcast and print advertising to promote
the DISH Network. We also offer point-of-sale literature, product displays,
demonstration kiosks and signage for retail outlets. We provide guides to our
dealers and distributors at nationwide educational seminars and directly by
mail, that describe DISH Network products and services. Our mobile sales and
marketing team visits retail outlets regularly to reinforce training and ensure
that these outlets quickly fulfill point-of-sale needs. Additionally, we
dedicate one DISH Network channel and provide a retailer specific website to
provide information about special services and promotions that we offer from
time to time.
9
Our future success in the subscription television industry depends on
our ability to acquire and retain DISH Network subscribers, among other factors.
Beginning in 1996, to stimulate subscriber growth, expand retail distribution of
our products and build consumer awareness of the DISH Network brand, we reduced
the retail price charged to consumers for EchoStar receiver systems.
Accordingly, since August 1996, we have provided varying levels of subsidies and
incentives to attract customers, including free or subsidized receiver systems,
installations, antenna, programming and other items. The amount of the subsidy
varies depending on many factors. This marketing strategy emphasizes our
long-term business strategy of maximizing future revenue by selling DISH Network
programming to the largest possible subscriber base and rapidly increasing the
size of that subscriber base. Since we subsidize certain consumer up-front
costs, we incur significant costs each time we acquire a new subscriber.
Although there can be no assurance, we believe that we will be able to fully
recoup the up-front costs of subscriber acquisition from future subscription
television services revenue.
During July 2000, we began offering our DISH Network subscribers the
option to lease receiver systems under our Digital Home Plan promotion. The
Digital Home Plan offers consumers the ability to lease from one to four
receiver systems with a one-year commitment to one of several qualifying
programming packages. With each plan, consumers receive in-home service and pay
a one-time set-up fee. We expect this marketing strategy will reduce the cost of
acquiring future subscribers by maintaining ownership of the receiver systems.
Upon termination of the Digital Home Plan, subscribers are required to return
the receiver to us. While we do not recover all of the equipment upon
termination of service, receivers that are recovered after deactivation are
refurbished and re-deployed at a much lower cost to us.
Internet and Interactive Services. We are continuing to expand our
offerings to include interactive and two-way high-speed Internet access. During
2001, we began offering DISH Network customers an interactive digital receiver
with a built-in hard disk drive that permits viewers to pause and record live
programs without the need for videotape. We now offer receivers capable of
storing up to 35 hours of programming, and expect to increase storage capacity
on future models to over 100 hours. We also are offering set-top boxes that can
provide a wide variety of innovative interactive television services and
applications.
Through our strategic investment in StarBand Communications, we offer
consumers two-way, high-speed satellite Internet access along with DISH Network
satellite television programming via a single dish. We believe this technology
is particularly well-suited for areas without cable or DSL infrastructure.
Two-way satellite Internet service offers significant benefits for consumers,
including an "always on" connection that saves time over dial-up methods and
eliminates the need for a second phone line. DISH Network customers need an
oblong dish, approximately 24 inches by 36 inches, and other equipment to take
advantage of two-way satellite Internet service. We currently offer consumers a
complete hardware and services solution for broadband Internet access combined
with DISH Network programming. For new customers who subscribe to a qualifying
DISH Network programming package and commit to one year of StarBand Internet
service, the StarBand hardware is currently offered for $549 and a standard
professional installation starts at $199. We currently offer a bundled price of
$100.99 per month for customers who subscribe to both DISH Network's America's
Top 150 programming package and the StarBand Internet service. See "- Liquidity
and Capital Resources."
We have also invested in Ka-band spot beam technology. While Ka-band
spot beam technology is currently in its infancy, and the technology might not
develop to the point where it is viable, we believe that spot beam Ka-band
satellites could become a cost effective way to offer consumers high-speed
two-way Internet access in the future. If Ka-band satellites prove to be viable,
they will be able to serve rural and other areas where high speed DSL and cable
modem service is not available. Thus, Ka-band technology might play an important
role in spanning the digital divide between urban and rural consumers. We
believe the service might also be successfully offered in urban and suburban
areas as well.
In an effort to continue to position ourselves to exploit this
potential opportunity, during November 2000, one of our wholly owned
subsidiaries purchased a 49.9% interest in VisionStar, Inc. VisionStar holds an
FCC license, and is constructing a Ka-band satellite, to launch into the 113
degree orbital location. In February 2002, we increased our ownership of
VisionStar to 90%, for a total purchase price of approximately $2.8 million. In
addition, we have made loans to VisionStar totaling approximately $4.6 million
as of December 31, 2001. In October 2001, upon approving the acquisition of
VisionStar by us, the FCC conditioned the license transfer on our completion of
construction of the satellite by April 2002, launching the satellite by May
2002, and reporting any change in the status of the spacecraft contract. We will
not complete construction or launch of the satellite by those dates and will
have to ask the FCC for an extension. Failure to meet any of these conditions or
receive an extension, of which there can be no assurance, could result in the
revocation of the Ka-band license at the 113 degree orbital location and could
materially impact our ability to recover our VisionStar investments. See "-
Government Regulation".
We are also seeking additional ways to expand our two-way high-speed
Internet access and high-speed data services that may include, but are not
limited to, partnerships with third parties who have particular expertise in the
high speed transmission of digital information. Although there can be no
assurance, we believe we will be able to increase our subscriber base and our
average revenue per subscriber by offering these and other similar services.
Satellites. We presently have six DBS satellites in geostationary orbit
approximately 22,300 miles above the equator and a seventh recently launched DBS
satellite that is currently undergoing transfer-orbit and test operations.
Satellites are located in orbital positions, or slots, that are designated by
their longitude. An orbital position describes both a physical location and an
assignment of spectrum in the applicable frequency band. The FCC has divided
each orbital position into 32 DBS frequency channels. Each transponder on our
satellites can exploit one frequency channel. Through digital compression
technology, we can currently transmit between eight and ten digital video
channels from each transponder, on average. The FCC licensed us to operate 96
DBS frequencies at various orbital positions including:
o 21 frequencies at the 119 degree orbital location and 29
frequencies at the 110 degree orbital location, both capable of
providing service to the entire continental United States;
o 11 frequencies at the 61.5 degree orbital location, capable of
providing service to the Eastern and Central United States;
o 24 frequencies at the 148 degree orbital location, capable of
providing service to the Western United States;
o 22 frequencies at the 175 degree orbital location, capable of
providing service to only the most western portion of the United
States. See "-- Government regulation;" and
o 11 additional as yet unassigned frequencies, likely to be made
available at the 175 degree orbital location, but only if certain
regulatory hurdles are met. See "-- Government regulation."
EchoStar I and EchoStar II each have 16 transponders that operate at
130 watts of power. Subject to the anomalies described below, EchoStar III and
EchoStar IV each have 32 transponders that operate at approximately 120 watts
per channel, switchable to 16 transponders operating at over 230 watts per
channel. EchoStar V has 32 transponders that operate at approximately 110 watts
per channel, switchable to 16 transponders operating at approximately 220 watts
per channel. EchoStar VI has 32 transponders that operate at approximately 120
watts per channel, switchable to 16 transponders operating at approximately 240
watts per channel. EchoStar VII should be capable of operating 32 DBS
transponders at 120 watts each, switchable to 16 DBS transponders operating at
240 watts each and includes spot-beam technology. In conjunction with the
operation of EchoStar VIII, the use of spot-beams would enable us to increase
the number of markets where we provide local channels by satellite, but will
reduce the number of video channels that could otherwise be offered ubiquitously
across the United States. Each transponder
10
can transmit multiple digital video, audio and data channels. Each of our
satellites has a minimum design life of 12 years.
Most of our core programming is broadcast from the 119 degree orbital
location. We currently are utilizing the 110 degree orbital location, where
EchoStar V is located, to enhance revenue opportunities with new value added
services for our current and future subscribers.
EchoStar VII was launched on February 21, 2002 from Cape Canaveral,
Florida. EchoStar VII will be tested at the 129 degree orbital location and will
then be moved to the 119 degree orbital location for commercial service.
Assuming successful completion of in-orbit testing, EchoStar VII is expected to
commence commercial service at the 119 degree orbital location during the second
quarter of 2002. EchoStar VII is planned to replace the capacity of the EchoStar
IV satellite, which has experienced a series of anomalies materially impacting
its functionality. Operating from the 119 degree orbital location, EchoStar VII,
assuming successful completion of in-orbit testing, will also provide local
channels by satellite to consumers in Alaska and Hawaii. EchoStar VII, together
with EchoStar VIII which is expected to launch this summer, will also improve
spectrum efficiency, enhance the quality of video channels for all DISH Network
customers, provide a broader array of programming choices to consumers in Alaska
and Hawaii, and increase in-orbit backup capacity.
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 has experienced
anomalies affecting its thermal systems and propulsion system. Consequently, the
total remaining useful life of EchoStar IV is currently approximately two years.
There can be no assurance that further material degradation, or total loss of
use, of EchoStar IV will not occur in the immediate future.
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 transponders 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. In addition, we are only licensed by the FCC
to operate 11 transponders at the 61.5 degree orbital location (together with an
additional six leased transponders). We will continue to evaluate the
performance of EchoStar III.
EchoStar V is equipped with a total of three momentum wheels, including
one spare. During July 2001, EchoStar V experienced an anomaly resulting in the
loss of one momentum wheel. The satellite was quickly restored to normal
operations mode. An investigation conducted by the spacecraft manufacturer
concluded that a failure within the momentum wheel electronics caused the loss.
The manufacturer also believes that the failure was isolated to this particular
unit. While no further momentum wheel losses are expected, there can be no
assurance future anomalies will not cause further losses which could impact
commercial operation of the satellite. At our request, the manufacturer has
developed contingency plans which include modifications to the spacecraft's
on-board software that will allow continued operation in the event of additional
momentum wheel failures, with limited effect on spacecraft life. During August
2001, one of the thrusters on EchoStar V experienced an anomalous event
resulting in a temporary interruption of service. The satellite was quickly
restored to normal operations mode. An investigation by the manufacturer has
determined that the engine remains functional but with a reduction in rated
thrust. The satellite is equipped with a substantial number of backup thrusters.
EchoStar V is also equipped with a total of 48 traveling-wave-tube amplifiers
("TWTAs"), including 16 spares. A total of two TWTAs were taken out of service
and replaced by spares between the launch of the satellite and June 30, 2001.
During the third quarter 2001, EchoStar V experienced anomalous telemetry
readings on two additional TWTAs. As a precaution, during September 2001 we
substituted one of those TWTA's with a spare. To the extent that EchoStar V
experiences anomalous telemetry readings on additional TWTAs it may be necessary
to utilize additional spare TWTAs. EchoStar V has also experienced anomalies
resulting in the loss of one solar array string. The satellite has a total of
approximately 96 solar array strings and approximately 92 are required to assure
full power availability for the 12-year design life of the satellite. An
investigation of the solar array anomalies, none of which have impacted
commercial operation of the satellite to date, is continuing. Until the root
cause of these
11
anomalies is finally determined, there can be no assurance future anomalies will
not cause further losses which could impact commercial operation of the
satellite.
EchoStar VI is equipped with a total of 48 transponders, including 16
spares. During April 2001, EchoStar VI experienced a series of anomalous events
resulting in a temporary interruption of service. The satellite was quickly
restored to normal operations mode. As a result of the anomaly, an investigation
conducted by the spacecraft manufacturer concluded that one stationkeeping
thruster and a pair of TWTA are unusable. The satellite is equipped with a
substantial number of backup transponders and thrusters. The satellite
manufacturer, Space Systems Loral ("SS/L"), has advised us that it believes that
the thruster anomaly was isolated to one stationkeeping thruster, and that while
further failures are possible, SS/L does not believe it is likely that
additional thrusters will be impacted. EchoStar VI has also experienced
anomalies resulting in the loss of two solar array strings. The satellite has a
total of approximately 112 solar array strings and approximately 106 are
required to assure full power availability for the 12-year design life of the
satellite. An investigation of the solar array anomalies, none of which have
impacted commercial operation of the satellite to date, is continuing. Until the
root cause of these anomalies is finally determined, there can be no assurance
future anomalies will not cause further losses which could impact commercial
operation of the satellite.
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.
Satellites under Construction. EchoStar VIII, which is expected to
operate at the 110 degree orbital location, and EchoStar IX, which is expected
to operate at the 121 degree orbital location, are being manufactured by SS/L.
EchoStar VIII will be capable of operating 32 DBS transponders at 120 watts
each, switchable to 16 DBS transponders operating at 240 watts each and includes
spot-beam technology. EchoStar IX will be capable of operating 32 Ku-band
transponders at 110 watts each, in addition to a Ka-band payload. EchoStar IX is
currently expected to be used for expanded DISH Network service such as video,
Internet, and other data services. The portion of the satellite expected to be
used for Internet and other data services, as opposed to video channels, has not
yet been finally determined.
Satellite Launches. During February 2001, we announced an agreement
with Lockheed Martin's International Launch Services division to provide launch
services for the EchoStar VII and EchoStar VIII satellites, which also includes
options for launch services for additional satellites.
EchoStar VII was launched on February 21, 2002 from Cape Canaveral,
Florida. EchoStar VII will be tested at 129 degree orbital location and will
then be moved to the 119 degree orbital location for commercial service. While
the launch appears to have been a complete success, until on-orbit testing is
complete we cannot be sure the satellite will be capable of full operations.
EchoStar VIII is expected to launch this summer on a Russian Proton K
launch vehicle from the Baikonur Cosmodrome in Kazakhstan.
12
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 us 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 our 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.
Additionally, we filed a lawsuit against the insurance carriers in the U.S.
District Court for the District of Colorado asserting causes of action for
violation of Federal and State antitrust laws. During March 2001, we voluntarily
dismissed our antitrust lawsuit without prejudice. We have the right to re-file
an antitrust action against the insurers in the future. 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.
At the time we filed our claim in 1998, we recognized an impairment
loss of $106 million to write-down the carrying value of the satellite and
related costs, and simultaneously recorded an insurance claim receivable for the
same amount. We will have to reduce the amount of the receivable if a final
settlement is reached for less than this amount.
The indentures related to certain of EchoStar DBS Corporation's
("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 EchoStar Broadband Corporation's
("EBC") senior notes requires us to maintain satellite insurance on the lesser
of half of our satellites or three of our satellites. EchoStar I through
EchoStar IX are owned by a direct subsidiary of EBC. Insurance coverage is
therefore required for at least three 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 three of our satellites from cash and cash equivalents to cash reserved
for satellite insurance on our balance sheet. As of December 31, 2001, cash
reserved for satellite insurance totaled approximately $122 million. The
reclassifications will continue until such time, if ever, as we can again insure
our satellites on acceptable terms and for acceptable amounts. If we lease or
transfer ownership of EchoStar VII, EchoStar VIII or EchoStar IX to EDBS, which
we are currently considering, we would need to reserve additional cash for the
depreciated cost of additional satellites. 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 its 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 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.
13
COMPETITION FOR OUR DISH NETWORK BUSINESS
We compete in the highly competitive subscription television service
industry against cable television and other land-based and satellite-based
system operators offering video, audio and data programming and entertainment
services. Many of these competitors have substantially greater financial,
marketing and other resources than we have. Our ability to increase earnings
depends, in part, on our ability to compete with these operators.
Cable television operators have a large, established customer base, and
many cable operators have significant investments in, and access to,
programming. Of the 97% of United States television households in which cable
television service is currently available, approximately 67% currently subscribe
to cable. Cable television operators have advantages relative to us by, among
other things, providing service to multiple television sets within the same
household at a lesser incremental cost to the consumer, by being able to provide
local and other programming in a larger number of geographic areas, and through
bundling their analog video service with expanded digital video services
delivered terrestrially or via satellite, two-way high speed Internet access,
and telephone service on upgraded cable systems. As a result of these and other
factors, we may not be able to continue to expand our subscriber base or compete
effectively against cable television operators.
New technologies could have a material adverse effect on the demand for
our DBS services. For example, new and advanced local multi-point distribution
services are currently being implemented. In addition, entities such as regional
telephone companies, which are likely to have greater resources than we have,
are implementing and supporting digital video compression over existing
telephone lines and digital "wireless cable." Moreover, mergers, joint ventures,
and alliances among franchise, wireless or private cable television operators,
regional Bell operating companies and others may result in providers capable of
offering bundled cable television and telecommunications services in competition
with us. We may not be able to compete successfully with existing competitors or
new entrants in the market for subscription television services.
DIRECTV has launched six high powered DBS satellites and has 46 DBS
frequencies that are capable of full coverage of the continental United States.
DIRECTV currently offers more than 300 channels of combined video and audio
programming and, as of December 31, 2001, had approximately 10.7 million
subscribers. If the merger with DIRECTV's parent is not completed, we believe
DIRECTV would continue to be in an advantageous position relative to our company
with regard to programming packages, provision of local programming and,
possibly, volume discounts for programming offers. In addition, the National
Rural Telecommunications Cooperative, through its members and affiliates,
competes with us in DIRECTV's territories.
DIRECTV's satellite receivers are sold in a significantly greater
number of consumer electronics stores than ours. Moreover, we do not have
manufacturing agreements or arrangements with consumer products manufacturers
other than JVC and Thomson. As a result, among other things of these factors,
and since we typically do not advertise nationally, our receivers and
programming services are less well known to consumers than those of DIRECTV. Due
to this relative lack of consumer awareness and other factors, we are at a
competitive marketing disadvantage compared to DIRECTV.
In addition, other companies in the United States have conditional
permits or have leased transponders for DBS assignments that can be used to
provide service to portions of the United States. The FCC has proposed to
allocate additional expansion spectrum for DBS services, which could create
significant additional competition in the market for subscription television
services. Moreover, as evidenced by a recent application filed at the FCC, DBS
service providers may seek and receive authority to serve the U.S. market from
full-CONUS slots allocated to other nations, particularly where such nations
have entered bilateral agreements with the U.S. Also, C-Band satellite providers
and overlay services compete with us, particularly in rural areas.
Most areas of the United States can receive traditional terrestrial
VHF/ UHF television broadcasts of between three and ten channels. These
broadcasters are often low to medium power operators with a limited coverage
area and provide local, network and syndicated programming. The local content
nature of the programming may be important to the consumer, and VHF/UHF
programming is typically provided free of charge. The FCC has allocated
additional digital spectrum to licensed broadcasters. At least during a
transition period, each existing television station will be able to retain its
present analog frequencies and also transmit programming on a digital channel
that may permit multiple programming services per channel.
14
ECHOSTAR TECHNOLOGIES CORPORATION
EchoStar Technologies Corporation ("ETC"), one of our wholly-owned
subsidiaries, internally designs and develops EchoStar receiver systems. Our
satellite receivers have won numerous awards from the Consumer Electronics
Manufacturers Association, dealers, retailers, and industry trade publications.
We outsource the manufacture of EchoStar receiver systems to third parties who
manufacture the receivers in accordance with our specifications.
We created our ETC division in connection with the development of the
DISH Network. We believe that we have an opportunity to grow this business
further in the future. The same employees who design EchoStar receiver systems
for the DISH Network are also involved in designing set-top boxes sold to
international TV customers. Our satellite receivers are designed around the
Digital Video Broadcasting standard, which is widely used in Europe and Asia.
Consequently, international ETC projects may result in improvements in design
and economies of scale in the production of EchoStar receiver systems for the
DISH Network.
In addition to supplying EchoStar receiver systems for the DISH
Network, ETC sells similar digital satellite receivers internationally. Our
satellite receivers are sold internationally either directly to television
service operators or to our independent distributors worldwide. We believe that
direct-to-home satellite service is particularly well-suited for countries
without extensive cable infrastructure. We are actively soliciting new business
for ETC, but we cannot provide any assurance in that regard.
Through 2001, our two major international customers were Via Digital, a
subsidiary of Telefonica, Spain's largest telephone company, and Bell ExpressVu,
a subsidiary of Bell Canada, Canada's largest telephone company. For 2002, we
have binding purchase orders from Bell ExpressVu and we are actively trying to
secure new orders from Via Digital for deliveries starting in the third quarter
of 2002. However, we cannot guarantee at this time that those negotiations will
be successful. Our future revenue in this area depends largely on the success of
these operators, which in turn, depends on other factors, such as the level of
consumer acceptance of direct-to-home satellite TV products and the intensity of
competition for international subscription television subscribers.
ETC's business also includes our Atlanta-based EchoStar Data Networks
Corporation and our UK-based Eldon Technology Limited subsidiaries. EchoStar
Data Networks is a supplier of technology for distributing Internet and other
content over satellite networks. Eldon Technology designs and tests various
software and other technology used in digital televisions and set-top boxes,
strengthening our product design capabilities for satellite receivers and
integrated televisions in both the international and United States markets.
COMPETITION FOR OUR ETC BUSINESS
We compete with a substantial number of foreign and domestic companies,
many of which have significantly greater resources, financial or otherwise, than
we have. We expect new competitors to enter this market because of rapidly
changing technology. Our ability to anticipate these technological changes and
introduce enhanced products expeditiously will be a significant factor in our
ability to remain competitive. Existing competitors' actions and new entrants
may have a material adverse impact on our revenues. We do not know if we will be
able to successfully introduce new products and technologies on a timely basis
in order to remain competitive.
15
GOVERNMENT REGULATION
The following summary of regulatory developments and legislation is not
intended to describe all present and proposed government regulation and
legislation affecting the video programming distribution industry. Government
regulations that are currently the subject of judicial or administrative
proceedings, legislative hearings or administrative proposals could change our
industry, in varying degrees. We cannot predict either the outcome of these
proceedings or any potential impact they might have on the industry or on our
operations. This section sets forth a brief summary of regulatory issues
pertaining to our operations.
We are required to obtain authorizations and permits from the FCC and
other similar foreign regulatory agencies to construct, launch and operate our
satellites and other components of our DBS system. Additionally, as a private
operator of a United States satellite system, we are subject to the regulatory
authority of the FCC and the Radio Regulations promulgated by the International
Telecommunication Union. We also have to obtain import and general destination
export licenses from the United States Department of Commerce to receive and
deliver certain components of direct-to-home satellite TV systems. In addition,
the delivery of satellites and related technical information for the purpose of
launch by foreign launch services providers is subject to strict export control
and prior approval requirements.
FCC PERMITS AND LICENSES
The FCC has jurisdiction and review power over the following general
areas:
o assigning frequencies and authorizations;
o ensuring compliance with the terms and conditions of such
assignments and authorizations, including required timetables for
construction and operation of satellites and other due diligence
requirements;
o authorizing individual satellites and earth stations;
o avoiding interference with other radio frequency emitters; and
o ensuring compliance with applicable provisions of the
Communications Act of 1934.
All of our FCC authorizations are subject to conditions imposed by the
FCC in addition to the FCC's authority to modify, cancel or revoke them. In
addition, all of our authorizations for satellite systems that are not yet
operational are subject to construction and progress obligations, milestones,
reporting and other requirements. We have not filed, or not timely filed, some
of the required reports. The FCC has indicated that it may revoke, terminate,
condition or decline to extend or renew such authorizations if we fail to comply
with applicable Communications Act requirements. We have received conditional
licenses from the FCC to operate satellites in the Ka-band and Ku-band and have
an application pending for a system that would use extended Ku-band frequencies
(although that application has remained pending for years). Use of those
licenses and conditional authorizations are subject to certain technical and due
diligence requirements, including the requirement to construct and launch
satellites. The granting of those licenses has been challenged by parties with
interests that are adverse to ours. Among other things, our conditional license
for a Ku-band satellite system is subject to pending petitions for
reconsideration and cancellation. The construction, completion and launch
milestones for both Ku-band satellites have expired. We have filed a timely
request for the extension of these milestones for our Ku-band system. With
respect to our license for the Ka-band system, the FCC recently authorized our
operation of inter-satellite links for the system and assigned milestone
requirements for the construction, launch and operation of the satellite system.
If we fail to file adequate reports or to demonstrate progress in the
construction of our satellite systems, the FCC has stated that it may cancel our
authorizations for those systems. Consistent with our initial application, our
application for our Ka-band system license allows us to use only 500 MHz of
Ka-band spectrum in each direction, while many other licensees have been
authorized to use 1,000 MHz in each direction. The FCC recently denied our
modification application to use additional spectrum and granted certain Ka-band
licenses that would preclude such expanded capacity for us.
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The FCC issues DBS licenses for ten year periods, which is less than
the useful life of a healthy DBS satellite. Upon expiration of the initial
license term, the FCC has the option to renew a satellite operator's license or
authorize an operator to operate for a period of time on special temporary
authority, or decline to renew the license. If the FCC declined to renew the
operator's license, the operator would be required to cease operations and the
frequencies would revert to the FCC. The FCC usually grants special temporary
authorizations for periods of up to 180 days. These authorizations are usually
subject to several other conditions. We also must obtain FCC authorization to
operate our earth stations, including the earth stations necessary to uplink
programming to our satellites.
We have licenses to use 21 frequencies at the 119 degree orbital
location, which expire in 2006; a license to operate 11 frequencies at the 61.5
degree orbital location, which expires in 2008; and licenses to operate 29
frequencies at the 110 degree orbital location, which we believe expire in 2009.
Our authorization at the 148 degree orbital location requires us to utilize all
of our FCC-allocated frequencies at that location by December 20, 2002, or risk
losing those frequencies that we are not using. We believe we have fulfilled
this requirement but the FCC has not confirmed its agreement. At the 61.5 degree
orbital location we sublease six transponders (corresponding to six frequencies)
from licensee Dominion in addition to our 11 licensed frequencies. For another
13 frequencies at the 61.5 degree orbital location we have special temporary
authority, which the FCC may refuse to renew, and which is subject to several
restrictive conditions. The FCC recently extended the permit of another company
to construct and launch a satellite that would use most of these additional
channels. If our special temporary authority to use the channels assigned to
that other company does not expire sooner, it will be terminated if that company
does actually construct and launch a satellite to the 61.5 degree orbital
location. Third parties have opposed, and we expect them to continue to oppose,
some of our authorizations or pending and future requests to the FCC for
extensions, modifications, waivers and approvals. We applied for and received
authorization to test EchoStar VII at the 129 degree orbital location and to
place EchoStar VII in commercial operation at the 119 degree orbital location.
Generally, all of our licenses are subject to expiration unless renewed by the
FCC, and our special temporary authorizations are granted for periods of 180
days or less, subject again to possible renewal by the FCC.
In early 2000, we moved EchoStar IV to the 119 degree orbital location.
The move allowed us to transition some of the programming previously on EchoStar
I and EchoStar II to EchoStar IV, which can provide service to Alaska and
Hawaii. In connection with that plan, among other things, we have also
petitioned the FCC to declare that we have met our due diligence obligations for
the 148 degree orbital location. The State of Hawaii has opposed that request
and there is no assurance that it will be granted by the FCC. If our request is
not granted by the FCC, our license for the 148 degree orbital location may be
revoked or canceled for any frequencies at the 148 degree orbital location that
may not be used by the December 2002 operation milestone.
We have received FCC authorization to operate EchoStar IV and EchoStar
VI at the 119 degree orbital location. We have also moved EchoStar I from the
119 degree orbital location to the 148 degree orbital location. EchoStar VI
commenced commercial service during October 2000. Given past launch delays for
EchoStar VII, we asked for and received special temporary authority from the FCC
to operate EchoStar II, which previously was located at the 119 degree orbital
location, at the 148 degree orbital location, in order to help comply with our
January 1, 2002 "must carry" obligations. This renewable authority is for 30
days beginning on December 28, 2001. This special temporary authority has been
opposed by Pegasus Development Corporation. While we have timely requested the
renewal of the special temporary authority within the 30-day period, there can
be no assurance that the FCC will not reconsider that temporary authorization
and revoke it or refuse to extend it. While we have also applied to the FCC for
modification authority to operate EchoStar II at the 148 degree orbital location
on a more permanent basis, this application remains pending and there can be no
assurances that it will be granted by the FCC.
In general, our plans involve the relocation of satellites either
within or slightly outside the "cluster" of a particular orbital location, or
from one orbital location to another where we have various types of
authorizations. These changes require FCC approval, and we cannot be sure that
we will receive all needed approvals for our current and future plans.
Furthermore, the states of Alaska and Hawaii requested that the FCC impose
conditions on the license for EchoStar VI, relating to certain aspects of our
service such as prices and equipment. While the FCC denied these requests for
conditions, it cautioned that it may impose similar requirements as a result of
a pending rulemaking. Such requirements could be very onerous for us. In
general, the states of Alaska and Hawaii have expressed views that our service
to these states from various orbital locations does not comply with our
FCC-imposed obligations to serve those states, and we cannot be sure that the
FCC will not accept these views. Such actions would have a material adverse
effect on our business. Moreover, because we cannot meet the geographic
17
service requirements from the 148 degree orbital location, we had to request and
obtain a conditional waiver of these requirements to allow operation of EchoStar
I at that location. As a result, our current authorization to operate EchoStar I
at the 148 degree orbital location is subject to several conditions that may be
onerous. Furthermore, we have requested an extension of that waiver to also
allow operation of EchoStar II at the same location, and we cannot be sure the
FCC will grant that request.
We have substantially completed the construction of one additional DBS
satellite, EchoStar VIII. We presently plan to operate this satellite at the 110
degree orbital location, but the launch and operation of this satellite requires
prior FCC approval. We have not yet applied for authorization to launch EchoStar
VIII and we cannot be sure that this request will be timely granted or that it
will be granted at all by the FCC.
On February 25, 2000, we acquired Kelly Broadcasting Systems, Inc. We
recently discovered that Kelly Broadcasting Systems and us inadvertently failed
to file with the FCC the necessary application to transfer control over certain
earth stations licensed to Kelly Broadcasting Systems. We have recently filed
the necessary application for a transfer of control over these earth stations,
and have requested special temporary authority from the FCC to continue to
operate these earth stations while the application to transfer control is being
processed by the FCC. We cannot be sure that the FCC will not deny either or
both of these requests or that it will not commence an enforcement proceeding
for the failure to file a timely transfer of control application, possibly
resulting in fines or revocation of the licenses in question. Any such action
that might prevent Kelly Broadcasting Systems from operating these earth
stations would impair our ability to receive certain types of programming and
deliver it to customers.
Instead of constructing separate Ka-band and Ku-band satellites for
which we have a license at the 121 degree orbital location, we are in the
process of constructing a "hybrid" Ku/Ka-band satellite. Launch and operation of
this satellite requires prior FCC approval, which we have requested. We cannot
be sure that this request will be granted. That satellite does not currently
incorporate inter-satellite links, and one company has argued to the FCC that
this makes us subject to more expedited milestones for our system, some of which
have lapsed. We have objected to this argument, but cannot be sure what action
the FCC will take.
During November 2000, one of our subsidiaries purchased a 49.9%
interest in VisionStar, Inc. VisionStar holds an FCC license, and is
constructing a Ka-band satellite, to launch into the 113 degree orbital
location. In February 2002, we increased our ownership of VisionStar to 90%, for
a total purchase price of approximately $2.8 million. In addition, we have made
loans to VisionStar totaling approximately $4.6 million as of December 31, 2001.
Pegasus Development Corporation filed a petition for reconsideration of the
FCC's approval of that transaction. There can be no assurance that the FCC will
not reconsider its approval or otherwise revoke VisionStar's license, rendering
our investment worthless. Furthermore, 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. Failure to meet the milestones will
make the license invalid unless the milestones are extended by the FCC. In May
2001, the FCC already denied an earlier request by VisionStar to extend its
milestones. In October 2001, upon granting the acquisition of VisionStar by us,
the FCC conditioned the license transfer on our completion of construction of
the satellite by April 2002, launching the satellite by May 2002, and reporting
any change in the status of the spacecraft contract. We will not complete
construction or launch of the satellite by those dates and will have to ask the
FCC for an extension. Failure to meet any of these conditions or receive an
extension, of which there can be no assurance, could result in the revocation of
the Ka-band license at the 113 degree orbital location and could materially
impact our ability to recover our VisionStar investments.
Our projects to construct and launch additional Ku-band, extended
Ku-band and Ka-band satellites are in the early stages of development and are
currently being challenged by several companies with interests adverse to ours.
There can be no assurance that the FCC will sustain these licenses, or grant the
pending applications, or that we will be able to successfully capitalize on any
resulting business opportunities.
18
In general, many of our authorizations and pending applications are
subject to petitions and oppositions filed against us by several companies, and
we cannot be sure that our authorizations will not be cancelled, revoked or
modified or that our applications will not be denied.
IN-ORBIT AUTHORIZATIONS
The telemetry, tracking and control operations of EchoStar I are in an
area of the spectrum called the "C-band." Although the FCC granted us
conditional authority to use these frequencies for telemetry, tracking and
control, in January 1996 a foreign government raised an objection to EchoStar
I's use of these frequencies. We cannot be certain whether that objection will
subsequently require us to relinquish the use of such C-band frequencies for
telemetry, tracking and control purposes. Further, EchoStar II's telemetry,
tracking and control operations are in the "extended" C-band. Our authorization
to use these frequencies expired on January 1, 1999. Although we have timely
applied for extension of that authorization to November 2006, we cannot be sure
that the FCC will grant our request. If we lose the ability to use these
frequencies for controlling either satellite, we would lose the satellite.
Recently, the FCC released a ruling that will allow commercial terrestrial
services and hamper future satellite operations in the "extended" C-band
frequencies. This ruling might have negative implications for us. Also, our
request to operate EchoStar II at the 148 degree orbital location includes a
request to use the extended C-band for Telemetry Tracking and Control ("TT&C")
at that orbital location. We cannot be sure that the FCC will grant that
request.
INTERNATIONAL TELECOMMUNICATION UNION STANDARDS
Our DBS system also must conform to the International Telecommunication
Union ("ITU") broadcasting satellite service plan. If any of our operations are
not consistent with this plan, the ITU will only provide authorization on a
non-interference basis pending successful modification of the plan or the
agreement of all affected administrations to the non-conforming operations.
Accordingly, unless and until the ITU modifies its broadcasting satellite
service plan to include the technical parameters of DBS applicants' operations,
our satellites, along with those of other DBS operators, must not cause harmful
electrical interference with other assignments that are in conformance with the
plan. Further, DBS satellites are not presently entitled to any protection from
other satellites that are in conformance with the plan. We believe the United
States government has filed modification requests with the ITU for EchoStar I,
EchoStar II and EchoStar III. The ITU has requested certain technical
information in order to process the requested modifications. We have cooperated,
and continue to cooperate, with the FCC in the preparation of its responses to
the ITU requests. We cannot predict when the ITU will act upon these requests
for modification or if they will be granted.
DBS AUTHORIZATIONS AND FREQUENCIES THAT WE COULD LOSE
We also have conditional authorizations for several other DBS and fixed
service satellites that are not operational. One permit for 11 unspecified
western frequencies was set to expire on August 15, 1995. Although we filed a
timely extension request, the FCC has deferred a decision on that request
pending the FCC's analysis of our due diligence for that permit. The FCC has not
yet assigned the frequencies related to that permit because in 1992 it held that
we had not completed contracting for these western assignments - the first prong
of the required diligence - and asked us to submit amended contract
documentation. Although we submitted such documentation, the FCC has not yet
ruled on this matter, and we cannot be sure that the FCC will rule in our favor.
We also have a conditional permit for a total of 11 western frequencies
at the 175 degree orbital location that expired on August 15, 1999. That
expiration date is pursuant to an extension granted by the FCC's International
Bureau in 1996. That extension was subject to the condition that we make
significant progress toward construction and operation of a DBS system
substantially in compliance with, or ahead of, the most recent timetable that we
submitted to the FCC. The FCC's International Bureau also urged us to expedite
construction and launch of additional satellites for our DBS system at these
frequencies. PrimeStar, a DBS provider that DirecTV acquired in 1999, filed a
request with the FCC that is still pending requesting that the FCC reverse the
International Bureau's grant of an extension.
19
We also have a conditional permit for 11 additional frequencies at the
175 degree orbital location, which was set to expire on November 30, 1998. That
expiration date was pursuant to an extension granted by the FCC's International
Bureau in 1995. When it granted the extension, the FCC reserved the right to
cancel the permit if we failed to progress toward operation of the DBS system in
accordance with the timetable that we submitted to the FCC. That extension also
is subject to a still pending challenge by PrimeStar.
While we have timely filed requests for extension of all the western
permits, we cannot be sure how the FCC will act with respect to these requests.
REGULATIONS
DBS Rules. Once the FCC grants a conditional construction permit, the
permittee must proceed with due diligence in constructing the system. The FCC
has adopted specific milestones that must be met in order to retain the permit,
unless the FCC determines that an extension or waiver is appropriate. Permittees
must file semi-annual reports on the status of their due diligence efforts. The
due diligence milestones require holders of conditional permits to complete
contracting for construction of their systems within one year of grant of the
permit. Additionally, the satellites must be operational within six years of
grant. For permits issued after January 19, 1996, permittees must complete
construction of the first satellite in their system within four years of grant
of the permit. The FCC also may impose other conditions on the grant of the
permit. The holders of new DBS authorizations issued on or after January 19,
1996 must also provide DBS service to Alaska and Hawaii from at least one of
their DBS satellites or they will have to relinquish their western assignments.
We are presently not able to satisfy this requirement from the 148 degree
orbital location. With respect to the EchoStar I satellite, we have received a
waiver of that requirement subject to several onerous conditions. We have also
requested other waivers of that requirement, including a waiver to allow
EchoStar II operation at the 148 degree orbital location. The state of Hawaii
has generally requested many conditions to such waivers. In addition, we are
required to serve Alaska and Hawaii from the 110 degree orbital location. While
we believe that our current plan, which involves the use of our capacity at that
location for local-into-local broadcast as well as other programming, is in
compliance with that requirement, there can be no assurance that the FCC will
consider this plan as complying with the rule. In general, the states of Alaska
and Hawaii have expressed views that our service to these states from various
orbital locations does not comply with our FCC-imposed obligations to serve
those states, and we cannot be sure that the FCC will not accept these views.
Subject to applicable regulations governing non-DBS operations, a
licensee may make unrestricted use of its assigned frequencies for non-DBS
purposes during the first five years of the ten-year license term. After the
first five years, the licensee may continue to provide non-DBS service as long
as at it dedicates at least one-half of its total capacity at a given orbital
location to providing DBS service. Further, the FCC indicated its desire to
streamline and revise its rules governing DBS satellites. We cannot be sure
about the content and effect any new DBS rules might have on our business.
Certain Other Communications Act Provisions. As a distributor of
television programming, we are also affected by numerous laws and regulations,
including the Communications Act.
The FCC imposes different rules for "subscription" and "broadcast"
services. We believe that because we offer a subscription programming service,
we are not subject to many of the regulatory obligations imposed upon broadcast
licensees. However, we cannot be certain whether the FCC will find in the future
that we should comply with regulatory obligations as a broadcast licensee with
respect to our current and future operations, and certain parties have requested
that we be treated as a broadcaster. If the FCC determined that we are a
broadcast licensee, it could require us to comply with all regulatory
obligations imposed upon broadcast licensees, which are generally subject to
more burdensome regulation than subscription service providers like us.
Under a requirement of the Cable Act, the FCC imposed public interest
requirements on DBS licensees, such as us, to set aside four percent of channel
capacity exclusively for noncommercial programming for which we must charge
programmers below-cost rates and for which we may not impose additional charges
on subscribers. This could displace programming for which we could earn
commercial rates and could adversely affect our financial results. The FCC has
not reviewed our methodology for computing the channel capacity we must set
aside or for determining the rates that we charge public interest programmers,
and we cannot be sure that, if the FCC were to review these methodologies, it
would find them in compliance with the public interest requirements.
20
Under a requirement of the Telecommunications Act of 1996, the FCC
recently imposed upon broadcasters and certain multichannel video programming
distributors, including us, the responsibility of providing video description
for visually impaired persons. Video description involves the insertion into a
television program of narrated descriptions of settings and actions that are not
otherwise reflected in the dialogue, and is typically provided through the
Secondary Audio Programming ("SAP") channel. Commencing April 12, 2002, we will
be required to provide video description for a minimum of 50 hours per calendar
quarter (roughly four hours per week) of prime time and/or children's
programming on each of any of the top five national non-broadcast networks we
carry. In addition, we will be required to "pass through" any video description
we receive from a broadcast station or non-broadcast network if we have the
technical capability necessary to do so associated with the channel on which we
distribute the programming with video description. While the FCC acknowledged
that programming networks, and not multichannel video programming distributors,
may actually describe the programming, it declared that for ease of enforcement
and monitoring compliance it would hold distributors responsible for compliance.
These requirements may impose a material burden on us.
The FCC has also commenced an inquiry into distribution of high-speed
Internet access services and a rulemaking concerning interactive television
services. In these proceedings, the FCC is considering whether to impose on
distributors, including satellite distributors like us, various types of "open
access" obligations (such as required carriage of independent content
providers). We cannot be sure that the FCC will not ultimately impose such
obligations, which could be very onerous, and could create a significant strain
on our capacity and ability to provide other services.
The FCC has commenced a rulemaking which seeks to streamline and revise
its rules governing DBS operators. This rulemaking involves many proposed DBS
rules. There can be no assurance about the content and effect of any new DBS
rules passed by the FCC, and the rules may include expanded geographic service
requirements for Alaska, Hawaii and Puerto Rico. The FCC has also released a
notice of proposed rulemaking regarding the current restrictions on the
flexibility of DBS operators to provide services other than DBS, and may change
these restrictions.
Foreign Ownership Restrictions. The Communications Act and the FCC's
implementing regulations provide that when subsidiaries of a holding company
hold certain types of FCC licenses, foreign nationals or their representatives
may not own or vote more than 25% of the total equity of the holding company,
except upon an FCC public interest determination. There is some ambiguity
regarding the extent to which this foreign ownership prohibition applies to DBS
services. The FCC has ruled that these foreign ownership limitations in the
Communications Act do not apply to providers of subscription DBS services like
us. On the other hand, the FCC has left open the question of whether the FCC's
own rules impose on DBS services that foreign ownership limit. Furthermore, the
World Trade Organization agreement facilitating certain foreign investments in
telecommunications services does not extend to DBS services, and the standards
for waiving the DBS services foreign ownership limit to the extent applicable
are therefore unclear. While the FCC has granted us in the past a waiver to the
extent required to allow an investment from a foreign company, we cannot be sure
that the FCC will similarly grant such waiver requests, to the extent required
to allow other foreign investments that may implicate the alien ownership limits
in the future. The foreign ownership limitations clearly will apply to our
licenses for fixed satellite service if we hold ourselves out as a common
carrier or if the FCC decides to treat us as such a carrier. The FCC has noted
that we have proposed to operate one of its authorized fixed satellite service
systems on a common carrier as well as a non-common carrier basis. We have
recently informed the FCC that we have no common carrier plans with respect to
that system. If the FCC decides to treat us as a common carrier for any of its
operations or if we operate as one, we cannot be sure that the FCC will grant
any request for a public interest determination that may be needed to allow any
indirect foreign investment in excess of 25%.
On January 22, 2002, Vivendi acquired shares of our series D
convertible preferred stock which are currently convertible into approximately
10.7% of our total outstanding common stock, representing approximately 2% of
the total fully-diluted voting rights of us today. In addition, a subsidiary of
The News Corporation Limited, a South Australia corporation, owns approximately
2.2% of our total common stock outstanding stock, having less than 1% of our
total voting power. In connection with the MCI WorldCom authorization that we
received in connection with its transactions with The News Corporation Limited,
the FCC decided to waive any foreign ownership limitations to the extent
applicable. While we believe that the current levels of foreign ownership are
below any applicable limit, in light of any subsequent FCC decisions, policy
changes or additional foreign ownership in us, we may in the future need a
separate FCC determination that foreign ownership
21
in excess of any applicable limits is consistent with the public interest in
order to avoid a violation of the Communications Act or the FCC's rules.
Certain Other Rulemakings. The FCC recently proposed to allocate
additional "expansion" spectrum for DBS operators starting in 2007. DirecTV has
filed an application for a satellite system using those expansion frequencies.
Foreign satellite systems also are potential providers of DBS service
within the United States. In May 1996, in its DISCO II proceeding, the FCC
proposed permitting foreign satellite systems to serve the United States if the
home country of the foreign-licensed satellite offers open "effective
competitive opportunities" in the same type of satellite service to United
States licensed satellites. In the February 1997 World Trade Organization
Agreement, the United States offer contained an exemption from market opening
commitments for, among other things, DBS and direct-to-home satellite services.
In November 1997, the FCC released new rules that maintained the effective
competitive opportunities test with respect to foreign-licensed satellites
seeking to provide DBS and direct-to-home satellite services in the United
States. The FCC also established a strong presumption in favor of authorizing
foreign-licensed satellites to provide services other than DBS and
direct-to-home satellite in the United States. The FCC has also reached
bilateral protocols allowing the provision of DBS service by satellites licensed
by Mexico and Argentina.
The FCC has adopted a proposal to allow non-geostationary orbit fixed
satellite services to operate on a co-primary basis in the same frequency as DBS
and Ku-based FSS services, and is currently finalizing rules to govern these
services. These satellite operations could provide global high-speed data
services. In addition to possible interference concerns, this would, among other
things, create additional competition for satellite and other services. In the
same rulemaking, the FCC has been considering a terrestrial service originally
proposed by Northpoint Technology, Ltd. that would retransmit local television
or other video and data services to DBS subscribers or others in the same DBS
spectrum that we use throughout the United States.
We have submitted numerous pleadings jointly with DIRECTV to the FCC
objecting to the Northpoint request, which in our view may cause harmful and
substantial interference to the service provided to DBS customers. Furthermore,
other entities have now filed applications similar to the one filed by
Northpoint, and at least one other entity has also obtained a license from the
FCC to conduct experimental operations. If Northpoint or other entities become
authorized to use our spectrum, they could cause harmful and substantial
interference with our service.
Furthermore, the Satellite Home Viewer Improvement Act required the FCC
to make a determination by November 29, 2000 regarding licenses for facilities
that will retransmit broadcast signals to underserved markets by using spectrum
otherwise allocated to commercial use, possibly including DBS spectrum.
Northpoint had already been allowed by the FCC to conduct experimental
operations in Texas and Washington, D.C. On December 8, 2000, the FCC released a
Report and Order and Further Notice of Proposed Rulemaking in this proceeding
that concluded that a terrestrial "point-to-multipoint" service can share the
spectrum with DBS on a no interference basis -- a conclusion that may have a
significant adverse impact on our operations. At the same time, the FCC
initiated a further notice of proposed rulemaking to determine the appropriate
interference standards and technical rules with which such a terrestrial service
must comply. The FCC also requested proposals on how to process applications for
licenses for the new service, and tentatively proposed excluding satellite
companies from such licenses. We have filed a petition for reconsideration of
the FCC's conclusion and comments on its proposals.
In addition, recent appropriations legislation required independent
testing of the Northpoint technology, and created a rural loan guarantee program
for providers of certain types of services. The tests mandated by that law have
been completed. MITRE, the independent testing entity, concluded that the new
terrestrial service "poses a significant interference threat to DBS operation in
many realistic operational situations"; "a wide variety of mitigation techniques
exist that . . . can greatly reduce, or eliminate, the geographical extent of
the regions of potential . . . interference into DBS"; and that "bandsharing
appears feasible if and only if suitable mitigation measures are applied." The
independent study left open the question of whether the potential costs of such
mitigation measures together with the impact of residual interference outweighed
the benefit of allowing the new terrestrial service in the band used by DBS. We
and DIRECTV have asserted to the FCC that MITRE's findings constitute additional
grounds for reconsidering the FCC's conclusion on sharing, while Northpoint has
argued that
22
MITRE confirms Northpoint's ability to share with DBS. We cannot be sure whether
and when these processes will result in the licensing of Northpoint and/or
companies proposing a similar service to operate in the spectrum licensed to us,
what the interference standards will be, and how significant the interference
into our operations will be. On December 3, 2001, we and DIRECTV filed with the
FCC a request that it assign spectrum to these new proposed terrestrial systems
other than that currently allocated for use by DBS. We cannot be sure whether
the FCC will take any action on this request, or whether the request will be
granted.
Distant and Local Broadcast Signals. We believe that our ability to
deliver local programming via satellite into the markets from which the
programming originates helps us attract subscribers who would not otherwise be
willing to purchase satellite systems. Although we have commenced providing
local network service to eligible subscribers in various metropolitan centers,
subject to certain conditions, our ability to provide such a service is limited
as discussed below.
Satellite Home Viewer Improvement Act and Retransmission Consent. The
Copyright Act, as amended by the Satellite Home Viewer Improvement Act of 1999,
or SHVIA, permits satellite retransmission of distant network channels only to
"unserved households." Whether a household qualifies as "unserved" for the
purpose of eligibility to receive a distant network channel depends, in part, on
whether that household can receive a signal of "Grade B intensity" as defined by
the FCC. In February 1999, the FCC released a report and order on these matters.
Although the FCC declined to change the values of Grade B intensity, it adopted
a method for measuring it at particular households. The FCC also endorsed a
method for predicting Grade B intensity at particular households. In addition,
SHVIA instructed the FCC to establish a predictive model based on the model it
had endorsed in February 1999, and also directed the FCC to ensure that its
predictive model takes account of terrain, building structures and other land
cover variations. The FCC issued a report and order that does not adjust the
model to reflect such variations for any VHF stations. Failure to account for
these variations could hamper our ability to retransmit distant network
channels.
SHVIA has also established a process whereby consumers predicted to be
served by a local station may request that this station waive the unserved
household limitation so that the requesting consumer may receive distant signals
by satellite. If the waiver request is denied, SHVIA entitles the consumer to
request an actual test, with the cost to be borne by either the satellite
carrier, such as us, or the broadcast station depending on the results. The
testing process required by the statute can be very costly. The FCC staff has
informally raised questions about how we implement that process. We can provide
no assurance that the FCC will not find that our implementation of the process
is not in compliance with these requirements. Furthermore, the FCC has
identified a third party organization to examine and propose tester
qualification and other standards for testing. We cannot be sure that this
decision will not have an adverse effect on our ability to test whether a
consumer is eligible for distant signals.
In addition, SHVIA could adversely affect us in several other respects.
SHVIA prohibits us from providing individual customers with more than two
distant signals for each broadcasting network and leaves the FCC's Grade B
intensity standard unchanged without future legislation. The FCC released a
report recommending that only minor changes be made to the Grade B standard, a
recommendation that is unfavorable to us. While SHVIA reduces the royalty rate
that we currently pay for superstation and distant network signals, it directed
the FCC to issue rules by November 29, 2000 requiring us to delete substantial
programming (including sports programming) from these signals in certain
circumstances. The FCC has released rules implementing that directive, which
have become effective. Although we have implemented certain measures in our
effort to comply with these rules, these requirements have hampered, and may
further hamper, our ability to retransmit distant network and superstation
signals, and the burdens from the rules upon us may become so onerous that we
may be required to substantially alter, or stop retransmitting, many or all
superstation signals. In addition, the FCC's sports blackout requirements, which
apply to all distant network signals, may require costly upgrades to our system.
We asked the FCC to reconsider several aspects of these rules to make the rules
less burdensome, but we cannot predict whether the FCC will take any favorable
action with respect to the request, and other parties have asked for
reconsideration to the rules which would be adverse to our business. On
reconsideration, the FCC may resolve certain outstanding issues unfavorably to
us. Any changes to, or adverse interpretations of, the existing regulations may
create additional burdens for us.
SHVIA generally gives satellite companies a statutory copyright license
to retransmit local broadcast channels, subject to obtaining the retransmission
consent of the local station. Retransmission consent agreements are important to
us because a failure to reach such agreements with broadcasters who elect
retransmission consents instead of mandatory "must carry" carriage means we
cannot carry these broadcasters'
23
signals, and could have an adverse effect on our strategy to compete with cable
and other satellite companies, which provide local channels. SHVIA requires
broadcasters to negotiate retransmission consent agreements in good faith. The
FCC has promulgated rules governing broadcasters' good faith negotiation
obligation. These rules allow satellite providers to file complaints with the
FCC against broadcasters for violating the duty to negotiate retransmission
consent agreements in good faith. While we have been able to reach
retransmission consent agreements with most of the local network stations we
currently carry, any additional roll-out of local channels in more cities will
require more agreements, and we cannot be sure that we will secure these
agreements or that we will secure new agreements upon the expiration of our
current retransmission consent agreements, some of which are short term. We were
unable to conclude long-term retransmission consent agreements with the NBC
station in San Francisco or the ABC station in Nashville and discontinued
transmission of those channels as a result. On March 1, 2001, we filed a
retransmission consent complaint with the FCC against the owner of these
stations, Young Broadcasting, Inc., asserting that Young has failed to negotiate
in good faith. The FCC's Cable Services Bureau ruled against us in this
proceeding and also determined that we "failed in [our] duty of candor" to the
FCC and abused the FCC's processes because we disclosed to the public some
information subject to a pending request for confidential treatment that we had
filed and did not immediately notify the FCC of this disclosure. While we
believe that this determination by the FCC was factually and legally wrong
because the FCC did not, and could not, make the underlying findings necessary
to support such a determination, we have not formally appealed that order and
have only informally expressed our views in a letter to the Cable Services
Bureau. We cannot be sure that the FCC will agree with these views. In certain
circumstances, lack of candor can bear on the FCC's evaluation of a company's
fitness to be an FCC licensee. Since that time, Young has lost its NBC
affiliation, and we have reached an agreement with the new NBC affiliate in San
Jose to serve the San Francisco Bay area.
Many other provisions of SHVIA could adversely affect us. Among other
things, the law includes the imposition of "must carry" requirements on DBS
providers. The FCC has implemented that requirement and adopted detailed and
onerous "must carry" rules covering both commercial and non-commercial broadcast
stations. These rules require that commencing January 1, 2002 satellite
distributors carry all the local broadcast stations requesting carriage in a
timely and appropriate manner in areas they choose to offer any local
programming. Since we have limited capacity, the number of markets in which we
can offer local programming is reduced by the "must carry" requirement to carry
large numbers of stations in each market we serve. The legislation also includes
provisions which could expose us to material monetary penalties, and permanent
prohibitions on the sale of all local and distant network channels, based on
inadvertent violations of the legislation, prior law, or the FCC rules.
Imposition of these penalties would have a material adverse effect on our
business operations generally. Several "must carry" complaints by broadcasters
against us are pending at the FCC. We cannot be sure that the FCC will not rule
against us in those proceedings, resulting in carriage of many additional
stations in the markets where we offer local stations. In addition, we cannot be
sure that the FCC will not interpret or implement its rules in such a manner as
to inhibit our current plan for compliance with the "must carry" requirements.
The National Association of Broadcasters and Association of Local Television
Stations filed an emergency petition on January 4, 2002 asking the FCC to modify
or clarify its rules to prohibit or hamper our compliance plan. On January 8,
2002, the FCC placed the petition on public notice and stated that it may be
able to resolve the issue by means of a declaratory ruling without the need for
a rulemaking. Many companies have filed comments and reply comments in response
to the petition opposing our compliance plan on various grounds. Any FCC action
modifying or clarifying the rules in accordance with the broadcasters' request
could result in a decrease in the number of local areas where we offer local
network programming. We are also exposed to court actions and damage claims if
we are found by any court to have violated the "must carry" requirements.
On December 7, 2001, the U.S. 4th Circuit Court of Appeals rejected the
satellite industry's constitutional challenge to the "must carry" provisions of
SHVIA and our appeal of the FCC's "must carry" rules, leaving in place the
requirement that, beginning January 1, 2002, we carry all local stations in any
market where we carry a single local broadcast station. While we believe that we
technologically meet this mandate in the markets we currently serve, there can
be no assurance that the FCC's interpretation of its "must carry" rules will not
result in a future decrease in the number of local markets where we offer local
network programming. In addition, while the FCC has decided for now not to
impose dual digital/analog carriage obligations -- i.e., additional requirements
in connection with the carriage of digital television stations that go beyond
carriage of one signal (whether analog or digital) for each station - the FCC
has also issued a further notice of proposed rulemaking on this matter. We
cannot be sure that this rulemaking will not result in further, even more
onerous, digital carriage requirements.
24
Opposition to Our Delivery of Distant Signals. Until July 1998, we
obtained distant broadcast network channels (ABC, NBC, CBS and FOX) for
distribution to our customers through PrimeTime 24. In December 1998, the U.S.
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 December 1998, the networks filed a motion for preliminary
injunction directly against us. In September 2000, the District Court granted
this motion and made several amendments to it. The injunction required us to
terminate distant network programming to certain of our subscribers. The U.S.
Court of Appeals for the Eleventh Circuit stayed the injunction pending our
appeal. In September 2001, the U.S. Court of Appeals for the Eleventh Circuit
vacated the District Court's injunction, finding, among other things, that it
was too broad and remanded the case back to the District Court for an
evidentiary hearing. If after the trial or an evidentiary hearing the injunction
is reinstated, it could force us to terminate delivery of distant network
channels to a substantial portion of our distant network subscriber base, which
could also cause many of these subscribers to cancel their subscription to our
other services. Such terminations would result in a small reduction in our
reported average monthly revenue per subscriber and could result in a temporary
increase in churn. If we lose the case at trial, the judge could, among other
remedies, prohibit all future sales of distant network programming by us, which
would have a material adverse effect on our business. In order, among other
things, to plan for the potential re-implementation of the injunction, we may
terminate the delivery of distant network channels to certain subscribers.
Dependence on Cable Act for Program Access. We purchase a substantial
percentage of our programming from cable-affiliated programmers. Any change in
the Cable Act and the FCC's rules that permit the cable industry or
cable-affiliated programmers to discriminate against competing businesses, such
as ours, in the sale of programming could adversely affect our ability to
acquire programming at all or to acquire programming on a cost-effective basis.
Under the Cable Act and the FCC's rules, cable-affiliated programmers generally
must offer programming they have developed to all multi-channel video
programming distributors on non-discriminatory terms and conditions. The Cable
Act and the FCC's rules also prohibit some types of exclusive programming
contracts involving cable affiliated programming. This prohibition on
exclusivity will sunset in October 2002 unless the FCC acts to extend it. The
FCC has commenced a proceeding to determine whether to extend it. We cannot be
sure that the FCC will not allow the prohibition to sunset, which would mean
that many popular programs may become unavailable to us. While we have filed
several complaints with the FCC alleging discrimination, exclusivity, or
refusals to deal, we have only had limited success in convincing the FCC to
grant us relief. The FCC has denied or dismissed many of our complaints, and we
believe has generally not shown a willingness to enforce the program access
rules strictly. As a result, we may be limited in our ability to obtain access
(or non-discriminatory access) to cable-affiliated programming. In January 2001,
we appealed the FCC denial of our complaint regarding certain cable-affiliated
sports programming in the Philadelphia area to the U.S. Court of Appeals for the
District of Columbia Circuit. Our appeal was opposed by the FCC. Comcast
Corporation, which controls the programming at issue, intervened on the side of
the FCC opposing our appeal. Oral argument regarding our appeal was held on
February 5, 2002. We cannot predict the outcome of this appeal, or how the
outcome may affect our ability to obtain access to cable affiliated programming.
PATENTS AND TRADEMARKS
Many entities, including some of our competitors, have or may in the
future obtain patents and other intellectual property rights that cover or
affect products or services related to those that we offer. In general, if a
court determines that one or more of our products infringes on intellectual
property held by others, we may be required to cease developing or marketing
those products, to obtain licenses from the holders of the intellectual
property, or to redesign those products in such a way as to avoid infringing the
patent claims. If a competitor holds intellectual property rights, it may not
allow us to use its intellectual property at any price, which could adversely
affect our competitive position.
We cannot assure you that we are aware of all intellectual property
rights that our products may potentially infringe. In addition, patent
applications in the United States are confidential until the Patent and
Trademark Office issues a patent and, accordingly, we cannot evaluate the extent
to which our products may infringe claims contained in pending patent
applications. Further, it is often not possible to determine definitively
whether a claim of infringement is valid, absent protracted litigation.
25
We cannot estimate the extent to which we may be required in the future
to obtain intellectual property licenses or the availability and cost of any
such licenses. Those costs, and their impact on net income, could be material.
Damages in patent infringement cases may also include treble damages in certain
circumstances. To the extent that we are required to pay royalties to third
parties to whom we are not currently making payments, these increased costs of
doing business could negatively affect our liquidity and operating results. We
are currently being sued in patent infringement actions, including, among other,
suits by the following entities: Starsight Telecast, Inc.; Gemstar; Superguide
Corp.; IPPV Enterprises, LLC; and MAAST, Inc. We cannot be certain the courts
will conclude these entities do not own the rights they claim, that our products
do not infringe on these rights, that we would be able to obtain licenses from
these persons on commercially reasonable terms or, if we were unable to obtain
such licenses, that we would be able to redesign our products to avoid
infringement.
Certain Gemstar patents are currently being reviewed by the
International Trade Commission. An adverse decision 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. See "- Legal Proceedings."
EMPLOYEES
We had approximately 11,000 employees at December 31, 2001, most of
whom are located in the United States. We generally consider relations with our
employees to be good.
Although a total of approximately 75 employees in two of our field
offices have voted to unionize, we are not currently a party to any collective
bargaining agreements. However, we are currently negotiating collective
bargaining agreements at these offices.
26
EXECUTIVE OFFICERS OF THE REGISTRANT
(FURNISHED IN ACCORDANCE WITH ITEM 401 (b) OF REGULATION S-K, PURSUANT TO
GENERAL INSTRUCTION G(3) OF FORM 10-K)
The following table sets forth the name, age and offices with EchoStar
of each of our executive officers, the period during which each executive
officer has served as such, and each executive officer's business experience
during the past five years:
NAME AGE POSITION
---- --- --------
Charles W. Ergen.................. 48 Chairman, Chief Executive Officer and Director
Michael T. Dugan.................. 53 President and Chief Operating Officer
James DeFranco.................... 49 Executive Vice President and Director
Steven B. Schaver................. 47 President of EchoStar International Corporation
David K. Moskowitz................ 43 Senior Vice President, General Counsel, Secretary and
Director
Soraya Hesabi-Cartwright.......... 41 Executive Vice President of DISH Network
Mark W. Jackson................... 41 Senior Vice President of EchoStar Technologies Corporation
Michael R. McDonnell.............. 38 Senior Vice President and Chief Financial Officer
Michael Kelly..................... 40 Senior Vice President of DISH Network Service Corporation
Charles W. Ergen. Mr. Ergen has been Chairman of the Board of Directors and
Chief Executive Officer of EchoStar since its formation and, during the past
five years, has held various executive officer and director positions with
EchoStar's subsidiaries. Mr. Ergen, along with his spouse and James DeFranco,
was a co-founder of EchoStar in 1980.
Michael T. Dugan. Mr. Dugan is the President and Chief Operating Officer of
EchoStar. In that capacity, Mr. Dugan is responsible for, among other things,
all operations at EchoStar. Until April 2000, he was President of EchoStar
Technologies Corporation. Previously he was the Senior Vice President of the
Consumer Products Division of ECC. Mr. Dugan has been with EchoStar since 1990.
James DeFranco. Mr. DeFranco, currently the Executive Vice President of
EchoStar, has been a Vice President and a Director of EchoStar since its
formation and, during the past five years, has held various executive officer
positions with EchoStar's subsidiaries. Mr. DeFranco, along with Mr. Ergen and
Mr. Ergen's spouse, was a co-founder of EchoStar in 1980.
Steven B. Schaver. Mr. Schaver was named President of EchoStar International
Corporation in April 2000. Mr. Schaver also served as EchoStar's Chief Financial
Officer from February 1996 through August 2000, and served as EchoStar's Chief
Operating Officer from November 1996 until April 2000. From November 1993 to
February 1996, Mr. Schaver was the Vice President of EchoStar's European and
African operations.
David K. Moskowitz. Mr. Moskowitz is the Senior Vice President, Secretary
and General Counsel of EchoStar. Mr. Moskowitz joined EchoStar in March 1990. He
was elected to EchoStar's Board of Directors during 1998. Mr. Moskowitz is
responsible for all legal affairs and certain business functions for EchoStar
and its subsidiaries.
Soraya Hesabi-Cartwright. Ms. Hesabi-Cartwright was named Executive Vice
President of DISH Network in April 2000. Ms. Hesabi-Cartwright served as Senior
Vice President of Human Resources and Customer Service from November 1998 until
April 2000. Ms. Hesabi-Cartwright joined EchoStar in 1994 as Director of Human
Resources and was promoted to Vice President of Human Resources in 1996. During
1996, Ms. Hesabi-Cartwright transferred to EchoStar's Customer Service Center as
Vice President of Customer Service, where she served until her promotion in
1998.
27
Mark W. Jackson. Mr. Jackson was named Senior Vice President of EchoStar
Technologies Corporation in April 2000. Mr. Jackson served as Senior Vice
President of Satellite Services from December 1997 until April 2000. From April
1993 until December 1997 Mr. Jackson served as Vice President of Engineering at
EchoStar.
Michael R. McDonnell. Mr. McDonnell joined EchoStar in August 2000 as Senior
Vice President and Chief Financial Officer. Mr. McDonnell is responsible for all
accounting and finance functions of the Company. Prior to joining EchoStar, Mr.
McDonnell was a Partner with PricewaterhouseCoopers LLP, serving on engagements
for companies in the technology and information communications industries.
Michael Kelly. Mr. Kelly joined EchoStar in March 2000 as Senior Vice
President of International Programming upon consummation of EchoStar's
acquisition of Kelly Broadcasting Systems, Inc. From January 1991 until March
2000, Mr. Kelly served as President of Kelly Broadcasting Systems, Inc. where he
was responsible for all components of the business, including operations,
finance, and international and domestic business development.
There are no arrangements or understandings between any executive
officer and any other person pursuant to which any executive officer was
selected as such. Pursuant to the Bylaws of EchoStar, executive officers serve
at the discretion of the Board of Directors. Cantey Ergen, Charlie Ergen's
spouse, and Peter Dea were elected to the Board of Directors during 2001.
Jean-Marie Messier, Chairman and CEO of Vivendi, was added to the Board of
Directors in January 2002.
ITEM 2. PROPERTIES
The following table sets forth certain information concerning our
material properties:
SEGMENT(s) USING APPROXIMATE OWNED OR
DESCRIPTION/USE/LOCATION PROPERTY SQUARE FOOTAGE LEASED
------------------------ ---------------- -------------- --------
Corporate headquarters and customer service center,
Littleton, Colorado ..................................... All 156,000 Owned
EchoStar Technologies Corporation office and
distribution center, Englewood, Colorado ................ ETC 155,000 Owned
EchoStar Technologies Corporation engineering
offices, Englewood, Colorado ............................ ETC 57,200 Owned
Digital broadcast operations center, Cheyenne,
Wyoming ................................................. DISH Network 144,000 Owned
Digital broadcast operations center, Gilbert, Arizona ...... DISH Network 120,000 Owned
Customer service center, McKeesport, Pennsylvania .......... DISH Network 100,000 Leased
Customer service center, El Paso, Texas .................... DISH Network 100,000 Owned
Customer service center, Christiansburg, Virginia .......... DISH Network 100,000 Owned
Customer service center, Thornton, Colorado ................ DISH Network 55,000 Owned
Customer service center, Bluefield, West Virginia .......... DISH Network 51,000 Owned
Warehouse and distribution center, Atlanta, Georgia ........ ETC 160,000 Leased
Warehouse and distribution center, Denver, Colorado ........ ETC 132,800 Leased
Warehouse and distribution center, Sacramento,
California .............................................. ETC 78,500 Owned
European headquarters and warehouse, Almelo, The
Netherlands ............................................. ETC and Other 53,800 Owned
28
ITEM 3. LEGAL PROCEEDINGS
Fee Dispute
We had a contingent fee arrangement with the attorneys who represented
us in prior litigation with The News Corporation, Ltd. The contingent fee
arrangement provides for the attorneys to be paid a percentage of any net
recovery obtained by us in the News Corporation litigation. The attorneys
asserted that they might be entitled to receive payments totaling hundreds of
millions of dollars under this fee arrangement. We consistently maintained that
the demand significantly overstated the amount to which the attorneys might
reasonably be entitled.
During mid-1999, we initiated litigation against the attorneys in the
Arapahoe County, Colorado, District Court arguing that the fee arrangement was
void and unenforceable. In December 1999, the attorneys initiated an arbitration
proceeding before the American Arbitration Association. The litigation was
stayed while the arbitration proceeded. The arbitration hearing concluded on
October 11, 2001. During the four week arbitration hearing, the attorneys
presented a damage model for $56 million. We asserted even that amount
significantly overstated the amount to which the attorneys might reasonably be
entitled. During closing arguments, the attorneys presented a separate damage
calculation for $111 million to the arbitration panel.
On November 7, 2001, the arbitration panel awarded the attorneys
approximately $40 million for its contingency fee under the fee agreement. In
the award, the arbitration panel also dismissed our claims against the attorneys
that we had initiated in the Arapahoe County, Colorado, District Court. Pursuant
to the award, approximately $8 million was to be paid within 30 days of the
award with the balance to be paid in equal quarterly principal installments over
four years, commencing February 1, 2002. Interest is to be paid at the prime
rate (calculated as the average amount for each relevant year as published daily
in the Wall Street Journal), compounded annually.
On November 30, 2001, we filed a motion to vacate the award on the
following grounds: (1) the award as issued violates public policy and cannot be
enforced; and (2) the Panel exceeded its authority under Colorado Revised
Statutes Section 13-22-214(1)(a)(III). Alternatively, we requested that the
Arapahoe County District Court modify the award to correct a calculation error.
The attorneys have opposed our motion to vacate. The motion remains pending
before the District Court in Arapahoe County, Colorado. There can be no
assurance that we will succeed in our effort to vacate or modify the arbitration
award.
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, EDBS, ETC, and EchoStar Satellite Broadcasting
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.
29
The Court in the Alberta action recently 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. It is too early to make an
assessment of the probable outcome of the litigation or to determine the extent
of any potential liability or damages.
Broadcast network programming
Until July 1998, we obtained distant broadcast network channels (ABC,
NBC, CBS and FOX) for distribution to our customers through PrimeTime 24. In
December 1998, the United States District Court for the Southern District of
Florida entered a nationwide permanent injunction requiring PrimeTime 24 to shut
off distant network channels to many of its customers, and henceforth to sell
those channels to consumers in accordance with certain stipulations in the
injunction.
In October 1998, we filed a declaratory judgment action against ABC,
NBC, CBS and FOX in the U.S. District Court for the District of Colorado. We
asked the court to enter a judgment declaring that our 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 case remains pending in Miami. While the
networks have not sought monetary damages, they have sought to recover attorney
fees if they prevail.
In February 1999, the networks filed a "Motion for Temporary
Restraining Order, Preliminary Injunction and Contempt Finding" against DirecTV,
Inc. in Miami related to the delivery of distant network channels to DirecTV
customers by satellite. DirecTV settled this lawsuit with the networks. Under
the terms of the settlement between DirecTV and the networks, some DirecTV
customers were scheduled to lose access to their satellite-provided distant
network channels by July 31, 1999, while other DirecTV customers were to be
disconnected by December 31, 1999. Subsequently, PrimeTime 24 and substantially
all providers of satellite-delivered network programming other than EchoStar
agreed to this cut-off schedule, although we do not know if they adhered to this
schedule.
In December 1998, the networks filed a Motion for Preliminary
Injunction against us in the Miami court, and asked the court to enjoin us from
providing network programming except under limited circumstances. A preliminary
injunction hearing was held on September 21, 1999. 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 our 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 be
physically impossible to comply. The order imposes restrictions on our past and
future sale of distant ABC, NBC, CBS and Fox channels similar to those imposed
on PrimeTime 24 (and, we believe, on DirecTV and others). Some of those
restrictions go beyond the statutory requirements imposed by the SHVA and the
SHVIA. For these and other reasons we believe the Court's order is, among other
things, fundamentally flawed, unconstitutional and should be overturned.
However, it is very unusual for a Court of Appeals to overturn a lower court's
order and there can be no assurance whatsoever that it will be overturned.
On October 3, 2000, and again on October 25, 2000, the Court amended
its original preliminary injunction order in an effort to fix some of the errors
in the original order. The twice amended preliminary injunction order required
us to shut off, by February 15, 2001, all subscribers who are ineligible to
receive distant network
30
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's order indicated that the matter was to be
remanded to the District Court for an evidentiary hearing. On December 28, 2001,
the Eleventh Circuit denied our request for rehearing. The Eleventh Circuit
issued its mandate on January 29, 2002, remanding the case to the Florida
District Court. We cannot predict when an evidentiary hearing will be set before
the District Court or when a trial will be set before the District Court if the
Networks withdraw their request for a preliminary injunction as they have
indicated they will do when the case was remanded to the District Court.
We are considering an appeal to the United States Supreme Court. If we
decide to appeal, there is no guarantee that the United States Supreme Court
will agree to hear any petition filed or that our appeal will be heard before
any evidentiary hearing or trial in the District Court.
If, after an evidentiary hearing or 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 our distant network
subscriber base, which could also cause many of these subscribers to cancel
their subscription to our 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.
31
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
the 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.
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 United 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 March 21,
2002 and a ruling by the full ITC is expected 60 days later. 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 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 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 one of
the patents. We intend to vigorously defend this case and to press our patent
misuse defenses.
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.
32
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 claim 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. The parties have completed briefing and oral argument of post-trial
motions. We intend to appeal any adverse decision and plaintiffs have indicated
they may appeal as well. 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. 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. Our
response is due on March 7, 2002, and 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.
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. 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.
33
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.
PrimeTime 24 Joint Venture
PrimeTime 24 Joint Venture filed suit against us during September, 1998
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 approximate $10
million breach of contract claim for fees during the period from May 1998
through July 19, 1998. 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
34
insurance carriers offered us a total of approximately $88 million, or 40% of
the total policy amount, in settlement of the EchoStar IV insurance claim. The
insurers 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 our 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.
Additionally, we filed a lawsuit against the insurance carriers in the U.S.
District Court for the District of Colorado asserting causes of action for
violation of Federal and State antitrust laws. During March 2001, we voluntarily
dismissed our antitrust lawsuit without prejudice. We have the right to re-file
an antitrust action against the insurers in the future. 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.
In addition to the above actions, we are subject to various other legal
proceedings and claims which arise in the ordinary course of business. In the
opinion of management, the amount of ultimate liability with respect to those
actions will not materially affect our financial position or results of
operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On October 27, 2001, our Board of Directors unanimously determined that
the proposed merger of Hughes with us and the related transactions were
advisable, fair to and in the best interest of us and our stockholders. Our
Board of Directors unanimously approved the merger agreement and unanimously
recommended that our stockholders approve the merger agreement.
On October 28, 2001, the Samburu Warrior Revocable Trust, a family
trust controlled by Mr. Charles W. Ergen, executed a written consent approving
the merger agreement. The Samburu Warrior Revocable Trust was beneficial owner
of 238,435,208 shares of our class B common stock, par value of $0.01, which are
100% of the outstanding shares of our class B common stock and which represented
approximately 90.8% of the combined voting power of all of our outstanding
common stock as of October 28, 2001.
35
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our class A common stock is quoted on the Nasdaq Stock Market under the
symbol "DISH." The sale prices reflect inter-dealer quotations and do not
include retail markups, markdowns, or commissions. The high and low closing sale
prices of the class A common stock during 2000 and 2001 on the Nasdaq Stock
Market (as reported by Nasdaq) are set forth below. On March 22, 2000 we
completed a two-for-one split of our outstanding common stock. All references to
share and per share amounts included below retroactively give effect to the
stock split completed in March 2000.
2000 High Low
---- --------- ---------
First Quarter .................................. $ 79.000 $ 40.719
Second Quarter ................................. 74.188 31.188
Third Quarter .................................. 53.422 31.625
Fourth Quarter ................................. 54.125 22.750
2001
----
First Quarter .................................. $ 34.000 $ 21.813
Second Quarter ................................. 38.510 25.813
Third Quarter .................................. 30.440 20.470
Fourth Quarter ................................. 27.470 22.130
As of February 25, 2002, there were approximately 6,068 holders of
record of our class A common stock, not including stockholders who beneficially
own class A common stock held in nominee or street name. As of February 25,
2002, all 238,435,208 outstanding shares of our class B common stock were held
by Charles W. Ergen, our Chairman and Chief Executive Officer. There is
currently no trading market for our class B common stock.
We have never declared or paid any cash dividends on any class of our
common stock and do not expect to declare dividends on our common stock in the
foreseeable future. Payment of any future dividends will depend upon our
earnings and capital requirements, restrictions in our debt facilities, and
other factors the Board of Directors considers appropriate. We currently intend
to retain our earnings, if any, to support future growth and expansion. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources."
36
ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated financial data as of and for each of the five
years ended December 31, 2001 have been derived from, and are qualified by
reference to our Consolidated Financial Statements which have been audited by
Arthur Andersen LLP, independent public accountants. This data should be read in
conjunction with our Consolidated Financial Statements and related Notes thereto
for the three years ended December 31, 2001, and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" included elsewhere in
this report.
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------------
1997 1998 1999 2000 2001
----------- ----------- ----------- ----------- -----------
STATEMENTS OF OPERATIONS DATA (IN THOUSANDS, EXCEPT PER SHARE DATA)
REVENUE:
DISH Network .............................. $ 344,250 $ 683,032 $ 1,352,603 $ 2,352,237 $ 3,605,724
DTH equipment sales and integration
services .................................. 91,637 256,193 184,041 259,830 271,242
Other ..................................... 41,531 43,441 66,197 103,153 124,172
----------- ----------- ----------- ----------- -----------
Total revenue ............................... 477,418 982,666 1,602,841 2,715,220 4,001,138
COSTS AND EXPENSES:
DISH Network operating expenses ........... 193,274 395,411 732,675 1,265,445 1,757,750
Cost of sales - DTH equipment and
integration services .................... 61,992 173,388 148,427 194,963 188,039
Cost of sales - other ..................... 23,909 16,496 17,084 32,992 81,974
Marketing expenses ........................ 179,923 320,521 727,061 1,158,640 1,084,375
General and administrative ................ 69,315 97,105 150,397 250,425 377,873
Non-cash, stock-based compensation ........ -- -- 61,060 51,465 20,173
Depreciation and amortization ............. 173,276 102,636 113,228 185,356 278,652
----------- ----------- ----------- ----------- -----------
Total costs and expenses .................... 701,689 1,105,557 1,949,932 3,139,286 3,788,836
----------- ----------- ----------- ----------- -----------
Operating income (loss) ..................... (224,271) (122,891) (347,091) (424,066) 212,302
Extraordinary charge for early
retirement of debt, net of tax .......... -- -- (268,999) -- --
=========== =========== =========== =========== ===========
Net loss .................................... $ (312,825) $ (260,882) $ (792,847) $ (650,326) $ (215,498)
=========== =========== =========== =========== ===========
Net loss attributable to common shares ...... $ (321,267) $ (296,097) $ (800,100) $ (651,472) $ (215,835)
=========== =========== =========== =========== ===========
Weighted-average common shares outstanding .. 335,344 359,856 416,476 471,023 477,172
=========== =========== =========== =========== ===========
Basic and diluted loss per share(1) ......... $ (0.96) $ (0.82) $ (1.92) $ (1.38) $ (0.45)
=========== =========== =========== =========== ===========
AS OF DECEMBER 31,
-------------------------------------------------------------------------
1997 1998 1999 2000 2001
----------- ----------- ----------- ----------- -----------
(IN THOUSANDS)
BALANCE SHEETS DATA
Cash, cash equivalents and marketable investment
securities ........................................ $ 420,514 $ 324,100 $ 1,254,175 $ 1,464,175 $ 2,828,297
Cash reserved for satellite insurance ............... -- -- -- 82,393 122,068
Restricted cash and marketable investment
securities ........................................ 187,762 77,657 3,000 3,000 1,288
Total assets ........................................ 1,805,646 1,806,852 3,898,189 4,636,835 6,519,686
Long-term obligations (less current portion):
1994 Notes ........................................ 499,863 571,674 1,503 -- --
1996 Notes ........................................ 438,512 497,955 1,097 -- --
1997 Notes ........................................ 375,000 375,000 15 -- --
9 1/4% Seven Year Notes ........................... -- -- 375,000 375,000 375,000
9 3/8% Ten Year Notes ............................. -- -- 1,625,000 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
4 7/8% Convertible Notes .......................... -- -- 1,000,000 1,000,000 1,000,000
5 3/4% Convertible Notes .......................... -- -- -- -- 1,000,000
Mortgages and other notes payable, net of
current portion ................................... 51,846 43,450 27,990 14,812 6,480
Series B Preferred Stock ............................ 199,164 226,038 -- -- --
Total stockholders' equity (deficit) ................ (88,961) (371,540) (48,418) (657,383) (777,772)
37
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------
1997 1998 1999 2000 2001
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT SUBSCRIBERS AND PER SUBSCRIBER DATA)
OTHER DATA
DISH Network subscribers ........................... 1,040,000 1,940,000 3,410,000 5,260,000 6,830,000
Average monthly revenue per subscriber ............. $ 38.50 $ 39.25 $ 42.71 $ 45.33 $ 49.32
EBITDA(2) .......................................... (50,995) (20,255) (172,803) (187,245) 511,127
Less amortization of subscriber acquisition costs .. (121,735) (18,869) -- -- --
---------- ---------- ---------- ---------- ----------
EBITDA, as adjusted to exclude amortization of ..... (172,730) (39,124) (172,803) (187,245) 511,127
subscriber acquisition costs
Net cash flows from:
Operating activities ............................. 43 (16,890) (58,513) (118,677) 489,483
Investing activities ............................. (597,249) (8,048) (62,826) (911,957) (1,279,119)
Financing activities ............................. 703,182 (13,722) 920,091 982,153 1,610,707
----------
(1) The loss per share amount in 1999 of $(1.92) includes $(1.28) per share
relating to basic and diluted loss per share before extraordinary charges
and $(0.64) per share relating to the extraordinary charge for early
retirement of debt, net of tax.
(2) We believe it is common practice in the telecommunications industry for
investment bankers and others to use various multiples of current or
projected EBITDA (operating income (loss) plus depreciation and
amortization, and non-cash, stock-based compensation) for purposes of
estimating current or prospective enterprise value and as one of many
measures of operating performance. Conceptually, EBITDA measures the amount
of income generated each period that could be used to service debt, because
EBITDA is independent of the actual leverage employed by the business; but
EBITDA ignores funds needed for capital expenditures and expansion. Some
investment analysts track the relationship of EBITDA to total debt as one
measure of financial strength. However, EBITDA does not purport to represent
cash provided or used by operating activities and should not be considered
in isolation or as a substitute for measures of performance prepared in
accordance with generally accepted accounting principles.
EBITDA differs significantly from cash flows from operating activities
reflected in the consolidated statement of cash flows. Cash flows from
operating activities is net of interest and taxes paid and is a more
comprehensive determination of periodic income on a cash (vs. accrual)
basis, exclusive of non-cash items of income and expenses such as
depreciation and amortization. In contrast, EBITDA is derived from accrual
basis income and is not reduced for cash invested in working capital.
Consequently, EBITDA is not affected by the timing of receivable collections
or when accrued expenses are paid. We are not aware of any uniform standards
for determining EBITDA and believe presentations of EBITDA may not be
calculated consistently by different entities in the same or similar
businesses. EBITDA is shown before and after amortization of subscriber
acquisition costs, which were deferred through September 1997 and amortized
over one year. EBITDA for 1999, 2000 and 2001 also excludes approximately
$61 million, $51 million and $20 million in non-cash, stock-based
compensation expense resulting from significant post-grant appreciation of
stock options granted to employees, respectively. In addition, EBITDA does
not include the impact of amounts capitalized under our Digital Home Plan of
approximately $65.4 million and $338 million during 2000 and 2001,
respectively.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
We expect that consummation of the Hughes merger and related
transactions and consummation of the PanAmSat acquisition described in
"Business -- Recent Developments -- The Proposed Merger with Hughes" 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 that
transaction into account. The EchoStar information statement, which we expect to
file with the Securities and Exchange Commission in mid-March and distribute to
our common stockholders this summer, will include pro forma financial
information of the combined company as if the Hughes merger was consummated and
for us as if the PanAmSat acquisition was consummated, each in accordance with
the rules and regulations of the Securities and Exchange Commission. Please see
"Business -- Recent Developments -- The Proposed Merger with Hughes" for a
description of how you can obtain a copy of the EchoStar information statement
once we file it with the Securities and Exchange Commission.
RESULTS OF OPERATIONS
Year Ended December 31, 2001 Compared to the Year Ended December 31, 2000.
Revenue. Total revenue for the year ended December 31, 2001 was $4.001
billion, an increase of $1.286 billion compared to total revenue for the year
ended December 31, 2000 of $2.715 billion. The increase in total revenue was
primarily attributable to continued DISH Network subscriber growth and higher
average revenue per subscriber. Assuming a continued slow economy, we expect
that our revenues will increase 20% to 25% in 2002 as the number of DISH Network
subscribers increases.
DISH Network subscription television services revenue totaled $3.588
billion for the year ended December 31, 2001, an increase of $1.241 billion
compared to the same period in 2000. DISH Network subscription television
services revenue principally consists of revenue from basic, premium and
pay-per-view subscription television services. This increase was directly
attributable to continued DISH Network subscriber growth and higher average
revenue per subscriber. DISH Network added approximately 1.57 million net new
subscribers for the year ended December 31, 2001 compared to approximately 1.85
million net new subscriber additions during the same period in 2000. We believe
the reduction in net new subscribers for the year ended December 31, 2001
primarily resulted from the slowing economy, and increased churn. As of December
31, 2001, we had approximately 6.83 million DISH Network subscribers compared to
approximately 5.26 million at December 31, 2000, an increase of approximately
30%. DISH Network subscription television services
38
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 $49.32 during
the year ended December 31, 2001 and approximately $45.33 during the same period
in 2000. The increase in monthly average revenue per subscriber is primarily
attributable to $1.00 price increases in both May 2000 and February 2001, the
increased availability of local channels by satellite, the introduction of our
high-end America's Top 150 basic programming package during April 2000, together
with an increase in subscriber penetration in our higher priced Digital Home
Plans. This increase is also attributable to a change in marketing promotions
from 2000 to 2001. From August 2000 to January 31, 2001, we marketed a promotion
offering consumers free premium movie channels. Under this promotion, all new
subscribers who ordered certain qualifying programming packages and any or all
of our four premium movie packages between August 1, 2000 and January 31, 2001,
received those premium movie packages free for three months. This promotion had
a negative impact on monthly average revenue per subscriber during 2000 since no
premium movie package revenue was received from participating subscribers for
the term of each participating subscriber's free service. The increase from
discontinuing our free premium movie channel promotion was partially offset by
the introduction of our I Like 9 promotion, discussed below, during August 2001.
While there can be no assurance, we expect a modest increase in monthly average
revenue per subscriber during 2002.
Impacts from our litigation with the networks in Florida, new FCC rules
governing the delivery of superstations and other factors could cause us to
terminate delivery of distant network channels and superstations to a material
portion of our subscriber base, which could cause many of those customers to
cancel their subscription to our other services. Any such terminations could
result in a small reduction in average monthly revenue per subscriber and could
result in an increase in our percentage churn.
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.
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. While we believe we meet
statutory "must carry" requirements, the FCC could interpret or implement its
"must carry" rules in ways that may require us to reduce the number of markets
where we provide local service. 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 year ended December 31, 2001, DTH equipment sales and
integration services revenue totaled $271 million, an increase of $11 million
compared to the same period during 2000. DTH equipment sales consist of sales of
digital set-top boxes and other digital satellite broadcasting equipment to
international DTH service operators, sales of StarBand equipment and sales of
DBS accessories, including equipment upgrades. This increase in DTH equipment
sales and integration services revenue was primarily attributable to an increase
in sales of StarBand equipment and DBS accessories. This increase was partially
offset by a decrease in demand for digital set-top boxes from our two primary
international DTH customers.
A significant portion of DTH equipment sales and integration services
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 and
integration services 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 and integration
services 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.
39
DISH Network Operating Expenses. DISH Network operating expenses
totaled $1.758 billion during the year ended December 31, 2001, an increase of
$493 million or 39% compared to the same period in 2000. DISH Network operating
expenses represented 49% and 54% of subscription television services revenue
during the years ended December 31, 2001 and 2000, respectively. The increase in
DISH Network operating expenses in total was consistent with, and primarily
attributable to, the increase in the number of DISH Network subscribers. We
expect to continue to control costs and create operating efficiencies. While
there can be no assurance, we expect operating expenses as a percentage of
subscription television services revenue to remain near current levels during
2002. If we are successful in obtaining commercial launch and in-orbit
insurance, this expense to revenue ratio could increase.
Subscriber-related expenses totaled $1.433 billion during the year
ended December 31, 2001, an increase of $463 million compared to the same period
in 2000. 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% and 41% of subscription television services
revenues during the years ended December 31, 2001 and 2000, respectively. The
decrease in subscriber-related expenses as a percentage of subscription
television services revenue primarily resulted from our programming package
price increases during 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 $285 million during the year ended December 31, 2001, an
increase of $34 million as compared to the same period in 2000. The increase in
customer service center and other expenses primarily resulted from increased
personnel and telephone expenses to support the growth of the DISH Network and
from operating expenses related to the expansion of our installation and service
business. Customer service center and other expenses totaled 8% of subscription
television services revenue during the year ended December 31, 2001, as compared
to 11% during the same period in 2000. The decrease in this expense to revenue
ratio primarily resulted from the on-going construction and start-up costs of
our fifth customer service center in Virginia and our sixth customer service
center in West Virginia during 2000, as well as increased operating efficiencies
during 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 launch and in-orbit
insurance premiums. Satellite and transmission expenses totaled $40 million
during the year ended December 31, 2001, a $4 million decrease compared to the
same period in 2000. Satellite and transmission expenses totaled 1% and 2% of
subscription television services revenue during the year ended December 31, 2001
and 2000, respectively. We expect satellite and transmission expenses in total
and as a percentage of subscription television services revenue to increase in
the future as additional satellites or digital broadcast centers are placed in
service and to the extent we successfully obtain commercial launch and in-orbit
insurance.
Cost of sales - DTH equipment and Integration Services. Cost of sales -
DTH equipment and integration services totaled $188 million during the year
ended December 31, 2001, a decrease of $7 million compared to the same period in
2000. Cost of sales - DTH equipment and integration services principally
includes costs associated with digital set-top boxes and related components sold
to international DTH operators and DBS accessories. The decrease in cost of
sales - DTH equipment and integration services principally resulted from a
decrease in sales of digital set-top boxes to our two primary international DTH
customers. Cost of sales - DTH equipment and integration services represented
69% and 75% of DTH equipment revenue, during the year ended December 31, 2001
and 2000, respectively. The decrease in this expense to revenue ratio primarily
resulted from an increase in sales of higher-margin DBS accessories during 2001.
40
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 $1.084 billion during the year
ended December 31, 2001 compared to $1.159 billion for the same period in 2000.
This decrease primarily resulted from a decrease in Subscriber promotion
subsidies - cost of sales as a result of higher penetration of our Digital Home
Plan promotion, pursuant to which certain equipment costs are capitalized, as
discussed below. This decrease was partially offset by an increase in subscriber
promotion subsidies - other due to increases in installation subsidies for
multiple receivers under the Digital Home Plan promotion and an increase in
advertising expense related to our 2001 marketing promotions, primarily our I
Like 9 promotion. 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 costs related to our free installation promotion and other promotional
incentives. Advertising and other expenses totaled $147 million and $139 million
during the year ended December 31, 2001 and 2000, respectively.
During the year ended December 31, 2001, our marketing promotions
included our DISH Network One-Rate Plan, Bounty Programs, Free Now, I Like 9,
free installation program, and Digital Home Plan, which are described below.
DISH Network One-Rate Plan, Bounty Programs, Free Now Promotion and I
Like 9. Under the DISH Network One-Rate Plan, consumers were eligible to receive
a rebate of up to $199 on the purchase of certain EchoStar receiver systems. To
be eligible for this rebate, we required a one-year commitment to our America's
Top 150 programming or our America's Top 100 CD programming package plus one
premium movie package (or equivalent additional programming). This promotion
expired on January 31, 2001.
Under the Bounty Programs, qualified customers were eligible to receive
a free base-level EchoStar receiver system and free installation. To be eligible
for this program, a subscriber must have made a one-year commitment to subscribe
to a qualified programming package. Certain of these promotions expired on
January 31, 2001.
From February through July 2001, we offered new subscribers a free
base-level EchoStar receiver system and free installation under our Free Now
promotion. To be eligible, a subscriber had to provide a valid major credit card
and make a one-year commitment to subscribe to either our America's Top 150
programming package or our America's Top 100 CD or DISH Latino Dos programming
package plus additional programming totaling at least $39.98 per month.
Subscriber acquisition costs were materially higher under this plan compared to
historical promotions.
During August 2001, we commenced our I Like 9 promotion. Under this
promotion, subscribers who purchased an EchoStar receiver system for $199 or
higher, receive 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 direct sales to consumers pursuant to our DISH Network One-Rate
Plan, Bounty Programs, Free Now promotion and I Like 9 fall under the scope of
EITF Issue No. 00-14, "Accounting for Certain Sales Incentives" ("EITF 00-14").
In accordance with EITF 00-14, we account for the rebate (substantively
equivalent to the return of a customer deposit) under our DISH Network One-Rate
Plan by establishing a liability equal to the amount of the rebate to be paid to
the customer upon receipt of the upfront payment from the subscriber and do not
recognize revenue for that amount. The return of the upfront payment received
from the customer is charged against such liability account when such amount is
paid back to the customer. We do not receive any up-front proceeds from
subscribers under Bounty Programs or the Free Now promotion. Programming revenue
under the I Like 9 promotion is recorded at the substantially discounted monthly
rate charged to the subscriber.
Our dealer sales under our DISH Network One-Rate Plan, the Bounty
Programs, Free Now promotion and I Like 9 fall under the scope of EITF Issue No.
00-25, "Vendor Income Statement Characterization of Consideration Paid to a
Reseller of the Vendor's Products" ("EITF 00-25"). In accordance with the
consensus guidance for Issue 2 of EITF 00-25, "buydowns" should be characterized
as a reduction of revenue. As such, certain commissions paid to dealers are
recorded as a reduction of the net proceeds received by us from the dealers.
also charge the equipment reimbursements paid under the Bounty Programs and the
Free Now promotion against the proceeds from the dealer.
41
The rebate paid under the One Rate Plan is treated similarly as a reduction of
proceeds from the dealer by analogy to lease inducements, which are also
generally recognized as a reduction of revenue.
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 100 CD or DISH Latino Dos
programming package for $36.99 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 December 31, 2001, included the first month's programming payment.
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 April 30,
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 year ended
December 31, 2001, our subscriber acquisition costs totaled approximately $1.074
billion, or approximately $395 per new subscriber activation. Since we retain
ownership of the equipment, amounts capitalized under our Digital Home Plan are
not included in our calculation of these subscriber acquisition costs, which
would be materially higher if we expensed rather than capitalized Digital Home
Plan equipment costs. Comparatively, our subscriber acquisition costs during the
year ended December 31, 2000 totaled $1.155 billion, or approximately $452 per
new subscriber activation. The decrease in our per new subscriber acquisition
cost primarily resulted from an increase in penetration of our Digital Home
Plans, the introduction of our I Like 9 promotion and an increase in direct
sales. Capital expenditures under our Digital Home Plan promotion totaled
approximately $338 million and $65.4 million for the years ended December 31,
2001 and 2000, respectively. While there can be no assurance, we expect per
subscriber acquisition costs for the year ended December 31, 2002 to be
consistent with per subscriber acquisition costs for the year ended December 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 $378 million during the year ended December 31, 2001, an
increase of $128 million as compared to the same period in 2000. The increase in
G&A expenses was principally attributable to increased legal fees and personnel
expenses to support the growth of the DISH Network. G&A expenses represented 9%
of total revenue during the years ended December 31, 2001 and 2000. 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
years ended December 31, 2001 and 2000 we recognized $20 million and $51
million, respectively, under this performance-based plan. The remaining deferred
compensation of $25 million, which will be reduced by future forfeitures, if
any, will be recognized over the remaining vesting period.
42
We report all non-cash compensation based on stock option appreciation
as a single expense category in our accompanying statements of operations. The
following table represents the other expense categories in our statements of
operations that would be affected if non-cash, stock-based compensation was
allocated to the same expense categories as the base compensation for key
employees who participate in the 1999 incentive plan:
DECEMBER 31,
2000 2001
------- -------
(in thousands)
Customer service center and other .................. $ 1,744 $ 1,767
Satellite and transmission ......................... 3,061 1,115
General and administrative ......................... 46,660 17,291
------- -------
Total non-cash, stock-based compensation ........ $51,465 $20,173
======= =======
Options to purchase an additional 9.7 million shares are outstanding as
of December 31, 2001 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 $9.04. 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 these goals cannot
be reasonably predicted as of December 31, 2001, no compensation was recorded
during 1999, 2000 and 2001 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 $1.596 billion during the year ended December 31, 2001, an increase of $625
million or 64% compared to the same period in 2000. Pre-marketing cash flow in
2001 was adversely effected by a $30 million fourth quarter charge resulting
from our News Corp. attorney fee arbitration. Our pre-marketing cash flow as a
percentage of total revenue was approximately 40% during the year ended December
31, 2001 compared to 36% during the same period in 2000. We believe that
pre-marketing cash flow can be a helpful measure of operating efficiency for
companies in the DBS industry. While there can be no assurance, we expect
pre-marketing cash flow as a percentage of total revenue to remain at
approximately 40% during 2002.
Earnings Before Interest, Taxes, Depreciation and Amortization. EBITDA
is defined as operating income (loss) plus depreciation and amortization, and
non-cash, stock-based compensation. EBITDA was $511 million during the year
ended December 31, 2001, compared to negative $187 million during the same
period in 2000. This improvement in EBITDA was directly attributable to the
increase in the number of DISH Network subscribers and higher average revenue
per subscriber, resulting in recurring revenue which was large enough to support
the cost of new and existing subscribers, together with the introduction of our
Digital Home Plan in July 2000. Our calculation of EBITDA for the years ended
December 31, 2001 and 2000 does not include approximately $20 million and $51
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 $65.4 million and $338 million during 2000 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. See "Selected Financial Data - Note 2."
Depreciation and Amortization. Depreciation and amortization expenses
aggregated $279 million during the year ended December 31, 2001, a $94 million
increase compared to the same period in 2000. The increase in depreciation and
amortization expenses principally resulted from an increase in depreciation
related to the commencement of operation of EchoStar VI in October 2000 and
other depreciable assets, including Digital Home Plan equipment, placed in
service during late 2000 and 2001.
43
Other Income and Expense. Other expense, net, totaled $426 million
during the year ended December 31, 2001, an increase of $200 million compared to
the same period in 2000. This increase primarily resulted from an increase in
interest expense as a result of the issuance of our 10 3/8% Senior Notes in
September 2000 and the issuance of our 5 3/4% Convertible Subordinated Notes in
May 2001 and from net losses on marketable and non-marketable investment
securities of approximately $110 million. This increase in interest expense was
partially offset by an increase in interest income and capitalized interest
during 2001.
Year Ended December 31, 2000 Compared to the Year Ended December 31, 1999.
Revenue. Total revenue for the year ended December 31, 2000 was $2.715
billion, an increase of $1.112 billion compared to total revenue for the year
ended December 31, 1999 of $1.603 billion. The increase in total revenue was
primarily attributable to DISH Network subscriber growth.
DISH Network subscription television services revenue totaled $2.347
billion for the year ended December 31, 2000, an increase of $1.003 billion
compared to the same period in 1999. This increase was directly attributable to
the increase in the number of DISH Network subscribers and higher average
revenue per subscriber. DISH Network added approximately 1.85 million net new
subscribers for the year ended December 31, 2000, an increase of approximately
26% compared to approximately 1.47 million net subscriber additions during 1999.
As of December 31, 2000, we had approximately 5.26 million DISH Network
subscribers compared to approximately 3.4 million at December 31, 1999, an
increase of 54%. Monthly average revenue per subscriber was approximately $45.33
during the year ended December 31, 2000 and approximately $42.71 during the same
period in 1999. The increase in monthly average revenue per subscriber is
primarily attributable to a $1.00 price increase in America's Top 100 CD, our
most popular programming package, during May 2000, the increased availability of
local channels by satellite together with the earlier successful introduction of
our America's Top 150 programming package.
For the year ended December 31, 2000, DTH equipment sales and
integration services totaled $260 million, an increase of $76 million compared
to the same period during 1999. DTH equipment sales consist of sales of digital
set-top boxes and other digital satellite broadcasting equipment to
international DTH service operators and sales of DBS accessories. This increase
in DTH equipment sales and integration services revenue was primarily
attributable to an increase in international demand for digital set-top boxes as
compared to the same period during 1999.
DISH Network Operating Expenses. DISH Network operating expenses
totaled $1.265 billion during the year ended December 31, 2000, an increase of
$532 million or 73% compared to the same period in 1999. DISH Network operating
expenses represented 54% and 55% of subscription television services revenue
during the years ended December 31, 2000 and 1999, respectively. The increase in
DISH Network operating expenses in total was consistent with, and primarily
attributable to, the increase in the number of DISH Network subscribers.
Subscriber-related expenses totaled $970 million during the year ended
December 31, 2000, an increase of $395 million compared to the same period in
1999. Such expenses represented 41% and 43% of subscription television services
revenues during the years ended December 31, 2000 and 1999, respectively.
Customer service center and other expenses totaled $251 million during
the year ended December 31, 2000, an increase of $134 million as compared to the
same period in 1999. The increase in customer service center and other expenses
primarily resulted from increased personnel and telephone expenses to support
the growth of the DISH Network and from operating expenses related to the
expansion of our installation and service business. Customer service center and
other expenses totaled 11% of subscription television services revenue during
the year ended December 31, 2000, as compared to 9% during the same period in
1999. The increase in this expense to revenue ratio primarily resulted from the
on-going construction and start-up costs of our fifth customer service center in
Virginia, our sixth customer service center in West Virginia, and the continued
build-out of our installation offices nationwide.
Satellite and transmission expenses include expenses associated with
the operation of our digital broadcast center, contracted satellite telemetry,
tracking and control services, and satellite in-orbit insurance. Satellite and
transmission expenses totaled $44 million during the year ended December 31,
2000, a $3 million increase compared to the same period in 1999. This increase
resulted from higher satellite and other digital broadcast center operating
expenses due to an increase in the number of operational satellites. Satellite
and transmission expenses totaled 2% and 3% of subscription television services
revenue during the years ended December 31, 2000 and 1999, respectively.
44
Cost of sales - DTH equipment and Integration Services. Cost of sales -
DTH equipment and integration services totaled $195 million during the year
ended December 31, 2000, an increase of $47 million compared to the same period
in 1999. This increase in cost of sales - DTH equipment and integration services
is consistent with the increase in DTH equipment sales and integration services
revenue. Cost of sales - DTH equipment and integration services represented 75%
and 81% of DTH equipment revenue, during the years ended December 31, 2000 and
1999, respectively. The higher margin was principally attributable to a $16.6
million loss provision recorded during 1999 primarily for component parts and
purchase commitments related to our first generation model 7100 set-top boxes,
for which production was suspended in favor of our second generation model 7200
set-top boxes.
Marketing Expenses. Marketing expenses totaled $1.159 billion during
the year ended December 31, 2000, an increase of $432 million compared to the
same period in 1999. The increase in marketing expenses was primarily
attributable to an increase in subscriber promotion subsidies. Subscriber
promotion subsidies - 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 costs related to
our free installation promotion and other promotional incentives. Advertising
and other expenses totaled $139 million and $65 million during the years ended
December 31, 2000 and 1999, respectively.
General and Administrative Expenses. General and administrative
expenses totaled $250 million during the year ended December 31, 2000, an
increase of $100 million as compared to the same period in 1999. The increase in
G&A expenses was principally attributable to increased personnel expenses to
support the growth of the DISH Network. G&A expenses represented 9% of total
revenue during the years ended December 31, 2000 and 1999.
Non-cash, Stock-based Compensation. As a result of substantial
post-grant appreciation of stock options, during the years ended December 31,
2000 and 1999 we recognized $51 million and $61 million, respectively, of the
total remaining deferred stock-based compensation under the 1999 incentive plan.
The remainder will be recognized over the remaining vesting period.
We report all non-cash compensation based on stock option appreciation
as a single expense category in our accompanying statements of operations. The
following table represents the other expense categories in our statements of
operations that would be affected if non-cash, stock-based compensation was
allocated to the same expense categories as the base compensation for key
employees who participate in the 1999 incentive plan:
DECEMBER 31,
1999 2000
------- -------
(in thousands)
Customer service center and other .................. $ 4,328 $ 1,744
Satellite and transmission ......................... 2,308 3,061
General and administrative ......................... 54,424 46,660
------- -------
Total non-cash, stock-based compensation ........ $61,060 $51,465
======= =======
Pre-Marketing Cash Flow. Pre-marketing cash flow is comprised of EBITDA
plus total marketing expenses. Pre-marketing cash flow was $971 million during
the year ended December 31, 2000, an increase of 75% compared to the same period
in 1999. Our pre-marketing cash flow as a percentage of total revenue was 36% in
2000 compared to 35% in 1999. We believe that pre-marketing cash flow can be a
useful measure of operating efficiency for companies in the DBS industry.
Earnings Before Interest, Taxes, Depreciation and Amortization. EBITDA
is defined as operating income (loss) plus depreciation and amortization, and
non-cash, stock-based compensation. EBITDA was negative $187 million during the
year ended December 31, 2000 compared to negative $173 million during the same
period in 1999. This decline in EBITDA principally resulted from an increase in
DISH Network marketing expenses primarily resulting from increased subscriber
additions. Our calculation of EBITDA for the years ended December 31, 2000 and
1999 does not include approximately $51 million and $61 million, respectively,
of non-cash compensation expense resulting from post-grant appreciation of
employee stock options. In addition, EBITDA does not include the impact of
amounts capitalized under our Digital Home Plan of approximately $65.4 million
during 2000.
45
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. See "Selected Financial Data - Note 2."
Depreciation and Amortization. Depreciation and amortization expenses
aggregated $185 million during the year ended December 31, 2000, a $72 million
increase compared to the same period in 1999. The increase in depreciation and
amortization expenses principally resulted from an increase in depreciation
related to the commencement of operation of EchoStar V in November 1999 and
EchoStar VI in October 2000 and other depreciable assets placed in service
during 2000 and late 1999.
Other Income and Expense. Other expense, net, totaled $226 million
during the year ended December 31, 2000, an increase of $49 million compared to
the same period in 1999. This increase resulted from our equity in the loss of
affiliates, as well as an increase in interest expense as a result of the
issuance of our 10 3/8% Senior Notes due 2007 in September 2000. This increase
in interest expense was partially offset by an increase in interest income.
LIQUIDITY AND CAPITAL RESOURCES
Cash Sources
Since inception, we have financed the development of our EchoStar DBS
system, and the related commercial introduction of the DISH Network service,
primarily through the sale of equity and debt securities and cash from
operations. From May 1994 through December 31, 2001, we have raised total gross
cash proceeds of approximately $249 million from the sale of our equity
securities and as of December 31, 2001, we had approximately $5.7 billion of
outstanding long-term debt (including current portion).
As of December 31, 2001, our cash, cash equivalents and marketable
investment securities totaled $2.952 billion, including $122 million of cash
reserved for satellite insurance and approximately $1 million of restricted
cash, compared to $1.550 billion, including $82 million of cash reserved for
satellite insurance and $3 million of restricted cash, as of December 31, 2000.
For the year ended December 31, 2001 and 2000, we reported net cash flows from
operating activities of $489 million and negative $119 million, respectively.
The $608 million increase in net cash flow from operating activities reflects,
among other things, an increase in the number of DISH Network subscribers,
increased penetration of our Digital Home Plan promotions, changes in working
capital and higher average revenue per subscriber, resulting in recurring
revenue which is large enough to support the cost of new and existing
subscribers, though not yet adequate to 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.
46
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.
As of December 31, 2001, we recorded unrealized gains of approximately
$4 million as a separate component of stockholders' deficit. During the year
ended December 31, 2001, 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 $70 million, and established a
new cost basis for these securities This amount does not include realized gains
of approximately $22 million on the sales of marketable investment securities.
If the fair market value of our marketable securities portfolio does not remain
at or above 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. Certain of the companies in which we have investments
cancelled their planned initial public offerings and have minimal cash on hand.
The ability of certain of these entities 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, during the twelve months ended December 31,
2001, we have recorded cumulative charges to earnings of approximately $62
million to reduce the carrying values of certain of our non-marketable
investment securities to their estimated fair values. If we become aware of any
factors that indicate that the carrying value of certain of our non-marketable
investment securities is impaired, we may be required to record an additional
charge to earnings in future periods.
Deferred Tax Assets
Net deferred tax assets of approximately $69 million and $67 million as
of December 31, 2001 and 2000, respectively, have remained substantially
unchanged on our balance sheet since 1996. Additional deferred tax assets of
approximately $844 million generated since 1996 have been substantially offset
by adjustments to our valuation allowance. We expect to generate taxable income
in the future, but the timing and amount of that taxable income is uncertain and
we do not believe the criteria for recognition of additional tax benefits are
presently satisfied. We need to generate future taxable income of approximately
$190 million to realize the benefit of the net deferred tax assets recognized
and we continue to believe it is more likely than not that the assets we have
recorded will be realized. We expect to adjust the valuation allowance in the
future when the timing and amount of additional future taxable income becomes
more certain. If it is determined at some point in the future that any or all of
previously reserved deferred tax assets are more likely than not realizable,
significant deferred income tax benefits will need to be recorded and such
benefits may be material.
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Internal Revenue Service Proposed Adjustment
During 2001, the Internal Revenue Service conducted an audit of our
consolidated federal income tax returns for the years 1997, 1998, and 1999. As a
result of this review, the IRS' position is that certain subscriber acquisition
costs deducted by us in those years should instead be capitalized and amortized
over a period of five years. We do not agree with this proposed adjustment and
have initiated an appeal of the agent's position. At this time, the ultimate
resolution of this dispute is uncertain. If our arguments for deductibility are
unsuccessful and we are required to capitalize and amortize these costs over
five years, the federal net operating losses ("NOLs") available to us at
December 31, 2001 could be reduced by as much as $1.7 billion. Such an outcome
would not materially alter our ultimate tax obligations but could significantly
accelerate the timing of when we would be required to begin making material
current income tax payments. We would also incur a cumulative alternative
minimum tax liability for the years 1998, 2000, and 2001 totaling approximately
$7 million. Any reduction in NOLs and the resulting alternative minimum tax
liability would be offset by corresponding deferred tax assets related to the
unamortized capitalized cost and the future credit for the alternative minimum
taxes paid which may be carried forward indefinitely. We intend to vigorously
defend our position that we will be able to continue our current policy of
deducting subscriber acquisition costs as incurred for tax purposes. However, as
of December 31, 2001, the outcome is uncertain.
Subscriber Turnover
Our percentage churn for the year ended December 31, 2001 increased
compared to the same period during 2000. We believe that the increase resulted
from the slowing economy, significant piracy of our competitor's products,
stronger competition from digital cable and cable modems, bounty programs
offered by competitors, our maturing subscriber base, and other factors. 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,
new FCC rules governing the delivery of superstations and other factors could
cause us to terminate delivery of distant network channels and superstations to
a material portion of our subscriber base, which could cause many of those
customers to cancel their subscription to our other services. Any such
terminations could result in a small reduction in average monthly revenue per
subscriber and could result in an increase in our percentage churn.
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.
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. While we currently believe we
meet statutory "must carry" requirements, the FCC could interpret or implement
its "must carry" rules in ways that may require us to decrease the number of
markets where we provide local channels. 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 $395
per new subscriber activation during the year ended December 31, 2001. Since we
retain ownership of the equipment, amounts capitalized under our Digital Home
Plan, totaling approximately $338 million in 2001, are not included in our
calculation of these subscriber acquisition costs, which would be materially
higher if we expensed rather than capitalized Digital Home Plan equipment costs.
While there can be no assurance, we currently expect our per subscriber
acquisition costs for the year ended December 31, 2002 to be consistent with per
subscriber acquisition costs for the year ended December 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.
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Funds necessary to meet subscriber acquisition costs will be satisfied
from existing cash and investment balances to the extent available. We may,
however, be required to raise additional capital in the future to meet these
requirements. If we were required to raise capital today, a variety of debt and
equity funding sources would likely be available to us. However, there can be no
assurance that additional financing will be available on acceptable terms, or at
all, if needed in the future.
Digital Home Plan
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 100 CD or DISH Latino Dos programming package for
$36.99 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 December 31,
2001, included the first months programming payment. 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. Our Digital
Home Plan promotion requires us to capitalize and depreciate over four years
equipment costs that would otherwise be expensed at the time of sale, but also
results in increased capital expenditures. Capital expenditures under our
Digital Home Plan promotion totaled approximately $338 million and $65.4 million
for the years ended December 31, 2001 and 2000, respectively.
Conditional Access System
The access control system is central to the security network that
prevents unauthorized viewing of programming. Theft of cable and satellite
programming has been widely reported and our signal encryption has been pirated
and could be further compromised in the future. Theft of our programming reduces
future potential revenue and increases our net subscriber acquisition costs. If
other measures are not successful, it could be necessary to replace the credit
card size smart card that controls the security of each consumer set top box at
a material cost to us. In order to combat piracy and to generate additional
future revenue opportunities, we may decide to replace smart cards at any time
in the future. The cost of replacing these smart cards will not have a material
adverse effect on our results of operations.
Intellectual Property
Many entities, including some of our competitors, now have and may in
the future obtain patents and other intellectual property rights that cover or
affect products or services directly or indirectly related to those that we
offer. In general, if a court determines that one or more of our products
infringes on intellectual property held by others, we would be required to cease
developing or marketing those products, to obtain licenses to develop and market
those products from the holders of the intellectual property, or to redesign
those products in such a way as to avoid infringing the patent claims. Material
damage awards, including the potential for triple damages under patent laws,
could also result. Various parties have asserted patent and other intellectual
property rights with respect to components within our direct broadcast satellite
system. Certain of these parties have filed suit against us, including Gemstar,
Starsight and Superguide, as previously described. We cannot be certain that
these persons do not own the rights they claim, that our products do not
infringe on these rights, that we would be able to obtain licenses from these
persons on commercially reasonable terms or, if we were unable to obtain such
licenses, that we would be able to redesign our products to avoid infringement.
Certain Gemstar patents are currently being reviewed by the
International Trade Commission. An adverse decision 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.
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Merger Obligations
Consummation of the Hughes merger and related transactions will require at least
$7.025 billion of cash. At the time of signing of the merger agreement, we had
approximately $1.5 billion of available cash on hand, and obtained $5.525
billion in bridge financing commitments for the Hughes merger and related
transactions. These commitments have been reduced to $3.325 billion as a result
of the sale of $700 million of 9 1/8% senior notes by EDBS and $1.5 billion of
our series D preferred stock to Vivendi. Any other financings we complete prior
to closing of the Hughes merger will generally further reduce the bridge
financing commitments dollar-for-dollar. The remaining approximately $3.325
billion of required cash, is expected to come from new cash raised by us, Hughes
or a subsidiary of Hughes on or prior to the closing of the merger through
public or private debt or equity offerings, bank debt or a combination thereof.
The amount of such cash that could be raised by us prior to completion of the
Hughes merger is severely restricted. Our agreements with GM and Hughes prohibit
us from raising any additional equity capital beyond the $1.5 billion Vivendi
investment. The prohibition will likely continue for two years following
completion of the Hughes merger, absent possible favorable IRS rulings or
termination of the Hughes merger. Further, our agreements with GM and Hughes
place substantial restrictions on our ability to raise additional debt prior to
the closing of the Hughes merger.
The Hughes merger agreement requires that we use commercially
reasonable efforts to: 1) amend the indentures relating to certain of our debt
instruments so that the Hughes merger and related transactions would not
constitute a change of control requiring us to make an offer to repurchase those
notes, 2) obtain additional committed financing, on terms reasonably
satisfactory to Hughes, sufficient to refinance the notes outstanding under the
indentures which we are unable to amend, or 3) present to Hughes a plan, taking
into account prevailing market conditions for the relevant notes, designed so
that at and after the effective time of the Hughes merger, the surviving
corporation and its subsidiaries would not be in breach of their obligations
under those indentures. These consent fees could be material, and our financing
costs may increase significantly as a result of obtaining these consents or
refinancing these notes.
In consideration for the bridge financing commitments discussed above,
we are obligated to the lenders for the following non-refundable fees whether or
not the Hughes merger or PanAmSat acquisition are ever consummated:
o Commitment Fees of 1% of the aggregate bridge financing
commitments were paid by us to the lenders upon execution of the
agreements relating to the Commitments. These fees, totaling
approximately $55 million, were deferred and are being charged to
interest expense as the bridge commitments are reduced.
Approximately $7.4 million of deferred commitment fees were
expensed upon issuance of the 9 1/8% Seven Year Notes by EDBS
during December 2001. 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 commitment fees not
previously expensed will be charged to interest expense in future
periods.
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o Ticking fees of .50% per year on the aggregate remaining bridge
financing commitments are payable quarterly, in arrears, until the
closing of either the Hughes merger or the PanAmSat acquisition,
or the termination or expiration of the agreements relating to the
bridge commitments. These ticking fees will be expensed as
incurred. As of December 31, 2001, we had expensed approximately
$4.9 million in ticking fees.
Vivendi Equity Investment
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. 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 any downward price movements in our 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 falls below $26.04 per share
on the date specified below, or $525 million if the Hughes merger is not
completed and the price of our class A common stock falls below $26.04 per share
on the 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 will be recorded as of the
date of consummation of the investment and will be periodically adjusted to the
current settlement amount of the contingent value rights, based on the current
price of the class A common stock, through a charge to retained earnings. Future
non-cash charges or credits to retained earnings related to adjustments to the
contingent value rights will impact our 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 our 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 issued with a beneficial conversion feature.
This feature requires 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
preferred stock. This discount of $0.54 per share will be charged to retained
earnings as of the date of issuance of the series D preferred stock. Future
non-cash charges to retained earnings related to the amortization of the series
D preferred stock discount will have a negative impact on our net income (loss)
available to common shareholders.
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The issuance costs related to the series D preferred stock will be
recorded as a reduction of the carrying value of the series D preferred stock
and corresponding contingent value rights and will be immediately charged to
retained earnings upon issuance of the series D preferred common stock, which
will have a negative impact on our net income (loss) available to common
shareholders.
Obligations and Future Capital Requirements
We have semi-annual cash debt service obligations for all of our
outstanding long-term debt securities, as follows:
SEMI-ANNUAL PAYMENT SEMI-ANNUAL DEBT
DATES SERVICE REQUIREMENTS
----------------------- --------------------
9 1/4% Senior Notes due 2006 ........................ February 1 and August 1 $17,343,750
9 3/8% Senior Notes due 2009 ........................ February 1 and August 1 76,171,875
10 3/8% Senior Notes due 2007 ........................ April 1 and October 1 51,875,000
9 1/8% Senior Notes due 2009 ........................ January 15 and July 15 31,937,500
4 7/8% Convertible Subordinated Notes due 2007 ..... January 1 and July 1 24,375,000
5 3/4% Convertible Subordinated Notes due 2008 ..... May 15 and November 15 28,750,000
Semi-annual debt service requirements related to our 5 3/4% Convertible
Subordinated Notes due 2008 commenced on November 15, 2001. Semi-annual debt
service requirements related to our 9 1/8% Senior Notes due 2009 will commence
on July 15, 2002. There are no scheduled principal payment or sinking fund
requirements prior to maturity of any of these notes.
Future maturities of our outstanding long-term debt and operating lease
obligations are summarized as follows (in thousands):
DECEMBER 31,
--------------------------------------------------------------------------------------------------
2002 2003 2004 2005 2006 THEREAFTER TOTAL
-------- -------- -------- -------- ---------- ------------ ------------
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 .................. 14,782 1,992 723 753 798 2,214 21,262
Operating leases ............ 11,918 11,486 9,551 5,262 1,623 3,444 43,284
-------- -------- -------- -------- ---------- ------------ ------------
Total ....................... $ 26,700 $ 13,478 $ 10,274 $ 6,015 $ 377,421 $ 5,330,658 $ 5,764,546
======== ======== ======== ======== ========== ============ ============
In the event of a change of control, as defined in each of the
indentures related to our long-term debt, we will be required to make an offer
to repurchase all or any part of each of the outstanding notes at a purchase
price equal to 101% of the aggregate principal amount thereof, together with
accrued and unpaid interest thereon, to the date of repurchase.
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 senior notes requires us to maintain satellite
insurance on the lesser of half of our satellites or three of our satellites.
EchoStar I through EchoStar IX are owned by a direct subsidiary of EBC.
Insurance coverage is therefore required for at least three of our seven
satellites currently in orbit. The launch and/or in-orbit insurance policies for
EchoStar I, EchoStar II, EchoStar III, EchoStar V, EchoStar VI and 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 three of our satellites from cash and cash equivalents to cash reserved
for satellite insurance on our balance sheet. As of December 31, 2001, cash
reserved for satellite insurance totaled approximately $122 million. The
reclassifications will continue until such time, if ever, as we can again insure
our satellites on acceptable terms and for acceptable amounts. If we lease or
transfer ownership of EchoStar VII, EchoStar VIII or EchoStar IX to EDBS, which
we are currently considering, we would need to
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reserve additional cash for the depreciated cost of additional satellites. The
reserve would increase by approximately $60 million if one or two satellites are
so leased or transferred, and by an additional material amount if a third
satellite is leased or transferred. 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 December 31, 2001, 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 to which it relates. A portion of the
contract price with respect to EchoStar VII is payable over a period of 13 years
following launch with interest at 8%, and a portion of the contract price with
respect to EchoStar VIII and EchoStar IX is payable following launch with
interest at 8%. Those in orbit payments are contingent on the continued health
of the satellites. The satellite vendor financings for both EchoStar III,
EchoStar IV and EchoStar VII are secured by an ECC corporate guarantee.
During 2002, we anticipate total capital expenditures of between
$500-$750 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.
During November 2000, one of our wholly owned subsidiaries purchased a
49.9% interest in VisionStar, Inc. VisionStar holds an FCC license, and is
constructing a Ka-band satellite, to launch into the 113 degree orbital
location. In February 2002, we increased our ownership of VisionStar to 90%, for
a total purchase price of approximately $2.8 million. In addition, we have made
loans to VisionStar totaling approximately $4.6 million as of December 31, 2001.
Pegasus Development Corporation filed a petition for reconsideration of the
FCC's approval of that transaction. There can be no assurance that the FCC will
not reconsider its approval or otherwise revoke VisionStar's license, rendering
our investment worthless. Furthermore, 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 will have to ask for an extension.
Failure to meet the milestones or receive an extension, of which there can be no
assurance, will make the license invalid unless the milestones are extended by
the FCC. In May 2001, the FCC already denied an earlier request by VisionStar to
extend its milestones. In October 2001, upon granting the
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acquisition of VisionStar by us, the FCC conditioned the license transfer on our
completion of construction of the satellite by April 2002, launching the
satellite by May 2002, and reporting any change in the status of the spacecraft
contract. 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. See " - Merger
Obligations."
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.
SECURITY RATINGS
Our current credit ratings are B1 and B to B+ on our long-term senior
notes, and Caa1 and B- with respect to our convertible subordinated notes, as
rated by Moody's Investor Services and Standard and Poor's Rating Services,
respectively. Debt ratings by the various rating agencies reflect each agency's
opinion of the ability of issuers to repay debt obligations as they come due.
With respect to Moody's, the B1 rating for senior debt indicates that the
assurance of interest and principal payment and principal security over any long
period of time is small. For S&P, the B ratings indicates the issuer is
vulnerable to nonpayment of interest and principal obligations, but the issuer
has the capacity to meet its financial commitments on the obligations. With
respect to Moody's, the Caa1 rating for the convertible subordinated debt
indicates that the security presents elements of significant risk with respect
to principal or interest. In general, lower ratings result in higher borrowing
costs. A security rating is not a recommendation to buy, sell, or hold
securities and may be subject to revision or withdrawal at any time by the
assigning rating organization. Each rating should be evaluated independently of
any other rating.
CRITICAL ACCOUNTING POLICIES
We have identified the policies below as critical to our business
operations and the understanding of our results of operations. For a detailed
discussion on the application of these and other significant accounting
policies, see Note 2 in the Notes to the Consolidated Financial Statements in
Item 14 of this Annual Report on Form 10-K, beginning on page F-10. Note that
our preparation of this Annual Report on Form 10-K requires us to make estimates
and assumptions that affect the reported amount of assets and liabilities,
disclosure of contingent assets and liabilities at the date of our financial
statements, and the reported amounts of revenue and expenses during the
reporting period. There can be no assurance that actual results will not differ
from those estimates.
o Subscriber Acquisition Costs. We generally expense as incurred the net cost
of acquiring subscribers, other than costs capitalized under our Digital
Home Plan promotion.
o Capitalized satellite receivers. Since we retain ownership of equipment
issued pursuant to the Digital Home Plan promotion, we are required to
capitalize and depreciate equipment costs that would otherwise be expensed
at the
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time of sale. Such capitalized costs are depreciated over a period of four
years. If a Digital Home Plan subscriber disconnects from the service, the
subscriber is required to return the leased equipment to us or be charged
for the equipment. While we do not recover all of the equipment upon
termination of service, EchoStar receivers that are recovered after
de-activation of a Digital Home Plan subscriber are refurbished and
re-deployed.
o Marketable and Non-Marketable Securities. See previous discussion of
"Investment Securities."
o Asset Impairment. We review our long-lived assets and identifiable
intangible assets for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. For
assets which are held and used in operations, the asset would be impaired if
the book value of the asset exceeded the undiscounted future net cash flows
related to the asset. For those assets which are to be disposed of, the
assets would be impaired to the extent the fair value does not exceed the
book value. We consider relevant cash flow, estimated future operating
results, trends and other available information including the fair value of
frequency rights owned, in assessing whether the carrying value of assets
are recoverable.
o Income taxes. Our income tax policy records the estimated future tax effects
of temporary differences between the tax bases of assets and liabilities and
amounts reported in the accompanying consolidated balance sheets, as well as
operating loss and tax credit carryforwards. We follow very specific and
detailed guidelines regarding the recoverability of any tax assets recorded
on the balance sheet and provide any necessary allowances as required.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 141, "Business Combinations," ("FAS 141"),
which is required to be adopted July 1, 2001. FAS 141 requires the purchase
method of accounting for all business combinations initiated after June 30,
2001. The application of FAS 141 has not had a material impact on our financial
position or results of operations.
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, we
are required to apply all other provisions of FAS 142. We are currently
evaluating the potential impact, if any, the adoption of FAS 142 will have on
our financial position and results of operations.
In August 2001, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" ("FAS 144"), which is effective for
fiscal periods beginning after December 15, 2001 and interim periods within
those fiscal years. FAS 144 establishes an accounting model for impairment or
disposal of long-lived assets to be disposed. We are currently evaluating the
potential impact, if any, the adoption of FAS 144 will have on our financial
position and results of operation.
SEASONALITY
Our revenues vary throughout the year. As is typical in the
subscription television service industry, our first six months generally produce
fewer new subscribers than the second half of the year. Our operating results in
any period may be affected by the incurrence of advertising and promotion
expenses that do not necessarily produce commensurate revenues in the short-term
until the impact of such advertising and promotion is realized in future
periods.
INFLATION
Inflation has not materially affected our operations during the past
three years. We believe that our ability to increase the prices charged for our
products and services in future periods will depend primarily on competitive
pressures. We do not have any material backlog of our products.
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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
MARKET RISKS ASSOCIATED WITH FINANCIAL INSTRUMENTS
As of December 31, 2001, our unrestricted cash, cash equivalents and
marketable investment securities had a fair value of approximately $2.8 billion.
Of that amount, a total of approximately $2.7 billion was invested in: (a) cash;
(b) debt instruments of the U.S. Government and its agencies; (c) commercial
paper with an average maturity of less than one year and rated in one of the
four highest rating categories by at least two nationally recognized statistical
rating organizations; and (d) instruments with similar risk characteristics to
the commercial paper described above. The primary purpose of these investing
activities has been to preserve principal until the cash is required to fund
operations. Consequently, the size of this portfolio fluctuates significantly as
cash is raised and used in our business.
The value of certain of the investments in this portfolio can be
impacted by, among other things, the risk of adverse changes in securities and
economic markets generally, as well as the risks related to the performance of
the companies whose commercial paper and other instruments we hold. However, the
high quality of these investments (as assessed by independent rating agencies),
reduces these risks. The value of these investments can also be impacted by
interest rate fluctuations. At December 31, 2001, all of our investments in this
category were in fixed rate instruments or money market type accounts. While an
increase in interest rates would ordinarily adversely impact the fair value of
fixed rate investments, we normally hold these investments to maturity.
Consequently, neither interest rate fluctuations nor other market risks
typically result in significant gains or losses to this portfolio. A decrease in
interest rates has the effect of reducing our future annual interest income from
this portfolio, since funds would be re-invested at lower rates as the
instruments mature. Over time, any net percentage decrease in interest rates
could be reflected in a corresponding net percentage decrease in our interest
income. As of December 31, 2001 our marketable securities portfolio balance was
approximately $2.8 billion with an average annual interest rate of approximately
3.2%. A hypothetical 10% decrease in interest rates would result in a decrease
of approximately $9 million in annual interest income.
We also invest in debt and equity of public and private companies for
strategic and financial purposes. As of December 31, 2001, we held strategic and
financial debt and equity investments of public companies with a fair value of
approximately $133 million. We acquired stock in one of those companies, OpenTV,
in connection with establishment of a strategic relationship which did not
involve the investment of cash by us. None of these investments accounted for
more than 40% of the total fair value of the portfolio. We may make additional
strategic and financial investments in other debt and equity securities in the
future.
The fair value of our strategic debt investments can be impacted by
interest rate fluctuations. Absent the effect of other factors, a hypothetical
10% increase in LIBOR would result in a decrease in the fair value of our
investments in these debt instruments of approximately $6.3 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 $13.3 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.
56
During the year ended December 31, 2001, we 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 $70 million, and
established a new cost basis for these securities. This amount does not include
realized gains of approximately $22 million on the sales of marketable
investment securities. In addition, we have recorded unrealized gains totaling
approximately $4 million as of December 31, 2001. If the fair market value of
our marketable securities portfolio does not remain at or above 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 $2.8 billion, we also have made strategic equity
investments in certain non-marketable investment securities within the broadband
industry including Wildblue Communications, StarBand Communications and
VisionStar, Inc. Through December 31, 2001, we invested approximately $156
million in these non-marketable investment securities, including loans to
VisionStar of approximately $4.6 million. The securities of these companies are
not publicly traded. Our ability to create realizable value for our strategic
investments in companies that are not public is dependent on the success of
their business 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. StarBand and Wildblue have cancelled their planned initial public
stock offerings and have minimal cash on hand. StarBand has reduced its
operations and Wildblue has suspended most of its operations. The ability of
both of these entities to raise additional capital in the future is currently
uncertain, and attempts to date have been unsuccessful. In addition, StarBand
has significant vendor and bank obligations and their independent public
accountants have expressed uncertainty as to their ability to continue as a
going concern in the 2001 StarBand audit opinion. As a result of these factors,
we have recorded cumulative impairment and equity-method charges of
approximately $114 million to reduce the carrying values of these non-marketable
investment securities to their estimated net realizable values, aggregating
approximately $42 million as of December 31, 2001. Of the $114 million,
approximately $64 million was recorded related to our equity in losses of
StarBand ($29 million and $35 million during the years ended December 31, 2000
and 2001, respectively). The remaining $50 million represents impairment charges
recorded during 2001 to reduce the carrying value of Wildblue to zero. If we
become aware of any factors that indicate that the carrying values of any of our
non-marketable investment securities are impaired, we will be required to record
additional charges to earnings in future periods to reduce some or all of the
remaining investment balances to their estimated net realizable values.
As of December 31, 2001, 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 $233 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 December 31, 2001, 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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our Consolidated Financial Statements are included in this report
beginning on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
57
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item with respect to the identity and
business experience of our directors will be set forth in our Proxy Statement
for the Annual Meeting of Shareholders to be held on May 6, 2002, under the
caption "Election of Directors," which information is hereby incorporated herein
by reference.
The information required by this Item with respect to the identity and
business experience of our executive officers is set forth on page 26 of this
report under the caption "Executive Officers."
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item will be set forth in our Proxy
Statement for the Annual Meeting of Shareholders to be held on May 6, 2002,
under the caption "Executive Compensation and Other Information," which
information is hereby incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item will be set forth in our Proxy
Statement for the Annual Meeting of Shareholders to be held on May 6, 2002,
under the captions "Election of Directors" and "Equity Security Ownership,"
which information is hereby incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item will be set forth in our Proxy
Statement for the Annual Meeting of Shareholders to be held on May 6, 2002,
under the caption "Certain Relationships and Related Transactions," which
information is hereby incorporated herein by reference.
58
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
(1) Financial Statements PAGE
----
Report of Arthur Andersen LLP, Independent Public Accountants .................. F-2
Report of Ernst & Young LLP, Independent Public Accountants .................... F-3
Consolidated Balance Sheets at December 31, 2000 and 2001 ...................... F-4
Consolidated Statements of Operations and Comprehensive Loss for the
years ended December 31, 1999, 2000 and 2001 ................................. F-5
Consolidated Statements of Changes in Stockholders' Deficit for the
years ended December 31, 1999, 2000 and 2001 ................................. F-6
Consolidated Statements of Cash Flows for the years ended
December 31, 1999, 2000 and 2001 ............................................. F-7
Notes to Consolidated Financial Statements ..................................... F-8
(2) Financial Statement Schedules
None. All schedules have been included in the Consolidated Financial
Statements or Notes thereto.
(3) Exhibits
3.1(a)+ Amended and Restated Articles of Incorporation of EchoStar.
3.1(b)* Amended and Restated Bylaws of EchoStar (incorporated by
reference to Exhibit 3(ii) to the Current Report on Form 8-K,
dated January 23, 2002, of EchoStar, Commission File No.
0-26176).
3.2(a)* Articles of Incorporation of EchoStar Broadband Corporation
("EBC") (incorporated by reference to Exhibit 3.1(a) to the
Registration Statement on Form S-4 of EBC, Registration No.
333-52756).
3.2(b)* Bylaws of EBC (incorporated by reference to Exhibit 3.1(b) to the
Registration Statement on Form S-4 of EBC, Registration No.
333-52756).
3.3(a)* Articles of Incorporation of EchoStar DBS Corporation ("DBS
Corp.") (incorporated by reference to Exhibit 3.4(a) to the
Registration Statement on Form S-4 of DBS Corp., Registration No.
333-31929).
3.3(b)* Bylaws of DBS Corp. (incorporated by reference to Exhibit 3.4(b)
to the Registration Statement on Form S-4 of DBS Corp.,
Registration No. 333-31929).
4.1* Warrant Agreement between EchoStar and First Trust, as Warrant
Agent (incorporated by reference to Exhibit 4.2 to the
Registration Statement on Form S-1 of Dish Ltd., Registration No.
33-76450).
4.2* Security Agreement in favor of First Trust, as trustee under the
Indenture filed as Exhibit 4.1 hereto (incorporated by reference
to Exhibit 4.3 to the Registration Statement on Form S-1 of Dish
Ltd., Registration No. 33-76450).
4.3* Escrow and Disbursement Agreement between Dish Ltd. and First
Trust (incorporated by reference to Exhibit 4.4 to the
Registration Statement on Form S-1 of Dish, Registration No.
33-76450).
4.4* Pledge Agreement in favor of First Trust, as trustee under the
Indenture filed as Exhibit 4.1 hereto (incorporated by reference
to Exhibit 4.5 to the Registration Statement on Form S-1 of Dish
Ltd., Registration No. 33-76450).
59
4.5* Intercreditor Agreement among First Trust, Continental Bank, N.A.
and Martin Marietta Corporation ("Martin Marietta") (incorporated
by reference to Exhibit 4.6 to the Registration Statement on Form
S-1 of Dish, Registration No. 33-76450).
4.6* Registration Rights Agreement by and between EchoStar and Charles
W. Ergen (incorporated by reference to Exhibit 4.8 to the
Registration Statement on Form S-1 of EchoStar, Registration No.
33-91276).
4.7* Indenture of Trust, relating to DBS Corp.'s 9 1/4% Senior Notes
due 2006 ("Seven Year Notes"), dated as of January 25, 1999,
among DBS Corp., the Guarantors (as defined therein) and U.S.
Bank Trust National Association ("U.S. Bank"), as trustee
(incorporated by reference to Exhibit 4.1 to the Registration
Statement on Form S-4 of DBS Corp., Registration No. 333-71345).
4.8* Indenture of Trust, relating to DBS Corp.'s 9 3/8% Senior Notes
due 2009 ("Ten Year Notes"), dated as of January 25, 1999, among
DBS Corp., the Guarantors (as defined therein) and U.S. Bank, as
trustee (incorporated by reference to Exhibit 4.3 to the
Registration Statement on Form S-4 of DBS Corp., Registration No.
333-71345).
4.9* Registration Rights Agreement, relating to the Seven Year Notes,
dated as of January 25, 1999, by and among DBS Corp., the
Guarantors and the Initial Purchasers (as defined therein)
(incorporated by reference to Exhibit 4.5 to the Registration
Statement on Form S-4 of DBS Corp., Registration No. 333-71345).
4.10* Registration Rights Agreement, relating to the Ten Year Notes,
dated as of January 25, 1999, by and among DBS Corp., the
Guarantors and the Initial Purchasers (as defined therein)
(incorporated by reference to Exhibit 4.6 to the Registration
Statement on Form S-4 of DBS Corp., Registration No. 333-71345).
4.11* Indenture relating to 4 7/8% Convertible Subordinated Notes due
2007, dated as of December 8, 1999, between EchoStar
Communications Corporation and U.S. Bank Trust National
Association, as trustee, (incorporated by reference to Exhibit
4.1 to the Registration Statement on Form S-3 of EchoStar
Communications Corporation, Registration No. 333-31894).
4.12* Registration Rights Agreement, relating to the 47/8 % Convertible
Subordinated Notes Due 2007, dated as of December 8, 1999, by and
among EchoStar Communications Corporation and the initial
purchasers (incorporated by reference to Exhibit 4.2 to the
Registration Statement on Form S-3 of EchoStar Communications
Corporation, Registration No. 333-31894).
4.13* Indenture relating to 10 3/8% Senior Notes due 2007, dated as of
September 25, 2000, between EchoStar Broadband Corporation and
U.S. Bank Trust National Association, as trustee (incorporated by
reference to Exhibit 4.1 to the Quarterly Report on Form 10-Q of
EchoStar for the quarter ended September 30, 2000, Commission
File No.0-26176).
4.14* Registration Rights Agreement dated as of September 25, 2000, by
and among EchoStar Broadband Corporation, Donaldson, Lufkin &
Jenrette Securities Corporation, Banc of America Securities LLC,
Credit Suisse First Boston Corporation and ING Barings LLC
(incorporated by reference to Exhibit 4.2 to the Quarterly Report
on Form 10-Q of EchoStar for the quarter ended September 30,
2000, Commission File No.0-26176).
4.15* Indenture, relating to the 5 3/4% Convertible Subordinated Notes
Due 2008, dated as of May 31, 2001 between EchoStar
Communications Corporation and U.S. Bank Trust National
Association, as Trustee (incorporated by reference to Exhibit 4.1
to the Quarterly Report on Form 10-Q of EchoStar for the quarter
ended June 30, 2001, Commission File No.0-26176).
60
4.16* Registration Rights Agreement, relating to the 5 3/4% Convertible
Subordinated Notes Due 2008, dated as of May 31, 2001, by and
between EchoStar Communications Corporation and UBS Warburg LLC
(incorporated by reference to Exhibit 4.2 to the Quarterly Report
on Form 10-Q of EchoStar for the quarter ended June 30, 2001,
Commission File No.0-26176).
4.17+ Indenture, relating to the 9 1/8% Senior Notes Due 2009, dated as
of December 28, 2001 between EchoStar DBS Corporation and U.S.
Bank Trust National Association, as Trustee.
4.18+ Registration Rights Agreement, relating to the 9 1/8% Senior
Notes Due 2009, dated as of December 28, 2001, by and among
EchoStar DBS Corporation and Deutsche Banc Alex. Brown, Inc.,
Credit Suisse First Boston Corporation, Lehman Brothers Inc. and
UBS Warburg LLC.
4.19+ Certificate of Withdrawal Withdrawing the Series A, Series B and
Series C Preferred Stock Designations of EchoStar.
4.20+ Series D Mandatorily Convertible Participating Preferred Stock
Certificate of Designation of EchoStar.
10.1* Key Employee Bonus Plan, dated as of January 1, 1994
(incorporated by reference to Exhibit 10.7 to the Registration
Statement on Form S-1 of Dish, Registration No. 33-76450)**
10.2* Consulting Agreement, dated as of February 17, 1994, between ESC
and Telesat Canada (incorporated by reference to Exhibit 10.8 to
the Registration Statement on Form S-1 of Dish, Registration No.
33-76450).
10.3* Form of Satellite Launch Insurance Declarations (incorporated by
reference to Exhibit 10.10 to the Registration Statement on Form
S-1 of Dish, Registration No. 33-81234).
10.4* Dish 1994 Stock Incentive Plan (incorporated by reference to
Exhibit 10.11 to the Registration Statement on Form S-1 of Dish,
Registration No. 33-76450).**
10.5* Form of Tracking, Telemetry and Control Contract between AT&T
Corp. and ESC (incorporated by reference to Exhibit 10.12 to the
Registration Statement on Form S-1 of Dish, Registration No.
33-81234).
10.6* Manufacturing Agreement, dated as of March 22, 1995, between HTS
and SCI Technology, Inc. (incorporated by reference to Exhibit
10.12 to the Registration Statement on Form S-1 of Dish,
Commission File No. 33-81234).
10.7* Statement of Work, dated January 31, 1995 from ESC to DiviCom,
Inc. (incorporated by reference to Exhibit 10.14 to the
Registration Statement on Form S-1 of EchoStar, Registration No.
33-91276).
10.8* EchoStar 1995 Stock Incentive Plan (incorporated by reference to
Exhibit 10.16 to the Registration Statement on Form S-1 of
EchoStar, Registration No. 33-91276)**
10.9* Satellite Construction Contract, dated as of July 18, 1996,
between EDBS and Lockheed Martin Corporation (incorporated by
reference to Exhibit 10.18 to the Quarterly Report on Form 10-Q
of EchoStar for the quarter ended June 30, 1996, Commission File
No. 0-26176).
10.10* Confidential Amendment to Satellite Construction Contract between
DBSC and Martin Marietta, dated as of May 31, 1995 (incorporated
by reference to Exhibit 10.14 to the Registration Statement of
Form S-4 of EchoStar, Registration No. 333-03584).
10.11* Agreement between HTS, ESC and ExpressVu Inc., dated January 8,
1997, as amended (incorporated by reference to Exhibit 10.18 to
the Annual Report on Form 10-K of EchoStar for the year ended
December 31, 1996, as amended, Commission File No. 0-26176).
61
10.12* Amendment No. 9 to Satellite Construction Contract, effective as
of July 18, 1996, between Direct Satellite Broadcasting
Corporation, a Delaware corporation ("DBSC") and Martin Marrieta
Corporation (incorporated by reference to Exhibit 10.1 to the
Quarterly Report on Form 10-Q of EchoStar for the quarterly
period ended June 30, 1997, Commission File No. 0-26176).
10.13* Amendment No. 10 to Satellite Construction Contract, effective as
of May 31, 1996, between DBSC and Lockheed Martin Corporation
(incorporated by reference to Exhibit 10.2 to the Quarterly
Report on Form 10-Q of EchoStar for the quarterly period ended
June 30, 1997, Commission File No. 0-26176).
10.14* Purchase Agreement, dated November 30, 1998, by and among
American Sky Broadcasting, LLC ("ASkyB"), The News Corporation
Limited ("News Corporation"), MCI Telecommunications Corporation
and EchoStar (incorporated by reference to Exhibit 10.1 to the
Current Report on Form 8-K filed by EchoStar on December 1, 1998,
Commission File No. 0-26176).
10.15* Voting Agreement, dated November 30, 1998, among EchoStar, AskyB,
News Corporation and MCI Telecommunications Corporation
(incorporated by reference to Exhibit 10.3 to the Current Report
on Form 8-K of EchoStar, filed as of December 1, 1998, Commission
File No. 0-26176).
10.16* Agreement to Form NagraStar LLC, dated as of June 23, 1998, by
and between Kudelski S.A., EchoStar and ESC (incorporated by
reference to Exhibit 10.28 to the Annual Report on Form 10-K of
EchoStar for the year ended December 31, 1998, Commission File
No. 0-26176).
10.17* First Amendment, dated June 23, 1999, to the Purchase Agreement
dated November 30, 1998, by and among American Sky Broadcasting,
LLC, The News Corporation Limited, MCI Telecommunications
Corporation, and EchoStar Communications Corporation
(incorporated by reference to Exhibit 10.3 to the Current Report
on Form 8-K of EchoStar, filed as of July 2, 1999, Commission
File No. 0-26176).
10.18* Registration Rights Agreement, dated June 24, 1999, by and among
EchoStar Communications Corporation, MCI Telecommunications
Corporation, American Sky Broadcasting, LLC, and News America
Incorporated (incorporated by reference to Exhibit 10.4 to the
Current Report on Form 8-K of EchoStar, filed as of July 2, 1999,
Commission File No. 0-26176).
10.19* Satellite Construction Contract dated as of January 27, 2000,
between EchoStar Orbital Corporation and Lockheed Martin
Corporation (incorporated by reference to Exhibit 10.1 to the
Quarterly Report on Form 10-Q of EchoStar for the quarter ended
March 31, 2000, Commission File No.0-26176).
10.20* Satellite Construction Contract dated as of February 4, 2000,
between EchoStar Orbital Corporation and Space Systems/Loral Inc.
(incorporated by reference to Exhibit 10.2 to the Quarterly
Report on Form 10-Q of EchoStar for the quarter ended March 31,
2000, Commission File No.0-26176).
10.21* Satellite Construction Contract dated as of February 22, 2000,
between EchoStar Orbital Corporation and Space Systems/Loral Inc.
(incorporated by reference to Exhibit 10.3 to the Quarterly
Report on Form 10-Q of EchoStar for the quarter ended March 31,
2000, Commission File No.0-26176).
10.22* Agreement dated as of February 22, 2000, between EchoStar Orbital
Corporation and Loral Skynet, a division of Loral SpaceCom
Corporation (incorporated by reference to Exhibit 10.4 to the
Quarterly Report on Form 10-Q of EchoStar for the quarter ended
March 31, 2000, Commission File No.0-26176).
10.23* Contract for Launch Services, dated January 31, 2001, between
Lockheed Martin's International Launch Services and EchoStar
Orbital Corporation (incorporated by reference to Exhibit 10.1 to
the Quarterly Report on Form 10-Q of EchoStar for the quarter
ended March 31, 2001, Commission File No.0-26176).
62
10.24* Modification Nos. 1-7 to the Satellite Contract (EchoStar VII -
119 degree West Longitude) dated January 27, 2000, between
Lockheed Martin Corporation and EchoStar Orbital Corporation
(incorporated by reference to Exhibit 10.1 to the Quarterly
Report on Form 10-Q of EchoStar for the quarter ended June 30,
2001, Commission File No.0-26176).
10.25* Amended and Restated Contract dated February 1, 2001, between
EchoStar Orbital Corporation and Space Systems/Loral, Inc.,
EchoStar VIII Satellite Program (110 degree West Longitude)
(incorporated by reference to Exhibit 10.2 to the Quarterly
Report on Form 10-Q of EchoStar for the quarter ended June 30,
2001, Commission File No.0-26176).
10.26* Amendment No. 1 to the Contract dated February 22, 2000, between
EchoStar Orbital Corporation and Space Systems/Loral Inc.,
EchoStar IX Satellite Program (121 degree West Longitude)
(incorporated by reference to Exhibit 10.3 to the Quarterly
Report on Form 10-Q of EchoStar for the quarter ended June 30,
2001, Commission File No.0-26176).
10.27* Agreement and Plan of Merger, dated October 28, 2001, by and
between EchoStar and Hughes Electronics Corporation (incorporated
by reference to Exhibit 99.1 to the Current Report on Form 8-K of
EchoStar, filed as of October 31, 2001, Commission File No.
0-26176).
10.28* Implementation Agreement, dated October 28, 2001, by and among
General Motors Corporation, Hughes Electronics Corporation and
EchoStar (incorporated by reference to Exhibit 99.2 to the
Current Report on Form 8-K of EchoStar, filed as of October 31,
2001, Commission File No. 0-26176).
10.29* Stock Purchase Agreement, dated October 28, 2001, among EchoStar,
Hughes Electronics Corporation, Hughes Communications Galaxy,
Inc., Hughes Communications Satellite Services, Inc. and Hughes
Communications Inc. (incorporated by reference to Exhibit 99.3 to
the Current Report on Form 8-K of EchoStar, filed as of October
31, 2001, Commission File No. 0-26176).
10.30* Separation Agreement, dated October 28, 2001, by and between
General Motors Corporation and Hughes Electronics Corporation
(incorporated by reference to Exhibit 99.4 to the Current Report
on Form 8-K of EchoStar, filed as of October 31, 2001, Commission
File No. 0-26176).
10.31* Investment Agreement, dated December 14, 2001, between EchoStar
and Vivendi Universal, S.A., and exhibits (incorporated by
reference to Exhibit 99.1 to the Current Report on Form 8-K of
EchoStar, filed as of December 20, 2001, Commission File No.
0-26176).
10.32* Stockholder Voting Agreement, dated December 14, 2001, by and
among Charles W. Ergen, The Samburu Warrior Revocable Trust and
Vivendi Universal, S.A. (incorporated by reference to Exhibit
99.2 to the Current Report on Form 8-K of EchoStar, filed as of
December 20, 2001, Commission File No. 0-26176).
10.33+ Modification No. 8 to the Satellite Contract (EchoStar VII - 119
degree West Longitude) dated October 12, 2001, between Lockheed
Martin Corporation and EchoStar Orbital Corporation.
10.34+ Modification No. 9 to the Satellite Contract (EchoStar VII - 119
degree West Longitude) dated October 16, 2001, between Lockheed
Martin Corporation and EchoStar Orbital Corporation.
10.35+ Contract amendment No.1 to the EchoStar VIII contract between
EchoStar Orbital Corporation and Space Systems/Loral, Inc., dated
October 19, 2001.
10.36+ Modification No. 10 to the Satellite Contract (EchoStar VII - 119
degree West Longitude) dated December 12, 2001, between Lockheed
Martin Corporation and EchoStar Orbital Corporation.
21+ Subsidiaries of EchoStar Communications Corporation.
63
23.1+ Consent of Arthur Andersen LLP, Independent Public Accountants
23.2+ Consent of Ernst & Young LLP, Independent Public Accountants
24.1+ Powers of Attorney authorizing signature of Cantey Ergen, Raymond
L. Friedlob, O. Nolan Daines, Peter A. Dea and Jean-Marie
Messier.
----------
* Incorporated by reference.
** Constitutes a management contract or compensatory plan or arrangement.
+ Filed herewith.
(b) Reports on Form 8-K
On October 29, 2001, we filed a Current Report on Form 8-K to report
that on October 28, 2001, General Motors Corporation and its subsidiary Hughes
Electronics, together with us, announced the signing of definitive agreements
that provide for the spin-off of Hughes from GM and the merger of Hughes with
us.
On October 31, 2001, we filed a Current Report on Form 8-K to file our
amended and restated Bylaws and certain definitive agreements entered into in
connection with the announcement of the merger of Hughes with us.
On November 13, 2001, we filed a current report on Form 8-K to report
that: 1) at least $5.525 billion of total financing is expected to be required
in connection with the merger of Hughes with EchoStar, which we intend to fund
in the capital markets through equity offerings, debt offerings, bank debt or a
combination thereof and through privately negotiated transactions; 2) we have
obtained $2.7625 billion bridge commitments from each of Deutsche Bank and
Credit Suisse First Boston, which in certain circumstances may be drawn down in
the event we are unable to raise the full $5.525 billion in the capital markets;
and 3) we have paid, as compensation for extension of the bridge commitments, a
total of approximately $55 million to Deutsche Bank and Credit Suisse First
Boston.
On December 14, 2001, we filed a Current Report on Form 8-K to
announce: 1) a proposed $1.5 billion investment by Vivendi Universal and the
formation of a strategic alliance to offer new programming and interactive
television services to consumers; 2) that our EDBS subsidiary offered $700
million aggregate principal amount of Senior Notes due 2009, in accordance with
Securities and Exchange Commission Rule 144A; 3) the expected offer to exchange
approximately $1 billion of EBC 10 3/8% Senior Notes due 2007 for substantially
identical notes of EDBS, and 3) that the earliest scheduled launch of EchoStar
VII was the first quarter of 2002 (subject to FCC approval).
On December 20, 2001, we filed a Current Report on Form 8-K: 1) to
report that on December 14, 2001, Vivendi Universal, S.A., us and certain of our
stockholders entered into definitive agreements in connection with the
announcement of a proposed $1.5 billion investment by Vivendi Universal in us
and the formation of a strategic alliance with us to offer new programming and
interactive television services to consumers; and 2) to file certain definitive
agreements entered into in connection with the announcement of the Vivendi
Universal investment and formation of a strategic alliance with EchoStar.
64
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, EchoStar has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
ECHOSTAR COMMUNICATIONS CORPORATION
By: /s/ Michael R. McDonnell
----------------------------------------------------
Michael R. McDonnell
Senior Vice President and Chief Financial Officer
Date: February 28, 2002
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of EchoStar
and in the capacities and on the dates indicated:
Signature Title Date
--------- ----- ----
/s/ Charles W. Ergen Chief Executive Officer and Chairman February 28, 2002
------------------------ (Principal Executive Officer)
Charles W. Ergen
/s/ Michael R. McDonnell Senior Vice President and Chief Financial Officer February 28, 2002
------------------------ (Principal Financial Officer)
Michael R. McDonnell
/s/ James DeFranco Director February 28, 2002
------------------------
James DeFranco
/s/ David K. Moskowitz Director February 28, 2002
------------------------
David K. Moskowitz
* Director February 28, 2002
------------------------
Cantey Ergen
* Director February 28, 2002
------------------------
Raymond L. Friedlob
* Director February 28, 2002
------------------------
O. Nolan Daines
* Director February 28, 2002
------------------------
Peter A. Dea
* Director February 28, 2002
------------------------
Jean-Marie Messier
* By: /s/ David K. Moskowitz
-----------------------
David K. Moskowitz
Attorney-in-Fact
65
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
CONSOLIDATED FINANCIAL STATEMENTS:
Report of Arthur Andersen LLP, Independent Public Accountants....................... F-2
Report of Ernst & Young LLP, Independent Public Accountants......................... F-3
Consolidated Balance Sheets at December 31, 2000 and 2001........................... F-4
Consolidated Statements of Operations and Comprehensive Loss for the
years ended December 31, 1999, 2000 and 2001..................................... F-5
Consolidated Statements of Changes in Stockholders' Deficit for the
years ended December 31, 1999, 2000 and 2001..................................... F-6
Consolidated Statements of Cash Flows for the years ended
December 31, 1999, 2000 and 2001................................................. F-7
Notes to Consolidated Financial Statements.......................................... F-8
F-1
REPORT OF ARTHUR ANDERSEN LLP, INDEPENDENT PUBLIC ACCOUNTANTS
To EchoStar Communications Corporation:
We have audited the accompanying consolidated balance sheets of
EchoStar Communications Corporation (a Nevada corporation) and subsidiaries as
of December 31, 2000 and 2001, and the related consolidated statements of
operations and comprehensive loss, changes in stockholders' deficit and cash
flows for each of the three years in the period ended December 31, 2001. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits. We did not audit the financial statements of StarBand Communications
Inc., the investment in which is reflected in the accompanying consolidated
financial statements as of and for the year ended December 31, 2001 using the
equity method of accounting. The investment in StarBand Communications Inc.
represents approximately 0.6% percent of total assets as of December 31, 2001,
and the equity in its net losses represents approximately 16.7% percent of net
loss for the year ended December 31, 2001. The financial statements of StarBand
Communications Inc. were audited by other auditors whose report has been
furnished to us and our opinion, insofar as it relates to the amounts included
for StarBand Communications Inc., is based solely on the report of the other
auditors.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits and the report of other
auditors provide a reasonable basis for our opinion.
In our opinion, based on our audit and the report of other auditors,
the financial statements referred to above present fairly, in all material
respects, the consolidated financial position of EchoStar Communications
Corporation and subsidiaries as of December 31, 2000 and 2001, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 2001, in conformity with accounting
principles generally accepted in the United States.
ARTHUR ANDERSEN LLP
Denver, Colorado,
February 27, 2002.
F-2
REPORT OF ERNST & YOUNG LLP, INDEPENDENT PUBLIC ACCOUNTANTS
Board of Directors
StarBand Communications Inc.
We have audited the balance sheet of StarBand Communications Inc. (the
Company), as of December 31, 2001, and the related statements of operations,
stockholders' deficit, mandatorily redeemable convertible preferred stock, and
cash flows for the year ended December 31, 2001 (not presented separately
herein). These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of StarBand
Communications Inc., at December 31, 2001, and the results of its operations and
its cash flows for the year then ended, in conformity with accounting principles
generally accepted in the United States.
The accompanying financial statements have been prepared assuming the
Company will continue as a going concern. As more fully described in Note 1, the
Company has incurred operating losses of $205.6 million and net cash used in
operating activities of $98.6 million during the year ended December 31, 2001.
These conditions raise substantial doubt about the Company's ability to continue
as a going concern. Management's plans in regard to these matters are also
described in Note 1. The financial statements do not include any adjustments to
reflect the possible future effects on the recoverability and classification of
assets or the amounts and classification of liabilities that may result from the
outcome of this uncertainty.
ERNST & YOUNG LLP
McLean, Virginia
February 7, 2002
F-3
ECHOSTAR COMMUNICATIONS CORPORATION
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
DECEMBER 31,
------------------------------
2000 2001
----------- -----------
ASSETS
Current Assets:
Cash and cash equivalents ..................................... $ 856,818 $ 1,677,889
Marketable investment securities .............................. 607,357 1,150,408
Trade accounts receivable, net of allowance for uncollectible
accounts of $31,241 and $22,770, respectively ............... 278,614 318,128
Insurance receivable .......................................... 106,000 106,000
Inventories ................................................... 161,161 190,747
Other current assets .......................................... 50,656 68,795
----------- -----------
Total current assets ............................................. 2,060,606 3,511,967
Restricted cash .................................................. 3,000 1,288
Cash reserved for satellite insurance (Note 3) ................... 82,393 122,068
Property and equipment, net ...................................... 1,511,303 1,904,012
FCC authorizations, net .......................................... 709,984 696,409
Other noncurrent assets .......................................... 269,549 283,942
----------- -----------
Total assets ................................................ $ 4,636,835 $ 6,519,686
=========== ===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities:
Trade accounts payable ........................................ $ 226,568 $ 254,868
Deferred revenue .............................................. 283,895 359,424
Accrued expenses .............................................. 691,482 859,293
Current portion of long-term debt ............................. 21,132 14,782
----------- -----------
Total current liabilities ........................................ 1,223,077 1,488,367
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
4 7/8% Convertible Notes ..................................... 1,000,000 1,000,000
5 3/4% Convertible Notes ...................................... -- 1,000,000
Mortgages and other notes payable, net of current portion ..... 14,812 6,480
Long-term deferred distribution and carriage revenue and other
long-term liabilities ....................................... 56,329 102,611
----------- -----------
Total long-term obligations, net of current portion .............. 4,071,141 5,809,091
----------- -----------
Total liabilities ........................................... 5,294,218 7,297,458
Commitments and Contingencies (Note 9)
Stockholders' Deficit:
6 3/4% Series C Cumulative Convertible Preferred Stock, 218,951
and 0 shares issued and outstanding, respectively ........... 10,948 --
Class A Common Stock, $.01 par value, 1,600,000,000 shares
authorized, 235,749,557 and 241,015,004 shares issued and
outstanding, respectively ................................... 2,357 2,410
Class B Common Stock, $.01 par value, 800,000,000 shares
authorized, 238,435,208 shares issued and outstanding ....... 2,384 2,384
Class C Common Stock, $.01 par value, 800,000,000 shares
authorized, none outstanding ................................ -- --
Additional paid-in capital .................................... 1,700,367 1,709,797
Deferred stock-based compensation ............................. (58,193) (25,456)
Accumulated other comprehensive income (loss) ................. (60,580) 3,594
Accumulated deficit ........................................... (2,254,666) (2,470,501)
----------- -----------
Total stockholders' deficit ...................................... (657,383) (777,772)
----------- -----------
Total liabilities and stockholders' deficit ................. $ 4,636,835 $ 6,519,686
=========== ===========
See accompanying Notes to Consolidated Financial Statements.
F-4
ECHOSTAR COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(In thousands, except per share amounts)
YEAR ENDED DECEMBER 31,
-------------------------------------------------
1999 2000 2001
----------- ----------- -----------
REVENUE:
DISH Network:
Subscription television services ....................... $ 1,344,136 $ 2,346,700 $ 3,588,441
Other .................................................. 8,467 5,537 17,283
----------- ----------- -----------
Total DISH Network ....................................... 1,352,603 2,352,237 3,605,724
DTH equipment sales and integration services ............. 184,041 259,830 271,242
Other .................................................... 66,197 103,153 124,172
----------- ----------- -----------
Total revenue ............................................... 1,602,841 2,715,220 4,001,138
COSTS AND EXPENSES:
DISH Network Operating Expenses:
Subscriber-related expenses ............................ 574,828 970,374 1,433,245
Customer service center and other ...................... 117,249 250,704 284,868
Satellite and transmission ............................. 40,598 44,367 39,637
----------- ----------- -----------
Total DISH Network operating expenses .................... 732,675 1,265,445 1,757,750
Cost of sales - DTH equipment and integration services ... 148,427 194,963 188,039
Cost of sales - other .................................... 17,084 32,992 81,974
Marketing:
Subscriber promotion subsidies - cost of sales
(exclusive of depreciation included below) ............ 478,122 747,020 459,909
Subscriber promotion subsidies - other ................. 184,238 273,080 477,903
Advertising and other .................................. 64,701 138,540 146,563
----------- ----------- -----------
Total marketing expenses ................................. 727,061 1,158,640 1,084,375
General and administrative ............................... 150,397 250,425 377,873
Non-cash, stock-based compensation ....................... 61,060 51,465 20,173
Depreciation and amortization ............................ 113,228 185,356 278,652
----------- ----------- -----------
Total costs and expenses .................................... 1,949,932 3,139,286 3,788,836
----------- ----------- -----------
Operating income (loss) ..................................... (347,091) (424,066) 212,302
Other income (Expense):
Interest income .......................................... 26,179 79,733 97,671
Interest expense, net of amounts capitalized ............. (201,613) (267,990) (371,365)
Other .................................................... (1,169) (37,448) (152,652)
----------- ----------- -----------
Total other income (expense) ................................ (176,603) (225,705) (426,346)
----------- ----------- -----------
Loss before income taxes .................................... (523,694) (649,771) (214,044)
Income tax provision, net ................................... (154) (555) (1,454)
----------- ----------- -----------
Loss before extraordinary charges ........................... (523,848) (650,326) (215,498)
Extraordinary charge for early retirement of debt, net of tax (268,999) -- --
----------- ----------- -----------
Net loss .................................................... $ (792,847) $ (650,326) $ (215,498)
=========== =========== ===========
Change in unrealized loss on available-for-sale securities,
net of tax ............................................... -- (60,580) (5,697)
Reclassification adjustment for impairment losses on
available-for-sale securities included in net loss ....... -- -- 69,871
----------- ----------- -----------
Comprehensive loss .......................................... $ (792,847) $ (710,906) $ (151,324)
=========== =========== ===========
Net loss attributable to common shareholders (Note 2) ....... $ (800,100) $ (651,472) $ (215,835)
=========== =========== ===========
Weighted-average common shares outstanding .................. 416,476 471,023 477,172
=========== =========== ===========
Basic and diluted loss per common share ..................... $ (1.92) $ (1.38) $ (0.45)
=========== =========== ===========
See accompanying Notes to Consolidated Financial Statements.
F-5
ECHOSTAR COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT
(In thousands, except per share amounts)
DEFERRED
STOCK-
COMMON STOCK SERIES A SERIES C BASED
------------------------ PREFERRED PREFERRED COMPEN-
SHARES AMT. STOCK STOCK SATION
------- ----------- ----------- ----------- -----------
Balance, December 31, 1998 ................... 360,976 $ 3,609 $ 20,807 $ 108,666 $ --
Series A Preferred Stock dividends (at
$0.75 per share) ........................ -- -- 124 -- --
Retirement of Series A Preferred Stock .... -- -- (20,931) -- --
Series B Preferred Stock dividends payable
in-kind ................................. -- -- -- -- --
Accretion of Series C Preferred Stock ..... -- -- -- 6,335 --
Series C Preferred Stock dividends (at
$0.84375 per share, per quarter) ........ -- -- -- -- --
Conversion of Series C Preferred Stock .... 22,832 228 -- (69,567) --
Proceeds from Series C Preferred Stock
deposit account ......................... 46 -- -- -- --
Issuance of Class A Common Stock:
Acquisition of Media(4) ................. 1,376 14 -- -- --
News Corporation and MCI transaction .... 68,824 688 -- -- --
Exercise of stock options ............... 3,868 39 -- -- --
Employee benefits ....................... 556 6 -- -- --
Employee Stock Purchase Plan ............ 44 -- -- -- --
Deferred stock-based compensation ......... -- -- -- -- (178,840)
Deferred stock-based compensation
recognized .............................. -- -- -- -- 61,060
Net loss .................................. -- -- -- -- --
------- ----------- ----------- ----------- -----------
Balance, December 31, 1999 ................... 458,522 4,584 -- 45,434 (117,780)
Series C Preferred Stock dividends (at
$0.84375 per share, per quarter) ........ -- -- -- -- --
Conversion of Series C Preferred Stock .... 11,320 113 -- (34,486) --
Issuance of Class A Common Stock:
Acquisition of Kelly Broadcasting Systems 510 5 -- -- --
Exercise of stock options ............... 3,593 36 -- -- --
Employee benefits ....................... 182 2 -- -- --
Employee Stock Purchase Plan ............ 58 1 -- -- --
Forfeitures of deferred non-cash,
stock-based compensation ................ -- -- -- -- 6,730
Deferred stock-based compensation
recognized .............................. -- -- -- -- 52,857
Unrealized holding losses on
available-for-sale securities, net ...... -- -- -- -- --
Net loss .................................. -- -- -- -- --
------- ----------- ----------- ----------- -----------
Balance, December 31, 2000 ................... 474,185 4,741 -- 10,948 (58,193)
Series C Preferred Stock dividends (at
$0.84375 per share, per quarter) ........ -- -- -- -- --
Conversion and redemption of Series C
Preferred Stock ......................... 3,592 36 -- (10,948) --
Issuance of Class A Common Stock: ......... --
Exercise of stock options ............... 1,555 16 -- -- --
Employee benefits ....................... 39 -- -- -- --
Employee Stock Purchase Plan ............ 80 1 -- -- --
Forfeitures of deferred non-cash,
stock-based compensation ................ -- -- -- -- 5,143
Deferred stock-based compensation
recognized .............................. -- -- -- -- 27,594
Change in unrealized holding gains
(losses) on available-for-sale
securities, net ......................... -- -- -- -- --
Net loss .................................. -- -- -- -- --
------- ----------- ----------- ----------- -----------
Balance, December 31, 2001 ................... 479,451 $ 4,794 $ -- $ -- $ (25,456)
======= =========== =========== =========== ===========
ACCUMULATED
DEFICIT AND
ADDITIONAL UNREALIZED
PAID-IN HOLDING GAINS
CAPITAL (LOSSES) TOTAL
----------- ------------- -----------
Balance, December 31, 1998 ................... $ 228,471 $ (733,093) $ (371,540)
Series A Preferred Stock dividends (at
$0.75 per share) ........................ -- (124) --
Retirement of Series A Preferred Stock .... -- (70,003) (90,934)
Series B Preferred Stock dividends payable
in-kind ................................. -- (241) (241)
Accretion of Series C Preferred Stock ..... -- (6,335) --
Series C Preferred Stock dividends (at
$0.84375 per share, per quarter) ........ -- (553) (553)
Conversion of Series C Preferred Stock .... 69,339 -- --
Proceeds from Series C Preferred Stock
deposit account ......................... 953 2 955
Issuance of Class A Common Stock:
Acquisition of Media(4) ................. 9,593 -- 9,607
News Corporation and MCI transaction .... 1,123,632 -- 1,124,320
Exercise of stock options ............... 7,125 -- 7,164
Employee benefits ....................... 3,789 -- 3,795
Employee Stock Purchase Plan ............ 796 -- 796
Deferred stock-based compensation ......... 178,840 -- --
Deferred stock-based compensation
recognized .............................. -- -- 61,060
Net loss .................................. -- (792,847) (792,847)
----------- ----------- -----------
Balance, December 31, 1999 ................... 1,622,538 (1,603,194) (48,418)
Series C Preferred Stock dividends (at
$0.84375 per share, per quarter) ........ -- (1,146) (1,146)
Conversion of Series C Preferred Stock .... 34,373 -- --
Issuance of Class A Common Stock:
Acquisition of Kelly Broadcasting Systems 31,551 -- 31,556
Exercise of stock options ............... 10,973 -- 11,009
Employee benefits ....................... 7,282 -- 7,284
Employee Stock Purchase Plan ............ 1,722 -- 1,723
Forfeitures of deferred non-cash,
stock-based compensation ................ (8,072) -- (1,342)
Deferred stock-based compensation
recognized .............................. -- -- 52,857
Unrealized holding losses on
available-for-sale securities, net ...... -- (60,580) (60,580)
Net loss .................................. -- (650,326) (650,326)
----------- ----------- -----------
Balance, December 31, 2000 ................... 1,700,367 (2,315,246) (657,383)
Series C Preferred Stock dividends (at
$0.84375 per share, per quarter) ........ -- (337) (337)
Conversion and redemption of Series C
Preferred Stock ......................... 10,909 -- (3)
Issuance of Class A Common Stock: .........
Exercise of stock options ............... 8,040 -- 8,056
Employee benefits ....................... 1,173 -- 1,173
Employee Stock Purchase Plan ............ 1,872 -- 1,873
Forfeitures of deferred non-cash,
stock-based compensation ................ (12,564) -- (7,421)
Deferred stock-based compensation
recognized .............................. -- -- 27,594
Change in unrealized holding gains
(losses) on available-for-sale
securities, net ......................... -- 64,174 64,174
Net loss .................................. -- (215,498) (215,498)
----------- ----------- -----------
Balance, December 31, 2001 ................... $ 1,709,797 $(2,466,907) $ (777,772)
=========== =========== ===========
See accompanying Notes to Consolidated Financial Statements.
F-6
ECHOSTAR COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
YEAR ENDED DECEMBER 31,
---------------------------------------------
1999 2000 2001
----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ..................................................................... $ (792,847) $ (650,326) $ (215,498)
Adjustments to reconcile net loss to net cash flows from operating activities:
Extraordinary charge for early retirement of debt ......................... 268,999 -- --
Equity in losses of affiliates ............................................ -- 29,115 34,908
Loss on impairment of satellite (Note 3) .................................. 13,741 -- --
Realized and unrealized loss (gain) on investments ........................ (24,439) 3,039 110,458
Deferred stock-based compensation recognized .............................. 61,060 51,465 20,173
Depreciation and amortization ............................................. 113,228 185,356 278,652
Amortization of debt discount and deferred financing costs ................ 13,678 6,506 9,189
Change in long-term deferred satellite services revenue and other long-term
liabilities ............................................................ 10,173 37,236 46,282
Other, net ................................................................ 447 17,819 36,179
Changes in current assets and current liabilities:
Trade accounts receivable, net .......................................... (52,452) (111,898) (39,514)
Inventories ............................................................. (45,688) (41,851) (25,247)
Other current assets .................................................... (4,091) (8,296) (8,316)
Trade accounts payable .................................................. 103,400 27,250 28,233
Deferred revenue ........................................................ 48,549 100,776 75,529
Accrued expenses ........................................................ 227,729 235,132 138,455
----------- ----------- -----------
Net cash flows from operating activities ..................................... (58,513) (118,677) 489,483
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of marketable investment securities ................................ (541,401) (1,363,884) (2,549,179)
Sales of marketable investment securities .................................... 434,517 1,041,784 2,023,268
Cash reserved for satellite insurance (Note 3) ............................... -- (82,393) (59,488)
Change in cash reserved for satellite insurance due to depreciation on related
satellites (Note 3) .................................................... -- -- 19,813
Funds released from escrow and restricted cash and marketable investment
securities ............................................................. 80,585 -- 1,712
Purchases of property and equipment .......................................... (91,152) (331,401) (637,457)
Advances and payments under in-orbit satellite contract ...................... 67,804 (48,894) (8,441)
Capitalized merger-related costs ............................................. -- -- (17,830)
Investment in Wildblue Communications ........................................ -- (50,000) --
Investment in SONICblue (fka Replay TV) ...................................... -- (10,000) --
Investment in StarBand Communications ........................................ -- (50,045) (50,000)
Other ........................................................................ (13,179) (17,124) (1,517)
----------- ----------- -----------
Net cash flows from investing activities ..................................... (62,826) (911,957) (1,279,119)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of 9 1/4% Seven Year Notes ............................ 375,000 -- --
Proceeds from issuance of 9 3/8% Ten Year Notes .............................. 1,625,000 -- --
Proceeds from issuance of 10 3/8% Seven Year Notes ........................... -- 1,000,000 --
Proceeds from issuance of 9 1/8% Seven Year Notes ............................ -- -- 700,000
Proceeds from issuance of 4 7/8% Convertible Notes ........................... 1,000,000 -- --
Proceeds from issuance of 5 3/4% Convertible Notes ........................... -- -- 1,000,000
Debt issuance costs and prepayment premiums .................................. (293,987) (9,645) (29,450)
Deferred bridge loan financing costs ......................................... -- -- (55,250)
Retirement of 1994 Notes ..................................................... (575,674) -- --
Retirement of 1996 Notes ..................................................... (501,350) -- --
Retirement of 1997 Notes ..................................................... (378,110) -- --
Retirement of Senior Exchange Notes .......................................... (228,528) -- --
Redemption of Series A Preferred Stock ....................................... (90,934) -- --
Repayments of mortgage indebtedness and other notes payable .................. (22,201) (17,668) (14,182)
Net proceeds from Class A Common Stock options exercised and Class A Common
Stock issued for Employee Stock Purchase Plan ............................. 7,960 12,732 9,929
Other ........................................................................ 2,915 (3,266) (340)
----------- ----------- -----------
Net cash flows from financing activities ..................................... 920,091 982,153 1,610,707
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents ......................... 798,752 (48,481) 821,071
Cash and cash equivalents, beginning of year ................................. 106,547 905,299 856,818
----------- ----------- -----------
Cash and cash equivalents, end of year ....................................... $ 905,299 $ 856,818 $ 1,677,889
=========== =========== ===========
See accompanying Notes to Consolidated Financial Statements.
F-7
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND BUSINESS ACTIVITIES
Principal Business
The operations of EchoStar Communications Corporation ("ECC," and together
with its subsidiaries, or referring to particular subsidiaries in certain
circumstances, "EchoStar" or the "Company") include 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.
Recent Developments
On October 28, 2001, EchoStar signed definitive agreements with Hughes
Electronics Corporation ("Hughes"), and General Motors ("GM"), which is Hughes'
parent corporation, relating to EchoStar's merger with Hughes in a
stock-for-stock transaction.
The surviving corporation in the merger will carry EchoStar's name and
will provide DBS services in the United States and Latin America, primarily
under the DIRECTV brand name, global fixed satellite services and other
broadband communication services. The merger is subject to the prior separation
of Hughes from GM by way of a recapitalization of Hughes and split-off of Hughes
from GM and other conditions and risks.
Consummation of the Hughes merger and related transactions will require
at least $7.025 billion of cash. At the time of signing of the merger agreement,
EchoStar had approximately $1.5 billion of available cash on hand, and obtained
$5.525 billion in bridge financing commitments for Hughes merger and related
transactions. These commitments have been reduced to $3.325 billion as a result
of the sale of $700 million of 9 1/8% senior notes by EDBS and $1.5 billion of
our series D preferred stock to Vivendi. Any other financings EchoStar completes
prior to closing of the Hughes merger will generally further reduce the bridge
financing commitments dollar-for-dollar. The remaining approximately $3.325
billion of required cash, is expected to come from new cash raised by EchoStar,
Hughes or a subsidiary of Hughes on or prior to the closing of the merger
through public or private debt or equity offerings, bank debt or a combination
thereof. The amount of such cash that could be raised by EchoStar prior to
completion of the Hughes merger is severely restricted. EchoStar's agreements
with GM and Hughes prohibit it from raising any additional equity capital beyond
the $1.5 billion Vivendi investment. The prohibition will likely continue for
two years following completion of the Hughes merger, absent possible favorable
IRS rulings or terminations of the Hughes merger. Further, EchoStar's agreements
with GM and Hughes place substantial restrictions on EchoStar's ability to raise
additional debt prior to the closing of the Hughes merger.
If Hughes cannot complete the merger with EchoStar, EchoStar may be
required to purchase Hughes' 81% interest in PanAmSat, merge with PanAmSat or
make a tender offer for all of PanAmSat's shares and may also be required to pay
a $600 million termination fee to Hughes. If EchoStar purchases the Hughes
interest in PanAmSat rather than undertaking the merger or the tender offer,
EchoStar must make offers for all PanAmSat shares that remain outstanding.
EchoStar expects that its acquisition of Hughes' interest in PanAmSat, which is
at a price of $22.47 per share, together with its assumed purchase of the
remaining outstanding PanAmSat shares and payment of the termination fee to
Hughes would require at least $3.4 billion of cash and approximately $600
million of EchoStar's class A common stock. EchoStar expects that it would meet
this cash requirement by utilizing a portion of cash on hand.
F-8
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Organization and Legal Structure
In December 1995, ECC merged Dish, Ltd. with another wholly-owned
subsidiary of ECC. During 1999, EchoStar placed ownership of all of its direct
broadcast satellites and related FCC licenses into subsidiaries of EchoStar DBS
Corporation. Dish, Ltd. and EchoStar Satellite Broadcasting Company were merged
into EchoStar DBS Corporation. EchoStar IV and the related FCC licenses were
transferred to ESC. During September 2000, EchoStar Broadband Corporation was
formed for the purposes of issuing new debt. Contracts for the construction and
launch of EchoStar VII, EchoStar VIII and EchoStar IX are held in EchoStar
Orbital Corporation. Substantially all of EchoStar's operations are conducted by
subsidiaries of EDBS.
The following table summarizes the organizational structure of EchoStar
and its principal subsidiaries as of December 31, 2001:
REFERRED TO
LEGAL ENTITY HEREIN AS PARENT
------------ ----------- ------
EchoStar Communications Corporation ECC Publicly owned
EchoStar Broadband Corporation EBC ECC
EchoStar DBS Corporation EDBS EBC
EchoStar Orbital Corporation EOC EBC
EchoStar Satellite Corporation ESC EDBS
Echosphere Corporation Echosphere EDBS
EchoStar Technologies Corporation ETC EDBS
Significant Risks and Uncertainties
Substantial Leverage. EchoStar is highly leveraged, which makes it
vulnerable to changes in general economic conditions. As of December 31, 2001,
EchoStar had outstanding long-term debt (including both the current and
long-term portions) totaling approximately $5.7 billion. EchoStar has
semi-annual cash debt service obligations for all of its outstanding long-term
debt securities, as follows:
SEMI-ANNUAL PAYMENT SEMI-ANNUAL DEBT
DATES SERVICE REQUIREMENTS
------------------------- --------------------
9 1/4% Senior Notes due 2006 ("9 1/4% Seven Year Notes") ..... February 1 and August 1 $17,343,750
9 3/8% Senior Notes due 2009 ("9 3/8% Ten Year Notes") ........ February 1 and August 1 76,171,875
10 3/8% Senior Notes due 2007 ("10 3/8% Seven Year Notes") .... April 1 and October 1 51,875,000
9 1/8% Senior Notes due 2009 ("9 1/8% Seven Year Notes") ..... January 15 and July 15 31,937,500
4 7/8% Convertible Subordinated Notes due 2007 ("4 7/8%
Convertible Notes") ......................................... January 1 and July 1 24,375,000
5 3/4% Convertible Subordinated Notes due 2008 ("5 3/4%
Convertible Notes") ......................................... May 15 and November 15 28,750,000
F-9
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Semi-annual debt service requirements related to EchoStar's 5 3/4%
Convertible Subordinated Notes due 2008 commenced on November 15, 2001.
Semi-annual debt service requirements related to EchoStar's 9 1/8% Senior Notes
due 2009 will commence on July 15, 2002. There are no scheduled principal
payment or sinking fund requirements prior to maturity of any of these notes.
EchoStar's ability to meet its debt service obligations will depend on, among
other factors, the successful execution of its business strategy, which is
subject to uncertainties and contingencies beyond EchoStar's control.
Expected Operating Losses. Since 1996, EchoStar has reported
significant operating and net losses. Improvements in EchoStar's future results
of operations are largely dependent upon its ability to increase its customer
base while maintaining its overall cost structure, controlling subscriber
turnover and effectively managing its subscriber acquisition costs. No assurance
can be given that EchoStar will be effective with regard to these matters. In
addition, generally EchoStar incurs significant acquisition costs to obtain DISH
Network subscribers. The high cost of obtaining new subscribers magnifies the
negative effects of subscriber turnover.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The accompanying consolidated financial statements include the accounts
of EchoStar and all of its wholly-owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated. EchoStar accounts
for investments in 50% or less owned entities using the equity or cost method,
except for its investments in marketable equity securities, which are carried at
fair value.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses for each reporting
period. Actual results could differ from those estimates.
Stock Splits
On each of July 19, 1999, October 25, 1999 and March 22, 2000, EchoStar
completed a two-for-one split of its outstanding class A and class B common
stock. An amount equal to the par value of the common shares issued for the
July, October and March stock splits was transferred from additional paid-in
capital to class A common stock and class B common stock. All references to
shares and per share amounts included herein retroactively give effect to the
stock splits completed in July 1999, October 1999 and March 2000.
Foreign Currency Transaction Gains and Losses
The functional currency of EchoStar's foreign subsidiaries is the U.S.
dollar because their sales and purchases are predominantly denominated in that
currency. Transactions denominated in currencies other than U.S. dollars are
recorded based on exchange rates at the time such transactions arise. Subsequent
changes in exchange rates result in transaction gains and losses which are
reflected in income as unrealized (based on period-end translation) or realized
(upon settlement of the transaction). Net transaction gains (losses) during
1999, 2000 and 2001 were not material to EchoStar's results of operations.
F-10
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Statements of Cash Flows Data
The following presents EchoStar's supplemental cash flow statement
disclosure (in thousands):
YEAR ENDED DECEMBER 31,
--------------------------------------------
1999 2000 2001
---------- ---------- ----------
Cash paid for interest, net of amounts capitalized ................................ $ 128,553 $ 211,064 $ 377,038
Cash paid for income taxes ........................................................ 119 641 1,832
Capitalized interest .............................................................. -- 5,343 25,647
8% Series A Cumulative Preferred Stock dividends .................................. 124 -- --
12 1/8% Series B Senior Redeemable Exchangeable Preferred Stock dividends
payable in-kind ................................................................ 241 -- --
Accretion of 6 3/4% Series C Cumulative Convertible Preferred Stock ............... 6,335 -- --
6 3/4% Series C Cumulative Convertible Preferred Stock dividends .................. 553 1,146 337
Assets acquired from News Corporation and MCI:
FCC licenses and other ......................................................... 626,120 -- --
Satellites ..................................................................... 451,200 -- --
Digital broadcast operations center ............................................ 47,000 -- --
Common Stock issued to News Corporation and MCI ................................... 1,124,320 -- --
Class A common stock issued related to acquisition of Kelly Broadcasting -- 31,556 --
Systems ......................................................................
Conversion of 6 3/4% Series C Cumulative Convertible Preferred Stock to Class
A common stock ................................................................. -- 34,373 10,948
Forfeitures of deferred non-cash, stock-based compensation ........................ -- 8,072 12,564
Cash and Cash Equivalents
EchoStar considers all liquid investments purchased with an original
maturity of 90 days or less to be cash equivalents. Cash equivalents as of
December 31, 2000 and 2001 consist of money market funds, corporate notes and
commercial paper; such balances are stated at fair market value.
Marketable and Non-Marketable Investment Securities and Restricted Cash
EchoStar currently classifies all marketable investment securities as
available-for-sale. The fair market value of marketable investment securities
approximates the carrying value and represents the quoted market prices at the
balance sheet dates. Related unrealized gains and losses are reported as a
separate component of stockholders' deficit, net of related deferred income
taxes, if applicable. The specific identification method is used to determine
cost in computing realized gains and losses. Such unrealized gains totaled
approximately $4 million as of December 31, 2001.
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 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
year ended December 31, 2001 EchoStar recorded an aggregate charge to earnings
for other than temporary declines in the fair market value of its marketable
investment securities of approximately $70 million. This amount does not include
realized gains of approximately $22 million on the sales of marketable
investment
F-11
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
securities. If the fair market value of EchoStar's marketable securities
portfolio does not remain at or above 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 an
additional charge 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 within the broadband industry including
Wildblue Communications, StarBand Communications and VisionStar, Inc. Through
December 31, 2001, EchoStar invested approximately $156 million in these
non-marketable investment securities, including loans to VisionStar of
approximately $4.6 million. The securities of these companies are not publicly
traded. EchoStar's ability to create realizable value for its strategic
investments in companies that are not public is dependent on the success of
their business 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. StarBand and Wildblue have cancelled their planned initial
public stock offerings and have minimal cash on hand. StarBand has reduced its
operations and Wildblue has suspended most of its operations. The ability of
both of these entities to raise additional capital in the future is currently
uncertain, and attempts to date have been unsuccessful. In addition, StarBand
has significant vendor and bank obligations and their independent public
accountants have expressed uncertainty as to their ability to continue as a
going concern in the 2001 StarBand audit opinion. As a result of these factors,
EchoStar has recorded cumulative impairment and equity-method charges of
approximately $114 million to reduce the carrying values of these non-marketable
investment securities to their estimated net realizable values, aggregating
approximately $42 million as of December 31, 2001. Of the $114 million,
approximately $64 million was recorded related to EchoStar's equity in losses of
StarBand ($29 million and $35 million during the years ended December 31, 2000
and 2001, respectively). The remaining $50 million represents impairment charges
recorded during 2001 to reduce the carrying value of Wildblue to zero. If
EchoStar becomes aware of any factors that indicate that the carrying values of
any of its non-marketable investment securities are impaired, EchoStar will be
required to record additional charges to earnings in future periods to reduce
some or all of the remaining investment balances to their estimated net
realizable values.
Restricted cash and marketable investment securities, as reflected in
the accompanying consolidated balance sheets, include restricted cash placed in
trust for the purpose of repaying a note payable as of December 31, 2000 and
2001.
The major components of marketable investment securities and restricted
cash are as follow (in thousands):
MARKETABLE INVESTMENT SECURITIES RESTRICTED CASH
DECEMBER 31, DECEMBER 31,
-------------------------------- ---------------------------
2000 2001 2000 2001
------------ ---------- ---------- ----------
Commercial paper .................. $ 327,250 $ 515,752 $ -- $ --
Corporate notes and bonds ......... 206,556 550,364 -- --
Corporate equity securities ....... 53,936 40,633 -- --
Government bonds .................. 19,615 43,659 -- --
Restricted cash ................... -- -- 3,000 1,288
------------ ---------- ---------- ----------
$ 607,357 $1,150,408 $ 3,000 $ 1,288
============ ========== ========== ==========
As of December 31, 2001, marketable investment securities and
restricted cash include debt securities of $947 million with contractual
maturities of one year or less, $157 million with contractual maturities between
one and five years and $6 million with contractual maturities greater than five
years. Actual maturities may differ from contractual maturities as a result of
EchoStar's ability to sell these securities prior to maturity.
F-12
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Fair Value of Financial Instruments
Fair values for EchoStar's high-yield debt are based on quoted market
prices. The fair values of EchoStar's mortgages and other notes payable are
estimated using discounted cash flow analyses. The interest rates assumed in
such discounted cash flow analyses reflect interest rates currently being
offered for loans with similar terms to borrowers of similar credit quality.
The following table summarizes the book and fair values of EchoStar's
debt facilities at December 31, 2000 and 2001 (in thousands):
DECEMBER 31, 2000 DECEMBER 31, 2001
--------------------------- ---------------------------
BOOK VALUE FAIR VALUE BOOK VALUE FAIR VALUE
---------- ---------- ---------- ----------
9 1/4% Seven Year Notes ................ $ 375,000 $ 365,625 $ 375,000 $ 382,500
9 3/8% Ten Year Notes .................. 1,625,000 1,584,375 1,625,000 1,673,750
10 3/8% Seven Year Notes ............... 1,000,000 985,000 1,000,000 1,040,000
9 1/8% Seven Year Notes ................ -- -- 700,000 701,750
4 7/8% Convertible Notes ............... 1,000,000 750,000 1,000,000 891,300
5 3/4% Convertible Notes ............... -- -- 1,000,000 896,300
Mortgages and other notes payable ...... 35,944 35,495 21,262 21,262
Inventories
Inventories are stated at the lower of cost or market value. Cost is
determined using the first-in, first-out method. Proprietary products are
manufactured by outside suppliers to EchoStar's specifications. Manufactured
inventories include materials, labor, freight-in, royalties and manufacturing
overhead. Cost of other inventories includes parts, contract manufacturers'
delivered price, assembly and testing labor, and related overhead, including
handling and storage costs. Inventories consist of the following (in thousands):
DECEMBER 31,
--------------------------
2000 2001
--------- ---------
Finished goods - DBS ......................... $ 96,362 $ 127,186
Raw materials ................................ 40,247 45,725
Finished goods - reconditioned and other ..... 23,101 19,548
Work-in-process .............................. 8,879 7,924
Consignment .................................. 2,478 3,611
Reserve for excess and obsolete inventory .... (9,906) (13,247)
--------- ---------
$ 161,161 $ 190,747
========= =========
Property and Equipment
Property and equipment are stated at cost. Cost includes interest
capitalized of approximately $5 million and $26 million during the years ended
December 31, 2000 and 2001, respectively. No interest was capitalized during
1999. The costs of satellites under construction are capitalized during the
construction phase, assuming the eventual successful launch and in-orbit
operation of the satellite. If a satellite were to fail during launch or while
in-orbit, the resultant loss would be charged to expense in the period such loss
was incurred. The amount of any such loss would be reduced to the extent of
insurance proceeds received, if any, as a result of the launch or in-orbit
failure. Depreciation is recorded on a straight-line basis for financial
reporting purposes. Repair and maintenance costs are charged to expense when
incurred. Renewals and betterments are capitalized.
EchoStar reviews its long-lived assets and identifiable intangible
assets for impairment whenever events or changes in circumstances indicate that
the carrying amount of an asset may not be recoverable. For assets which are
F-13
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
held and used in operations, the asset would be impaired if the book value of
the asset exceeded the undiscounted future net cash flows related to the asset.
For those assets which are to be disposed of, the assets would be impaired to
the extent the fair value does not exceed the book value. EchoStar considers
relevant cash flow, estimated future operating results, trends and other
available information including the fair value of frequency rights owned, in
assessing whether the carrying value of assets are recoverable.
FCC Authorizations
FCC authorizations are recorded at cost and amortized using the
straight-line method over a period of 40 years. Such amortization commences at
the time the related satellite becomes operational; capitalized costs are
written off at the time efforts to provide services are abandoned. Accumulated
amortization related to FCC authorizations totaled approximately $28 million and
$47 million as of December 31, 2000 and 2001, respectively.
Effective January 1, 2002, EchoStar will be required to adopt 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. EchoStar is currently evaluating
the potential impact, if any, the adoption of FAS 142 will have on our financial
position and results of operations.
Revenue Recognition
Revenue from the provision of DISH Network subscription television
services and other satellite services is recognized as revenue in the period
such services are provided. Revenue from international sales of digital set-top
boxes and related accessories is recognized upon shipment to customers. Specific
revenue and subscriber acquisition cost recognition policies relating to the
marketing promotions for the periods presented are discussed below.
During the year ended December 31, 2001, our marketing promotions
included the DISH Network One-Rate Plan, Bounty Programs, Free Now, I Like 9,
and Digital Home Plan, which are described below.
DISH Network One-Rate Plan, Bounty Programs, Free Now Promotion and I
Like 9. Under the DISH Network One-Rate Plan, consumers were eligible to receive
a rebate of up to $199 on the purchase of certain EchoStar receiver systems. To
be eligible for this rebate, a subscriber must have made a one-year commitment
to subscribe to EchoStar's America's Top 150 programming or EchoStar's America's
Top 100 CD programming package plus one premium movie package (or equivalent
additional programming). This promotion expired on January 31, 2001.
Under the Bounty Programs, qualified customers were eligible to receive
a free base-level EchoStar receiver system and free installation. To be eligible
for this program, a subscriber must have made a one-year commitment to subscribe
to a qualified programming package. Certain of these promotions expired on
January 31, 2001.
From February through July 2001, EchoStar offered new subscribers a
free base-level EchoStar receiver system and free installation under its Free
Now promotion. To be eligible, a subscriber had to provide a valid major credit
card and make a one-year commitment to subscribe to either EchoStar's America's
Top 150 programming package or EchoStar's America's Top 100 CD or DISH Latino
Dos programming package plus additional programming totaling at least $39.98 per
month.
F-14
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
During August 2001, EchoStar commenced its I Like 9 promotion. Under
this promotion, subscribers who purchased an EchoStar receiver system for $199
or higher, received free installation and either EchoStar's America's Top 100 CD
or EchoStar's DISH Latino Dos programming package for $9 a month for the first
year. This promotion expired January 31, 2002.
EchoStar's direct sales to consumers pursuant to its DISH Network
One-Rate Plan, Bounty Programs, Free Now promotion and I Like 9 fall under the
scope of EITF Issue No. 00-14, "Accounting for Certain Sales Incentives" ("EITF
00-14"). In accordance with EITF 00-14, EchoStar accounts for the rebate
(substantively equivalent to the return of a customer deposit) under its DISH
Network One-Rate Plan by establishing a liability equal to the amount of the
rebate to be paid to the customer upon receipt of the upfront payment from the
subscriber and does not recognize revenue for that amount. The return of the
upfront payment received from the customer is charged against such liability
account when such amount is paid back to the customer. EchoStar does not receive
any up-front proceeds from subscribers under Bounty Programs or the Free Now
promotion. Programming revenue under the I Like 9 promotion is recorded at the
substantially discounted monthly rate charged to the subscriber. See Subscriber
Promotions Subsidies and Subscriber Acquisition Costs below for discussion
regarding the accounting for costs under these promotions.
EchoStar's dealer sales under its DISH Network One-Rate Plan, the
Bounty Programs, Free Now promotion and I Like 9 fall under the scope of EITF
Issue No. 00-25, "Vendor Income Statement Characterization of Consideration Paid
to a Reseller of the Vendor's Products" ("EITF 00-25"). In accordance with the
consensus guidance for Issue 2 of EITF 00-25, "buydowns" should be characterized
as a reduction of revenue. As such, certain commissions paid to dealers are
recorded as a reduction of the net proceeds received by EchoStar from the
dealers. EchoStar also charges the equipment reimbursements paid under the
Bounty Programs and the Free Now promotion against the proceeds from the dealer.
The rebate paid under the One Rate Plan is treated similarly as a reduction of
proceeds from the dealer by analogy to lease inducements, which are also
generally recognized as a reduction of revenue. See additional discussion under
Subscriber Promotions Subsidies and Subscriber Acquisition Costs below
Digital Home Plan. EchoStar's 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 100 CD or DISH Latino Dos
programming package for $36.99 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 December 31, 2001, included the first month's programming payment.
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 EchoStar retains ownership of equipment issued pursuant to the Digital
Home Plan promotion, equipment costs are capitalized and depreciated over a
period of four years.
StarBand. Prior to September 27, 2001, EchoStar accounted for the sale
of StarBand equipment as a third-party distributor of the equipment. In
accordance with EITF 99-19, EchoStar recorded revenue and cost of sales related
to the sale of StarBand hardware on a gross basis upon shipment to its
retailers, as the Company assumed the risk associated with the inventory if the
equipment was not sold to its retailers. EchoStar also recorded revenue and cost
of sales related to StarBand installations performed by the Company on a gross
basis upon installation. EchoStar did not enter into a multiple element
arrangement with its independent retailers or the end users of StarBand's
service as EchoStar was only a distributor of StarBand's equipment. Once the
equipment was purchased from an EchoStar retailer and installed in the StarBand
subscriber's home, EchoStar was not responsible for actual StarBand subscriber
activations or the provision of Internet services. Additionally, all StarBand
subscriber Internet service payments collected by EchoStar in connection with a
bundled billing are remitted directly to StarBand. If such bundled service
revenue for StarBand Internet services is not collected by EchoStar as
StarBand's billing agent, EchoStar has no remittance obligation to StarBand
whatsoever.
Effective September 27, 2001, in connection with EchoStar's increased
equity interest in StarBand, EchoStar began subsidizing the cost of equipment to
the subscriber by offering discounted equipment through its independent
F-15
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
dealers. As such, beginning September 27, 2001, EchoStar accounts for the sale
of StarBand equipment similar to the accounting for its DISH Network One-Rate
Plan, Bounty Programs, and Free Now promotion, as discussed in subscriber
promotion subsidies below.
EchoStar offers a bundled price of $100.99 for EchoStar's America's Top
150 ("AT 150") programming and the Starband Internet service. For StarBand
customers activated prior to September 27, 2001, in accordance with EITF Issue
No. 99-19, EchoStar recognizes $35.99 for the video portion of the revenue and
records a liability to Starband for the $65.00 related to the Internet service.
The $10.00 discount from the total standard price of EchoStar's AT 150
($40.99/mo.) and the Starband Internet service ($70.00/mo.) is shared 50/50
between EchoStar and Starband. In the event EchoStar does not collect the
monthly programming and Internet payments from a subscriber, EchoStar is not
obligated to remit payment to Starband for Internet services rendered to the
subscriber.
For StarBand customers activated after September 27, 2001, as a
retailer of the StarBand service, EchoStar recognizes the entire $100.99 of
revenue for the video and Internet service and records costs equal to the
monthly payment made by EchoStar to Starband for providing the service. In the
event EchoStar does not collect the monthly programming and Internet payments
from a subscriber, EchoStar is still obligated to remit payment to Starband for
the cost of providing the Internet service to the customer.
Subscriber Promotion Subsidies and Subscriber Acquisition Costs
Subscriber promotion subsidies - cost of sales includes the cost of
Echostar receiver systems distributed to retailers and other distributors of
EchoStar's equipment and receiver systems sold directly by EchoStar to
subscribers. Subscriber promotion subsidies - other includes net costs related
to various installation promotions and other promotional incentives. EchoStar
makes payments to its independent dealers as consideration for equipment
installation services and for equipment buydowns (commissions and rebates).
EchoStar expenses payments for equipment installation services as Subscriber
promotion subsidies - other. EchoStar's payments for equipment buydowns
represent a partial or complete return of the dealer's purchase price and are,
therefore, netted against the proceeds received from the dealer. EchoStar
reports the net proceeds or cost from its various sales promotions through its
independent dealer network as a component of Subscriber promotion subsidies -
other. No net proceeds or cost from the sale of subscriber related equipment is
recognized as revenue. Accordingly, subscriber acquisition costs are generally
expensed as incurred except for under EchoStar's Digital Home Plan which was
initiated during 2000 wherein the Company retains title to the receiver system
and certain ancillary equipment resulting in the capitalization and depreciation
of such equipment cost over its estimated useful life.
Deferred Debt Issuance Costs and Debt Discount
Costs of issuing debt are generally deferred and amortized to interest
expense over the terms of the respective notes (see Note 4).
Deferred Revenue
Deferred revenue principally consists of prepayments received from
subscribers for DISH Network programming. Such amounts are recognized as revenue
in the period the programming is provided to the subscriber.
F-16
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Long-Term Deferred Distribution and Carriage Revenue
Long-term deferred distribution and carriage revenue consists of
advance payments from certain content providers for carriage of their signal on
the DISH Network. Such amounts are deferred and recognized as revenue on a
straight-line basis over the related contract terms (up to ten years).
Accrued Expenses
Accrued expenses consist of the following (in thousands):
DECEMBER 31,
-----------------------
2000 2001
-------- --------
Programming ...................................... $176,566 $250,795
Royalties and copyright fees ..................... 111,228 145,140
Interest ......................................... 131,999 142,789
Marketing ........................................ 86,861 53,279
Other ............................................ 184,828 267,290
-------- --------
$691,482 $859,293
======== ========
Research and Development Costs
Research and development costs are expensed as incurred. Research and
development costs totaled $10 million, $17 million and $19 million for the years
ended December 31, 1999, 2000, and 2001, respectively.
Comprehensive Loss
The change in unrealized gain (loss) on available-for-sale securities
is the only component of EchoStar's other comprehensive loss. Accumulated other
comprehensive income (loss) presented on the accompanying consolidated balance
sheets consists of the accumulated net unrealized income (loss) on
available-for-sale securities, net of deferred taxes.
Basic and Diluted Loss Per Share
Statement of Financial Accounting Standards No. 128, "Earnings Per
Share" ("FAS No. 128") requires entities to present both basic earnings per
share ("EPS") and diluted EPS. Basic EPS excludes dilution and is computed by
dividing income (loss) available to common shareholders by the weighted-average
number of common shares outstanding for the period. Diluted EPS reflects the
potential dilution that could occur if stock options or warrants were exercised
or convertible securities were converted to common stock, resulting in the
issuance of common stock that then would share in any earnings of the Company.
EchoStar had net losses for the years ending December 31, 1999, 2000 and 2001.
Therefore, the effect of the common stock equivalents and convertible securities
is excluded from the computation of diluted earnings (loss) per share since the
effect is anti-dilutive.
F-17
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Earnings per share amounts for all periods are presented below in
accordance with the requirements of FAS No. 128.
YEAR ENDED DECEMBER 31,
-------------------------------------------
1999 2000 2001
--------- --------- ---------
(In thousands, except per share data)
Numerator:
Net loss ..................................................... $(792,847) $(650,326) $(215,498)
8% Series A Cumulative Preferred Stock dividends ............. (124) -- --
12 1/8% Series B Senior Redeemable Exchangeable Preferred
Stock dividends payable in-kind ............................ (241) -- --
Accretion of 6 3/4% Series C Cumulative Convertible
Preferred Stock ............................................ (6,335) -- --
6 3/4% Series C Cumulative Convertible Preferred Stock
dividends .................................................. (553) (1,146) (337)
--------- --------- ---------
Numerator for basic and diluted loss per share - loss
attributable to common shareholders ........................ $(800,100) $(651,472) $(215,835)
========= ========= =========
Denominator:
Denominator for basic and diluted loss per share -
weighted-average common shares outstanding ................. 416,476 471,023 477,172
========= ========= =========
Net loss per common share:
Basic and diluted loss per share before extraordinary charge .... $ (1.28) $ (1.38) $ (0.45)
Extraordinary charge for the early retirement of debt ........... (0.64) -- --
--------- --------- ---------
Basic and diluted loss per share ................................ $ (1.92) $ (1.38) $ (0.45)
========= ========= =========
Shares of Class A Common Stock issuable upon conversion of:
6 3/4% Series C Cumulative Convertible Preferred Stock ....... 14,912 3,593 --
4 7/8% Convertible Subordinated Notes ........................ 22,007 22,007 22,007
5 3/4% Convertible Subordinated Notes ........................ -- -- 23,100
As of December 31, 1999, 2000 and 2001, options to purchase
approximately 27,844,000, 25,118,000 and 22,748,000 shares of class A common
stock were outstanding, respectively.
Reclassifications
Certain prior year balances in the consolidated financial statements
and accompanying notes to consolidated financial statements have been
reclassified to conform with the 2001 presentation.
New Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 141, "Business Combinations," ("FAS 141"),
which is required to be adopted July 1, 2001. FAS 141 requires the purchase
method of accounting for all business combinations initiated after June 30,
2001. The application of FAS 141 has not had a material impact on EchoStar's
financial position or results of operations.
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 is required to apply all other provisions of FAS 142. EchoStar is
currently evaluating the potential impact, if any, the adoption of FAS 142 will
have on our financial position and results of operations.
F-18
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
In August 2001, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" ("FAS 144"), which is effective for
fiscal periods beginning after December 15, 2001 and interim periods within
those fiscal years. FAS 144 establishes an accounting model for impairment or
disposal of long-lived assets to be disposed of by sale. EchoStar is currently
evaluating the potential impact, if any, the adoption of FAS 144 will have on
its financial position and results of operation.
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following (in thousands):
DECEMBER 31,
LIFE ------------------------------
(IN YEARS) 2000 2001
---------- ----------- -----------
EchoStar I ............................. 12 $ 201,607 $ 201,607
EchoStar II ............................ 12 228,694 228,694
EchoStar III ........................... 12 234,083 234,083
EchoStar IV ............................ 4 89,505 89,505
EchoStar V ............................. 12 208,548 210,446
EchoStar VI ............................ 12 243,789 246,022
Furniture, fixtures and equipment ...... 2-12 331,069 409,523
Buildings and improvements ............. 7-40 83,922 94,325
Digital Home Plan equipment ............ 4 62,726 353,567
Tooling and other ...................... 2 5,211 6,041
Land ................................... -- 10,083 12,699
Vehicles ............................... 7 968 1,595
Construction in progress ............... -- 226,454 462,365
----------- -----------
Total property and equipment ....... 1,926,659 2,550,472
Accumulated depreciation ............... (415,356) (646,460)
----------- -----------
Property and equipment, net ........ $ 1,511,303 $ 1,904,012
=========== ===========
Construction in progress consists of the following (in thousands):
DECEMBER 31,
-----------------------
2000 2001
-------- --------
Progress amounts for satellite construction, launch, and launch
insurance:
EchoStar VII ............................................. 76,382 159,577
EchoStar VIII ............................................ 46,487 128,535
EchoStar IX .............................................. 22,215 74,189
Digital broadcast operations center ........................... 39,797 56,347
Other ......................................................... 41,573 43,717
-------- --------
$226,454 $462,365
======== ========
F-19
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
EchoStar V
EchoStar V is equipped with a total of three momentum wheels, including
one spare. During July 2001, EchoStar V experienced an anomaly resulting in the
loss of one momentum wheel. The satellite was quickly restored to normal
operations mode. An investigation conducted by the spacecraft manufacturer
concluded that a failure within the momentum wheel electronics caused the loss.
The manufacturer also believes that the failure was isolated to this particular
unit. While no further momentum wheel losses are expected, there can be no
assurance future anomalies will not cause further losses which could impact
commercial operation of the satellite. At EchoStar's request, the manufacturer
has developed contingency plans which include modification to the spacecraft's
on-board software that will allow continued operation in the event of additional
momentum wheel failures, with limited effect on spacecraft life. During August
2001, one of the thrusters on EchoStar V experienced an anomalous event
resulting in a temporary interruption of service. The satellite was quickly
restored to normal operations mode. An investigation by the manufacturer has
determined that the engine remains functional but with a reduction in rated
thrust. The satellite is equipped with a substantial number of backup thrusters.
EchoStar V is also equipped with a total of 48 traveling-wave-tube amplifiers
("TWTAs"), including 16 spares. A total of two TWTAs were taken out of service
and replaced by spares between the launch of the satellite and June 30, 2001.
During the third quarter 2001, EchoStar V experienced anomalous telemetry
readings on two additional TWTAs. As a precaution, during September 2001
EchoStar substituted one of those TWTA's with a spare. To the extent that
EchoStar V experiences anomalous telemetry readings on additional TWTAs it may
be necessary to utilize additional spare TWTAs. EchoStar V has also experienced
anomalies resulting in the loss of one solar array string. The satellite has a
total of approximately 96 solar array strings and approximately 92 are required
to assure full power availability for the 12-year design life of the satellite.
An investigation of the solar array anomalies, none of which have impacted
commercial operation of the satellite to date, is continuing. Until the root
cause of these anomalies is finally determined, there can be no assurance future
anomalies will not cause further losses which could impact commercial operation
of the satellite.
EchoStar VI
EchoStar VI is equipped with a total of 48 transponders, including 16
spares. During April 2001, EchoStar VI experienced a series of anomalous events
resulting in a temporary interruption of service. The satellite was quickly
restored to normal operations mode. As a result of the anomaly, an investigation
conducted by the spacecraft manufacturer concluded that one stationkeeping
thruster and a pair of TWTA are unusable. The satellite is equipped with a
substantial number of backup transponders and thrusters. The satellite
manufacturer, Space Systems Loral ("SS/L"), has advised EchoStar that it
believes that the thruster anomaly was isolated to one stationkeeping thruster,
and that while further failures are possible, SS/L does not believe it is likely
that additional thrusters will be impacted. EchoStar VI has also experienced
anomalies resulting in the loss of two solar array strings. The satellite has a
total of approximately 112 solar array strings and approximately 106 are
required to assure full power availability for the 12-year design life of the
satellite. An investigation of the solar array anomalies, none of which have
impacted commercial operation of the satellite to date, is continuing. Until the
root cause of these anomalies is finally determined, there can be no assurance
future anomalies will not cause further losses which could impact commercial
operation of the satellite.
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
F-20
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
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. Additionally, EchoStar filed a lawsuit against the
insurance carriers in the U.S. District Court for the District of Colorado
asserting causes of action for violation of Federal and State antitrust laws.
During March 2001, EchoStar voluntarily dismissed its antitrust lawsuit without
prejudice. EchoStar has the right to re-file an antitrust action against the
insurers in the future.
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 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 EBC's senior notes requires EchoStar to maintain satellite
insurance on the lesser of half of its satellites or three of its satellites.
EchoStar I through EchoStar IX are owned by a direct subsidiary of EBC.
Insurance coverage is therefore required for at least three 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
reclassified an amount equal to the depreciated cost of three of its satellites
from cash and cash equivalents to cash reserved for satellite insurance on its
balance sheet. As of December 31, 2001, cash reserved for satellite insurance
totaled approximately $122 million. If EchoStar leases or transfers ownership of
EchoStar VII, EchoStar VIII or EchoStar IX to EDBS, which it is currently
considering, EchoStar would need to reserve additional cash for the depreciated
cost of additional satellites. The reserve would increase by approximately $60
million if one or two satellites are so leased or transferred, and by an
additional material amount if a third satellite is leased or transferred. The
reclassifications will continue until such time, if ever, as EchoStar can again
insure its satellites on acceptable terms and for acceptable amounts.
F-21
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
4. LONG-TERM DEBT
9 1/4% Seven Year and 9 3/8% Ten Year Notes
On January 25, 1999, EDBS sold $375 million principal amount of the 9
1/4% Seven Year Notes and $1.625 billion principal amount of the 9 3/8% Ten Year
Notes. Interest accrues at annual rates of 9 1/4% and 9 3/8%, respectively and
is payable semi-annually in cash in arrears on February 1 and August 1 of each
year, commencing August 1, 1999.
Concurrently with the closing of the 9 1/4% Seven Year Notes and 9 3/8%
Ten Year Notes offering, EchoStar used approximately $1.658 billion of net
proceeds received from the sale of the 9 1/4% Seven Year and 9 3/8% Ten Year
Notes to complete tender offers for its then outstanding senior notes issued in
1994, 1996 and 1997. In February 1999, EchoStar used approximately $268 million
of net proceeds received from the sale of the 9 1/4% Seven Year and 9 3/8% Ten
Year Notes to complete the tender offers related to the 12 1/8% Senior Exchange
Notes due 2004, issued on January 4, 1999, in exchange for all issued and
outstanding 12 1/8% Series B Senior Redeemable Exchangeable Preferred Stock.
With the exception of certain de minimis domestic and foreign
subsidiaries, the 9 1/4% Seven Year and 9 3/8% Ten Year Notes are fully,
unconditionally and jointly and severally guaranteed by all subsidiaries of
EDBS. The 9 1/4% Seven Year and 9 3/8% Ten Year Notes are general senior
unsecured obligations which:
o rank pari passu in right of payment to each other and to all
existing and future senior unsecured obligations;
o rank senior to all existing and future junior obligations; and
o are effectively junior to secured obligations to the extent of the
collateral securing such obligations, including any borrowings under
future secured credit facilities.
Except under certain circumstances requiring prepayment premiums, and
in other limited circumstances, the 9 1/4% Seven Year and 9 3/8% Ten Year Notes
are not redeemable at EDBS's option prior to February 1, 2003 and February 1,
2004, respectively. Thereafter, the 9 1/4% Seven Year Notes will be subject to
redemption, at the option of EDBS, in whole or in part, at redemption prices
decreasing from 104.625% during the year commencing February 1, 2003 to 100% on
or after February 1, 2005, together with accrued and unpaid interest thereon to
the redemption date. The 9 3/8% Ten Year Notes will be subject to redemption, at
the option of EDBS, in whole or in part, at redemption prices decreasing from
104.688% during the year commencing February 1, 2004 to 100% on or after
February 1, 2008, together with accrued and unpaid interest thereon to the
redemption date.
The indentures related to the 9 1/4% Seven Year and 9 3/8% Ten Year
Notes (the "Seven and Ten Year Notes Indentures") contain restrictive covenants
that, among other things, impose limitations on the ability of EDBS to:
o incur additional indebtedness;
o apply the proceeds of certain asset sales;
o create, incur or assume liens;
o create dividend and other payment restrictions with respect to
EDBS's subsidiaries;
o merge, consolidate or sell assets; and
o enter into transactions with affiliates.
In addition, EDBS may pay dividends on its equity securities only if no
default shall have occurred or is continuing under the Seven and Ten Year Notes
Indentures; and after giving effect to such dividend and the incurrence of any
indebtedness (the proceeds of which are used to finance the dividend), EDBS'
ratio of total indebtedness to cash flow (calculated in accordance with the
Indentures) would not exceed 8.0 to 1.0. Moreover, the aggregate amount of such
dividends generally may not exceed the sum of the difference of cumulative
consolidated cash flow (calculated in accordance with
F-22
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
the Indentures) minus 120% of consolidated interest expense of EDBS (calculated
in accordance with the Indentures), in each case from April 1, 1999 plus an
amount equal to 100% of the aggregate net cash proceeds received by EDBS and its
subsidiaries from the issuance or sale of certain equity interests of EDBS or
EchoStar.
In the event of a change of control, as defined in the Seven and Ten
Year Notes Indentures, EDBS will be required to make an offer to repurchase all
of the 9 1/4% Seven Year and 9 3/8% Ten Year Notes at a purchase price equal to
101% of the aggregate principal amount thereof, together with accrued and unpaid
interest thereon, to the date of repurchase.
10 3/8% Seven Year Notes
On September 25, 2000, our wholly-owned subsidiary, EBC, sold $1
billion principal amount of the 10 3/8% Seven Year Notes. Interest accrues at an
annual rate of 10 3/8% and is payable semi-annually in cash, in arrears on April
1 and October 1 of each year. The proceeds of the 10 3/8% Seven Year Notes will
be used primarily by EchoStar's subsidiaries for the construction and launch of
additional satellites, strategic acquisitions and other general working capital
purposes.
The indenture related to the 10 3/8% Seven Year Notes (the "10 3/8%
Seven Year Notes Indenture") contains certain restrictive covenants that
generally do not impose material limitations on EchoStar. Subject to certain
limitations, the 10 3/8% Seven Year Notes Indenture permits EBC to incur
additional indebtedness, including secured and unsecured indebtedness that ranks
on parity with the 10 3/8% Seven Year Notes. Any secured indebtedness will, as
to the collateral securing such indebtedness, be effectively senior to the 10
3/8% Seven Year Notes to the extent of such collateral.
The 10 3/8% Seven Year Notes are:
o general unsecured obligations of EBC;
o ranked equally in right of payment with all of EBC's existing and
future senior debt;
o ranked senior in right of payment to all of EBC's other existing
and future subordinated debt; and
o ranked effectively junior to (i) all liabilities (including trade
payables) of EBC's subsidiaries and (ii) all of EBC's secured
obligations, to the extent of the collateral securing such
obligations, including any borrowings under any of EBC's future
secured credit facilities, if any.
Except under certain circumstances requiring prepayment premiums, and
in other limited circumstances, the 10 3/8% Seven Year Notes are not redeemable
at EchoStar's option prior to October 1, 2004. Thereafter, the 10 3/8% Seven
Year Notes will be subject to redemption, at EchoStar's option, in whole or in
part, at redemption prices decreasing from 105.188% during the year commencing
October 1, 2004 to 100% on or after October 1, 2006, together with accrued and
unpaid interest thereon to the redemption date.
In the event of a change of control, as defined in the 10 3/8% Seven
Year Notes Indenture, EBC will be required to make an offer to repurchase all or
any part of a holder's 10 3/8% Seven Year Notes at a purchase price equal to
101% of the aggregate principal amount thereof, together with accrued and unpaid
interest thereon, to the date of repurchase.
Under the terms of the 10 3/8% Seven Year Notes Indenture, EBC has
agreed to cause its subsidiary, EDBS to make an offer to exchange (the "EDBS
Exchange Offer") all of the outstanding 10 3/8% Seven Year Notes for a new class
of notes issued by EDBS as soon as practical following the first date (as
reflected in EDBS' most recent quarterly or annual financial statements) on
which EDBS is permitted to incur indebtedness in an amount equal to the
outstanding principal balance of the 10 3/8% Seven Year Notes under the
"Indebtedness to Cash Flow Ratio" test contained in the indentures (the "EDBS
Indentures") governing the EDBS 9 1/4% Seven Year Notes and 9 3/8% Ten Year
Notes, and such incurrence of indebtedness would not otherwise cause any breach
or violation of, or result in a default under, the terms of the EDBS Indentures.
Pursuant to the terms of the EDBS indentures, the actual EDBS Exchange offer
will be effected during the first quarter of 2002.
F-23
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
9 1/8% Seven Year Notes
On December 28, 2001, EDBS sold $700 million principal amount of the 9
1/8% Seven Year Notes. Interest accrues at an annual rate of 9 1/8% and is
payable semi-annually in cash, in arrears on January 15 and July 15 of each
year, commencing July 15, 2002. The proceeds of the 9 1/8% Seven Year Notes are
intended to be used for one or more of the following: 1) to provide a portion of
the financing for the proposed merger of EchoStar with Hughes Electronics
Corporation, 2) if EchoStar does not consummate the merger, to provide a portion
of the financing for the acquisition by EchoStar of Hughes' approximately 81%
interest in PanAmSat Corporation, and 3) the construction, launch and insurance
of additional satellites, strategic acquisitions and other general corporate
purposes.
The 9 1/8% Seven Year Notes are guaranteed by substantially all
subsidiaries of EDBS on a senior basis. The 9 1/8% Seven Year Notes are general
unsecured senior obligations which:
o rank senior with all of EDBS' future subordinated debt; and
o rank junior to any of EDBS' secured debt to the extent of the value
of the assets securing such debt.
Except under certain circumstances requiring prepayment premiums, and
in other limited circumstances, the 9 1/8% Seven Year Notes are not redeemable
at EDBS' option prior to January 15, 2006. Thereafter, the 9 1/8% Seven Year
Notes will be subject to redemption, at EDBS' option, in whole or in part, at
redemption prices decreasing from 104.563% during the year commencing January
15, 2006 to 100% on or after January 15, 2008, together with accrued and unpaid
interest thereon to the redemption date.
The indenture related to the 9 1/8% Seven Year Notes (the "9 1/8% Seven
Year Notes Indenture") contains restrictive covenants that, among other things,
impose limitations on the ability of EDBS and its restricted subsidiaries to:
o incur additional indebtedness or enter into sale and leaseback
transactions;
o pay dividends or make distribution on EDBS' capital stock or
repurchase EDBS' capital stock;
o make certain investments;
o create liens;
o enter into transactions with affiliates;
o merge or consolidate with another company; and
o transfer and sell assets
In the event of a change of control, as defined in the 9 1/8% Seven
Year Notes Indenture, EDBS will be required to make an offer to repurchase all
or any part of a holder's 9 1/8% Seven Year Notes at a purchase price equal to
101% of the aggregate principal amount thereof, together with accrued and unpaid
interest thereon, to the date of repurchase.
4 7/8% Convertible Notes
On December 2, 1999, EchoStar sold $1 billion principal amount of the 4
7/8% Convertible Notes. Interest accrues at an annual rate of 4 7/8% and is
payable semi-annually in cash, in arrears on January 1 and July 1 of each year,
commencing July 1, 2000.
The 4 7/8% Convertible Notes are general unsecured obligations, which
rank junior in right of payment to:
o all existing and future senior obligations;
o all of EchoStar's secured debts to the extent of the value of the
assets securing those debts; and
o all existing and future debts and other liabilities or EchoStar's
subsidiaries.
F-24
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Except under certain circumstances requiring prepayment premiums, and
in other limited circumstances, the 4 7/8% Convertible Notes are not redeemable
at EchoStar's option prior to January 1, 2003. Thereafter, the 4 7/8%
Convertible Notes will be subject to redemption, at the option of the Company,
in whole or in part, at redemption prices decreasing from 102.786% during the
year commencing January 1, 2003 to 100% on or after January 1, 2007, together
with accrued and unpaid interest thereon to the redemption date.
The 4 7/8% Convertible Notes, unless previously redeemed, are
convertible at the option of the holder any time after 90 days following the
date of their original issuance and prior to maturity into shares of our class A
common stock at a conversion price of $45.44 per share.
The indenture related to the 4 7/8% Convertible Notes (the "4 7/8%
Convertible Notes Indenture") contain certain restrictive covenants that do not
impose material limitations on EchoStar.
In the event of a change of control, as defined in the 4 7/8%
Convertible Notes Indenture, EchoStar will be required to make an offer to
repurchase all or any part of the holder's 4 7/8% Convertible Notes at a
purchase price equal to 101% of the aggregate principal amount thereof, together
with accrued and unpaid interest thereon, to the date of repurchase.
5 3/4% Convertible Notes
On May 24, 2001, EchoStar sold $1 billion principal amount of the 5
3/4% Convertible Notes. Interest accrues at an annual rate of 5 3/4% and is
payable semi-annually in cash, in arrears on May 15 and November 15 of each
year, commencing November 15, 2001.
The 5 3/4% Convertible Notes are general unsecured obligations, which
rank equal to EchoStar's 4 7/8% Convertible Notes and junior in right of payment
to:
o all existing and future senior obligations;
o all of EchoStar's secured debts to the extent of the value of the
assets securing those debts; and
o all existing and future debts and other liabilities or EchoStar's
subsidiaries.
Except under certain circumstances requiring prepayment premiums, and
in other limited circumstances, the 5 3/4% Convertible Notes are not redeemable
at EchoStar's option prior to May 15, 2004. Thereafter, the 5 3/4% Convertible
Notes will be subject to redemption, at the option of the Company, in whole or
in part, at redemption prices decreasing from 103.286% during the year
commencing May 15, 2004 to 100% on or after May 15, 2008, together with accrued
and unpaid interest thereon to the redemption date.
The 5 3/4% Convertible Notes, unless previously redeemed, are
convertible at the option of the holder any time after 90 days following the
date of their original issuance and prior to maturity into shares of EchoStar's
class A common stock at a conversion price of $43.29 per share.
The indenture related to the 5 3/4% Convertible Notes (the "5 3/4%
Convertible Notes Indenture") contains certain restrictive covenants that do not
impose material limitations on EchoStar.
In the event of a change of control, as defined in the 5 3/4%
Convertible Notes Indenture, EchoStar will be required to make an offer to
repurchase all or any part of the holder's 5 3/4% Convertible Notes at a
purchase price equal to 101% of the aggregate principal amount thereof, together
with accrued and unpaid interest thereon, to the date of repurchase.
Certain Debt Indentures
The Hughes merger agreement requires that EchoStar use commercially
reasonable efforts to: 1) amend the indentures relating to certain of its debt
instruments so that the Hughes merger and related transactions would not
constitute a change of control requiring it to make an offer to repurchase those
notes, 2) obtain additional committed financing, on terms reasonably
satisfactory to Hughes, sufficient to refinance the notes outstanding under the
indentures which EchoStar is unable to amend, or 3) present to Hughes a plan,
taking into account prevailing market
F-25
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
conditions for the relevant notes, designed so that at and after the effective
time of the Hughes merger, the surviving corporation and its subsidiaries would
not be in breach of their obligations under those indentures.
Mortgages and Other Notes Payable
Mortgages and other notes payable consists of the following (in
thousands):
DECEMBER 31,
------------------------
2000 2001
-------- --------
8.25% note payable for satellite vendor financing for EchoStar I due in equal monthly
installments of $772, including interest, through February 2001 ...................... $ 2,137 $ --
8.25% note payable for satellite vendor financing for EchoStar II due in equal
monthly installments of $562, including interest, through November 2001 .............. 5,930 --
8.25% note payable for satellite vendor financing for EchoStar III due in
equal monthly installments of $294, including interest, through October 2002 ......... 5,978 2,829
8.25% note payable for satellite vendor financing for EchoStar IV due upon
resolution of satellite insurance claim (Note 3) ..................................... 11,327 11,327
Mortgages and other unsecured notes payable due in installments through August
2020 with interest rates ranging from 2% to 10% ...................................... 10,572 7,106
-------- --------
Total .................................................................................. 35,944 21,262
Less current portion ................................................................... (21,132) (14,782)
-------- --------
Mortgages and other notes payable, net of current portion .............................. $ 14,812 $ 6,480
======== ========
Future maturities of EchoStar's outstanding long-term debt are
summarized as follows (in thousands):
DECEMBER 31,
-------------------------------------------------------------------------------------------------
2002 2003 2004 2005 2006 THEREAFTER TOTAL
---------- ---------- ---------- ---------- ---------- ---------- ----------
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 ................... 14,782 1,992 723 753 798 2,214 21,262
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total ........................ $ 14,782 $ 1,992 $ 723 $ 753 $ 375,798 $5,327,214 $5,721,262
========== ========== ========== ========== ========== ========== ==========
Satellite Vendor Financing
The purchase price for satellites is required to be paid in progress
payments, some of which are non-contingent payments that are deferred until
after the respective satellites are in orbit (satellite vendor financing).
EchoStar utilized $36 million, $28 million, $14 million and $13 million of
satellite vendor financing for EchoStar I, EchoStar II, EchoStar III and
EchoStar IV, respectively. The satellite vendor financings for both EchoStar
III, EchoStar IV and EchoStar VII are secured by an ECC corporate guarantee.
Bridge Financing Commitments
As previously discussed, EchoStar and Hughes have obtained $5.525
billion in bridge financing commitments for the Hughes merger and related
transactions. This commitment has been reduced to $3.325 billion as a result of
the sale the 9 1/8% Senior Notes due 2009 by EDBS on December 28, 2001 and the
closing of the $1.5 billion equity investment in EchoStar as part of EchoStar's
strategic alliance with Vivendi on January 22, 2002.
In consideration for the bridge financing commitments, EchoStar is
obligated to the lenders for the following non-refundable fees whether or not
the Hughes merger or PanAmSat acquisition are ever consummated:
F-26
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
o Commitment Fees of 1% of the aggregate bridge financing
commitments were paid by EchoStar to the lenders upon execution of
the agreements relating to the commitments. These fees, totaling
approximately $55 million, were deferred and are being charged to
interest expense as the bridge commitments are reduced.
Approximately $7.4 million of these commitment fees were expensed
upon issuance of the 9 1/8% Seven Year Notes by EDBS during
December 2001. 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 commitment fees not previously
expensed will be charged to interest expense in future periods.
o Ticking fees of .50% per year on the aggregate remaining bridge
financing commitments are payable quarterly, in arrears, until the
closing of either the Hughes merger or the PanAmSat acquisition,
or the termination or expiration of the agreements relating to the
bridge commitments. These ticking fees will be expensed as
incurred. As of December 31, 2001, we had expensed approximately
$4.9 million in ticking fees.
5. INCOME TAXES
As of December 31, 2001, EchoStar had net operating loss carryforwards
("NOLs") for Federal income tax purposes of approximately $2.112 billion. The
NOLs will begin to expire in the year 2012. The use of the NOLs is subject to
statutory and regulatory limitations regarding changes in ownership. Statement
of Financial Accounting Standard No. 109, "Accounting for Income Taxes," ("FAS
No. 109") requires that the potential future tax benefit of NOLs be recorded as
an asset. FAS No. 109 also requires that deferred tax assets and liabilities be
recorded for the estimated future tax effects of temporary differences between
the tax basis and book value of assets and liabilities. Deferred tax assets are
offset by a valuation allowance to the extent it is considered more likely than
not that the benefits of such assets will not be realized.
In 2001, EchoStar increased its valuation allowance sufficient to
offset net deferred tax assets arising during the year except for the tax
deferred asset related to federal alternative minimum income tax, which has an
indefinite life. Realization of net deferred tax assets is not assured and is
principally dependent on generating future taxable income prior to expiration of
the NOLs. Management believes existing net deferred tax assets in excess of the
valuation allowance will, more likely than not, be realized. EchoStar
continuously reviews the adequacy of its valuation allowance. Future decreases
to the valuation allowance will be made only as changed circumstances indicate
that it is more likely than not that the additional benefits will be realized.
Any future adjustments to the valuation allowance will be recognized in
EchoStar's provision for income taxes.
F-27
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
The actual tax (provision) benefit for 1999, 2000 and 2001 are
reconciled to the amounts computed by applying the statutory Federal tax rate to
income before taxes as follows:
YEAR ENDED DECEMBER 31,
------------------------------
1999 2000 2001
----- ----- -----
Statutory rate .................................. 35.0% 35.0% 35.0%
State income taxes, net of Federal benefit ...... 2.3 2.9 1.4
Employee stock option exercise and sale ......... -- 3.2 1.5
Cumulative effect of change in tax rate resulting
from a revision of apportionment of
state income.................................. -- -- (11.9)
Non-deductible interest expense ................. (0.3) -- --
Other ........................................... 1.3 1.4 (2.8)
Increase in valuation allowance ................. (38.3) (42.5) (22.5)
----- ----- -----
Total benefit from income taxes .............. --% --% 0.7%
===== ===== =====
The temporary differences, which give rise to deferred tax assets and
liabilities as of December 31, 2000 and 2001, are as follows (in thousands):
DECEMBER 31,
--------- ---------
2000 2001
--------- ---------
Current deferred tax assets:
Accrued expenses ................................................... $ 77,110 $ 95,431
Inventory reserves and cost methods ................................ 3,974 5,369
Allowance for doubtful accounts .................................... 12,533 8,896
Other .............................................................. 79 243
--------- ---------
Total current deferred tax assets .................................... 93,696 109,939
Current deferred tax liabilities:
Other .............................................................. (40) (39)
--------- ---------
Total current deferred tax liabilities ............................... (40) (39)
--------- ---------
Gross current deferred tax assets .................................... 93,656 109,900
Valuation allowance .................................................. (79,194) (89,115)
--------- ---------
Net current deferred tax assets ...................................... 14,462 20,785
Noncurrent deferred tax assets:
General business, foreign tax, alternative minimum tax credits ..... 2,504 3,904
Net operating loss carryforwards ................................... 771,748 771,162
Incentive plan stock compensation .................................. 38,841 44,715
Unrealized loss on investments ..................................... -- 48,159
Loss on equity method investments .................................. 10,961 24,219
Other .............................................................. 23,802 39,200
--------- ---------
Total noncurrent deferred tax assets ................................. 847,856 931,359
Noncurrent deferred tax liabilities:
Depreciation ....................................................... (77,452) (115,589)
Other .............................................................. (1,108) (13,072)
--------- ---------
Total noncurrent deferred tax liabilities ............................ (78,560) (128,661)
--------- ---------
Gross deferred tax assets ............................................ 769,296 802,698
--------- ---------
Valuation allowance .................................................. (716,623) (754,948)
--------- ---------
Net noncurrent deferred tax assets ................................... 52,673 47,750
--------- ---------
Net deferred tax assets .............................................. $ 67,135 $ 68,535
========= =========
F-28
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
The components of the (provision for) benefit from income taxes are as
follows (in thousands):
YEAR ENDED DECEMBER 31,
-------------------------------------------
1999 2000 2001
--------- --------- ---------
Current (provision) benefit:
Federal .............................. $ -- $ -- $ (1,400)
State ................................ (45) (80) (860)
Foreign .............................. (108) (475) (593)
--------- --------- ---------
(153) (555) (2,853)
Deferred (provision) benefit:
Federal .............................. 286,195 247,519 44,910
State ................................ 27,748 28,809 4,736
Increase in valuation allowance ...... (313,943) (276,328) (48,246)
--------- --------- ---------
-- -- 1,400
--------- --------- ---------
Total (provision) benefit ......... $ (153) $ (555) $ (1,453)
========= ========= =========
Deferred Tax Assets
Net deferred tax assets of approximately $69 million and $67 million as
of December 31, 2001 and 2000, respectively, have remained substantially
unchanged on EchoStar's balance sheet since 1996. Additional deferred tax assets
of approximately $844 million generated since 1996 have been substantially
offset by adjustments to EchoStar's valuation allowance. EchoStar expects to
generate taxable income in the future, but the timing and amount of that taxable
income is uncertain and EchoStar does not believe the criteria for recognition
of additional tax benefits are presently satisfied. EchoStar needs to generate
future taxable income of approximately $190 million to realize the benefit of
the net deferred tax assets recognized and EchoStar continues to believe it is
more likely than not that the assets it has recorded will be realized. EchoStar
expects to adjust the valuation allowance in the future when the timing and
amount of additional future taxable income becomes more certain. If it is
determined at some point in the future that any or all of previously reserved
deferred tax assets are more likely than not realizable, significant deferred
income tax benefits will need to be recorded and such benefits may be material.
Internal Revenue Service Proposed Adjustment
During 2001, the Internal Revenue Service conducted an audit of
EchoStar's consolidated federal income tax returns for the years 1997, 1998, and
1999. As a result of this review, the IRS' position is that certain subscriber
acquisition costs deducted by EchoStar in those years should instead be
capitalized and amortized over a period of five years. EchoStar does not agree
with this proposed adjustment and has initiated an appeal of the agent's
position. At this time, the ultimate resolution of this dispute is uncertain. If
EchoStar's arguments for deductibility are unsuccessful and EchoStar is required
to capitalize and amortize these costs over five years, the federal net
operating losses ("NOLs") available to EchoStar at December 31, 2001 could be
reduced by as much as $1.7 billion. Such an outcome would not materially alter
EchoStar's ultimate tax obligations but could significantly accelerate the
timing of when it would be required to begin making material current income tax
payments. EchoStar would also incur a cumulative alternative minimum tax
liability for the years 1998, 2000, and 2001 totaling approximately $7 million.
Any reduction in NOLs and the resulting alternative minimum tax liability would
be offset by corresponding deferred tax assets related to the unamortized
capitalized cost and the future credit for the alternative minimum taxes paid
which may be carried forward indefinitely. EchoStar intends to vigorously defend
its position that EchoStar will be able to continue its current policy of
deducting subscriber acquisition costs as incurred for tax purposes. However, as
of December 31, 2001, the outcome is uncertain.
F-29
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
6. STOCKHOLDERS' EQUITY (DEFICIT)
Common Stock
The class A, class B and class C common stock are equivalent in all
respects except voting rights. Holders of class A and class C common stock are
entitled to one vote per share and holders of class B common stock are entitled
to ten votes per share. Each share of class B and class C common stock is
convertible, at the option of the holder, into one share of class A common
stock. Upon a change in control of ECC, each holder of outstanding shares of
class C common stock is entitled to ten votes for each share of class C common
stock held. ECC's principal stockholder owns all outstanding class B common
stock and all other stockholders own class A common stock. There are no shares
of class C common stock outstanding.
7. STOCK COMPENSATION PLANS
Stock Incentive Plan
In April 1994, EchoStar adopted a stock incentive plan to provide
incentive to attract and retain officers, directors and key employees. EchoStar
currently has reserved up to 80 million shares of its class A common stock for
granting awards under its 1995 Stock Incentive Plan and an additional 80 million
shares of its class A common stock for granting awards under its 1999 Stock
Incentive Plan. In general, stock options granted through December 31, 2001 have
included exercise prices not less than the fair market value of EchoStar's class
A common stock at the date of grant, and vest, as determined by EchoStar's Board
of Directors, generally at the rate of 20% per year.
During 1999, EchoStar adopted the 1999 Incentive Plan which provided
certain key employees a contingent incentive including stock options and cash.
The payment of these incentives was contingent upon the achievement of certain
financial and other goals of EchoStar. EchoStar met certain of these goals
during 1999. Accordingly, in 1999, EchoStar recorded approximately $179 million
of deferred compensation related to post-grant appreciation of options to
purchase approximately 4.2 million shares, granted pursuant to the 1999
Incentive Plan. The related deferred compensation will be recognized over the
five-year vesting period. During the year ended December 31, 1999, 2000 and
2001, EchoStar recognized expense of $61 million, $51 million and $20 million,
respectively, under the 1999 Incentive Plan. The remaining deferred compensation
of $25 million, which will be reduced by future forfeitures, if any, will be
recognized over the remaining vesting period.
Options to purchase an additional 9.7 million shares are outstanding as
of December 31, 2001 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 $9.04. 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 these goals cannot
be reasonably predicted through December 31, 2001, no compensation was recorded
during 1999, 2000 and 2001 related to these long-term options. EchoStar will
continue to evaluate the likelihood of achieving these long-term goals and will
record the related compensation at the time achievement of these goals becomes
probable. Such compensation, if recorded, could result in material non-cash
stock-based compensation expense in EchoStar's statements of operations.
F-30
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
A summary of EchoStar's incentive stock option activity for the years
ended December 31, 1999, 2000 and 2001 is as follows:
1999 2000 2001
--------------------------- --------------------------- --------------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
----------- ----------- ----------- ----------- ----------- -----------
Options outstanding, beginning of
year .............................. 11,576,120 $ 2.04 27,843,640 $ 6.26 25,117,893 $ 10.81
Granted .............................. 20,847,712 7.71 2,942,000 51.56 867,500 37.30
Exercised ............................ (3,808,114) 1.84 (3,591,209) 3.05 (1,579,324) 5.17
Forfeited ............................ (772,078) 4.92 (2,076,538) 20.78 (1,658,476) 10.86
----------- ----------- ----------- ----------- ----------- -----------
Options outstanding, end of year ..... 27,843,640 $ 6.26 25,117,893 $ 10.81 22,747,593 $ 13.18
=========== =========== =========== =========== =========== ===========
Exercisable at end of year ........... 2,755,432 $ 1.86 2,911,256 $ 5.49 4,701,357 $ 10.77
=========== =========== =========== =========== =========== ===========
Exercise prices for options outstanding as of December 31, 2001 are as
follows:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------------------------------------------------------------
RANGE OF NUMBER WEIGHTED- NUMBER
OUTSTANDING AVERAGE EXERCISABLE
AS OF REMAINING WEIGHTED- AS OF WEIGHTED-
RANGE OF DECEMBER 31, CONTRACTUAL AVERAGE DECEMBER 31, AVERAGE
EXERCISE PRICES 2001 LIFE EXERCISE PRICE 2001 EXERCISE PRICE
------------------- ------------ ----------- -------------- ------------- --------------
$ 1.167 - $ 2.750 3,294,790 4.48 $ 2.21 2,174,862 $ 2.14
3.000 - 3.434 148,904 5.69 3.01 35,704 3.05
5.486 - 6.600 12,221,723 7.08 6.01 1,216,399 6.02
10.203 - 19.180 3,060,976 6.81 13.75 570,392 12.33
22.703 - 27.688 608,200 8.41 23.42 91,400 22.71
32.420 - 39.500 1,818,000 7.32 35.50 272,000 34.30
48.750 - 52.750 442,000 8.11 49.31 126,000 48.94
60.125 - 79.000 1,153,000 8.42 65.90 214,600 64.93
------------------- ---------- ---- -------- --------- --------
$ 1.1667 - $ 79.000 22,747,593* 6.80 $ 13.18 4,701,357 $ 10.77
=================== ========== ==== ======== ========= ========
* This amount includes 9.7 million shares outstanding pursuant to the
Long Term Incentive Plan.
Accounting for Stock-Based Compensation
EchoStar has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees," ("APB 25") and related
interpretations in accounting for its stock-based compensation plans. Under APB
25, EchoStar generally does not recognize compensation expense on the issuance
of stock under its Stock Incentive Plan because the option terms are typically
fixed and typically the exercise price equals or exceeds the market price of the
underlying stock on the date of grant. In October 1995, the Financial Accounting
Standards Board issued Financial Accounting Standard No. 123, "Accounting and
Disclosure of Stock-Based Compensation," ("FAS No. 123") which established an
alternative method of expense recognition for stock-based compensation awards to
employees based on fair values. EchoStar elected to not adopt FAS No. 123 for
expense recognition purposes.
F-31
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Pro forma information regarding net income and earnings per share is
required by FAS No. 123 and has been determined as if EchoStar had accounted for
its stock-based compensation plans using the fair value method prescribed by
that statement. For purposes of pro forma disclosures, the estimated fair value
of the options is amortized to expense over the options' vesting period. All
options are initially assumed to vest. Compensation previously recognized is
reversed to the extent applicable to forfeitures of unvested options. EchoStar's
pro forma net loss attributable to common shares and pro forma basic and diluted
loss per common share were as follows (in thousands, except per share amounts):
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1999 2000 2001
------------ ------------ ------------
Net loss attributable to common shares ...... $ (749,836) $ (622,925) $ (224,229)
============ ============ ============
Basic and diluted loss per share ............ $ (1.80) $ (1.32) $ (0.47)
============ ============ ============
The pro forma net loss for 1999 and 2000 is less than the loss reported
in the statement of operations because of the $61 million and $51 million
charge, respectively, for the post-grant appreciation of stock-based
compensation, determined under APB 25 and reported by EchoStar, is greater than
the amount of stock-based compensation that would have been reported by EchoStar
under the provisions of FAS No. 123.
The fair value of each option grant was estimated at the date of the
grant using a Black-Scholes option pricing model with the following
weighted-average assumptions:
YEAR ENDED DECEMBER 31,
--------------------------------------
1999 2000 2001
--------- ---------- ----------
Risk-free interest rate .......................... 5.38% 6.19% 4.94%
Volatility factor ................................ 76% 98% 64%
Dividend yield ................................... 0.00% 0.00% 0.00%
Expected term of options ......................... 6 years 6 years 6 years
Weighted-average fair value of options granted ... $ 7.14 $ 30.41 $ 15.75
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect the
fair value estimate, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of its
stock-based compensation awards.
8. EMPLOYEE BENEFIT PLANS
Employee Stock Purchase Plan
During 1997, the Board of Directors and shareholders approved an
employee stock purchase plan (the "ESPP"), effective beginning October 1, 1997.
Under the ESPP, EchoStar is authorized to issue a total of 800,000 shares of
class A common stock. Substantially all full-time employees who have been
employed by EchoStar for at least one calendar quarter are eligible to
participate in the ESPP. Employee stock purchases are made through payroll
deductions. Under the terms of the ESPP, employees may not deduct an amount
which would permit such employee to purchase capital stock of EchoStar under all
stock purchase plans of EchoStar at a rate which would exceed $25,000 in fair
market value of capital stock in any one year. The purchase price of the stock
is 85% of the closing price of the class A common stock on the last business day
of each calendar quarter in which such shares of class A common stock are deemed
sold to an employee under the ESPP. The ESPP shall terminate upon the first to
occur of (i) October 1, 2007 or (ii) the date on which the ESPP is terminated by
the Board of Directors. During
F-32
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
1999, 2000 and 2001, employees purchased approximately 44,000, 58,000 and 80,000
shares of class A common stock through the ESPP, respectively.
401(k) Employee Savings Plan
EchoStar sponsors a 401(k) Employee Savings Plan (the "401(k) Plan")
for eligible employees. Voluntary employee contributions to the 401(k) Plan may
be matched 50% by EchoStar, subject to a maximum annual contribution by EchoStar
of $1,000 per employee. EchoStar also may make an annual discretionary
contribution to the plan with approval by EchoStar's Board of Directors, subject
to the maximum deductible limit provided by the Internal Revenue Code of 1986,
as amended. EchoStar's cash contributions to the 401(k) Plan for matching
contributions totaled $314,000 in 1999, $1.6 million in 2000 and $429,000 in
2001. Additionally, during 1999, EchoStar 520,000 shares of its class A common
stock (fair value of approximately $3 million) to the 401(k) Plan related to its
1998 discretionary contribution. During 2000, EchoStar contributed 120,000
shares of its class A common stock (fair value of approximately $6 million) to
the 401(k) Plan related to its 1999 discretionary contribution. During 2001,
EchoStar contributed approximately $2 million in cash to the 401 (k) Plan
related to its 2000 discretionary contribution and accrued approximately $6.7
million related to its 2002 discretionary contribution.
9. OTHER COMMITMENTS AND CONTINGENCIES
Leases
Future minimum lease payments under noncancelable operating leases as
of December 31, 2001, are as follows (in thousands):
YEAR ENDING DECEMBER 31,
2002 ............................................... $11,918
2003 ............................................... 11,486
2004 ............................................... 9,551
2005 ............................................... 5,262
2006 ............................................... 1,623
Thereafter ......................................... 3,444
-------
Total minimum lease payments .................... $43,284
=======
Total rental expense for operating leases approximated $4 million, $9
million and $14 million in 1999, 2000 and 2001, respectively.
Purchase Commitments
As of December 31, 2001, EchoStar's purchase commitments totaled
approximately $79 million. The majority of these commitments relate to EchoStar
receiver systems and related components. All of the purchases related to these
commitments are expected to be made during 2002. EchoStar expects to finance
these purchases from existing unrestricted cash balances and future cash flows
generated from operations.
Patents and Intellectual Property
Many entities, including some of EchoStar's competitors, now have and
may in the future obtain patents and other intellectual property rights that
cover or affect products or services directly or indirectly related to those
that EchoStar offers. EchoStar may not be aware of all patents and other
intellectual property rights that its products may potentially infringe. Damages
in patent infringement cases can include a tripling of actual damages in certain
cases. Further, EchoStar cannot estimate the extent to which it may be required
in the future to obtain licenses with respect to patents held by others and the
availability and cost of any such licenses. Various parties have asserted patent
and other
F-33
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
intellectual property rights with respect to components within EchoStar's direct
broadcast satellite system. EchoStar cannot be certain that these persons do not
own the rights they claim, that its products do not infringe on these rights,
that it would be able to obtain licenses from these persons on commercially
reasonable terms or, if it was unable to obtain such licenses, that it would be
able to redesign its products to avoid infringement.
Fee Dispute
EchoStar had a contingent fee arrangement with attorneys who
represented EchoStar in prior litigation with The News Corporation, Ltd. The
contingent fee arrangement provides for the attorneys to be paid a percentage of
any net recovery obtained by EchoStar in the News Corporation litigation. The
attorneys asserted that they might be entitled to receive payments totaling
hundreds of millions of dollars under this fee arrangement. EchoStar
consistently maintained that the demand significantly overstated the amount to
which the attorneys might reasonably be entitled.
During mid-1999, EchoStar initiated litigation against the attorneys in
the Arapahoe County, Colorado, District Court arguing that the fee arrangement
was void and unenforceable. In December 1999, the attorneys initiated an
arbitration proceeding before the American Arbitration Association. The
litigation was stayed while the arbitration proceeded. The arbitration hearing
concluded on October 11, 2001. During the four week arbitration hearing, the
attorneys presented a damage model for $56 million. EchoStar asserted even that
amount significantly overstated the amount to which the attorneys might
reasonably be entitled. During closing arguments, the attorneys presented a
separate damage calculation for $111 million to the arbitration panel.
On November 7, 2001, the arbitration panel awarded the attorneys
approximately $40 million for its contingency fee under the fee agreement. In
the award, the arbitration panel also dismissed EchoStar's claims against the
attorneys that EchoStar had initiated in the Arapahoe County, Colorado, District
Court. Pursuant to the award, approximately $8 million was to be paid within 30
days of the award with the balance to be paid in equal quarterly principal
installments over four years, commencing February 1, 2002. Interest is to be
paid at the prime rate (calculated as the average amount for each relevant year
as published daily in the Wall Street Journal), compounded annually. As a result
of this award, EchoStar recorded a charge of approximately $30 million during
2001.
On November 30, 2001, Echostar filed a motion to vacate the award on
the following grounds: (1) the award as issued violates public policy and cannot
be enforced; and (2) the Panel exceeded its authority under Colorado Revised
Statutes Section 13-22-214(1)(a)(III). Alternatively, EchoStar requested that
the Arapahoe County District Court modify the award to correct a calculation
error. The attorneys have opposed EchoStar's motion to vacate. The motion
remains pending before the District Court in Arapahoe County, Colorado. There
can be no assurance that EchoStar will succeed in its effort to vacate or modify
the arbitration award.
F-34
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
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 recently 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
currently in discovery. EchoStar intends to vigorously defend the suit. It is
too early to make an assessment of the probable outcome of the litigation or to
determine the extent of any potential liability or damages.
Broadcast network programming
Until July 1998, EchoStar obtained distant broadcast network channels
(ABC, NBC, CBS and FOX) for distribution to its customers through PrimeTime 24.
In December 1998, the United States District Court for the Southern District of
Florida entered a nationwide permanent injunction requiring PrimeTime 24 to shut
off distant network channels to many of its customers, and henceforth to sell
those channels to consumers in accordance with certain stipulations in the
injunction.
In October 1998, EchoStar filed a declaratory judgment action against
ABC, NBC, CBS and FOX in 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 case remains pending in Miami. While
the networks have not sought monetary damages, they have sought to recover
attorney fees if they prevail.
In February 1999, the networks filed a "Motion for Temporary
Restraining Order, Preliminary Injunction and Contempt Finding" against DirecTV,
Inc. in Miami related to the delivery of distant network channels to DirecTV
customers by satellite. DirecTV settled this lawsuit with the networks. Under
the terms of the settlement between DirecTV and the networks, some DirecTV
customers were scheduled to lose access to their satellite-provided distant
network channels by July 31, 1999, while other DirecTV customers were to be
disconnected by December 31, 1999. Subsequently, PrimeTime 24 and substantially
all providers of satellite-delivered network programming other than EchoStar
agreed to this cut-off schedule, although EchoStar does not know if they adhered
to this schedule.
In December 1998, the networks filed a Motion for Preliminary
Injunction against EchoStar in the Miami court, and asked the court to enjoin
EchoStar from providing network programming except under limited
F-35
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
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
be physically impossible to comply. The order imposes restrictions on EchoStar's
past and future sale of distant ABC, NBC, CBS and Fox channels similar to those
imposed on PrimeTime 24 (and, EchoStar believes, on DirecTV and others). Some of
those restrictions go beyond the statutory requirements imposed by the SHVA and
the SHVIA. For these and other reasons EchoStar believes the Court's order is,
among other things, fundamentally flawed, unconstitutional and should be
overturned. However, it is very unusual for a Court of Appeals to overturn a
lower court's order and there can be no assurance whatsoever that it will be
overturned.
On October 3, 2000, and again on October 25, 2000, the Court amended
its original preliminary injunction order in an effort to fix some of the errors
in the original order. The twice amended preliminary injunction order required
EchoStar to shut off, by February 15, 2001, all subscribers who are ineligible
to receive distant network programming under the court's order. EchoStar
appealed the September 2000 preliminary injunction order and the October 3, 2000
amended preliminary injunction order. On November 22, 2000, the United States
Court of Appeals for the Eleventh Circuit stayed the Florida Court's preliminary
injunction order pending EchoStar's appeal. At that time, the Eleventh Circuit
also expedited its consideration of EchoStar's appeal.
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's order indicated that the matter
was to be remanded to the District Court for an evidentiary hearing. On December
28, 2001, the Eleventh Circuit denied EchoStar's request for rehearing. The
Eleventh Circuit issued its mandate on January 29, 2002, remanding the case to
the Florida District Court. Echostar cannot predict when an evidentiary hearing
will be set before the District Court or when a trial will be set before the
District Court if the Networks withdraw their request for a preliminary
injunction as they have indicated they will do when the case was remanded to the
District Court.
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ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
EchoStar is considering an appeal to the United States Supreme Court.
If EchoStar decides to appeal, there is no guarantee that the United States
Supreme Court will agree to hear any petition filed or that EchoStar's appeal
will be heard before any evidentiary hearing or trial in the District Court.
If, after an evidentiary hearing or 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 the 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
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.
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 March 21, 2002 and a ruling by the full ITC is expected 60 days
later. 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
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ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
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 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. EchoStar intends to vigorously defend
this case and to press its patent misuse defenses.
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 claim 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. The parties have completed briefing and oral argument of post-trial
motions. EchoStar intends to appeal any adverse decision and plaintiffs have
indicated they may appeal as well. Any final award of damages would be split
between EchoStar and Nagra in percentages to be agreed upon between EchoStar and
Nagra.
California Actions
A purported class action was filed against EchoStar in the California
State Superior Court for Alameda County during May 2001 by Andrew A. Werby. The
complaint, relating to late fees, alleges unlawful, unfair and fraudulent
business practices in violation of California Business and Professions Code
Section 17200 et seq., false and misleading advertising in violation of
California Business and Professions Code Section 17500, and violation of the
California Consumer Legal Remedies Act. 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. 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.
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ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
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. EchoStar's response is due on March 7, 2002, and 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 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. It is too early to make an assessment of the probable outcome
of the litigation or to determine the extent of any potential liability or
damages.
Satellite Dealers Supply, Inc. filed a lawsuit in the United States
District Court for the Eastern District of Texas on September 25, 2000, on
behalf of itself and a class of persons similarly situated. The plaintiff is
attempting to certify a nationwide class on behalf of sellers, installers, and
servicers of satellite equipment who contract with EchoStar and claims the
alleged class has been "subject to improper chargebacks." The plaintiff alleges
that EchoStar: (1) charged back certain fees paid by members of the class to
professional installers in violation of contractual terms; (2) manipulated the
accounts of subscribers to deny payments to class members; and (3)
misrepresented to class members who own certain equipment related to the
provision of satellite television service. 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.
F-39
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
PrimeTime 24 Joint Venture
PrimeTime 24 Joint Venture filed suit against EchoStar during
September, 1998 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 approximate $10 million breach of contract claim for fees during the period
from May 1998 through July 19, 1998. 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.
F-40
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
10. SEGMENT REPORTING
Financial Data by Business Unit (in thousands)
Statement of Financial Accounting Standard No. 131, "Disclosures About
Segments of an Enterprise and Related Information" ("FAS No. 131") establishes
standards for reporting information about operating segments in annual financial
statements of public business enterprises and requires that those enterprises
report selected information about operating segments in interim financial
reports issued to shareholders. Operating segments are components of an
enterprise about which separate financial information is available and regularly
evaluated by the chief operating decision maker(s) of an enterprise. During
2000, under this definition, we were operating as three separate business units.
However, beginning 2001, it was determined that EchoStar's chief operating
decision maker regularly evaluates only the following two separate business
units. In addition, as previously stated, EchoStar has retroactively applied the
equity method of accounting to its StarBand investment. All 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
----------- ------------ ----------- ------------ ------------
YEAR ENDED DECEMBER 31, 1999
Revenue ............................. $ 1,390,074 $ 160,276 $ 53,876 $ (1,385) $ 1,602,841
Depreciation and amortization ....... 97,150 4,434 11,648 (4) 113,228
Total expenses ...................... 1,634,251 165,238 155,440 (4,997) 1,949,932
EBITDA .............................. (147,026) (528) (28,857) 3,608 (172,803)
Interest income ..................... 26,506 1 143 (471) 26,179
Interest expense, net of interest
capitalized ...................... (201,356) (253) (475) 471 (201,613)
Income tax benefit (provision), net . -- (46) (108) -- (154)
Net income (loss) ................... (765,925) (31,883) 4,961 -- (792,847)
YEAR ENDED DECEMBER 31, 2000
Revenue ............................. $ 2,417,533 $ 207,945 $ 93,183 $ (3,441) $ 2,715,220
Depreciation and amortization ....... 160,910 5,338 19,108 -- 185,356
Total expenses ...................... 2,755,965 197,073 194,363 (8,115) 3,139,286
EBITDA .............................. (177,522) 16,210 (30,607) 4,674 (187,245)
Interest income ..................... 79,724 -- 340 (331) 79,733
Interest expense, net of interest
capitalized ...................... (267,650) (233) (438) 331 (267,990)
Income tax benefit (provision), net . (48) (32) (475) -- (555)
Net income (loss) ................... (703,229) (155) 53,267 (209) (650,326)
YEAR ENDED DECEMBER 31, 2001
Revenue ............................. $ 3,683,156 $ 189,150 $ 133,426 $ (4,594) $ 4,001,138
Depreciation and amortization ....... 243,810 6,682 28,160 -- 278,652
Total expenses ...................... 3,273,670 188,699 331,061 (4,594) 3,788,836
EBITDA .............................. 653,296 7,134 (149,303) -- 511,127
Interest income ..................... 96,372 -- 1,571 (272) 97,671
Interest expense, net of interest
capitalized ...................... (370,331) (211) (1,095) 272 (371,365)
Income tax benefit (provision), net . (51) -- (1,403) -- (1,454)
Net income (loss) ................... (231,053) (7,478) 23,033 -- (215,498)
F-41
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Geographic Information (in thousands) and Transaction with Major
Customers
UNITED STATES EUROPE TOTAL
------------- ---------- ----------
1999
Total revenue .................. $1,579,992 $ 22,849 $1,602,841
Long-lived assets .............. 2,059,242 3,099 2,062,341
2000
Total revenue .................. $2,667,133 $ 48,087 $2,715,220
Long-lived assets .............. 2,217,741 3,546 2,221,287
2001
Total revenue .................. $3,903,607 $ 97,531 $4,001,138
Long-lived assets .............. 2,595,542 4,879 2,600,421
Revenues are attributed to geographic regions based upon the location
from which the sale originated. United States revenue includes transactions made
to both United States and International customers. Europe revenue includes
transactions made customers in Europe, Africa and the Middle East. During the
years ended December 31, 1999, 2000 and 2001, United States revenue included
export sales to two international customers which totaled $126 million, $187
million and $176 million, respectively. These international sales accounted for
approximately 8%, 7% and 4% of EchoStar's total revenue during each of the three
years ended December 31, 2001, respectively. Revenues from these customers are
included within the EchoStar Technologies Corporation business unit.
11. SUMMARY FINANCIAL INFORMATION OF EQUITY METHOD INVESTEE
EchoStar originally invested $50 million in StarBand Communications
Inc. in April 2000. Effective September 27, 2001, EchoStar invested an
additional $50 million in StarBand, increasing its equity interest from
approximately 19% to approximately 32%. As a result of the increased equity
stake, this investment is now accounted for using the equity method of
accounting. As required by APB Opinion No. 18, the equity method accounting was
retroactively applied back to April 2000, the date of EchoStar's original
investment in StarBand.
Summarized financial information for StarBand has been derived from
StarBand's audited financial statements as of and for the years ended December
31, 2000 and 2001, which were audited by other auditors (whose reports expressed
substantial doubt regarding StarBand's ability to continue as a going concern)
and is as follows (in thousands):
PERIOD FROM
JANUARY 11, 2000
(INCEPTION)
THROUGH DECEMBER 31, AS OF DECEMBER 31,
2000 2001
-------------------- ------------------
BALANCE SHEET DATA:
Current assets .......................................... $104,251 $ 35,738
Noncurrent assets ....................................... 113,327 33,567
Current liabilities ..................................... 82,230 114,869
Noncurrent liabilities .................................. 142,165 109,482
Mandatorily redeemable convertible preferred stock ...... 153,426 238,394
YEAR ENDED DECEMBER 31,
--------------------------
2000 2001
--------- ---------
STATEMENT OF OPERATIONS DATA:
Total revenues ............................ $ 394 $ 36,630
Total operating expenses .................. 140,019 231,486
Net loss .................................. (139,531) (205,553)
F-42
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
12. VALUATION AND QUALIFYING ACCOUNTS
EchoStar's valuation and qualifying accounts as of December 31, 1999,
2000 and 2001 are as follows (in thousands):
BALANCE AT CHARGED TO
BEGINNING OF COSTS AND BALANCE AT
YEAR EXPENSES DEDUCTIONS END OF YEAR
------------ ---------- ---------- -----------
YEAR ENDED DECEMBER 31, 1999:
Assets:
Allowance for doubtful accounts .............. $ 2,996 $ 23,481 $(13,368) $ 13,109
Loan loss reserve ............................ 2,011 100 (272) 1,839
Reserve for inventory ........................ 5,181 1,785 (3,019) 3,947
Liabilities:
Reserve for warranty costs and other ......... 275 -- (65) 210
YEAR ENDED DECEMBER 31, 2000:
Assets:
Allowance for doubtful accounts .............. $ 13,109 $ 45,985 $(27,853) $ 31,241
Loan loss reserve ............................ 1,839 66 (346) 1,559
Reserve for inventory ........................ 3,947 6,357 (398) 9,906
Liabilities:
Reserve for warranty costs and other ......... 210 -- -- 210
YEAR ENDED DECEMBER 31, 2001:
Assets:
Allowance for doubtful accounts .............. $ 31,241 $ 59,725 $(68,196) $ 22,770
Loan loss reserve ............................ 1,559 67 (35) 1,591
Reserve for inventory ........................ 9,906 12,204 (8,863) 13,247
Liabilities:
Reserve for warranty costs and other ......... 210 773 (316) 667
13. QUARTERLY FINANCIAL DATA (UNAUDITED)
EchoStar's quarterly unaudited results of operations are summarized as
follows (in thousands, except per share amounts):
THREE MONTHS ENDED
--------------------------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
----------- ----------- ------------ -----------
(Unaudited)
Year Ended December 31, 2000:
Total revenue ........................ $ 565,721 $ 646,129 $ 697,972 $ 805,398
Operating loss ....................... (142,017) (86,231) (82,082) (113,736)
Net loss ............................. (185,130) (138,963) (142,049) (184,184)
Basic and diluted loss per share ..... $ (0.40) $ (0.30) $ (0.30) $ (0.39)
Year Ended December 31, 2001:
Total revenue ........................ $ 861,930 $ 966,272 $ 1,022,506 $ 1,150,430
Operating income (loss) .............. (15,183) 63,913 75,472 88,100
Net income (loss) .................... (169,867) (5,855) 3,095 (42,871)
Basic and diluted income (loss)
per share ......................... $ (0.36) $ (0.01) $ 0.01 $ (0.09)
F-43
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
14. SUBSEQUENT EVENTS
Strategic Alliance with Vivendi Universal and Sale of Series D Convertible
Preferred Stock
On January 22, 2002, a subsidiary of Vivendi Universal acquired
5,760,479 shares of EchoStar series D convertible preferred stock for $1.5
billion, or approximately $260.40 per share. Each share of the series D
preferred stock has the same economic (other than liquidation) and voting rights
as ten shares of EchoStar class A common stock into which it is convertible and
has a liquidation preference equal to approximately $260.40 per share.
Immediately prior to the consummation of the Hughes merger, the series D
preferred stock will convert into shares of EchoStar 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 EchoStar's class A common stock at any time at the
option of the holder and automatically upon the occurrence of certain other
specified events. EchoStar currently expects that the series D preferred stock
and related features, discussed below, will be classified as temporary equity on
its balance sheets.
In connection with the purchase of the series D convertible preferred
stock, Vivendi Universal also received contingent value rights, intended to
provide protection against any downward price movements 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 falls below $26.04 per share
on the date specified below , or $525 million if the Hughes merger is not
completed and the price of our class A common stock falls below $26.04 per share
on the 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 will be recorded as of the
date of consummation of the investment and will be periodically adjusted to the
current settlement amount of the contingent value rights, based on the current
price of the class A common stock, through a charge to retained earnings. Future
non-cash charges or credits to retained earnings related to adjustments to the
contingent value rights will impact 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 issued with a beneficial
conversion feature. This feature requires 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 preferred stock. This discount of $0.54 per share will be
charged to retained earnings as of the date of issuance of the series D
preferred stock. Future non-cash charges to retained earnings related to the
amortization of the series D preferred stock discount will have a negative
impact on Echostar's net income (loss) available to common shareholders.
The issuance costs related to the series D preferred stock will be
recorded as a reduction of the carrying value of the series D preferred stock
and corresponding contingent value rights and will be immediately charged to
retained earnings upon issuance of the series D preferred stock, which will have
a negative impact on EchoStar's net income (loss) available to common
shareholders.
In addition, Vivendi Universal and EchoStar announced an eight-year
strategic alliance in which Vivendi Universal will develop and provide
EchoStar's DISH Network customers in the U.S. a variety of programming and
interactive television services.
As part of this alliance, Vivendi Universal plans to offer EchoStar's
DISH Network customers five new non-exclusive channels of basic and niche
programming content. Vivendi Universal 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 EchoStar. Vivendi
Universal and EchoStar will also work together on a new programming initiative
F-44
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
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, EchoStar will integrate Vivendi
Universal's advanced, interactive middleware technology, MediaHighway, a
Canal+Technology, as a non-exclusive middleware solution that will provide DISH
Network customers using personal video records unique interactive television
services, such as movies from Vivendi Universal and music from Universal Music
Group.
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 transponders 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. In addition, 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).
EchoStar VII
EchoStar VII was launched on February 21, 2002 from Cape Canaveral,
Florida. EchoStar VII will be tested at the 129 degree orbital location and will
then be moved to the 119 degree orbital location for commercial service.
Assuming successful completion of in-orbit testing, EchoStar VII is expected to
commence commercial service at the 119 degree orbital location during the second
quarter of 2002. EchoStar VII is planned to replace the capacity of the EchoStar
IV satellite, which has experienced a series of anomalies materially impacting
its functionality. Operating from the 119 degree orbital location, EchoStar VII,
assuming successful completion of in-orbit testing, will also provide local
channels by satellite to consumers in Alaska and Hawaii. EchoStar VII, together
with EchoStar VIII which is expected to launch this summer, will also improve
spectrum efficiency, enhance the quality of video channels for all DISH Network
customers, provide a broader array of programming choices to consumers in Alaska
and Hawaii, and increase in-orbit backup capacity.
F-45
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
------- -----------
3.1(a)+ Amended and Restated Articles of Incorporation of EchoStar.
3.1(b)* Amended and Restated Bylaws of EchoStar (incorporated by
reference to Exhibit 3(ii) to the Current Report on Form 8-K,
dated January 23, 2002, of EchoStar, Commission File No.
0-26176).
3.2(a)* Articles of Incorporation of EchoStar Broadband Corporation
("EBC") (incorporated by reference to Exhibit 3.1(a) to the
Registration Statement on Form S-4 of EBC, Registration No.
333-52756).
3.2(b)* Bylaws of EBC (incorporated by reference to Exhibit 3.1(b) to
the Registration Statement on Form S-4 of EBC, Registration
No. 333-52756).
3.3(a)* Articles of Incorporation of EchoStar DBS Corporation ("DBS
Corp.") (incorporated by reference to Exhibit 3.4(a) to the
Registration Statement on Form S-4 of DBS Corp., Registration
No. 333-31929).
3.3(b)* Bylaws of DBS Corp. (incorporated by reference to Exhibit
3.4(b) to the Registration Statement on Form S-4 of DBS Corp.,
Registration No. 333-31929).
4.1* Warrant Agreement between EchoStar and First Trust, as Warrant
Agent (incorporated by reference to Exhibit 4.2 to the
Registration Statement on Form S-1 of Dish Ltd., Registration
No. 33-76450).
4.2* Security Agreement in favor of First Trust, as trustee under
the Indenture filed as Exhibit 4.1 hereto (incorporated by
reference to Exhibit 4.3 to the Registration Statement on Form
S-1 of Dish Ltd., Registration No. 33-76450).
4.3* Escrow and Disbursement Agreement between Dish Ltd. and First
Trust (incorporated by reference to Exhibit 4.4 to the
Registration Statement on Form S-1 of Dish, Registration No.
33-76450).
4.4* Pledge Agreement in favor of First Trust, as trustee under the
Indenture filed as Exhibit 4.1 hereto (incorporated by
reference to Exhibit 4.5 to the Registration Statement on Form
S-1 of Dish Ltd., Registration No. 33-76450).
4.5* Intercreditor Agreement among First Trust, Continental Bank,
N.A. and Martin Marietta Corporation ("Martin Marietta")
(incorporated by reference to Exhibit 4.6 to the Registration
Statement on Form S-1 of Dish, Registration No. 33-76450).
4.6* Registration Rights Agreement by and between EchoStar and
Charles W. Ergen (incorporated by reference to Exhibit 4.8 to
the Registration Statement on Form S-1 of EchoStar,
Registration No. 33-91276).
4.7* Indenture of Trust, relating to DBS Corp.'s 9 1/4% Senior
Notes due 2006 ("Seven Year Notes"), dated as of January 25,
1999, among DBS Corp., the Guarantors (as defined therein) and
U.S. Bank Trust National Association ("U.S. Bank"), as trustee
(incorporated by reference to Exhibit 4.1 to the Registration
Statement on Form S-4 of DBS Corp., Registration No.
333-71345).
4.8* Indenture of Trust, relating to DBS Corp.'s 9 3/8% Senior
Notes due 2009 ("Ten Year Notes"), dated as of January 25,
1999, among DBS Corp., the Guarantors (as defined therein) and
U.S. Bank, as trustee (incorporated by reference to Exhibit
4.3 to the Registration Statement on Form S-4 of DBS Corp.,
Registration No. 333-71345).
4.9* Registration Rights Agreement, relating to the Seven Year
Notes, dated as of January 25, 1999, by and among DBS Corp.,
the Guarantors and the Initial Purchasers (as defined therein)
(incorporated by reference to Exhibit 4.5 to the Registration
Statement on Form S-4 of DBS Corp., Registration No.
333-71345).
4.10* Registration Rights Agreement, relating to the Ten Year Notes,
dated as of January 25, 1999, by and among DBS Corp., the
Guarantors and the Initial Purchasers (as defined therein)
(incorporated by reference to Exhibit 4.6 to the Registration
Statement on Form S-4 of DBS Corp., Registration No.
333-71345).
4.11* Indenture relating to 4 7/8% Convertible Subordinated Notes
due 2007, dated as of December 8, 1999, between EchoStar
Communications Corporation and U.S. Bank Trust National
Association, as trustee, (incorporated by reference to Exhibit
4.1 to the Registration Statement on Form S-3 of EchoStar
Communications Corporation, Registration No. 333-31894).
4.12* Registration Rights Agreement, relating to the 47/8 %
Convertible Subordinated Notes Due 2007, dated as of December
8, 1999, by and among EchoStar Communications Corporation and
the initial purchasers (incorporated by reference to Exhibit
4.2 to the Registration Statement on Form S-3 of EchoStar
Communications Corporation, Registration No. 333-31894).
4.13* Indenture relating to 10 3/8% Senior Notes due 2007, dated as
of September 25, 2000, between EchoStar Broadband Corporation
and U.S. Bank Trust National Association, as trustee
(incorporated by reference to Exhibit 4.1 to the Quarterly
Report on Form 10-Q of EchoStar for the quarter ended
September 30, 2000, Commission File No.0-26176).
4.14* Registration Rights Agreement dated as of September 25, 2000,
by and among EchoStar Broadband Corporation, Donaldson, Lufkin
& Jenrette Securities Corporation, Banc of America Securities
LLC, Credit Suisse First Boston Corporation and ING Barings
LLC (incorporated by reference to Exhibit 4.2 to the Quarterly
Report on Form 10-Q of EchoStar for the quarter ended
September 30, 2000, Commission File No.0-26176).
4.15* Indenture, relating to the 5 3/4% Convertible Subordinated
Notes Due 2008, dated as of May 31, 2001 between EchoStar
Communications Corporation and U.S. Bank Trust National
Association, as Trustee (incorporated by reference to Exhibit
4.1 to the Quarterly Report on Form 10-Q of EchoStar for the
quarter ended June 30, 2001, Commission File No.0-26176).
4.16* Registration Rights Agreement, relating to the 5 3/4%
Convertible Subordinated Notes Due 2008, dated as of May 31,
2001, by and between EchoStar Communications Corporation and
UBS Warburg LLC (incorporated by reference to Exhibit 4.2 to
the Quarterly Report on Form 10-Q of EchoStar for the quarter
ended June 30, 2001, Commission File No.0-26176).
4.17+ Indenture, relating to the 9 1/8% Senior Notes Due 2009, dated
as of December 28, 2001 between EchoStar DBS Corporation and
U.S. Bank Trust National Association, as Trustee.
4.18+ Registration Rights Agreement, relating to the 9 1/8% Senior
Notes Due 2009, dated as of December 28, 2001, by and among
EchoStar DBS Corporation and Deutsche Banc Alex. Brown, Inc.,
Credit Suisse First Boston Corporation, Lehman Brothers Inc.
and UBS Warburg LLC.
4.19+ Certificate of Withdrawal Withdrawing the Series A, Series B
and Series C Preferred Stock Designations of EchoStar.
4.20+ Series D Mandatorily Convertible Participating Preferred Stock
Certificate of Designation of EchoStar.
10.1* Key Employee Bonus Plan, dated as of January 1, 1994
(incorporated by reference to Exhibit 10.7 to the Registration
Statement on Form S-1 of Dish, Registration No. 33-76450)**
10.2* Consulting Agreement, dated as of February 17, 1994, between
ESC and Telesat Canada (incorporated by reference to Exhibit
10.8 to the Registration Statement on Form S-1 of Dish,
Registration No. 33-76450).
10.3* Form of Satellite Launch Insurance Declarations (incorporated
by reference to Exhibit 10.10 to the Registration Statement on
Form S-1 of Dish, Registration No. 33-81234).
10.4* Dish 1994 Stock Incentive Plan (incorporated by reference to
Exhibit 10.11 to the Registration Statement on Form S-1 of
Dish, Registration No. 33-76450).**
10.5* Form of Tracking, Telemetry and Control Contract between AT&T
Corp. and ESC (incorporated by reference to Exhibit 10.12 to
the Registration Statement on Form S-1 of Dish, Registration
No. 33-81234).
10.6* Manufacturing Agreement, dated as of March 22, 1995, between
HTS and SCI Technology, Inc. (incorporated by reference to
Exhibit 10.12 to the Registration Statement on Form S-1 of
Dish, Commission File No. 33-81234).
10.7* Statement of Work, dated January 31, 1995 from ESC to DiviCom,
Inc. (incorporated by reference to Exhibit 10.14 to the
Registration Statement on Form S-1 of EchoStar, Registration
No. 33-91276).
10.8* EchoStar 1995 Stock Incentive Plan (incorporated by reference
to Exhibit 10.16 to the Registration Statement on Form S-1 of
EchoStar, Registration No. 33-91276)**
10.9* Satellite Construction Contract, dated as of July 18, 1996,
between EDBS and Lockheed Martin Corporation (incorporated by
reference to Exhibit 10.18 to the Quarterly Report on Form
10-Q of EchoStar for the quarter ended June 30, 1996,
Commission File No. 0-26176).
10.10* Confidential Amendment to Satellite Construction Contract
between DBSC and Martin Marietta, dated as of May 31, 1995
(incorporated by reference to Exhibit 10.14 to the
Registration Statement of Form S-4 of EchoStar, Registration
No. 333-03584).
10.11* Agreement between HTS, ESC and ExpressVu Inc., dated January
8, 1997, as amended (incorporated by reference to Exhibit
10.18 to the Annual Report on Form 10-K of EchoStar for the
year ended December 31, 1996, as amended, Commission File No.
0-26176).
10.12* Amendment No. 9 to Satellite Construction Contract, effective
as of July 18, 1996, between Direct Satellite Broadcasting
Corporation, a Delaware corporation ("DBSC") and Martin
Marrieta Corporation (incorporated by reference to Exhibit
10.1 to the Quarterly Report on Form 10-Q of EchoStar for the
quarterly period ended June 30, 1997, Commission File No.
0-26176).
10.13* Amendment No. 10 to Satellite Construction Contract, effective
as of May 31, 1996, between DBSC and Lockheed Martin
Corporation (incorporated by reference to Exhibit 10.2 to the
Quarterly Report on Form 10-Q of EchoStar for the quarterly
period ended June 30, 1997, Commission File No. 0-26176).
10.14* Purchase Agreement, dated November 30, 1998, by and among
American Sky Broadcasting, LLC ("ASkyB"), The News Corporation
Limited ("News Corporation"), MCI Telecommunications
Corporation and EchoStar (incorporated by reference to Exhibit
10.1 to the Current Report on Form 8-K filed by EchoStar on
December 1, 1998, Commission File No. 0-26176).
10.15* Voting Agreement, dated November 30, 1998, among EchoStar,
AskyB, News Corporation and MCI Telecommunications Corporation
(incorporated by reference to Exhibit 10.3 to the Current
Report on Form 8-K of EchoStar, filed as of December 1, 1998,
Commission File No. 0-26176).
10.16* Agreement to Form NagraStar LLC, dated as of June 23, 1998, by
and between Kudelski S.A., EchoStar and ESC (incorporated by
reference to Exhibit 10.28 to the Annual Report on Form 10-K
of EchoStar for the year ended December 31, 1998, Commission
File No. 0-26176).
10.17* First Amendment, dated June 23, 1999, to the Purchase
Agreement dated November 30, 1998, by and among American Sky
Broadcasting, LLC, The News Corporation Limited, MCI
Telecommunications Corporation, and EchoStar Communications
Corporation (incorporated by reference to Exhibit 10.3 to the
Current Report on Form 8-K of EchoStar, filed as of July 2,
1999, Commission File No. 0-26176).
10.18* Registration Rights Agreement, dated June 24, 1999, by and
among EchoStar Communications Corporation, MCI
Telecommunications Corporation, American Sky Broadcasting,
LLC, and News America Incorporated (incorporated by reference
to Exhibit 10.4 to the Current Report on Form 8-K of EchoStar,
filed as of July 2, 1999, Commission File No. 0-26176).
10.19* Satellite Construction Contract dated as of January 27, 2000,
between EchoStar Orbital Corporation and Lockheed Martin
Corporation (incorporated by reference to Exhibit 10.1 to the
Quarterly Report on Form 10-Q of EchoStar for the quarter
ended March 31, 2000, Commission File No.0-26176).
10.20* Satellite Construction Contract dated as of February 4, 2000,
between EchoStar Orbital Corporation and Space Systems/Loral
Inc. (incorporated by reference to Exhibit 10.2 to the
Quarterly Report on Form 10-Q of EchoStar for the quarter
ended March 31, 2000, Commission File No.0-26176).
10.21* Satellite Construction Contract dated as of February 22, 2000,
between EchoStar Orbital Corporation and Space Systems/Loral
Inc. (incorporated by reference to Exhibit 10.3 to the
Quarterly Report on Form 10-Q of EchoStar for the quarter
ended March 31, 2000, Commission File No.0-26176).
10.22* Agreement dated as of February 22, 2000, between EchoStar
Orbital Corporation and Loral Skynet, a division of Loral
SpaceCom Corporation (incorporated by reference to Exhibit
10.4 to the Quarterly Report on Form 10-Q of EchoStar for the
quarter ended March 31, 2000, Commission File No.0-26176).
10.23* Contract for Launch Services, dated January 31, 2001, between
Lockheed Martin's International Launch Services and EchoStar
Orbital Corporation (incorporated by reference to Exhibit 10.1
to the Quarterly Report on Form 10-Q of EchoStar for the
quarter ended March 31, 2001, Commission File No.0-26176).
10.24* Modification Nos. 1-7 to the Satellite Contract (EchoStar VII
- 119 degree West Longitude) dated January 27, 2000, between
Lockheed Martin Corporation and EchoStar Orbital Corporation
(incorporated by reference to Exhibit 10.1 to the Quarterly
Report on Form 10-Q of EchoStar for the quarter ended June 30,
2001, Commission File No.0-26176).
10.25* Amended and Restated Contract dated February 1, 2001, between
EchoStar Orbital Corporation and Space Systems/Loral, Inc.,
EchoStar VIII Satellite Program (110 degree West Longitude)
(incorporated by reference to Exhibit 10.2 to the Quarterly
Report on Form 10-Q of EchoStar for the quarter ended June 30,
2001, Commission File No.0-26176).
10.26* Amendment No. 1 to the Contract dated February 22, 2000,
between EchoStar Orbital Corporation and Space Systems/Loral
Inc., EchoStar IX Satellite Program (121 degree West
Longitude) (incorporated by reference to Exhibit 10.3 to the
Quarterly Report on Form 10-Q of EchoStar for the quarter
ended June 30, 2001, Commission File No.0-26176).
10.27* Agreement and Plan of Merger, dated October 28, 2001, by and
between EchoStar and Hughes Electronics Corporation
(incorporated by reference to Exhibit 99.1 to the Current
Report on Form 8-K of EchoStar, filed as of October 31, 2001,
Commission File No. 0-26176).
10.28* Implementation Agreement, dated October 28, 2001, by and among
General Motors Corporation, Hughes Electronics Corporation and
EchoStar (incorporated by reference to Exhibit 99.2 to the
Current Report on Form 8-K of EchoStar, filed as of October
31, 2001, Commission File No. 0-26176).
10.29* Stock Purchase Agreement, dated October 28, 2001, among
EchoStar, Hughes Electronics Corporation, Hughes
Communications Galaxy, Inc., Hughes Communications Satellite
Services, Inc. and Hughes Communications Inc. (incorporated by
reference to Exhibit 99.3 to the Current Report on Form 8-K of
EchoStar, filed as of October 31, 2001, Commission File No.
0-26176).
10.30* Separation Agreement, dated October 28, 2001, by and between
General Motors Corporation and Hughes Electronics Corporation
(incorporated by reference to Exhibit 99.4 to the Current
Report on Form 8-K of EchoStar, filed as of October 31, 2001,
Commission File No. 0-26176).
10.31* Investment Agreement, dated December 14, 2001, between
EchoStar and Vivendi Universal, S.A., and exhibits
(incorporated by reference to Exhibit 99.1 to the Current
Report on Form 8-K of EchoStar, filed as of December 20, 2001,
Commission File No. 0-26176).
10.32* Stockholder Voting Agreement, dated December 14, 2001, by and
among Charles W. Ergen, The Samburu Warrior Revocable Trust
and Vivendi Universal, S.A. (incorporated by reference to
Exhibit 99.2 to the Current Report on Form 8-K of EchoStar,
filed as of December 20, 2001, Commission File No. 0-26176).
10.33+ Modification No. 8 to the Satellite Contract (EchoStar VII -
119 degree West Longitude) dated October 12, 2001, between
Lockheed Martin Corporation and EchoStar Orbital Corporation.
10.34+ Modification No. 9 to the Satellite Contract (EchoStar VII -
119 degree West Longitude) dated October 16, 2001, between
Lockheed Martin Corporation and EchoStar Orbital Corporation.
10.35+ Contract amendment No.1 to the EchoStar VIII contract between
EchoStar Orbital Corporation and Space Systems/Loral, Inc.,
dated October 19, 2001.
10.36+ Modification No. 10 to the Satellite Contract (EchoStar VII -
119 degree West Longitude) dated December 12, 2001, between
Lockheed Martin Corporation and EchoStar Orbital Corporation.
21+ Subsidiaries of EchoStar Communications Corporation.
23.1+ Consent of Arthur Andersen LLP, Independent Public Accountants
23.2+ Consent of Ernst & Young LLP, Independent Public Accountants
24.1+ Powers of Attorney authorizing signature of Cantey Ergen,
Raymond L. Friedlob, O. Nolan Daines, Peter A. Dea and
Jean-Marie Messier.
----------
* Incorporated by reference.
** Constitutes a management contract or compensatory plan or arrangement.
+ Filed herewith.