UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
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(Mark One)
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ANNUAL REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2004
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TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period from
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Commission file number: 0-26176
EchoStar Communications Corporation
(Exact name of registrant as specified in its charter)
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Nevada
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88-0336997
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(State or other jurisdiction of incorporation or organization)
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(I.R.S. Employer Identification No.)
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9601 South Meridian Boulevard
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Englewood, Colorado
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80112
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(Address of principal executive offices)
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(Zip Code)
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Registrants telephone number, including area code: (303) 723-1000
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Class A common stock, $0.01 par value
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
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No
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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
Registrants 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.
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Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
Yes
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No
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As of March 11, 2005, the aggregate market value of Class A common stock held by non-affiliates* of the Registrant approximated $5.9 billion based upon the closing price
of the Class A common stock as reported on the Nasdaq National Market as of the close of business on that date.
As of March 11, 2005, the Registrants outstanding common stock consisted of 217,156,164 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 Registrants definitive Proxy Statement to be filed in connection with its 2005 Annual Meeting of Shareholders are incorporated by reference
in Part III.
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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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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, intend, plan, estimate,
expect or anticipate will occur and other similar statements), you must remember that our
expectations may not turn out to be correct, even though we believe they are reasonable. We do not
guarantee that any future transactions or events described herein 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 events or
results will conform to our expectations and predictions is subject to a number of risks and
uncertainties. These risks and uncertainties include, but are not limited to, the following:
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we face intense and increasing competition from the satellite and cable television
industry; new competitors are likely to enter the subscription television business, and new
technologies may increase competition;
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DISH Network subscriber growth may decrease, subscriber turnover may increase and
subscriber acquisition costs may increase;
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partners in our co-branding and other distribution relationships may de-emphasize or
discontinue their efforts to acquire DISH Network subscribers, or may begin offering
non-DISH Network video services, which would cause our subscriber additions and related
revenue to decline and could cause our subscriber turnover and other costs to increase;
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satellite programming signals have been pirated and will continue to be pirated in the
future; pirating could cause us to lose subscribers and revenue, and result in higher costs
to us;
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programming costs may increase beyond our current expectations; we may be unable to
obtain or renew programming agreements on acceptable terms or at all; existing programming
agreements could be subject to cancellation; foreign programming is increasingly offered on
other platforms which could cause our subscriber additions and related revenue to decline
and could cause our subscriber turnover to increase;
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weakness in the global or U.S. economy may harm our business generally, and adverse
local political or economic developments may occur in some of our markets;
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the regulations governing our industry may change;
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certain provisions of the Satellite Home Viewer Extension and Reauthorization Act of 2004, or SHVERA, may force us to stop
offering local channels in certain markets or incur additional costs to continue offering
local channels in certain markets;
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our satellite launches may be delayed or fail, or our satellites may fail in orbit prior
to the end of their scheduled lives causing extended interruptions of some of the channels
we offer;
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we currently do not have commercial insurance covering losses incurred from the failure
of satellite launches and/or in-orbit satellites;
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service interruptions arising from technical anomalies on satellites or on-ground
components of our DBS system, or caused by war, terrorist activities or natural disasters,
may cause customer cancellations or otherwise harm our business;
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we are heavily dependent on complex information technologies;
weaknesses in our information technology systems could have an adverse impact
on our business; we may have difficulty attracting and retaining
qualified personnel to maintain or information technology
infrastructure;
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we may be unable to obtain needed retransmission consents, Federal Communications
Commission (FCC) authorizations or export licenses, and we may lose our current or future
authorizations;
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we are party to various lawsuits which, if adversely decided, could have a significant
adverse impact on our business;
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we may be unable to obtain patent licenses from holders of intellectual property or
redesign our products to avoid patent infringement;
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sales of digital equipment and related services to international direct-to-home service
providers may decrease;
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we are highly leveraged and subject to numerous constraints on our ability to raise
additional debt;
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acquisitions, business combinations, strategic partnerships, divestitures and other
significant transactions may involve additional uncertainties;
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terrorist attacks, the possibility of war or other hostilities, and changes in political
and economic conditions as a result of these events may continue to affect the U.S. and the
global economy and may increase other risks;
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we are periodically evaluating and testing our internal controls over financial
reporting in order to satisfy the requirements of Section 404 of the Sarbanes-Oxley Act.
Although our management concluded that our internal control over financial reporting was
effective as of December 31, 2004, if in the future we are unable to report that our
internal controls over financial reporting are effective (or if our auditors do not agree
with our assessment of the effectiveness of, or are unable to express an opinion on, our
internal controls over financial reporting), we could lose investor confidence in our
financial reports, which could have a material adverse effect on our stock price and our
business; and
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we may face other risks described from time to time in periodic and current reports we
file with the Securities and Exchange Commission (SEC).
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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.
We assume no responsibility for updating forward-looking information contained or incorporated by
reference herein or in other reports we file with the SEC.
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.
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PART I
Item 1. BUSINESS
OVERVIEW
Our Business
Echostar Communications Corporation, through its DISH Network, is a leading provider of satellite
delivered digital television to customers across the United States. DISH Network services include
hundreds of video, audio and data channels, interactive television channels, digital video
recording, high definition television, international programming, professional installation and
24-hour customer service.
We started offering subscription television services on the DISH Network in March 1996. As of
December 31, 2004, the DISH Network had approximately 10.905 million subscribers. We currently
have twelve owned or leased in-orbit satellites which enable us to offer over 2,000 video and audio
channels to consumers across the United States. Since we use many of these channels for local
programming, no particular consumer could subscribe to all channels, but all are available using
small consumer satellite antennae, or dishes. 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, 2004, there were over 24.0 million
subscribers to direct broadcast satellite services in the United States. We believe that there are
more than 92.0 million pay television subscribers in the United States, and there continues to be
significant unsatisfied demand for high quality, reasonably priced television programming services.
DISH Network and EchoStar Technologies Corporation
EchoStar Communications Corporation (ECC) is a holding company. Its subsidiaries (which together
with ECC are referred to as EchoStar, the Company, we, us and/or our) operate two
interrelated business units:
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The DISH Networ
k which provides a direct broadcast satellite (DBS) subscription
television service in the United States; and
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EchoStar Technologies Corporation
(ETC) which designs and develops DBS set-top
boxes, antennae and other digital equipment for the DISH Network. We refer to this
equipment collectively as EchoStar receiver systems. ETC also designs, develops and
distributes similar equipment for international satellite service providers.
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Since 1994, we have deployed substantial resources to develop the EchoStar DBS System. The
EchoStar DBS System consists of our FCC-allocated DBS spectrum, our owned and leased satellites,
EchoStar receiver systems, digital broadcast operations centers, customer service facilities, and
certain other assets utilized in our operations. Our principal business strategy is to continue
developing our subscription television service in the United States to provide consumers with a
fully competitive alternative to cable television service.
Other Information
We were organized in 1995 as a corporation under the laws of the State of Nevada. Our common stock
is publicly traded on the Nasdaq National Market under the symbol DISH. Our principal executive
offices are located at 9601 South Meridian Boulevard, Englewood, Colorado 80112 and our telephone
number is (303) 723-1000.
Recent Developments
$1.0 Billion Senior
Notes Offering.
On October 1, 2004, we sold $1.0 billion
principal amount of our 6 5/8% Senior Notes due October 1, 2014. The Notes were sold in a
private placement to qualified institutional buyers in reliance on Rule 144A under the Securities
Act of 1933. We used the net proceeds from issuance of the Notes, together with available cash,
to redeem all of our outstanding 10 3/8% Senior Notes due 2007.
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10 3/8% Senior Notes
Redemption.
Effective October 1, 2004, we redeemed all of
our outstanding
10 3/8% Senior Notes due 2007. In accordance with the terms of the indenture governing the notes,
the $1.0 billion principal amount of the notes was redeemed at 105.188%, for a total of
approximately $1.052 billion. The premium paid of approximately $51.9 million, along with
unamortized debt issuance costs of approximately $4.1 million, were recorded as charges to earnings
during the fourth quarter of 2004.
Cash Dividend.
On December 14, 2004, we paid a one-time cash dividend of $1.00 per share, or
approximately $455.7 million, on outstanding shares of our Class A and Class B common stock to
shareholders of record at the close of business on December 8, 2004.
Cablevision Satellite Acquisition.
On January 20, 2005, we agreed to purchase certain satellite
assets from Rainbow DBS Co., a subsidiary of Cablevision Systems Corporation for $200.0 million.
Specifically, we have agreed to purchase Rainbow 1, a direct broadcast satellite located at 61.5
degrees West Longitude, together with the rights to 11 DBS frequencies at that location. The
satellite includes 13 transponders, up to 12 of which can be operated in spot beam mode. Also, as
part of this transaction, we will acquire ground facilities and related assets in Black Hawk, S.D.
The transaction is subject to customary conditions, including regulatory approval by the FCC.
There can be no assurance that such approval will be obtained.
Settlement of EchoStar IV Arbitration.
Several years ago, we filed a $219.3 million insurance
claim as a result of the failure of our EchoStar IV satellite to operate properly. The satellite
insurance consisted of separate, substantially identical policies with many carriers for varying
amounts which, in combination, create a total insured amount of $219.3 million. All of the
carriers contested the loss claim, resulting in arbitration under the terms of the policies.
On March 4, 2005, we agreed to settle our insurance claim and related claims for accrued interest
and bad faith with all carriers who agree to pay their proportionate share of an aggregate net
amount of $240.0 million. We retained title to and use of the EchoStar IV satellite. Payment from
each settling carrier is due on or before April 26, 2005, with interest commencing to accrue on
April 12, 2005. Currently, we have received signed agreements back from insurers representing our 90% of the aggregate amount. While we believe the remaining insurers will each
sign the agreement shortly, the arbitration will continue with respect to any insurers who decline
to settle.
Amounts payable to us in excess of our previously recorded $106.0 million receivable will be
recognized in income during the period in which the respective insurers sign the settlement
agreement. See Item 3 Legal Proceedings for more information relating to the underlying
insurance claim and our historical accounting for that claim.
Internal Review and Filing of Purported Securities Class Action.
Our Audit Committee recently
completed a review of recordkeeping and internal control issues relating to certain of our vendor
and third party relationships (the Review). The Review concluded that the Companys
recordkeeping in prior years and the current control environment were deficient and reported one
instance in which one of our executive officers in charge of certain business functions directed
the preparation, in prior years, of inaccurate documentation that was used to determine payments
made to a vendor. Management has evaluated this instance and determined that it constitutes a
significant deficiency in the Companys internal control over financial reporting, as defined by
the Public Company Accounting Oversight Boards Auditing Standard No. 2. Managements complete
report on internal control over financial reporting is set forth under Item 9A. Controls and
Procedures.
Notwithstanding this determination, no adjustments to our consolidated financial
statements were required as a result of the Review, and none were made. We are, however,
implementing several changes recommended by the Audit Committee to our governance, operating and
control policies and procedures. We have also taken disciplinary action and other steps to
remediate the conduct underlying the deficiencies identified by the Audit Committees Review.
Following the March 10, 2005 publication of a news article purporting to describe the Review and
other matters, we received a phone call from the Division of Enforcement of the Securities and
Exchange Commission inquiring about the matters described in the news article. The Company intends
to fully respond to that inquiry. On March 11, 2005, a purported class action lawsuit was filed
against us and several of our current and former officers in the United States District Court for
the District of Colorado. The complaint alleges, among other things, that we made material
misstatements and omissions by issuing financial statements and reports on operations that were
not in accordance with GAAP, through inadequate internal controls, failure to disclose related
party transactions and improperly booking certain transactions, resulting in violations of several
federal securities law provisions. We intend to vigorously defend against this complaint.
DISH NETWORK
Programming
Value-Based Programming Packages
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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 Americas Top 60 package for $26.99 per month. This package includes 60 of our
most popular video channels in digital format. We estimate that cable operators would typically
charge over $40.00 per month, on average, for comparable entry-level expanded basic service.
Our Americas Top 120 package currently sells for $37.99 per month and is similar to an expanded
basic cable package plus more than 30 commercial-free, CD-quality music channels. We estimate that
cable operators would typically charge over $45.00 per month, on average, for a similar package.
Our Americas Top 180 currently sells for $47.99 per month, and our Americas Everything Pak,
which combines our Americas Top 180 package and more than 30 commercial-free premium movie channels
including HBO, Cinemax, Showtime and Starz!, currently sells for $81.99 per month.
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Cable operators do typically include local channels in their programming packages. However, we can
provide satellite-delivered local channels in digital format to any of these packages for an
additional $5.99 per month in 155 of the largest markets in the United States, representing over
95% of all of U.S. television households.
We also offer each of these programming packages under our Digital Home Advantage promotion, which
can include a dual tuner receiver, installation in up to two rooms, and local channels where
available at no additional cost. Our Digital Home Advantage promotion prices are $31.99 per month for Americas Top 60, $42.99 per month for Americas Top 120, and $52.99 and $86.99 per month,
respectively, for Americas Top 180 and Americas Everything Pak. Generally, subscribers to any
Digital Home Advantage package may add a digital video recorder to their system for an additional
cost of only $5.00 per month.
Movie Packages
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We currently offer each of our four movie packages, which include up to 10 movie
channels per package, starting at $11.99 per month. We believe we currently offer more movie
channels than cable typically offers at a comparable price.
DISH Latino Programming Packages
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We also offer a variety of Spanish-language programming packages. Our DISH Latino package includes more than 30 Spanish-language
programming channels for $24.99 per month. We also offer DISH Latino Dos, which includes over 125 English
and Spanish-language programming channels for $34.99 per month. Our DISH Latino
Max includes more than 170 Spanish and English-language channels for $44.99 per month.
International Programming
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We offer over 100 foreign-language channels including
Arabic, South Asian, Hindi, Russian, Chinese, Greek and many others. DISH Network remains the
pay-TV leader in delivering foreign-language programming to customers in the United States, and our
foreign-language programming contributes significantly to our subscriber growth. We believe
foreign-language programming is a valuable niche product that attracts new subscribers to DISH Network who are unable to get similar programming elsewhere. However, we
face increasing competition from other distributors of foreign language programming,
including the Spanish-language programming discussed above, and there can be no assurance that we will
continue to experience growth in subscribers to our foreign-language programming
services. In addition, the increasing availability of foreign language programming
from our competitors, which in certain cases has resulted from our inability to renew programming agreements on an exclusive basis or at all, could contribute to an increase in our
subscriber churn. Our agreements with distributors of foreign language programming have varying
expiration dates, and some agreements are on a month-to-month basis. There can be no assurance
that we will be able to renew these agreements on acceptable terms or at all.
Sales, Marketing and Distribution
Sales Channels
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We currently sell EchoStar receiver systems and solicit orders for DISH Network
programming services through independent distributors, retailers and consumer electronics stores.
While we also sell receiver systems and programming directly, independent retailers are responsible
for most of our sales. These independent retailers are primarily local retailers who specialize in
TV and home entertainment systems. We also acquire customers through nationwide retailers such as
Costco, Sears and certain regional consumer electronic chains. In addition, RadioShack Corporation
sells EchoStar receiver systems and markets DISH Network programming services through its 5,200
corporate stores and in approximately 1,000 dealer franchise stores nationwide. We also 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 what we believe are competitive incentive programs.
Through these programs, qualified distributors and retailers receive, among other things,
incentives upon new subscriber activations and generally receive monthly residual incentives dependent on, among
other things, continued consumer subscription to qualified programming.
Marketing.
We use print, radio, and television, on a local and national basis, to
advertise and promote the DISH Network. We also offer point-of-sale literature, product displays,
demonstration kiosks and signage for retail outlets. We provide guides that describe DISH Network
products and services to our retailers and distributors and conduct periodic educational seminars.
Our mobile sales and marketing team visits retail outlets regularly to reinforce training and
ensure that these outlets have proper point-of-sale materials for our current promotions.
Additionally, we dedicate a DISH Network television channel and website to provide retailers with
information about special services and promotions that we offer from time to time.
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Promotional Subsidies
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Our future success in the subscription television industry depends on,
among other factors, our ability to acquire and retain DISH Network subscribers. We provide
varying levels of subsidies and incentives to attract customers, including leased, free or
subsidized receiver systems, installations, programming and other items. This marketing strategy
emphasizes our long-term business strategy of maximizing future revenue by selling DISH Network
programming to a large potential subscriber base and rapidly increasing our subscriber base. Since
we subsidize consumer up-front costs, we incur significant costs each time we acquire a new
subscriber. Although there can be no assurance, we believe that, on
average, 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. Our current equipment lease program, the Digital Home Advantage promotion, offers new
customers the ability to lease up to four installed EchoStar receivers, including various premium
models such as advanced digital video recorders and high definition receivers, when they subscribe
to one of several qualifying programming packages. Although there can be no assurance, we expect
this marketing strategy will reduce the cost of acquiring future subscribers because we retain
ownership of the receiver systems. Upon termination of service, Digital Home Advantage subscribers
are required to return the receiver and certain other equipment to us. While we do not recover all
of the equipment upon termination of service, equipment that is recovered after deactivation is
reconditioned and re-deployed at a lower cost than new equipment. The effectiveness of our plan to
reduce subscriber acquisition costs through redeployment
of leased equipment is dependent on our ability to retrieve and cost effectively recondition leased
equipment from subscribers who terminate service. Our ability to realize reduced equipment costs from redeploying reconditioned equipment will be negatively impacted by new compression technologies that will inevitably render some portion of our current and future EchoStar receivers obsolete. We will incur additional costs, which may be substantial, to upgrade or replace these set-top boxes.
We base our marketing promotions, among other things, on current competitive conditions. In some
cases, if competition increases, or we determine for any other reason that it is necessary to
increase our subscriber acquisition costs to attract new customers, our profitability and costs of
operation would be adversely affected.
Digital Video Recording and Interactive Service
We continue to expand our offerings to include advanced products such as digital video recorders,
or DVRs and interactive programming services. DISH Network customers can purchase or lease
receivers with built-in hard disk drives that permit viewers to pause and record live programs,
including programming in high definition, without the need for videotape. We now offer receivers
capable of storing up to 210 hours of programming and expect to increase storage capacity on future
receiver models. We also currently offer receivers that provide a wide variety of innovative
interactive television services and applications, including shopping and weather channels, wagering
and gaming.
Broadband Strategic Alliances
Since 2002, we have entered into agreements to offer a bundled package of services combining DISH
Network satellite television service with the voice and data services of various telecommunications
companies such as SBC Communications, Inc. (SBC) and others.
Beginning in the first quarter of 2004, we commenced sales of a co-branded service featuring our
DISH Network service bundled together with SBCs telephony, high-speed data and other
communications services. SBC is marketing the bundled service and is responsible for certain
integrated order-entry, customer service and billing. SBC also purchases set-top box equipment
from us to lease to bundled service customers. SBC outsources installation and certain customer
service functions to us for a fee. As part of the agreement, SBC paid us certain development and
implementation fees during 2003 and 2004.
While we expect to continue to pursue opportunities to bundle our DISH Network satellite television
service with the voice and data services of SBC and other telecommunications providers, SBC
recently announced that in 2005 it will begin deploying an advanced fiber network that will enable
it to offer video services directly. Our net new subscriber additions and certain of our other key
operating metrics would be adversely affected to the extent SBC de-emphasizes or discontinues its
efforts to acquire DISH Network subscribers. Moreover, there can be no assurance
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that we will be successful in developing significant new bundling opportunities with other
telecommunications companies.
Our Satellites
Our satellites operate in the Ku and Ka band portions of the microwave radio spectrum used for
satellite communications. The Ku-band spectrum is split into two segments by the FCC. The 11.7 to
12.2 GHz downlink band, which is the low and medium power portion of the Ku-band, is known as the
Fixed Satellite Service (FSS) band. The high power portion of the Ku-band within the 12.2 to
12.7 GHz downlink band is known as the Broadcast Satellite Service (BSS) band, which is also
referred to as Direct Broadcast Satellite or the DBS band.
Unlike the DBS spectrum, the FSS spectrum has no predefined frequency plan such that the number and
bandwidth of each individual channel can vary and satellite orbital locations are routinely as
close together as two degrees. In addition, there are more severe power limitations placed on FSS
spectrum. The result of these differences generally means that, while FSS spectrum can be
satisfactorily used for delivery of direct to home (DTH) services, it can carry somewhat less
capacity and generally requires a slightly larger user antenna or consumer dish to adequately
receive signals from a satellite.
Ka-band is a higher frequency band than Ku-band and roughly ranges from 18 to 40 GHz. For
commercial users, the downlink spectrum is generally considered to consist of frequencies between
18.3 18.8 GHz and 19.7 20.2 GHz. This part of the Ka-band is also considered to be FSS
spectrum, and therefore Ka-band orbital locations can routinely be as close together as two
degrees. The higher frequency and closer spacing generally make Ka-band spectrum transmissions
more susceptible to various types of signal interference, including interference caused by rain and
snow. While several companies in the satellite communications industry have business plans for
the use of Ka-band spectrum for video, data and broadband services, the use of Ka-band spectrum for
commercial satellite communication services is still in the developmental stage.
Most of our programming is currently transmitted to our customers on DBS frequencies within
the Ku-band spectrum. However, we continue to explore other opportunities including partnerships and
investments to expand our capacity through the use of other available spectrum, such as FSS
services in the Ku and Ka-bands.
Overview of Our Satellites and FCC Authorizations
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Our satellites are located in orbital
positions, or slots, that are designated by their western longitude. An orbital position describes
both a physical location and an assignment of spectrum in the applicable frequency band. The FCC
has divided each DBS orbital position into 32 frequency channels. Each transponder on our
satellites typically exploits one frequency channel. Through digital compression technology, we
can currently transmit between nine and thirteen digital video channels from each transponder. The
FCC has licensed us to operate 96 direct broadcast satellite frequencies at various orbital
positions including:
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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 (CONUS);
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11 frequencies at the 61.5 degree orbital location, capable of providing service
to the Eastern and Central United States;
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32 frequencies at the 148 degree orbital location, capable of providing service
to the Western United States; and
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3 frequencies at the 157 degree orbital location, capable of providing service
to the Western United States.
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We also hold licenses or lease capacity on satellites at two FSS orbital locations including:
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32 frequencies at the 121 degree orbital location, capable of providing CONUS
service; and
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24 frequencies at the 105 degree orbital location, currently capable of
providing service to approximately 80% of CONUS.
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In addition, we were the winning bidder for the remaining 29 DBS frequencies at the 157 degree
orbital location at an FCC auction conducted in July 2004. However, we have not yet been granted
the license for these frequencies, and we cannot be certain that the FCC will ultimately grant us
these licenses.
We currently broadcast the majority of our programming from the 110 and 119 degree locations. The
majority of our customers have satellite receiver systems that are
equipped to receive signals from, at least,
both of these locations.
Satellite Fleet
We presently have twelve owned or leased satellites in geostationary orbit approximately 22,300
miles above the equator. Each of the eight DBS satellites (EchoStar I through EchoStar VIII) and
one FSS Ku/Ka-band satellite (EchoStar IX) we own and operate has a minimum design life of at least
12 years. Our satellite fleet is a major component of our Echostar DBS System. While we believe
that overall our satellite fleet is in general good health, during 2004 and prior periods, certain
satellites within our fleet have experienced various anomalies, some of which have had a
significant adverse impact on their commercial operation.
We currently own a total of nine in-orbit satellites.
EchoStar I and II.
EchoStar I and II currently operate at the 148 degree orbital location. Each
of these Series 7000 class satellites designed and manufactured by Lockheed Martin Corporation, has
16 transponders that operate at approximately 130 watts of power. While both satellites are
currently functioning properly in orbit, similar Lockheed Series 7000 class satellites owned by
third parties have experienced total in-orbit failure. While we currently do not have sufficient
information available to reach any conclusions as to whether other satellites of the Series 7000 class might be at increased risk
of suffering a similar malfunction, no telemetry or other data indicates EchoStar I or EchoStar II
would be expected to experience a similar failure. EchoStar I and II are each equipped with 24 Traveling
Wave Tube Amplifiers (TWTA), of which 16 are required to support the transponders authorized for operation on each satellite. Prior to 2004, failures or reduced capabilities on a single TWTA on each of EchoStar I and II left each satellite with 23 usable TWTAs. While we dont expect a large number of additional TWTAs to fail in
any year, it is likely that additional TWTA failures will occur from time to time in the future,
and that those failures may impact commercial operation of the satellites. We will continue to
evaluate the performance of EchoStar I and EchoStar II as new events or changes in circumstances
become known.
EchoStar III.
EchoStar III currently operates at the 61.5 degree orbital location. During January
2004, a TWTA pair on this satellite failed, resulting in a loss of service on one of our licensed
transponders. An additional TWTA pair failed in March 2004. Including the seven TWTA pairs that
malfunctioned in prior years, these anomalies have resulted in the failure of a total of 18 TWTAs
on the satellite to date. While originally designed to operate a maximum of 32 transponders at
approximately 120 watts per channel, switchable to 16 transponders operating at over 230 watts per
channel, the satellite was equipped with a total of 44 TWTAs to provide redundancy. EchoStar III
can now operate a maximum of 26 transponders, but due to redundancy switching limitations and
specific channel authorizations it currently can only operate on 18 of the 19 FCC authorized
frequencies we utilize at the 61.5 degree west orbital location. While we dont expect a large
number of additional TWTAs to fail in any year, it is likely that additional TWTA failures will
occur from time to time in the future, and that those failures will further impact commercial
operation of the satellite. We will continue to evaluate the performance of EchoStar III as new
events or changes in circumstances become known.
EchoStar IV.
EchoStar IV is currently located at the 157 degree orbital location. Prior to 2004,
this satellite experienced failures with the deployment of its solar arrays and with 38 of its 44
transponders (including spares), and further experienced anomalies affecting its thermal systems
and propulsion systems. Several years ago, we filed a $219.3 million insurance claim for a total
loss under the launch insurance policies covering this satellite. On March 4, 2005, we agreed to
settle this claim (see Item 3 Legal Proceedings). On September 4, 2004, the south solar array
on EchoStar IV deployed fully and appears to be producing nominal current. There can be no
assurance that further material degradation, or total loss of use, of EchoStar IV will not occur in
the immediate future. As of December 31, 2003, EchoStar IV was fully depreciated.
6
EchoStar V.
EchoStar V is currently located at the 119 degree orbital location. This satellite is
equipped with a total of 96 solar array strings, 92 of which are required to assure full power
availability for the 12-year design life of the satellite. Prior to 2004, EchoStar V experienced
anomalies resulting in the loss of 4 solar array strings. During March 2004, EchoStar V lost an
additional solar array string, reducing solar array power to approximately 95% of its original
capacity. While originally designed to operate a maximum of 32 transponders at approximately 110
watts per channel, switchable to 16 transponders operating at approximately 220 watts per channel,
the solar array anomalies may prevent the use of some of those transponders for the full 12-year
design life of the satellite. In addition, momentum wheel anomalies previously experienced
resulted in more rapid use of fuel and a corresponding minor reduction of spacecraft life. An
investigation of the anomalies is continuing. Until the root causes are finally determined, there
can be no assurance that future anomalies will not cause further losses which could impact
commercial operation of the satellite. EchoStar V is not currently carrying any traffic and is
being utilized as an in-orbit spare. We will continue to evaluate the performance of EchoStar V as
new events or changes in circumstances become known. Increased fuel use resulting from commercial
operation of the spacecraft or other events and circumstances would require us to reduce the
remaining depreciable life of EchoStar V.
EchoStar VI.
EchoStar VI currently operates at the 110 degree orbital location. This satellite
has 32 transponders that operate at approximately 120 watts per channel, switchable to 16
transponders operating at approximately 240 watts per channel. The satellite has a total of
approximately 112 solar array strings and approximately 106 are required to assure full power
availability for the estimated 12-year design life of the satellite. Prior to 2004, EchoStar VI
lost a total of 3 solar array strings. During April 2004 and again in July 2004, EchoStar VI
experienced anomalies resulting in the loss of two additional solar array strings, bringing the
total number of string losses to five. An investigation of the solar array anomalies, none of
which have impacted commercial operation of the satellite or are expected to reduce the estimated
design life of the satellite to less than 12 years, 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. We will continue to evaluate the
performance of EchoStar VI as new events or changes in circumstances become known.
EchoStar VII.
EchoStar VII currently operates at the 119 degree orbital location. This satellite
has 32 transponders that operate at approximately 120 watts per channel, switchable to 16
transponders operating at approximately 240 watts per channel. EchoStar VII also includes
spot-beam technology which enables us to increase the number of markets where we provide local
channels, but reduces the number of video channels that could otherwise be offered across the
entire United States. Each transponder can transmit multiple digital video, audio and data
channels. During March 2004, our EchoStar VII satellite lost a solar array circuit. EchoStar VII
was designed with 24 solar array circuits and needs 23 for the spacecraft to be fully operational
at end of life. While this anomaly is not expected to reduce the estimated design life of the
satellite to less than 12 years and has not impacted commercial operation of the satellite to date,
an investigation of the anomaly is continuing. Until the root causes are finally determined, there
can be no assurance future anomalies will not cause further losses which could impact commercial
operation of the satellite. We will continue to evaluate the performance of EchoStar VII as new
events or changes in circumstances become known.
EchoStar VIII.
EchosStar VIII currently operates at the 110 degree orbital location. This
satellite has 32 transponders that operate at approximately 120 watts per channel, switchable to 16
transponders operating at approximately 240 watts per channel. EchoStar VIII also includes
spot-beam technology. During June 2004, EchoStar VIII experienced an anomaly which affected
operation of one of the primary gyroscopes on the satellite. A spare gyroscope has been switched
in and is performing nominally. EchoStar VIII was originally configured with three primary, and
one spare, gyroscope. Further, an anomaly previously experienced has resulted in certain
gyroscopes being utilized for aggregate periods of time substantially in excess of their originally
qualified limits in order to maintain nominal spacecraft operations and pointing. An investigation
is underway to determine the root cause of the anomaly and to develop procedures for continued
spacecraft operation in the event of future gyroscope anomalies. In January 2005, EchoStar VIII
experienced a fault within one of the computer components in the spacecraft control electronics.
The system is operating nominally on one processor with limited backup capacity. An investigation
is underway to determine the root cause of this anomaly and whether any permanent degradation or
loss of redundancy has occurred. While these anomalies are not expected to reduce the estimated
design life of the satellite to less than 12 years and have not impacted commercial operation of
the satellite to date, until the root causes of the anomalies are determined, there can be no
assurance future anomalies will not cause losses which could impact commercial operation of the
satellite.
7
EchoStar VIII is equipped with two solar arrays which convert solar energy into power for the
satellite. Those arrays rotate continuously to maintain optimal exposure to the sun. During 2003,
EchoStar VIII experienced anomalies that temporarily halted rotation of each solar array. Both
arrays are currently fully functional, but rotating in a mode recommended by the satellite
manufacturer which allows full rotation but is different than the originally prescribed mode. An
investigation of the solar array anomalies, none of which have impacted commercial operation of the
satellite, is continuing. Until the root cause of these anomalies is finally determined, there can
be no assurance future anomalies will not cause losses which could impact commercial operation of
the satellite.
During 2003, a single battery cell on EchoStar VIII exhibited reduced capacity. There are 72
battery cells on EchoStar VIII and all loads can be maintained for the full design life of the
satellite with up to two battery cells fully failed. An investigation of the battery cell anomaly,
which has not impacted commercial operation of the satellite, is underway. Until the root cause of
the anomaly is determined, there can be no assurance future anomalies will not cause losses which
could impact commercial operation of the satellite.
We depend on EchoStar VIII to provide local channels to over 40 markets until at least such time as
our EchoStar X satellite is successfully launched which is currently expected during the fourth
quarter of 2005 (see
Satellites under Construction
below). In the event that EchoStar VIII experienced a total
or substantial failure, we could transfer many, but not all, of those channels to other in-orbit
satellites.
EchoStar IX.
EchoStar IX currently operates at the 121 degree orbital location. This satellite
has 32 Ku-band transponders that operate at approximately 110 watts per channel, along with
transponders that can provide services in Ka-Band (a Ka-band payload). EchoStar IX provides
expanded video and audio channels to DISH Network subscribers who install a specially-designed
dish. The Ka-band spectrum is being used to test and verify potential future broadband initiatives
and to implement those services.
We currently lease a total of three in-orbit satellites.
AMC-2.
AMC-2 currently operates at the 105 degree orbital location. This SES Americom FSS
satellite is equipped with 24 medium power FSS Ku transponders and is used primarily to provide
local channels by satellite to DISH Network subscribers who install a specially-designed dish. Our
lease of this satellite will continue at least until the AMC-15 satellite discussed below is placed
in service at this location, which is expected to occur during the second half of 2005.
AMC-15.
AMC-15 is currently being relocated to the 113 degree orbital location and is expected to
move to the 105 degree orbital location during the second half of 2005. This SES Americom FSS
satellite is equipped with 24 Ku FSS transponders that operate at approximately 120 watts per
channel and a Ka FSS payload consisting of 12 spot beams. We could use the capacity on AMC-15 to
offer a combination of programming including local network channels in additional markets, together
with satellite-delivered high-speed internet services.
AMC-16
. AMC-16 is currently located at the 85 degree orbital location. This SES Americom FSS
satellite is virtually identical to AMC-15 and is equipped with 24 Ku FSS transponders that operate
at approximately 120 watts per channel and a Ka FSS payload consisting of 12 spot beams capable of
covering full CONUS. We could use the capacity on AMC-16 as a backup for AMC-15, and could also
utilize the satellite to offer local network channels in additional markets, together with
satellite-delivered high-speed internet services.
Satellite Insurance
.
We currently do not carry insurance for any of our in-orbit satellites. To
satisfy insurance covenants related to our 9 3/8% Senior Notes due 2009 and 10 3/8% Senior Notes
due 2007, we previously classified an amount equal to the depreciated cost of five of our
satellites as cash reserved for satellite insurance on our balance sheet. As of December 31, 2003,
this amount totaled approximately $176.8 million. During 2004, we redeemed all of these Notes (See
Note 4 in the Notes to the Consolidated Financial Statements in Item 15 of this Annual Report on
Form 10-K) and are no longer subject to these insurance covenants. Since the indentures for our
remaining outstanding notes do not have covenants requiring satellite insurance, we reclassified
the remaining amount of the reserve to cash and cash equivalents during the fourth quarter of 2004.
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, programming
continuity cannot be assured in the event of multiple satellite losses.
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Several years ago, we filed a $219.3 million insurance claim for a total loss under the launch
insurance policies covering our EchoStar IV satellite. On March 4, 2005 we agreed to settle this
claim and related claims for accrued interest and bad faith with all carriers who agree to pay
their proportionate share of an aggregate net amount of $240.0 million. We retained title to and
use of the EchoStar IV satellite. See Item 3 Legal Proceedings for more information.
Certain Other Risks to Our Satellites
.
Meteoroid events pose a potential threat to all in-orbit
geosynchronous satellites including our DBS satellites. While the probability that our satellites
will be damaged by 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 our direct broadcast 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 our direct broadcast
satellites. The locations of these hazards are generally well known and may require us to perform
maneuvers to avoid collisions.
Satellites under Construction.
We have entered into contracts to construct four new satellites.
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EchoStar X, a Lockheed Martin A2100 class DBS satellite, is expected to be completed and
launched during the fourth quarter of 2005 and will enable better bandwidth utilization,
provide back-up protection for our existing local channel offerings, capacity
to potentially offer local channels in additional markets and could allow DISH Network to offer other value-added services.
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EchoStar XI, a Space Systems/Loral FS1300 class DBS satellite, is expected to be
completed during 2007 and is contingent upon, among other things,
finalization of the necessary bankruptcy court approvals. There can be no assurance that
these approvals will be finalized or that the satellite will ultimately be launched. EchoStar XI will
enable better bandwidth utilization, provide back-up protection for our existing offerings,
and could allow DISH Network to offer other value-added services.
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Two additional Lockheed Martin A2100 class spot beam Ka-band satellites are expected to
be completed during 2008 and will enable better bandwidth utilization and could allow DISH
Network to offer other value-added services including 2-way broadband and video.
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Satellites under Lease.
We have also entered into satellite service agreements to lease capacity
on two additional satellites under construction.
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An SES Americom DBS satellite expected to launch during 2006 and
commence commercial operations at an orbital location to be determined at a future date.
This satellite could be used as additional backup capacity and to offer
other value-added services.
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An additional satellite expected to launch during 2006, contingent upon, among other
things, obtaining necessary regulatory approvals. There can be no assurance that we will
obtain these approvals or that the satellite will ultimately be launched. This satellite
could allow DISH Network to offer other value-added services.
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In addition, on January 20, 2005, we agreed to purchase Rainbow 1, a DBS satellite located at 61.5
degrees West Longitude, together with the rights to 11 DBS frequencies at that location (See
Recent Developments). The transaction is subject to regulatory approval by the FCC and other
regulatory agencies. There can be no assurance that such approval will be obtained.
We are significantly increasing our satellite capacity as a result of the agreements discussed
above and other satellite service agreements currently under negotiation. While we are currently
evaluating various opportunities to make profitable use of this capacityincluding, but not
limited to, launching satellite two-way and wireless broadband, increasing our international
programming and other services, and expanding our local and high definition programmingwe do not
have firm plans to utilize all of the additional satellite capacity we expect to acquire. In
addition, there can be no assurance that we can successfully develop the business opportunities we
currently plan to pursue with this additional capacity. Future costs associated with this
additional capacity will negatively impact our margins if we do not have sufficient growth in
subscribers or in demand for new programming or services to generate revenue to offset the costs of
this increased capacity.
As a result of our recent agreements discussed above, and other satellite service agreements
currently under negotiation, we have significantly increased our capacity of satellites and orbital
locations. We are currently evaluating various opportunities to make profitable use of this
capacity, including, but not limited to, launching satellite two-way and wireless broadband,
increasing our international programming and other services, and expanding our local and high
definition programming. These business opportunities may not materialize, and accordingly, there
can be no assurance that we will be able to utilize this increased capacity profitably.
Components of a DBS System
Overview
.
In order to provide programming services to DISH Network subscribers, we have entered
into agreements with video, audio and data programmers who generally make their programming content
available to our digital broadcast operations centers in Cheyenne, Wyoming and Gilbert, Arizona,
via commercial satellites or fiber optic networks. We monitor those
signals for quality, and can add promotional messages, public service programming, advertising, and
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 satellites and
broadcast directly to DISH Network subscribers.
In order to receive DISH Network programming, a subscriber needs:
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a satellite antenna, which people sometimes refer to as a dish, and related components;
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a satellite receiver or set-top box; and
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a television set.
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EchoStar Receiver Systems
.
EchoStar receiver systems include a small satellite dish, a digital
satellite receiver that decrypts and decompresses 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 models include a hard disk drive enabling additional
features such as digital video recording of up to 210 hours of programming and a UHF/infrared
universal remote. Certain of our standard and premium systems allow independent satellite TV
viewing on two separate televisions. We also offer a variety of specialized products including
high definition television (HDTV) receivers. 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. DISH Network reception equipment is incompatible with our competitors systems.
Although we internally design and engineer our receiver systems, we outsource manufacturing to
high-volume contract electronics manufacturers. Sanmina-SCI Corporation is the primary manufacturer
of our receiver systems. JVC and Celetronix USA, Inc. also manufacture some of our receiver
systems.
We depend on a few manufacturers, and in some cases a single manufacturer, for the production of
our receivers and many components of our EchoStar receiver systems that we provide to subscribers.
Although there can be no assurance, we do not believe that the loss of any single manufacturer will
materially impact our business.
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Conditional Access System
.
We use conditional access technology to encrypt our programming so only
those who pay can receive it. We use microchips embedded in credit card-sized access cards, called
smart cards, or in security chips in the satellite receiver, together referred to as security
access devices, to control access to authorized programming content. ECC owns 50% of NagraStar
L.L.C., a joint venture that provides us with security access devices. Nagra USA, a subsidiary of
the Kudelski Group, owns the other 50% of NagraStar. NagraStar purchases these security access
devices from NagraCard SA, a Swiss company which is also a subsidiary of the Kudelski Group. These
security access devices, which we can upgrade over the air 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 security access devices to
permit decryption of the programming for viewing by that consumer. The set-top box then
decompresses the programming and sends it to the consumers television.
Our signal encryption has been pirated, allowing illegal receipt of our programming, and our
security systems could be further compromised in the future. Theft of our programming reduces
future potential revenue and increases our net subscriber acquisition costs. In addition, theft of
our competitors programming can also increase our churn. Compromises of our encryption technology
could also adversely affect our ability to contract for video and audio services provided by
programmers. It is illegal to create, sell or otherwise distribute mechanisms or devices to
circumvent that encryption. We continue to respond to compromises of our encryption system with
security measures intended to make signal theft of our programming more difficult. To further
combat piracy and maintain the functionality of active set-top boxes, we are in the process of
replacing older generation smart cards with newer generation smart cards. We expect to complete
the replacement of older generation smart cards during the second half of 2005. However, there can
be no assurance that these security measures or any future security measures we may implement will
be effective in reducing piracy of our programming signals.
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 have expanded our
installation business, which is conducted through our DISH Network Service L.L.C. subsidiary. We
use both employees and independent contractors for professional installations. Independent
installers are held to DISH Network Service L.L.C. service standards to attempt to ensure each DISH
Network customer receives the same quality installation and service. Our offices and independent
installers are strategically located throughout the continental United States. Although there can
be no assurance, we believe that our internal installation business helps to improve quality
control, decrease wait time on service calls and new installations and helps us better accommodate
anticipated subscriber growth.
Digital Broadcast Operations Centers
.
Our principal digital broadcast operations centers are
located in Cheyenne, Wyoming and Gilbert, Arizona. Almost all of the functions necessary to
provide satellite-delivered services occur at those locations. The digital broadcast operations
centers use fiber optic lines and downlink antennas to receive programming and other data from
content providers. For local channels, the programming signals are encoded in the originating city
and then backhauled via fiber to our principal digital broadcast operation centers. These centers
then uplink programming content to our direct broadcast satellites. Equipment at our digital
broadcast operations centers performs substantially all compression and encryption of DISH
Networks programming signals. We are also in the process of
building several new mini digital broadcast operations centers that will allow us to better utilize the spot beam capabilities of our
satellites.
Customer Service Centers
.
We currently operate ten customer service centers fielding substantially
all of our customer service calls. Potential and existing subscribers can call a single telephone
number to receive assistance for hardware, programming, billing, 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 and improve the customers
self-service experience.
Subscriber Management
.
We presently use, and are dependent on, CSG Systems International, Inc.s
software system for the majority of DISH Network subscriber billing and related functions.
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Competition for our Dish Network Business
We compete in the subscription television service industry against other DBS television providers,
cable television and other land-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 earnings and other operating metrics could be
materially adversely affected if we are unable to compete successfully with these and other new
providers of multi-channel video programming services.
Cable Television
.
Cable television operators have a large, established customer base, and many
cable operators have significant investments in, and access to, programming. Of the 99% of United
States television households in which cable television service was available as of December 31,
2004, approximately 62% subscribed to cable. Cable television operators continue to leverage their
advantages relative to us by, among other things, bundling their analog video service with expanded
digital video services, 2-way high speed internet access, and telephone services. Cable television
operators with analog systems are also able to provide service to multiple television sets within the same household at
a lesser incremental cost to the consumer, and they are able to provide local and other programming
in a larger number of geographic areas.
Some digital cable platforms currently offer a VOD service that enables subscribers to choose from
a library of programming selections for viewing at their convenience. We are currently developing
our own VOD service alternative which is expected to be launched in late 2005. We cannot assure
you that our VOD service, when launched, will be successful in
competing with the cable services offering.
DirecTV and other DBS and Direct-to-Home System Operators
.
During December 2003, an affiliate of
News Corporation acquired a 34% controlling interest in The DirecTV Group (formerly known as Hughes
Electronics Corporation), the owner of DirecTV. News Corporations diverse world-wide satellite,
content and other related businesses may provide competitive advantages to DirecTV with respect to
the acquisition of programming, content and other assets valuable to our industry. In addition,
DirecTVs satellite receivers are sold in a significantly greater number of consumer electronics
stores than ours. As a result of this and other factors, our 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. We believe DirecTV
continues to be in an advantageous position relative to our company with regard to, among other
things, certain programming packages, and possibly, volume discounts for programming offers.
DirecTV also recently announced plans to launch four new satellites, two of which are expected to
be operational in each of 2005 and 2007, which will be used to offer local and national high
definition programming to most of the U.S. population. If DirecTV implements these plans, we may
be at a competitive disadvantage.
In addition, during 2004 DirecTV and the National Rural Telecommunications Cooperative (NRTC)
entered into an agreement which terminated NRTCs rights to be the exclusive distributor of DirecTV
in large portions of the rural United States. As a result of this agreement, DirecTV is now able
to compete directly against us in these territories, and this could adversely affect our ability to
continue to add or retain rural subscribers.
Other companies in the United States have conditional permits or have launched satellites or leased
transponders for a comparatively small number of DBS assignments that can be used to provide
subscription satellite services to portions of the United States. These new entrants may have a
competitive advantage over us in deploying some new products and technologies because of the
substantial costs we may be required to incur to make new products or technologies available across
our installed base of over 11 million subscribers.
VHF/UHF Broadcasters
.
Most areas of the United States can receive traditional terrestrial VHF/UHF
television broadcasts of between 3 and 10 channels. These broadcasters 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. In addition, 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. Our business could be adversely affected by continued free broadcast of local and other
programming and increased program offerings by traditional broadcasters.
Impact of HDTV
. We may be placed at a competitive disadvantage to the extent other multi-channel
video providers are able to offer more programming in high definition than we
are. We could be further disadvantaged to the extent a significant number of local broadcasters
begin offering local channels in high definition, unless we make substantial additional investments
in infrastructure to deliver high definition programming. While we expect that we would be able to
use a portion of our planned increase in satellite capacity to respond to some of these competitive
threats, there can be no assurance that we will be able to effectively compete with high definition
program offerings from other video providers.
New Technologies and Competitors.
New technologies could also have a material adverse effect on
the demand for our DBS services. For example, we face a competitive threat from the
build-out of advanced fiber optic networks. Verizon and SBC have recently begun widespread
deployment of fiber-optic networks that could allow them to offer video services directly to
millions of homes as early as 2006. In addition, telephone companies and
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other entities are also implementing and supporting digital video compression over existing
telephone lines and digital wireless cable which may allow them to offer video services without
having to build a new infrastructure. Moreover, mergers, joint ventures, and alliances among
franchise, wireless or private cable television operators, telephone companies and others may
result in providers capable of offering television services in competition with us. Furthermore,
all of these companies may use these existing and new technologies to offer a bundle of television
and telecommunications services that may prove to be more competitive than our current offerings.
We may not be able to compete successfully with existing competitors or new entrants in the market
for television services.
ECHOSTAR TECHNOLOGIES CORPORATION
EchoStar Technologies Corporation (ETC), one of our wholly-owned subsidiaries, designs
and develops EchoStar receiver systems. Our satellite receivers have won numerous awards from the
Consumer Electronics Manufacturers Association, 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.
The primary purpose of our ETC division is to support the DISH Network. However, in addition to
supplying EchoStar receiver systems and related accessories for the DISH Network, ETC also sells
similar digital satellite receivers internationally, either directly to television service
operators or to our independent distributors worldwide. This has created a source of additional
business for us and synergies that directly benefit DISH Network. For example, our satellite
receivers are designed around the Digital Video Broadcasting standard, which is widely used in
Europe and Asia. 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. Consequently, we
benefit from the possibility that ETCs international projects may result in improvements in design
and economies of scale in the production of EchoStar receiver systems for the DISH Network.
We believe that direct-to-home satellite service is particularly well-suited for countries without
extensive cable infrastructure, and we are actively soliciting new business for ETC. However,
there can be no assurance that ETC will be able to develop additional international sales or
maintain its existing business.
Through 2004, our primary international customer was Bell ExpressVu, a subsidiary of Bell Canada,
Canadas national telephone company. We currently have certain binding purchase orders from Bell
ExpressVu, and we are actively trying to secure new orders from other potential international
customers. However, we cannot guarantee at this time that those negotiations will be successful.
Our future international revenue depends largely on the success of these and other international
operators, which in turn, depends on other factors, such as the level of consumer acceptance of
direct-to-home satellite TV products and the increasing intensity of competition for international
subscription television subscribers.
ETCs 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
Through ETC, 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. We do not know if we will be able to successfully
introduce new products and technologies on a timely basis in order to remain competitive.
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GOVERNMENT REGULATION
We are subject to comprehensive regulation by the Federal Communications Commission (FCC). We
are also regulated by other federal agencies, state and local authorities and the International
Telecommunication Union (ITU). Depending upon the circumstances, noncompliance with legislation
or regulations promulgated by these entities could result in suspension or revocation of our
licenses or authorizations, the termination or loss of contracts or the imposition of contractual
damages, civil fines or criminal penalties.
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 to 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.
FCC Regulation under the Communications Act
FCC Jurisdiction over our Operations.
The Communications Act of 1934, as amended, which we refer
to as the Communications Act, gives the FCC broad authority to regulate the operations of
satellite companies. Specifically, the Communications Act gives the FCC regulatory jurisdiction
over the following areas relating to communications satellite operations:
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the assignment of satellite radio frequencies and orbital locations;
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licensing of satellites, earth stations, the granting of related authorizations, and
evaluation of the fitness of a company to be a licensee;
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approval for the relocation of satellites to different orbital locations or the
replacement of an existing satellite with a new satellite;
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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;
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avoiding interference with other radio frequency emitters; and
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ensuring compliance with other applicable provisions of the Communications Act and
FCC rules and regulations governing the operations of satellite communications
providers and multi-channel video distributors.
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In order to obtain FCC satellite licenses and authorizations, communication satellite operators
must satisfy strict legal, technical and financial qualification requirements. Once issued, these
licenses and authorizations are subject to a number of conditions including, among other things,
satisfaction of ongoing due diligence obligations, construction milestones, and various reporting
requirements.
Our Basic DBS Frequency Licenses and Authorizations.
Most of our programming is transmitted to our
customers on frequencies in the 12.2 to 12.7 GHz range, which we refer to as the DBS frequencies.
We are licensed or authorized by the FCC to operate DBS frequencies at the following orbital
locations:
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11 frequencies at the 61.5 degree orbital location;
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29 frequencies at the 110 degree orbital location;
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21 frequencies at the 119 degree orbital location;
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32 frequencies at the 148 degree orbital location; and
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3 frequencies at the 157 degree orbital location.
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We also sublease six transponders (corresponding to six frequencies) at the 61.5 degree orbital
location from licensee Dominion Video Satellite, Inc. In addition, we were the winning bidder for
the remaining 29 DBS frequencies at the 157 degree orbital location at an FCC auction conducted in
July 2004. However, we have not yet been granted the license for these frequencies. We have also
applied for a transfer of the 11 DBS frequencies at the 61.5 location currently owned by Rainbow
based on our recent agreement to purchase the Rainbow 1 satellite and related assets, see Recent
Developments. We cannot be certain that the FCC will ultimately grant us the licenses for the
additional frequencies at 61.5 or 157.
Duration of our Satellite Licenses and Authorizations.
Generally speaking, all of our satellite
licenses are subject to expiration unless renewed by the FCC. While under a recent FCC rulemaking
the term of certain satellite licenses has been extended from 10 to 15 years, the term of DBS
licenses remains at 10 years; our licenses are currently set to expire at various times starting as
early as 2006. In addition, our special temporary authorizations are granted for periods of only
180 days or less, subject again to possible renewal by the FCC.
Opposition and other Risks to our Licenses and Authorizations.
Several third parties have opposed,
and we expect them to continue to oppose, some of our FCC satellite authorizations and pending
requests to the FCC for extensions, modifications, waivers and approvals of our licenses. In
addition, we may not have fully complied with all of the FCC reporting and filing requirements in
connection with our satellite authorizations. Because of this opposition and our failure to comply
with certain requirements of our authorizations, it is possible the FCC could revoke, terminate,
condition or decline to extend or renew certain of our authorizations or licenses.
Our FSS Licenses
. In addition to our DBS licenses and authorizations, we have received conditional
licenses from the FCC to operate FSS satellites in the Ka-band and the Ku-band, including licenses
to operate EchoStar IX (a hybrid Ka/Ku-band satellite) at the 121 degree orbital location. In
addition, EchoStar holds Ka-band licenses at the 97, 113 and 117 degree orbital locations, and
extended Ku-band licenses at the 109 and 121 degree orbital locations. Use of these licenses and
conditional authorizations is subject to certain technical and due diligence requirements,
including the requirement to construct and launch satellites according to specific milestones and
deadlines. Our projects to construct and launch Ku-band, extended Ku-band and Ka-band satellites
are in various stages of development.
Risks to our Ka-Band
and Ku-Band Authorizations.
Our Ka-band license at the 121 degree orbital
locations allow us to use only 500 MHz of Ka-band spectrum in each direction, while certain other
licensees have been authorized to use 1000 MHz in each direction. Our Ka-band licenses at the 97,
113 and 117 degree orbital locations are for the full 1000 MHz in each direction. With respect to
these latter Ka-band licenses, the FCC requires construction, launch and operation of the
satellites to be completed by December 2008, October 2009, and March 2009, respectively. We
recently submitted satellite construction contracts to the FCC for
the proposed Ka-band satellites
at the 97 and 117 degree orbital locations. We cannot be sure that
the FCC will rule that the contracts we
submitted comply with their first construction milestone requirements. Moreover, ITU deadlines
require Ka-band satellites to be operating at the 97, 113 and 117 degree orbital locations by June
of 2005. For our extended Ku-band satellites at the 109 and 121 degree orbital locations, the FCC
requires construction, launch and operation of the satellites to be completed by September 2009.
There can be no assurance that we will develop acceptable plans to meet all of these deadlines, or
that we will be able to utilize any of these orbital slots.
Recent FCC Rulemaking Affecting our Licenses and Applications.
The FCC changed its system for
processing applications to a first-come, first-served process. Since that change became
effective, we have filed or refiled, and have pending before the FCC, new applications for as many
as nine satellites in several different frequency bands. Several of our direct or indirect
competitors have filed petitions to deny or dismiss certain of our pending applications or have
requested that conditions be placed on authorizations we requested. We received conditional
Ka-band licenses for the 97, 113 and 117 degree orbital locations, and extended Ku-band licenses
for the 109 and 121 degree orbital locations, while a number of our other applications have been
denied or dismissed without prejudice by the FCC. We cannot be sure that the FCC will grant any of
our outstanding applications, or that the authorizations, if granted, will not be subject to
onerous conditions. Moreover, the cost of building, launching and insuring a satellite can be as
much as $250.0 million or more, and we cannot be sure that we will be able to construct
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and launch all of the satellites for which we have requested authorizations. The FCC has also
imposed a $3.0 million (previously $5.0 million) bond requirement for all future satellite
licenses, which would be forfeited by a licensee that does not meet its diligence milestones for a
particular satellite. We have provided the FCC with letters of
credit, collateralized by approximately $15 million of our
restricted cash and marketable investment securities, to satisfy this requirement for all of our
Ka-band and extended Ku-band licenses.
New Satellite License Auction Proceedings
. The FCC has proposed to auction licenses for two DBS
frequencies at the 61.5 degree orbital location. On December 27, 2004, the FCC ruled that DBS providers that hold
DBS licenses at orbital locations capable of serving the entire
continental United States (including
EchoStar) would not be eligible to bid for the license for the two
frequencies at the 61.5 degree
orbital location, and would not be qualified to acquire that license for a period of four years
following grant. While this ruling pertains to different DBS channels than the 11 channels that we
have sought to acquire from Rainbow (as previously discussed), we cannot be sure that this ruling
will not adversely affect the FCCs disposition of our application for assignment of the 11
channels to us.
Expansion DBS Spectrum
. The FCC has also allocated additional expansion spectrum for DBS services
commencing in 2007. This could create significant additional competition in the market for
subscription television services. We filed applications for this additional spectrum during March
2002 but cannot predict whether the FCC will grant these applications.
Other Services in the DBS band
. The FCC has also adopted rules that allow non-geostationary orbit
fixed satellite services to operate on a co-primary basis in the same
frequency band as direct broadcast
satellite and Ku-band-based fixed satellite services. In the same rulemaking, the FCC authorized
use of the DBS spectrum that we use by terrestrial communication services and it auctioned licenses
for these terrestrial services during January 2004. There can be no assurance that operations by
non-geostationary orbit fixed satellite services or terrestrial communication services in the DBS
band will not interfere with our DBS operations and adversely affect our business.
Proposals to allow 4.5 Degree Spacing.
During April 2002, SES Americom, Inc. requested a
declaratory ruling that it is in the public interest for SES Americom to offer satellite capacity
for third party direct-to-home services to consumers in the United States and certain British
Overseas Territories in the Caribbean. SES Americom proposes to employ a satellite licensed by the
Government of Gibraltar to operate in the same uplink and downlink frequency bands as us, from an
orbital position located in between two orbital locations where EchoStar and DirecTV have already
positioned satellites. DirecTV, which opposes SESs petition, has itself filed a petition for
rulemaking for standards to permit such 4.5 degree spacing. On January 23, 2004, we filed comments
in response to DirecTVs petition for rulemaking. The
possibility that the FCC will allow service to the U.S. from
closer-spaced DBS slots may permit additional competition against us
from other DBS providers.
Competition for Canadian Orbital Slots.
DirecTV requested and obtained FCC authority to provide
service to the United States from a Canadian DBS orbital slot. We have also requested authority to
do the same from the Canadian DBS orbital slot at 129 degrees and an FSS orbital slot at 118.7
degrees. The possibility that the FCC will allow service to the U.S.
from foreign slots may permit additional competition against us from other DBS providers.
Rules Relating to Alaska and Hawaii
. The holders of DBS authorizations issued after January 19,
1996 must provide DBS service to Alaska and Hawaii if such service is technically feasible from the
authorized orbital location. Our authorizations at the 110 degree, 148 degree and 157 degree
orbital locations were received after January 19, 1996. While we provide service to Alaska and
Hawaii from both the 110 and 119 degree orbital locations, those states have expressed the view
that our service should more closely resemble our service to the mainland United States and
otherwise needs improvement. Further, the satellites we currently operate at the 148 and 157
degree orbital locations are not able to provide service to Alaska and/or Hawaii. We received
temporary conditional waivers of the service requirement for both the 148 and 157 degree orbital
locations. However, the FCC could revoke these waivers at any time.
The FCC has also concluded a rulemaking which seeks to streamline and revise its rules governing
DBS operators. In connection with this rulemaking, the FCC clarified its geographic service
requirements to introduce a requirement that we provide programming packages to residents of Hawaii
and Alaska that are reasonably comparable to what
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we offer in the contiguous 48 states. We cannot be sure that this requirement will not affect us
adversely by requiring us to devote additional resources to serving these two states.
Other Communications Act Provisions
Rules Relating to Broadcast Services.
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 must comply with regulatory
obligations as a broadcast licensee, and certain parties have requested that we be treated as a
broadcaster. If the FCC determines 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 television service providers.
Public Interest Requirements.
Under a requirement of the Cable Act, the FCC imposed public
interest requirements on DBS licensees. These rules require us to set aside four percent of our
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 generally not reviewed all aspects of our methodology for
processing public interest carriage requests, computing the channel capacity we must set aside or
determining the rates that we charge public interest programmers. We cannot be sure that if the
FCC were to review these methodologies it would find them in compliance with the public interest
requirements.
Moreover, certain parties have challenged certain aspects of our methodology for processing public
interest carriage requests in a pending proceeding, and we received a letter from the FCCs
Enforcement Bureau regarding these issues. We cannot be sure that the Commission will not take
enforcement action against us, which may result in fines and/or changes to our methodology for
compliance with these rules. The FCCs Enforcement Bureau is also investigating the public
interest qualifications of a programmer that at one time occupied a channel of public interest
capacity on our system.
Other Open Access Requirements.
The FCC has also commenced an open access proceeding regarding
distribution of high-speed Internet access services and interactive television services. We cannot
be sure that the FCC will not ultimately impose open access obligations on us, which could be very
onerous, and could create a significant strain on our capacity and ability to provide other
services.
Plug and Play and Broadcast Flag.
The FCC adopted the so-called plug and play standard for
compatibility between digital television sets and cable systems. That standard was developed
through negotiations involving the cable and consumer electronics industries, but not us, and we
are concerned that it may impose certain onerous encoding rules on all multichannel video
programming distributors, including us, and that the standard and its implementation process favor
cable systems. We have filed a petition for review of the FCCs plug and play order with the
federal Court of Appeals for the District of Columbia Circuit on various grounds, but we cannot be
sure that the court will not uphold the FCCs decision. The FCC also adopted the broadcast flag
method for copy-protecting content broadcast digitally over the air. The cable industry has
requested that certain requirements established by the FCC also extend to DBS set-top boxes. It is
too early to fully assess the risks to us from the adoption of these standards and the possible
extension of these requirements to DBS boxes.
Emergency Alert System.
The FCC recently initiated a rulemaking seeking comments on whether its
rules that require broadcasters and cable operators to transmit emergency alert messages should be
extended to other distributors, such as DBS operators. We currently do not have the capability of
receiving, processing or relaying alerts from the 550 emergency alert system areas back into those
areas, and the difficulties of obtaining this capability are likely insurmountable. Even if
technically feasible, such capability would likely require costly and substantial modifications to
our system or to our subscriber set-top boxes.
The Satellite Home Viewer Improvement Act and Satellite Home Viewer Extension and Reauthorization
Act
Retransmission of Distant Networks.
The Copyright Act, as amended by the Satellite Home Viewer
Improvement Act, or SHVIA, permits satellite retransmission of distant network channels only to
unserved households. An
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example of a distant station retransmission is a Los Angeles network station retransmitted by
satellite to a subscriber outside of Los Angeles. That subscriber qualifies as an unserved
household if he or she cannot receive, over the air, a signal of sufficient intensity (Grade B
intensity) from a local station affiliated with the same network.
SHVIA has also established a process whereby consumers predicted to be served by a local station
may request that that 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), the broadcast station, or the consumer. The testing process required by the statute
can be very costly.
In addition, SHVIA has affected and continues to affect us adversely in several other respects.
The legislation prohibits us from carrying more than two distant signals for each broadcasting
network and leaves the FCCs Grade B intensity standard unchanged without future legislation. The
FCC recently rejected our petition for reconsideration of its methodology for predicting whether a
particular household is served by a signal of Grade B intensity. While we have filed a petition
for federal appellate review of the FCCs action we cannot be sure that the court will not uphold
the FCCs decision. The FCC rules mandated by SHVIA also require us to delete substantial
programming (including sports programming) from these signals. Although we have implemented
certain measures in order to comply with these rules, these requirements have significantly
hampered, and may further hamper, our ability to retransmit distant network and superstation
signals. The burdens the rules impose upon us may become so onerous that we may be required to
substantially alter, or stop retransmitting some programming channels. In addition, the
FCCs sports blackout requirements, which apply to all distant network signals, may require costly
upgrades to our system.
On December 8, 2004, Congress passed the Satellite Home Viewer Extension and Reauthorization Act,
or SHVERA. SHVERA extends our legal authority to retransmit distant stations under SHVIA to
December 31, 2009, but imposes new and complex restrictions on that authority. In general, we will
no longer be able to offer distant network stations to new
subscribers in markets in which we offer local network
stations. In addition, our ability to retransmit distant digital network stations today depends on
whether a household is unserved by the analog signal of the local network station. While the
statute gives us the ability to engage in signal strength testing to determine whether a household
can receive the digital signal of the local network station, this ability does not
commence until at least April 30, 2006 or July 15, 2007 (depending on the market and whether
extensions are granted), and is also subject to certain restrictions. It is too early to fully
assess all of the implications of SHVERA for our retransmissions of distant network stations.
SHVERA also amended the royalty provisions applicable to our retransmission of distant network
channels and superstations. While the initial royalty rate specified in SHVERA for analog
distant network and superstation signals is that in effect on July 1, 2004, SHVERA has increased
the initial rate for digital station retransmissions. In addition, SHVERA provides that these
rates may be modified by voluntary negotiation or through arbitration initiated by the Librarian of
Congress if no voluntary agreement is reached. While we have reached a conditional agreement with
certain (but not all) copyright owners, we may be required to submit to arbitration to obtain
agreements with others, and there is a risk we may be required to pay significantly higher royalty
rates for these distant stations as a result.
While SHVERA gives us the ability that cable operators already have to also import into a local
market certain stations from neighboring markets that are deemed significantly viewed in the
local market, that ability is subject to a number of restrictions, including the requirement of
receiving retransmission consent and the prohibition on importing a digital signal of better
resolution than the local digital network station that we carry.
Opposition to Our Delivery of Distant Signals.
See Item 3 Legal Proceedings Distant Network
Litigation for information regarding opposition to our delivery of distant signals.
Retransmission of Local Networks.
SHVIA generally gives satellite companies a statutory copyright
license to retransmit local broadcast channels by satellite back into the market from which they
originated, subject to obtaining the retransmission consent of the local network station. If we
fail to reach retransmission consent agreements with broadcasters we cannot carry their signals.
This could have an adverse effect on our strategy to compete with cable and other satellite
companies which provide local signals. While we have been able to reach retransmission consent
agreements with most local network stations in markets where we currently offer local channels by
satellite, roll-out
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of local channels in additional cities will require that we obtain additional retransmission
agreements. 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.
Must Carry and Other Requirements.
SHVIA also imposed must carry requirements on DBS providers
and the FCC has adopted detailed must carry rules. These rules generally require that satellite
distributors carry all the local broadcast stations requesting carriage in a timely and appropriate
manner in areas where they choose to offer local programming, not just the four major networks.
Since we have limited capacity, the number of markets in which we can offer local programming is
reduced by the must carry requirements. The must carry 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.
Several must carry complaints by broadcasters against us are pending at the FCC. The FCC has
ruled against us in certain of these proceedings, and we cannot be sure that the FCC will rule in
our favor in other pending or future proceedings. Adverse rulings could result in a decrease in
the number of local areas where we can offer local network programming. This in turn could
increase churn in those markets and preclude us from offering local network channels in new
markets, thereby reducing our competitiveness.
Also, SHVERA requires, among other things, that all local broadcast channels delivered by satellite
to any particular market be available from a single dish within 18 months of the laws December 8,
2004 effective date. Because we had planned to transition all local channels in any particular
market to the same dish by 2008 rather than in the shorter transition period mandated by SHVERA,
satellite capacity limitations may force us to move the local channels in as many as 30 markets to
different satellites, requiring subscribers in those markets to install a second or a different
dish to continue receiving their local network channels. We may be forced to stop offering local
channels in some of those markets altogether.
The transition of all local channels to the same dish could result in disruptions of service for a
substantial number of our customers, and our ability to timely comply with this requirement without
incurring significant additional costs is dependent on, among other things, the successful launch
and operation of one or more additional satellites. It is possible that the
costs of compliance with this requirement could exceed
$100.0 million. To the extent some of those costs
are passed on to our subscribers, and because many subscribers may be unwilling to install a second
dish where one had been adequate, we expect that our subscriber churn could be negatively impacted.
In the meantime, we cannot be sure that the FCC will not interpret or implement its existing rules
in such a manner as to inhibit our use of a two-dish solution to comply with the must carry
requirements. The National Association of Broadcasters and Association of Local Television
Stations filed an emergency petition during 2002 asking the FCC to modify or clarify its rules to
prohibit or hamper our compliance plan. In response, during April 2002, a bureau of the FCC issued
a declaratory ruling and order finding that our compliance plan violated certain provisions of
SHVIA and the FCCs must carry regulations. Challenges to the April 2002 order have been filed
by various parties, including one by us, and are presently pending. During April 2002, the bureau
also issued an order granting in part numerous complaints filed against us by individual broadcast
stations that claimed violations of the must carry requirements similar to those addressed in the
prior April 2002 order. Depending upon the ultimate outcome of these proceedings (including the
extent to which our compliance reports are accepted), further orders by a bureau of the FCC or by
the FCC itself could result in a decrease in the number of local areas where we will offer local
network programming until new satellites are launched. This, in turn, could significantly increase
the churn of subscribers in those areas where local network programming is no longer offered and
impair our ability-to gain new subscribers in those areas, which could materially adversely affect
our financial performance. We could also be exposed to damage claims if we are found by any court
to have violated the must carry requirements, which could have a material adverse affect on our
financial position.
In addition, while the FCC has decided for now not to impose on satellite carriers must carry for
high definition television stations or dual digital/analog or multicast carriage obligations -
i.e., additional requirements in connection with the carriage of digital television stations that
go beyond carriage of one video signal (whether analog or standard definition digital) for each
station the FCC still has pending rulemaking proceedings on these matters. While the FCC
recently ruled against dual and multicast carriage for cable companies, we cannot be certain that
this decision will be upheld on review, that there will not be legislation overturning it, or that
it will be applied to satellite carriers. In addition, certain parties have continued to urge the
FCC to require satellite HDTV must-carry.
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These proceedings may result in further, even more onerous, digital carriage requirements. HDTV
must-carry would likely require us to reduce the number of markets that we are otherwise able to
serve with local stations in order to carry multiple signals for local stations in the markets that
we would continue to serve.
Dependence on Cable Act for Program Access
We purchase a substantial percentage of our programming from cable-affiliated programmers. The
Cable Acts provisions prohibiting exclusive contracting practices with cable affiliated
programmers have been extended from October 2002 to October 2007, but this extension could be
reversed. Upon expiration of those provisions, many popular programs may become unavailable to us,
causing a loss of customers and adversely affecting our revenues and financial performance. Any
change in the Cable Act and the FCCs 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. We believe that the FCC generally has not shown a willingness to enforce the
program access rules aggressively. As a result, we may be limited in our ability to obtain access
(or nondiscriminatory access) to programming from programmers that are affiliated with the cable
system operators.
Affiliates of certain cable providers have denied us access to sports programming they feed to
their cable systems terrestrially, rather than by satellite. To the extent that cable operators
deliver additional programming terrestrially in the future, they may assert that this additional
programming is also exempt from the program access laws. These restrictions on our access to
programming could materially adversely affect our ability to compete in regions serviced by these
cable providers.
The International Telecommunication Union
Our DBS system also must conform to the International Telecommunication Union, or 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. The United States government has
filed modification requests with the ITU for EchoStars I through VIII. 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
made.
Export Control Regulation
We are required to obtain import and general destination export licenses from the United States
government to receive and deliver components of direct-to-home satellite TV systems. In addition,
the delivery of satellites and related technical information for the purpose of launch by foreign
launch services providers is subject to strict export control and prior approval requirements.
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 those intellectual property
rights are held by a competitor, we may be unable to obtain the intellectual property at any price,
which could adversely affect our competitive position.
We may not be 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,
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accordingly, our products may infringe claims contained in pending patent applications of which we
are not aware. Further, the process of determining definitively whether a claim of infringement is
valid often involves expensive and protracted litigation, even if we are ultimately successful on
the merits.
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 our 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 unanticipated
royalties to third parties, these increased costs of doing business could negatively affect our
liquidity and operating results. We are currently defending patent infringement actions. We
cannot be certain the courts will conclude these companies 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. See Item 3 Legal Proceedings.
ENVIRONMENTAL REGULATIONS
We are subject to the requirements of federal, state, local and foreign environmental and
occupational safety and health laws and regulations. These include laws regulating air emissions,
water discharge and waste management. We attempt to maintain compliance with all such
requirements. We do not expect capital or other expenditures for environmental compliance to be
material in 2005 or 2006. Environmental requirements are complex, change frequently and have
become more stringent over time. Accordingly, we cannot provide assurance that these requirements
will not change or become more stringent in the future in a manner that could have a material
adverse effect on our business.
SEGMENT REPORTING DATA AND GEOGRAPHIC AREA DATA
For operating segment and principal geographic area data for 2004, 2003 and 2002 see Note 10 in the
Notes to the Consolidated Financial Statements in Item 15 of this Annual Report on Form 10-K.
EMPLOYEES
We had approximately 20,000 employees at December 31, 2004, most of whom are located in the
United States. We generally consider relations with our employees to be good.
Although a total of approximately 40 employees in one of our field offices have voted to
unionize, we are not currently a party to any collective bargaining agreements. However, we are
currently negotiating a collective bargaining agreement at this office.
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WHERE YOU CAN FIND MORE INFORMATION
We are subject to the informational requirements of the Exchange Act and accordingly file our
annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy
statements and other information with the Securities and Exchange Commission (SEC). The Public
may read and copy any materials filed with the SEC at the SECs Public Reference Room at 450 Fifth
Street, NW, Washington, DC 20549. Please call the SEC at (800) SEC-0330 for further information on
the Public Reference Room. As an electronic filer, our public filings are also maintained on the
SECs Internet site that contains reports, proxy and information statements, and other information
regarding issuers that file electronically with the SEC. The address of that website is
http://www.sec.gov.
WEBSITE ACCESS
Our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and
amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange
Act also may be accessed free of charge through our website as soon as reasonably practicable after
we have electronically filed such material with, or furnished it to, the SEC. The address of that
website is
http://www.echostar.com
.
We have adopted a written code of ethics that applies to all of our directors, officers and
employees, including our principal executive officer and senior financial officers, in accordance
with Section 406 of the Sarbanes-Oxley Act of 2002 and the rules of the Securities and Exchange
Commission promulgated thereunder. Our code of ethics is available on our corporate website at
www.echostar.com
. In the event that we make changes in, or provide waivers of, the
provisions of this code of ethics that the SEC requires us to disclose, we intend to disclose these
events on our website.
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 officers business experience during the past five years:
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Name
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|
Age
|
|
Position
|
Charles W. Ergen
|
|
|
52
|
|
|
Chairman, Chief Executive Officer and Director
|
O. Nolan Daines
|
|
|
45
|
|
|
Executive Vice President, Information Technology and Broadband
|
James DeFranco
|
|
|
52
|
|
|
Executive Vice President and Director
|
Mark W. Jackson
|
|
|
44
|
|
|
President, EchoStar Technologies Corporation
|
Michael Kelly
|
|
|
43
|
|
|
Executive Vice President, DISH Network Service L.L.C. and
Customer Service Operations
|
David K. Moskowitz
|
|
|
46
|
|
|
Executive Vice President, General Counsel, Secretary and Director
|
David J. Rayner
|
|
|
47
|
|
|
Executive Vice President and Chief Financial Officer
|
Steven B. Schaver
|
|
|
51
|
|
|
President, EchoStar International Corporation
|
Michael Schwimmer
|
|
|
44
|
|
|
Executive Vice President, Programming and Marketing
|
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 EchoStars subsidiaries. Mr. Ergen, along with his spouse and
James DeFranco, was a co-founder of EchoStar in 1980.
O. Nolan Daines.
Mr. Daines is the Executive Vice President of Information Technology and
Broadband and is currently responsible for EchoStars broadband initiatives including strategic
alliances with telecommunication partners. Mr. Daines joined EchoStar as Senior Vice President in
September 2002. He served on EchoStars Board of Directors and its Audit Committee from March 1998
until September 2002. In addition, until May 2002, Mr. Daines served as a member of EchoStars
Executive Compensation Committee. In 1993, Mr. Daines founded
22
DiviCom, Inc., where he held various executive officer positions from the formation of DiviCom
until October 1999.
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 and director positions with EchoStars subsidiaries. Mr. DeFranco, along
with Mr. Ergen and Mr. Ergens spouse, was a co-founder of EchoStar in 1980.
Mark W. Jackson.
Mr. Jackson is the President of EchoStar Technologies Corporation. Mr. Jackson
served as Senior Vice President of EchoStar Technologies Corporation from April 2000 until June
2004 and as Senior Vice President of Satellite Services from December 1997 until April 2000.
Michael Kelly.
Mr. Kelly is the Executive Vice President of DISH Network Service L.L.C. and
Customer Service Operations. Mr. Kelly served as Senior Vice President of DISH
Network Service L.L.C. from March 2001 until February 2004 and as Senior Vice President of
International Programming from March 2000 until March 2001. Mr. Kelly
joined EchoStar in March 2000 following EchoStars 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.
David K. Moskowitz.
Mr. Moskowitz is the Executive Vice President, Secretary and General Counsel
of EchoStar. Mr. Moskowitz joined EchoStar in March 1990. He was elected to EchoStars Board of
Directors during 1998. Mr. Moskowitz is responsible for all legal affairs and certain business
functions for EchoStar and its subsidiaries.
David J. Rayner.
Mr. Rayner is the Executive Vice President and Chief Financial Officer of
EchoStar. Mr. Rayner is responsible for all accounting and finance functions of the Company.
Prior to joining EchoStar, Mr. Rayner served as Senior Vice President and Chief Financial Officer
of Time Warner Telecom from June 1998 to December 2004. During his time with Time Warner Telecom,
Mr. Rayner served as Vice President Finance from February 1997 to May 1998 and was Controller
from May 1994 to February 1997. From 1982 to 1994, Mr. Rayner held various financial and
operational management positions with Time Warner Cable.
Steven B. Schaver.
Mr. Schaver was named President of EchoStar International Corporation in April
2000. Mr. Schaver served as EchoStars Chief Financial Officer from February 1996 through August
2000 and served as EchoStars Chief Operating Officer from November 1996 until April 2000.
Michael Schwimmer.
Mr. Schwimmer is the Executive Vice President of Programming and Marketing.
Mr. Schwimmer served as Senior Vice President of Programming from February 2002 to June 2004 and as
Vice President of Programming from July 1997 to February 2002.
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.
23
Item 2. PROPERTIES
The following table sets forth certain information concerning our principal properties:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Approximate
|
|
|
|
|
|
|
Segment(s)
|
|
|
Square
|
|
|
Owned or
|
|
Description/Use/Location
|
|
Using Property
|
|
|
Footage
|
|
|
Leased
|
|
Corporate headquarters, Englewood, Colorado
|
|
All
|
|
|
476,000
|
|
|
Owned
|
EchoStar
Technologies Corporation engineering offices and service center, Englewood, Colorado
|
|
ETC
|
|
|
150,000
|
|
|
Owned
|
EchoStar
Technologies Corporation engineering offices, Englewood, Colorado
|
|
ETC
|
|
|
63,000
|
|
|
Owned
|
Digital broadcast operations center, Cheyenne, Wyoming
|
|
DISH Network
|
|
|
123,000
|
|
|
Owned
|
Digital broadcast operations center, Gilbert, Arizona
|
|
DISH Network
|
|
|
120,000
|
|
|
Owned
|
Customer call center and data center, Littleton, Colorado
|
|
DISH Network
|
|
|
202,000
|
|
|
Owned
|
Customer call center, warehouse and service center, El Paso, Texas
|
|
DISH Network
|
|
|
171,000
|
|
|
Owned
|
Customer call center, McKeesport, Pennsylvania
|
|
DISH Network
|
|
|
106,000
|
|
|
Leased
|
Customer call center, Christiansburg, Virginia
|
|
DISH Network
|
|
|
103,000
|
|
|
Owned
|
Customer call center and general offices, Tulsa, Oklahoma
|
|
DISH Network
|
|
|
78,500
|
|
|
Leased
|
Customer call center and general offices, Pine Brook, New Jersey
|
|
DISH Network
|
|
|
67,000
|
|
|
Leased
|
Customer call center, Thornton, Colorado
|
|
DISH Network
|
|
|
55,000
|
|
|
Owned
|
Customer call center, Harlingen, Texas
|
|
DISH Network
|
|
|
54,000
|
|
|
Owned
|
Customer call center, Bluefield, West Virginia
|
|
DISH Network
|
|
|
50,000
|
|
|
Owned
|
Warehouse, distribution and service center, Atlanta, Georgia
|
|
DISH Network
|
|
|
144,000
|
|
|
Leased
|
Warehouse and distribution center, Denver, Colorado
|
|
DISH Network
|
|
|
163,000
|
|
|
Leased
|
Warehouse and distribution center, Sacramento, California
|
|
DISH Network
|
|
|
82,000
|
|
|
Owned
|
Warehouse and distribution center, Dallas, Texas
|
|
DISH Network
|
|
|
80,000
|
|
|
Leased
|
Warehouse and distribution center, Chicago, Illinois
|
|
DISH Network
|
|
|
48,000
|
|
|
Leased
|
Warehouse and distribution center, Denver, Colorado
|
|
DISH Network
|
|
|
44,000
|
|
|
Owned
|
Warehouse and distribution center, Baltimore, Maryland
|
|
DISH Network
|
|
|
37,000
|
|
|
Leased
|
Engineering offices and warehouse, Almelo, The Netherlands
|
|
All Other
|
|
|
55,000
|
|
|
Owned
|
In addition to the principal properties listed above, we operate several DISH Network
service centers strategically located in regions throughout the United States.
Item 3. LEGAL PROCEEDINGS
Distant Network Litigation
Until July 1998, we obtained feeds of 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 in Miami 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 the injunction.
In October 1998, we filed a declaratory judgment action against ABC, NBC, CBS and FOX in the United
States District Court for the District of Colorado. We asked the Court to find that our method of
providing distant network programming did not violate SHVIA and hence did not infringe the
networks copyrights. In November 1998, the networks and their affiliate association 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 Federal Court.
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 that lawsuit with the
networks. Under the terms of the settlement between DirecTV and the
24
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, substantially all providers of satellite-delivered network programming other than us
agreed to this cut-off schedule, although we do not know if they adhered to this schedule.
In April 2002, we reached a private settlement with ABC, Inc., one of the plaintiffs in the
litigation, and jointly filed a stipulation of dismissal. In November 2002, we reached a private
settlement with NBC, another of the plaintiffs in the litigation and jointly filed a stipulation of
dismissal. On March 10, 2004, we reached a private settlement with CBS, another of the plaintiffs
in the litigation and jointly filed a stipulation of dismissal. We have also reached private
settlements with many independent stations and station groups. We were unable to reach a
settlement with five of the original eight plaintiffs Fox and the independent affiliate groups
associated with each of the four networks.
A trial took place during April 2003 and the District Court issued a final judgment in June 2003.
The District Court found that with one exception our current distant network qualification
procedures comply with the law. We have revised our procedures to comply with the District Courts
Order. Although the plaintiffs asked the District Court to enter an injunction precluding us from
selling any local or distant network programming, the District Court refused. While the plaintiffs
did not claim monetary damages and none were awarded, the plaintiffs were awarded approximately
$4.8 million in attorneys fees. This amount is substantially less than the amount the plaintiffs
sought. We ask the Court to reconsider the award and the Court has vacated the fee award. When
the award was vacated, the District Court also allowed us an opportunity to conduct discovery
concerning the amount of plaintiffs requested fees. The parties have agreed to postpone discovery
and an evidentiary hearing regarding attorneys fees until after the Court of Appeals rules on the
pending appeal of the Courts June 2003 final judgment. It is not possible to make a firm
assessment of the probable outcome of plaintiffs outstanding request for fees.
The District Courts injunction requires us to use a computer model to re-qualify, as of June 2003,
all of our subscribers who receive ABC, NBC, CBS or Fox programming by satellite from a market
other than the city in which the subscriber lives. The Court also invalidated all waivers
historically provided by network stations. These waivers, which have been provided by stations for
the past several years through a third party automated system, allow subscribers who believe the
computer model improperly disqualified them for distant network channels to nonetheless receive
those channels by satellite. Further, even though SHVIA provides that certain subscribers who
received distant network channels prior to October 1999 can continue to receive those channels
through December 2004, the District Court terminated the right of our grandfathered subscribers to
continue to receive distant network channels.
We believe the District Court made a number of errors and appealed the decision. Plaintiffs
cross-appealed. The Court of Appeals granted our request to stay the injunction until our appeal
is decided. Oral arguments occurred during February 2004. It is not possible to predict how or
when the Court of Appeals will rule on the merits of our appeal.
In the event the Court of Appeals upholds the injunction, and if we do not reach private settlement
agreements with additional stations, we will attempt to assist subscribers in arranging alternative
means to receive network channels, including migration to local channels by satellite where
available, and free off air antenna offers in other markets. However, we cannot predict with any
degree of certainty how many subscribers would cancel their primary DISH Network programming as a
result of termination of their distant network channels. We could be required to terminate distant
network programming to all subscribers in the event the plaintiffs prevail on their cross-appeal
and we are permanently enjoined from delivering all distant network channels. Termination of
distant network programming to subscribers would result, among other things, in a reduction in
average monthly revenue per subscriber and a temporary increase in subscriber churn.
Satellite Insurance
Several years ago, we filed a $219.3 million insurance claim for a total loss under the launch
insurance policies covering our EchoStar IV satellite. 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. The insurance carriers include La
Reunion Spatiale; AXA Reinsurance Company (n/k/a AXA Corporate Solutions
25
Reinsurance Company),
United States Aircraft Insurance Group; Assurances Generales De France I.A.R.T. (AGF); Certain
Underwriters at Lloyds, London; Great Lakes Reinsurance (U.K.) PLC; British Aviation Insurance
Group; If Skaadeforsikring (previously Storebrand); Hannover Re (a/k/a International Hannover); The
Tokio Marine & Fire Insurance Company, Ltd.; Marham Space Consortium (a/k/a Marham Consortium
Management); Ace Global Markets (a/k/a Ace London); M.C. Watkins Syndicate; Goshawk Syndicate Management Ltd.; D.E. Hope Syndicate
10009 (Formerly Busbridge); Amlin Aviation; K.J. Coles & Others; H.R. Dumas & Others; Hiscox
Syndicates, Ltd.; Cox Syndicate; Hayward Syndicate; D.J. Marshall & Others; TF Hart; Kiln;
Assitalia Le Assicurazioni DItalia S.P.A. Roma; La Fondiaria Assicurazione S.P.A., Firenze;
Vittoria Assicurazioni S.P.A., Milano; Ras Riunione Adriatica Di Sicurta S.P.A., Milano; Societa
Cattolica Di Assicurazioni, Verano; Siat Assicurazione E Riassicurazione S.P.A, Genova; E. Patrick;
ZC Specialty Insurance; Lloyds of London Syndicates 588 NJM, 1209 MEB and 861 MEB; Generali France
Assurances; Assurance France Aviation; and Ace Bermuda Insurance Ltd.
The insurance carriers offered us a total of approximately $88.0 million, or 40% of the total
policy amount, in settlement of the EchoStar IV insurance claim. We rejected this settlement offer
and submitted our claim to arbitration pursuant to the terms of the insurance policies.
On March 4, 2005, we agreed to settle our insurance claim and related claims for accrued interest
and bad faith with all carriers who agree to pay their proportionate share of an aggregate net
amount of $240.0 million. We retained title to and use of the EchoStar IV satellite. Payment from
each settling carrier is due on or before April 26, 2005, with interest commencing to accrue on
April 12, 2005. Currently, we have received signed agreements back from insurers representing
over 90% of the aggregate amount. While we believe the remaining insurers will each
sign the agreement shortly, the arbitration will continue with respect to any insurers who decline
to settle.
Gemstar
During October 2000, Starsight Telecast, Inc., a subsidiary of Gemstar-TV Guide International, Inc.
(Gemstar), 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.
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. Gemstar filed
counterclaims alleging infringement of additional patents and asserted new patent infringement
counterclaims.
In February 2001, Gemstar filed additional patent infringement actions against us in the District
Court in Atlanta, Georgia and with the ITC. We settled all of the litigation with Gemstar during
2004 (See Note 2 in the Notes to the Consolidated Financial
Statements in Item 15 of this
Annual Report on Form 10-K ).
Superguide
During 2000, Superguide Corp. (Superguide) 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 sought injunctive and declaratory relief and damages in an unspecified
amount. We examined these patents and believe that they are not infringed by any of our products or
services.
On summary judgment, the District Court ruled that none of the asserted patents were infringed by
us. These rulings were appealed to the United States Court of Appeals for the Federal Circuit.
During February 2004, the Federal Circuit affirmed in part and reversed in part the District
Courts findings and remanded the case back to the District Court for further proceedings. Based
upon the settlement with Gemstar discussed above, we now have an additional defense in this case
based upon a license from Gemstar. We will continue to vigorously defend this case. In the event
that a Court ultimately determines that we infringe on any of the patents, we may be subject to
substantial damages, which may include treble damages and/or an injunction that could require us to
materially modify certain user-friendly
26
electronic programming guide and related features that we
currently offer to consumers. It is not possible to make a firm assessment of the probable outcome
of the suit or to determine the extent of any potential liability or damages.
Broadcast Innovation, L.L.C.
In November of 2001, Broadcast Innovation, L.L.C. filed a lawsuit against us, DirecTV, Thomson
Consumer Electronics and others in Federal District Court in Denver, Colorado. The suit alleges
infringement of United States Patent Nos. 6,076,094 (the 094 patent) and 4,992,066 (the 066
patent). The 094 patent relates to certain methods and devices for transmitting and receiving
data along with specific formatting information for the data. The 066 patent relates to certain
methods and devices for providing the scrambling circuitry for a pay television system on removable
cards. We examined these patents and believe that they are not infringed by any of our products or
services. Subsequently, DirecTV and Thomson settled with Broadcast Innovation leaving us as the
only defendant.
During January 2004, the judge issued an order finding the 066 patent invalid. In August of 2004,
the Court ruled the 094 invalid in a parallel case filed by Broadcast Innovation against Charter
and Comcast. Our case is stayed pending the appeal of the Charter case. We intend to continue to
vigorously defend this case. In the event that a Court ultimately determines that we infringe on
any of the patents, we may be subject to substantial damages, which may include treble damages
and/or an injunction that could require us to materially modify certain user-friendly features that
we currently offer to consumers. It is not possible to make a firm assessment of the probable
outcome of the suit or to determine the extent of any potential liability or damages.
TiVo Inc.
During January 2004, TiVo Inc. filed a lawsuit against us in the United States District Court for
the Eastern District of Texas. The suit alleges infringement of United States Patent No. 6,233,389
(the 389 patent). The 389 patent relates to certain methods and devices for providing what the
patent calls time-warping. We have examined this patent and do not believe that it is infringed
by any of our products or services. During March 2005, the Court denied our motion to transfer
this case to the United States District Court for the Northern District of California. We intend
to vigorously defend this case. In the event that a Court ultimately determines that we infringe
this patent, we may be subject to substantial damages, which may include treble damages and/or an
injunction that could require us to materially modify certain user-friendly features that we
currently offer to consumers. It is not possible to make a firm assessment of the probable outcome
of the suit or to determine the extent of any potential liability or damages.
Acacia
In June 2004, Acacia Media Technologies filed a lawsuit against us in the United States District
Court for the Northern District of California. The suit also named DirecTV, Comcast, Charter, Cox
and a number of smaller cable companies as defendants. Acacia is an intellectual property holding
company which seeks to license the patent portfolio that it has acquired. The suit alleges
infringement of United States Patent Nos. 5,132,992, 5,253,275, 5,550,863, 6,002,720 and 6,144,702
(herein after the 992, 275, 863, 720 and 702 patents, respectively). The 992, 863, 720 and
702 patents have been asserted against us.
The asserted patents relate to various systems and methods related to the transmission of digital
data. The 992 and 702 patents have also been asserted against several internet adult content
providers in the United States District Court for the Central District of California. On July 12,
2004, that Court issued a Markman ruling which found that the 992 and 702 patents were not as
broad as Acacia had contended.
Acacias various patent infringement cases have now been consolidated for pre-trial purposes in the
United States District court for the Northern District of California. We intend to vigorously
defend this case. In the event that a Court ultimately determines that we infringe on any of the
patents, we may be subject to substantial damages, which may include treble damages and/or an
injunction that could require us to materially modify certain user-friendly features that we
currently offer to consumers. It is not possible to make a firm assessment of the probable outcome
of the suit or to determine the extent of any potential liability or damages.
27
California Action
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 was filed against us in the California State Superior
Court for Los Angeles County in 1999 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. A hearing on the plaintiffs motion for class
certification and our motion for summary judgment was held during 2002. At the hearing, the Court
issued a preliminary ruling denying the plaintiffs motion for class certification. However,
before issuing a final ruling on class certification, the Court granted our motion for summary
judgment with respect to all of the plaintiffs claims. Subsequently, we filed a motion for
attorneys fees which was denied by the Court. The plaintiffs filed a notice of appeal of the
courts granting of our motion for summary judgment and we cross-appealed the Courts ruling on our
motion for attorneys fees. During December 2003, the Court of Appeals affirmed in part; and
reversed in part, the lower courts decision granting summary judgment in our favor. Specifically,
the Court found there were triable issues of fact whether we may have violated the alleged consumer
statutes with representations concerning the number of channels and the program schedule.
However, the Court found no triable issue of fact as to whether the representations crystal clear
digital video or CD quality audio constituted a cause of action. Moreover, the Court affirmed
that the reasonable consumer standard was applicable to each of the alleged consumer statutes.
Plaintiff argued the standard should be the least sophisticated consumer. The Court also
affirmed the dismissal of Plaintiffs breach of warranty claim. Plaintiff filed a Petition for
Review with the California Supreme Court and we responded. During March 2004, the California
Supreme Court denied Plaintiffs Petition for Review. Therefore, the action has been remanded to
the trial court pursuant to the instructions of the Court of Appeals. Hearings on class
certification were conducted on December 21, 2004 and on February 7, 2005. The Court denied
Plaintiffs motion for class certification on February 10, 2005. It is uncertain whether the
Plaintiff will appeal this decision. Therefore, it is not possible to make an assessment of the
probable outcome of the litigation or to determine the extent of any potential liability.
Retailer Class Actions
We have been sued by retailers in three separate purported class actions. During October 2000, two
separate lawsuits were filed in the Arapahoe County District Court in the State of Colorado and the
United States District Court for the District of Colorado, respectively, by Air Communication &
Satellite, Inc. and John DeJong, et al. on behalf of themselves and a class of persons similarly
situated. The plaintiffs are attempting to certify nationwide classes on behalf of certain of our
satellite hardware retailers. The plaintiffs are requesting the Courts to declare certain
provisions of, and changes to, alleged agreements between us and the retailers invalid and
unenforceable, and to award damages for lost incentives and payments, charge backs, and other
compensation. We are vigorously defending against the suits and have asserted a variety of
counterclaims. The United States District Court for the District of Colorado stayed the Federal
Court action to allow the parties to pursue a comprehensive adjudication of their dispute in the
Arapahoe County State Court. John DeJong, d/b/a Nexwave, and Joseph Kelley, d/b/a Keltronics,
subsequently intervened in the Arapahoe County Court action as plaintiffs and proposed class
representatives. We have filed a motion for summary judgment on all counts and against all
plaintiffs. The plaintiffs filed a motion for additional time to conduct discovery to enable them
to respond to our motion. The Court granted a limited discovery period which ended November 15,
2004. The Court is hearing discovery related motions and we expect the Court to follow with a
briefing schedule for the motion for summary judgment. It is not possible 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. (SDS) filed a lawsuit against us in the United States District
Court for the Eastern District of Texas during September 2000, on behalf of itself and a class of
persons similarly situated. The plaintiff was attempting to certify a nationwide class on behalf
of sellers, installers, and servicers of satellite equipment who contract with us and who allege
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, the ownership of certain equipment related
to the provision of our satellite television service. During September 2001, the Court granted our
motion to dismiss. The plaintiff moved for reconsideration of the Courts order dismissing the
case. The Court denied the plaintiffs motion for reconsideration. The trial court denied our
motions for sanctions against SDS. Both parties perfected appeals before the Fifth Circuit Court
of Appeals. On appeal, the Fifth Circuit upheld the dismissal. The Fifth Circuit vacated and
remanded the District Courts denial of
28
our motion for sanctions. The District Court subsequently issued a written opinion containing the
same findings. The only issue remaining is our collection of costs, which were previously granted
by the Court.
StarBand Shareholder Lawsuit
During August 2002, a limited group of shareholders in StarBand, a broadband Internet satellite
venture in which we invested, filed an action in the Delaware Court of Chancery against us and
EchoBand Corporation, together with four EchoStar executives who sat on the Board of Directors for
StarBand, for alleged breach of the fiduciary duties of due care, good faith and loyalty, and also
against us and EchoBand Corporation for aiding and abetting such alleged breaches. Two of the
individual defendants, Charles W. Ergen and David K. Moskowitz, are members of our Board of
Directors. The action stems from the defendants involvement as directors, and our position as a
shareholder, in StarBand. During July 2003, the Court granted the defendants motion to dismiss on
all counts. The Plaintiffs appealed. On April 15, 2004, the Delaware Supreme Court remanded the
case instructing the Chancery Court to re-evaluate its decision in light of a recent opinion of the
Delaware Supreme Court, Tooley v. Donaldson, No. 84,2004 (Del. Supr. April 2, 2004). Plaintiffs
filed a motion to amend their complaint which was denied by the Court. The Plaintiffs appealed the
denial of their motion to amend and the appeal is pending. It is not possible to make a firm
assessment of the probable outcome of the litigation or to determine the extent of any potential
liability or damages.
Enron Commercial Paper Investment Complaint
During November 2003, an action was commenced in the United States Bankruptcy Court for the
Southern District of New York, against approximately 100 defendants, including us, who invested in
Enrons commercial paper. The complaint alleges that Enrons October 2001 prepayment of its
commercial paper is a voidable preference under the bankruptcy laws and constitutes a fraudulent
conveyance. The complaint alleges that we received voidable or fraudulent prepayments of
approximately $40.0 million. We typically invest in commercial paper and notes which are rated in
one of the four highest rating categories by at least two nationally recognized statistical rating
organizations. At the time of our investment in Enron commercial paper, it was considered to be
high quality and considered to be a very low risk. The defendants have moved the Court to dismiss
the case on grounds that Enrons complaint does not adequately state a legal claim. Those motions
are currently under consideration by the Court. 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.
Bank One
During March 2004, Bank One, N.A. (Bank One) filed suit against us and one of our subsidiaries,
EchoStar Acceptance Corporation (EAC), in the Court of Common Pleas of Franklin County, Ohio
alleging breach of a duty to indemnify. Bank One alleges that EAC is contractually required to
indemnify Bank One for a settlement it paid to consumers who entered private label credit card
agreements with Bank One to purchase satellite equipment in the late 1990s. Bank One alleges that
we entered into a guarantee wherein we agreed to pay any indemnity obligation incurred by Bank One.
During April 2004, we removed the case to federal court in Columbus, Ohio. We deny the
allegations and intend to vigorously defend against the claims. We filed a motion to dismiss the
Complaint which was granted in part and denied in part. The Court granted our motion, agreeing we
did not owe Bank One a duty to defend the underlying lawsuit. However, the Court denied the motion
in that Bank One will be allowed to attempt to prove that we owed Bank One a duty to indemnify.
The case is currently in discovery. 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 against
us.
Church Communications Network, Inc.
During August 2004, Church Communications Network, Inc. (CCN) filed suit against EchoStar
Satellite L.L.C. (ESLLC) in the United States District Court for the Northern District of
Alabama. CCN contends that our contractual relationship with Dominion Video Satellite, Inc., a
direct broadcast provider that airs only Christian programming, constitutes a breach of a
commercial television services agreement between ESLLC and CCN (the CCN Agreement). Further, CCN
contends that our reluctance to disclose the confidential provisions of the Dominion/EchoStar
agreement warrant causes of action for negligent misrepresentation, intentional misrepresentation,
and non-disclosure. We filed a motion to dismiss CNNs complaint, or alternatively to transfer
29
the case to a Colorado court. The Court denied our motion to dismiss, but granted our motion to
transfer. As a result, the action was transferred to the United States District Court for the
District of Colorado. Thereafter, we filed a motion to dismiss the case in the Colorado court.
The motion to dismiss is currently pending before the Court and the case is currently in discovery.
Although the CCN Agreement specifically limits damages to $500,000, CCN initially sought $1.5
million. As this case progressed, CCN initially increased the amount of its alleged damages to
over $3.0 million and has recently indicated that it is now seeking damages in excess of $15.0
million. As this is currently in early discovery it is not possible to make a firm assessment of
the probable outcome of the litigation or to determine the extent of any potential liability or
damages.
Vivendi
In January 2005, Vivendi Universal, S.A. (Vivendi), filed suit against EchoStar Communications
Corporation in the United States District Court for the Southern District of New York alleging that
we have anticipatorily repudiated or are in breach of an alleged agreement between EchoStar and
Vivendi pursuant to which we are allegedly required to broadcast a music-video channel provided by
Vivendi. Vivendis complaint seeks injunctive and declaratory relief, and damages in an
unspecified amount. Vivendi has since filed a motion for a preliminary injunction, in which it
asks the Court to order us to broadcast the Vivendi music-video channel during the pendency of the
litigation and to pay Vivendi for the provision of its music-video channel. We intend to
vigorously defend this case. In the event that a Court determines that Vivendi is entitled to a
preliminary injunction, we may be required to broadcast the Vivendi music-video channel during the
pendency of the litigation, which would impact the bandwidth that we have available to broadcast
other services. In the event that a Court ultimately determines that we have a contractual
obligation to broadcast the Vivendi music-video channel and that we are in breach of that
obligation, we may be required to broadcast the Vivendi music-video channel and be subject to
substantial damages. It is not possible to make a firm assessment of the probable outcome of the
suit or to determine the extent of any potential liability or damages.
Fox Sports Direct
During June 2004, Fox Sports Direct (Fox) sued us in the United States District Court Central
District of California for alleged breach of contract. During October 2004, we reached a
settlement with Fox for an immaterial amount.
Other
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 our opinion, the amount of ultimate liability
with respect to any of these actions is unlikely to materially affect our financial position,
results of operations or liquidity.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No items were submitted to a vote of security holders during the fourth quarter of 2004.
PART II
|
|
Item 5.
|
MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
|
Market Price of and Dividends on the Registrants Common Equity and Related Stockholder Matters
Market Information.
Our Class A common stock is quoted on the Nasdaq National Market under the
symbol DISH. The sale prices shown below reflect inter-dealer quotations and do not include
retail markups, markdowns, or commissions and may not necessarily represent actual transactions.
The high and low closing sale prices of our Class A common stock during 2003 and 2004 on the
Nasdaq National Market (as reported by Nasdaq) are set forth below.
30
|
|
|
|
|
|
|
|
|
|
|
High
|
|
|
Low
|
|
2003
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$
|
30.40
|
|
|
$
|
23.28
|
|
Second Quarter
|
|
|
36.28
|
|
|
|
27.63
|
|
Third Quarter
|
|
|
40.40
|
|
|
|
34.27
|
|
Fourth Quarter
|
|
|
40.53
|
|
|
|
30.44
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$
|
39.33
|
|
|
$
|
32.40
|
|
Second Quarter
|
|
|
34.65
|
|
|
|
29.54
|
|
Third Quarter
|
|
|
31.89
|
|
|
|
27.26
|
|
Fourth Quarter
|
|
|
34.27
|
|
|
|
30.02
|
|
As of March 11, 2005, there were approximately 4,819 holders of record of our Class A
common stock, not including stockholders who beneficially own Class A common stock held in
nominee or street name. As of March 11, 2005, 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.
Dividend.
On December 14, 2004, we paid a one-time cash dividend of $1.00 per share, or
approximately $455.7 million, on outstanding shares of our Class A and Class B common stock to
shareholders of record at the close of business on December 8, 2004.
We currently do not intend to declare additional dividends on our common stock. 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 Item 7. Managements Discussion and Analysis of Financial Condition and Results
of Operations Liquidity and Capital Resources.
Securities Authorized for Issuance Under Equity Compensation Plans.
See Item 12 Security
Ownership of Certain Beneficial Owners and Management.
31
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
The following table provides information regarding purchases of our Class A common stock made by us
for the period from October 1, 2004 through March 11, 2005.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
Total Number of
|
|
|
Maximum Approximate
|
|
|
|
Number of
|
|
|
|
|
|
|
Shares Purchased
|
|
|
Dollar Value of Shares
|
|
|
|
Shares
|
|
|
Average
|
|
|
as Part of Publicly
|
|
|
that May Yet be
|
|
|
|
Purchased
|
|
|
Price Paid
|
|
|
Announced Plans
|
|
|
Purchased Under the
|
|
Period
|
|
(a)
|
|
|
per Share
|
|
|
or Programs
|
|
|
Plans or Programs (b)
|
|
|
|
(In thousands, except share data)
|
|
October 1 - October 31, 2004
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
1,000,000
|
|
November 1 - November 30, 2004
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
1,000,000
|
|
December 1 - December 31, 2004
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
1,000,000
|
|
January 1 - January 31, 2005
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
1,000,000
|
|
February 1 - February 28, 2005
|
|
|
90,000
|
|
|
$
|
28.96
|
|
|
|
90,000
|
|
|
$
|
997,394
|
|
March 1 - March 11, 2005
|
|
|
200,000
|
|
|
$
|
28.67
|
|
|
|
200,000
|
|
|
$
|
991,660
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
290,000
|
|
|
$
|
28.76
|
|
|
|
290,000
|
|
|
$
|
991,660
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
|
During the period from October 1, 2004 through March 11, 2005 all purchases were made
pursuant to the program discussed below in open market transactions.
|
|
(b)
|
|
Our Board of Directors authorized the purchase of up to $1.0 billion of our Class A Common
Stock on August 9, 2004. All purchases were made in accordance with Rule 10b-18 of the Securities
Exchange Act of 1934 pursuant to our Rule 10b5-1 plan entered into on September 1, 2004 and which
expires on the earlier of August 31, 2005 or when an aggregate amount of $1.0 billion of stock V
has been purchased. We may elect not to purchase the maximum amount of shares allowable under this
plan and we may also enter into additional Rule 10b5-1 plans to facilitate the share repurchases
authorized by our Board of Directors. All purchases may be through open market purchases under the
plan or privately negotiated transactions subject to market conditions and other factors. To date,
no plans or programs for the purchase of our stock have been terminated prior to their expiration.
There were also no other plans or programs for the purchase of our stock that expired during the
period from October 1, 2004 through March 11, 2005. Purchased shares have and will be held as
Treasury shares and may be used for general corporate purposes.
|
Item 6. SELECTED FINANCIAL DATA
The selected consolidated financial data as of and for each of the five years ended December 31,
2004 have been derived from, and are qualified by reference to our Consolidated Financial
Statements. Beginning January 1, 2004, we combined certain revenue and cost of sales items into
other captions. All prior period amounts have been conformed to the current period presentation.
See further discussion under Item 7. Explanation of Key Metrics and Other Items. This data
should be read in conjunction with our Consolidated Financial Statements and related Notes thereto
for the three years ended December 31, 2004, and Managements Discussion and Analysis of Financial
Condition and Results of Operations included elsewhere in this report.
32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2000
|
|
|
2001
|
|
|
2002
|
|
|
2003
|
|
|
2004
|
|
|
|
(In thousands, except per share data)
|
|
Statements of Operations Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subscriber-related revenue
|
|
$
|
2,371,850
|
|
|
$
|
3,605,724
|
|
|
$
|
4,429,699
|
|
|
$
|
5,409,875
|
|
|
$
|
6,677,370
|
|
Equipment sales
|
|
|
300,996
|
|
|
|
359,934
|
|
|
|
348,629
|
|
|
|
295,409
|
|
|
|
373,253
|
|
Other
|
|
|
42,374
|
|
|
|
35,480
|
|
|
|
42,497
|
|
|
|
34,012
|
|
|
|
100,593
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
2,715,220
|
|
|
|
4,001,138
|
|
|
|
4,820,825
|
|
|
|
5,739,296
|
|
|
|
7,151,216
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subscriber related expenses (exclusive of
depreciation shown below)
|
|
|
1,276,943
|
|
|
|
1,792,542
|
|
|
|
2,200,239
|
|
|
|
2,707,898
|
|
|
|
3,567,409
|
|
Satellite and transmission expenses (exclusive
of depreciation shown below)
|
|
|
44,719
|
|
|
|
40,899
|
|
|
|
62,131
|
|
|
|
79,322
|
|
|
|
112,239
|
|
Cost of sales equipment
|
|
|
227,955
|
|
|
|
263,046
|
|
|
|
227,670
|
|
|
|
194,491
|
|
|
|
305,313
|
|
Cost of sales other
|
|
|
|
|
|
|
6,967
|
|
|
|
6,466
|
|
|
|
3,496
|
|
|
|
33,265
|
|
Subscriber acquisition costs
|
|
|
1,155,941
|
|
|
|
1,080,819
|
|
|
|
1,168,649
|
|
|
|
1,312,068
|
|
|
|
1,527,886
|
|
General and administrative
|
|
|
196,907
|
|
|
|
305,738
|
|
|
|
319,915
|
|
|
|
332,723
|
|
|
|
397,718
|
|
Non-cash, stock-based compensation
|
|
|
51,465
|
|
|
|
20,173
|
|
|
|
11,279
|
|
|
|
3,544
|
|
|
|
1,180
|
|
Depreciation and amortization
|
|
|
185,356
|
|
|
|
278,652
|
|
|
|
372,958
|
|
|
|
398,206
|
|
|
|
502,901
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
3,139,286
|
|
|
|
3,788,836
|
|
|
|
4,369,307
|
|
|
|
5,031,748
|
|
|
|
6,447,911
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
$
|
(424,066
|
)
|
|
$
|
212,302
|
|
|
$
|
451,518
|
|
|
$
|
707,548
|
|
|
$
|
703,305
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(650,326
|
)
|
|
$
|
(215,498
|
)
|
|
$
|
(852,034
|
)(1)
|
|
$
|
224,506
|
|
|
$
|
214,769
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net income (loss) to common shareholders
|
|
$
|
(651,472
|
)
|
|
$
|
(215,835
|
)
|
|
$
|
(414,601
|
)(2)
|
|
$
|
224,506
|
|
|
$
|
214,769
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted-average common shares outstanding
|
|
|
471,023
|
|
|
|
477,172
|
|
|
|
480,429
|
|
|
|
483,098
|
|
|
|
464,053
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted-average common shares outstanding
|
|
|
471,023
|
|
|
|
477,172
|
|
|
|
480,429
|
|
|
|
488,314
|
|
|
|
467,645
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income (loss) per share
|
|
$
|
(1.38
|
)
|
|
$
|
(0.45
|
)
|
|
$
|
(0.86
|
)
|
|
$
|
0.46
|
|
|
$
|
0.46
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income (loss) per share
|
|
$
|
(1.38
|
)
|
|
$
|
(0.45
|
)
|
|
$
|
(0.86
|
)
|
|
$
|
0.46
|
|
|
$
|
0.46
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividend per common share
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
1.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2000
|
|
|
2001
|
|
|
2002
|
|
|
2003
|
|
|
2004
|
|
|
|
(In thousands)
|
|
Balance Sheet Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, cash equivalents and marketable
investment securities
|
|
$
|
1,464,175
|
|
|
$
|
2,828,297
|
|
|
$
|
2,686,995
|
|
|
$
|
3,972,974
|
|
|
$
|
1,155,633
|
|
Restricted cash and marketable investment securities
|
|
|
3,000
|
|
|
|
1,288
|
|
|
|
9,972
|
|
|
|
19,974
|
|
|
|
57,552
|
|
Cash reserved for satellite insurance
|
|
|
82,393
|
|
|
|
122,068
|
|
|
|
151,372
|
|
|
|
176,843
|
|
|
|
|
|
Total assets
|
|
|
4,636,835
|
|
|
|
6,519,686
|
|
|
|
6,260,585
|
|
|
|
7,585,018
|
|
|
|
6,029,277
|
|
Long-term obligations (including current portion):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Notes
|
|
|
3,000,000
|
|
|
|
3,700,000
|
|
|
|
3,700,000
|
|
|
|
5,378,351
|
|
|
|
3,946,153
|
|
Convertible Notes
|
|
|
1,000,000
|
|
|
|
2,000,000
|
|
|
|
2,000,000
|
|
|
|
1,500,000
|
|
|
|
1,525,000
|
|
Capital lease obligation, mortgages and other notes payable
|
|
|
36,290
|
|
|
|
21,602
|
|
|
|
47,053
|
|
|
|
59,322
|
|
|
|
331,735
|
|
Total stockholders equity (deficit)
|
|
|
(657,383
|
)
|
|
|
(777,772
|
)
|
|
|
(1,176,022
|
)
|
|
|
(1,032,524
|
)
|
|
|
(2,078,212
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2000
|
|
|
2001
|
|
|
2002
|
|
|
2003
|
|
|
2004
|
|
Other Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DISH Network subscribers, as of year end (in millions)
|
|
|
5.260
|
|
|
|
6.830
|
|
|
|
8.180
|
|
|
|
9.425
|
|
|
|
10.905
|
|
DISH Network subscriber additions, gross (in millions)
|
|
|
2.554
|
|
|
|
2.722
|
|
|
|
2.764
|
|
|
|
2.894
|
|
|
|
3.441
|
|
DISH Network subscriber additions, net (in millions)
|
|
|
1.850
|
|
|
|
1.570
|
|
|
|
1.350
|
|
|
|
1.245
|
|
|
|
1.480
|
|
Monthly churn percentage
|
|
|
1.39
|
%
|
|
|
1.60
|
%
|
|
|
1.59
|
%
|
|
|
1.57
|
%
|
|
|
1.62
|
%
|
Average revenue per subscriber (ARPU)
|
|
$
|
45.69
|
|
|
$
|
49.56
|
|
|
$
|
49.37
|
|
|
$
|
51.21
|
|
|
$
|
54.87
|
|
Average subscriber acquisition costs per subscriber (SAC)
|
|
$
|
452
|
|
|
$
|
395
|
|
|
$
|
421
|
|
|
$
|
453
|
|
|
$
|
444
|
|
Equivalent average subscriber acquisition costs per
subscriber (Equivalent SAC)
|
|
$
|
478
|
|
|
$
|
519
|
|
|
$
|
507
|
|
|
$
|
480
|
|
|
$
|
593
|
|
Net cash flows from (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities
|
|
$
|
(118,677
|
)
|
|
$
|
489,483
|
|
|
$
|
66,744
|
|
|
$
|
575,581
|
|
|
$
|
1,001,442
|
|
Investing activities
|
|
$
|
(911,957
|
)
|
|
$
|
(1,279,119
|
)
|
|
$
|
(682,387
|
)
|
|
$
|
(1,761,870
|
)
|
|
$
|
1,078,281
|
|
Financing activities
|
|
$
|
982,153
|
|
|
$
|
1,610,707
|
|
|
$
|
420,832
|
|
|
$
|
994,070
|
|
|
$
|
(2,666,022
|
)
|
(1)
|
|
Net loss in 2002 includes $689.8 million related to merger termination costs.
|
|
(2)
|
|
The net loss to common shareholders in 2002 of $414.6 million differs significantly from the
net loss in 2002 of $852.0 million due to a gain on repurchase of Series D Convertible
Preferred Stock of approximately $437.4 million.
|
33
|
|
Item 7.
|
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|
EXECUTIVE SUMMARY
Our strategy for 2005 will focus on improving our operating results and free cash flow by
attempting to increase our subscriber base, reduce churn, control rising subscriber acquisition
costs and maintain or improve operating margins. We will also focus on improving our competitive
position by leveraging our increased satellite capacity to pursue strategic initiatives.
Operational Results and Goals
Increase our subscriber base and reduce churn.
We added approximately 1.480 million net new
subscribers during 2004, ending the year with approximately 10.905 million DISH Network
subscribers. We remain committed to growing our subscriber base with high quality customers by
continuing to offer compelling consumer promotions. These promotions include offers of free or low
cost advanced consumer electronics products, such as digital video recorders and high definition
receivers, as well as various promotional offers of our DISH Network programming packages, which we
believe generally have a better price-to-value relationship than packages currently offered by
most other subscription television providers.
However, there are many reasons we may not be able to maintain our current rate of new subscriber
growth. For example, our subscriber growth would decrease if our partners in our co-branding and
other distribution relationships de-emphasize or discontinue their efforts to acquire DISH network
subscribers, or if they begin offering non-DISH Network video services. Our subscriber growth
would also be negatively impacted to the extent our competitors offer more attractive consumer
promotions, including, among other things, better priced or more attractive programming packages or
more compelling consumer electronic products and services, including advanced digital video
recorders, video on demand (VOD) services, and HDTV services or additional local channels. Many
of our competitors are also better equipped than we are to offer video services bundled with other
telecommunications services such as telephone and broadband data services, including wireless
services.
In order to increase our subscriber base we must control our rate of customer turnover,
or churn. Our percentage monthly churn for the year ended December 31, 2004 was approximately
1.62%, compared to our percentage churn for the same period in 2003 of approximately 1.57%. Our
principal strategy to control churn is to attract higher quality long term customers by imposing
heightened credit requirements and tailoring our promotions toward subscribers desiring multiple
receivers and advanced products such as digital video recorders and high definition receivers. We
also plan to continue to offer advanced products to existing customers through our lease promotions
and to initiate other loyalty programs to improve our overall subscriber retention. However, there
can be no assurance these and other actions we may take to control subscriber churn will be
successful, and we are unlikely to be able to continue to grow our subscriber base at current rates
if we cannot control our customer churn.
We also continue to undertake initiatives with respect to our conditional access system to further
enhance the security of the DISH Network signal and attempt to make theft of our programming
commercially impractical or uneconomical. However, piracy and many other factors may have a
material adverse impact on our subscriber churn.
Control rising subscriber acquisition costs.
We generally subsidize installation and all or a
portion of the cost of EchoStar receiver systems in order to attract new DISH Network subscribers,
and these and other subscriber acquisition costs have increased significantly over the past year.
If a subscriber churns earlier than previously estimated, we may not fully recover the costs
related to the acquisition of that subscriber. Our principal strategies to control rising
subscriber acquisition costs involve growing our base with higher quality customers who are less
likely to churn and reducing the overall cost of subsidized equipment we provide to new customers.
Our principal method for reducing the cost of subscriber equipment is to lease our receiver systems
to new subscribers rather than selling systems to them at little or no cost. Leasing enables us
to, among other things, reduce our future subscriber acquisition costs by redeploying equipment
returned by disconnected lease subscribers to new subscribers. We are further reducing the cost
of subscriber equipment through our design and deployment of EchoStar receivers with multiple
tuners that allow the subscriber to receive our DISH Network services in multiple rooms using a
single set-top box, thereby reducing the number of EchoStar receivers we deploy to each subscriber
household. However, our overall subscriber acquisition costs, including amounts expensed and
capitalized, both in the aggregate and on a per new subscriber basis, may materially increase in
the future to the extent that we introduce more aggressive promotions
34
|
|
Item 7.
|
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
|
or newer, more expensive consumer electronics products in response to new promotions and products
offered by our competitors. In addition, new compression technologies will inevitably render some
portion of our current and future EchoStar receivers obsolete and we will incur additional costs,
which may be substantial, to upgrade or replace these set-top boxes.
Maintain or improve operating margins.
We will continue to work to generate cost savings during
2005 by improving our operating efficiency and attempting to control rising programming costs.
During 2004, our operating margins were negatively impacted by costs associated with the expansion
of our installation, in-home service and call center operations. We are attempting to control
these costs by improving the quality of the initial installation, providing better subscriber
education in the use of our products and services, and enhancing our training programs for our
in-home service and call center representatives. However, these initiatives may not be sufficient
to maintain or increase our operational efficiencies and we may not be able to continue to grow our
operations cost effectively.
Our operating margins have also been adversely impacted by rising programming costs. Payments we
make to programmers for programming content represent one of the largest components of our
operating costs. We expect programming providers to continue to demand higher rates for their
programming. We will continue to negotiate aggressively with programming providers in an effort to
control rising programming costs. However, there can be no assurance we will be successful in
controlling these costs, and we may be forced to drop one or more channels if we cannot reach
acceptable agreements with all of our content providers. In addition, there can be no assurance
that we will be able to increase the price of our programming to offset these programming rate
increases without affecting the competitiveness of our programming packages.
Leverage Increased Satellite Capacity
. We have recently entered into agreements to purchase or
lease a substantial amount of additional satellite capacity. We are currently evaluating various
opportunities to utilize this capacity, including, but not limited to, launching satellite two-way
and wireless broadband data services, increasing our international programming and expanding our
local and high definition programming. However, we face a variety of risks and uncertainties that
may prevent us from utilizing this additional satellite capacity profitably. These risks include,
among other things, the risks that there may be insufficient market demand for these new services
and program offerings, or that customers might find competing services and program offerings more
attractive. In addition, many of these new services depend on successful development of new
technologies which may not perform as we expect. Our results of operation and financial condition
will be adversely affected if we cannot make profitable use of this additional satellite capacity.
Explanation of Key Metrics and Other Items
Subscriber-related revenue
.
Subscriber-related revenue consists principally of revenue from
basic, movie, local, international and pay-per-view subscription television services, advertising
sales, digital video recorder fees, equipment rental fees and additional outlet fees from
subscribers with multiple set-top boxes and other subscriber revenue. Contemporaneous with the
commencement of sales of co-branded services pursuant to our agreement with SBC during the first quarter of 2004, Subscriber-related revenue also includes revenue
from equipment sales, installation and other services related to that agreement. Revenue from
equipment sales to SBC is deferred and recognized over the estimated average co-branded subscriber
life. Revenue from installation and certain other services performed at the request of SBC is
recognized upon completion of the services.
Development and implementation fees received from SBC are being recognized in Subscriber-related
revenue over the next several years. In order to estimate the amount recognized monthly, we first
divide the number of co-branded subscribers activated during the month under the SBC agreement by
total estimated co-branded subscriber activations during the life of the contract. We then
multiply this percentage by the total development and implementation fees received from SBC. The
resulting estimated monthly amount is recognized as revenue ratably over the estimated average
co-branded subscriber life.
Effective January 1, 2004, we combined Subscription television service revenue and Other
subscriber-related revenue into Subscriber-related revenue. All prior period amounts were
reclassified to conform to the current period presentation.
35
|
|
Item 7.
|
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
|
Equipment sales
.
Equipment sales consist of sales of digital set-top boxes and related
components by our ETC subsidiary to an international DBS service provider. Equipment sales also
include unsubsidized sales of DBS accessories to retailers and other distributors of our equipment
domestically and to DISH Network subscribers. Equipment sales does not include revenue from
sales of equipment to SBC. Effective January 1, 2004, Equipment sales includes non-DISH Network
receivers and other accessories sold by our EchoStar International Corporation subsidiary to
international customers which were previously included in Other revenue. All prior period
amounts were reclassified to conform to the current period presentation.
Other.
Other sales consists principally of subscription television service revenues from the
C-band subscription television service business of Superstar/Netlink Group L.L.C. (SNG) that we
acquired in April 2004.
Subscriber-related expenses
.
Subscriber-related expenses principally include costs incurred in
connection with our in-home service and call center operations, overhead costs associated with our
installation business, programming expenses, copyright royalties, residual commissions paid to
retailers or distributors, billing, lockbox, subscriber retention and other variable subscriber
expenses. Contemporaneous with the commencement of sales of co-branded services pursuant to our
agreement with SBC during the first quarter of 2004, Subscriber-related expenses also include the
cost of sales and expenses from equipment sales, direct costs of installation and other services
related to that relationship. Cost of sales from equipment sales to SBC are deferred and
recognized over the estimated average co-branded subscriber life. Expenses from installation and
certain other services performed at the request of SBC are recognized as the services are
performed.
Satellite and transmission expenses
.
Satellite and transmission expenses include costs
associated with the operation of our digital broadcast centers, the transmission of local channels,
satellite telemetry, tracking and control services, satellite and transponder leases, and other
related services.
Cost of sales equipment.
Cost of sales equipment principally includes costs associated with
digital set-top boxes and related components sold by our ETC subsidiary to an international DBS
service provider and unsubsidized sales of DBS accessories to DISH Network subscribers and to
retailers and other distributors of our equipment domestically. Cost of sales equipment does
not include the costs from sales of equipment to SBC. Effective January 1, 2004, Cost of sales
equipment includes non-DISH Network receivers and other accessories sold by our EchoStar
International Corporation subsidiary to international customers which were previously included in
Cost of sales other. All prior period amounts conform to the current period presentation.
Cost of sales other.
Cost of sales other principally includes programming and other expenses
associated with the C-band subscription television service business of SNG we acquired in April
2004.
Subscriber acquisition costs
.
Under most promotions, we subsidize the installation and all or a
portion of the cost of EchoStar receiver systems in order to attract new DISH Network subscribers.
Our Subscriber acquisition costs include the cost of EchoStar receiver systems sold to retailers
and other distributors of our equipment, the cost of receiver systems sold directly by us to
subscribers, net costs related to our promotional incentives, and costs related to installation and
acquisition advertising. We exclude the value of equipment capitalized under our equipment lease
program from our calculation of Subscriber acquisition costs. We also exclude payments and the
value of returned equipment related to disconnected lease program subscribers from our
calculation of Subscriber acquisition costs.
SAC and Equivalent SAC.
We are not aware of any uniform standards for calculating SAC and believe
presentations of SAC may not be calculated consistently by different companies in the same or
similar businesses. We calculate SAC by dividing total Subscriber acquisition costs for a period
by the number of gross new DISH Network subscribers during the period. We include all new DISH
Network subscribers in our calculation, including DISH Network subscribers added with little or no
subscriber acquisition costs. Equivalent SAC adds to
Subscriber acquisition costs the value of equipment capitalized under our
new subscriber lease program less the value of returned equipment
related to disconnected lease
program subscribers, which became available for sale rather than being redeployed through the lease
program, together with payments received in connection with equipment not returned to us.
General and administrative expenses
.
General and administrative expenses primarily include
employee-related costs associated with administrative services such as legal, information systems,
accounting and finance. It also
36
|
|
Item 7.
|
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
|
includes outside professional fees (i.e. legal and accounting services) and building maintenance
expense and other items associated with administration.
Interest expense.
Interest expense primarily includes interest expense, prepayment premiums and
amortization of debt issuance costs associated with our debt and convertible debt securities, net
of capitalized interest.
Other.
The main components of Other income and expense are equity in earnings and losses of our
affiliates, gains and losses on the sale of investments, and impairment of marketable and
non-marketable investment securities.
Earnings before interest, taxes, depreciation and amortization (EBITDA)
. EBITDA is defined as
Net income (loss) plus Interest expense net of Interest income, Taxes and Depreciation and
amortization.
DISH Network subscribers.
We include customers obtained through direct sales, and through our
retail networks, including our co-branding relationship with SBC and other distribution
relationships, in our DISH Network subscriber count. We believe our overall economic return for
co-branded and traditional subscribers will be comparable. We also provide DISH Network service to
hotels, motels and other commercial accounts. For certain of these commercial accounts, we divide
our total revenue for these commercial accounts by an amount approximately equal to the retail
price of our most widely distributed programming package, AT60 (but taking into account,
periodically, price changes and other factors), and include the resulting number, which is
substantially smaller than the actual number of commercial units served, in our DISH Network
subscriber count.
During April 2004, we acquired the C-band subscription television service business of SNG, the
assets of which primarily consist of acquired customer relationships. Although we expect to
convert some of these customer relationships from C-band subscription television services to our
DISH Network DBS subscription television service, acquired C-band subscribers are not included in
our DISH network subscriber count unless they have also subscribed to our DISH Network DBS
television service.
Monthly average revenue per subscriber (ARPU)
.
We are not aware of any uniform standards for
calculating ARPU and believe presentations of ARPU may not be calculated consistently by other
companies in the same or similar businesses. We calculate average monthly revenue per subscriber,
or ARPU, by dividing average monthly Subscriber-related revenues for the period (total
Subscriber-related revenues during the period divided by the number of months in the period) by
our average DISH Network subscribers for the period. Average DISH Network subscribers are
calculated for the period by adding the average DISH Network subscribers for each month and
dividing by the number of months in the period. Average DISH Network subscribers for each month
are calculated by adding the beginning and ending DISH Network subscribers for the month and
dividing by two. As discussed in Subscriber-related revenue above, effective January 1, 2004 we
include amounts previously reported as Other subscriber-related revenue in our ARPU calculation.
All prior period amounts conform to the current period presentation.
Subscriber churn/subscriber turnover
.
We are not aware of any uniform standards for calculating
subscriber churn and believe presentations of subscriber churn may not be calculated consistently
by different companies in the same or similar businesses. We calculate percentage monthly
subscriber churn by dividing the number of DISH Network subscribers who terminate service during
each month by total DISH Network subscribers as of the beginning of that month. We calculate
average subscriber churn for any period by dividing the number of DISH Network subscribers
who terminated service during that period by the average number of DISH Network subscribers
eligible to churn during the period, and further dividing by the number of months in the period.
Average DISH Network subscribers eligible to churn during the period are calculated by adding the
DISH Network subscribers as of the beginning of each month in the period and dividing by the total
number of months in the period.
Free cash flow
.
We define free cash flow as Net cash flows from operating activities less
Purchases of property and equipment, as shown on our Consolidated Statements of Cash Flows.
37
|
|
Item 7.
|
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
|
RESULTS OF OPERATIONS
Year Ended December 31, 2004 Compared to the Year Ended December 31, 2003.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
Variance
|
|
|
|
2004
|
|
|
2003
|
|
|
Amount
|
|
|
%
|
|
|
|
(In thousands)
|
Statements of Operations Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subscriber-related revenue
|
|
$
|
6,677,370
|
|
|
$
|
5,409,875
|
|
|
$
|
1,267,495
|
|
|
|
23.4
|
%
|
Equipment sales
|
|
|
373,253
|
|
|
|
295,409
|
|
|
|
77,844
|
|
|
|
26.4
|
%
|
Other
|
|
|
100,593
|
|
|
|
34,012
|
|
|
|
66,581
|
|
|
|
195.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
7,151,216
|
|
|
|
5,739,296
|
|
|
|
1,411,920
|
|
|
|
24.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subscriber-related expenses
|
|
|
3,567,409
|
|
|
|
2,707,898
|
|
|
|
859,511
|
|
|
|
31.7
|
%
|
% of Subscriber-related revenue
|
|
|
53.4
|
%
|
|
|
50.1
|
%
|
|
|
|
|
|
|
|
|
Satellite and transmission expenses
|
|
|
112,239
|
|
|
|
79,322
|
|
|
|
32,917
|
|
|
|
41.5
|
%
|
% of Subscriber-related revenue
|
|
|
1.7
|
%
|
|
|
1.5
|
%
|
|
|
|
|
|
|
|
|
Cost of sales - equipment
|
|
|
305,313
|
|
|
|
194,491
|
|
|
|
110,822
|
|
|
|
57.0
|
%
|
% of Equipment sales
|
|
|
81.8
|
%
|
|
|
65.8
|
%
|
|
|
|
|
|
|
|
|
Cost of sales - other
|
|
|
33,265
|
|
|
|
3,496
|
|
|
|
29,769
|
|
|
|
851.5
|
%
|
Subscriber acquisition costs
|
|
|
1,527,886
|
|
|
|
1,312,068
|
|
|
|
215,818
|
|
|
|
16.4
|
%
|
General and administrative
|
|
|
397,718
|
|
|
|
332,723
|
|
|
|
64,995
|
|
|
|
19.5
|
%
|
% of Total revenue
|
|
|
5.6
|
%
|
|
|
5.8
|
%
|
|
|
|
|
|
|
|
|
Non-cash, stock-based compensation
|
|
|
1,180
|
|
|
|
3,544
|
|
|
|
(2,364
|
)
|
|
|
(66.7
|
%)
|
Depreciation and amortization
|
|
|
502,901
|
|
|
|
398,206
|
|
|
|
104,695
|
|
|
|
26.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
6,447,911
|
|
|
|
5,031,748
|
|
|
|
1,416,163
|
|
|
|
28.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
703,305
|
|
|
|
707,548
|
|
|
|
(4,243
|
)
|
|
|
(0.6
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
42,287
|
|
|
|
65,058
|
|
|
|
(22,771
|
)
|
|
|
(35.0
|
%)
|
Interest expense, net of amounts capitalized
|
|
|
(505,732
|
)
|
|
|
(552,490
|
)
|
|
|
46,758
|
|
|
|
8.5
|
%
|
Other
|
|
|
(13,482
|
)
|
|
|
18,766
|
|
|
|
(32,248
|
)
|
|
|
(171.8
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense)
|
|
|
(476,927
|
)
|
|
|
(468,666
|
)
|
|
|
(8,261
|
)
|
|
|
(1.8
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
226,378
|
|
|
|
238,882
|
|
|
|
(12,504
|
)
|
|
|
(5.2
|
%)
|
Income tax benefit (provision), net
|
|
|
(11,609
|
)
|
|
|
(14,376
|
)
|
|
|
2,767
|
|
|
|
19.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
214,769
|
|
|
$
|
224,506
|
|
|
$
|
(9,737
|
)
|
|
|
(4.3
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DISH Network subscribers, as of year end (in millions)
|
|
|
10.905
|
|
|
|
9.425
|
|
|
|
1.480
|
|
|
|
15.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DISH Network subscriber additions, gross (in millions)
|
|
|
3.441
|
|
|
|
2.894
|
|
|
|
0.547
|
|
|
|
18.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DISH Network subscriber additions, net (in millions)
|
|
|
1.480
|
|
|
|
1.245
|
|
|
|
0.235
|
|
|
|
18.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Monthly churn percentage
|
|
|
1.62
|
%
|
|
|
1.57
|
%
|
|
|
0.05
|
%
|
|
|
3.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average revenue per subscriber (ARPU)
|
|
$
|
54.87
|
|
|
$
|
51.21
|
|
|
$
|
3.66
|
|
|
|
7.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average subscriber acquisition costs per subscriber (SAC)
|
|
$
|
444
|
|
|
$
|
453
|
|
|
$
|
(9
|
)
|
|
|
(2.0
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equivalent average subscriber acquisition costs per
subscriber (Equivalent SAC)
|
|
$
|
593
|
|
|
$
|
480
|
|
|
$
|
113
|
|
|
|
23.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA
|
|
$
|
1,192,724
|
|
|
$
|
1,124,520
|
|
|
$
|
68,204
|
|
|
|
6.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
38
|
|
Item 7.
|
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
|
DISH Network subscribers
.
As of December 31, 2004, we had approximately 10.905 million DISH
Network subscribers compared to approximately 9.425 million at December 31, 2003, an increase of
approximately 15.7%. DISH Network added approximately 1.480 million net new subscribers for the
year ended December 31, 2004 compared to approximately 1.245 million net new subscribers during the
same period in 2003. We believe the increase in net new subscribers resulted from a number of
factors, including the commencement of sales under our co-branding agreement with SBC and other
distribution relationships and an increase in our distribution channels. Temporary product
shortages and installation delays during the second half of 2003 were substantially eliminated
during the first quarter of 2004 which also contributed to the current year increase.
A material portion of our new subscriber additions are derived from our relationship with SBC.
However, SBC recently announced that in 2005 it will begin deploying an advanced fiber network that
will enable it to offer video services directly. Our net new subscriber additions and certain of
our other key operating metrics would be adversely affected to the extent SBC de-emphasizes or
discontinues its efforts to acquire DISH Network subscribers.
Additionally, as the size of our subscriber base continues to increase, if percentage subscriber
churn remains constant, increasing numbers of gross new subscribers are required to sustain net
subscriber growth.
Subscriber-related revenue.
DISH Network Subscriber-related revenue totaled $6.677 billion for
the year ended December 31, 2004, an increase of $1.267 billion or 23.4% compared to the same
period in 2003. This increase was directly attributable to continued DISH Network subscriber
growth and the increase in ARPU discussed below.
ARPU
. Monthly average revenue per subscriber was approximately $54.87 during the year ended
December 31, 2004 and approximately $51.21 during the same period in 2003. The $3.66 or 7.1% increase in
monthly average revenue per DISH Network subscriber is primarily attributable to price increases of
up to $2.00 in February 2004 and 2003 on some of our most popular packages, and from equipment
sales, installation and other services related to our relationship with SBC. This increase was
also attributable to a reduction in the number of DISH Network subscribers receiving subsidized
programming through our free and discounted programming promotions, the increased availability of
local channels by satellite, increases in our advertising sales and increases in the number of DISH
Network subscribers with multiple set-top boxes and digital video recorders. We provided local
channels by satellite in 152 markets as of December 31, 2004 compared to 101 markets as of December
31, 2003.
Impacts from our litigation with the networks in Florida, FCC rules governing the delivery of
superstations, and other factors could cause us to terminate delivery of network channels and
superstations to a substantial number of our subscribers, which could cause many of those customers
to cancel their subscription to our other services. In the event the Court of Appeals upholds the
Miami District Courts network litigation injunction, and if we do not reach private settlement
agreements with additional stations, we will attempt to assist subscribers in` arranging
alternative means to receive network channels, including migration to local channels by satellite
where available, and free off air antenna offers in other markets. However, we cannot predict with
any degree of certainty how many subscribers might ultimately cancel their primary DISH Network
programming as a result of termination of their distant network channels. We could be required to
terminate distant network programming to all subscribers in the event the plaintiffs prevail on
their cross-appeal and we are permanently enjoined from delivering all distant network channels.
Termination of distant network programming to subscribers would result in, among other things, a
reduction in average monthly revenue per subscriber and a temporary increase in subscriber churn.
In April 2002, the FCC concluded that our must carry implementation methods were not in
compliance with the must carry rules. If the FCC finds our subsequent remedial actions
unsatisfactory, while we would attempt to continue providing local network channels in all markets
without interruption, we could be forced by capacity constraints to reduce the number of markets in
which we provide local channels. This could cause a temporary increase in churn and a small
reduction in average monthly revenue per subscriber.
Equipment sales
.
For the year ended December 31, 2004, Equipment sales totaled $373.3 million,
an increase of $77.8 million or 26.4% compared to the same period during 2003. This increase
principally resulted from an increase in sales of DBS accessories to retailers and other
distributors of our equipment domestically and to DISH Network subscribers.
39
|
|
Item 7.
|
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
|
We currently have certain binding purchase orders and a minimum volume commitment with an
international DBS service provider through March 31, 2006 and we are actively trying to secure new
orders from other potential international customers. However, we cannot guarantee at this time
that those negotiations will be successful. A significant portion of our equipment revenue depends
largely on sustaining substantial orders from this international DBS service provider and other
international operators, which in turn, depends on other factors, such as the level of consumer
acceptance of direct-to-home satellite TV products and the increasing intensity of competition for
international subscription television subscribers. We have recently decided to downsize and
eliminate certain product lines sold by our EchoStar International Corporation subsidiary and
accordingly, we expect that future sales of our non-DISH Network receivers and other accessories to
international customers will decline as compared to historical levels.
Other.
Other sales totaled $100.6 million for the year ended December 31, 2004, an increase of
$66.6 million compared to the same period during 2003. This increase is primarily attributable to
the subscription television service revenues from C-band subscribers of the SNG business that we
acquired in April 2004.
Subscriber-related expenses
.
Subscriber-related expenses totaled $3.567 billion during the year
ended December 31, 2004, an increase of $859.5 million or 31.7% compared to the same period in
2003. The increase in Subscriber-related expenses was primarily attributable to the increase in
the number of DISH Network subscribers, which resulted in increased expenses to support the DISH
Network. Subscriber-related expenses represented 53.4% and 50.1% of Subscriber-related revenue
during the years ended December 31, 2004 and 2003, respectively. The increase in this expense to
revenue ratio primarily resulted from increases in our programming and subscriber retention costs,
and costs associated with the expansion of our installation, in-home service and call center
operations. These increased operational costs, some of which are temporary, related to, among
other things, more complicated installations required by receivers with multiple tuners and a
larger dish, or SuperDISH which is used to receive programming from our FSS satellites. The
increase also resulted from cost of sales and expenses from equipment sales, installation and other
services related to our relationship with SBC. Since margins related to our co-branded subscribers
are lower than for our traditional subscribers, we expect this relationship to continue to
negatively impact this ratio to the extent that we continue to add co-branded subscribers under our
SBC agreement. The ratio of Subscriber-related expenses to Subscriber-related revenue could
also continue to increase if our programming and retention costs increase at a greater rate than
our Subscriber-related revenue and if we are unable to improve efficiencies related to our
installation, in-home service and call center operations.
We currently offer local broadcast channels in approximately 155 markets across the United States.
In 38 of those markets, two dishes are necessary to receive all local channels in the market.
SHVERA now
requires, among other things, that all local broadcast channels delivered by
satellite to any particular market be available from a single dish within 18 months of the laws
December 8, 2004 effective date. Because we had planned to transition all local channels in any
particular market to the same dish by 2008 rather than in the shorter transition period mandated by
SHVERA, satellite capacity limitations may force us to move the local channels in as many as 30
markets to different satellites, requiring subscribers in those markets to install a second or a
different dish to continue receiving their local network channels. We may be forced to stop
offering local channels in some of those markets altogether.
The transition of all local channels to the same dish could result in disruptions of service for a
substantial number of our customers, and our ability to timely comply with this requirement without
incurring significant additional costs is dependent on, among other things, the successful launch
and operation of one or more additional satellites. It is possible that the
costs of compliance with this requirement could exceed $100.0 million. To the extent some of those costs
are passed on to our subscribers, and because many subscribers may be unwilling to install a second
dish where one had been adequate, we expect that our subscriber churn could be negatively impacted.
In the normal course of business, we enter into various contracts with programmers to provide
content. Our programming contracts generally require us to make payments based on the number of
subscribers to which the respective content is provided. Consequently, our programming expenses
will continue to increase to the extent we are successful in growing our subscriber base. In
addition, because programmers continue to raise the price of content, there can be no assurance
that our Subscriber-related expenses as a percentage of Subscriber-related revenue will not
materially increase absent corresponding price increases in our DISH Network programming packages.
40
|
|
Item 7.
|
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
|
Satellite and transmission expenses
.
Satellite and transmission expenses totaled $112.2 million
during the year ended December 31, 2004, an increase of $32.9 million or 41.5% compared to the same period
in 2003. This increase primarily resulted from commencement of service and operational costs
associated with the increasing number of markets in which we offer local network channels by
satellite as previously discussed, and increases in our FSS satellite lease payment obligations. Satellite and transmission expenses totaled 1.7% and 1.5% of Subscriber-related
revenue during each of the years ended December 31, 2004 and 2003, respectively. The increase in
the expense to revenue ratio principally resulted from additional operational costs to support the
commencement of service and on-going operations of our local markets discussed above. These
expenses will increase further in the future as we increase the size of our satellite fleet, if we
obtain in-orbit satellite insurance, as we increase the number and operations of our digital
broadcast centers and as additional local markets and other programming services are launched.
Cost of sales equipment.
Cost of sales equipment totaled $305.3 million during the year
ended December 31, 2004, an increase of $110.8 million or 57.0% compared to the same period in
2003. This increase primarily resulted from the increase in sales of DBS accessories to retailers
and other distributors of our equipment domestically and to DISH Network subscribers discussed
above, and approximately $18.4 million in charges related to slow moving and obsolete inventory.
Cost of sales equipment represented 81.8% and 65.8% of Equipment sales, during the years
ended December 31, 2004 and 2003, respectively. The increase in the expense to revenue ratio
principally related to the charges for slow moving and obsolete inventory discussed above, and an
approximate $6.8 million reduction in the cost of set-top box equipment during 2003 resulting from
a change in estimated royalty obligations. This increase in the expense to revenue ratio also
related to a decline in margins on the sales of DBS accessories and on sales by our ETC subsidiary
to an international DBS service provider due to reductions in prices and increased sales of lower
margin accessories.
Cost of sales other.
Cost of sales other totaled $33.3 million during the year ended
December 31, 2004, an increase of $29.8 million compared to the same period in 2003. This increase
is primarily attributable to expenses associated with the C-band subscription television service
business of SNG we acquired in April 2004.
Subscriber acquisition costs.
Subscriber acquisition costs totaled approximately $1.528 billion
for the year ended December 31, 2004, an increase of $215.8 million or 16.4% compared to the same
period in 2003. Subscriber acquisition costs during the year ended December 31, 2003 included a
benefit of approximately $77.2 million comprised of approximately $42.8 million related to a
reduction in the cost of set-top box equipment resulting from a change in estimated royalty
obligations and $34.4 million from a litigation settlement. The increase in Subscriber
acquisition costs was attributable to a larger number of gross DISH Network subscriber additions
during the year ended December 2004 compared to the same period in 2003, partially offset by a
higher number of DISH Network subscribers participating in our equipment lease program and the
acquisition of co-branded subscribers during 2004 as discussed under SAC and Equivalent SAC below.
SAC and Equivalent SAC.
Subscriber acquisition costs per new DISH Network subscriber activation
were approximately $444 for the year ended December 31, 2004 and approximately $453 during the same
period in 2003. SAC during the year ended December 31, 2003 included the benefit of approximately
$77.2 million discussed above. Absent this benefit, our SAC for 2003 would have been approximately
$27 higher, or $480. The decrease in SAC during the year ended December 31, 2004 as compared to
the same period in 2003 (excluding this benefit) was directly attributable to the acquisition of
co-branded subscribers during 2004. Excluding the effect of co-branded subscribers, SAC would have
increased during the current year as compared to the same period in 2003. The increase in SAC
(excluding the effect of co-branded subscribers) was primarily related to more expensive promotions
offered during 2004 including up to three free receivers for new subscribers and free advanced
products, such as digital video recorders and high definition receivers. Further, during 2004,
since a greater number of DISH Network subscribers activated multiple receivers, receivers with
multiple tuners or other advanced products, including SuperDISH, installation costs increased as
compared to 2003. These factors were partially offset by an increase in DISH Network subscribers
participating in our equipment lease program and reduced subscriber acquisition advertising.
Penetration of our equipment lease program increased during the second half of 2004. Our capital
expenditures will continue to increase to the extent we maintain or increase our lease penetration
as a percentage of new subscriber additions. However, we believe the increase in capital
expenditures from penetration of our equipment lease program will continue to be partially
mitigated by the redeployment of equipment returned by disconnected lease program
41
|
|
Item 7.
|
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
|
subscribers. Our Subscriber acquisition costs, both in aggregate and on a per new subscriber
activation basis, may further materially increase in the future 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. See further discussion under
Liquidity and Capital Resources Subscriber
Retention and Acquisition Costs.
Equipment capitalized under our lease program for new customers totaled approximately $574.8
million and $108.1 million for the year ended December 31, 2004 and 2003, respectively. Returned
equipment related to disconnected lease program subscribers, which became available for sale
rather than being redeployed through the lease program, together with payments received in
connection with equipment not returned to us, totaled approximately $60.8 million and $30.2 million
during the years ended December 31, 2004 and 2003, respectively. If we included in our calculation
of SAC the equipment capitalized less the value of equipment returned and payments received, our
Equivalent SAC would have been approximately $593 during 2004 compared to $480 during 2003. As
discussed above, Subscriber acquisition costs during 2003 included a benefit of approximately
$77.2 million or $27 per subscriber. Absent this benefit, our Equivalent SAC, would have been $507
for the year ended December 31, 2003. This increase is primarily attributable to a greater number
of DISH Network subscribers activating multiple receivers, and advanced products, such as
SuperDISH, digital video recorders and high definition receivers.
Subscriber acquisition promotions.
As previously discussed, our Subscriber acquisitions costs include,
among other things, net costs related to our Subscriber acquisition promotions. During the year ended
December 31, 2004, our significant new subscriber promotions were as follows:
Digital Home Advantage
Effective February 1, 2004, our Digital Home Advantage promotion provided
new lease subscribers up to four installed EchoStar receivers, including various premium models,
with a qualifying programming subscription. The subscriber is required to pay a monthly rental fee
for each leased receiver, but is not required to agree to a minimum lease period. The subscriber
must provide a valid major credit card, their social security number, have an acceptable credit
score, and pay a one-time set-up fee of $49.99. The subscriber receives a $49.99 credit on their
first months bill. Effective October 19, 2004, the promotion was expanded whereby the consumer
may agree to either a one or two year commitment in exchange for receiving the benefits of our
Digital Home Protection Plan, an optional extended warranty program, without charge for one or two
years, respectively. Since we retain ownership of equipment installed pursuant to the Digital Home
Advantage promotion, equipment costs are capitalized and depreciated over a period of up to four
years. Although there can be no assurance as to the ultimate duration of our current equipment
lease promotion, we expect it to continue through at least July 31, 2005.
Free Dish
Effective February 1, 2004, our Free DISH promotion provided new subscribers with a
choice of up to three installed EchoStar receivers, including one premium receiver model for
$49.99. The subscriber receives a $49.99 credit on their first months bill. To be eligible,
subscribers must provide a valid major credit card, their social security number, have an
acceptable credit score, and make a one or two year commitment to subscribe to a qualified
programming package, depending on the set-top box models selected by the subscriber. Certain
advanced products, including digital video recorders and high definition receivers, require
additional upgrade fees. The Free Dish promotion ended on January 31, 2005.
Free for All
Effective February 1, 2004, our Free for All promotion provides new subscribers who
purchase one or two installed receiver systems for $149.00 or $199.00, respectively, a monthly
credit of $10.00 for 15 or 20 months, respectively. The subscriber must subscribe to a qualifying
programming package and provide their social security number. Effective February 1, 2005, new
subscribers under our Free for All promotion who purchase one or two receiver systems and subscribe
to a qualifying programming package receive a monthly credit of $5.00 for 30 or 40 months,
respectively. Although there can be no assurance as to the ultimate duration of the Free for All
promotion, we expect it to continue through at least July 31, 2005.
General and administrative expenses
.
General and administrative expenses totaled $397.7 million
during the year ended December 31, 2004, an increase of $65.0 million or 19.5% compared to the same
period in 2003. The increase in General and administrative expenses was primarily attributable
to increased personnel and infrastructure expenses to support the growth of the DISH Network.
General and administrative expenses represented 5.6% and 5.8% of Total revenue during the years
ended December 31, 2004 and 2003, respectively. The decrease in this expense to revenue ratio
resulted primarily from Total revenue increasing at a higher rate than our General and
administrative expenses.
42
|
|
Item 7.
|
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
|
Non-cash, stock-based compensation.
During 1999, we adopted an incentive plan under our 1995 Stock
Incentive Plan, which provided certain key employees with incentives including stock options.
During the year ended December 31, 2004, we recognized $1.2 million of compensation under this
performance-based plan, a decrease of $2.4 million compared to the same period in 2003. All
deferred compensation remaining as of December 31, 2003 was recognized during the quarter ending on
March 31, 2004.
As discussed under Critical Accounting Estimates below, in December 2004, the Financial
Accounting Standards Board issued Statement of Financial Accounting Standards No. 123 (Revised
2004), Share Based Payment (SFAS 123®) which is effective for financial statements as of the
beginning of the first interim period that begins after June 15, 2005. We are currently evaluating
which transitional provision and fair value methodology we will follow. However, we expect that
any expense associated with the adoption of the provisions of SFAS 123® will have a material
negative impact on our results of operations.
Depreciation and amortization.
Depreciation and amortization expense totaled $502.9 million
during the year ended December 31, 2004, an increase of $104.7 million or 26.3% compared to the
same period in 2003. The increase in Depreciation and amortization expense primarily resulted
from additional depreciation related to the commencement of commercial operation of our EchoStar IX
satellite in October 2003, and increases in depreciation related to equipment leased to customers
and other depreciable assets, including finite lived intangible assets, placed in service during
2003 and 2004. As of December 31, 2003, EchoStar IV was fully depreciated and accordingly, we
recorded no expense for this satellite during the year ended December 31, 2004. This partially
offset the increase in depreciation expense discussed above.
Interest income
.
Interest income totaled $42.3 million during the year ended December 31, 2004,
a decrease of $22.8 million or 35.0%compared to the same period in 2003. This decrease principally
resulted from lower cash and marketable investment securities balances in 2004 as compared to 2003,
partially offset by higher total returns earned on our cash and marketable investment securities
during 2004.
Interest expense, net of amounts capitalized
.
Interest expense totaled $505.7 million during the
year ended December 31, 2004, a decrease of $46.8 million or 8.5% compared to the same period in
2003. This decrease primarily resulted from a net reduction in interest expense of approximately
$98.3 million for the year ended December 31, 2004 related to the debt redemptions and repurchases
of our previously outstanding senior debt during 2003 and 2004. This decrease was partially offset
by an increase in prepayment premiums and the write-off of debt issuance costs totaling
approximately $134.7 million in 2004 compared to approximately $97.1 million in 2003. See Note 4
in the Notes to the Consolidated Financial Statements in Item 15 of this Annual Report on Form
10-K.
Other.
Other expense totaled $13.5 million during the year ended December 31, 2004 compared to
Other income of $18.8 million during 2003. The decrease is primarily attributable to net losses
on the sale of securities from our marketable investments portfolio for the year ended December 31,
2004 as compared to net gains during 2003.
Earnings before interest, taxes, depreciation and amortization
. EBITDA was $1.193 billion during
the year ended December 31, 2004, an increase of $68.2 million or 6.1% compared to $1.125 billion
during the same period in 2003. EBITDA during the year ended December 31, 2003 included a benefit
of approximately $77.2 million related to the change in estimated royalty obligations and
litigation settlement discussed above. Absent this 2003 benefit, our increase in EBITDA for the
year ended December 31, 2004 would have been $145.4 million. The increase in EBITDA (excluding
this benefit) was primarily attributable to the changes in operating revenues and expenses
discussed above. EBITDA does not include the impact of capital expenditures under our new and
existing subscriber equipment lease programs of approximately $654.9 million and $118.6 million
during the years ended December 31, 2004 and 2003, respectively.
The following table reconciles EBITDA to the accompanying financial statements:
43
|
|
Item 7.
|
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended
|
|
|
|
December 31,
|
|
|
|
2004
|
|
|
2003
|
|
|
|
(In thousands)
|
|
EBITDA
|
|
$
|
1,192,724
|
|
|
$
|
1,124,520
|
|
Less:
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
|
463,445
|
|
|
|
487,432
|
|
Income tax provision (benefit), net
|
|
|
11,609
|
|
|
|
14,376
|
|
Depreciation and amortization
|
|
|
502,901
|
|
|
|
398,206
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
214,769
|
|
|
$
|
224,506
|
|
|
|
|
|
|
|
|
EBITDA is not a measure determined in accordance with accounting principles generally accepted
in the United States, or GAAP, and should not be considered a substitute for operating income, net
income or any other measure determined in accordance with GAAP. EBITDA is used as a measurement of
operating efficiency and overall financial performance and we believe it to be a helpful measure
for those evaluating companies in the multi-channel video programming distribution industry.
Conceptually, EBITDA measures the amount of income generated each period that could be used to
service debt, pay taxes and fund capital expenditures. EBITDA should not be considered in
isolation or as a substitute for measures of performance prepared in accordance with GAAP.
Income tax benefit (provision), net.
Our income tax policy is to record the estimated future tax
effects of temporary differences between the tax bases of assets and liabilities and amounts
reported in our accompanying consolidated balance sheets, as well as operating loss, tax credit
and other carry-forwards. We follow the guidelines set forth in Statement of Financial Accounting
Standards No. 109, Accounting for Income Taxes (SFAS 109) regarding the recoverability of any
tax assets recorded on the balance sheet and provide any necessary valuation allowances as
required. Determining necessary valuation allowances requires us to make assessments about the
timing of future events, including the probability of expected future taxable income and available
tax planning opportunities. We currently have an approximate $1.0 billion valuation allowance
recorded as an offset against all of our net deferred tax assets. In accordance with SFAS 109, we
periodically evaluate our need for a valuation allowance based on historical evidence, including
trends, and future expectations in each reporting period. In the future, at such time as is
required by SFAS 109, all or a portion of the current valuation allowance may be reversed. We
recognized Net income for the years ended December 31, 2004 and 2003, and accordingly, now
believe that if this trend continues it is more likely than not we will reverse our current
recorded valuation allowance in the near term which will have a material positive impact on our
Net income (loss). However, there can be no assurance if or when all or a portion of our
valuation allowance will be reversed.
Net income (loss).
Net income was $214.8 million during the year ended December 31, 2004, a
decrease of $9.7 million or 4.3% compared to $224.5 million for the same period in 2003. The
decrease was primarily attributable to lower Operating income, Interest income and Other
income partially offset by the decrease in Interest expense resulting from the factors discussed
above.
44
|
|
Item 7.
|
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
|
Year Ended December 31, 2003 Compared to the Year Ended December 31, 2002.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
Variance
|
|
|
|
2003
|
|
|
2002
|
|
|
Amount
|
|
|
%
|
|
|
|
(In thousands)
|
|
Statements of Operations Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subscriber-related revenue
|
|
$
|
5,409,875
|
|
|
$
|
4,429,699
|
|
|
$
|
980,176
|
|
|
|
22.1
|
%
|
Equipment sales
|
|
|
295,409
|
|
|
|
348,629
|
|
|
|
(53,220
|
)
|
|
|
(15.3
|
%)
|
Other
|
|
|
34,012
|
|
|
|
42,497
|
|
|
|
(8,485
|
)
|
|
|
(20.0
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
5,739,296
|
|
|
|
4,820,825
|
|
|
|
918,471
|
|
|
|
19.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subscriber-related expenses
|
|
|
2,707,898
|
|
|
|
2,200,239
|
|
|
|
507,659
|
|
|
|
23.1
|
%
|
% of Subscriber-related revenue
|
|
|
50.1
|
%
|
|
|
49.7
|
%
|
|
|
|
|
|
|
|
|
Satellite and transmission expenses
|
|
|
79,322
|
|
|
|
62,131
|
|
|
|
17,191
|
|
|
|
27.7
|
%
|
% of Subscriber-related revenue
|
|
|
1.5
|
%
|
|
|
1.4
|
%
|
|
|
|
|
|
|
|
|
Cost of sales - equipment
|
|
|
194,491
|
|
|
|
227,670
|
|
|
|
(33,179
|
)
|
|
|
(14.6
|
%)
|
% of Equipment sales
|
|
|
65.8
|
%
|
|
|
65.3
|
%
|
|
|
|
|
|
|
|
|
Cost of sales - other
|
|
|
3,496
|
|
|
|
6,466
|
|
|
|
(2,970
|
)
|
|
|
(45.9
|
%)
|
Subscriber acquisition costs
|
|
|
1,312,068
|
|
|
|
1,168,649
|
|
|
|
143,419
|
|
|
|
12.3
|
%
|
General and administrative
|
|
|
332,723
|
|
|
|
319,915
|
|
|
|
12,808
|
|
|
|
4.0
|
%
|
% of Total revenue
|
|
|
5.8
|
%
|
|
|
6.6
|
%
|
|
|
|
|
|
|
|
|
Non-cash, stock-based compensation
|
|
|
3,544
|
|
|
|
11,279
|
|
|
|
(7,735
|
)
|
|
|
(68.6
|
%)
|
Depreciation and amortization
|
|
|
398,206
|
|
|
|
372,958
|
|
|
|
25,248
|
|
|
|
6.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
5,031,748
|
|
|
|
4,369,307
|
|
|
|
662,441
|
|
|
|
15.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
707,548
|
|
|
|
451,518
|
|
|
|
256,030
|
|
|
|
56.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
65,058
|
|
|
|
112,927
|
|
|
|
(47,869
|
)
|
|
|
(42.4
|
%)
|
Interest expense, net of amounts capitalized
|
|
|
(552,490
|
)
|
|
|
(482,903
|
)
|
|
|
(69,587
|
)
|
|
|
(14.4
|
%)
|
Merger termination related expenses
(including $33,323 in interest expense)
|
|
|
|
|
|
|
(689,798
|
)
|
|
|
689,798
|
|
|
|
100.0
|
%
|
Other
|
|
|
18,766
|
|
|
|
(170,680
|
)
|
|
|
189,446
|
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense)
|
|
|
(468,666
|
)
|
|
|
(1,230,454
|
)
|
|
|
761,788
|
|
|
|
61.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
238,882
|
|
|
|
(778,936
|
)
|
|
|
1,017,818
|
|
|
|
N/A
|
|
Income tax benefit (provision), net
|
|
|
(14,376
|
)
|
|
|
(73,098
|
)
|
|
|
58,722
|
|
|
|
80.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
224,506
|
|
|
$
|
(852,034
|
)
|
|
$
|
1,076,540
|
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net income (loss) to common shareholders
|
|
$
|
224,506
|
|
|
$
|
(414,601
|
)
|
|
$
|
639,107
|
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DISH Network subscribers, as of year end (in millions)
|
|
|
9.425
|
|
|
|
8.180
|
|
|
|
1.245
|
|
|
|
15.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DISH Network subscriber additions, gross (in millions)
|
|
|
2.894
|
|
|
|
2.764
|
|
|
|
0.130
|
|
|
|
4.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DISH Network subscriber additions, net (in millions)
|
|
|
1.245
|
|
|
|
1.350
|
|
|
|
(0.105
|
)
|
|
|
(7.8
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Monthly churn percentage
|
|
|
1.57
|
%
|
|
|
1.59
|
%
|
|
|
(0.02
|
%)
|
|
|
(1.3
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average revenue per subscriber (ARPU)
|
|
$
|
51.21
|
|
|
$
|
49.37
|
|
|
$
|
1.84
|
|
|
|
3.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average subscriber acquisition costs per subscriber (SAC)
|
|
$
|
453
|
|
|
$
|
421
|
|
|
$
|
32
|
|
|
|
7.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equivalent average subscriber acquisition costs per
subscriber (Equivalent SAC)
|
|
$
|
480
|
|
|
$
|
507
|
|
|
$
|
(27
|
)
|
|
|
(5.3
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA
|
|
$
|
1,124,520
|
|
|
$
|
(2,679
|
)
|
|
$
|
1,127,199
|
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
45
|
|
Item 7.
|
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
|
DISH Network subscribers.
As of December 31, 2003, we had approximately 9.425 million DISH
Network subscribers compared to approximately 8.180 million at December 31, 2002, an increase of
approximately 15.2%. DISH Network added approximately 1.245 million net new subscribers for the
year ended December 31, 2003 compared to approximately 1.350 million net new subscribers during the
same period in 2002. We believe the reduction in net new subscribers for the year ended December
31, 2003, compared to the same period in 2002, resulted from a number of factors, including
stronger competition from advanced digital cable and cable modems. Additionally, as the size of
our subscriber base continues to increase, even if percentage churn remains constant, increasing
numbers of gross new subscribers are required to sustain net subscriber growth.
Subscriber additions during the second half of 2003 were negatively impacted by delays in the
delivery of several newly developed products, which resulted in a temporary product shortage, and
product installations in the third and fourth quarter of 2003. These delays were substantially
eliminated during the first quarter of 2004.
Subscriber-related revenue.
DISH Network Subscriber-related revenue totaled $5.410 billion for
the year ended December 31, 2003, an increase of $980.2 million or 22.1% compared to the same
period in 2002. This increase was directly attributable to continued DISH Network subscriber
growth and the increase in ARPU discussed below.
ARPU
. Monthly average revenue per subscriber was approximately $51.21 during the year ended
December 31, 2003 and approximately $49.37 during the same period in 2002. The $1.84 or 3.7% increase in
monthly average revenue per subscriber is primarily attributable to price increases of up to $2.00
in February 2003 on some of our most popular packages, the increased availability of local channels
by satellite and an increase in the number of DISH Network subscribers with multiple set-top boxes.
During 2003, we launched 47 additional local markets compared to the launch of 18 additional
markets during 2002. These increases were partially offset by certain subscriber promotions, under
which new DISH Network subscribers received free programming for the first three months of their
term of service, and other promotions under which DISH Network subscribers received discounted
programming.
Equipment sales
. For the year ended December 31, 2003, Equipment sales totaled $295.4 million, a
decrease of $53.2 million or 15.3% compared to the same period during 2002. The decrease in
Equipment sales principally resulted from a decline in the number of digital set-top boxes and
related components sold by our ETC subsidiary to an international DBS service provider.
Subscriber-related expenses
.
Subscriber-related expenses totaled $2.708 billion during the year
ended December 31, 2003, an increase of $507.7 million or 23.1% compared to the same period in
2002. The increase in Subscriber-related expenses was primarily attributable to the increase in
the number of DISH Network subscribers. This growth resulted in increased expenses to support the
DISH Network, including programming costs, personnel expenses, the opening of a new call center,
and increased operating expenses related to the expansion of our DISH Network Service L.L.C.
business. Subscriber-related expenses represented 50.1% and 49.7% of Subscriber-related
revenue during the years ended December 31, 2003 and 2002, respectively. The increase in
Subscriber-related expenses as a percentage of Subscriber-related revenue primarily resulted
from an approximately $30.2 million reversal of an accrual during 2002 related to the replacement
of smart cards in satellite receivers owned by us and leased to consumers. This accrual reversal
decreased the 2002 expense to revenue ratio from 50.4% to 49.7%. The increase in the expense to
revenue ratio from 2002 to 2003 was partially offset by an increase in monthly average revenue per
subscriber and increased operating efficiencies.
Satellite and transmission expenses
. Satellite and transmission expenses totaled $79.3 million
during the year ended December 31, 2003, an increase of $17.2 million or 27.7% compared to the same
period in 2002. This increase primarily resulted from commencement of service and operational
costs associated with the increasing number of markets in which we offer local network channels by
satellite as previously discussed. Satellite and transmission expenses totaled 1.5% and 1.4% of
Subscriber-related revenue during each of the years ended December 31, 2003 and 2002,
respectively.
Cost of sales equipment.
Cost of sales equipment totaled $194.5 million during the year
ended December 31, 2003, a decrease of $33.2 million or 14.6% compared to the same period in 2002.
This decrease related primarily to a decrease in sales of digital set-top boxes and related
components by our ETC subsidiary to an international DBS service provider. Cost of sales
equipment during the years ended December 31, 2003 and 2002 include non-recurring
46
|
|
Item 7.
|
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
|
reductions in the cost of set-top box equipment of approximately $6.8 million and $6.5 million,
respectively. Cost of sales equipment represented 65.8% and 65.3% of Equipment sales, during
the years ended December 31, 2003 and 2002, respectively.
Subscriber acquisition costs.
Subscriber acquisition costs totaled approximately $1.312 billion
for the year ended December 31, 2003, an increase of $143.4 million or 12.3% compared to the same
period in 2002. The increase principally resulted from the sale of equipment at little or no cost
to the subscriber, a decrease in subscriber equipment leases and increases in acquisition marketing
as discussed under SAC and Equivalent SAC below. This increase was partially offset by benefits of approximately
$77.2 million which were recorded in 2003. These benefits include approximately $34.4 million
related to the receipt of a reimbursement payment for previously sold set-top box equipment
pursuant to a litigation settlement and approximately $42.8 million related to a reduction in the
cost of set-top box equipment resulting from a change in estimated royalty obligations.
Subscriber acquisition costs during the year ended December 31, 2002 included a benefit of
approximately $47.7 million resulting from the non-recurring reduction in the cost of set-top box
equipment as a result of favorable litigation developments and the completion of royalty
arrangements with more favorable terms than estimated amounts previously accrued.
SAC and Equivalent SAC.
Subscriber acquisition costs per new DISH Network subscriber activation
were approximately $453 for the year ended December 31, 2003 and approximately $421 during the same
period in 2002. As discussed above, SAC during the years ended December 31, 2003 and 2002 included
benefits of approximately $77.2 million and $47.7 million, respectively. Absent these benefits,
our SAC for 2003 and 2002 would have been approximately $27 and $17 higher, respectively, or $480
and $438, respectively. The increase in SAC (excluding these benefits) during the year ended
December 31, 2003 as compared to the same period in 2002 was primarily attributable to an increase
in the sale of equipment at little or no cost to the subscriber, including our promotion in which
subscribers are eligible to receive up to three free receivers or a free digital video recorder,
together with a decrease in subscriber equipment leases. The increase also resulted from an
increase in acquisition marketing in 2003 compared to 2002.
Equipment capitalized under our lease program for new customers totaled approximately $108.1
million and $277.6 million for the year ended December 31, 2003 and 2002, respectively. Returned
equipment related to disconnected lease program subscribers, which became available for sale
rather than being redeployed through the lease program, together with payments received in
connection with equipment not returned to us, totaled approximately $30.2 million and $37.8 million
during the years ended December 31, 2003 and 2002, respectively. If we included in our calculation
of SAC the equipment capitalized less the value of equipment returned and payments received, our
Equivalent SAC would have been approximately $480 during 2003 compared to $507 during 2002. As
discussed above, Subscriber acquisition costs during the years ended December 31, 2003 and 2002
included benefits of approximately $77.2 million and $47.7 million, respectively. Absent these
benefits, our Equivalent SAC for 2003 and 2002 would have been $507 and $524, respectively. This
decrease principally resulted from a greater percentage of returned leased equipment being
redeployed to new lease customers and relatively less of that equipment being offered for sale as
remanufactured equipment.
General and administrative expenses.
General and administrative expenses totaled $332.7 million
during the year ended December 31, 2003, an increase of $12.8 million or 4.0% compared to the same
period in 2002. The increase in General and administrative expenses was primarily attributable
to increased personnel and infrastructure expenses to support the growth of the DISH Network.
General and administrative expenses represented 5.8% and 6.6% of Total revenue during the years
ended December 31, 2003 and 2002, respectively. This decrease in General and administrative
expenses as a percent of Total revenue was the result of increased administrative efficiencies.
Non-cash, stock-based compensation.
During 1999, we adopted an incentive plan under our 1995 Stock
Incentive Plan, which provided certain key employees with incentives including stock options.
During the year ended December 31, 2003, we recognized $3.5 million of compensation under this
performance-based plan, a decrease of $7.7 million compared to the same period in 2002. This
decrease was primarily attributable to proportionate vesting and stock option forfeitures resulting
from employee terminations. The remaining deferred compensation of $1.2 million as of December 31,
2003 was recognized over the remaining vesting period, ending on March 31, 2004.
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
47
|
|
Item 7.
|
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Continued
|
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:
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended
|
|
|
|
December 31,
|
|
|
|
2003
|
|
|
2002
|
|
|
|
(In thousands)
|
|
Subscriber-related
|
|
$
|
34
|
|
|
$
|
729
|
|
Satellite and transmission
|
|
|
359
|
|
|
|
(7
|
)
|
General and administrative
|
|
|
3,151
|
|
|
|
10,557
|
|
|
|
|
|
|
|
|
Total non-cash, stock-based compensation
|
|
$
|
3,544
|
|
|
$
|
11,279
|
|
|
|
|
|
|
|
|
Depreciation and amortization.
Depreciation and amortization expense totaled $398.2 million
during the year ended December 31, 2003, an increase of $25.2 million or 6.8% compared to the same
period in 2002. The increase in Depreciation and amortization expense principally resulted from
an increase in depreciation related to the commencement of commercial operation of EchoStar VII,
VIII and IX in April 2002, October 2002, and October 2003, respectively, and leased equipment and
other additional depreciable assets placed in service during 2003.
Interest income.
Interest income totaled $65.1 million during the year ended December 31, 2003,
a decrease of $47.9 million or 42.4% compared to the same period in 2002. This decrease
principally resulted from lower returns and lower cash and marketable investment securities
balances in 2003 as compared to 2002.
Interest expense, net of amounts capitalized.
Interest expense totaled $552.5 million during the
year ended December 31, 2003, an increase of $69.6 million or 14.4% compared to the same period in
2002. This increase primarily resulted from prepayment premiums and accelerated amortization of
debt issuance costs totaling approximately $97.1 million related to the full and partial
redemptions and repurchases of certain of our debt securities, as discussed further in Liquidity
and Capital Resources, and additional interest expense totaling approximately $43.0 million
related to our $500.0 million convertible notes offering and our $2.5 billion senior notes offering
during July and October 2003, respectively. This increase also resulted from a $15.4 million
reduction in the amount of interest capitalized during the year ended December 31, 2003 as compared
to the same period in 2002. Interest is capitalized during the construction phase of a satellite,
however, capitalization of additional interest ceases upon commercial operation of the satellite.
Therefore, once EchoStar VII, EchoStar VIII and EchoStar IX commenced commercial operation during
April 2002, October 2002 and August 2003, respectively, we ceased capitalizing interest related to
these satellites. The expensing of this previously capitalized interest resulted in an increase in
Interest expense. This increase was partially offset by a reduction in interest expense of
approximately $52.4 million as a result of the debt redemptions and repurchases discussed above.
In addition, Interest expense for the year ended December 31, 2002 includes approximately $31.1
million related to our 2002 bridge financing commitments.
Merger termination related expenses.
The $689.8 million decrease in Merger termination related
expenses is attributable to costs expensed during 2002 upon termination of our proposed merger
with Hughes, which consists of a $600.0 million termination fee paid to Hughes, $56.5 million of
previously capitalized merger costs and $33.3 million of fees paid in connection with merger
financing activities.
Other
.
Other income totaled $18.8 million during the year ended December 31, 2003, compared to
Other expense of $170.7 million during the same period in 2002. This improvement principally
resulted from net gains on marketable and non-marketable investment securities of approximately
$19.8 million recorded in 2003 compared to net losses of approximately $135.6 million recorded in
2002. This improvement also resulted from the absence during 2003 of any net change in valuation
of contingent value rights, which totaled $19.7 million during the year ended December 31, 2002.
Our Series D convertible preferred stock was repurchased during the fourth quarter of 2002.
Earnings before interest, taxes, depreciation and amortization.
EBITDA was $1.125 billion during
the year ended December 31, 2003, compared to a negative $2.7 million during the same period in
2002. The improvement was primarily attributable to a reduction in Other expenses totaling
$845.9 million, the components of which are discussed above, as well as the increase in the number of DISH Network subscribers, which continues
to result in revenue sufficient to support the cost of new and existing subscribers. The
improvement was partially offset by a decrease in subscribers leasing equipment and a corresponding
increase in equipment subsidies compared to the same
48
|
|
Item 7.
|
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Continued
|
period in 2002, as well as a decrease in
Equipment sales. EBITDA does not include the impact of capital expenditures under our new and
existing subscriber equipment lease program of approximately $118.6 million during 2003, and our
new subscriber equipment lease program of $277.6 million during 2002 .
The following table reconciles EBITDA to the accompanying financial statements:
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended
|
|
|
|
December 31,
|
|
|
|
2003
|
|
|
2002
|
|
|
|
(In thousands)
|
|
EBITDA
|
|
$
|
1,124,520
|
|
|
$
|
(2,679
|
)
|
Less:
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
|
487,432
|
|
|
|
369,976
|
|
Interest expense, merger related
|
|
|
|
|
|
|
33,323
|
|
Income tax provision (benefit), net
|
|
|
14,376
|
|
|
|
73,098
|
|
Depreciation and amortization
|
|
|
398,206
|
|
|
|
372,958
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
224,506
|
|
|
$
|
(852,034
|
)
|
|
|
|
|
|
|
|
EBITDA is not a measure determined in accordance with accounting principles generally accepted
in the United States, or GAAP, and should not be considered a substitute for operating income, net
income or any other measure determined in accordance with GAAP. EBITDA is used as a measurement of
operating efficiency and overall financial performance and we believe it to be a helpful measure
for those evaluating companies in the multi-channel video programming distribution industry.
Conceptually, EBITDA measures the amount of income generated each period that could be used to
service debt, pay taxes and fund capital expenditures. EBITDA should not be considered in
isolation or as a substitute for measures of performance prepared in accordance with GAAP.
Net income (loss).
Net income was $224.5 million during the year ended December 31, 2003, an
increase of $1.077 billion compared to a Net loss of $852.0 million for the same period in 2002.
The improvement was primarily attributable to an increase in Operating income and an improvement
in Other expense, the components of which are discussed above.
Basic and diluted net income (loss) to common shareholders
.
Basic and diluted net income to
common shareholders was $224.5 million during the year ended December 31, 2003, an improvement of
$639.1 million compared to Basic and diluted net loss to common shareholders of $414.6 million
for the same period in 2002. The improvement is primarily attributable to the improvement in Net
loss, discussed above. The improvement was partially offset by a $437.4 million gain on the
redemption of Series D convertible preferred stock from Vivendi during 2002.
LIQUIDITY AND CAPITAL RESOURCES
Our principal sources of cash during 2004 were operating activities, sales of
certain marketable investment securities and the issuance of long-term notes. Our principal uses
of cash during 2004 were to repurchase or redeem long-term notes, purchase property and equipment,
repurchase our Class A common stock and pay a dividend on our Class A and Class B common stock.
See further discussion of 2004 financings in Cash flows from financing activities below.
We expect that our future working capital, capital expenditure and debt service requirements will
be satisfied primarily from existing cash and investment balances and cash generated from
operations. Our ability to generate positive future operating and net cash flows is dependent
upon, among other things, our ability to retain existing DISH Network subscribers. There can be no
assurance we will be successful in executing our business plan. The amount of capital required to
fund our 2005 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 and
retention, including capitalized costs associated with our new and existing subscriber equipment
lease programs. The amount of capital required in 2005 will also depend on our levels of
investment in infrastructure necessary to support local markets and other
possible strategic initiatives. We currently anticipate that 2005 capital expenditures will be
significantly higher than 2004 capital expenditures of $980.6 million due to, among other things, increased spending on equipment leased to subscribers and satellites. Our capital expenditures
will vary depending on the number of
49
|
|
Item 7.
|
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Continued
|
satellites leased or under construction at any point in
time. Our working capital and capital expenditure requirements could increase materially in the
event of increased competition for subscription television customers, significant satellite
failures, in the event we make strategic investments or acquisitions, or in the event of general
economic downturn, among other factors. These factors could require that we raise additional
capital in the future. There can be no assurance that we could raise all required capital or that
required capital would be available on acceptable terms.
Cash, cash equivalents and marketable investment securities.
We consider all liquid investments
purchased within 90 days of their maturity to be cash equivalents. See Item 7A. Quantitative
and Qualitative Disclosures About Market Risk for further discussion regarding our marketable
investment securities. As of December 31, 2004, our restricted and unrestricted cash, cash
equivalents and marketable investment securities totaled $1.213 billion, including approximately
$57.6 million of other restricted cash and marketable investment securities, compared to $4.170
billion, including $176.8 million of cash reserved for satellite insurance and $20.0 million of
other restricted cash and marketable investment securities, as of December 31, 2003. During 2004,
we redeemed the remainder of our 9 3/8% Senior Notes due 2009 and our 10 3/8% Senior Notes
due 2007 using unrestricted cash and marketable investment securities of approximately $1.545 billion and the proceeds from the sale of our 6 5/8%
Senior Notes due 2014. As a result of these redemptions, we reclassified $176.8 million
of cash reserved for satellite insurance to cash and cash equivalents. During 2004, capital
expenditures, repurchases of our Class A common stock and a dividend on our Class A and Class B
common stock further reduced our unrestricted cash and marketable investment securities by
approximately $980.6 million, $809.6 million, and $455.7 million, respectively.
The following discussion highlights our free cash flow and cash flow activities during the years
ended December 31, 2004, 2003 and 2002.
Free cash flow.
We define free cash flow as Net cash flows from operating activities less
Purchases of property and equipment, as shown on our Consolidated Statements of Cash Flows. We
believe free cash flow is an important liquidity metric because it measures, during a given period,
the amount of cash generated that is available to repay debt obligations, make investments, funds acquisitions and for certain other
activities. Free cash flow is not a measure determined in accordance with GAAP and should not be
considered a substitute for Operating income, Net income, Net cash flows from operating
activities or any other measure determined in accordance with GAAP. Since free cash flow includes
investments in operating assets, we believe this non-GAAP liquidity measure is useful in addition
to the most directly comparable GAAP measure Net cash flows from operating activities. Free
cash flow also excludes cash which may be necessary for acquisitions, investments and other needs
that may arise.
Free cash flow was $20.9 million, $253.8 million and negative $369.1 million for the years ended
December 31, 2004, 2003 and 2002, respectively. The decrease from 2003 to 2004 of approximately
$232.9 million resulted from an approximate $658.8 million increase in Purchases of property and
equipment offset by an increase in Net cash flows from operating activities of approximately
$425.9 million. The increase in Purchases of property and equipment was primarily attributable
to increased spending for equipment under our lease programs, satellite construction payments and
prepayments under our satellite service agreements, and for general expansion to support the growth
of the DISH Network. The increase in Net cash flows from operating activities was primarily
attributable to significantly more cash flow generated by changes in operating assets and
liabilities in 2004 as compared to 2003. Cash flow from changes in operating assets and
liabilities was $241.7 million during 2004 compared to negative $75.7 million in 2003. The
improvement in cash flow from changes in operating assets and liabilities resulted from increases
in accounts payable, accrued programming expenses, and an increase in net deferred revenue
primarily attributable to equipment sales to SBC, partially offset by rising inventory levels,
increased subscriber accounts receivable and receivables related to SBC.
The increase in free cash flow from 2002 to 2003 of approximately $622.8 million resulted from an
increase in Net cash flows from operating activities of approximately $508.8 million and a
decrease in Purchases of property and equipment of approximately $114.0 million. The increase in
Net cash flows from operating activities is primarily attributable to an improvement in net
income that principally resulted from approximately $689.8 million in merger termination related
expenses incurred during 2002 as discussed in Managements Discussion and Analysis of Financial
Condition and Results of Operations. The improvement in net income was offset by significantly
less cash flow generated from changes in operating assets and liabilities in 2003 as compared to
2002. Cash flow from changes in operating assets and liabilities was negative $75.7 million during
2003 compared to $183.0 million during 2002. This decrease primarily resulted from an increased
use of cash related to prepayments made under our satellite service agreements and reductions in
accounts payable and accrued expenses as a result of the timing of certain payments. The decrease
in Purchases of property and equipment was primarily attributable to reduced spending on the
construction of satellites and the capitalization of less equipment under our lease programs.
50
|
|
Item 7.
|
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Continued
|
The following table reconciles free cash flow to Net cash flows from operating activities.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
|
(In thousands)
|
|
Free Cash Flow
|
|
$
|
20,855
|
|
|
$
|
253,762
|
|
|
$
|
(369,075
|
)
|
Add back:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
980,587
|
|
|
|
321,819
|
|
|
|
435,819
|
|
|
|
|
|
|
|
|
|
|
|
Net cash flows from operating activities
|
|
$
|
1,001,442
|
|
|
$
|
575,581
|
|
|
$
|
66,744
|
|
|
|
|
|
|
|
|
|
|
|
During the years ended December 31, 2004, 2003 and 2002, free cash flow was significantly
impacted by changes in operating assets and liabilities as shown in the Net cash flows from
operating activities section of our Consolidated Statements of Cash Flows included herein.
Operating asset and liability balances can fluctuate significantly from period to period and there
can be no assurance that free cash flow will not be negatively impacted by material changes in
operating assets and liabilities in future periods, since these changes depend upon, among other
things, managements timing of payments, inventory levels and cash receipts. In addition to
fluctuations resulting from changes in operating assets and liabilities, free cash flow can vary
significantly from period to period depending upon, among other things, subscriber growth,
subscriber revenue, subscriber churn, subscriber acquisition costs, operating efficiencies,
increases or decreases in purchases of property and equipment and other factors.
Impacts from our litigation with the networks in Florida, FCC rules governing the delivery of
superstations and other factors could cause us to terminate delivery of network channels and
superstations to a substantial number of our subscribers, which could cause many of those customers
to cancel their subscription to our other services. In the event the Court of Appeals upholds the
Miami District Courts network litigation injunction, and if we do not reach private settlement
agreements with additional stations, we will attempt to assist subscribers in arranging alternative
means to receive network channels, including migration to local channels by satellite where
available, and free off air antenna offers in other markets. However, we cannot predict with any
degree of certainty how many subscribers might ultimately cancel their primary DISH Network
programming as a result of termination of their distant network channels. We could be required to
terminate distant network programming to all subscribers in the event the plaintiffs prevail on
their cross-appeal and we are permanently enjoined from delivering all distant network channels.
Termination of distant network programming to subscribers would result in a reduction in average
monthly revenue per subscriber and a temporary increase in subscriber churn.
Our future capital expenditures could increase or decrease depending on the strength of the
economy, strategic opportunities or other factors.
Cash flows from operating activities.
We typically reinvest the cash flow from operating
activities in our business primarily to grow our subscriber base and to expand our infrastructure.
For the years ended December 31, 2004, 2003 and 2002, we reported net cash flows from operating
activities of $1.001 billion, $575.6 million and $66.7
million, respectively. See discussion of changes in net cash flows from operating activities
included in Free cash flow above.
51
|
|
Item 7.
|
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Continued
|
Cash flows from investing activities.
Our investing activities generally include purchases and
sales of marketable investment securities and cash used to grow our subscriber base and
expand our infrastructure. For the years ended December 31, 2004, 2003 and 2002, we reported net
cash flows from investing activities of $1.078 billion, negative $1.762 billion and negative $682.4
million, respectively. The increase from 2003 to 2004 of approximately $2.840 billion primarily
resulted from an increase in net sales of marketable investment securities, and from a
reclassification of cash previously restricted for satellite insurance. The increase in net cash
flows from investing activities was partially offset by increases in cash used for capital
expenditures and our asset acquisition from Gemstar (See Note 2 in the Notes to the Consolidated
Financial Statements in Item 15 of this Annual Report on Form 10-K).
The decrease from 2002 to 2003 of approximately $1.079 billion primarily resulted from an increase
in net purchases of marketable investment securities related to the investment of the net proceeds
from our 2003 financings discussed below. In addition, cash flows from investing activities for
the year ended December 31, 2002 includes cash used for merger-related costs of approximately $38.6
million. The decrease in net cash flows from investing activities was partially offset by a
decrease in purchases of property and equipment driven by reduced spending on the construction of
satellites and capitalization of less equipment under our new subscriber equipment lease program in
2003 as compared to 2002.
Cash flows from financing activities.
Our financing activities include net proceeds related to the
issuance of long-term debt, and cash used for the repurchase or redemption of long-term
debt and mortgages or other notes payable, repurchases of our Class A common stock and our 2004
dividend payment. For the years ended December 31, 2004, 2003 and 2002, we reported net cash flows
from financing activities of negative $2.666 billion, $994.1 million and $420.8 million,
respectively.
The decrease from 2003 to 2004 of approximately $3.660 billion principally resulted from the
following 2004 financing activities:
|
|
Effective February 2, 2004, we redeemed the remaining $1.423 billion outstanding
principal amount of our 9 3/8% Senior Notes due 2009.
|
|
|
|
Effective October 1, 2004, we redeemed all of our $1.0 billion outstanding principal
amount of the 10 3/8% Senior Notes due 2007.
|
|
|
|
During 2004, we repurchased approximately 25.9 million shares of our Class A common
stock in open market transactions for a total cost of approximately $809.6 million.
|
|
|
|
On December 14, 2004, we paid a cash dividend of $455.7 million to holders of our Class
A and Class B common stock.
|
This decrease from 2003 to 2004 was partially offset by the following financing sources of cash:
|
|
On October 1, 2004, we sold $1.0 billion principal amount of our 6 5/8% Senior Notes
due 2014.
|
|
|
|
On August 25, 2004, we sold a $25.0 million 3% Convertible Subordinated Note due 2011 to
CenturyTel Service Group L.L.C.
|
In addition to the 2004 financing activities described above, the decrease in net cash flows from
financing activities from 2003 to 2004 was also partially due to $1.178 billion in net cash flows
received during 2003 from the issuance of long-term debt as described below.
The increase from 2002 to 2003 of approximately $573.2 million principally resulted from the
following 2003 financing activities:
|
|
On July 21, 2003, we sold a $500.0 million 3% Convertible Subordinated Note due 2010 to
SBC Communications, Inc.
|
|
|
|
On October 2, 2003, we sold (i) $1.0 billion principal amount of our 5 3/4% Senior
Notes due 2008; (ii) $1.0 billion principal amount of our 6 3/8% Senior Notes due 2011; and
(iii) $500.0 million principal amount of our Floating Rate Senior Notes due 2008.
|
This increase from 2002 to 2003 was partially offset by the following financing uses of cash:
52
|
|
Item 7.
|
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Continued
|
|
|
Effective February 1, 2003, we redeemed all of the $375.0 million outstanding
principal amounts of our 9 1/4% Senior Notes due 2006.
|
|
|
|
Effective September 3, 2003, we redeemed $245.0 million of the $700.0 million
outstanding principal amount of our 9 1/8 % Senior Notes due 2009.
|
|
|
|
Effective October 20, 2003, we redeemed all of the $1.0 billion outstanding principal
amount of our 4 7/8% Convertible Subordinated Notes due 2007.
|
|
|
|
During the fourth quarter of 2003, we repurchased approximately $201.6 million of the
$1.625 billion principal amount outstanding on our 9 3/8% Senior Notes due 2009 in open
market transactions.
|
|
|
|
During the fourth quarter of 2003, we repurchased shares of our Class A common stock in
open market transactions for a total cost of approximately $190.4 million.
|
This increase from 2002 to 2003 was also partially offset by the net cash received from the issuance and
subsequent repurchase of our Series D convertible preferred stock during 2002.
Other Liquidity Items
Subscriber turnover.
Our percentage monthly subscriber churn for the year ended December 31, 2004
was approximately 1.62%, compared to our percentage subscriber churn for the same period in 2003 of
approximately 1.57%. We believe the increase in subscriber churn resulted from a number of
factors, including but not limited to competition from digital cable, cable bounties, piracy,
temporary customer service deficiencies resulting from rapid expansion of our installation, in-home
service and call center operations, and from increasingly complex products, the temporary
unavailability of Viacom programming, and the changes in promotional mix discussed below. While we
believe the impact of many of these factors will diminish with time, there can be no assurance that
these and other factors will not continue to contribute to relatively higher churn than we have
experienced historically. Additionally, certain of our promotions allow consumers with relatively
lower credit to become subscribers and these subscribers typically churn at a higher rate.
However, these subscribers are also acquired at
a lower cost resulting in a smaller economic loss upon disconnect.
Effective February 1, 2004, we introduced our Digital Home Advantage program. Under this
promotion, subscribers who lease equipment are not required to enter into annual or longer
programming commitments. Therefore, Digital Home Advantage subscribers may be more likely to
terminate during their first year of service because there is no financial disincentive for them to
terminate. Prior to introduction of this promotion, a greater percentage of our new DISH Network
subscribers entered into one or two year commitments, obligating them to pay cancellation fees for
early termination. However, we believe that any impact on our overall economic return has been, and will continue to
be, mitigated in the near term by the acquisition of more DISH Network subscribers under our
Digital Home Advantage promotion, whereby upon customer disconnect the equipment is returned and
may be redeployed to future subscribers.
We currently offer local broadcast channels in approximately 155 markets across the United States.
In 38 of those markets, two dishes are necessary to receive all local channels in the market.
SHVERA now requires, among other things, that all local broadcast channels delivered by
satellite to any particular market be available from a single dish within 18 months of the laws
December 8, 2004 effective date. Because we had planned to transition all local channels in any
particular market to the same dish by 2008 rather than in the shorter transition period mandated by
SHVERA, satellite capacity limitations may force us to move the local channels in as many as 30
markets to different satellites, requiring subscribers in those markets to install a second or a
different dish to continue receiving their local network channels. We may be forced to stop
offering local channels in some of those markets altogether.
The transition of all local channels to the same dish could result in disruptions of service for a
substantial number of our customers, and our ability to timely comply with this requirement without
incurring significant additional costs is dependent on, among other things, the successful launch
and operation of one or more additional satellites. It is possible that the costs of compliance with this requirement could
exceed $100.0 million. To the extent some of those costs are passed on to our subscribers, and because
many subscribers may be unwilling to install a second dish where one had been adequate, we expect
that our subscriber churn could be negatively impacted.
53
|
|
Item 7.
|
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Continued
|
In addition, if the FCC finds that our current must carry methods are not in compliance with the
must carry rules, while we would attempt to continue providing local network channels in all
markets without interruption, we could be forced by capacity constraints to reduce the number of
markets in which we provide local channels. This could cause a temporary increase in subscriber
churn and a small reduction in average monthly revenue per subscriber.
Impacts from our litigation with the networks in Florida, FCC rules governing the delivery of
superstations, and other factors could cause us to terminate delivery of network channels and
superstations to a substantial number of our subscribers, which could cause many of those customers
to cancel their subscription to our other services. In the event the Court of Appeals upholds the
Miami District Courts network litigation injunction, and if we do not reach private settlement
agreements with additional stations, we will attempt to assist subscribers in arranging alternative
means to receive network channels, including migration to local channels by satellite where
available, and free off air antenna offers in other markets. However, we cannot predict how many
subscribers might ultimately cancel their primary DISH Network programming as a result of
termination of their distant network channels. We could be required to terminate distant network
programming to all subscribers in the event the plaintiffs prevail on their cross-appeal and we are
permanently enjoined from delivering all distant network channels. Termination of distant network
programming to subscribers would result in a reduction in average monthly revenue per subscriber
and a temporary increase in subscriber churn.
Increases in piracy or theft of our signal, or our competitors signals, also could cause
subscriber churn to increase in future periods. We continue to respond to compromises of our
encryption system with security measures intended to make signal theft of our programming more
difficult. In order to combat piracy and maintain the functionality of active set-top boxes,
we are in the process of replacing older generation smart cards with newer generation smart cards.
We expect to complete the replacement of older generation smart cards during the second half of 2005.
However, there can be no assurance that these security measures or any future security measures we
may implement will be effective in reducing piracy of our programming signals.
Additionally, as the size of our subscriber base continues to increase, even if percentage
subscriber churn remains constant, increasing numbers of gross new DISH Network subscribers are
required to sustain net subscriber growth.
Subscriber acquisition and retention costs.
As previously described, we generally subsidize
installation and all or a portion of the cost of EchoStar receiver systems in order to attract new
DISH Network subscribers. Our costs to acquire subscribers, and to a lesser extent our subscriber
retention costs, can vary significantly from period to period and can cause material variability to
our net income (loss) and free cash flow. While there can be no assurance, we believe continued
tightening of credit requirements, together with promotions tailored towards subscribers with
multiple receivers and advanced products such as digital video recorders and high definition
receivers, will attract better long-term subscribers. Our Subscriber
acquisition costs, both in the aggregate and on a per new subscriber activation basis, or SAC, may
materially increase in the future 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.
Our equipment lease penetration increased during the year ended December 31, 2004 as compared to
the same period in 2003. This reduced our Subscriber acquisition costs and SAC for the current
period, and resulted in an increase in capital expenditures. In the event we
continue to increase our equipment lease penetration, our SAC will continue to be positively
impacted and our capital expenditures will continue to increase. Although we
believe these increase in capital expenditures have been, and will continue to
be, mitigated by equipment returned from disconnected customers that has been or will be
redeployed, new compression technologies will inevitably render some portion of our current and
future EchoStar receivers obsolete, and we will incur additional costs, which may be substantial,
to upgrade or replace these set-top boxes.
In an effort to reduce subscriber turnover, we offer various programs to existing subscribers
including programs for new and upgraded equipment. We generally subsidize installation and all or
a portion of the cost of EchoStar receivers pursuant to our subscriber retention programs. During
the second half of 2004, we expanded our retention program by offering to lease additional
receivers to existing subscribers. Our capital expenditures related to subscriber retention
programs could increase in the future to the extent we increase penetration of our existing
subscriber equipment lease program.
54
|
|
Item 7.
|
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Continued
|
Cash necessary to fund retention programs and total subscriber acquisition costs are expected to be
satisfied from existing cash and marketable investment securities balances and cash generated from
operations to the extent available. We may, however, decide to raise additional capital in the
future to meet these requirements. If we decided to raise capital today, a variety of debt and
equity funding sources would likely be available to us. However, there can be no assurance that
additional financing will be available on acceptable terms, or at all, if needed in the future.
Obligations and Future Capital Requirements
Contractual obligations and off-balance sheet arrangements.
We have never engaged in off-balance sheet
financing activities. Future maturities of our outstanding debt and contractual obligations are
summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments due by period
|
|
|
|
Total
|
|
|
2005
|
|
|
2006-2007
|
|
|
2008-2009
|
|
|
Thereafter
|
|
|
|
(In thousands)
|
|
Long-term debt obligations
|
|
$
|
5,471,153
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
2,946,153
|
|
|
$
|
2,525,000
|
|
Satellite-related obligations
|
|
|
2,231,363
|
|
|
|
184,909
|
|
|
|
546,664
|
|
|
|
432,335
|
|
|
|
1,067,455
|
|
Capital lease obligation
|
|
|
286,605
|
|
|
|
28,463
|
|
|
|
41,043
|
|
|
|
49,687
|
|
|
|
167,412
|
|
Operating lease obligations
|
|
|
84,000
|
|
|
|
24,873
|
|
|
|
40,822
|
|
|
|
15,746
|
|
|
|
2,559
|
|
Purchase obligations
|
|
|
1,449,183
|
|
|
|
1,233,437
|
|
|
|
91,729
|
|
|
|
98,060
|
|
|
|
25,957
|
|
Mortgages and other notes payable
|
|
|
45,130
|
|
|
|
16,599
|
|
|
|
7,842
|
|
|
|
4,354
|
|
|
|
16,335
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
9,567,434
|
|
|
$
|
1,488,281
|
|
|
$
|
728,100
|
|
|
$
|
3,546,335
|
|
|
$
|
3,804,718
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest on Long-Term Debt
We have quarterly and semi-annual cash interest requirements for our outstanding long-term debt
securities (See Note 4 in the Notes to the Consolidated Financial Statements in Item 15 of this
Annual Report on Form 10-K for details), as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Annual
|
|
|
|
Quarterly/Semi-Annual
|
|
|
Debt Service
|
|
|
|
Payment Dates
|
|
|
Requirements
|
|
5 3/4% Convertible Subordinated Notes due 2008
|
|
May 15 and November 15
|
|
$
|
57,500,000
|
|
9 1/8% Senior Notes due 2009
|
|
January 15 and July 15
|
|
$
|
40,711,461
|
|
3% Convertible Subordinated Notes due 2010
|
|
June 30 and December 31
|
|
$
|
15,000,000
|
|
Floating Rate Senior Notes due 2008
|
|
January 1, April 1,
July 1 and October 1
|
|
$
|
29,050,000
|
|
5 3/4% Senior Notes due 2008
|
|
April 1 and October 1
|
|
$
|
57,500,000
|
|
6 3/8% Senior Notes due 2011
|
|
April 1 and October 1
|
|
$
|
63,750,000
|
|
3% Convertible Subordinated Notes due 2011
|
|
June 30 and December 31
|
|
$
|
750,000
|
|
6 5/8% Senior Notes due 2014
|
|
April 1 and October 1
|
|
$
|
66,250,000
|
|
55
|
|
Item 7.
|
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Continued
|
Interest accrues on our Floating Rate Senior Notes due 2008 based on the three month London Interbank
Offered Rate (LIBOR) plus 3.25%. The interest rate at December 31, 2004 was 5.81%.
Semi-annual cash interest requirements related to our 3% Convertible Subordinated Note due
2011 commenced on December 31, 2004. Semi-annual cash interest requirements related to our 6 5/8%
Senior Notes due 2014 will commence on April 1, 2005. There are no scheduled principal payment or
sinking fund requirements prior to maturity on any of these notes.
We also have periodic cash interest requirements for our outstanding capital lease obligation,
mortgages and other notes payable. Future maturities of the cash interest requirements for all of
our outstanding long-term debt are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments due by period
|
|
|
|
Total
|
|
|
2005
|
|
|
2006-2007
|
|
|
2008-2009
|
|
|
Thereafter
|
|
|
|
(In thousands)
|
|
Long-term debt
|
|
$
|
1,927,018
|
|
|
$
|
329,818
|
|
|
$
|
661,023
|
|
|
$
|
467,867
|
|
|
$
|
468,310
|
|
Capital lease obligation, mortgages and other notes payable
|
|
|
132,741
|
|
|
|
22,515
|
|
|
|
39,612
|
|
|
|
32,108
|
|
|
|
38,506
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,059,759
|
|
|
$
|
352,333
|
|
|
$
|
700,635
|
|
|
$
|
499,975
|
|
|
$
|
506,816
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Satellite-Related Obligations
Satellites under Construction.
We have entered into contracts to construct four satellites, see
Item 1 Business Our Satellites.
|
|
During July 2003, we entered into a contract for the construction of EchoStar X,. We
anticipate construction to be completed and that this satellite will be launched during
the fourth quarter of 2005.
|
|
|
During December 2004, we entered into a contract for the construction of EchoStar XI.
Construction is expected to be completed during 2007 and is contingent upon, among other
things, finalization of the necessary bankruptcy court approvals. There can be no
assurance these approvals will be finalized or that the satellite will ultimately be
launched. Future commitments related to this satellite are included in the table above.
|
|
|
During December 2004 and March 2005, we entered into contracts for the construction of
two spot beam Ka-band satellites, which are expected to be completed during 2008.
|
Satellites under Lease.
We have also entered into satellite service agreements to lease
capacity on five satellites, see Item 1 Business Our Satellites.
|
|
In connection with the SES Americom agreement for the lease of the AMC-15 satellite
discussed under
Capital Lease Obligation
below, we are currently leasing all of the
capacity on an existing in-orbit FSS satellite, AMC-2. Our lease of this satellite will
continue at least until AMC-15 is placed in service at this location, which is expected to
occur during the second half of 2005.
|
|
|
During February 2004, we entered into two additional satellite service agreements for
capacity on FSS satellites. The satellite under the first of these agreements, AMC-16,
launched during the fourth quarter of 2004 and commenced commercial operations during the
first quarter of 2005. This ten-year satellite service agreement is renewable by us on a
year to year basis following the initial term, and provides us with certain rights to
replacement satellites. In connection with this agreement, we prepaid $29.0 million
during 2004 and are required to make monthly payments for this satellite for the ten-year
period following commencement of commercial operations.
|
56
|
|
Item 7.
|
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Continued
|
|
|
The satellite under the second of these agreements is planned for launch during 2006
and is contingent upon, among other things, obtaining necessary regulatory approvals.
There can be no assurance that we will obtain these approvals or that the satellite will
ultimately be launched. In connection with this agreement, we prepaid $55.0 million
during 2004 and are required to make monthly payments for this satellite for the 15-year
period following commencement of commercial operations. Future commitments related to
this satellite are included in the table above.
|
|
|
During August 2003, we exercised our option under the SES Americom agreement for AMC-15
to also lease for an initial ten-year term all of the capacity on a new DBS satellite at
an orbital location to be determined at a future date. In connection with this agreement,
we prepaid $20.9 million to SES Americom during 2004. We anticipate that this satellite
will be launched during 2006.
|
As a result of our recent agreements with fixed satellite service providers and for the
construction of EchoStar X, EchoStar XI, and the Ka-band satellites, our obligations for payments
related to satellites have increased substantially. In certain circumstances the dates on which we
are obligated to make these payments could be delayed. These amounts will increase when we
commence payments for the launches of EchoStar XI and the Ka-band satellites, and would further
increase to the extent we procure insurance for our satellites or contract for the construction,
launch or lease of additional satellites.
Capital Lease Obligation
During March 2003, we entered into a satellite service agreement with SES Americom for all of the
capacity on a new FSS satellite, AMC-15. The ten-year satellite service agreement for the new
satellite is renewable by us on a year to year basis following the initial term, and provides us
with certain rights to replacement satellites. We are required to make monthly payments to SES
Americom for this satellite over the next ten years beginning in 2005. In accordance with
Statement of Financial Accounting Standards No. 13 (SFAS 13), we have accounted for the satellite
component of this agreement as a capital lease (See Note 4 in the Notes to the Consolidated
Financial Statements in Item 15 of this Annual Report on Form 10-K). The commitment related to the
present value of the net future minimum lease payments for the satellite component of the agreement
is included under
Capital Lease Obligation
in the table above. The commitment related to future
minimum payments designated for the lease of the 105 degree orbital location and other executory
costs is included under
Satellite-Related Obligations
in the table above. The commitment related
to the amount representing interest is included under
Interest on Long-Term Debt
in the table
above.
Purchase Obligations
Our 2005 purchase obligations primarily consist of binding purchase orders for EchoStar receiver
systems and related equipment, and for products and services related to the operation of our DISH
Network. Our purchase obligations also include certain guaranteed fixed contractual commitments to purchase programming content. Our purchase obligations can fluctuate significantly from period to period due to, among
other things, managements control of inventory levels, and can materially impact our future
operating asset and liability balances, and our future working capital requirements.
Programming Contracts
In the normal course of business, we have also entered into numerous contracts to purchase
programming content whereby our payment obligations are fully contingent on the number of
subscribers to which we provide the respective content. These programming commitments are not
included in the table above. The terms of our contracts typically range from one to ten years.
Our programming expenses will continue to increase to the extent we are successful growing our
subscriber base. Programming expenses are included in Subscriber-related expenses in the
accompanying consolidated statements of operations and comprehensive income (loss).
57
|
|
Item 7.
|
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Continued
|
Satellite insurance.
We currently do not carry insurance for any of our 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, programming continuity
cannot be assured in the event of multiple satellite losses. Further, we depend on our EchoStar
VIII satellite to provide local channels to over 40 markets until at least such time that our
EchoStar X satellite is launched. In the event that EchoStar VIII experienced a total or
substantial failure, we could transfer many, but not all of those channels to other in-orbit
satellites.
Future capital requirements.
In addition to our DBS business plan, we are exploring business plans
for FSS Ku-(extended) band and FSS Ka-band satellite systems, including licenses to operate at the
97, 109, 113, 117 and 121 degree orbital locations.
As a result of expected penetration of our new and existing subscriber equipment lease programs, we
anticipate an increase in capitalized subscriber equipment during 2005. In addition, in order to
support the continued increase in the number of local markets in which we offer local network
channels by satellite and for possible future broadband services, during 2005 we are constructing several new mini digital broadcast operations centers. As previously discussed, on January 20,
2005, we agreed to purchase certain satellite assets from Rainbow DBS Co., a subsidiary of
Cablevision Systems Corporation, for $200.0 million. The transaction is subject to customary
conditions, including regulatory approval by the FCC. As previously discussed, we expect our
capital expenditures for 2005 to be higher than 2004 capital expenditures of $980.6 million.
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. Future material investments or acquisitions may require that we
obtain additional capital. Also, as discussed previously, our Board of Directors approved the
repurchase of up to an additional $1.0 billion of our Class A common stock, which could require
that we raise additional capital. There can be no assurance that we could raise all required
capital or that required capital would be available on acceptable terms.
Security Ratings
Our current credit ratings are Ba3 and BB- on our long-term senior notes, and B2 and B with respect
to our publicly traded convertible subordinated notes, as rated by Moodys Investor Service and
Standard and Poors Rating Service, respectively. Debt ratings by the various rating agencies
reflect each agencys opinion of the ability of issuers to repay debt obligations as they come due.
With respect to Moodys, the Ba3 rating for our senior debt indicates that the obligations are
judged to have speculative elements and are subject to substantial credit risk. For S&P, the BB-
rating indicates the issuer is less vulnerable to nonpayment of interest and principal obligations
than other speculative issues. However, the issuer faces major ongoing uncertainties or exposure
to adverse business, financial, or economic conditions, which could lead to the obligors
inadequate capacity to meet its financial commitment on the obligation.
With respect to Moodys, the B2 rating for our publicly traded convertible subordinated debt
indicates that the security is considered speculative and is subject to high credit risk. For S&P,
the B rating indicates the issuer is more vulnerable to nonpayment of interest and principal
obligations, but the issuer currently has the capacity to meet its financial commitment on the
obligation. 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 Estimates
The preparation of the consolidated financial statements in conformity with GAAP requires
management to make estimates, judgments and assumptions that affect amounts reported therein.
Management bases its estimates, judgments and assumptions on historical experience and on various
other factors that are believed to be reasonable under the circumstances. Due to the inherent
uncertainty involved in making estimates, actual results reported in future periods may be affected
by changes in those estimates. The following represent what we believe are the critical accounting
policies that may involve a high degree of estimation, judgment and complexity. For a summary of
our
58
|
|
Item 7.
|
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Continued
|
significant accounting policies, including those discussed below, see Note 2 in the Notes to
the Consolidated Financial Statements in Item 15 of this Annual Report on Form 10-K.
|
|
Capitalized satellite receivers
.
Since we retain ownership of equipment provided pursuant
to our new and existing subscriber equipment lease programs, we capitalize and depreciate
equipment costs that would otherwise be expensed at the time of sale. Such capitalized
costs are depreciated over the estimated useful life of the equipment, which is based upon, among other things, managements judgment of the risk of technological obsolescence. Because of the inherent
difficulty of making this estimate, the estimated useful life of capitalized equipment may
change based on, among other things, historical experience and changes in technology as
well as our response to competitive conditions.
|
|
|
|
Accounting for investments in private and publicly-traded securities
.
We hold debt and
equity interests in companies, some of which are publicly traded and have highly volatile
prices. We record an investment impairment charge when we believe an investment has
experienced a decline in value that is judged to be other than temporary. We monitor our
investments for impairment by considering current factors including economic environment,
market conditions and the operational performance and other specific factors relating to
the business underlying the investment. Future adverse changes in these factors could
result in losses or an inability to recover the carrying value of the investments that may
not be reflected in an investments current carrying value, thereby possibly requiring an
impairment charge in the future.
|
|
|
|
Valuation of Long-Lived Assets
. We evaluate the carrying value of long-lived assets to
be held and used, other than goodwill and intangible assets with indefinite lives, when
events and circumstances warrant such a review. The carrying value of a long-lived asset
is considered impaired when the anticipated undiscounted cash flow from such asset is less
than its carrying value. In that event, a loss is recognized based on the amount by which
the carrying value exceeds the fair value of the long-lived asset. Fair value is
determined primarily using the estimated cash flows associated with the asset under review,
discounted at a rate commensurate with the risk involved. Losses on long-lived assets to
be disposed of by sale are determined in a similar manner, except that fair values are
reduced for selling costs. Changes in estimates of future cash flows could result in a
write-down of the asset in a future period.
|
|
|
|
Valuation of Goodwill and Intangible Assets with Indefinite Lives
.
We evaluate the
carrying value of goodwill and intangible assets with indefinite lives annually in the
fourth quarter, and also when events and circumstances warrant. We use estimates of fair
value to determine the amount of impairment, if any, of recorded goodwill and intangible
assets with indefinite lives. Fair value is determined primarily using the estimated
future cash flows, discounted at a rate commensurate with the risk involved. Changes in
our estimates of future cash flows could result in a write-down of goodwill and intangible
assets with indefinite lives in a future period, which could be material to our
consolidated results of operations and financial position.
|
|
|
|
Smart card replacement
.
We use conditional access technology, including embedding
microchips in credit card-sized access cards, or smart cards, to encrypt our programming
so only those who pay can receive it. Our signal encryption has been pirated, allowing
illegal receipt of our programming, and our security systems could be further compromised
in the future. Theft of our programming reduces future potential revenue and increases
our net subscriber acquisition costs. In addition, theft of our competitors programming
can also increase our churn. Compromises of our encryption technology could also
adversely affect our ability to contract for video and audio services provided by
programmers. To further combat piracy and maintain the functionality of active set-top
boxes, we are in the process of replacing older generation smart cards with newer
generation smart cards. We have accrued a liability for the replacement of smart cards in
satellite receivers sold to and owned by subscribers based on the estimated number of
cards that will be needed to execute our plan. This estimate is based on a number of
variables, including historical subscriber churn trends and the estimated per card costs
for smart card replacements. Changes in, among other things, the timing of the
replacement plan could result in increases or decreases in the smart card replacement
reserve. We expect to complete the replacement of older generation smart cards during the
second half of 2005.
|
|
|
|
Allowance for Doubtful Accounts
.
Management estimates the amount of required allowances
for the potential non-collectibility of accounts receivable based upon past collection
experience and consideration of other relevant factors. However, past experience may not
be indicative of future collections and therefore
|
59
|
|
Item 7.
|
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Continued
|
|
|
additional charges could be incurred in
the future to reflect differences between estimated and actual collections.
|
|
|
|
Income taxes
.
Our income tax policy is to record 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 the guidelines set forth in Statement of Financial Accounting
Standards No. 109, Accounting for Income Taxes regarding the recoverability of any tax
assets recorded on the balance sheet and provide any necessary valuation allowances as
required. Determining necessary valuation allowances requires us to make assessments about
the timing of future events, including the probability of expected future taxable income
and available tax planning opportunities. In accordance with SFAS 109, we periodically
evaluate our need for a valuation allowance based on both historical evidence, including
trends, and future expectations in each reporting period. Future performance could have a
significant effect on the realization of tax benefits, or reversals of valuation
allowances, as reported in our results of operations. Reversing our current recorded
valuation allowance would have a material positive impact on our Net income (loss) for
future periods.
|
|
|
|
Contingent liabilities
.
A significant amount of management judgment is required in
determining when, or if, an accrual should be recorded for a contingency and the amount of
such accrual. Estimates are developed in consultation with outside counsel and are based
on an analysis of potential outcomes. Due to the uncertainty of determining the likelihood
of a future event occurring and the potential financial statement impact of such an event,
it is possible that upon further development or resolution of a contingency matter, a
charge could be recorded in a future period that would be material to our consolidated
results of operations and financial position.
|
New Accounting Pronouncements
In December 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting
Standards No. 123 (Revised 2004), Share Based Payment (SFAS 123®) which (i) revises SFAS No.
123, Accounting for Stock-Based Compensation, (SFAS 123) to eliminate the disclosure only
provisions of that statement and the alternative to follow the intrinsic value method of accounting
under Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB
25) and its related implementation guidance, and (ii) requires a public entity to measure the cost
of employee services received in exchange for an award of equity instruments, including grants of
employee stock options, based on the grant-date fair value of the award and recognize that cost in
its results of operations over the period during which an employee is required to provide the
requisite service in exchange for that award. The statement is effective for financial statements
as of the beginning of the first interim period that begins after June 15, 2005. Companies may
elect to apply this statement either prospectively, or on a modified version of retrospective
application under which financial statements for prior periods are adjusted on a basis consistent
with the pro forma disclosures required for those periods under SFAS 123. We are currently
evaluating which transitional provision and fair value methodology we will follow. However, we
expect that any expense associated with the adoption of the provisions of SFAS 123® will have a
material negative impact on our results of operations.
Seasonality
Our revenues vary throughout the year. As is typical in the subscription television service
industry, the first half of the year generally produces 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 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.
60
Item 7A.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market Risks Associated With Financial Instruments
As of December 31, 2004, our restricted and unrestricted cash, cash equivalents and marketable
investment securities had a fair market value of approximately $1.213 billion. Of that amount, a
total of approximately $1.039 billion was invested in: (a) cash; (b) debt instruments of the U.S.
Government and its agencies; (c) commercial paper and notes with an overall 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, among other things, fund
operations, make strategic investments and expand the business. Consequently, the size of this
portfolio fluctuates significantly as cash is received and used in
our business.
Our restricted and unrestricted cash, cash equivalents and marketable investment securities had an
average annual return for the year ended December 31, 2004 of approximately 2.1%. A hypothetical
10.0% decrease in interest rates would result in a decrease of approximately $4.2 million in annual
interest income. 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, 2004, all of the $1.039 billion was invested in fixed or variable rate instruments
or money market type accounts. While an increase in interest rates would ordinarily adversely
impact the fair market value of fixed and variable rate investments, we normally hold these
investments to maturity. Consequently, neither interest rate fluctuations nor other market risks
typically result in significant realized 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.
Included in our marketable securities portfolio balance is debt and equity of public and private
companies we hold for strategic and financial purposes. As of December 31, 2004, we held strategic
and financial debt and equity investments of public companies with a fair market value of
approximately $174.3 million. We may make additional strategic and financial investments in debt
and other equity securities in the future. The fair market value of our strategic and financial
debt and equity investments can 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 10.0%
adverse change in the price of our public strategic debt and equity investments would result in
approximately a $17.4 million decrease in the fair market value of that portfolio. The fair market
value of our strategic debt investments are currently not materially impacted by interest rate
fluctuations due to the nature of these investments.
We currently classify all marketable investment securities as available-for-sale. We adjust the
carrying value of our available-for-sale securities to fair market value and report the related
temporary unrealized gains and losses as a separate component of Accumulated other comprehensive
income within Total stockholders equity (deficit), net of related deferred income tax.
Declines in the fair market value of a marketable investment security which are estimated to be
other than temporary are recognized in the consolidated 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 fair market value of
these securities are other than temporary. This quarterly evaluation consists of reviewing, among
other things, the fair market value of our marketable investment securities compared to the
carrying amount, 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 market value of investments below cost basis for a period of less than six
months are considered to be temporary. Declines in the fair market 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 market 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.
61
|
|
Item 7A.
|
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Continued
|
As of December 31, 2004, we had unrealized gains of approximately $51.8 million as a part of
Accumulated other comprehensive income within Total stockholders equity (deficit). During the
year ended December 31, 2004, we did not record any charge to earnings for other than temporary
declines in the fair market value of our marketable investment securities, and we realized net
losses of approximately $9.0 million on sales of marketable and non-marketable investment
securities. Realized gains and losses are accounted for on the specific identification method. During the twelve months ended December 31, 2004, our portfolio generally, and our
strategic investments particularly, has experienced and continues to experience volatility. If the fair
market value of our marketable securities portfolio does not remain 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 charges to earnings in future
periods equal to the amount of the decline in fair market value.
We also have strategic equity investments in certain non-marketable investment securities. We
account for such unconsolidated investments under either the equity method or cost method of
accounting. These securities are not publicly traded and accordingly, it is not practical to
regularly estimate the fair value of these investments, however, these investments are subject to
an evaluation for other than temporary impairment on a quarterly basis. This quarterly evaluation
consists of reviewing, among other things, company business plans and current financial statements,
if available, for factors that may indicate an impairment of 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. The fair value of these investments is not estimated
unless there are identified changes in circumstances that are likely to have a significant adverse
effect on the fair value of the investment. Our ability to realize value from our strategic
investments in companies that are not publicly traded is dependent on the success of their business
and their 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 we will not be able to obtain full
value for them. For the year ended December 31, 2004, we had $90.4 million aggregate carrying
amount of non-marketable and unconsolidated strategic equity investments, of which $52.7 million was
accounted for under the cost method. During the year ended December 31, 2004, we did not record
any impairment charges with respect to these investments.
As of December 31, 2004, we estimated the fair value of our fixed-rate debt and mortgages and other
notes payable to be approximately $5.924 billion using quoted market prices where available, and
third party valuations or discounted cash flow analyses when it was practicable to do so. The
interest rates assumed in these 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
10.0% decrease in assumed interest rates would increase the fair value of our debt by approximately
$161.2 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, 2004, a hypothetical 10.0%
increase in assumed interest rates would increase our annual interest expense by approximately
$35.6 million.
We have not used derivative financial instruments for hedging or speculative purposes.
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
|
Not applicable.
|
|
Item 9A.
|
CONTROLS AND PROCEDURES
|
Under the supervision and with the participation of our management, including our Chief Executive
Officer and Principal Financial Officer, we evaluated the effectiveness of the design and operation
of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities
Exchange Act of 1934) as of the end of the period covered by this report. Based on that
evaluation, our Chief Executive Officer and Principal Financial Officer concluded that our
disclosure controls and procedures are effective.
62
As part of our evaluation of our disclosure controls and procedures and internal control over
financial reporting, we identified certain deficiencies in the Companys internal control over
financial reporting that constitute a significant deficiency as defined by the Public Company
Accounting Oversight Boards Auditing Standard No. 2. This significant deficiency resulted in part
from the failure to maintain accurate books and records identified by the Review described under
Item 1 Description of Business Recent Developments Internal Review and Filing of Purported
Securities Class Action. That Review reported one instance in which one of our executive officers
in charge of certain business functions directed the preparation in prior years of inaccurate
documentation that was used to determine payments made to a vendor. We have also identified
several other significant deficiencies, none of which individually or in the aggregate constituted
a material weakness in our internal control over financial reporting as of December 31, 2004.
Managements Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal
control over financial reporting. Our internal control over financial reporting is
designed to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted
accounting principles.
Our internal control over financial reporting includes those policies and procedures that:
|
(i)
|
pertain to the maintenance of records that, in reasonable detail, accurately and
fairly reflect our transactions and dispositions of our assets;
|
|
(ii)
|
provide reasonable assurance that our transactions are recorded as necessary to
permit preparation of our financial statements in accordance with generally accepted
accounting principles, and that our receipts and expenditures are being made only in
accordance with authorizations of our management and our directors; and
|
|
(iii)
|
provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of our assets that could have a material
effect on our financial statements.
|
Because of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with policies or procedures may deteriorate.
Our management conducted an evaluation of the effectiveness of our internal control over
financial reporting based on the framework in Internal ControlIntegrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, our
management concluded that our internal control over financial reporting was effective as
of December 31, 2004.
The scope of managements assessment of the effectiveness of internal control over financial
reporting excludes the businesses and related assets of Gemstars Superstar/Netlink Group L.L.C.
(SNG), UVTV distribution, and SpaceCom, which we acquired in a purchase business combination
during 2004. Our consolidated total revenues for the year ended December 31, 2004 were
approximately $7.151 billion, of which the revenues of SNG, UVTV distribution and SpaceCom
represented $59.0 million, or less than 1%. Our consolidated total assets as of December 31, 2004
were $6.029 billion, of which the assets of SNG, UVTV distribution and SpaceCom represented $12.9
million, or less than 1%.
Our managements assessment of the effectiveness of our internal control over financial reporting
as of December 31, 2004 has been audited by KPMG LLP, an independent registered public accounting
firm, as stated in their attestation report which is included herein.
63
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
EchoStar Communications Corporation:
We have audited managements assessment, included in the accompanying Managements Report on
Internal Control Over Financial Reporting, that EchoStar Communications Corporation maintained
effective internal control over financial reporting as of December 31, 2004, based on criteria
established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). EchoStar Communications Corporations management
is responsible for maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting. Our responsibility is
to express an opinion on managements assessment and an opinion on the effectiveness of the
Companys internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, evaluating managements assessment, testing and evaluating the
design and operating effectiveness of internal control, and performing such other procedures as we
considered necessary in the circumstances. We believe that our audit provides a reasonable basis
for our opinion.
A companys internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles. A
companys internal control over financial reporting includes those policies and procedures that
(1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management
and directors of the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the companys assets that could
have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
In our opinion, managements assessment that EchoStar Communications Corporation maintained
effective internal control over financial reporting as of December 31, 2004, is fairly stated, in
all material respects, based on criteria established in Internal ControlIntegrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Also, in our
opinion, EchoStar Communications Corporation maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2004, based on criteria established in
Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO).
Echostar Communications Corporations assessment of the effectiveness of internal control over
financial reporting excludes the businesses and related assets of Gemstars Superstar/Netlink Group
L.L.C. (SNG), UVTV distribution, and SpaceCom, which were acquired in a purchase business
combination during 2004. Echostar Communications Corporations consolidated total revenues for the
year ended December 31, 2004 were approximately $7.151 billion, of which the revenues of SNG, UVTV
distribution and SpaceCom represented $59.0 million, or less than 1%. Echostar Communications
Corporations consolidated total assets as of December 31, 2004 were $6.029 billion, of which the
assets of SNG, UVTV distribution and SpaceCom represented $12.9 million, or less than 1%.
64
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the consolidated balance sheets of EchoStar Communications Corporation and
subsidiaries as of December 31, 2004 and 2003, and the related consolidated statements of
operations and comprehensive income (loss), stockholders equity (deficit), and cash flows for each
of the years in the three-year period ended December 31, 2004,
and our report dated March 16, 2005
expressed an unqualified opinion on those consolidated financial statements.
KPMG LLP
Denver, Colorado
March 16, 2005
65
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 2005 Annual Meeting of Shareholders
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 22 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 2005 Annual
Meeting of Shareholders under the caption Executive Compensation and Other Information, which
information is hereby incorporated herein by reference.
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|
Item 12.
|
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS
|
The information required by this Item will be set forth in our Proxy Statement for the 2005 Annual
Meeting of Shareholders under the captions Election of Directors, Equity Security Ownership and
Equity Compensation Plan Information, 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 2005
Annual Meeting of Shareholders under the caption Certain Relationships and Related
Transactions, which information is hereby incorporated herein by reference.
Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this Item will be set forth in our Proxy Statement for the 2005
Annual Meeting of Shareholders under the caption Principal Accountant Fees and Services, which
information is hereby incorporated herein by reference.
PART IV
Item 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
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(a)
|
The following documents are filed as part of this report:
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Page
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|
Report of KPMG LLP, Independent Registered Public Accounting Firm
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F-2
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Consolidated Balance Sheets at December 31, 2004 and 2003
|
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F-3
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Consolidated Statements of Operations and Comprehensive Income (Loss) for the years ended December 31, 2004, 2003 and 2002
|
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F-4
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Consolidated Statements of Changes in Stockholders Equity (Deficit) for the years ended December 31, 2002, 2003 and 2004
|
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F-5
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Consolidated Statements of Cash Flows for the years ended December 31, 2004, 2003 and 2002
|
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F-6
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Notes to Consolidated Financial Statements
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F-7
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(2)
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Financial Statement Schedules
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None. All schedules have been included in the Consolidated Financial Statements or
Notes thereto.
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(3)
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Exhibits
|
66
|
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3.1(a)*
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Amended and Restated Articles of Incorporation of EchoStar (incorporated by
reference to Exhibit 3.1(a) on the Quarterly Report on Form 10-Q of EchoStar for
the quarter ended June 30, 2003, Commission File No. 0-26176).
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3.1(b)*
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Amended and Restated Bylaws of EchoStar (incorporated by reference to
Exhibit 3.1(b) on the Quarterly Report on Form 10-Q of EchoStar for the quarter
ended June 30, 2003, Commission File No. 0-26176).
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|
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3.2(a)*
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Articles of Incorporation of EDBS (incorporated by reference to Exhibit 3.4(a) to
the Registration Statement on Form S-4 of EDBS, Registration No. 333-31929).
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|
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3.2(b)*
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Bylaws of EDBS (incorporated by reference to Exhibit 3.4(b) to the Registration
Statement on Form S-4 of EDBS, Registration No. 333-31929).
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4.1*
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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).
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|
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4.2*
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Indenture relating to 10 3/8% Senior Notes due 2007, dated as of November 12,
2002, between EDBS and U.S. Bank Trust National Association, as trustee
(incorporated by reference to Exhibit 4.8 to the Annual Report on Form 10-K of
EchoStar for the year ended December 31, 2002, Commission File No.0-26176).
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4.3*
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Indenture, relating to the 5 3/4% Convertible Subordinated Notes Due 2008, dated
as of May 31, 2001 between EchoStar 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).
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4.4*
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Registration Rights Agreement, relating to the 5 3/4% Convertible Subordinated
Notes Due 2008, dated as of May 31, 2001, by and between EchoStar and UBS Warburg
L.L.C. (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).
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|
|
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4.5*
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|
Indenture, relating to the 9 1/8% Senior Notes Due 2009, dated as of December 28,
2001 between EDBS and U.S. Bank Trust National Association, as Trustee
(incorporated by reference to Exhibit 4.17 to the Annual Report on Form 10-K of
EchoStar for the year ended December 31, 2001, Commission File No. 0-26176).
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4.6*
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Registration Rights Agreement, relating to the 9 1/8% Senior Notes Due 2009,
dated as of December 28, 2001, by and among EDBS and Deutsche Banc Alex. Brown,
Inc., Credit Suisse First Boston Corporation, Lehman Brothers Inc. and UBS
Warburg L.L.C. (incorporated by reference to Exhibit 4.18 to the Annual Report on
Form 10-K of EchoStar for the year ended December 31, 2001, Commission File No.
0-26176).
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4.7*
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Indenture, relating to EDBS 5
3
/
4
% Senior Notes due 2008, dated as of October 2,
2003, between EDBS 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, 2003, Commission File No.0-26176).
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4.8*
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|
Indenture, relating to EDBS 6 3/8% Senior Notes due 2011, dated as of October 2,
2003, between EDBS and U.S. Bank Trust National Association, as Trustee
(incorporated by reference to Exhibit 4.2 to the Quarterly Report on Form 10-Q of
EchoStar for the quarter ended September 30, 2003, Commission File No.0-26176).
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67
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4.9*
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|
Indenture, relating to EDBS Floating Senior Notes due 2008, dated as of October
2, 2003, between EDBS and U.S. Bank Trust National Association, as Trustee
(incorporated by reference to Exhibit 4.3 to the Quarterly Report on Form 10-Q of
EchoStar for the quarter ended September 30, 2003, Commission File No. 0-26176).
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4.10*
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Registration Rights Agreement dated as of October 2, 2003 among EDBS and the
other parties named herein (incorporated by reference to Exhibit 4.4 to the
Quarterly Report on Form 10-Q of EchoStar for the quarter ended September 30,
2003, Commission File No. 0-26176).
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4.11*
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3% Convertible Subordinated Note due 2010 (incorporated by reference to Exhibit
4.5 to the Quarterly Report on Form 10-Q of EchoStar for the quarter ended
September 30, 2003, Commission File No. 0-26176).
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4.12*
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First Supplemental Indenture, relating to the 9 1/8% Senior Notes Due 2009, dated
as of December 31, 2003 between EDBS and U.S. Bank Trust National Association, as
Trustee (incorporated by reference to Exhibit 4.12 to the Annual Report on Form 10-K for the year ended December 31, 2003, Commission File No. 0-26176).
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4.13*
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First Supplemental Indenture, relating to the 5 3/4% Senior Notes Due 2008, dated
as of December 31, 2003 between EDBS and U.S. Bank Trust National Association, as
Trustee (incorporated by reference to Exhibit 4.13 to the Annual Report on Form 10-K for the year ended December 31, 2003, Commission File No. 0-26176).
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4.14*
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First Supplemental Indenture, relating to the 6 3/8% Senior Notes Due 2011, dated
as of December 31, 2003 between EDBS and U.S. Bank Trust National Association, as
Trustee (incorporated by reference to Exhibit 4.14 to the Annual Report on Form 10-K for the year ended December 31, 2003, Commission File No. 0-26176).
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4.15*
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|
First Supplemental Indenture, relating to the Floating Rate Senior Notes Due
2008, dated as of December 31, 2003 between EDBS and U.S. Bank Trust National
Association, as Trustee (incorporated by reference to Exhibit 4.15 to the Annual Report on Form 10-K for the year ended December 31, 2003, Commission File No. 0-26176).
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4.16*
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First Supplemental Indenture, relating to the 10 3/8% Senior Notes Due 2007,
dated as of December 31, 2003 between EDBS and U.S. Bank Trust National
Association, as Trustee (incorporated by reference to Exhibit 4.16 to the Annual Report on Form 10-K for the year ended December 31, 2003, Commission File No. 0-26176).
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10.1*
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Form of Satellite Launch Insurance Declarations (incorporated by reference to
Exhibit 10.10 to the Registration Statement on Form S-1 of Dish Ltd.,
Registration No. 33-81234).
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10.2*
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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 Ltd., Commission File No. 33-81234).
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10.3*
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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).**
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|
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10.4*
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|
Echostar 1999 Stock Incentive Plan (incorporated by reference to Exhibit C to
EchoStars Definitive Proxy Statement on Schedule 14A dated March 23, 1999).**
|
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10.5*
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|
1995 Non-employee Director Stock Option Plan (incorporated by reference to
Exhibit 4.4 to the Registration Statement on Form S-8 of Echostar, Registration
No. 333-05575).**
|
|
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|
10.6*
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|
2001 Non-employee Director Stock Option Plan (incorporated by reference to
Exhibit 4.4 to the Registration Statement on Form S-8 of Echostar, Registration
No. 333-66490).**
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10.7*
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|
2002 Class B CEO Stock Option Plan (incorporated by reference to Appendix A to
EchoStars Definitive Proxy Statement on Schedule 14A dated April 9, 2002).**
|
|
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|
10.8*
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|
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).
|
68
|
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10.9*
|
|
Agreement to Form NagraStar L.L.C., 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).
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|
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10.10*
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|
License and OEM Manufacturing Agreement, dated July 1, 2002, between EchoStar
Satellite Corporation, EchoStar Technologies Corporation and Thomson multimedia,
Inc. (incorporated by reference to Exhibit 10.1 to the Quarterly Report on Form
10-Q of EchoStar for the quarter ended September 30, 2002, Commission File No.
0-26176).***
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|
|
|
10.11*
|
|
Amendment No. 19 to License and OEM Manufacturing Agreement, dated July 1, 2002,
between EchoStar Satellite Corporation, EchoStar Technologies Corporation and
Thomson multimedia, Inc. (incorporated by reference to Exhibit 10.57 to the
Annual Report on Form 10-K of EchoStar for the year ended December 31, 2002,
Commission File No.0-26176).
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10.12*
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|
Satellite Service Agreement, dated as of March 21, 2003, between SES Americom,
Inc., EchoStar Satellite Corporation and EchoStar Communications Corporation
(incorporated by reference to Exhibit 10.1 to the Quarterly Report on Form 10-Q
of EchoStar for the quarter ended March 31, 2003, Commission File No.0-26176).
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|
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10.13*
|
|
Amendment No. 1 to Satellite Service Agreement dated March 31, 2003 between SES
Americom Inc. and EchoStar (incorporated by reference to Exhibit 10.1 to the
Quarterly Report on Form 10-Q of EchoStar for the quarter ended September 30,
2003, Commission File No.0-26176).
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|
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10.14*
|
|
Satellite Service Agreement dated as of August 13, 2003 between SES Americom Inc.
and EchoStar (incorporated by reference to Exhibit 10.2 to the Quarterly Report
on Form 10-Q of EchoStar for the quarter ended September 30, 2003, Commission
File No.0-26176).
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10.15*
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|
Satellite Service Agreement, dated February 19, 2004, between SES Americom, Inc.
and EchoStar (incorporated by reference to Exhibit 10.1 to the Quarterly Report
on Form 10-Q of EchoStar for the quarter ended March 31, 2004, Commission File
No.0-26176).
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10.16*
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|
Amendment No. 1 to Satellite Service Agreement, dated March 10, 2004, between SES
Americom, Inc. and EchoStar (incorporated by reference to Exhibit 10.2 to the
Quarterly Report on Form 10-Q of EchoStar for the quarter ended March 31, 2004,
Commission File No.0-26176).
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10.17*
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Amendment No. 3 to Satellite Service Agreement, dated February 19, 2004, between
SES Americom, Inc. and EchoStar (incorporated by reference to Exhibit 10.3 to the
Quarterly Report on Form 10-Q of EchoStar for the quarter ended March 31, 2004,
Commission File No.0-26176).
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10.18*
|
|
Whole RF Channel Service Agreement, dated February 4, 2004, between Telesat
Canada and EchoStar (incorporated by reference to Exhibit 10.4 to the Quarterly
Report on Form 10-Q of EchoStar for the quarter ended March 31, 2004, Commission
File No.0-26176).
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|
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|
10.19*
|
|
Letter Amendment to Whole RF Channel Service Agreement, dated March 25, 2004,
between Telesat Canada and EchoStar (incorporated by reference to Exhibit 10.5 to
the Quarterly Report on Form 10-Q of EchoStar for the quarter ended March 31,
2004, Commission File No.0-26176).
|
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10.20*
|
|
Amendment No. 2 to Satellite Service Agreement, dated April 30, 2004, between SES
Americom, Inc. and EchoStar (incorporated by reference to Exhibit 10.1 to the
Quarterly Report on Form 10-Q of EchoStar for the quarter ended June 30, 2004,
Commission File No.0-26176).
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69
|
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10.21*
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Second Amendment to Whole RF Channel Service Agreement, dated May 5, 2004,
between Telesat Canada and Echostar (incorporated by reference to Exhibit 10.2 to
the Quarterly Report on Form 10-Q of EchoStar for the quarter ended June 30,
2004, Commission File No.0-26176).
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10.22
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|
Third Amendment to Whole RF Channel Service Agreement, dated October 12, 2004,
between Telesat Canada and Echostar. ***
|
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10.23
|
|
Amendment No. 4 to Satellite Service Agreement, dated October 21, 2004, between
SES Americom, Inc. and EchoStar. ***
|
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10.24
|
|
Amendment No. 3 to Satellite Service Agreement, dated November 19, 2004 between
SES Americom, Inc. and EchoStar ***
|
|
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10.25
|
|
Amendment No. 5 to Satellite Service Agreement, dated November 19, 2004, between
SES Americom, Inc. and EchoStar. ***
|
|
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|
10.26
|
|
Amendment No. 6 to Satellite Service Agreement, dated December 20, 2004, between
SES Americom, Inc. and EchoStar ***
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21
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Subsidiaries of EchoStar Communications Corporation.
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23.1
|
|
Consent of KPMG LLP, Independent Auditors.
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24.1
|
|
Powers of Attorney authorizing signature of Michael T. Dugan, Cantey Ergen,
Raymond L. Friedlob, Steven R. Goodbarn and C. Michael Schroeder.
|
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31.1
|
|
Section 302 Certification by Chairman and Chief Executive Officer.
|
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31.2
|
|
Section 302 Certification by Executive Vice President and Chief Financial Officer.
|
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|
|
32.1
|
|
Section 906 Certification by Chairman and Chief Executive Officer.
|
|
|
|
32.2
|
|
Section 906 Certification by Executive Vice President and Chief Financial Officer.
|
|
|
Filed herewith.
|
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*
|
|
Incorporated by reference.
|
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**
|
|
Constitutes a management contract or compensatory plan or arrangement.
|
|
***
|
|
Filed in redacted form since confidential treatment has been requested pursuant to
Rule 24.b-2 for certain portions thereof. A conforming electronic copy is filed herewith.
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70
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
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ECHOSTAR COMMUNICATIONS CORPORATION
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By:
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/s/
David J. Rayner
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David J. Rayner
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Executive Vice President and Chief Financial Officer
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Date: March 16, 2005
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed
below by the following persons on behalf of the registrant and in the capacities and on the dates
indicated.
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Signature
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Title
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Date
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/s/
Charles W. Ergen
Charles W. Ergen
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Chief Executive Officer and Chairman
(Principal Executive Officer)
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March 16, 2005
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/s/
David J. Rayner
David J. Rayner
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Executive Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
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March 16, 2005
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/s/
James DeFranco
James DeFranco
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Director
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March 16, 2005
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/s/
David K. Moskowitz
David K. Moskowitz
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Director
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March 16, 2005
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*
Michael T. Dugan
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Director
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March 16, 2005
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*
Cantey Ergen
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Director
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March 16, 2005
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*
Raymond L. Friedlob
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Director
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March 16, 2005
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*
Steven R. Goodbarn
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Director
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March 16, 2005
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*
C. Michael Schroeder
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Director
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March 16, 2005
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*By:
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/s/
David J. Rayner
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David J. Rayner
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Attorney-in-Fact
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71
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
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Page
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Consolidated Financial Statements:
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F2
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F3
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F4
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F5
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F6
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F7
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F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
EchoStar Communications Corporation:
We have audited the accompanying consolidated balance sheets of EchoStar Communications Corporation
and subsidiaries as of December 31, 2004 and 2003, and the related consolidated statements of
operations and comprehensive income (loss), stockholders equity (deficit), and cash flows for each
of the years in the three-year period ended December 31, 2004. These consolidated financial
statements are the responsibility of the Companys management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of EchoStar Communications Corporation and subsidiaries
as of December 31, 2004 and 2003, and the results of their operations and their cash flows for each
of the years in the three-year period ended December 31, 2004, in conformity with U.S. generally
accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the effectiveness of EchoStar Communications Corporations internal control
over financial reporting as of December 31, 2004, based on criteria established in Internal
ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO), and our report dated March 16, 2005 expressed an unqualified opinion on
managements assessment of, and the effective operation of, internal control over financial
reporting.
KPMG LLP
Denver, Colorado
March 16, 2005.
F-2
ECHOSTAR COMMUNICATIONS CORPORATION
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
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|
|
|
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|
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As of December 31,
|
|
|
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2004
|
|
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2003
|
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Assets
|
|
|
|
|
|
|
|
|
Current Assets:
|
|
|
|
|
|
|
|
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Cash and cash equivalents
|
|
$
|
704,560
|
|
|
$
|
1,290,859
|
|
Marketable investment securities
|
|
|
451,073
|
|
|
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2,682,115
|
|
Trade accounts receivable, net of allowance for uncollectible accounts
of $9,542 and $12,185, respectively
|
|
|
478,310
|
|
|
|
345,673
|
|
Inventories, net
|
|
|
271,581
|
|
|
|
155,147
|
|
Insurance receivable (Note 9)
|
|
|
106,000
|
|
|
|
|
|
Other current assets
|
|
|
101,784
|
|
|
|
99,321
|
|
|
|
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|
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Total current assets
|
|
|
2,113,308
|
|
|
|
4,573,115
|
|
Restricted cash and marketable investment securities
|
|
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57,552
|
|
|
|
19,974
|
|
Cash reserved for satellite insurance (Note 3)
|
|
|
|
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176,843
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Property and equipment, net (Note 3)
|
|
|
2,640,168
|
|
|
|
1,876,459
|
|
FCC authorizations
|
|
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739,326
|
|
|
|
711,562
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Intangible assets, net (Note 2)
|
|
|
240,186
|
|
|
|
13,221
|
|
Insurance receivable (Note 9)
|
|
|
|
|
|
|
106,000
|
|
Other noncurrent assets, net (Note 2)
|
|
|
238,737
|
|
|
|
107,844
|
|
|
|
|
|
|
|
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Total assets
|
|
$
|
6,029,277
|
|
|
$
|
7,585,018
|
|
|
|
|
|
|
|
|
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|
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|
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|
|
|
|
Liabilities and Stockholders Equity (Deficit)
|
|
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|
|
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|
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Current Liabilities :
|
|
|
|
|
|
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|
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Trade accounts payable
|
|
$
|
247,698
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|
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$
|
173,637
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|
Deferred revenue and other
|
|
|
757,302
|
|
|
|
514,831
|
|
Accrued programming
|
|
|
604,934
|
|
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366,497
|
|
Other accrued expenses
|
|
|
416,869
|
|
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478,973
|
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Current portion of capital lease and other long-term obligations (Note 4)
|
|
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45,062
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|
|
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14,995
|
|
9 3/8% Senior Note s due 2009 (Note 4)
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|
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|
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1,423,351
|
|
|
|
|
|
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Total current liabilities
|
|
|
2,071,865
|
|
|
|
2,972,284
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Long-term obligations, net of current portion:
|
|
|
|
|
|
|
|
|
10 3/8% Senior Notes due 2007 (Note 4)
|
|
|
|
|
|
|
1,000,000
|
|
5 3/4% Convertible Subordinated Notes due 2008
|
|
|
1,000,000
|
|
|
|
1,000,000
|
|
9 1/8% Senior Notes due 2009 (Note 4)
|
|
|
446,153
|
|
|
|
455,000
|
|
3% Convertible Subordinated Note due 2010
|
|
|
500,000
|
|
|
|
500,000
|
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Floating Rate Senior Notes due 2008
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500,000
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|
500,000
|
|
5 3/4% Senior Notes due 2008
|
|
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1,000,000
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|
|
|
1,000,000
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|
6 3/8% Senior Notes due 2011
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|
|
1,000,000
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|
|
|
1,000,000
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|
3% Convertible Subordinated Note due 2011 (Note 4)
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|
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25,000
|
|
|
|
|
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6 5/8% Senior Note s due 2014 (Note 4)
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|
|
1,000,000
|
|
|
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|
|
Capital lease obligation, mortgages and other notes payable, net of current portion (Note 4)
|
|
|
286,673
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|
44,327
|
|
Long-term deferred revenue, distribution and carriage payments and other long-term liabilities (Note 2)
|
|
|
277,798
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|
|
145,931
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|
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Total long-term obligations, net of current portion
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|
|
6,035,624
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|
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5,645,258
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Total liabilities
|
|
|
8,107,489
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|
|
8,617,542
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|
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Commitments and Contingencies (Note 9)
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|
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|
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|
|
|
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|
|
|
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|
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Stockholders Equity (Deficit):
|
|
|
|
|
|
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|
|
Class A common stock, $.01 par value, 1,600,000,000 shares authorized, 249,028,664
and 246,285,633 shares issued, 217,235,150 and 240,370,533 shares outstanding, respectively
|
|
|
2,490
|
|
|
|
2,463
|
|
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
|
|
|
1,764,973
|
|
|
|
1,733,805
|
|
Non-cash, stock-based compensation
|
|
|
|
|
|
|
(1,180
|
)
|
Accumulated other comprehensive income (loss)
|
|
|
53,418
|
|
|
|
80,991
|
|
Accumulated deficit
|
|
|
(2,901,477
|
)
|
|
|
(2,660,596
|
)
|
Treasury stock, at cost
|
|
|
(1,000,000
|
)
|
|
|
(190,391
|
)
|
|
|
|
|
|
|
|
Total stockholders equity (deficit)
|
|
|
(2,078,212
|
)
|
|
|
(1,032,524
|
)
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity (deficit)
|
|
$
|
6,029,277
|
|
|
$
|
7,585,018
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
F-3
ECHOSTAR COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(In thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Subscriber-related revenue
|
|
$
|
6,677,370
|
|
|
$
|
5,409,875
|
|
|
$
|
4,429,699
|
|
Equipment sales
|
|
|
373,253
|
|
|
|
295,409
|
|
|
|
348,629
|
|
Other
|
|
|
100,593
|
|
|
|
34,012
|
|
|
|
42,497
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
7,151,216
|
|
|
|
5,739,296
|
|
|
|
4,820,825
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Subscriber-related expenses (exclusive
of depreciation shown below Note 3)
|
|
|
3,567,409
|
|
|
|
2,707,898
|
|
|
|
2,200,239
|
|
Satellite and transmission expenses (exclusive
of depreciation shown below Note 3)
|
|
|
112,239
|
|
|
|
79,322
|
|
|
|
62,131
|
|
Cost of sales equipment
|
|
|
305,313
|
|
|
|
194,491
|
|
|
|
227,670
|
|
Cost of sales other
|
|
|
33,265
|
|
|
|
3,496
|
|
|
|
6,466
|
|
Subscriber acquisition costs:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales subscriber promotion subsidies (exclusive
of depreciation shown below Note 3)
|
|
|
459,006
|
|
|
|
502,656
|
|
|
|
439,863
|
|
Other subscriber promotion subsidies
|
|
|
925,195
|
|
|
|
628,928
|
|
|
|
574,750
|
|
Subscriber acquisition advertising
|
|
|
143,685
|
|
|
|
180,484
|
|
|
|
154,036
|
|
|
|
|
|
|
|
|
|
|
|
Total subscriber acquisition costs
|
|
|
1,527,886
|
|
|
|
1,312,068
|
|
|
|
1,168,649
|
|
General and administrative
|
|
|
397,718
|
|
|
|
332,723
|
|
|
|
319,915
|
|
Non-cash, stock-based compensation (Note 7)
|
|
|
1,180
|
|
|
|
3,544
|
|
|
|
11,279
|
|
Depreciation and amortization (Note 3)
|
|
|
502,901
|
|
|
|
398,206
|
|
|
|
372,958
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
6,447,911
|
|
|
|
5,031,748
|
|
|
|
4,369,307
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
703,305
|
|
|
|
707,548
|
|
|
|
451,518
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
42,287
|
|
|
|
65,058
|
|
|
|
112,927
|
|
Interest expense, net of amounts capitalized
|
|
|
(505,732
|
)
|
|
|
(552,490
|
)
|
|
|
(482,903
|
)
|
Merger termination related expenses (including $33,323 of interest expense)
|
|
|
|
|
|
|
|
|
|
|
(689,798
|
)
|
Other
|
|
|
(13,482
|
)
|
|
|
18,766
|
|
|
|
(170,680
|
)
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense)
|
|
|
(476,927
|
)
|
|
|
(468,666
|
)
|
|
|
(1,230,454
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
226,378
|
|
|
|
238,882
|
|
|
|
(778,936
|
)
|
Income tax benefit (provision), net
|
|
|
(11,609
|
)
|
|
|
(14,376
|
)
|
|
|
(73,098
|
)
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
214,769
|
|
|
$
|
224,506
|
|
|
$
|
(852,034
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
|
291
|
|
|
|
1,348
|
|
|
|
|
|
Unrealized holding gains (losses) on available-for-sale securities
|
|
|
6,284
|
|
|
|
71,480
|
|
|
|
(114,521
|
)
|
Recognition of previously unrealized (gains) losses on
available-for-sale securities included in net income (loss)
|
|
|
(34,148
|
)
|
|
|
1,966
|
|
|
|
117,124
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss)
|
|
$
|
187,196
|
|
|
$
|
299,300
|
|
|
$
|
(849,431
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net income (loss) to common shareholders
|
|
$
|
214,769
|
|
|
$
|
224,506
|
|
|
$
|
(414,601
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic net income (loss) per share weighted-average
common shares outstanding
|
|
|
464,053
|
|
|
|
483,098
|
|
|
|
480,429
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for diluted net income (loss) per share weighted-average
common shares outstanding
|
|
|
467,598
|
|
|
|
488,314
|
|
|
|
480,429
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income (loss)
|
|
$
|
0.46
|
|
|
$
|
0.46
|
|
|
$
|
(0.86
|
)
|
|
|
|
|
|
|
|
|
|
|
Diluted net income (loss)
|
|
$
|
0.46
|
|
|
$
|
0.46
|
|
|
$
|
(0.86
|
)
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
F-4
ECHOSTAR COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY (DEFICIT)
(In thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deficit and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Cash,
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
Stock-
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
Class A and B Common Stock
|
|
|
Paid-In
|
|
|
Based
|
|
|
Comprehensive
|
|
|
Treasury
|
|
|
|
|
|
|
Issued
|
|
|
Treasury
|
|
|
Outstanding
|
|
|
Amount
|
|
|
Capital
|
|
|
Compensation
|
|
|
Income (Loss)
|
|
|
Stock
|
|
|
Total
|
|
Balance, December 31, 2001
|
|
|
479,451
|
|
|
|
|
|
|
|
479,451
|
|
|
$
|
4,794
|
|
|
$
|
1,709,797
|
|
|
$
|
(25,456
|
)
|
|
$
|
(2,466,907
|
)
|
|
$
|
|
|
|
$
|
(777,772
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchase of Series D Convertible Preferred Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
437,433
|
|
|
|
|
|
|
|
437,433
|
|
Issuance of Class A common stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of stock options
|
|
|
1,417
|
|
|
|
|
|
|
|
1,417
|
|
|
|
14
|
|
|
|
7,511
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,525
|
|
Employee benefits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3
|
|
Employee stock purchase plan
|
|
|
107
|
|
|
|
|
|
|
|
107
|
|
|
|
1
|
|
|
|
1,904
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,905
|
|
Forfeitures of deferred non-cash, stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,520
|
)
|
|
|
1,911
|
|
|
|
|
|
|
|
|
|
|
|
(3,609
|
)
|
Deferred stock-based compensation recognized
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,888
|
|
|
|
|
|
|
|
|
|
|
|
14,888
|
|
Reversal of deferred tax asset for book stock-based
compensation that exceeded the related tax deduction
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,964
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,964
|
)
|
Change in unrealized holding gains (losses)
on available-for-sale securities, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,603
|
|
|
|
|
|
|
|
2,603
|
|
Net income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(852,034
|
)
|
|
|
|
|
|
|
(852,034
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2002
|
|
|
480,975
|
|
|
|
|
|
|
|
480,975
|
|
|
$
|
4,809
|
|
|
$
|
1,706,731
|
|
|
$
|
(8,657
|
)
|
|
$
|
(2,878,905
|
)
|
|
$
|
|
|
|
$
|
(1,176,022
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of Class A common stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of stock options
|
|
|
3,114
|
|
|
|
|
|
|
|
3,114
|
|
|
|
31
|
|
|
|
18,517
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,548
|
|
Employee benefits
|
|
|
566
|
|
|
|
|
|
|
|
566
|
|
|
|
6
|
|
|
|
16,347
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,353
|
|
Employee Stock Purchase Plan
|
|
|
66
|
|
|
|
|
|
|
|
66
|
|
|
|
1
|
|
|
|
1,889
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,890
|
|
Class A common stock repurchases, at cost
|
|
|
|
|
|
|
(5,915
|
)
|
|
|
(5,915
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(190,391
|
)
|
|
|
(190,391
|
)
|
Forfeitures of deferred non-cash, stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,933
|
)
|
|
|
775
|
|
|
|
|
|
|
|
|
|
|
|
(3,158
|
)
|
Deferred stock-based compensation recognized
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,702
|
|
|
|
|
|
|
|
|
|
|
|
6,702
|
|
Reversal of deferred tax asset for book stock-based
compensation that exceeded the related tax deduction
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,746
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,746
|
)
|
Change in unrealized holding gains (losses)
on available-for-sale securities, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
73,446
|
|
|
|
|
|
|
|
73,446
|
|
Foreign currency translation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,348
|
|
|
|
|
|
|
|
1,348
|
|
Net income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
224,506
|
|
|
|
|
|
|
|
224,506
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2003
|
|
|
484,721
|
|
|
|
(5,915
|
)
|
|
|
478,806
|
|
|
$
|
4,847
|
|
|
$
|
1,733,805
|
|
|
$
|
(1,180
|
)
|
|
$
|
(2,579,605
|
)
|
|
$
|
(190,391
|
)
|
|
$
|
(1,032,524
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of Class A common stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of stock options
|
|
|
2,175
|
|
|
|
|
|
|
|
2,175
|
|
|
|
21
|
|
|
|
14,448
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,469
|
|
Employee benefits
|
|
|
478
|
|
|
|
|
|
|
|
478
|
|
|
|
5
|
|
|
|
16,250
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,255
|
|
Employee Stock Purchase Plan
|
|
|
78
|
|
|
|
|
|
|
|
78
|
|
|
|
1
|
|
|
|
2,122
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,123
|
|
Class A common stock repurchases, at cost
|
|
|
|
|
|
|
(25,879
|
)
|
|
|
(25,879
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(809,609
|
)
|
|
|
(809,609
|
)
|
Exercise of stock warrants
|
|
|
12
|
|
|
|
|
|
|
|
12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred stock-based compensation recognized
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,180
|
|
|
|
|
|
|
|
|
|
|
|
1,180
|
|
Change in unrealized holding gains (losses)
on available-for-sale securities, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(27,864
|
)
|
|
|
|
|
|
|
(27,864
|
)
|
Foreign currency translation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
291
|
|
|
|
|
|
|
|
291
|
|
Reversal of deferred tax asset for book stock-based
compensation that exceeded the related tax deduction
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,652
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,652
|
)
|
Cash dividend on Class A and Class B
common stock ($1.00 per share)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(455,650
|
)
|
|
|
|
|
|
|
(455,650
|
)
|
Net income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
214,769
|
|
|
|
|
|
|
|
214,769
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2004
|
|
|
487,464
|
|
|
|
(31,794
|
)
|
|
|
455,670
|
|
|
$
|
4,874
|
|
|
$
|
1,764,973
|
|
|
$
|
|
|
|
$
|
(2,848,059
|
)
|
|
$
|
(1,000,000
|
)
|
|
$
|
(2,078,212
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
F-5
ECHOSTAR COMMUNICATIONS CORPORATION CONSOLIDATED
STATEMENTS OF CASH FLOWS
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
Cash Flows From Operating Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
214,769
|
|
|
$
|
224,506
|
|
|
$
|
(852,034
|
)
|
Adjustments to reconcile net income (loss) to net cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
502,901
|
|
|
|
398,206
|
|
|
|
372,958
|
|
Equity in losses (earnings) of affiliates
|
|
|
(5,686
|
)
|
|
|
1,649
|
|
|
|
8,012
|
|
Realized and unrealized losses (gains ) on investments
|
|
|
9,031
|
|
|
|
(19,784
|
)
|
|
|
135,619
|
|
Non-cash, stock-based compensation recognized
|
|
|
1,180
|
|
|
|
3,544
|
|
|
|
11,279
|
|
Deferred tax expense (benefit)
|
|
|
5,362
|
|
|
|
629
|
|
|
|
66,703
|
|
Change in valuation of contingent value rights, net of gain on extinguishment
|
|
|
|
|
|
|
|
|
|
|
19,645
|
|
Amortization of debt discount and deferred financing costs
|
|
|
22,262
|
|
|
|
26,685
|
|
|
|
11,906
|
|
Recognition of bridge commitment fees from reduction of bridge financing commitments
|
|
|
|
|
|
|
|
|
|
|
48,435
|
|
Capitalized merger costs
|
|
|
|
|
|
|
|
|
|
|
56,474
|
|
Change in non-current assets
|
|
|
(114,705
|
)
|
|
|
(49,333
|
)
|
|
|
|
|
Change in long-term deferred revenue, distribution and carriage payments and other long-term liabilities
|
|
|
109,522
|
|
|
|
11,434
|
|
|
|
(20,924
|
)
|
Other, net
|
|
|
9,942
|
|
|
|
15,835
|
|
|
|
4,756
|
|
Changes in current assets and current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade accounts receivable, net
|
|
|
(125,629
|
)
|
|
|
(14,178
|
)
|
|
|
(10,619
|
)
|
Inventories
|
|
|
(70,501
|
)
|
|
|
18,020
|
|
|
|
69,709
|
|
Other current assets
|
|
|
(44,757
|
)
|
|
|
(6,860
|
)
|
|
|
(474
|
)
|
Trade accounts payable
|
|
|
76,152
|
|
|
|
(91,176
|
)
|
|
|
18,014
|
|
Deferred revenue and other
|
|
|
211,161
|
|
|
|
71,074
|
|
|
|
84,333
|
|
Accrued programming and other accrued expenses
|
|
|
200,438
|
|
|
|
(14,670
|
)
|
|
|
42,952
|
|
|
|
|
|
|
|
|
|
|
|
Net cash flows from operating activities
|
|
|
1,001,442
|
|
|
|
575,581
|
|
|
|
66,744
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows From Investing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of marketable investment securities
|
|
|
(1,932,789
|
)
|
|
|
(5,050,502
|
)
|
|
|
(5,770,963
|
)
|
Sales of marketable investment securities
|
|
|
4,096,005
|
|
|
|
3,641,939
|
|
|
|
5,602,398
|
|
Purchases of property and equipment
|
|
|
(980,587
|
)
|
|
|
(321,819
|
)
|
|
|
(435,819
|
)
|
Change in cash reserved for satellite insurance (Note 9)
|
|
|
176,843
|
|
|
|
(25,471
|
)
|
|
|
(29,304
|
)
|
Change in restricted cash and marketable investment securities
|
|
|
(10,918
|
)
|
|
|
(1,533
|
)
|
|
|
1,288
|
|
Incentive payments under in-orbit satellite contract Echo VI
|
|
|
|
|
|
|
|
|
|
|
(8,441
|
)
|
Capitalized merger-related costs
|
|
|
|
|
|
|
|
|
|
|
(38,644
|
)
|
Asset acquisition (Note 2)
|
|
|
(238,610
|
)
|
|
|
|
|
|
|
|
|
FCC auction deposits
|
|
|
(26,684
|
)
|
|
|
|
|
|
|
|
|
Other
|
|
|
(4,979
|
)
|
|
|
(4,484
|
)
|
|
|
(2,902
|
)
|
|
|
|
|
|
|
|
|
|
|
Net cash flows from investing activities
|
|
|
1,078,281
|
|
|
|
(1,761,870
|
)
|
|
|
(682,387
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows From Financing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of Series D Convertible Preferred Stock and contingent value rights
|
|
|
|
|
|
|
|
|
|
|
1,483,477
|
|
Repurchase of Series D Convertible Preferred Stock and contingent value rights
|
|
|
|
|
|
|
|
|
|
|
(1,065,689
|
)
|
Proceeds from issuance of 6 5/8% Senior Notes due 2014 (Note 4)
|
|
|
1,000,000
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of 3% Convertible Subordinated Notes due 2011 and 2010, respectively (Note 4)
|
|
|
25,000
|
|
|
|
500,000
|
|
|
|
|
|
Proceeds from issuance of Floating Rate Senior Note s due 2008
|
|
|
|
|
|
|
500,000
|
|
|
|
|
|
Proceeds from issuance of 5 3/4% Senior Notes due 2008
|
|
|
|
|
|
|
1,000,000
|
|
|
|
|
|
Proceeds from issuance of 6 3/8% Senior Notes due 2011
|
|
|
|
|
|
|
1,000,000
|
|
|
|
|
|
Redemption of 10 3/8% Senior Notes due 2007 (Note 4)
|
|
|
(1,000,000
|
)
|
|
|
|
|
|
|
|
|
Redemption of 9 1/4% Senior Notes due 2006
|
|
|
|
|
|
|
(375,000
|
)
|
|
|
|
|
Repurchase and partial redemption of 9 1/8% Senior Notes due 2009, respectively (Note 4)
|
|
|
(8,847
|
)
|
|
|
(245,000
|
)
|
|
|
|
|
Redemption of 4 7/8% Convertible Subordinated Notes due 2007
|
|
|
|
|
|
|
(1,000,000
|
)
|
|
|
|
|
Redemption and repurchase of 9 3/8% Senior Notes due 2009, respectively (Note 4)
|
|
|
(1,423,351
|
)
|
|
|
(201,649
|
)
|
|
|
|
|
Class A common stock repurchases (Note 6)
|
|
|
(809,609
|
)
|
|
|
(190,391
|
)
|
|
|
|
|
Deferred debt issuance costs
|
|
|
(3,159
|
)
|
|
|
(12,500
|
)
|
|
|
(1,837
|
)
|
Cash dividend on Class A and Class B common stock (Note 6)
|
|
|
(455,650
|
)
|
|
|
|
|
|
|
|
|
Repayment of mortgages and other notes payable
|
|
|
(6,998
|
)
|
|
|
(1,828
|
)
|
|
|
(4,549
|
)
|
Net proceeds from Class A common stock options exercised and Class A common stock issued
under Employee Stock Purchase Plan
|
|
|
16,592
|
|
|
|
20,438
|
|
|
|
9,430
|
|
|
|
|
|
|
|
|
|
|
|
Net cash flows from financing activities
|
|
|
(2,666,022
|
)
|
|
|
994,070
|
|
|
|
420,832
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
(586,299
|
)
|
|
|
(192,219
|
)
|
|
|
(194,811
|
)
|
Cash and cash equivalents, beginning of period
|
|
|
1,290,859
|
|
|
|
1,483,078
|
|
|
|
1,677,889
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period
|
|
$
|
704,560
|
|
|
$
|
1,290,859
|
|
|
$
|
1,483,078
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
F-6
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Business Activities
Principal Business
EchoStar Communications Corporation (ECC) is a holding company. Its subsidiaries (which together
with ECC are referred to as EchoStar, the Company, we, us and/or our) operate two
interrelated business units:
|
|
The DISH Network
which provides a direct broadcast satellite (DBS) subscription
television service in the United States; and
|
|
|
|
EchoStar Technologies Corporation
(ETC) which designs and develops DBS set-top
boxes, antennae and other digital equipment for the DISH Network. We refer to this
equipment collectively as EchoStar receiver systems. ETC also designs, develops and
distributes similar equipment for international satellite service providers.
|
Since 1994, we have deployed substantial resources to develop the EchoStar DBS System. The
EchoStar DBS System consists of our Federal Communications Commission (FCC) allocated DBS spectrum, our owned and leased satellites,
EchoStar receiver systems, digital broadcast operations centers, customer service facilities, and
certain other assets utilized in our operations. Our principal business strategy is to continue
developing our subscription television service in the United States to provide consumers with a
fully competitive alternative to cable television service.
Organization and Legal Structure
The following table summarizes our organizational structure and our principal subsidiaries as of
December 31, 2004:
|
|
|
|
|
|
|
Referred to
|
|
|
Legal Entity
|
|
Herein As
|
|
Parent
|
EchoStar Communications Corporation
|
|
ECC
|
|
Publicly owned
|
EchoStar Orbital Corporation
|
|
EOC
|
|
ECC
|
EchoStar Orbital Corporation II
|
|
EOC II
|
|
EOC
|
EchoStar DBS Corporation
|
|
EDBS
|
|
EOC
|
EchoStar Satellite L.L.C.
|
|
ESLLC
|
|
EDBS
|
Echosphere L.L.C.
|
|
Echosphere
|
|
EDBS
|
EchoStar Technologies Corporation
|
|
ETC
|
|
EDBS
|
DISH Network Service L.L.C.
|
|
DNSLLC
|
|
EDBS
|
As of December 31, 2004, all of our DBS FCC licenses and nine of our in-orbit satellites were
owned by a direct subsidiary of EDBS. Contracts for the construction and launch of EchoStar X,
EchoStar XI and our Ka-band satellites are held in EOC II, a sister company to EDBS. Our satellite
lease contracts are also held by a direct subsidiary of EDBS. Substantially all of our operations
are conducted by subsidiaries of EDBS.
Significant Risks and Uncertainties
Substantial Leverage
.
We are highly leveraged, which makes us vulnerable to changes in general
economic conditions. As of December 31, 2004, we had outstanding long-term debt (including both
the current and long-term portions) totaling approximately $5.803 billion. We have quarterly and semi-annual cash
interest requirements for all of our outstanding long-term debt securities, as follows:
F-7
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Continued
|
|
|
|
|
|
|
|
|
|
|
Annual
|
|
|
|
Quarterly/Semi-Annual
|
|
Debt Service
|
|
|
|
Payment Dates
|
|
Requirements
|
|
5 3/4% Convertible Subordinated Notes due 2008
|
|
May 15 and November 15
|
|
$
|
57,500,000
|
|
9 1/8% Senior Notes due 2009
|
|
January 15 and July 15
|
|
$
|
40,711,461
|
|
3% Convertible Subordinated Note due 2010
|
|
June 30 and December 31
|
|
$
|
15,000,000
|
|
Floating Rate Senior Notes due 2008
|
|
January 1, April 1, July 1 and October 1
|
|
$
|
29,050,000
|
|
5 3/4% Senior Notes due 2008
|
|
April 1 and October 1
|
|
$
|
57,500,000
|
|
6 3/8% Senior Notes due 2011
|
|
April 1 and October 1
|
|
$
|
63,750,000
|
|
3% Convertible Subordinated Note due 2011
|
|
June 30 and December 31
|
|
$
|
750,000
|
|
6 5/8% Senior Notes due 2014
|
|
April 1 and October 1
|
|
$
|
66,250,000
|
|
Interest accrues on our Floating Rate Senior Notes due 2008 based on
the three month London Interbank Offered Rate (LIBOR) plus 3.25%. The interest rate at December
31, 2004 was 5.81%. Semi-annual cash interest requirements related to our 3% Convertible Subordinated Note due
2011 commenced on December 31, 2004. Semi-annual cash interest requirements related to our 6 5/8%
Senior Notes due 2014 will commence on April 1, 2005. There are no scheduled principal payment or
sinking fund requirements prior to maturity on any of these notes. Our ability to meet our debt
service requirements will depend on, among other factors, the successful execution of our business
strategy, which is subject to uncertainties and contingencies beyond our control.
2. Summary of Significant Accounting Policies
Basis of Presentation
Effective January 1, 2004, we combined Subscription television service revenue and Other
subscriber-related revenue into Subscriber-related revenue. Additionally, Equipment sales and
Cost of sales equipment now include non-DISH Network receivers and other accessories sold by
our EchoStar International Corporation subsidiary to international customers which were previously
included in Other revenue and Cost of sales other, respectively. All prior period amounts
were reclassified to conform to the current period presentation.
Certain other prior year amounts have
been reclassified to conform with the current year presentation.
Principles of Consolidation
We consolidate all majority owned subsidiaries and investments in entities in which we have
controlling influence. Non-majority owned investments are accounted for using the equity method
when we have the ability to significantly influence the operating decisions of the investee. When
we do not have the ability to significantly influence the operating decisions of an investee, the
cost method is used. For entities that are considered variable interest entities we apply the
provisions of FASB Interpretation No. (FIN) 46-R, Consolidation of Variable Interest Entities, and
Interpretation of ARB No. 51 (FIN 46-R). All significant intercompany accounts and transactions
have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted
in the United States (GAAP) requires us 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. Estimates
are used in accounting for, among other things, allowances for uncollectible accounts, inventory
allowances, self insurance obligations, deferred taxes and related valuation allowances, loss
contingencies, fair values of financial instruments, fair value of
assets and liabilities acquired in business
combinations, asset impairments, useful lives of property and equipment, retailer commissions,
programming expenses, subscriber lives including those related to our co-branding and other
distribution relationships, royalty obligations and smart card replacement obligations. Actual
results may differ from previously estimated amounts. Estimates and assumptions are reviewed
periodically, and the effects of revisions are reflected in the period they occur.
F-8
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Continued
During the three months ended December 31, 2003, we recorded approximately $61.4 million to reduce
our estimated royalty obligations related to the production of EchoStar receiver systems. The
following details the decrease in the financial statement line items affected by this change in
estimate (in thousands):
|
|
|
|
|
Cost of sales equipment
|
|
$
|
(6,839
|
)
|
Cost of sales subscriber promotion subsidies
|
|
|
(42,750
|
)
|
Depreciation and amortization
|
|
|
(5,937
|
)
|
Property and equipment, net
|
|
|
(5,341
|
)
|
Inventories, net
|
|
|
(505
|
)
|
Foreign Currency Translation
The functional currency of the majority of our foreign subsidiaries is the U.S. dollar because
their sales and purchases are predominantly denominated in that currency. However, for our
subsidiaries where the functional currency is the local currency, we translate assets and
liabilities into U.S. dollars at the period end exchange rate and record the translation
adjustments as a component of other comprehensive income (loss). We translate revenues and
expenses based on the exchange rates at the time such transactions arise, if known, or at the
average rate for the period. Transactions denominated in currencies other than the functional
currency are recorded at the exchange rate at the time of the transaction and are included in other
miscellaneous income and expense. Net transaction gains (losses) during 2004, 2003 and 2002 were
not significant.
Statements of Cash Flows Data
The following presents our supplemental cash flow statement disclosure:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
|
(In thousands)
|
|
Cash paid for interest
|
|
$
|
431,785
|
|
|
$
|
477,036
|
|
|
$
|
500,879
|
|
Capitalized interest
|
|
|
3,105
|
|
|
|
8,428
|
|
|
|
23,876
|
|
Cash received for interest
|
|
|
56,317
|
|
|
|
64,490
|
|
|
|
113,402
|
|
Cash paid for income taxes
|
|
|
3,302
|
|
|
|
11,646
|
|
|
|
8,396
|
|
Forfeitures of deferred non-cash, stock-based compensation
|
|
|
|
|
|
|
3,933
|
|
|
|
5,520
|
|
Assumption
of net operating liabilities in asset acquisition (Note 2)
|
|
|
25,685
|
|
|
|
|
|
|
|
|
|
Assumption of liabilities and long-term deferred revenue (Note 2)
|
|
|
69,357
|
|
|
|
|
|
|
|
|
|
Satellite financed under capital lease (Note 4)
|
|
|
286,605
|
|
|
|
|
|
|
|
|
|
Reduction in satellite vendor financing (Note 3)
|
|
|
13,712
|
|
|
|
|
|
|
|
|
|
Satellite and other vendor financing
|
|
|
6,519
|
|
|
|
13,097
|
|
|
|
30,000
|
|
Cash and Cash Equivalents
We consider all liquid investments purchased with an original maturity of 90 days or less to be
cash equivalents. Cash equivalents as of December 31, 2004 and 2003 consist of money market funds,
corporate notes and commercial paper. The cost of these investments approximates their fair market
value.
Marketable and Non-Marketable Investment Securities and Restricted Cash
We currently classify all marketable investment securities as available-for-sale. We adjust the
carrying value of our available-for-sale securities to fair market value and report the related
temporary unrealized gains and losses as a separate component of Accumulated other comprehensive
income within Total stockholders equity (deficit), net of related deferred income tax.
Declines in the fair market value of a marketable investment security which are estimated to be
other than temporary are recognized in the consolidated 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
F-9
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Continued
whether
declines in the fair market value of
these securities are other than temporary. This quarterly evaluation consists of reviewing, among
other things, the fair market value of our marketable investment securities compared to the
carrying amount, 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 market value of investments below cost basis for a period of less than six
months are considered to be temporary. Declines in the fair market 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 market 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, 2004 and 2003, we had unrealized gains of approximately $51.8 million and $79.6
million, respectively, as a part of Accumulated other comprehensive income within Total
stockholders equity (deficit). During the year ended December 31, 2004, we did not record any
charge to earnings for other than temporary declines in the fair market value of our marketable
investment securities. During the years ended December 31, 2003 and 2002, we recorded aggregate
charges to earnings for other than temporary declines in the fair market value of certain of our
marketable investment securities of approximately $2.0 million and $117.1 million, respectively,
and established a new cost basis for these securities. In addition, during the years ended
December 31, 2004, 2003 and 2002, we realized net losses of approximately $9.0 million and net
gains of approximately $21.9 million and $11.6 million on sales of marketable and non-marketable
investment securities, respectively. Realized gains and losses are
accounted for on the specific identification method.
Our approximately $1.213 billion of restricted and unrestricted cash, cash equivalents and
marketable investment securities includes debt and equity securities which we own for strategic and
financial purposes. The fair market value of these strategic marketable investment securities
aggregated approximately $174.3 million and $249.4 million as of December 31, 2004 and 2003,
respectively. Our portfolio generally, and our strategic investments particularly, has experienced and
continues to experience volatility. If the fair market value of our strategic marketable securities
portfolio does not remain 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 strategic marketable securities is
impaired, we may be required to record charges to earnings in future periods equal to the amount of
the decline in fair market value.
We also have strategic equity investments in certain non-marketable investment securities. We
account for such unconsolidated investments under either the equity method or cost method of
accounting. These securities are not publicly traded and accordingly, it is not practical to
regularly estimate the fair value of these investments, however, these investments are subject to
an evaluation for other than temporary impairment on a quarterly basis. This quarterly evaluation
consists of reviewing, among other things, company business plans and current financial statements,
if available, for factors that may indicate an impairment of 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. The fair value of these investments is not estimated
unless there are identified changes in circumstances that are likely to have a significant adverse
effect on the fair value of the investment. Our ability to realize value
from our strategic investments in companies that are not publicly traded is dependent on the
success of their business and their 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 we will not
be able to obtain full value for them. For the year ended December 31, 2004, we had $90.4 million
aggregate carrying amount of non-marketable and unconsolidated strategic equity investments, of
which $52.7 million is accounted for under the cost method. During the year ended December 31,
2004, we did not record any impairment charges with respect to these investments.
Restricted cash and marketable investment securities, as reflected in the accompanying consolidated
balance sheets, includes, among other things, cash and marketable investment securities set aside
as collateral for our letters of credit.
F-10
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Continued
The major components of marketable investment securities and restricted cash are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted Cash and Marketable
|
|
|
|
Marketable Investment Securities
|
|
|
Investment Securities
|
|
|
|
As of December 31,
|
|
|
As of December 31,
|
|
|
|
2004
|
|
|
2003
|
|
|
2004
|
|
|
2003
|
|
|
|
(In thousands)
|
|
Government bonds
|
|
$
|
214,683
|
|
|
$
|
1,258,366
|
|
|
$
|
46,111
|
|
|
$
|
18,431
|
|
Corporate notes and bonds
|
|
|
84,093
|
|
|
|
620,782
|
|
|
|
8,969
|
|
|
|
|
|
Corporate equity securities
|
|
|
149,496
|
|
|
|
111,687
|
|
|
|
|
|
|
|
|
|
Commercial paper
|
|
|
|
|
|
|
499,086
|
|
|
|
|
|
|
|
|
|
Asset backed obligations
|
|
|
2,801
|
|
|
|
192,194
|
|
|
|
|
|
|
|
|
|
Restricted cash
|
|
|
|
|
|
|
|
|
|
|
2,472
|
|
|
|
1,543
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
451,073
|
|
|
$
|
2,682,115
|
|
|
$
|
57,552
|
|
|
$
|
19,974
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2004, marketable investment securities and restricted cash include debt
securities of $228.5 million with contractual maturities of one year or less and $128.2 million
with contractual maturities between one and three years. Actual maturities may differ from
contractual maturities as a result of our ability to sell these securities prior to maturity.
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 built by contract
manufacturers to our specifications. We depend on a few manufacturers,
and in some cases
a single manufacturer, for the production of our receivers and many
components of our EchoStar receiver systems. Manufactured inventories include materials, labor, freight-in, royalties and manufacturing
overhead. Inventories consist of the following:
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2004
|
|
|
2003
|
|
|
|
(In thousands)
|
|
Finished goods DBS
|
|
$
|
159,350
|
|
|
$
|
103,274
|
|
Raw materials
|
|
|
68,144
|
|
|
|
32,693
|
|
Work-in-process service repair
|
|
|
40,720
|
|
|
|
15,000
|
|
Work-in-process
|
|
|
11,112
|
|
|
|
9,577
|
|
Consignment
|
|
|
2,644
|
|
|
|
1,373
|
|
Inventory allowance
|
|
|
(10,389
|
)
|
|
|
(6,770
|
)
|
|
|
|
|
|
|
|
Inventories, net
|
|
$
|
271,581
|
|
|
$
|
155,147
|
|
|
|
|
|
|
|
|
Property and Equipment
Property and equipment are stated at cost. Cost includes capitalized interest of approximately $3.1
million, $8.4 million and $23.9 million during the years ended December 31, 2004, 2003 and 2002,
respectively. The costs of satellites under construction, including certain amounts prepaid under
our satellite service agreements (Note 9), 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
estimated to be received, if any. Depreciation is
recorded on a straight-line basis over lives ranging from one to forty years. Repair and
maintenance costs are charged to expense when incurred. Renewals and betterments are capitalized.
F-11
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-
Continued
Long-lived Assets
We account for long-lived assets in accordance with the provisions of Statement of Financial
Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets
(SFAS 144). 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. Based on the guidance under SFAS 144, we evaluate our satellite fleet for
recoverability as an asset group. For assets which are held and used in operations, the asset would
be impaired if the carrying value of the asset (or asset group) exceeded its undiscounted future
net cash flows. Once an impairment is determined, the actual impairment is reported as the
difference between the carrying value and the fair value as estimated using discounted cash flows.
Assets which are to be disposed of are reported at the lower of the carrying amount or fair value
less costs to sell. We consider relevant cash flow, estimated future operating results, trends and
other available information in assessing whether the carrying value of assets are recoverable.
Goodwill and Intangible Assets
We account for our goodwill and intangible assets in accordance with the provisions of Statement of
Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets (SFAS 142), which
requires goodwill and intangible assets with indefinite useful lives not be amortized, but to be
tested for impairment annually or whenever indicators of impairments arise. Intangible assets that
have finite lives continue to be amortized over their estimated useful lives. Our intangible assets
consist primarily of FCC licenses. Generally, we have determined that our FCC licenses have
indefinite useful lives due to the following:
|
|
FCC spectrum is a non-depleting asset;
|
|
|
|
Existing DBS licenses are integral to our business and will contribute to cash flows indefinitely;
|
|
|
|
Replacement satellite applications are generally authorized by the FCC subject to
certain conditions, without substantial cost under a stable regulatory, legislative and
legal environment;
|
|
|
|
Maintenance expenditures in order to obtain future cash flows are not significant;
|
|
|
|
DBS licenses are not technologically dependent; and
|
|
|
|
We intend to use these assets for the foreseeable future.
|
In accordance with the guidance of EITF Issue No. 02-7, Unit of Accounting for Testing
Impairment of Indefinite-Lived Intangible Asset, (EITF 02-7) we combine all our indefinite life
FCC licenses into a single unit of accounting. The analysis encompasses future cash flows from
satellites transmitting from such licensed orbital locations, including revenue attributable to
programming offerings from such satellites, the direct operating and subscriber acquisition costs
related to such programming, and future capital costs for replacement satellites. Projected revenue
and cost amounts included current and projected subscribers. In conducting our annual impairment
test in 2004, we determined that the estimated fair value of the FCC licenses, calculated using the
discounted cash flow analysis, exceeded their carrying amount.
During March 2004, we entered into an agreement with Gemstar-TV Guide International, Inc.
(Gemstar) for use of certain Gemstar intellectual property and technology, use of the TV Guide
brand on our interactive program guides, and for distribution arrangements with Gemstar to provide
for the launch and carriage of the TV Guide Channel as well as the extension of an existing
distribution agreement for carriage of the TVG Network, and acquired Gemstars Superstar/Netlink
Group LLC (SNG), UVTV distribution, and SpaceCom businesses and related assets, for an aggregate
cash payment of $238.0 million, plus transaction costs. We further agreed to resolve all of our
outstanding litigation with Gemstar. These transactions were entered into contemporaneously and
F-12
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-
Continued
accounted for as a purchase business combination in accordance with Statement of Financial Accounting Standard No. 141, Business
Combinations (SFAS 141).
Based on an independent third -party valuation, the purchase consideration was allocated to identifiable tangible and
intangible assets and liabilities as follows (in thousands):
|
|
|
|
|
Current assets
|
|
$
|
1,184
|
|
Property and equipment
|
|
|
3,749
|
|
Intangible assets
|
|
|
260,546
|
|
|
|
|
|
Total assets acquired
|
|
$
|
265,479
|
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
(26,269
|
)
|
Long-term liabilities
|
|
|
(600
|
)
|
|
|
|
|
Total liabilities assumed
|
|
|
(26,869
|
)
|
|
|
|
|
Net assets acquired
|
|
$
|
238,610
|
|
|
|
|
|
The total $260.5 million of acquired intangible assets resulting from the Gemstar transactions
is comprised of contract-based intangibles totaling approximately $187.2 million with estimated
weighted-average useful lives of twelve years, and customer relationships totaling approximately
$73.3 million with estimated weighted-average useful lives of four years.
The business combination did not have a material impact on our results of operations for the year
ended December 31, 2004 and would not have materially impacted our results of operations for these
periods had the business combination occurred on January 1, 2004. Further, the business combination would not have had a material impact
on our results of operations for the comparable periods in 2003 and 2002 had the business combination occurred on
January 1, 2002.
As of December 31, 2004 and 2003, our identifiable intangibles subject to amortization consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
December 31, 2004
|
|
|
December 31, 2003
|
|
|
|
Intangible
|
|
|
Accumulated
|
|
|
Intangible
|
|
|
Accumulated
|
|
|
|
Assets
|
|
|
Amortization
|
|
|
Assets
|
|
|
Amortization
|
|
|
|
(In thousands)
|
|
Contract based
|
|
$
|
223,873
|
|
|
$
|
(46,852
|
)
|
|
$
|
36,668
|
|
|
$
|
(27,767
|
)
|
Customer relationships
|
|
|
73,298
|
|
|
|
(13,493
|
)
|
|
|
|
|
|
|
|
|
Technology based
|
|
|
17,181
|
|
|
|
(17,181
|
)
|
|
|
17,181
|
|
|
|
(16,221
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
314,352
|
|
|
$
|
(77,526
|
)
|
|
$
|
53,849
|
|
|
$
|
(43,988
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of these
intangible assets recorded on a straight line basis over an average
finite useful life primarily ranging
from approximately four to twelve years, was $33.5 million and $10.3 million for the years ended
December 31, 2004 and 2003, respectively. The aggregate amortization expense is estimated to be
approximately $35.7 million for 2005, $34.5 million for 2006, $34.0 million for 2007, $20.3 million
for 2008 and $15.5 million for 2009.
The excess of our investments in consolidated subsidiaries over net tangible and intangible asset
value at acquisition is recorded as goodwill. We had approximately $3.4 million of goodwill as of December
31, 2004 and 2003 which arose from a 2002 acquisition. In conducting our annual impairment test in
2004, we determined that the carrying amount of our goodwill was not impaired.
F-13
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Continued
Smart Card Replacement
We use conditional access technology, including embedding microchips in credit card-sized access
cards, or smart cards, to encrypt the programming we transmit to subscribers so that only those
who pay for service can receive our 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. In order to combat piracy and maintain the functionality of active set-top boxes, we are in
the process of replacing older generation smart cards with newer generation smart cards. We have
accrued a liability for the replacement of smart cards in satellite receivers sold to and owned by
subscribers based on the estimated number of cards that will be needed to execute our plan. This
estimate is based on a number of variables, including historical subscriber churn trends and the
estimated per card costs for smart card replacements. We expect to complete the replacement of
older generation smart cards during the second half of 2005.
As of December 31, 2004 and 2003, we had accrued $48.2 million and $74.6 million, respectively, for
replacement of these smart cards. This accrual is included in Other accrued expenses in our
consolidated balance sheets. Charges recorded to Subscriber-related expenses in our consolidated
statements of operations and comprehensive income (loss) totaled $2.9 million during the year ended
December 31, 2002. There was no additional expense recorded for smart card replacements during 2004
and 2003. During the years ended December 31, 2004 and 2003, approximately $13.4 million and $6.2
million, respectively, were charged against the smart card accrual for the replacement of older
generation smart cards. This liability will be reduced further as smart card replacements occur.
During 2004, we reduced Subscriber-related expenses by approximately $13.0 million to reduce our
accrual for the replacement of smart cards. This reduction primarily resulted from a decrease in
our estimate of the number of older satellite receivers that will be active when we exchange smart
cards.
Long-Term Deferred Revenue, Distribution and Carriage Payments
Certain programmers provide us up-front payments. Such amounts are deferred and in accordance with
EITF Issue No. 02-16, Accounting by a Customer (Including a Reseller) for Certain Consideration
Received from a Vendor (EITF 02-16) and are recognized as reductions to Subscriber-related
expenses on a straight-line basis over the relevant remaining contract term (up to 10 years). The
current and long-term portions of these deferred credits are recorded in the consolidated balance
sheets in Deferred revenue and other and Long-term deferred revenue, distribution and carriage
payments and other long-term liabilities, respectively.
During the year ended December 31, 2004, we made cash payments, assumed certain liabilities and
entered into agreements in exchange for equity interests in certain entities. We accounted for the
equity interests received in accordance with Emerging Issues Task Force Issue No. 00-8, Accounting
by a Grantee for an Equity Instrument to be Received in Conjunction with Providing Goods or
Services (EITF 00-8) and recorded approximately $77.3 million related to the fair value of these
equity interests in Other noncurrent assets as of December 31, 2004. We account for these
unconsolidated investments under either the equity method or cost method of accounting. Approximately $56.5 million in value of these equity interests has been recorded as a deferred
credit and will be recognized as reductions to Subscriber-related expenses ratably as our actual
costs are incurred under the related agreements in accordance with the guidance under EITF 02-16.
These deferred credits have been recorded as a component of Long-term deferred revenue,
distribution and carriage payments and other long-term liabilities in our consolidated balance
sheets.
F-14
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Continued
Income Taxes
We establish a provision for income taxes currently payable or receivable and for income tax
amounts deferred to future periods in accordance with Statement of Financial Accounting Standards
No. 109, Accounting for Income Taxes (SFAS 109). SFAS 109 requires that deferred tax assets or
liabilities be recorded for the estimated future tax effects of differences that exist between the
book and tax bases of assets and liabilities. Deferred tax assets are offset by valuation
allowances in accordance with SFAS 109, because we believe it is more likely than not that such net
deferred tax assets will not be realized.
Fair Value of Financial Instruments
Fair market values for our publicly traded debt securities are based on quoted market prices. The
fair values of our privately placed 3% Convertible Subordinated Notes due 2010 and 2011, and
mortgages and other notes payable are estimated using third-party valuations or discounted cash
flow analyses when it is practicable to do so. 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 our debt facilities at December 31, 2004
and 2003:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2004
|
|
|
As of December 31, 2003
|
|
|
|
Book Value
|
|
|
Fair Value
|
|
|
Book Value
|
|
|
Fair Value
|
|
|
|
(In thousands)
|
|
9 3/8% Senior Notes due 2009*
|
|
|
|
|
|
|
|
|
|
|
1,423,351
|
|
|
|
1,498,077
|
|
10 3/8% Senior Notes due 2007*
|
|
|
|
|
|
|
|
|
|
|
1,000,000
|
|
|
|
1,100,000
|
|
5 3/4% Convertible Subordinated Notes due 2008
|
|
|
1,000,000
|
|
|
|
1,023,750
|
|
|
|
1,000,000
|
|
|
|
1,035,000
|
|
9 1/8% Senior Notes due 2009
|
|
|
446,153
|
|
|
|
490,768
|
|
|
|
455,000
|
|
|
|
509,031
|
|
3% Convertible Subordinated Note due 2010
|
|
|
500,000
|
|
|
|
465,000
|
|
|
|
500,000
|
|
|
|
500,000
|
|
Floating Rate Senior Notes due 2008
|
|
|
500,000
|
|
|
|
518,125
|
|
|
|
500,000
|
|
|
|
520,625
|
|
5 3/4% Senior Notes due 2008
|
|
|
1,000,000
|
|
|
|
1,012,500
|
|
|
|
1,000,000
|
|
|
|
1,011,250
|
|
6 3/8% Senior Notes due 2011
|
|
|
1,000,000
|
|
|
|
1,047,500
|
|
|
|
1,000,000
|
|
|
|
1,025,000
|
|
3% Convertible Subordinated Note due 2011
|
|
|
25,000
|
|
|
|
22,500
|
|
|
|
|
|
|
|
|
|
6 5/8% Senior Notes due 2014
|
|
|
1,000,000
|
|
|
|
1,012,500
|
|
|
|
|
|
|
|
|
|
Capital lease obligation, mortgages
and other notes payable
|
|
|
331,735
|
|
|
|
331,735
|
|
|
|
59,322
|
|
|
|
59,322
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
5,802,888
|
|
|
|
5,924,378
|
|
|
|
6,937,673
|
|
|
|
7,258,305
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* The 9 3/8% Senior Notes due 2009 and the 10 3/8% Senior Notes due 2007 were redeemed February
2, 2004 and October 1, 2004, respectively.
Due to their short-term nature, book value approximates fair value for cash and cash
equivalents, trade accounts receivable, net of allowance and current liabilities for the periods
ending December 31, 2004 and 2003.
Deferred Debt Issuance Costs
Costs of issuing debt are generally deferred and amortized to interest expense over the terms of
the respective notes (Note 4).
Revenue Recognition
We recognize revenue when an arrangement exists, prices are determinable, collectibility is
reasonably assured and the goods or services have been delivered. Revenue from our subscription
television services is recognized when programming is broadcast to subscribers. Subscriber fees for multiple set-top receivers, digital
video recorders,
F-15
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Continued
equipment rental and other services are recognized as revenue, monthly as earned.
Revenue from advertising sales is recognized when the related services are performed. Payments
received from subscribers in advance of the broadcast or service period are recorded as Deferred
revenue in the consolidated balance sheets until earned. Revenue from equipment sales is
recognized upon shipment to customers.
Contemporaneous with the commencement of sales of co-branded services pursuant to our agreement
with SBC Communications, Inc. (SBC) during the first quarter of 2004, revenue from equipment
sales to SBC and development and implementation fees received from SBC is deferred and recognized
ratably over the estimated average co-branded subscriber life. Revenue from installation and
certain other services performed at the request of SBC is recognized upon completion of the
services.
Accounting for our new subscriber promotions which include programming discounts falls under the
scope of EITF Issue No. 01-9, Accounting for Consideration Given by a Vendor to a Customer
(Including a Reseller of the Vendors Capital Products) (EITF 01-9). In accordance with EITF
01-9, programming revenues under these promotions are recorded at the discounted monthly rate
charged to the subscriber. See Subscriber Acquisition Costs below for discussion regarding the
accounting for costs under these promotions.
Subscriber-related expenses
The cost of television programming distribution rights is generally incurred on a per subscriber
basis and various upfront carriage payments are recognized when the related programming is
distributed to subscribers. The cost of television programming rights to distribute live sporting
events for a season or tournament is charged to expense using the straight-line method over the
course of the season or tournament. Programming costs are included in Subscriber-related expenses
in the consolidated statements of operations and comprehensive income (loss). Subscriber-related
expenses also include costs incurred in connection with our in-home service and call center
operations, overhead costs associated with our installation business, copyright royalties, residual
commissions, billing, lockbox, subscriber retention and other variable subscriber expenses. These
costs are recognized as the services are performed or as incurred.
Contemporaneous with the commencement of sales of co-branded services pursuant to our agreement
with SBC during the first quarter of 2004, Subscriber-related expenses also include the cost of
sales and expenses from equipment sales, direct costs of installation and other services related to
that relationship. Cost of sales from equipment sales to SBC are deferred and recognized over the
estimated average co-branded subscriber life. Expenses from installation and certain other services
performed at the request of SBC are recognized as the services are performed.
Subscriber Acquisition Costs
Subscriber acquisition costs in our consolidated statements of operations and comprehensive income
(loss) consist of costs incurred to acquire new subscribers through third parties and our direct
customer acquisition distribution channel. Subscriber acquisition costs include the following line
items from our consolidated statements of operations and comprehensive income (loss):
|
|
Cost of sales subscriber promotion subsidies
includes the cost of EchoStar
receiver systems sold to retailers and other distributors of our equipment and receiver
systems sold directly by us to subscribers.
|
|
|
|
Other subscriber promotion subsidies
includes net costs related to promotional
incentives and costs related to installation.
|
|
|
|
Subscriber acquisition advertising
includes advertising and marketing expenses
related to the acquisition of new DISH Network subscribers. Advertising costs generally
are expensed as incurred.
|
During the year ended December 31, 2004, our significant subscriber acquisition promotions were as follows:
F-16
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Continued
Digital Home Advantage
Effective February 1, 2004, our Digital Home Advantage promotion provided
new lease subscribers up to four installed EchoStar receivers, including various premium models,
with a qualifying programming subscription. The subscriber is required to pay a monthly rental fee
for each leased receiver, but is not required to agree to a minimum lease period. The subscriber
must provide a valid major credit card, their social security number, have an acceptable credit
score, and pay a one-time set-up fee of $49.99. The subscriber receives a $49.99 credit on their
first months bill. Effective October 19, 2004, the promotion was expanded whereby the consumer may
agree to either a one or two year commitment in exchange for receiving the benefits of our Digital
Home Protection Plan, an optional extended warranty program, without charge for one or two years,
respectively. Since we retain ownership of equipment installed pursuant to the Digital Home
Advantage promotion, equipment costs are capitalized and depreciated over a period of up to four
years. Although there can be no assurance as to the ultimate duration of our current equipment
lease promotion, we expect it to continue through at least July 31, 2005.
Free Dish
Effective February 1, 2004, our Free DISH promotion provided new subscribers with a
choice of up to three installed EchoStar receivers, including one premium receiver model for
$49.99. The subscriber receives a $49.99 credit on their first months bill. To be eligible,
subscribers must provide a valid major credit card, their social security number, have an
acceptable credit score, and make a one or two year commitment to subscribe to a qualified
programming package, depending on the set-top box models selected by the subscriber. Certain
advanced products, including digital video recorders and high definition receivers, require
additional upgrade fees. The Free Dish promotion ended on January 31, 2005.
Free for All
Effective February 1, 2004, our Free for All promotion provides new subscribers who
purchase one or two installed receiver systems for $149.00 or $199.00, respectively, a monthly
credit of $10.00 for 15 or 20 months, respectively. The subscriber must subscribe to a qualifying
programming package and provide their social security number. Effective February 1, 2005, new
subscribers under our Free for All promotion who purchase one or two receiver systems and subscribe
to a qualifying programming package receive a monthly credit of $5.00 for 30 or 40 months,
respectively. Although there can be no assurance as to the ultimate duration of the Free for All
promotion, we expect it to continue through at least July 31, 2005.
Accounting for dealer sales under our promotions fall within the scope of EITF 01-9. In accordance
with that guidance, we characterize amounts paid to our independent dealers as consideration for
equipment installation services and for equipment buydowns (commissions and rebates) as a reduction
of revenue. We expense payments for equipment installation services as Other subscriber promotion
subsidies. Our payments for equipment buydowns represent a partial or complete return of the
dealers purchase price and are, therefore, netted against the proceeds received from the dealer.
We report the net cost from our various sales promotions through our independent dealer network as
a component of Other subscriber promotion subsidies. No net proceeds from the sale of subscriber
related equipment pursuant to our subscriber acquisition promotions are recognized as revenue.
Accordingly, subscriber acquisition costs are generally expensed as incurred except for under our
equipment lease promotion wherein we retain title to the receiver and certain other equipment resulting in the capitalization and depreciation of such equipment cost
over its estimated useful life.
Research and Development Costs
Research and development costs are expensed as incurred. Research and development costs totaled
$40.0 million, $32.4 million and $33.0 million for the years ended December 31, 2004, 2003 and
2002, respectively.
Accounting for Stock-Based Compensation
We apply the intrinsic value method of accounting under Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees, (APB 25) and related interpretations in accounting
for our stock-based compensation plans, which are described more fully in Note 7. Under APB 25, we
generally do not recognize compensation expense on the grant of options under our Stock Incentive
Plan because typically the option terms are fixed and the exercise price equals or exceeds the
market price of the underlying stock on the date of grant. We apply
F-17
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Continued
the disclosure only provisions of Statement of Financial Accounting Standards No. 123, Accounting and Disclosure of Stock-Based
Compensation, (SFAS 123).
Pro forma information regarding net income and earnings per share is required by SFAS 123 and has
been determined as if we had accounted for our 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 on a straight-line
basis. All options are initially assumed to vest. Compensation previously recognized is reversed to
the extent applicable to forfeitures of unvested options. The following table illustrates the
effect on net income (loss) per share if we had accounted for our stock-based compensation plans
using the fair value method:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
|
(In thousands, except per share amounts)
|
|
Net income (loss) to common shareholders, as reported
|
|
$
|
214,769
|
|
|
$
|
224,506
|
|
|
$
|
(414,601
|
)
|
Add: Stock-based employee compensation expense included
in reported net income (loss), net of related tax effects
|
|
|
1,139
|
|
|
|
3,420
|
|
|
|
10,884
|
|
Deduct: Total stock-based employee compensation expense determined
under fair value based method for all awards, net of related tax effects
|
|
|
(20,515
|
)
|
|
|
(26,138
|
)
|
|
|
(24,427
|
)
|
|
|
|
|
|
|
|
|
|
|
Pro forma net income (loss) to common shareholders
|
|
$
|
195,393
|
|
|
$
|
201,788
|
|
|
$
|
(428,144
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic income (loss) per share, as reported
|
|
$
|
0.46
|
|
|
$
|
0.46
|
|
|
$
|
(0.86
|
)
|
|
|
|
|
|
|
|
|
|
|
Diluted income (loss) per share, as reported
|
|
$
|
0.46
|
|
|
$
|
0.46
|
|
|
$
|
(0.86
|
)
|
|
|
|
|
|
|
|
|
|
|
Pro forma basic income (loss) per share
|
|
$
|
0.42
|
|
|
$
|
0.42
|
|
|
$
|
(0.89
|
)
|
|
|
|
|
|
|
|
|
|
|
Pro forma diluted income (loss) per share
|
|
$
|
0.42
|
|
|
$
|
0.41
|
|
|
$
|
(0.89
|
)
|
|
|
|
|
|
|
|
|
|
|
For purposes of this pro forma presentation, 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
Risk-free interest rate
|
|
|
3.69
|
%
|
|
|
3.32
|
%
|
|
|
4.14
|
%
|
Volatility factor
|
|
|
33.26
|
%
|
|
|
71.08
|
%
|
|
|
71.96
|
%
|
Expected term of options in years
|
|
|
5.4
|
|
|
|
6.7
|
|
|
|
6.7
|
|
Weighted-average fair value of options granted
|
|
$
|
11.66
|
|
|
$
|
20.38
|
|
|
$
|
15.08
|
|
During December 2004, we paid a one-time dividend of $1 per outstanding share of our Class A
and Class B common stock (Note 6) for the first time in our companys history. We do not intend to
pay additional dividends on our common stock and accordingly, the dividend yield
percentage is zero for all periods. 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 and so, our estimate of fair value may differ from other valuation models. Further,
the Black-Scholes model requires the input of highly subjective assumptions and because changes in
the subjective input assumptions can materially affect the fair value estimate, the existing models
do not necessarily provide a reliable single measure of the fair value of stock-based compensation
awards.
During 2004, in accordance with the guidance under SFAS 123 for selecting assumptions to use in an
option pricing model, we reduced our estimate of expected volatility based upon a re-evaluation of
the variability in the market price of our publicly traded stock. Historically, we have relied on
the variability in our daily stock price since inception to derive our estimate of expected
volatility. Upon review of this variability in our stock price over more recent periods, we believe
unadjusted historical experience is a relatively poor predictor of our future expectation of
volatility. Accordingly, we specifically identified extraordinary events in our history which
resulted in irregular movements in our stock price, and have disregarded the related periods in
calculating our historical average annual
F-18
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Continued
volatility. This adjustment, together with changes in the intervals of our regular historical price observations, contributed to the reduction in our
estimated volatility factor.
We will continue to evaluate our assumptions used to derive the estimated fair value of our options
as new events or changes in circumstances become known.
Basic and Diluted Net Income (Loss) Per Share
Statement of Financial Accounting Standards No. 128, Earnings Per Share (SFAS 128) requires
entities to present both basic earnings per share (EPS) and diluted EPS. Basic EPS excludes
dilution and is computed by dividing net 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 were exercised and convertible securities were
converted to common stock.
We recorded a net loss attributable to common shareholders for the years ending December 31, 2002.
Therefore, common stock equivalents and convertible securities are excluded from the computation of
diluted earnings (loss) per share for that period since the effect of including them is
anti-dilutive. Since we reported net income attributable to common shareholders for the year ending
December 31, 2004 and 2003, the potential dilution from stock options exercisable into common stock
for these periods was computed using the treasury stock method based on the average fair market
value of our Class A common stock for the period. The following table reflects the basic and
diluted weighted-average shares outstanding used to calculate basic and diluted earnings per share.
Earnings per share amounts for all periods are presented below in accordance with the requirements
of SFAS 128.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
|
(In thousands, except per share data)
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
214,769
|
|
|
$
|
224,506
|
|
|
$
|
(852,034
|
)
|
Gain on repurchase of Series D Convertible Preferred Stock
|
|
|
|
|
|
|
|
|
|
|
437,433
|
|
|
|
|
|
|
|
|
|
|
|
Numerator for basic and diluted net income (loss)
per common share
|
|
$
|
214,769
|
|
|
$
|
224,506
|
|
|
$
|
(414,601
|
)
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic net income (loss) per common share
weighted-average common shares outstanding
|
|
|
464,053
|
|
|
|
483,098
|
|
|
|
480,429
|
|
Impact of dilutive options outstanding
|
|
|
3,545
|
|
|
|
5,216
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for diluted net income (loss) per common share
weighted-average common shares outstanding
|
|
|
467,598
|
|
|
|
488,314
|
|
|
|
480,429
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income (loss) per share
|
|
$
|
0.46
|
|
|
$
|
0.46
|
|
|
$
|
(0.86
|
)
|
|
|
|
|
|
|
|
|
|
|
Diluted net income (loss) per share
|
|
$
|
0.46
|
|
|
$
|
0.46
|
|
|
$
|
(0.86
|
)
|
|
|
|
|
|
|
|
|
|
|
Shares of Class A common stock issuable upon conversion of:
|
|
|
|
|
|
|
|
|
|
|
|
|
4 7/8% Convertible Subordinated Notes due 2007
|
|
|
|
|
|
|
|
|
|
|
22,007
|
|
5 3/4% Convertible Subordinated Notes due 2008
|
|
|
23,100
|
|
|
|
23,100
|
|
|
|
23,100
|
|
3% Convertible Subordinated Note due 2010
|
|
|
6,866
|
|
|
|
6,866
|
|
|
|
|
|
3% Convertible Subordinated Note due 2011
|
|
|
399
|
|
|
|
|
|
|
|
|
|
As of December 31, 2004, 2003 and 2002 there were approximately 10.9 million, 10.1 million and 20.9
million options for shares of Class A common stock outstanding, respectively, not included in the
above denominator as their effect is antidilutive. Our 5 3/4% Convertible Subordinated Notes
due 2008, and our 3% Convertible Subordinated Notes due 2010 and 2011 are not included in the
diluted EPS calculation as the effect of the
F-19
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Continued
conversion of the notes would be anti-dilutive. Of the options outstanding as of December 31, 2004, options to purchase approximately 7.0 million shares
were outstanding under a long term incentive plan. Vesting of these options is contingent upon
meeting certain longer-term goals which have not yet been achieved. As such, the long-term
incentive options are not included in the diluted EPS calculation.
New Accounting Pronouncements
In December 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting
Standards No. 123 (Revised 2004), Share Based Payment (SFAS 123®) which (i) revises SFAS No.
123, Accounting for Stock-Based Compensation, (SFAS 123) to eliminate the disclosure only
provisions of that statement and the alternative to follow the intrinsic value method of accounting
under Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB
25) and its related implementation guidance, and (ii) requires a public entity to measure the cost
of employee services received in exchange for an award of equity instruments, including grants of
employee stock options, based on the grant-date fair value of the award and recognize that cost in
its results of operations over the period during which an employee is required to provide the
requisite service in exchange for that award. The statement is effective for financial statements
as of the beginning of the first interim period that begins after June 15, 2005. Companies may
elect to apply this statement either prospectively, or on a modified version of retrospective
application under which financial statements for prior periods are adjusted on a basis consistent
with the pro forma disclosures required for those periods under SFAS 123. We are currently evaluating which transitional provision and fair value methodology we will follow.
However, we expect that any expense associated with the adoption of the provisions of SFAS 123®
will have a material negative impact on our results of operations.
3. Property and Equipment
Property and equipment consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciable
|
|
|
|
|
|
|
Life
|
|
|
As of December 31,
|
|
|
|
(In Years)
|
|
|
2004
|
|
|
2003
|
|
|
|
|
|
|
|
(In thousands)
|
|
EchoStar I
|
|
|
12
|
|
|
$
|
201,607
|
|
|
$
|
201,607
|
|
EchoStar II
|
|
|
12
|
|
|
|
228,694
|
|
|
|
228,694
|
|
EchoStar III
|
|
|
12
|
|
|
|
234,083
|
|
|
|
234,083
|
|
EchoStar IV
|
|
|
4
|
|
|
|
78,511
|
|
|
|
78,511
|
|
EchoStar V
|
|
|
12
|
|
|
|
210,446
|
|
|
|
210,446
|
|
EchoStar VI
|
|
|
12
|
|
|
|
246,022
|
|
|
|
246,022
|
|
EchoStar VII
|
|
|
12
|
|
|
|
177,000
|
|
|
|
177,000
|
|
EchoStar VIII
|
|
|
12
|
|
|
|
175,801
|
|
|
|
189,513
|
|
EchoStar IX
|
|
|
12
|
|
|
|
127,376
|
|
|
|
127,376
|
|
AMC-15 satellite acquired under capital lease (Note 4)
|
|
|
10
|
|
|
|
330,800
|
|
|
|
|
|
Furniture, fixtures and equipment
|
|
|
2-10
|
|
|
|
664,778
|
|
|
|
613,789
|
|
Buildings and improvements
|
|
|
5-40
|
|
|
|
159,662
|
|
|
|
147,191
|
|
Equipment leased to customers
|
|
|
3-4
|
|
|
|
1,045,949
|
|
|
|
543,954
|
|
Tooling and other
|
|
|
1-5
|
|
|
|
14,191
|
|
|
|
5,100
|
|
Land
|
|
|
|
|
|
|
29,583
|
|
|
|
27,024
|
|
Vehicles
|
|
|
7
|
|
|
|
3,414
|
|
|
|
3,445
|
|
Construction in progress
|
|
|
|
|
|
|
273,153
|
|
|
|
86,490
|
|
|
|
|
|
|
|
|
|
|
|
|
Total property and equipment
|
|
|
|
|
|
$
|
4,201,070
|
|
|
$
|
3,120,245
|
|
Accumulated depreciation
|
|
|
|
|
|
|
(1,560,902
|
)
|
|
|
(1,243,786
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
|
|
|
$
|
2,640,168
|
|
|
$
|
1,876,459
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction in progress consists of the following:
F-20
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Continued
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2004
|
|
|
2003
|
|
|
|
(In thousands)
|
|
Progress amounts for satellite construction, including certain amounts
prepaid under satellite service agreements, launch, and launch insurance
|
|
$
|
202,687
|
|
|
$
|
24,303
|
|
Software related projects
|
|
|
36,848
|
|
|
|
35,148
|
|
Other
|
|
|
33,618
|
|
|
|
27,039
|
|
|
|
|
|
|
|
|
Construction in progress
|
|
$
|
273,153
|
|
|
$
|
86,490
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
|
(In thousands)
|
|
Equipment leased to customers
|
|
$
|
210,432
|
|
|
$
|
138,637
|
|
|
$
|
130,760
|
|
Satellites
|
|
|
134,619
|
|
|
|
145,232
|
|
|
|
128,155
|
|
Furniture, fixtures and equipment
|
|
|
110,272
|
|
|
|
93,030
|
|
|
|
92,180
|
|
Identifiable intangibles assets subject to amortization
|
|
|
33,939
|
|
|
|
10,346
|
|
|
|
11,123
|
|
Buildings and improvements
|
|
|
4,675
|
|
|
|
4,098
|
|
|
|
3,399
|
|
Tooling and other
|
|
|
8,964
|
|
|
|
6,863
|
|
|
|
7,341
|
|
|
|
|
|
|
|
|
|
|
|
Total depreciation and amortization
|
|
$
|
502,901
|
|
|
$
|
398,206
|
|
|
$
|
372,958
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales and operating expense categories included in our accompanying consolidated
statements of operations and comprehensive income (loss) do not include depreciation expense
related to satellites or Digital Home Advantage equipment.
Our Satellites
We presently have twelve owned or leased satellites in geostationary orbit approximately 22,300
miles above the equator. Each of the eight DBS satellites (EchoStar I through EchoStar VIII) and
one FSS Ku/Ka-band satellite (EchoStar IX) we own and operate has a minimum design life of at least
12 years. Our satellite fleet is a major component of our Echostar DBS System. While we believe
that overall our satellite fleet is in general good health, during 2004 and prior periods, certain
satellites within our fleet have experienced various anomalies, some of which have had a
significant adverse impact on their commercial operation.
EchoStar I and II
EchoStar I and II currently operate at the 148 degree orbital location. Each of these Series 7000
class satellites designed and manufactured by Lockheed Martin Corporation, has 16 transponders that
operate at approximately 130 watts of power. While both satellites are currently functioning
properly in orbit, similar Lockheed Series 7000 class satellites owned by third parties have
experienced total in-orbit failure. While we currently do not have sufficient information
available to reach any conclusions as to whether other satellites of the Series 7000 class might be
at increased risk of suffering a similar malfunction, no telemetry or other data indicates EchoStar
I or EchoStar II would be expected to experience a similar failure. EchoStar I and II are each
equipped with 24 Traveling Wave Tube Amplifiers (TWTA), of which 16 are required to support the
transponders authorized for operation on each satellite. Prior to 2004, failures or reduced
capabilities on a single TWTA on each of EchoStar I and II left each satellite with 23 usable
TWTAs. While we dont expect a large number of additional TWTAs to fail in any year, it is likely
that additional TWTA failures will occur from time to time in the future, and that those failures
may impact commercial operation of the satellites. We will continue to evaluate the performance of
EchoStar I and EchoStar II as new events or changes in circumstances become known.
F-21
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Continued
EchoStar III
EchoStar III currently operates at the 61.5 degree orbital location. During January 2004, a TWTA
pair on this satellite failed, resulting in a loss of service on one of our licensed transponders.
An additional TWTA pair failed in March 2004. Including the seven TWTA pairs that malfunctioned in
prior years, these anomalies have resulted in the failure of a total of 18 TWTAs on the satellite
to date. While originally designed to operate a maximum of 32 transponders at approximately 120
watts per channel, switchable to 16 transponders operating at over 230 watts per channel, the
satellite was equipped with a total of 44 TWTAs to provide redundancy. EchoStar III can now
operate a maximum of 26 transponders, but due to redundancy switching limitations and specific
channel authorizations it currently can only operate on 18 of the 19 FCC authorized frequencies we
utilize at the 61.5 degree west orbital location. While we dont expect a large number of
additional TWTAs to fail in any year, it is likely that additional TWTA failures will occur from
time to time in the future, and that those failures will further impact commercial operation of the
satellite. We will continue to evaluate the performance of EchoStar III as new events or changes
in circumstances become known.
EchoStar IV
EchoStar IV is currently located at the 157 degree orbital location. Prior to 2004, this satellite
experienced failures with the deployment of its solar arrays and with 38 of its 44 transponders
(including spares), and further experienced anomalies affecting its thermal systems and propulsion
systems. Several years ago, we filed a $219.3 million insurance claim for a total loss under the
launch insurance policies covering this satellite. On March 4, 2005, we agreed to settle this
claim (Note 9). On September 4, 2004, the south solar array on EchoStar IV deployed fully and
appears to be producing nominal current. There can be no assurance that further material
degradation, or total loss of use, of EchoStar IV will not occur in the immediate future. As of
December 31, 2003, EchoStar IV was fully depreciated.
EchoStar V
EchoStar V is currently located at the 119 degree orbital location. This satellite is equipped
with a total of 96 solar array strings, 92 of which are required to assure full power availability
for the 12-year design life of the satellite. Prior to 2004, EchoStar V experienced anomalies
resulting in the loss of 4 solar array strings. During March 2004, EchoStar V lost an additional
solar array string, reducing solar array power to approximately 95% of its original capacity.
While originally designed to operate a maximum of 32 transponders at approximately 110 watts per
channel, switchable to 16 transponders operating at approximately 220 watts per channel, the solar
array anomalies may prevent the use of some of those transponders for the full 12-year design life
of the satellite. In addition, momentum wheel anomalies previously experienced resulted in more rapid use of fuel and a corresponding minor reduction of
spacecraft life. An investigation of the anomalies is continuing. Until the root causes are
finally determined, there can be no assurance that future anomalies will not cause further losses
which could impact commercial operation of the satellite. EchoStar V is not currently carrying any
traffic and is being utilized as an in-orbit spare. We will continue to evaluate the performance
of EchoStar V as new events or changes in circumstances become known. Increased fuel use resulting
from commercial operation of the spacecraft or other events and circumstances would require us to
reduce the remaining depreciable life of EchoStar V.
EchoStar VI
EchoStar VI currently operates at the 110 degree orbital location. This satellite has 32
transponders that operate at approximately 120 watts per channel, switchable to 16 transponders
operating at approximately 240 watts per channel. The satellite has a total of approximately 112
solar array strings and approximately 106 are required to assure full power availability for the
estimated 12-year design life of the satellite. Prior to 2004, EchoStar VI lost a total of 3 solar
array strings. During April 2004 and again in July 2004, EchoStar VI experienced anomalies
resulting in the loss of two additional solar array strings, bringing the total number of string
losses to five. An investigation of the solar array anomalies, none of which have impacted
commercial operation of the satellite or are expected to reduce the estimated design life of the
satellite to less than 12 years, 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. We will continue to evaluate the performance of
EchoStar VI as new events or changes in circumstances become known.
F-22
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Continued
EchoStar VII
EchoStar VII currently operates at the 119 degree orbital location. This satellite has 32
transponders that operate at approximately 120 watts per channel, switchable to 16 transponders
operating at approximately 240 watts per channel. EchoStar VII also includes spot-beam technology
which enables us to increase the number of markets where we provide local channels, but reduces the
number of video channels that could otherwise be offered across the entire United States. Each
transponder can transmit multiple digital video, audio and data channels. During March 2004, our
EchoStar VII satellite lost a solar array circuit. EchoStar VII was designed with 24 solar array
circuits and needs 23 for the spacecraft to be fully operational at end of life. While this
anomaly is not expected to reduce the estimated design life of the satellite to less than 12 years
and has not impacted commercial operation of the satellite to date, an investigation of the anomaly
is continuing. Until the root causes are finally determined, there can be no assurance future
anomalies will not cause further losses which could impact commercial operation of the satellite.
We will continue to evaluate the performance of EchoStar VII as new events or changes in
circumstances become known.
EchoStar VIII
EchoStar VIII currently operates at the 110 degree orbital location. This satellite has 32
transponders that operate at approximately 120 watts per channel, switchable to 16 transponders
operating at approximately 240 watts per channel. EchoStar VIII also includes spot-beam
technology. During June 2004, EchoStar VIII experienced an anomaly which affected operation of one
of the primary gyroscopes on the satellite. A spare gyroscope has been switched in and is
performing nominally. EchoStar VIII was originally configured with three primary, and one spare,
gyroscope. Further, an anomaly previously experienced has resulted in certain gyroscopes being
utilized for aggregate periods of time substantially in excess of their originally qualified limits
in order to maintain nominal spacecraft operations and pointing. An investigation is underway to
determine the root cause of the anomaly and to develop procedures for continued spacecraft
operation in the event of future gyroscope anomalies. In January 2005, EchoStar VIII experienced a
fault within one of the computer components in the spacecraft control electronics. The system is
operating nominally on one processor with limited backup capacity. An investigation is underway to
determine the root cause of this anomaly and whether any permanent degradation or loss of
redundancy has occurred. While these anomalies are not expected to reduce the estimated design
life of the satellite to less than 12 years and have not impacted commercial operation of the
satellite to date, until the root causes of the anomalies are determined, there can be no assurance future anomalies will not cause losses which could impact
commercial operation of the satellite.
EchoStar VIII is equipped with two solar arrays which convert solar energy into power for the
satellite. Those arrays rotate continuously to maintain optimal exposure to the sun. During 2003,
EchoStar VIII experienced anomalies that temporarily halted rotation of each solar array. Both
arrays are currently fully functional, but rotating in a mode recommended by the satellite
manufacturer which allows full rotation but is different than the originally prescribed mode. An
investigation of the solar array anomalies, none of which have impacted commercial operation of the
satellite, is continuing. Until the root cause of these anomalies is finally determined, there can
be no assurance future anomalies will not cause losses which could impact commercial operation of
the satellite.
During 2003, a single battery cell on EchoStar VIII exhibited reduced capacity. There are 72
battery cells on EchoStar VIII and all loads can be maintained for the full design life of the
satellite with up to two battery cells fully failed. An investigation of the battery cell anomaly,
which has not impacted commercial operation of the satellite, is underway. Until the root cause of
the anomaly is determined, there can be no assurance future anomalies will not cause losses which
could impact commercial operation of the satellite.
F-23
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Continued
We depend on EchoStar VIII to provide local channels to over 40 markets until at least such time as
our EchoStar X satellite is successfully launched which is currently expected during the fourth
quarter of 2005 (Note 9). In the event that EchoStar VIII experienced a total or substantial
failure, we could transfer many, but not all, of those channels to other in-orbit satellites.
We were required to make in-orbit incentive payments in the aggregate amount of $15.0 million over
a period of 14 years from launch as part of the purchase price for EchoStar VIII. These in-orbit
incentive payments may be reduced in the event that certain anomalies are experienced by the
satellite. Following launch of EchoStar VIII, we recognized the total amount of these in-orbit
incentive payments by increasing the amount capitalized for the satellite. As a result of the
anomalies experienced by the satellite to date, we determined that payment of these in-orbit
incentives was no longer probable and reduced our remaining estimated obligation of approximately
$13.7 million to zero as December 31, 2004 by reducing the amount capitalized for the satellite.
EchoStar IX
EchoStar IX currently operates at the 121 degree orbital location. This satellite has 32 Ku-band
transponders that operate at approximately 110 watts per channel, along with transponders that can
provide services in Ka-Band (a Ka-band payload). EchoStar IX provides expanded video and audio
channels to DISH Network subscribers who install a specially-designed dish. The Ka-band spectrum
is being used to test and verify potential future broadband initiatives and to implement those
services.
SFAS 144 requires a long-lived asset or asset group to be tested for recoverability whenever events
or changes in circumstance indicate that its carrying amount may not be recoverable. Based on the
guidance under SFAS 144, we evaluate our satellite fleet for recoverability as an asset group.
While certain of the anomalies discussed above, and previously disclosed, may be considered to
represent a significant adverse change in the physical condition of an individual satellite, based
on the redundancy designed within each satellite and considering the asset grouping, these
anomalies (none of which caused a loss of service for an extended period) are not considered to be
significant events that would require evaluation for impairment recognition pursuant to the
guidance under SFAS 144. Should any one satellite be abandoned or determined to have no service
potential, the net carrying amount would be written off.
We currently do not carry insurance for any of our in-orbit satellites. To satisfy insurance
covenants related to our 9 3/8% Senior Notes due 2009 and 10 3/8% Senior Notes due 2007, we
previously classified an amount equal to the depreciated cost of five of our satellites as cash
reserved for satellite insurance on our consolidated balance sheets. As of December 31, 2003, this
amount totaled approximately $176.8 million. During 2004, we redeemed all of these Notes (Note 4)
and are no longer subject to these insurance covenants. Since the indentures for our remaining
outstanding notes do not have covenants requiring satellite insurance, we reclassified the remaining amount of the reserve to cash and cash
equivalents during the fourth quarter of 2004.
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, programming continuity
cannot be assured in the event of multiple satellite losses.
9 3/8% Senior Notes due 2009 and 10 3/8% Senior Notes due 2007
Effective February 2, 2004, we redeemed the remainder of our outstanding 9 3/8% Senior Notes due
2009. In accordance with the terms of the indenture governing the notes, the remaining $1.423
billion principal amount of the notes was repurchased at 104.688%, for a total of approximately
$1.490 billion. As a result of this redemption,
F-24
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Continued
We have been discharged and released from our obligations under the related indenture. The premium paid of approximately $66.7 million, along
with unamortized debt issuance costs of approximately $10.8 million, was recorded as charges to
earnings and is included in interest expense in the consolidated statements of operations and
comprehensive income (loss).
Effective October 1, 2004, we redeemed all of our outstanding 10 3/8% Senior Notes due 2007. In
accordance with the terms of the indenture governing the notes, the $1.0 billion principal amount of the notes was
redeemed at 105.188%, for a total of approximately $1.052 billion. As a result of this redemption,
we have been discharged and released from our obligations under the related indenture. The
premium paid of approximately $51.9 million, along with unamortized debt issuance costs of
approximately $4.1 million, was recorded as charges to earnings and is included in interest expense
in the consolidated statements of operations and comprehensive income (loss).
5 3/4% Convertible Subordinated Notes due 2008
The 5 3/4% Convertible Subordinated Notes mature May 15, 2008. 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.
The 5 3/4% Convertible Subordinated Notes are general unsecured obligations and junior in right of
payment to:
|
|
all existing and future senior obligations;
|
|
|
|
all of our secured debts to the extent of the value of the assets securing those debts; and
|
|
|
|
all existing and future debts and other liabilities or our subsidiaries.
|
Except under certain circumstances requiring prepayment premiums, and in other limited
circumstances, the 5 3/4% Convertible Subordinated Notes were not redeemable at our option prior to
May 15, 2004. Beginning May 15, 2004, the 5 3/4% Convertible Subordinated Notes became subject to
redemption, at our option, in whole or in part, at redemption prices decreasing annually from
103.286% to 100% on 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 our Class A common stock at a conversion price of $43.29 per share.
The indenture related to the 5 3/4% Convertible Subordinated Notes (the 5 3/4% Convertible
Subordinated Notes Indenture) contains certain restrictive covenants that do not impose material
limitations on us.
In the event of a change of control, as defined in the 5 3/4% Convertible Subordinated Notes
Indenture, we will be required to make an offer to repurchase all or any part of the holders 5
3/4% Convertible Subordinated 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.
9 1/8% Senior Notes due 2009
The 9 1/8% Senior Notes mature January 15, 2009.
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.
Effective September 3, 2003, we redeemed $245.0 million principal amount of our 9 1/8% Senior
Notes due 2009, fully exercising our optional partial redemption right. During the second quarter
of 2004, we repurchased in open market transactions approximately $8.8 million principal amount
of our 9 1/8% Senior Notes due 2009. The approximate $1.1 million difference between the market
price paid and the principal amount of the notes, together with approximately $0.1 million of
unamortized debt issuance costs related to the notes repurchased during 2004, were recorded as
charges to earnings and are included in interest expense in the consolidated statements of
operations and comprehensive income (loss). The outstanding principal amount of the notes after the
redemption and repurchase is $446.2 million. As a portion of the 9 1/8% Senior Notes remains
outstanding as of December 31,
F-25
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Continued
2004, we continue to be subject to the terms of the related indentures until such time as the 9 1/8% Senior Notes are fully redeemed.
The 9 1/8% Senior Notes are guaranteed by substantially all subsidiaries of EDBS on a senior basis.
The 9 1/8% Senior Notes are general unsecured senior obligations which:
|
|
rank senior with all of EDBS future subordinated debt; and
|
|
|
|
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% Senior Notes are not redeemable at our option prior to January 15,
2006. Thereafter, the 9 1/8% Senior Notes will be subject to redemption, at our 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% Senior Notes (the 9 1/8% Senior Notes Indenture) contains
restrictive covenants that, among other things, impose limitations on the ability of EDBS and its
restricted subsidiaries to:
|
|
incur additional indebtedness or enter into sale and leaseback transactions;
|
|
|
|
pay dividends or make distribution on EDBS capital stock or repurchase EDBS capital stock;
|
|
|
|
make certain investments;
|
|
|
|
create liens;
|
|
|
|
enter into transactions with affiliates;
|
|
|
|
merge or consolidate with another company; and
|
|
|
|
transfer and sell assets
|
In the event of a change of control, as defined in the 9 1/8% Senior Notes Indenture, we will be
required to make an offer to repurchase all or any part of a holders 9 1/8% Senior 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.
3% Convertible Subordinated Note due 2010
On July 21, 2003, we sold $500.0 million principal amount of the 3% Convertible Subordinated Note
due 2010 which mature July 21, 2010 to SBC Communications, Inc. (SBC) in a privately negotiated
transaction. Interest accrues at an annual rate of 3% and is payable semi-annually in cash, in
arrears on June 30 and December 31 of each year.
The 3% Convertible Subordinated Note due 2010 is convertible into approximately 6.87 million shares
of our Class A common stock at the option of SBC at $72.82 per share, subject to adjustment in
certain circumstances.
The 3% Convertible Subordinated Note due 2010 is:
|
|
general unsecured obligations;
|
|
|
|
ranked junior in right of payment with all of our existing and future senior debt;
|
|
|
|
ranked equal in right of payment to our existing convertible subordinated debt; and
|
|
|
|
ranked equal in right of payment to all other existing and future indebtedness
whenever the instrument expressly provides that such indebtedness ranks equal with the 3%
Convertible Subordinated Note due 2010.
|
The indenture related to the 3% Convertible Subordinated Note due 2010 contains certain restrictive
covenants that do not impose material limitations on us.
In the event of a change of control, as defined in the related indenture, we will be required to
make an offer to repurchase all or any part of the holders 3% Convertible Subordinated Note due
2010 at a purchase price equal to
F-26
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Continued
100% of the aggregate principal amount thereof, together with accrued and unpaid interest thereon, to the date of repurchase. Commencing July 21, 2008, we may
redeem, and SBC may require us to purchase, all or a portion of the note without premium.
Floating Rate Senior Notes due 2008
On October 2, 2003, we sold $500.0 million principal amount of Floating Rate Senior Notes which
mature October 1, 2008. Interest accrues at a floating rate based on three month LIBOR plus 3.25%, and is
payable quarterly in cash in arrears on January 1, April 1, July 1 and October 1 of each year,
commencing January 1, 2004. The interest rate at December 31, 2004 was 5.81%. The proceeds, along
with proceeds from our 5 3/4% and 6 3/8% Senior Notes, were used primarily to repurchase or redeem
all or a portion of our outstanding 9 3/8% Senior Notes due 2009 and other outstanding debt
securities, and for general corporate purposes.
The Floating Rate Senior Notes will be redeemable, in whole or in part, at any time beginning
October 1, 2005 at redemption prices decreasing from 102% during the year commencing October 1,
2005 to 100% on or after October 1, 2007. Prior to October 1, 2005, we may also redeem up to 35% of
each of the Floating Rate Senior Notes at premiums specified in the indenture with the net cash
proceeds from certain equity offerings or capital contributions.
The Floating Rate Senior Notes are:
|
|
general unsecured senior obligations of EDBS;
|
|
|
|
ranked equally in right of payment with all of EDBS and the guarantors existing and
future unsecured senior debt;
|
|
|
|
ranked effectively junior to our and the guarantors current and future secured
senior indebtedness up to the value of the collateral securing such indebtedness.
|
The indenture related to our Floating Rate Senior Notes (the Floating Rate Senior Notes
Indenture) contains restrictive covenants that, among other things, impose limitations on the
ability of EDBS and its restricted subsidiaries to:
|
|
incur additional indebtedness or enter into sale and leaseback transactions;
|
|
|
|
pay dividends or make distribution on EDBS capital stock or repurchase EDBS capital stock;
|
|
|
|
make certain investments;
|
|
|
|
create liens;
|
|
|
|
enter into transactions with affiliates;
|
|
|
|
merge or consolidate with another company; and
|
|
|
|
transfer and sell assets
|
In the event of a change of control, as defined in the related indenture, we will be required to
make an offer to repurchase all or any part of a holders Floating Rate Senior 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% Senior Notes due 2008
On October 2, 2003, we sold $1.0 billion principal amount of our 5 3/4% Senior Notes which mature
October 1, 2008. Interest accrues at an annual rate of 5 3/4% and is payable semi-annually in cash
in arrears on April 1 and October 1 of each year, commencing April 1, 2004. The proceeds, along
with proceeds from the Floating Rate Senior Notes and the 6 3/8% Senior Notes, were used primarily
to repurchase or redeem all or a portion of our outstanding 9 3/8% Senior Notes due 2009 and
other outstanding debt securities, and for general corporate purposes.
The 5 3/4% Senior Notes will be redeemable, in whole or in part, at any time at a redemption price
equal to 100% of their principal amount plus a make-whole premium, as defined in the related
indenture, together with accrued and
F-27
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Continued
unpaid interest. Prior to October 1, 2006, we may also redeem up to 35% of each of the 5 3/4% Senior Notes at specified premiums with the net cash proceeds from
certain equity offerings or capital contributions.
The 5 3/4% Senior Notes are:
|
|
general unsecured senior obligations of EDBS;
|
|
|
|
ranked equally in right of payment with all of EDBS and the guarantors existing and
future unsecured senior debt;
|
|
|
|
ranked effectively junior to our and the guarantors current and future secured
senior indebtedness up to the value of the collateral securing such indebtedness.
|
The indenture related to the 5 3/4% Senior Notes (the 5 3/4% Senior Notes Indenture) contains
restrictive covenants that, among other things, impose limitations on the ability of EDBS and its
restricted subsidiaries to:
|
|
incur additional indebtedness or enter into sale and leaseback transactions;
|
|
|
|
pay dividends or make distribution on EDBS capital stock or repurchase EDBS capital stock;
|
|
|
|
make certain investments;
|
|
|
|
create liens;
|
|
|
|
enter into transactions with affiliates;
|
|
|
|
merge or consolidate with another company; and
|
|
|
|
transfer and sell assets
|
In the event of a change of control, as defined in the related indenture, we will be required to
make an offer to repurchase all or any part of a holders 5 3/4% Senior 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.
6 3/8% Senior Notes due 2011
On October 2, 2003, we sold $1.0 billion principal amount of our 6 3/8% Senior Notes which mature
October 1, 2011. Interest accrues at an annual rate of 6 3/8% and is payable semi-annually in cash
in arrears on April 1 and October 1 of each year, commencing April 1, 2004. The proceeds, along
with proceeds from the Floating Rate Senior Notes and the 5 3/4% Senior Notes, were used primarily
to repurchase or redeem all or a portion of our outstanding 9 3/8% Senior Notes due 2009 and
other outstanding debt securities, and for general corporate purposes.
The 6 3/8% Senior Notes will be redeemable, in whole or in part, at any time at a redemption price
equal to 100% of their principal amount plus a make-whole premium, as defined in the related
indenture, together with accrued and unpaid interest. Prior to October 1, 2006, we may also redeem
up to 35% of each of the 6 3/8% Senior Notes at specified premiums with the net cash proceeds from
certain equity offerings or capital contributions.
The 6 3/8% Senior Notes are:
|
|
general unsecured senior obligations of EDBS;
|
|
|
|
ranked equally in right of payment with all of EDBS and the guarantors existing and
future unsecured senior debt;
|
|
|
|
ranked effectively junior to our and the guarantors current and future secured
senior indebtedness up to the value of the collateral securing such indebtedness.
|
The indenture related to the 6 3/8% Senior Notes (the 6 3/8% Senior Notes Indenture) contains
restrictive covenants that, among other things, impose limitations on the ability of EDBS and its
restricted subsidiaries to:
|
|
incur additional indebtedness or enter into sale and leaseback transactions;
|
|
|
|
pay dividends or make distribution on EDBS capital stock or repurchase EDBS capital stock;
|
|
|
|
make certain investments;
|
F-28
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Continued
|
|
create liens;
|
|
|
|
enter into transactions with affiliates;
|
|
|
|
merge or consolidate with another company; and
|
|
|
|
transfer and sell assets
|
In the event of a change of control, as defined in the related indenture, we will be required to
make an offer to repurchase all or any part of a holders 6 3/8% Senior 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.
3% Convertible Subordinated Note due 2011
On August 25, 2004, we sold $25.0 million principal amount of the 3% Convertible Subordinated Note
due 2011 which mature August 25, 2011 to CenturyTel Service Group, LLC (CTL) in a privately
negotiated transaction. Interest accrues at an annual rate of 3% and is payable semi-annually in
cash, in arrears on June 30 and December 31 of each year, commencing December 31, 2004.
The 3% Convertible Subordinated Note due 2011 is convertible into approximately 398,724 shares of
our Class A common stock at the option of CTL at $62.70 per share, subject to adjustment in certain
circumstances.
The 3% Convertible Subordinated Note due 2011 is:
|
|
general unsecured obligations;
|
|
|
|
ranked junior in right of payment with all of our existing and future senior debt;
|
|
|
|
ranked equal in right of payment to our existing convertible subordinated debt; and
|
|
|
|
ranked equal in right of payment to all other existing and future indebtedness
whenever the instrument expressly provides that such indebtedness ranks equal with the 3%
Convertible Subordinated Note due 2011.
|
The indenture related to the 3% Convertible Subordinated Note due 2011 contains certain restrictive
covenants that do not impose material limitations on us.
In the event of a change of control, as defined in the related indenture, we will be required to
make an offer to repurchase all or any part of the holders 3% Convertible Subordinated Note due
2011 at a purchase price equal to 100% of the aggregate principal amount thereof, together with
accrued and unpaid interest thereon, to the date of repurchase. Commencing August 25, 2009, we may
redeem, and CTL may require us to purchase, all or a portion of the note without premium.
6 5/8% Senior Notes due 2014
On October 1, 2004, we sold $1.0 billion principal amount of our 6 5/8% Senior Notes which mature
October 1, 2014 in a private placement to qualified institutional buyers in reliance on Rule 144A
under the Securities Act of 1933. Interest accrues at an annual rate of 6 5/8% and is payable
semi-annually in cash in arrears on April 1 and October 1 of each year, commencing April 1, 2005.
The proceeds, together with available cash, were used to redeem all of our outstanding 10 3/8%
Senior Notes due 2007.
We have agreed to offer to exchange the 6 5/8% Senior Notes for new issues of identical debt
securities registered under the Securities Act of 1933.
The 6 5/8% Senior Notes will be redeemable, in whole or in part, at any time at a redemption price
equal to 100% of their principal amount plus a make-whole premium, as defined in the related
indenture, together with accrued and unpaid interest. Prior to October 1, 2007, we may also redeem
up to 35% of each of the 6 5/8% Senior Notes at specified premiums with the net cash proceeds from
certain equity offerings or capital contributions.
The 6 5/8% Senior Notes are:
F-29
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Continued
|
|
general unsecured senior obligations of EDBS;
|
|
|
|
ranked equally in right of payment with all of EDBS and the guarantors existing and
future unsecured senior debt;
|
|
|
|
ranked effectively junior to our and the guarantors current and future secured
senior indebtedness up to the value of the collateral securing such indebtedness.
|
The indenture related to the 6 5/8% Senior Notes (the 6 5/8% Senior Notes Indenture) contains
restrictive covenants that, among other things, impose limitations on the ability of EDBS and its
restricted subsidiaries to:
|
|
incur additional indebtedness or enter into sale and leaseback transactions;
|
|
|
|
pay dividends or make distribution on EDBS capital stock or repurchase EDBS capital stock;
|
|
|
|
make certain investments;
|
|
|
|
create liens;
|
|
|
|
enter into transactions with affiliates;
|
|
|
|
merge or consolidate with another company; and
|
|
|
|
transfer and sell assets.
|
In the event of a change of control, as defined in the related indenture, we will be required to
make an offer to repurchase all or any part of a holders 6 5/8% Senior 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.
Capital Lease Obligation, Mortgages and Other Notes Payable
Capital lease obligation, mortgages and other notes payable consists of the following:
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2004
|
|
|
2003
|
|
|
|
(In thousands)
|
|
AMC-15 satellite financed under capital lease obligation
|
|
$
|
286,605
|
|
|
$
|
|
|
8.25% note payable for EchoStar IV satellite vendor financing due
upon resolution of satellite insurance claim (Note 3)
|
|
|
11,327
|
|
|
|
11,327
|
|
8% note payable for EchoStar VII satellite vendor financing, payable over 13 years from launch
|
|
|
13,549
|
|
|
|
14,302
|
|
8% note payable for EchoStar VIII satellite vendor financing (Note 3)
|
|
|
|
|
|
|
14,381
|
|
8% note payable for EchoStar IX satellite vendor financing, payable over 14 years from launch
|
|
|
9,587
|
|
|
|
10,000
|
|
Mortgages and other unsecured notes payable due in installments through
August 2020 with interest rates ranging from 2% to 10%
|
|
|
10,667
|
|
|
|
9,312
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
331,735
|
|
|
$
|
59,322
|
|
Less current portion
|
|
|
(45,062
|
)
|
|
|
(14,995
|
)
|
|
|
|
|
|
|
|
Capital lease obligation, mortgages and other notes payable, net of current portion
|
|
$
|
286,673
|
|
|
$
|
44,327
|
|
|
|
|
|
|
|
|
Capital Lease Obligation
During March 2003, we entered into a
satellite service agreement with SES Americom for all of the
capacity on a new Fixed Satellite Service (FSS) satellite,
AMC-15, which successfully
launched during the fourth quarter of 2004 and commenced commercial
operations in January 2005. In connection with this
agreement, we prepaid $50.0 million to SES Americom during 2003. The ten-year satellite service
agreement for the new satellite is renewable by us on a year to year basis following the initial
term, and provides us with certain rights to replacement satellites. We are required to make
monthly payments to SES Americom for this satellite over the next ten years beginning in 2005. In
accordance with Statement of Financial
F-30
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Continued
Accounting Standards No. 13 (SFAS 13), we have accounted for the satellite component of this agreement as a capital lease. We did not recognize any
depreciation on the satellite acquired under this capital lease during 2004.
Future minimum lease payments under this capital lease obligation, together with the present value of the net
minimum lease payments as of December 31, 2004 are as follows:
|
|
|
|
|
For the Year Ending December 31,
2005
|
|
$
|
56,600
|
|
2006
|
|
|
52,000
|
|
2007
|
|
|
52,000
|
|
2008
|
|
|
52,000
|
|
2009
|
|
|
52,000
|
|
Thereafter
|
|
|
254,656
|
|
|
|
|
|
Total minimum lease payments
|
|
|
519,256
|
|
Less: Amount representing lease of the orbital location and estimated executory costs (primarily
insurance and maintenance) including profit thereon, included in total minimum lease payments
|
|
|
(113,690
|
)
|
|
|
|
|
Net minimum lease payments
|
|
|
405,566
|
|
Less: Amount representing interest
|
|
|
(118,961
|
)
|
|
|
|
|
Present value of net minimum lease payments
|
|
|
286,605
|
|
Less: Current portion
|
|
|
(28,463
|
)
|
|
|
|
|
Long-term portion of capital lease obligation
|
|
$
|
258,142
|
|
|
|
|
|
Future maturities of our outstanding long-term debt, including the current portion, are
summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments due by period
|
|
|
|
Total
|
|
|
2005
|
|
|
2006-2007
|
|
|
2008-2009
|
|
|
Thereafter
|
|
|
|
(In thousands)
|
|
Long-term debt obligations
|
|
$
|
5,471,153
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
2,946,153
|
|
|
$
|
2,525,000
|
|
Capital lease obligation, mortgages and other notes payable
|
|
|
331,735
|
|
|
|
45,062
|
|
|
|
48,885
|
|
|
|
54,041
|
|
|
|
183,747
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
5,802,888
|
|
|
|
45,062
|
|
|
$
|
48,885
|
|
|
$
|
3,000,194
|
|
|
$
|
2,708,747
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5. Income Taxes
As of December 31, 2004, we had net operating loss carryforwards (NOLs) for federal income tax
purposes of approximately $3.346 billion and credit carryforwards of approximately $9.2 million.
The NOLs begin to expire in the year 2011 and capital loss and credit carryforwards will begin to
expire in the year 2006.
During 2004 and 2003, we decreased our valuation allowance by approximately $76.8 million and $83.0
million, respectively, as a result of a decrease in net deferred tax assets each year. During 2002,
we increased our valuation allowance by approximately $277.9 million to fully offset all net
deferred tax assets. Included in this increase is $210.8 million relating to deferred tax assets
generated during 2002 and $67.1 million relating to the balance of the net deferred tax asset that
was not offset by a valuation allowance at December 31, 2001.
The Federal NOL includes amounts related to tax deductions totaling approximately $270.0 million
for exercised stock options. The tax benefit of these deductions has been allocated directly to
contributed capital and has been offset by a valuation allowance.
During 2004 and 2003, stock option compensation expenses related to the 1999 Incentive Plan, for
which an estimated deferred tax benefit was previously recorded, exceeded the actual tax deductions
allowed. Tax charges associated with the reversal of the prior tax benefit have been allocated to
additional paid-in capital in accordance with Accounting Principals Board Opinion No. 25, Accounting for Stock Issued to
Employees. During 2004 and 2003, charges of $2.2 and $6.4 million, respectively, were made to
additional paid-in capital.
F-31
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Continued
The components of the (provision for) benefit from income taxes are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
|
(In thousands)
|
|
Current (provision) benefit:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
(523
|
)
|
|
$
|
(141
|
)
|
|
$
|
|
|
State
|
|
|
(5,824
|
)
|
|
|
(13,608
|
)
|
|
|
(5,279
|
)
|
Foreign
|
|
|
(428
|
)
|
|
|
(739
|
)
|
|
|
(2,075
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,775
|
)
|
|
|
(14,488
|
)
|
|
|
(7,354
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred (provision) benefit:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(75,306
|
)
|
|
|
(71,318
|
)
|
|
|
224,452
|
|
State
|
|
|
(6,313
|
)
|
|
|
(11,579
|
)
|
|
|
(12,333
|
)
|
Decrease (increase) in valuation allowance
|
|
|
76,785
|
|
|
|
83,009
|
|
|
|
(277,863
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,834
|
)
|
|
|
112
|
|
|
|
(65,744
|
)
|
|
|
|
|
|
|
|
|
|
|
Total benefit (provision)
|
|
$
|
(11,609
|
)
|
|
$
|
(14,376
|
)
|
|
$
|
(73,098
|
)
|
|
|
|
|
|
|
|
|
|
|
The actual tax provisions for 2004, 2003 and 2002 reconcile to the amounts computed by
applying the statutory Federal tax rate to income before taxes as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
|
(% of pre-tax (income) loss)
|
|
Statutory rate
|
|
|
(35.0
|
)
|
|
|
(35.0
|
)
|
|
|
35.0
|
|
State income taxes, net of Federal benefit
|
|
|
(3.5
|
)
|
|
|
(6.8
|
)
|
|
|
(1.5
|
)
|
Contingent value rights
|
|
|
|
|
|
|
|
|
|
|
(0.9
|
)
|
Foreign taxes and income not U.S. taxable
|
|
|
(0.8
|
)
|
|
|
|
|
|
|
(0.2
|
)
|
Stock option compensation
|
|
|
(0.6
|
)
|
|
|
(1.2
|
)
|
|
|
0.7
|
|
Deferred tax asset adjustment for filed returns
|
|
|
2.3
|
|
|
|
3.7
|
|
|
|
(2.1
|
)
|
Cumulative change in effective state tax rate
|
|
|
|
|
|
|
|
|
|
|
(4.1
|
)
|
Intangible amortization and other
|
|
|
(1.5
|
)
|
|
|
(1.5
|
)
|
|
|
(0.6
|
)
|
Decrease (increase) in valuation allowance
|
|
|
34.0
|
|
|
|
34.8
|
|
|
|
(35.7
|
)
|
|
|
|
|
|
|
|
|
|
|
Total benefit (provision) for income taxes
|
|
|
(5.1
|
)
|
|
|
(6.0
|
)
|
|
|
(9.4
|
)
|
|
|
|
|
|
|
|
|
|
|
The temporary differences, which give rise to deferred tax assets and liabilities as of
December 31, 2004 and 2003, are as follows:
F-32
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Continued
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2004
|
|
|
2003
|
|
|
|
(In thousands)
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
NOL, credit and other carryforwards
|
|
$
|
1,221,236
|
|
|
$
|
1,188,537
|
|
Unrealized losses on investments
|
|
|
53,923
|
|
|
|
111,221
|
|
Accrued expenses
|
|
|
23,858
|
|
|
|
32,639
|
|
Stock compensation
|
|
|
15,122
|
|
|
|
16,967
|
|
Equity method investments
|
|
|
|
|
|
|
1,076
|
|
Deferred
revenue
|
|
|
70,286
|
|
|
|
33,288
|
|
Other
|
|
|
12,742
|
|
|
|
12,279
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
1,397,167
|
|
|
|
1,396,007
|
|
Valuation allowance
|
|
|
(1,001,974
|
)
|
|
|
(1,111,841
|
)
|
|
|
|
|
|
|
|
Deferred tax asset after valuation allowance
|
|
|
395,193
|
|
|
|
284,166
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Equity method investments
|
|
|
(17,128
|
)
|
|
|
|
|
Depreciation and amortization
|
|
|
(385,847
|
)
|
|
|
(288,539
|
)
|
State taxes net of federal effect
|
|
|
(12,108
|
)
|
|
|
(8,503
|
)
|
Other
|
|
|
(247
|
)
|
|
|
(246
|
)
|
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
|
(415,330
|
)
|
|
|
(297,288
|
)
|
|
|
|
|
|
|
|
Net deferred tax asset (liability)
|
|
$
|
(20,137
|
)
|
|
$
|
(13,122
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current portion of net deferred tax asset (liability)
|
|
$
|
21,318
|
|
|
$
|
37,783
|
|
Noncurrent portion of net deferred tax asset (liability)
|
|
|
(41,455
|
)
|
|
|
(50,905
|
)
|
|
|
|
|
|
|
|
Total net deferred tax asset (liability)
|
|
$
|
(20,137
|
)
|
|
$
|
(13,122
|
)
|
|
|
|
|
|
|
|
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 10 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 10
votes for each share of Class C common stock held. Our principal stockholder owns all outstanding
Class B common stock and, together with all other stockholders, own outstanding Class A common
stock. There are no shares of Class C common stock outstanding.
Common Stock Repurchase Programs
During the fourth quarter of 2003, our Board of Directors authorized the repurchase of an aggregate
of up to $1.0 billion of our Class A common stock. During 2004 and 2003, we purchased approximately
25.9 million and 5.9 million shares of our Class A common stock, respectively, for approximately
$809.6 million and $190.4 million, respectively. As of July 15, 2004, we had completed this share
repurchase plan, having purchased a total of 31.8 million shares of our Class A common stock for a
total of $1.0 billion.
Effective August 9, 2004, our Board of Directors authorized the repurchase of an aggregate of up to
an additional $1.0 billion of our Class A common stock pursuant to a new share repurchase plan. As
of December 31, 2004, we had not repurchased any shares under this plan. Our share repurchase
program does not require us to acquire any specific number or amount of securities and may be
terminated at any time.
F-33
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Continued
Cash Dividend
On December 14, 2004, we paid a one-time cash dividend of $1.00 per share, or approximately $455.7
million, on outstanding shares of our Class A and Class B common stock to shareholders of record at
the close of business on December 8, 2004.
7.
|
Stock Compensation Plans
|
Stock Incentive Plans
We have adopted stock incentive plans to attract and retain officers, directors and key employees.
We currently have 80.0 million shares of our Class A common stock reserved for granting awards
under our 1995 Stock Incentive Plan and an additional 80.0 million shares of our Class A common
stock for granting awards under our 1999 Stock Incentive Plan. In general, stock options granted
through December 31, 2004 have included exercise prices not less than the fair market value of our
Class A common stock at the date of grant, and vest, as determined by our Board of Directors,
generally at the rate of 20% per year.
During 1999, we adopted an incentive plan under our 1995 Stock Incentive Plan, which provided
certain key employees a contingent incentive including stock options and cash. 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, in 1999, we recorded approximately $178.8 million of
deferred compensation related to post-grant appreciation of options to purchase approximately 4.2
million shares. The related deferred compensation, net of forfeitures, was recognized over the
five-year option vesting period. During the year ended December 31, 2004, 2003 and 2002, we
recognized expense of $1.2 million, $3.5 million and $11.3 million, respectively, under the 1999
incentive plan. There is no remaining deferred compensation to be recognized under this plan.
Effective January 26, 2005, we adopted a long-term, performance-based stock incentive plan (the
2005 LTIP) within the terms of our 1999 Stock Incentive Plan to provide incentive to our
executive officers and certain other key employees upon achievement of specified long-term business
objectives. Employees participating in the 2005 LTIP may elect to receive a one-time award of (i)
an option to acquire a specified number of shares priced at market value on the date of the awards,
expected to be March 31, 2005; (ii) rights to acquire for no additional consideration a specified
smaller number of shares of our Class A common stock; or (iii) a corresponding combination of a
lesser number of option shares and such rights to acquire our Class A common stock. The options and
rights will vest at a varying rate over a seven year period; provided, however, that none of the
options or rights will vest if we fail to achieve the specified long-term performance goal. We will
record the related compensation when achievement of this performance goal becomes probable, if
ever. Such compensation, if recorded, would likely result in material non-cash, stock-based
compensation expense in our consolidated statements of operations and comprehensive income
(loss).
We report all non-cash compensation based on stock option appreciation as a single expense
category in our accompanying consolidated statements of operations and comprehensive income (loss).
The following table represents the other expense categories in our consolidated statements of operations and
comprehensive income
F-34
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Continued
(loss) 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
|
(In thousands)
|
|
Subscriber-related
|
|
$
|
51
|
|
|
$
|
34
|
|
|
$
|
729
|
|
Satellite and transmission
|
|
|
69
|
|
|
|
359
|
|
|
|
(7
|
)
|
General and administrative
|
|
|
1,060
|
|
|
|
3,151
|
|
|
|
10,557
|
|
|
|
|
|
|
|
|
|
|
|
Total non-cash, stock-based compensation
|
|
$
|
1,180
|
|
|
$
|
3,544
|
|
|
$
|
11,279
|
|
|
|
|
|
|
|
|
|
|
|
Options to purchase an additional 7.0 million shares are outstanding as of December 31, 2004
and were granted with exercise prices equal to the fair market value of the underlying shares on
the date they were issued during 1999, 2000 and 2001 pursuant to a long-term incentive plan under
our 1995 Stock Incentive Plan. The weighted-average exercise price of these options is $8.90.
Vesting of these options is contingent upon meeting certain longer-term goals which have not yet
been achieved. Consequently, no compensation was recorded during the years ended December 31, 2004,
2003 and 2002 related to these long-term options. We will record the related compensation at the
achievement of the performance goals, if ever. Such compensation, if recorded, would likely result
in material non-cash, stock-based compensation expense in our consolidated statements of operations
and comprehensive income (loss).
A summary of our stock option activity for the years ended December 31, 2004, 2003 and 2002 is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
Exercise
|
|
|
|
|
|
|
Exercise
|
|
|
|
|
|
|
Exercise
|
|
|
|
Options
|
|
|
Price
|
|
|
Options
|
|
|
Price
|
|
|
Options
|
|
|
Price
|
|
Options outstanding, beginning of year
|
|
|
17,735,818
|
|
|
$
|
16.59
|
|
|
|
20,874,925
|
|
|
$
|
13.97
|
|
|
|
22,793,593
|
|
|
$
|
13.18
|
|
Granted
|
|
|
4,223,000
|
|
|
|
31.64
|
|
|
|
1,354,500
|
|
|
|
29.93
|
|
|
|
532,088
|
|
|
|
20.76
|
|
Exercised
|
|
|
(2,154,498
|
)
|
|
|
6.64
|
|
|
|
(3,010,713
|
)
|
|
|
5.75
|
|
|
|
(1,392,218
|
)
|
|
|
5.30
|
|
Forfeited
|
|
|
(2,125,104
|
)
|
|
|
19.70
|
|
|
|
(1,482,894
|
)
|
|
|
15.67
|
|
|
|
(1,058,538
|
)
|
|
|
12.20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding, end of year
|
|
|
17,679,216
|
|
|
|
21.03
|
|
|
|
17,735,818
|
|
|
|
16.59
|
|
|
|
20,874,925
|
|
|
|
13.97
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at end of year
|
|
|
5,607,416
|
|
|
|
25.90
|
|
|
|
5,525,437
|
|
|
|
19.45
|
|
|
|
6,325,708
|
|
|
|
13.62
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise prices for options outstanding as of December 31, 2004 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
|
Options Exercisable
|
|
|
|
|
|
|
|
|
|
|
|
Number
|
|
|
Weighted-
|
|
|
|
|
|
|
Number
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
|
|
|
Average
|
|
|
Weighted-
|
|
|
Exercisable
|
|
|
Weighted-
|
|
|
|
|
|
|
|
|
|
|
|
as of
|
|
|
Remaining
|
|
|
Average
|
|
|
As of
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
Contractual
|
|
|
Exercise
|
|
|
December 31,
|
|
|
Exercise
|
|
|
|
|
|
|
|
|
|
|
|
2004*
|
|
|
Life
|
|
|
Price
|
|
|
2004
|
|
|
Price
|
|
$2.12500
|
|
|
-
|
|
|
$
|
3.00785
|
|
|
|
538,251
|
|
|
|
1.96
|
|
|
$
|
2.34
|
|
|
|
538,251
|
|
|
$
|
2.34
|
|
$5.48625
|
|
|
-
|
|
|
$
|
6.00000
|
|
|
|
7,297,371
|
|
|
|
4.02
|
|
|
|
6.00
|
|
|
|
1,393,371
|
|
|
|
6.00
|
|
$10.20315
|
|
|
-
|
|
|
$
|
19.18000
|
|
|
|
1,665,594
|
|
|
|
4.57
|
|
|
|
13.92
|
|
|
|
750,594
|
|
|
|
11.71
|
|
$22.70325
|
|
|
-
|
|
|
$
|
28.88000
|
|
|
|
1,384,300
|
|
|
|
7.26
|
|
|
|
27.62
|
|
|
|
349,300
|
|
|
|
26.63
|
|
$30.75000
|
|
|
-
|
|
|
$
|
39.50000
|
|
|
|
5,374,700
|
|
|
|
8.12
|
|
|
|
32.82
|
|
|
|
1,526,300
|
|
|
|
34.88
|
|
$48.75000
|
|
|
-
|
|
|
$
|
52.75000
|
|
|
|
278,000
|
|
|
|
4.89
|
|
|
|
49.64
|
|
|
|
220,000
|
|
|
|
49.19
|
|
$60.12500
|
|
|
-
|
|
|
$
|
79.00000
|
|
|
|
1,141,000
|
|
|
|
5.31
|
|
|
|
65.77
|
|
|
|
829,600
|
|
|
|
64.44
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$2.12500
|
|
|
-
|
|
|
$
|
79.00000
|
|
|
|
17,679,216
|
|
|
|
5.61
|
|
|
|
21.03
|
|
|
|
5,607,416
|
|
|
|
25.90
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
|
These amounts include approximately 7.0 million shares outstanding pursuant to the Long-Term
Incentive Plan.
|
F-35
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Continued
8.
|
Employee Benefit Plans
|
Employee Stock Purchase Plan
During 1997, the Board of Directors and shareholders approved an employee stock purchase plan (the
ESPP), effective beginning October 1, 1997. Under the ESPP, we are authorized to issue a total of
800,000 shares of Class A common stock. Substantially all full-time employees who have been
employed by us 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 our capital stock under all of our
stock purchase plans 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 2004, 2003 and 2002 employees purchased approximately 78,000, 66,000 and 107,000
shares of Class A common stock through the ESPP, respectively.
401(k) Employee Savings Plan
We sponsor 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 us, subject to a maximum annual
contribution by us of $1,000 per employee. Forfeitures of unvested participant balances which are
retained by the 401(k) Plan may be used to fund matching and discretionary contributions. We did
not recognize any expense related to matching 401(k) contributions during the year ended December
31, 2004 as 401(k) Plan forfeitures were sufficient to fund all of the company matching
contributions. Expense recognized related to matching 401(k) contributions, net of forfeitures,
totaled approximately $632 thousand and $993 thousand during the years ended December 31, 2003 and
2002, respectively. We also may make an annual discretionary contribution to the plan with approval
by our Board of Directors, subject to the maximum deductible limit provided by the Internal Revenue
Code of 1986, as amended. These contributions may be made in cash or in our stock. Discretionary
contributions, net of forfeitures, were approximately $12.8 million, $15.4 million and $16.9
million relating to the 401(k) Plan years ended December 31, 2004, 2003 and 2002, respectively.
9.
|
Commitments and Contingencies
|
Commitments
Future maturities of our contractual obligations are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments due by period
|
|
|
Total
|
|
|
2005
|
|
|
2006-2007
|
|
|
2008-2009
|
|
|
Thereafter
|
|
|
|
(In thousands)
|
|
Satellite-related obligations
|
|
$
|
2,117,673
|
|
|
$
|
177,126
|
|
|
$
|
519,632
|
|
|
$
|
407,175
|
|
|
$
|
1,013,740
|
|
Operating lease obligations
|
|
|
84,000
|
|
|
|
24,873
|
|
|
|
40,822
|
|
|
|
15,746
|
|
|
|
2,559
|
|
Purchase obligations
|
|
|
1,449,183
|
|
|
|
1,233,437
|
|
|
|
91,729
|
|
|
|
98,060
|
|
|
|
25,957
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
3,650,856
|
|
|
$
|
1,435,436
|
|
|
$
|
652,183
|
|
|
$
|
520,981
|
|
|
$
|
1,042,256
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Satellite-Related Obligations
Satellites under Construction.
We have entered into contracts to construct four new satellites.
During July 2003, we entered into a contract for the construction of EchoStar X, a Lockheed Martin
A2100 class DBS satellite. We anticipate construction to be completed and that this satellite will
be launched during the fourth
F-36
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Continued
quarter of 2005. EchoStar X will enable better bandwidth utilization, provide back-up protection for our
existing local channel offerings, capacity to potentially offer local channels in additional markets, and could allow
DISH Network to offer other value-added services.
During December 2004, we entered into a contract for the construction of EchoStar XI, a Space
Systems Loral FS1300 class DBS satellite. In connection with this agreement, we obtained an option
for the construction of other additional satellites. Construction is expected to be completed
during 2007 and is contingent upon, among other things, the finalization of the necessary bankruptcy
court approvals. There can be no assurance that these approvals will be finalized or that the
satellite will ultimately be launched. Future commitments related to this satellite are included in
the table above. EchoStar XI will enable better bandwidth utilization, provide back-up protection
for our existing offerings, and could allow DISH Network to offer other value-added services.
During December 2004 and March 2005, we entered into contracts for the construction of two Lockheed
Martin A2100 class spot beam Ka-band satellites, which are expected to be completed during 2008.
These satellites will enable better bandwidth utilization and could allow DISH Network to offer
other value-added services including 2-way broadband and video.
Satellites under Lease.
In addition to our lease of the AMC-15 satellite
(Note 4), we have also entered into satellite service agreements to
lease capacity on four other satellites.
In connection with the SES Americom agreement discussed under
Capital Lease Obligation
(Note 4), we
are currently leasing all of the capacity on an existing in-orbit FSS satellite, AMC-2, at the 105
degree orbital location. Our lease of this satellite will continue at least until AMC-15 is placed
in service at this location, which is expected to occur during the second half of 2005. We use the
capacity on AMC-2 to provide local network channels.
During February 2004, we entered into two additional satellite service agreements for capacity on
FSS satellites. The satellite under the first of these agreements, AMC-16, launched during the
fourth quarter of 2004 and commenced commercial operations during the first quarter of 2005. We
could use this additional satellite, which is currently located at the 85 degree orbital location,
as backup for AMC-15, and may also utilize the satellite to offer local network channels in additional markets,
together with satellite-delivered high-speed internet services. This ten-year satellite service
agreement is renewable by us on a year to year basis following the initial term, and provides us
with certain rights to replacement satellites. In connection with this agreement, we prepaid $29.0
million during 2004 and are required to make monthly payments for this satellite for the ten-year
period following commencement of commercial operations.
The satellite under the second of these agreements is planned for launch during 2006 and is
contingent upon, among other things, obtaining necessary regulatory approvals. There can be no
assurance that we will obtain these approvals or that the satellite will ultimately be launched. This additional satellite
could allow DISH Network to offer other value-added services. In connection with this agreement, we
prepaid $55.0 million during 2004 and are required to make monthly payments for this satellite for
the 15-year period following commencement of commercial operations. Future commitments related to this satellite are
included in the table above.
During August 2003, we exercised our option under the SES Americom agreement for AMC-15 to also
lease for an initial ten-year term all of the capacity on a new DBS satellite at an orbital
location to be determined at a future date. In connection with this agreement, we prepaid $20.9
million to SES Americom during 2004. We anticipate that this satellite will be launched during 2006
and could be used as additional backup capacity and to offer other value-added
services.
As a result of our recent agreements with fixed satellite service providers and for the
construction of EchoStar X, EchoStar XI, and the Ka-band satellites, our obligations for payments
related to satellites have increased substantially. In certain circumstances the dates on which we
are obligated to make these payments could be delayed. These amounts, will
increase when we
F-37
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Continued
commence payments for the launches of EchoStar XI and the Ka-band satellites, and
would further increase to the extent we procure insurance for our satellites or contract for the
construction, launch or lease of additional satellites.
Purchase Obligations
Our 2005 purchase obligations primarily consist of binding purchase orders for EchoStar receiver
systems and related equipment and for products and services related to the operation of our DISH
Network. Our purchase obligations also include certain guaranteed
fixed contractual commitments to purchase programming content.
Programming Contracts
In the normal course of business, we have also entered into numerous contracts to purchase
programming content whereby our payment obligations are fully contingent on the number of
subscribers to which we provide the respective content. These programming commitments are not
included in the table above. The terms of our contracts typically range from one to ten years.
Our programming expenses will continue to increase to the extent we are successful growing our
subscriber base. Programming expenses are included in Subscriber-related expenses in the
accompanying consolidated statements of operations and comprehensive income (loss).
Rent Expense
Total rent expense for operating leases approximated $59.1 million, $32.2 million and $17.9 million
in 2004, 2003 and 2002, respectively.
Patents and 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. We may not be aware of all patents and other intellectual property
rights that our products may potentially infringe. Damages in patent infringement cases can include
a tripling of actual damages in certain cases. Further, we cannot estimate the extent to which we
may be required in the future to obtain licenses with respect to patents held by others and the
availability and cost of any such licenses. Various parties have asserted patent and other intellectual property rights with respect to components
within our direct broadcast satellite system. We cannot be certain that these persons do not own
the rights they claim, that our products do not infringe on these rights, that we would be able to
obtain licenses from these persons on commercially reasonable terms or, if we were unable to obtain such licenses, that we
would be able to redesign our products to avoid infringement.
Contingencies
Distant Network Litigation
Until July 1998, we obtained feeds of 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 in Miami 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 the injunction.
In October 1998, we filed a declaratory judgment action against ABC, NBC, CBS and FOX in the United
States District Court for the District of Colorado. We asked the Court to find that our method of
providing distant network programming did not violate SHVIA and hence did not infringe the
networks copyrights. In November 1998, the networks and their affiliate association 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 Federal Court.
F-38
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Continued
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 that 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, substantially all providers of satellite-delivered network programming other than us
agreed to this cutoff schedule, although we do not know if they adhered to this schedule.
In April 2002, we reached a private settlement with ABC, Inc., one of the plaintiffs in the
litigation, and jointly filed a stipulation of dismissal. In November 2002, we reached a private
settlement with NBC, another of the plaintiffs in the litigation and jointly filed a stipulation of
dismissal. On March 10, 2004, we reached a private settlement with CBS, another of the plaintiffs
in the litigation and jointly filed a stipulation of dismissal. We have also reached private
settlements with many independent stations and station groups. We were unable to reach a settlement
with five of the original eight plaintiffs Fox and the independent affiliate groups associated
with each of the four networks.
A trial took place during April 2003 and the District Court issued a final judgment in June 2003.
The District Court found that with one exception our current distant network qualification
procedures comply with the law. We have revised our procedures to comply with the District Courts
Order. Although the plaintiffs asked the District Court to enter an injunction precluding us from
selling any local or distant network programming, the District Court refused. While the plaintiffs
did not claim monetary damages and none were awarded, the plaintiffs were awarded approximately
$4.8 million in attorneys fees. This amount is substantially less than the amount the plaintiffs
sought. We ask the Court to reconsider the award and the Court has vacated the fee award. When the
award was vacated, the District Court also allowed us an opportunity to conduct discovery
concerning the amount of plaintiffs requested fees. The parties have agreed to postpone discovery and an evidentiary hearing regarding attorneys fees until after the
Court of Appeals rules on the pending appeal of the Courts June 2003 final judgment. It is not
possible to make a firm assessment of the probable outcome of plaintiffs outstanding request for
fees.
The District Courts injunction requires us to use a computer model to re-qualify, as of June 2003,
all of our subscribers who receive ABC, NBC, CBS or Fox programming by satellite from a market
other than the city in which the subscriber lives. The Court also invalidated all waivers
historically provided by network stations. These waivers, which have been provided by stations for
the past several years through a third party automated system, allow subscribers who believe the
computer model improperly disqualified them for distant network channels to nonetheless receive
those channels by satellite. Further, even though SHVIA provides that certain subscribers who
received distant network channels prior to October 1999 can continue to receive those channels
through December 2004, the District Court terminated the right of our grandfathered subscribers to
continue to receive distant network channels.
We believe the District Court made a number of errors and appealed the decision. Plaintiffs
cross-appealed. The Court of Appeals granted our request to stay the injunction until our appeal is
decided. Oral arguments occurred during February 2004. It is not possible to predict how or when
the Court of Appeals will rule on the merits of our appeal.
In the event the Court of Appeals upholds the injunction, and if we do not reach private settlement
agreements with additional stations, we will attempt to assist subscribers in arranging alternative
means to receive network channels, including migration to local channels by satellite where
available, and free off air antenna offers in other markets. However, we cannot predict with any
degree of certainty how many subscribers would cancel their primary DISH Network programming as a
result of termination of their distant network channels. We could be required to terminate
distant network programming to all subscribers in the event the plaintiffs prevail on their
cross-appeal and we are permanently enjoined from delivering all distant network channels.
Termination of distant network
F-39
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Continued
programming to subscribers would result, among other things, in a
reduction in average monthly revenue per subscriber and a temporary increase in subscriber churn.
Satellite Insurance
Several years ago, we filed a $219.3 million insurance claim for a total loss under the launch
insurance policies covering our EchoStar IV satellite. 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. The insurance carriers include La Reunion
Spatiale; AXA Reinsurance Company (n/k/a AXA Corporate Solutions Reinsurance Company), United
States Aircraft Insurance Group; Assurances Generales De France I.A.R.T. (AGF); Certain
Underwriters at Lloyds, London; Great Lakes Reinsurance (U.K.) PLC; British Aviation Insurance
Group; If Skaadeforsikring (previously Storebrand); Hannover Re (a/k/a International Hannover); The
Tokio Marine & Fire Insurance Company, Ltd.; Marham Space Consortium (a/k/a Marham Consortium
Management); Ace Global Markets (a/k/a Ace London); M.C. Watkins Syndicate; Goshawk Syndicate
Management Ltd.; D.E. Hope Syndicate 10009 (Formerly Busbridge); Amlin Aviation; K.J. Coles &
Others; H.R. Dumas & Others; Hiscox Syndicates, Ltd.; Cox Syndicate; Hayward Syndicate; D.J.
Marshall & Others; TF Hart; Kiln; Assitalia Le Assicurazioni DItalia S.P.A. Roma; La Fondiaria
Assicurazione S.P.A., Firenze; Vittoria Assicurazioni S.P.A., Milano; Ras Riunione Adriatica Di
Sicurta S.P.A., Milano; Societa Cattolica Di Assicurazioni, Verano; Siat Assicurazione E
Riassicurazione S.P.A, Genova; E. Patrick; ZC Specialty Insurance; Lloyds of London Syndicates 588
NJM, 1209 MEB and 861 MEB; Generali France Assurances; Assurance France Aviation; and Ace Bermuda
Insurance Ltd.
The insurance carriers offered us a total of approximately $88.0 million, or 40% of the total
policy amount, in settlement of the EchoStar IV insurance claim. We rejected this settlement offer and submitted
our claim to arbitration pursuant to the terms of the insurance policies.
On March 4, 2005, we agreed to settle our insurance claim and related claims for accrued interest
and bad faith with all carriers who agree to pay their proportionate share of an aggregate net
amount of $240.0 million. We retained title to and use of the EchoStar IV satellite. Payment from
each settling carrier is due on or before April 26, 2005, with interest commencing to accrue on
April 12, 2005. Currently, we have received signed agreements back from insurers representing over 90% of the aggregate amount. While we believe the remaining insurers will each sign
the agreement shortly, the arbitration will continue with respect to any insurers who decline to
settle.
Gemstar
During October 2000, Starsight Telecast, Inc., a subsidiary of Gemstar-TV Guide International, Inc.
(Gemstar), 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.
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. Gemstar filed
counterclaims alleging infringement of additional patents and asserted new patent infringement
counterclaims.
In February 2001, Gemstar filed additional patent infringement actions against us in the District
Court in Atlanta, Georgia and with the ITC. We settled all of the litigation with Gemstar during
2004 (Note 2).
Superguide
During 2000, Superguide Corp. (Superguide) 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 sought injunctive and declaratory relief and damages in an
F-40
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Continued
unspecified amount. We examined these patents and believe that they are not infringed by any of our products or
services.
On summary judgment, the District Court ruled that none of the asserted patents were infringed by
us. These rulings were appealed to the United States Court of Appeals for the Federal Circuit.
During February 2004, the Federal Circuit affirmed in part and reversed in part the District
Courts findings and remanded the case back to the District Court for further proceedings. Based
upon the settlement with Gemstar discussed above, we now have an additional defense in this case
based upon a license from Gemstar. We will continue to vigorously defend this case. In the event
that a Court ultimately determines that we infringe on any of the patents, we may be subject to
substantial damages, which may include treble damages and/or an injunction that could require us to
materially modify certain user-friendly electronic programming guide and related features that we
currently offer to consumers. It is not possible to make a firm assessment of the probable outcome
of the suit or to determine the extent of any potential liability or damages.
Broadcast Innovation, L.L.C.
In November of 2001, Broadcast Innovation, L.L.C. filed a lawsuit against us, DirecTV, Thomson
Consumer Electronics and others in Federal District Court in Denver, Colorado. The suit alleges
infringement of United States Patent Nos. 6,076,094 (the 094 patent) and 4,992,066 (the 066
patent). The 094 patent relates to certain methods and devices for transmitting and receiving
data along with specific formatting information for the data. The 066 patent relates to certain methods and devices for providing the
scrambling circuitry for a pay television system on removable cards. We examined these patents and
believe that they are not infringed by any of our products or services. Subsequently, DirecTV and
Thomson settled with Broadcast Innovation leaving us as the only defendant.
During January 2004, the judge issued an order finding the 066 patent invalid. In August of 2004,
the Court ruled the 094 invalid in a parallel case filed by Broadcast Innovation against Charter
and Comcast. Our case is stayed pending the appeal of the Charter case. We intend to continue to
vigorously defend this case. In the event that a Court ultimately determines that we infringe on
any of the patents, we may be subject to substantial damages, which may include treble damages
and/or an injunction that could require us to materially modify certain user-friendly features that
we currently offer to consumers. It is not possible to make a firm assessment of the probable
outcome of the suit or to determine the extent of any potential liability or damages.
TiVo Inc.
During January 2004, TiVo Inc. filed a lawsuit against us in the United States District Court for
the Eastern District of Texas. The suit alleges infringement of United States Patent No. 6,233,389
(the 389 patent). The 389 patent relates to certain methods and devices for providing what the
patent calls time-warping. We have examined this patent and do not believe that it is infringed
by any of our products or services. During March 2005, the Court denied our motion to transfer this
case to the United States District Court for the Northern District of California. We intend to
vigorously defend this case. In the event that a Court ultimately determines that we infringe this
patent, we may be subject to substantial damages, which may include treble damages and/or an
injunction that could require us to materially modify certain user-friendly features that we
currently offer to consumers. It is not possible to make a firm assessment of the probable outcome
of the suit or to determine the extent of any potential liability or damages.
Acacia
In June 2004, Acacia Media Technologies filed a lawsuit against us in the United States District
Court for the Northern District of California. The suit also named DirecTV, Comcast, Charter, Cox
and a number of smaller cable companies as defendants. Acacia is an intellectual property holding company which seeks to license
the patent portfolio that it has acquired. The suit alleges infringement of United States Patent
Nos. 5,132,992, 5,253,275, 5,550,863, 6,002,720 and 6,144,702 (herein after the 992, 275, 863,
720 and 702 patents, respectively). The 992, 863, 720 and 702 patents have been asserted
against us.
F-41
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Continued
The asserted patents relate to various systems and methods related to the transmission of digital
data. The 992 and 702 patents have also been asserted against several internet adult content
providers in the United States District Court for the Central District of California. On July 12,
2004, that Court issued a Markman ruling which found that the 992 and 702 patents were not as
broad as Acacia had contended.
Acacias various patent infringement cases have now been consolidated for pre-trial purposes in the
United States District court for the Northern District of California. We intend to vigorously
defend this case. In the event that a Court ultimately determines that we infringe on any of the
patents, we may be subject to substantial damages, which may include treble damages and/or an
injunction that could require us to materially modify certain user-friendly features that we
currently offer to consumers. It is not possible to make a firm assessment of the probable outcome
of the suit or to determine the extent of any potential liability or damages.
California Action
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 was filed against us in the California State Superior Court for Los Angeles
County in 1999 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. A hearing on the plaintiffs motion for class certification and our motion
for summary judgment was held during 2002. At the hearing, the Court issued a preliminary ruling
denying the plaintiffs motion for class certification. However, before issuing a final ruling on
class certification, the Court granted our motion for summary judgment with respect to all of the
plaintiffs claims. Subsequently, we filed a motion for attorneys fees which was denied by the
Court. The plaintiffs filed a notice of appeal of the courts granting of our motion for summary
judgment and we cross-appealed the Courts ruling on our motion for attorneys fees. During
December 2003, the Court of Appeals affirmed in part; and reversed in part, the lower courts
decision granting summary judgment in our favor. Specifically, the Court found there were triable
issues of fact whether we may have violated the alleged consumer statutes with representations
concerning the number of channels and the program schedule. However, the Court found no triable
issue of fact as to whether the representations crystal clear digital video or CD quality audio
constituted a cause of action. Moreover, the Court affirmed that the reasonable consumer standard
was applicable to each of the alleged consumer statutes. Plaintiff argued the standard should be
the least sophisticated consumer. The Court also affirmed the dismissal of Plaintiffs breach of
warranty claim. Plaintiff filed a Petition for Review with the California Supreme Court and we
responded. During March 2004, the California Supreme Court denied Plaintiffs Petition for Review.
Therefore, the action has been remanded to the trial court pursuant to the instructions of the
Court of Appeals. Hearings on class certification were conducted on December 21, 2004 and on February 7, 2005. The Court denied Plaintiffs motion for class
certification on February 10, 2005. It is uncertain whether the Plaintiff will appeal this
decision. Therefore, it is not possible to make an assessment of the probable outcome of the
litigation or to determine the extent of any potential liability.
Retailer Class Actions
We have been sued by retailers in three separate purported class actions. During October 2000, two
separate lawsuits were filed in the Arapahoe County District Court in the State of Colorado and the
United States District Court for the District of Colorado, respectively, by Air Communication &
Satellite, Inc. and John DeJong, et al. on behalf of themselves and a class of persons similarly
situated. The plaintiffs are attempting to certify nationwide classes on behalf of certain of our
satellite hardware retailers. The plaintiffs are requesting the Courts to declare
certain provisions of, and changes to, alleged agreements between us and the retailers invalid and
unenforceable, and to award damages for lost incentives and payments, charge backs, and other
compensation. We are vigorously defending against the suits and have asserted a variety of
counterclaims. The United States District Court for the District of Colorado stayed the Federal
Court action to allow the parties to pursue a comprehensive adjudication of their dispute in the
Arapahoe County State Court. John DeJong, d/b/a Nexwave, and Joseph Kelley, d/b/a Keltronics, subsequently intervened in the
F-42
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Continued
Arapahoe County Court action as plaintiffs and proposed class representatives. We have filed a motion for summary judgment on all counts and against all
plaintiffs. The plaintiffs filed a motion for additional time to conduct discovery to enable them
to respond to our motion. The Court granted a limited discovery period which ended November 15,
2004. The Court is hearing discovery related motions and we expect the Court to follow with a
briefing schedule for the motion for summary judgment. It is not possible 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. (SDS) filed a lawsuit against us in the United States District
Court for the Eastern District of Texas during September 2000, on behalf of itself and a class of
persons similarly situated. The plaintiff was attempting to certify a nationwide class on behalf of
sellers, installers, and servicers of satellite equipment who contract with us and who allege 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, the ownership of certain equipment related
to the provision of our satellite television service. During September 2001, the Court granted our
motion to dismiss. The plaintiff moved for reconsideration of the Courts order dismissing the
case. The Court denied the plaintiffs motion for reconsideration. The trial court denied our
motions for sanctions against SDS. Both parties perfected appeals before the Fifth Circuit Court of
Appeals. On appeal, the Fifth Circuit upheld the dismissal. The Fifth Circuit vacated and remanded
the District Courts denial of our motion for sanctions. The District Court subsequently issued a
written opinion containing the same findings. The only issue remaining is our collection of costs,
which were previously granted by the Court.
StarBand Shareholder Lawsuit
During August 2002, a limited group of shareholders in StarBand, a broadband Internet satellite
venture in which we invested, filed an action in the Delaware Court of Chancery against us and
EchoBand Corporation, together with four EchoStar executives who sat on the Board of Directors for
StarBand, for alleged breach of the fiduciary duties of due care, good faith and loyalty, and also
against us and EchoBand Corporation for aiding and abetting such alleged breaches. Two of the
individual defendants, Charles W. Ergen and David K. Moskowitz, are members of our Board of
Directors. The action stems from the defendants involvement as directors, and our position as a
shareholder, in StarBand. During July 2003, the Court granted the defendants motion to dismiss on
all counts. The Plaintiffs appealed. On April 15, 2004, the Delaware Supreme Court remanded the
case instructing the Chancery Court to reevaluate its decision in light of a recent opinion of the
Delaware Supreme Court, Tooley v. Donaldson, No. 84,2004 (Del. Supr. April 2, 2004). Plaintiffs
filed a motion to amend their complaint which was denied by the Court. The Plaintiffs appealed the
denial of their motion to amend and the appeal is pending. It is not possible to make a firm
assessment of the probable outcome of the litigation or to determine the extent of any potential
liability or damages.
Enron Commercial Paper Investment Complaint
During November 2003, an action was commenced in the United States Bankruptcy Court for the
Southern District of New York, against approximately 100 defendants, including us, who invested in
Enrons commercial paper. The complaint alleges that Enrons October 2001 prepayment of its
commercial paper is a voidable preference under the bankruptcy laws and constitutes a fraudulent
conveyance. The complaint alleges that we received voidable or fraudulent prepayments of
approximately $40.0 million. We typically invest in commercial paper and notes which are rated in
one of the four highest rating categories by at least two nationally recognized statistical rating
organizations. At the time of our investment in Enron commercial paper, it was considered to be high quality and
considered to be a very low risk. The defendants have moved the Court to dismiss the case on
grounds that Enrons complaint does not adequately state a legal claim. Those motions are currently
under consideration by the Court. 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.
Bank One
F-43
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Continued
During March 2004, Bank One, N.A. (Bank One) filed suit against us and one of our subsidiaries,
EchoStar Acceptance Corporation (EAC), in the Court of Common Pleas of Franklin County, Ohio alleging
breach of a duty to indemnify. Bank One alleges that EAC is contractually required to indemnify
Bank One for a settlement it paid to consumers who entered private label credit card agreements
with Bank One to purchase satellite equipment in the late 1990s. Bank One alleges that we entered
into a guarantee wherein we agreed to pay any indemnity obligation incurred by Bank One. During
April 2004, we removed the case to federal court in Columbus, Ohio. We deny the allegations and
intend to vigorously defend against the claims. We filed a motion to dismiss the Complaint which
was granted in part and denied in part. The Court granted our motion, agreeing we did not owe Bank
One a duty to defend the underlying lawsuit. However, the Court denied the motion in that Bank One
will be allowed to attempt to prove that we owed Bank One a duty to indemnify. The case is
currently in discovery. 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 against us.
Church Communications Network, Inc.
During August 2004, Church Communications Network, Inc. (CCN) filed suit against EchoStar
Satellite L.L.C. (ESLLC) in the United States District Court for the Northern District of
Alabama. CCN contends that our contractual relationship with Dominion Video Satellite, Inc., a
direct broadcast provider that airs only Christian programming, constitutes a breach of a
commercial television services agreement between ESLLC and CCN (the CCN Agreement). Further, CCN
contends that our reluctance to disclose the confidential provisions of the Dominion/EchoStar
agreement warrant causes of action for negligent misrepresentation, intentional misrepresentation,
and non-disclosure. We filed a motion to dismiss CNNs complaint, or alternatively to transfer the
case to a Colorado court. The Court denied our motion to dismiss, but granted our motion to
transfer. As a result, the action was transferred to the United States District Court for the
District of Colorado. Thereafter, we filed a motion to dismiss the case in the Colorado court. The
motion to dismiss is currently pending before the Court and the case is currently in discovery.
Although the CCN Agreement specifically limits damages to $500,000, CCN initially sought $1.5
million. As this case progressed, CCN initially increased the amount of its alleged damages to over
$3.0 million and has recently indicated that it is now seeking damages in excess of $15.0 million.
As this is currently in early discovery it is not possible to make a firm assessment of the
probable outcome of the litigation or to determine the extent of any potential liability or
damages.
Vivendi
In January 2005, Vivendi Universal, S.A. (Vivendi), filed suit against EchoStar Communications
Corporation in the United States District Court for the Southern District of New York alleging that
we have anticipatorily repudiated or are in breach of an alleged agreement between EchoStar and
Vivendi pursuant to which we are allegedly required to broadcast a music-video channel provided by
Vivendi. Vivendis complaint seeks injunctive and declaratory relief, and damages in an unspecified
amount. Vivendi has since filed a motion for a preliminary injunction, in which it asks the Court
to order us to broadcast the Vivendi music-video channel during the pendency of the litigation and
to pay Vivendi for the provision of its music-video channel. We intend to vigorously defend this
case. In the event that a Court determines that Vivendi is entitled to a preliminary injunction, we
may be required to broadcast the Vivendi music-video channel during the pendency of the litigation, which would impact the bandwidth that we
have available to broadcast other services. In the event that a Court ultimately determines that we
have a contractual obligation to broadcast the Vivendi music-video channel and that we are in
breach of that obligation, we may be required to broadcast the Vivendi music-video channel and be
subject to substantial damages. It is not possible to make a firm assessment of the probable outcome of the suit or to
determine the extent of any potential liability or damages.
Fox Sports Direct
F-44
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Continued
During June 2004, Fox Sports Direct (Fox) sued us in the United States District Court Central
District of California for alleged breach of contract. During October 2004, we reached a settlement
with Fox for an immaterial amount.
F-45
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Continued
Other
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 our opinion, the amount of ultimate liability
with respect to any of these actions is unlikely to materially affect our financial position,
results of operations or liquidity.
Reauthorization of Satellite Home Viewer Improvement Act
We currently offer local broadcast channels in approximately 155 markets across the United States.
In 38 of those markets, two dishes are necessary to receive all local channels in the market.
SHVERA now requires, among other things, that all local broadcast channels delivered by satellite
to any particular market be available from a single dish within 18 months of the laws December 8,
2004 effective date. Because we had planned to transition all local channels in any particular
market to the same dish by 2008 rather than in the shorter transition period mandated by SHVERA,
satellite capacity limitations may force us to move the local channels in as many as 30 markets to
different satellites, requiring subscribers in those markets to install a second or a different
dish to continue receiving their local network channels. We may be forced to stop offering local
channels in some of those markets altogether.
The transition of all local channels to the same dish could result in disruptions of service
for a substantial number of our customers, and our ability to timely comply with this requirement
without incurring significant additional costs is dependent on, among other things, the successful
launch and operation of one or more additional satellites. It is possible that
the costs of compliance with this requirement could exceed
$100.0 million. To the extent some of those
costs are passed on to our subscribers, and because many subscribers may be unwilling to install a
second dish where one had been adequate, we expect that our subscriber churn could be negatively
impacted. It is too early to make a firm determination of the cost of
compliance.
Financial Data by Business Unit
Statement of Financial Accounting Standards No. 131, Disclosures About Segments of an Enterprise
and Related Information (SFAS 131) establishes standards for reporting information about
operating segments in annual financial statements of public business enterprises and requires that
those enterprises report selected information about operating segments in interim financial reports
issued to shareholders. Operating segments are components of an enterprise about which separate
financial information is available and regularly evaluated by the chief operating decision maker(s)
of an enterprise. Under this definition we currently operate as two business units. The All Other
column consists of revenue from other satellite services and expenses from other operating segments
for which the disclosure requirements of SFAS 131 do not apply.
F-46
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Continued
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EchoStar
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DISH
|
|
|
Technologies
|
|
|
All
|
|
|
|
|
|
|
Consolidated
|
|
|
|
Network
|
|
|
Corporation
|
|
|
Other
|
|
|
Eliminations
|
|
|
Total
|
|
|
|
(In thousands)
|
|
Year Ended December 31, 2002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
4,544,550
|
|
|
$
|
169,674
|
|
|
$
|
113,445
|
|
|
$
|
(6,844
|
)
|
|
$
|
4,820,825
|
|
Depreciation and amortization
|
|
|
328,495
|
|
|
|
7,114
|
|
|
|
37,349
|
|
|
|
|
|
|
|
372,958
|
|
Total costs and expenses
|
|
|
4,158,324
|
|
|
|
136,387
|
|
|
|
81,440
|
|
|
|
(6,844
|
)
|
|
|
4,369,307
|
|
Interest income
|
|
|
111,593
|
|
|
|
|
|
|
|
1,334
|
|
|
|
|
|
|
|
112,927
|
|
Interest expense, net of amounts capitalized
|
|
|
(482,512
|
)
|
|
|
(188
|
)
|
|
|
(203
|
)
|
|
|
|
|
|
|
(482,903
|
)
|
Income tax benefit (provision), net
|
|
|
(75,253
|
)
|
|
|
4,233
|
|
|
|
(2,078
|
)
|
|
|
|
|
|
|
(73,098
|
)
|
Net income (loss)
|
|
|
(916,607
|
)
|
|
|
37,440
|
|
|
|
27,133
|
|
|
|
|
|
|
|
(852,034
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
5,518,183
|
|
|
$
|
131,684
|
|
|
$
|
97,983
|
|
|
$
|
(8,554
|
)
|
|
$
|
5,739,296
|
|
Depreciation and amortization
|
|
|
347,331
|
|
|
|
6,717
|
|
|
|
44,158
|
|
|
|
|
|
|
|
398,206
|
|
Total costs and expenses
|
|
|
4,852,543
|
|
|
|
115,012
|
|
|
|
72,747
|
|
|
|
(8,554
|
)
|
|
|
5,031,748
|
|
Interest income
|
|
|
64,750
|
|
|
|
|
|
|
|
308
|
|
|
|
|
|
|
|
65,058
|
|
Interest expense, net of amounts capitalized
|
|
|
(551,768
|
)
|
|
|
(161
|
)
|
|
|
(561
|
)
|
|
|
|
|
|
|
(552,490
|
)
|
Income tax benefit (provision), net
|
|
|
(12,604
|
)
|
|
|
(1,085
|
)
|
|
|
(687
|
)
|
|
|
|
|
|
|
(14,376
|
)
|
Net income (loss)
|
|
|
182,809
|
|
|
|
15,445
|
|
|
|
26,252
|
|
|
|
|
|
|
|
224,506
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
6,926,528
|
|
|
$
|
125,881
|
|
|
$
|
107,675
|
|
|
$
|
(8,868
|
)
|
|
$
|
7,151,216
|
|
Depreciation and amortization
|
|
|
446,822
|
|
|
|
6,718
|
|
|
|
49,361
|
|
|
|
|
|
|
|
502,901
|
|
Total costs and expenses
|
|
|
6,222,175
|
|
|
|
154,147
|
|
|
|
80,457
|
|
|
|
(8,868
|
)
|
|
|
6,447,911
|
|
Interest income
|
|
|
41,717
|
|
|
|
|
|
|
|
570
|
|
|
|
|
|
|
|
42,287
|
|
Interest expense, net of amounts capitalized
|
|
|
(504,612
|
)
|
|
|
(133
|
)
|
|
|
(987
|
)
|
|
|
|
|
|
|
(505,732
|
)
|
Income tax benefit (provision), net
|
|
|
(11,464
|
)
|
|
|
(385
|
)
|
|
|
240
|
|
|
|
|
|
|
|
(11,609
|
)
|
Net income (loss)
|
|
|
215,582
|
|
|
|
(28,767
|
)
|
|
|
27,954
|
|
|
|
|
|
|
|
214,769
|
|
Geographic Information and Transaction with Major Customers
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United
|
|
|
|
|
|
|
|
|
|
States
|
|
|
Europe
|
|
|
Total
|
|
|
|
(In thousands)
|
|
Long-lived assets, including FCC authorizations
|
|
|
|
|
|
|
|
|
|
|
|
|
2003
|
|
$
|
2,588,707
|
|
|
$
|
12,535
|
|
|
$
|
2,601,242
|
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
$
|
3,604,675
|
|
|
$
|
15,005
|
|
|
$
|
3,619,680
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
2002
|
|
$
|
4,750,782
|
|
|
$
|
70,043
|
|
|
$
|
4,820,825
|
|
|
|
|
|
|
|
|
|
|
|
2003
|
|
$
|
5,675,078
|
|
|
$
|
64,218
|
|
|
$
|
5,739,296
|
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
$
|
7,091,723
|
|
|
$
|
59,493
|
|
|
$
|
7,151,216
|
|
|
|
|
|
|
|
|
|
|
|
Revenues are attributed to geographic regions based upon the location from where the sale
originated. United States revenue includes transactions with both United States and International customers.
Europe revenue includes transactions with customers in Europe, Africa and the Middle East. Revenues
from these customers are included within the All Other operating segment.
During the years ended December 31, 2004, 2003 and 2002, United States revenue included export
sales to one international customer which totaled $125.3 million, $127.6 million and $169.1
million, respectively. These international sales accounted for approximately 1.8%, 2.2% and 3.5% of
our total revenue during each of the years
F-47
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Continued
ended December 31, 2004, 2003 and 2002, respectively. Revenues from these customers are included within the
EchoStar Technologies Corporation operating segment.
11.
|
Valuation and Qualifying Accounts
|
Our valuation and qualifying accounts as of December 31, 2002, 2003 and 2004 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
Charged to
|
|
|
|
|
|
|
|
|
|
|
Beginning of
|
|
|
Costs and
|
|
|
|
|
|
|
Balance at
|
|
|
|
Year
|
|
|
Expenses
|
|
|
Deductions
|
|
|
End of Year
|
|
|
|
(In thousands)
|
|
Year ended December 31, 2002:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
$
|
22,770
|
|
|
$
|
53,967
|
|
|
$
|
(57,573
|
)
|
|
$
|
19,164
|
|
Loan loss reserve
|
|
|
1,591
|
|
|
|
109
|
|
|
|
(1,700
|
)
|
|
|
|
|
Reserve for inventory
|
|
|
13,247
|
|
|
|
7,420
|
|
|
|
(10,700
|
)
|
|
|
9,967
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2003:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
$
|
19,164
|
|
|
$
|
61,351
|
|
|
$
|
(68,330
|
)
|
|
$
|
12,185
|
|
Reserve for inventory
|
|
|
9,967
|
|
|
|
1,703
|
|
|
|
(4,900
|
)
|
|
|
6,770
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
$
|
12,185
|
|
|
$
|
66,289
|
|
|
$
|
(68,932
|
)
|
|
$
|
9,542
|
|
Reserve for inventory
|
|
|
6,770
|
|
|
|
8,428
|
|
|
|
(4,809
|
)
|
|
|
10,389
|
|
12.
|
Quarterly Financial Data (Unaudited)
|
Our quarterly results of operations are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
|
|
|
|
March 31
|
|
|
June 30
|
|
|
September 30
|
|
|
December 31
|
|
|
|
(In thousands, except per share data)
|
|
|
|
(Unaudited)
|
|
Year ended December 31, 2003:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
1,359,048
|
|
|
$
|
1,414,567
|
|
|
$
|
1,452,295
|
|
|
$
|
1,513,386
|
|
Operating income (loss)
|
|
|
178,748
|
|
|
|
222,993
|
|
|
|
160,485
|
|
|
|
145,322
|
|
Net income (loss)
|
|
|
57,917
|
|
|
|
128,793
|
|
|
|
35,116
|
|
|
|
2,680
|
|
Basic income per share
|
|
$
|
0.12
|
|
|
$
|
0.27
|
|
|
$
|
0.07
|
|
|
$
|
0.01
|
|
Diluted income per share
|
|
$
|
0.12
|
|
|
$
|
0.26
|
|
|
$
|
0.07
|
|
|
$
|
0.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
1,579,796
|
|
|
$
|
1,777,713
|
|
|
$
|
1,862,613
|
|
|
$
|
1,931,094
|
|
Operating income (loss)
|
|
|
122,166
|
|
|
|
184,017
|
|
|
|
194,924
|
|
|
|
202,198
|
|
Net income (loss)
|
|
|
(42,886
|
)
|
|
|
85,316
|
|
|
|
102,261
|
|
|
|
70,078
|
|
Basic income per share
|
|
$
|
(0.09
|
)
|
|
$
|
0.18
|
|
|
$
|
0.22
|
|
|
$
|
0.15
|
|
Diluted income per share
|
|
$
|
(0.09
|
)
|
|
$
|
0.18
|
|
|
$
|
0.22
|
|
|
$
|
0.15
|
|
13.
|
Related Party Transactions
|
We own 50% of NagraStar LLC (NagraStar),
a joint venture that is our exclusive provider of security access
devices. Nagra USA, a subsidiary of the Kudelski Group, owns the other 50% of NagraStar. NagraStar
purchases these security
F-48
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Continued
access devices from NagraCard SA, a Swiss company which is also a
subsidiary of the Kudelski Group. Because we are not required to consolidate NagraStar, but we do
have the ability to significantly influence its operating policies, we accounted for our investment
in NagraStar under the equity method of accounting for all periods presented. During the years
ended December 31, 2004, 2003 and 2002, we purchased from NagraStar approximately $123.8 million,
$68.4 million and $56.2 million, respectively, for security access devices. As of December 31, 2004
and 2003, amounts payable to NagraStar totaled $22.7 million and $7.7 million, respectively. As of
December 31, 2004, we were committed to purchase approximately $92.5 million of security access
devices from NagraStar. Approximately $22.8 million of these commitments had been accrued for as of
December 31, 2004 on our consolidated balance sheets.
Cablevision Satellite Acquisition
On January 20, 2005, we agreed to purchase certain satellite assets from Rainbow DBS Co., a
subsidiary of Cablevision Systems Corporation for $200.0 million. Specifically, we have agreed to purchase
Rainbow 1, a direct broadcast satellite located at 61.5 degrees West Longitude, together with the
rights to 11 DBS frequencies at that location. The satellite includes 13 transponders, up to 12 of
which can be operated in spot beam mode. Also, as part of this transaction, we will acquire
ground facilities and related assets in Black Hawk, S.D. The transaction is subject to customary
conditions, including regulatory approval by the FCC. There can be no assurance that such approval
will be obtained.
Settlement of EchoStar IV Arbitration
On March 4, 2005, we agreed to settle our insurance claim and related claims for accrued interest
and bad faith with all carriers who agree to pay their proportionate share of an aggregate net
amount of $240.0 million. We retained title to and use of the EchoStar IV satellite. Payment from
each settling carrier is due on or before April 26, 2005, with interest commencing to accrue on
April 12, 2005. Currently, we have received signed agreements back from insurers representing
over 90% of the aggregate amount. While we believe the remaining insurers will each sign
the agreement shortly, the arbitration will continue with respect to any insurers who decline to
settle.
Amounts payable to us in excess of our previously recorded $106.0 million receivable will be
recognized in income during the period in which the respective insurers sign the settlement
agreement. See Note 9 for more information relating to the underlying insurance claim and our
historical accounting for that claim.
F-49
Index to Exhibit
|
|
|
3.1(a)*
|
|
Amended and Restated Articles of Incorporation of EchoStar (incorporated by
reference to Exhibit 3.1(a) on the Quarterly Report on Form 10-Q of EchoStar for
the quarter ended June 30, 2003, Commission File No. 0-26176).
|
|
|
|
3.1(b)*
|
|
Amended and Restated Bylaws of EchoStar (incorporated by reference to
Exhibit 3.1(b) on the Quarterly Report on Form 10-Q of EchoStar for the quarter
ended June 30, 2003, Commission File No. 0-26176).
|
|
|
|
3.2(a)*
|
|
Articles of Incorporation of EDBS (incorporated by reference to Exhibit 3.4(a) to
the Registration Statement on Form S-4 of EDBS, Registration No. 333-31929).
|
|
|
|
3.2(b)*
|
|
Bylaws of EDBS (incorporated by reference to Exhibit 3.4(b) to the Registration
Statement on Form S-4 of EDBS, Registration No. 333-31929).
|
|
|
|
4.1*
|
|
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).
|
|
|
|
4.2*
|
|
Indenture relating to 10 3/8% Senior Notes due 2007, dated as of November 12,
2002, between EDBS and U.S. Bank Trust National Association, as trustee
(incorporated by reference to Exhibit 4.8 to the Annual Report on Form 10-K of
EchoStar for the year ended December 31, 2002, Commission File No.0-26176).
|
|
|
|
4.3*
|
|
Indenture, relating to the 5 3/4% Convertible Subordinated Notes Due 2008, dated
as of May 31, 2001 between EchoStar 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).
|
|
|
|
4.4*
|
|
Registration Rights Agreement, relating to the 5 3/4% Convertible Subordinated
Notes Due 2008, dated as of May 31, 2001, by and between EchoStar and UBS Warburg
L.L.C. (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).
|
|
|
|
4.5*
|
|
Indenture, relating to the 9 1/8% Senior Notes Due 2009, dated as of December 28,
2001 between EDBS and U.S. Bank Trust National Association, as Trustee
(incorporated by reference to Exhibit 4.17 to the Annual Report on Form 10-K of
EchoStar for the year ended December 31, 2001, Commission File No. 0-26176).
|
|
|
|
4.6*
|
|
Registration Rights Agreement, relating to the 9 1/8% Senior Notes Due 2009,
dated as of December 28, 2001, by and among EDBS and Deutsche Banc Alex. Brown,
Inc., Credit Suisse First Boston Corporation, Lehman Brothers Inc. and UBS
Warburg L.L.C. (incorporated by reference to Exhibit 4.18 to the Annual Report on
Form 10-K of EchoStar for the year ended December 31, 2001, Commission File No.
0-26176).
|
|
|
|
4.7*
|
|
Indenture, relating to EDBS 5
3
/
4
% Senior Notes due 2008, dated as of October 2,
2003, between EDBS 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, 2003, Commission File No.0-26176).
|
|
|
|
4.8*
|
|
Indenture, relating to EDBS 6 3/8% Senior Notes due 2011, dated as of October 2,
2003, between EDBS and U.S. Bank Trust National Association, as Trustee
(incorporated by reference to Exhibit 4.2 to the Quarterly Report on Form 10-Q of
EchoStar for the quarter ended September 30, 2003, Commission File No.0-26176).
|
|
|
|
4.9*
|
|
Indenture, relating to EDBS Floating Senior Notes due 2008, dated as of October
2, 2003, between EDBS and U.S. Bank Trust National Association, as Trustee
(incorporated by reference to Exhibit 4.3 to the Quarterly Report on Form 10-Q of
EchoStar for the quarter ended September 30, 2003, Commission File No.0-26176).
|
|
|
|
4.10*
|
|
Registration Rights Agreement dated as of October 2, 2003 among EDBS and the
other parties named herein (incorporated by reference to Exhibit 4.4 to the
Quarterly Report on Form 10-Q of EchoStar for the quarter ended September 30,
2003, Commission File No.0-26176).
|
|
|
|
4.11*
|
|
3% Convertible Subordinated Note due 2010 (incorporated by reference to Exhibit
4.5 to the Quarterly Report on Form 10-Q of EchoStar for the quarter ended
September 30, 2003, Commission File No.0-26176).
|
|
|
|
4.12*
|
|
First Supplemental Indenture, relating to the 9 1/8% Senior Notes Due 2009, dated
as of December 31, 2003 between EDBS and U.S. Bank Trust National Association, as
Trustee (incorporated by reference to Exhibit 4.12 to the Annual Report on Form 10-K for the year ended December 31, 2003, Commission File No. 0-26176).
|
|
|
|
4.13*
|
|
First Supplemental Indenture, relating to the 5 3/4% Senior Notes Due 2008, dated
as of December 31, 2003 between EDBS and U.S. Bank Trust National Association, as
Trustee (incorporated by reference to Exhibit 4.13 to the Annual Report on Form 10-K for the year ended December 31, 2003, Commission File No. 0-26176).
|
|
|
|
4.14*
|
|
First Supplemental Indenture, relating to the 6 3/8% Senior Notes Due 2011, dated
as of December 31, 2003 between EDBS and U.S. Bank Trust National Association, as
Trustee (incorporated by reference to Exhibit 4.14 to the Annual Report on Form 10-K for the year ended December 31, 2003, Commission File No. 0-26176).
|
|
|
|
4.15*
|
|
First Supplemental Indenture, relating to the Floating Rate Senior Notes Due
2008, dated as of December 31, 2003 between EDBS and U.S. Bank Trust National
Association, as Trustee (incorporated by reference to Exhibit 4.15 to the Annual Report on Form 10-K for the year ended December 31, 2003, Commission File No. 0-26176).
|
|
|
|
4.16*
|
|
First Supplemental Indenture, relating to the 10 3/8% Senior Notes Due 2007,
dated as of December 31, 2003 between EDBS and U.S. Bank Trust National
Association, as Trustee (incorporated by reference to Exhibit 4.16 to the Annual Report on Form 10-K for the year ended December 31, 2003, Commission File No. 0-26176).
|
|
|
|
10.1*
|
|
Form of Satellite Launch Insurance Declarations (incorporated by reference to
Exhibit 10.10 to the Registration Statement on Form S-1 of Dish Ltd.,
Registration No. 33-81234).
|
|
|
|
10.2*
|
|
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 Ltd., Commission File No. 33-81234).
|
|
|
|
10.3*
|
|
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).**
|
|
|
|
10.4*
|
|
Echostar 1999 Stock Incentive Plan (incorporated by reference to Exhibit C to
EchoStars Definitive Proxy Statement on Schedule 14A dated March 23, 1999).**
|
|
|
|
10.5*
|
|
1995 Non-employee Director Stock Option Plan (incorporated by reference to
Exhibit 4.4 to the Registration Statement on Form S-8 of Echostar, Registration
No. 333-05575).**
|
|
|
|
10.6*
|
|
2001 Non-employee Director Stock Option Plan (incorporated by reference to
Exhibit 4.4 to the Registration Statement on Form S-8 of Echostar, Registration
No. 333-66490).**
|
|
|
|
10.7*
|
|
2002 Class B CEO Stock Option Plan (incorporated by reference to Appendix A to
EchoStars Definitive Proxy Statement on Schedule 14A dated April 9, 2002).**
|
|
|
|
10.8*
|
|
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).
|
|
|
|
10.9*
|
|
Agreement to Form NagraStar L.L.C., 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).
|
|
|
|
10.10*
|
|
License and OEM Manufacturing Agreement, dated July 1, 2002, between EchoStar
Satellite Corporation, EchoStar Technologies Corporation and Thomson multimedia,
Inc. (incorporated by reference to Exhibit 10.1 to the Quarterly Report on Form
10-Q of EchoStar for the quarter ended September 30, 2002, Commission File No.
0-26176).***
|
|
|
|
10.11*
|
|
Amendment No. 19 to License and OEM Manufacturing Agreement, dated July 1, 2002,
between EchoStar Satellite Corporation, EchoStar Technologies Corporation and
Thomson multimedia, Inc. (incorporated by reference to Exhibit 10.57 to the
Annual Report on Form 10-K of EchoStar for the year ended December 31, 2002,
Commission File No.0-26176).
|
|
|
|
10.12*
|
|
Satellite Service Agreement, dated as of March 21, 2003, between SES Americom,
Inc., EchoStar Satellite Corporation and EchoStar Communications Corporation
(incorporated by reference to Exhibit 10.1 to the Quarterly Report on Form 10-Q
of EchoStar for the quarter ended March 31, 2003, Commission File No.0-26176).
|
|
|
|
10.13*
|
|
Amendment No. 1 to Satellite Service Agreement dated March 31, 2003 between SES
Americom Inc. and EchoStar (incorporated by reference to Exhibit 10.1 to the
Quarterly Report on Form 10-Q of EchoStar for the quarter ended September 30,
2003, Commission File No.0-26176).
|
|
|
|
10.14*
|
|
Satellite Service Agreement dated as of August 13, 2003 between SES Americom Inc.
and EchoStar (incorporated by reference to Exhibit 10.2 to the Quarterly Report
on Form 10-Q of EchoStar for the quarter ended September 30, 2003, Commission
File No.0-26176).
|
|
|
|
10.15*
|
|
Satellite Service Agreement, dated February 19, 2004, between SES Americom, Inc.
and EchoStar (incorporated by reference to Exhibit 10.1 to the Quarterly Report
on Form 10-Q of EchoStar for the quarter ended March 31, 2004, Commission File
No.0-26176).
|
|
|
|
10.16*
|
|
Amendment No. 1 to Satellite Service Agreement, dated March 10, 2004, between SES
Americom, Inc. and EchoStar (incorporated by reference to Exhibit 10.2 to the
Quarterly Report on Form 10-Q of EchoStar for the quarter ended March 31, 2004,
Commission File No.0-26176).
|
|
|
|
10.17*
|
|
Amendment No. 3 to Satellite Service Agreement, dated February 19, 2004, between
SES Americom, Inc. and EchoStar (incorporated by reference to Exhibit 10.3 to the
Quarterly Report on Form 10-Q of EchoStar for the quarter ended March 31, 2004,
Commission File No.0-26176).
|
|
|
|
10.18*
|
|
Whole RF Channel Service Agreement, dated February 4, 2004, between Telesat
Canada and EchoStar (incorporated by reference to Exhibit 10.4 to the Quarterly
Report on Form 10-Q of EchoStar for the quarter ended March 31, 2004, Commission
File No.0-26176).
|
|
|
|
10.19*
|
|
Letter Amendment to Whole RF Channel Service Agreement, dated March 25, 2004,
between Telesat Canada and EchoStar (incorporated by reference to Exhibit 10.5 to
the Quarterly Report on Form 10-Q of EchoStar for the quarter ended March 31,
2004, Commission File No.0-26176).
|
|
|
|
10.20*
|
|
Amendment No. 2 to Satellite Service Agreement, dated April 30, 2004, between SES
Americom, Inc. and EchoStar (incorporated by reference to Exhibit 10.1 to the
Quarterly Report on Form 10-Q of EchoStar for the quarter ended June 30, 2004,
Commission File No.0-26176).
|
|
|
|
10.21*
|
|
Second Amendment to Whole RF Channel Service Agreement, dated May 5, 2004,
between Telesat Canada and Echostar (incorporated by reference to Exhibit 10.2 to
the Quarterly Report on Form 10-Q of EchoStar for the quarter ended June 30,
2004, Commission File No.0-26176).
|
|
|
|
10.22
|
|
Third Amendment to Whole RF Channel Service Agreement, dated October 12, 2004,
between Telesat Canada and Echostar. ***
|
|
|
|
10.23
|
|
Amendment No. 4 to Satellite Service Agreement, dated October 21, 2004, between
SES Americom, Inc. and EchoStar. ***
|
|
|
|
10.24
|
|
Amendment No. 3 to Satellite Service Agreement, dated November 19, 2004 between
SES Americom, Inc. and EchoStar ***
|
|
|
|
10.25
|
|
Amendment No. 5 to Satellite Service Agreement, dated November 19, 2004, between
SES Americom, Inc. and EchoStar. ***
|
|
|
|
10.26
|
|
Amendment No. 6 to Satellite Service Agreement, dated December 20, 2004, between
SES Americom, Inc. and EchoStar ***
|
|
|
|
21
|
|
Subsidiaries of EchoStar Communications Corporation.
|
|
|
|
23.1
|
|
Consent of KPMG LLP, Independent Auditors.
|
|
|
|
24.1
|
|
Powers of Attorney authorizing signature of Michael T. Dugan, Cantey Ergen,
Raymond L. Friedlob, Steven R. Goodbarn and C. Michael Schroeder.
|
|
|
|
31.1
|
|
Section 302 Certification by Chairman and Chief Executive Officer.
|
|
|
|
31.2
|
|
Section 302 Certification by Executive Vice President and Chief Financial Officer.
|
|
|
|
32.1
|
|
Section 906 Certification by Chairman and Chief Executive Officer.
|
|
|
|
32.2
|
|
Section 906 Certification by Executive Vice President and Chief Financial Officer.
|
|
|
Filed herewith.
|
|
*
|
|
Incorporated by reference.
|
|
**
|
|
Constitutes a management contract or compensatory plan or arrangement.
|
|
***
|
|
Filed in redacted form since confidential treatment has been requested pursuant to
Rule 24.b-2 for certain portions thereof. A conforming electronic copy is filed herewith.
|