UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Form 10-Q
(Mark One)
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[X]
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2004 |
OR
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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 _____________ to _____________. |
Commission File Number: 0-26176
EchoStar Communications Corporation
Nevada | 88-0336997 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
9601 South Meridian Boulevard | ||
Englewood, Colorado | 80112 | |
(Address of principal executive offices) | (Zip code) |
(303) 723-1000
(Registrants telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as defined by Rule 12b-2 of the Exchange Act). Yes [X] No [ ]
As of July 30, 2004, the Registrants outstanding common stock consisted of 215,857,912 shares of Class A Common Stock and 238,435,208 Shares of Class B Common Stock.
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION
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Item 1. Financial Statements
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Item 3. Defaults Upon Senior Securities
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Item 5. Other Information
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Amendment No. 2 to Satellite Service Agreement | ||||||||
Second Amendment to Whole RF Channel Service Agreement | ||||||||
Section 302 Certification by Chairman and CEO | ||||||||
Section 302 Certification by Executive VP and CFO | ||||||||
Section 906 Certification by Chairman and CEO | ||||||||
Section 906 Certification by Executive VP and CFO |
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 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 with our expectations and predictions is subject to a number of risks and uncertainties. The risks and uncertainties include, but are not limited to, the following:
| we face intense and increasing competition from the satellite and cable television industry; new competitors may enter the subscription television business, and new technologies may increase competition; | |||
| DISH Network subscriber growth may decrease, subscriber turnover may increase and subscriber acquisition costs may increase; | |||
| 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; | |||
| 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; | |||
| 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; | |||
| the regulations governing our industry may change; | |||
| new provisions of the Satellite Home Viewer Improvement Act may force us to stop offering local channels in certain markets or incur additional costs to continue offering local channels in certain markets; | |||
| our satellite launches may be delayed or fail, or our satellites may fail in orbit prior to the end of their scheduled lives, which could result in extended interruptions of some of the channels we offer; | |||
| we currently do not have traditional commercial insurance covering losses incurred from the failure of satellite launches and/or in-orbit satellites and we may be unable to settle outstanding claims with insurers; | |||
| 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; | |||
| 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; | |||
| we are party to various lawsuits which, if adversely decided, could have a significant adverse impact on our business; | |||
| we may be unable to obtain patent licenses from holders of intellectual property or redesign our products to avoid patent infringement; | |||
| sales of digital equipment and related services to international direct-to-home service providers may decrease; | |||
| we are highly leveraged and subject to numerous constraints on our ability to raise additional debt; | |||
| acquisitions, business combinations, strategic partnerships, divestitures and other significant transactions may involve additional uncertainties; | |||
| 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; and | |||
| 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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ECHOSTAR COMMUNICATIONS
CORPORATION
The accompanying notes are an integral part of the condensed consolidated financial statements.
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ECHOSTAR COMMUNICATIONS
CORPORATION
The accompanying notes are an integral part of the condensed consolidated financial statements.
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ECHOSTAR COMMUNICATIONS
CORPORATION
The accompanying notes are an integral part of the condensed consolidated financial statements.
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ECHOSTAR COMMUNICATIONS CORPORATION
1.
Organization and Business Activities
Principal
Business
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.
2.
Significant Accounting Policies
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with accounting principles generally accepted in
the United States (GAAP) and with the instructions to Form 10-Q and Article
10 of Regulation S-X for interim financial information. Accordingly, these
statements do not include all of the information and notes required for
complete financial statements. In our opinion, all adjustments (consisting of
normal recurring adjustments) considered necessary for a fair presentation have
been included. Operating results for the six months ended June 30, 2004 are
not necessarily indicative of the results that may be expected for the year
ending December 31, 2004. For further information, refer to the consolidated
financial statements and notes thereto included in our Annual Report on Form
10-K for the year ended December 31, 2003 (2003 10-K). The results of
operations for the three and six months ended June 2004 include a charge of
approximately $13.0 million to establish a reserve for estimated
Subscriber-related expenses relating
to prior periods. This reserve may increase or decrease in future
periods.
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.
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.
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ECHOSTAR COMMUNICATIONS CORPORATION
Use of Estimates
The preparation of financial statements in conformity with 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 tax asset valuation allowances, loss
contingencies, fair values of financial instruments, asset impairments, useful
lives of property and equipment, 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.
Comprehensive Income (Loss)
The components of comprehensive income (loss), net of tax, are as follows:
Accumulated other comprehensive income presented on the accompanying
condensed consolidated balance sheets consists of the accumulated net
unrealized gains (losses) on available-for-sale securities and foreign currency
translation adjustments, net of deferred taxes.
Basic and Diluted Income (Loss) Per Share
Statement of Financial Accounting Standard 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 income
(loss) 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 dilutive stock options were exercised and convertible securities
were converted to common stock.
The following table reflects the basic and diluted weighted-average shares:
As
of June 30, 2004 and 2003, we had approximately 18.9 million and 18.5
million options for the purchase of shares of class A common stock outstanding, respectively.
The potential dilution from stock options exercisable into approximately
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ECHOSTAR COMMUNICATIONS CORPORATION
3.6 million and 5.0 million shares of common stock computed using the treasury
stock method based on the average fair market value of the class A common stock
for the period, were included in our weighted-average diluted common shares
outstanding for the three months ended June 30, 2004 and 2003, respectively.
The potential dilution from stock options exercisable into approximately 3.9
million and 5.3 million shares of common stock, calculated as previously
described, were included for the six months ended June 30, 2004 and 2003,
respectively.
Of the options to purchase a total of approximately 18.9 million shares
outstanding as of June 30, 2004, options to purchase approximately 7.4 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. Accordingly, the long-term incentive options are not included
in the diluted EPS calculation.
As of June 30, 2004 and 2003, our 5 3/4% Convertible Subordinated Notes due
2008 were convertible into approximately 23.1 million shares of Class A Common
stock. As of June 30, 2004, our 3% Convertible Subordinated Note due 2010 was
convertible into approximately 6.9 million shares of Class A Common stock. As
of June 30, 2003, our 4 7/8% Convertible Subordinated Notes due 2007 (our 4
7/8% Notes) were convertible into approximately 22.0 million shares of Class A
Common stock. We redeemed the $1.0 billion outstanding principal amount of our
4 7/8% Notes during October 2003. Our convertible notes are not included in
the diluted EPS calculation for all periods presented as their conversion would
be antidilutive.
Accounting for Stock-Based Compensation
We have elected to follow 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. Under APB 25, we generally do not recognize
compensation expense on the grant of options under our stock incentive plans
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 the disclosure only provisions of Statement of Financial Accounting
Standard 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 market 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 unvested options are forfeited
upon termination of employment. 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:
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ECHOSTAR COMMUNICATIONS CORPORATION
For purposes of this pro forma presentation, the fair value of each option was
estimated at the date of the grant using a Black-Scholes option pricing model.
The Black-Scholes option valuation model was developed for use in estimating
the fair value of exchange traded options which have no vesting restrictions
and are fully transferable. Consequently, 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 model does not necessarily provide a reliable single measure of the
fair value of stock-based compensation awards.
Non-cash, stock-based compensation
During 1999, we adopted a plan under our 1995 Stock Incentive Plan, which
provided certain key employees with incentives including stock options. The
table below shows the amount of compensation expense recognized under this
performance-based plan for the three and six months ended June 30, 2004 and
2003. There is no remaining deferred compensation to be recognized under this
plan subsequent to March 31, 2004.
We report all non-cash compensation based on stock option appreciation as a
single expense category in our condensed consolidated statements of operations.
The following table shows the other expense categories in our condensed
consolidated 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:
Options to purchase 7.4 million shares were outstanding pursuant to a long-term
incentive plan under our 1995 Stock Incentive plan as of June 30, 2004. These
options were granted with exercise prices at least equal to the market value of
the underlying shares on the dates they were issued during 1999, 2000 and 2001.
The weighted-average exercise price of these options is $9.21. Vesting of
these options is contingent upon meeting certain longer-
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ECHOSTAR COMMUNICATIONS CORPORATION
term goals which have not yet been achieved. Consequently, no compensation was
recorded during the six months ended June 30, 2004 related to these long-term
options. We will record the related compensation upon the achievement of the
performance goals, if ever. This compensation, if recorded, could result in
material non-cash, stock-based compensation expense in our condensed
consolidated statements of operations.
3.
Marketable and Non-Marketable Investment Securities
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 component of Accumulated other comprehensive income,
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 condensed consolidated statements of operations, thereby
establishing a new cost basis for the 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 these 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 June 30, 2004 and December 31, 2003, we had unrealized gains of
approximately $29.2 million and $79.6 million, respectively, as a part of
Accumulated other comprehensive income within Total stockholders deficit.
During the six months ended June 30, 2004, we did not record any charges to
earnings for other than temporary declines in the fair market value of our
marketable investment securities, and we realized net losses of approximately
$8.5 million on marketable and non-marketable investment securities. Our
approximately $1.856 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 $153.2 million as of June 30, 2004. During the six months ended
June 30, 2004, our portfolio generally, and our strategic investments
particularly, experienced 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 value.
We also have made, and may continue in the future to make, strategic equity
investments in securities that are not publicly traded, including equity
interests we received in exchange for cash and non-cash consideration (Note 6).
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. We evaluate
our non-marketable investment securities on a quarterly basis to determine
whether the carrying value of each investment is impaired. This quarterly
evaluation consists of reviewing, among other things, company business plans
and current financial statements, if available, for factors which may indicate
an impairment in our investment. These factors may include, but are not
limited to, cash flow concerns, material litigation, violations of debt
covenants and changes in business strategy. During the six months ended June
30, 2004, we did not record any impairment charges with respect to these
instruments.
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ECHOSTAR COMMUNICATIONS CORPORATION
4.
Inventories
Inventories consist of the following:
5.
Satellites
We review our long-lived assets for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable in accordance with the provision of Statement of Financial
Accounting Standards No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets (SFAS 144), We consider the relevant cash flows, estimated
operating results and other information in evaluating the performance of our
satellites in accordance with SFAS 144 and have determined the carrying value
of our satellites are fully recoverable. We will continue to evaluate the
performance of our satellites as new events or changes in circumstances become
known.
EchoStar III
During January 2004, a Traveling Wave Tube Amplifier (TWTA) pair on our
EchoStar III 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
any given time, 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,
currently it can only operate on 18 of the 19 FCC authorized frequencies we own
or lease at the 61.5 degree west orbital location. While we don't
expect a large number of 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 V
Our EchoStar V 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 any given time, the solar array
anomalies may prevent the use of all 32 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 and may be required to reduce the remaining
depreciable life as new events or circumstances develop.
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ECHOSTAR COMMUNICATIONS CORPORATION
EchoStar VI
Prior to 2004, EchoStar VI had lost a total of 3 solar array strings. In 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. 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. 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 further
losses which could impact commercial operation of the satellite.
EchoStar VII
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.
EchoStar VIII
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. 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. 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.
Satellite Insurance
In September 1998, 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 Aviation Underwriters, Inc., 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.
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ECHOSTAR COMMUNICATIONS CORPORATION
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. The insurers assert, among other things, that EchoStar IV was not a
total loss, as that term is defined in the policy, and that we did not abide by
the exact terms of the insurance policies. We strongly disagree and filed
arbitration claims against the insurers for breach of contract, failure to pay
a valid insurance claim and bad faith denial of a valid claim, among other
things. Due to forum selection clauses in certain of the policies, we are
pursuing our arbitration claims against Ace Bermuda Insurance Ltd. in London,
England, and our arbitration claims against all of the other insurance carriers
in New York, New York. The New York arbitration commenced on April 28, 2003,
and the Arbitration Panel has conducted approximately thirty-five days of
hearings. The insurers have requested additional proceedings in the New York
arbitration before any final arbitration award is made by the Panel. The
parties to the London arbitration have agreed to stay that proceeding pending a
ruling in the New York arbitration. There can be no assurance as to when an
arbitration award may be made and what amount, if any, we will receive in
either the New York or the London arbitrations or, if we do, that we will
retain title to EchoStar IV with its reduced capacity.
At the time we filed our claim in 1998, we recognized an initial impairment
loss of $106.0 million to write-down the carrying value of the satellite and
related costs, and simultaneously recorded an insurance claim receivable for
the same amount. As of December 31, 2003, EchoStar IV was fully
depreciated. While there can be no assurance that we will receive the
amount claimed in either the New York or the London arbitrations, we continue
to believe the insurance claim amount is fully recoverable and expect to
receive a favorable decision prior to December 31, 2004.
The indentures related to certain of EDBSs senior notes contain restrictive
covenants that require us to maintain satellite insurance with respect to at
least three of the ten satellites EDBS owns or leases. We currently do not
carry traditional insurance for any of our satellites. To satisfy insurance
covenants related to EDBS senior notes, we classify an amount equal to the
depreciated cost of three of our satellites as Cash reserved for satellite
insurance on our balance sheet. As of June 30, 2004, this amount totaled
approximately $107.1 million. We will continue to reserve cash for satellite
insurance on our balance sheet until such time, if ever, as we again insure
our satellites on acceptable terms and for acceptable amounts, or until the
covenants requiring that insurance are no longer applicable. The
amount reserved is not adequate to fund the construction, launch and
insurance of a replacement satellite, and it typically takes several years to design, construct and launch a satellite.
6.
Other Noncurrent Assets
South.com LLC
In December 2003, we made an investment in South.com LLC (South.com), a
variable interest entity we consolidate in our condensed consolidated
financial statements in accordance with FIN 46-R. South.com was formed to, among other things, bid on and hold FCC licenses.
During December 2003, South.com paid a $7.1 million deposit to participate in
the January 2004 FCC license auction. During January 2004, South.com paid an
additional deposit to the FCC of $20.6 million as the high-bidder on several
licenses. These deposits are included in Other current assets in our
condensed consolidated balance sheets as of June 30, 2004 and December 31,
2003.
Gemstar-TV Guide International Transaction
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, which were
substantially completed on April 4, 2004, were entered into contemporaneously
and accounted for as a purchase business combination in accordance with
Statement of Financial Accounting Standard No. 141, Business Combinations
(SFAS 141).
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ECHOSTAR COMMUNICATIONS CORPORATION
Based on an independent third-party valuation, the purchase consideration was
allocated to identifiable tangible and intangible assets and liabilities as
follows (in thousands):
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 five years.
The business combination did not have a material impact on our results of
operations for the three and six months ended June 30, 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 had the business combination occurred on
January 1, 2003.
Goodwill and Intangible Assets
As of June 30, 2004 and December 31, 2003, we had approximately $313.2 million
and $52.7 million of gross identifiable intangibles, respectively, with related
accumulated amortization of approximately $54.8 million and $42.9 million,
respectively. These identifiable intangibles consist of the following:
Amortization of these intangible assets with an average finite useful life
primarily ranging from approximately five to twelve years was $9.6 million and
$11.9 million for the three and six months ended June 30, 2004, respectively.
For all of 2004, the aggregate amortization expense related to these
identifiable intangible assets is estimated to be $33.7 million. The aggregate
amortization expense is estimated to be approximately $33.6 million for 2005,
$31.7 million for 2006, $29.1 million for 2007, and $27.1 million for 2008. In
addition, we had approximately $3.4 million of goodwill as of June 30, 2004 and
December 31, 2003 which arose from a 2002 acquisition.
Other
During the six months ended June 30, 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
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ECHOSTAR COMMUNICATIONS CORPORATION
approximately $77.3 million related to the fair value of these equity interests
in Other noncurrent assets as of June 30, 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 Issue No.
02-16, Accounting by a Customer (including a Reseller) for Certain
Consideration Received from a Vendor (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 condensed
consolidated balance sheet.
7.
Long-Term Debt
9 3/8% Senior Note Redemption
Effective February 2, 2004, EDBS redeemed the remaining $1.423 billion
principal amount of its outstanding 9 3/8% Senior Notes due 2009 at 104.688%,
for a total of approximately $1.490 billion. The premium paid of approximately
$66.7 million, along with unamortized debt issuance costs of approximately
$10.8 million, were recorded as charges to interest expense in February 2004.
9 1/8% Senior Note Repurchases
During the second quarter of 2004, EDBS repurchased in open market transactions
approximately $8.8 million principal amount of its 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 repurchased notes, were recorded as charges to
interest expense during the second quarter of 2004 .
8.
Commitments and Contingencies
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 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 the Satellite Home Viewer Act 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 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.
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ECHOSTAR COMMUNICATIONS CORPORATION
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 Court issued a final judgment in
June 2003. The 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 appealed the fee award and the Court recently vacated the fee award. 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 attorney 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 none-the-less receive those channels by satellite.
Further, even though the Satellite Home Viewer Improvement Act 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 argument
occurred on February 26, 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 will 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.
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.
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ECHOSTAR COMMUNICATIONS CORPORATION
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 6).
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.
It is our understanding that these patents may be licensed by Superguide to
Gemstar. Gemstar was added as a party to this case and asserted these patents
against us. Gemstars claim against us was resolved as a part of the
settlement discussed above.
A Markman ruling interpreting the patent claims was issued by the Court and in
response to that ruling; we filed motions for summary judgment of
non-infringement for each of the asserted patents. Gemstar filed a motion for
summary judgment of infringement with respect to one of the patents. During
July 2002, the Court ruled that none of our products infringe the 5,038,211 and
5,293,357 patents. With respect to the 4,751,578 patent, the Court ruled that
none of our current products infringed that patent and asked for additional
information before it could rule on certain low-volume products that are no
longer in production. During July 2002, the Court summarily ruled that the
low-volume products did not infringe any of the asserted patents. Accordingly,
the Court dismissed the case and awarded us our court costs and the case was
appealed to the United States Court of Appeals for the Federal Circuit.
On February 12, 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. A petition for reconsideration of the Federal Circuit
Decision was denied. Based upon the settlement with Gemstar, 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, LLC
In November of 2001, Broadcast Innovation, LLC 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.
On January 23, 2004, the judge issued an order finding the 066 patent invalid.
Motions with respect to the infringement, invalidity and construction of the
094 patent remain pending. We intend to continue to vigorously
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ECHOSTAR COMMUNICATIONS CORPORATION
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.
In January of 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. We intend to
vigorously defend this case and we have moved to have it transferred to the
United States District Court for the Northern District of California. 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.
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 as to 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. 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
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ECHOSTAR COMMUNICATIONS CORPORATION
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 have filed a motion for additional time
to conduct discovery to enable them to respond to our motion. The Court has
not ruled on either of the two motions. 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 for lack of personal
jurisdiction. 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 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, a broadband Internet satellite venture in which we invested. 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). 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. 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.
Acacia
In June of 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
17
ECHOSTAR COMMUNICATIONS CORPORATION
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 although Acacias complaint does not identify any products
or services that it believes are infringing these patents. These 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. 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.
Fox Sports Direct
On June 14, 2004, Fox Sports Direct (Fox) sued us in the United States
District Court Central District of California for alleged breach of contract.
Fox claims, among other things, that we underpaid license fees for the period
from January 2000 through December 2001 and has requested an accounting for the
period from January 2000 through June 2003. Fox has claimed damages of $25.0
million, plus interest. An answer has not yet been filed and no discovery has commenced. It
is too early to determine whether or not we will have liability for
license fees in excess of our paid and accrued programming costs, or
for interest.
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.
9.
Depreciation and Amortization Expense
Depreciation and amortization expense consists of the following:
Cost of sales and operating expense categories included in our accompanying
condensed consolidated statements of operations do not include depreciation
expense related to satellites or equipment leased to customers.
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ECHOSTAR COMMUNICATIONS CORPORATION
10.
Segment Reporting
Financial Data by Business Unit
Statement of Financial Accounting Standard 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 category consists of revenue and expenses from other operating segments
for which the disclosure requirements of SFAS 131 do not apply.
11.
Related Party
As previously disclosed, we own 50% of NagraStar LLC (NagraStar), a joint
venture that provides us with smart cards. As of June 30, 2004, we were
committed to purchase approximately $101.3 million of smart cards from
NagraStar. Approximately $44.4 million of these commitments had been accrued
for as of June 30, 2004 on our condensed consolidated balance sheet.
12.
Subsequent Events
Common
Stock Repurchase Programs
As previously disclosed, 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 the six months ended June 30, 2004, we
purchased approximately 22.9 million shares of our Class A common stock for
approximately $722.5 million. During the period between July 1 and July 15,
2004, we repurchased approximately 2.9 million additional shares of our Class A
common stock for approximately $87.1 million. As of July 15, 2004, we had
completed the 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.
We may make repurchases of our Class A Common stock through open market
purchases or privately negotiated transactions subject to market conditions and
other factors. Our repurchase programs do not require us to acquire any
specific number or amount of securities and any of those programs may be
terminated at any time. We may enter into Rule 10b5-1 plans from time to time
to facilitate repurchases of our securities.
19
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, as well as rental and additional outlet fees
from subscribers with multiple set-top boxes. 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,
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 an estimated average 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.
Equipment sales
.
Equipment sales consist of sales of digital set-top boxes
by our ETC subsidiary to an international DBS service provider. Equipment
sales also include unsubsidized sales of DBS accessories to DISH Network
subscribers and to retailers and other distributors of our equipment
domestically. 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.
Subscriber-related expenses
.
Subscriber-related expenses include costs
incurred in connection with our installation, in-home service and
call center operations, programming expenses, copyright royalties, residual commissions, 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,
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, contracted satellite telemetry, tracking
and control services and transponder leases.
Cost of sales equipment.
Cost of sales equipment principally includes
costs associated with digital set-top boxes and related components sold 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.
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
20
receiver systems sold directly by us to subscribers, net costs related to our
free installation promotions and other promotional incentives, and costs
related to 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 relating to disconnecting lease program subscribers from our
calculation of Subscriber acquisition costs.
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.
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
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
high yield 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, or 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. Effective
April 1, 2003, we include Other income and expense items in our definition of
EBITDA. All prior period amounts conform to the current period presentation.
DISH Network subscribers.
We include customers obtained through direct sales,
and through our retail networks, including our co-branding relationship with
SBC and other similar marketing arrangements, 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 Superstar/Netlink Group LLC (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.
21
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 monthly 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
Condensed Consolidated Statements of Cash Flows.
22
RESULTS OF OPERATIONS
Three Months Ended June 30, 2004 Compared to the Three Months Ended June 30,
2003.
23
DISH Network subscribers.
As of June 30, 2004, we had approximately 10.125
million DISH Network subscribers compared to approximately 8.800 million DISH
Network subscribers at June 30, 2003, an increase of approximately 15.1%.
DISH Network added approximately 340,000 net new DISH Network subscribers for
the quarter ended June 30, 2004 compared to approximately 270,000 net new DISH
Network subscribers during the same period in 2003. As the size of our
subscriber base continues to increase, even 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
$1.661 billion for the three months ended June 30, 2004, an increase of $317.5
million or 23.6% 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. DISH Network Subscriber-related revenue
will continue to increase to the extent we are successful in increasing the
number of DISH Network subscribers and maintaining or increasing revenue per
subscriber.
ARPU
.
Monthly average revenue per DISH Network subscriber was approximately
$55.59 during the three months ended June 30, 2004 and approximately $51.69
during the same period in 2003. The $3.90 increase in monthly average revenue
per DISH Network subscriber is primarily attributable to price increases of up
to $2.00 in February 2004 on some of our most popular packages, a reduction in
the number of subscribers receiving subsidized programming through our free and
discounted programming promotions, the increased availability of local
channels by satellite and an increase in subscribers with multiple set-top
boxes. We provided local channels by satellite in 136 markets as of June 30,
2004 as compared to 69 markets as of June 30, 2003. This increase was also
partially attributable to revenue from equipment sales, installation and other
services related to our relationship with SBC. While there can be no
assurance, we expect revenues from this relationship, particularly
the installation revenues, to
continue to have a positive impact on ARPU in the near term to the extent that
we continue to add co-branded subscribers under the agreement.
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.
Equipment sales
.
For the three months ended June 30, 2004, Equipment sales
totaled $85.7 million, an increase of $22.4 million compared to the same period
during 2003. This increase principally resulted from an increase in
unsubsidized sales of DBS accessories to DISH Network subscribers and to
retailers and other distributors of our equipment domestically. The increase
in sales of DBS accessories primarily relates to, among other things,
subscriber equipment upgrades to support the launch of additional programming,
including local markets. The increase in Equipment sales was partially
offset by a decrease in sales of non-DISH Network receivers and other
accessories sold by our EchoStar International Corporation subsidiary to
international customers.
Subscriber-related expenses.
Subscriber-related expenses totaled $900.8
million during the three months ended June 30, 2004, an increase of $246.1
million or 37.6% 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 54.2% and
48.7% of Subscriber-related revenue during the three months ended June 30,
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
24
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 a larger dish, or SuperDISH,
used to receive programming from our FSS satellites. This increase also resulted from an approximate $13.0 million charge
during the three months ended June 30, 2004 to establish a reserve
for estimated expenses related to prior periods, and further to 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 the agreement. The increase in the expense to revenue ratio from 2003 to
2004 was partially offset by the increase in monthly average revenue per DISH
Network subscriber discussed above. The ratio of Subscriber-related expenses
to Subscriber-related revenue could continue to increase if our programming
and retention costs increase at a greater rate than our Subscriber-related
revenue.
We currently offer local broadcast channels in approximately 143 markets across
the United States. In 38 of those markets, two dishes are necessary to receive
all local channels in the market. In connection with reauthorization of the
Satellite Home Viewer Improvement Act this year, Congress is considering
requiring that all local broadcast channels delivered by satellite to any
particular market be available from one dish. We currently plan to transition
all markets to a single dish by 2008. If a two-dish prohibition with a shorter
transition period is enacted, we would be forced by capacity limitations to
move the local channels in as many as 30 markets to new satellites, requiring
subscribers in those markets to install a second dish to continue receiving
their local channels. We may be forced to stop offering local channels in some
of those markets altogether. The transition would result in disruptions of
service for a substantial number of customers, and the cost of compliance could
exceed $100.0 million. To the extent 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, it is expected that subscriber churn would be
negatively impacted.
Satellite and transmission expenses
.
Satellite and transmission expenses
totaled $27.6 million during the three months ended June 30, 2004, an $11.2
million increase compared to the same period in 2003. This increase primarily
resulted from launch and operational costs, including lease payment obligations
pursuant to our Fixed Satellite Service (FSS) agreements, associated with the
increasing number of markets in which we offer local network channels by
satellite as previously discussed. Satellite and transmission expenses
totaled 1.7% and 1.2% of Subscriber-related revenue during each of the three
months ended June 30, 2004 and 2003, respectively. The increase in the expense
to revenue ratio principally resulted from additional operational costs to
support launches of our local markets discussed above. These expenses will
increase further in the future to the extent we enter into additional satellite
lease agreements, obtain traditional satellite insurance, and to the extent we
increase the operations at our digital broadcast centers as, among other
things, additional satellites are placed in service and additional local
markets and other programming services are launched.
Cost of sales equipment.
Cost of sales equipment totaled $67.6 million
during the three months ended June 30, 2004, an increase of $22.9 million
compared to the same period in 2003. This increase related primarily to the
increase in unsubsidized sales of DBS accessories to DISH Network subscribers
and to retailers and other distributors of our equipment domestically discussed
above and a $6.7 million write-off of certain defective DBS accessories
provided by a bankrupt supplier. Cost of sales equipment represented 78.9%
and 70.7% of Equipment sales, during the three months ended June 30, 2004 and
2003, respectively. The increase in the expense to revenue ratio principally
related to the write-off of certain defective DBS accessories discussed above.
Subscriber acquisition costs.
Subscriber acquisition costs totaled
approximately $365.3 million for the three months ended June 30, 2004, an
increase of $79.6 million or 27.9% compared to the same period in 2003. The
increase in Subscriber acquisition costs was directly attributable to a
larger number of gross DISH Network subscriber additions during the three
months ended June 30, 2004 compared to the same period in 2003. Subscriber
acquisition costs during the three months ended June 30, 2003 included a
benefit of approximately $34.4 million resulting from a litigation settlement
which also contributed to the increase. This increase was 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 below.
25
SAC.
Subscriber acquisition costs per new DISH Network subscriber activation
(SAC) were approximately $431 for the three months ended June 30, 2004 and
approximately $408 during the same period in 2003. SAC during the three months
ended June 30, 2003 included a benefit of approximately $34.4 million discussed
above. Absent this benefit, our SAC for the three months ended June 30, 2003
would have been approximately $49 higher, or $457. The decrease in SAC during
the three months ended June 30, 2004 as compared to the same period in 2003
(excluding this benefit) was primarily attributable to an increase in DISH
Network subscribers participating in our equipment lease program, the
acquisition of co-branded subscribers during 2004, and reduced subscriber
acquisition advertising. These factors were partially offset by more expensive
promotions we 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 the three months ended June 30,
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 the same period in 2003. Finally,
subscribers added during the three months ended June 30, 2004 received more
free equipment and less discounted programming than new subscribers activated
during the comparable period in 2003. This change in promotional mix increased
both SAC and ARPU for the three months ended June 30, 2004 as compared to the
same period in 2003. Our Subscriber acquisition costs, both in the aggregate and
on a per new subscriber activation basis, 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.
We exclude the value of equipment capitalized under our equipment lease program
from our calculation of SAC. We also exclude payments and the value of
returned equipment relating to disconnecting lease program subscribers from our
calculation of SAC. If these amounts were included, our SAC would have been
approximately $576 during the three months ended June 30, 2004 compared to $441
during the same period in 2003. As discussed above, Subscriber acquisition
costs during the three months ended June 30, 2003 included a benefit of
approximately $34.4 million or $49 per subscriber related to a litigation
settlement. Absent this benefit, our SAC, including the value of equipment
capitalized under our equipment lease program and including payments and the
value of returned equipment relating to disconnecting lease program subscribers
would have been $490 for the three months ended June 30, 2003. Our equipment
lease penetration increased during the three months ended June 30, 2004 as
compared to the same period in 2003. Additional penetration of our equipment lease program will
increase capital expenditures. See further discussion of capitalized
subscriber acquisition costs and payments and certain returned equipment
relating to disconnecting lease program subscribers included in
Liquidity and
Capital Resources Subscriber Acquisition and Retention Costs
.
General and administrative expenses.
General and administrative expenses
totaled $97.2 million during the three months ended June 30, 2004, an increase
of $8.1 million 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 5.5% and 6.3% of Total
revenue during the three months ended June 30, 2004 and 2003, respectively.
The decrease in this expense to revenue ratio resulted primarily from higher
total revenues discussed above and administrative efficiencies.
Depreciation and amortization.
Depreciation and amortization expense totaled
$123.9 million during the three months ended June 30, 2004, a $23.6 million
increase 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 additional depreciable assets placed in service
during the second half of 2003 and the six months ended June 30, 2004. As of
December 31, 2003, EchoStar IV was fully depreciated and accordingly, we
recorded no expense for this satellite during the three months ended June 30,
2004. This partially offset the increase in depreciation expense discussed
above.
Interest expense, net of amounts capitalized.
Interest expense totaled $93.4
million during the three months ended June 30, 2004, a decrease of $14.3
million compared to the same period in 2003. This decrease primarily resulted
from a reduction in interest expense of approximately $57.5 million as a result
of debt redemptions and repurchases during 2003 and 2004. This decrease was
partially offset by additional interest expense totaling approximately $40.0
million related to our $500.0 million 3% Convertible Subordinated Note due 2010
issued during July 2003 and our $2.5 billion aggregate of senior notes issued
during October 2003, together with prepayment premiums and the write-off of
debt
26
issuance costs totaling approximately $1.2 million related to repurchases of
our 9 1/8% Senior Notes due 2009 during the second quarter of 2004.
Earnings Before Interest, Taxes, Depreciation and Amortization
. EBITDA was
$296.1 million during the three months ended June 30, 2004, compared to $325.0
million during the same period in 2003. EBITDA during the three months ended
June 30, 2003 included a benefit of approximately $34.4 million related to a
litigation settlement. Absent this 2003 benefit, our EBITDA for the three
months ended June 30, 2004 would have been $5.5 million higher than EBITDA for
the comparable period in 2003. The increase in EBITDA (excluding this benefit)
was primarily attributable to increases in ARPU and in the number of DISH
Network subscribers and an increase in the number of DISH Network subscribers
participating in our equipment lease program (which results in an increase in
capital expenditures and less SAC). The increase in EBITDA is also
attributable in part to the acquisition of co-branded subscribers, which
reduces overall SAC. These factors were partially offset by a higher number of
gross DISH Network subscribers additions during the three months ended June 30,
2004 as compared to the same period in 2003 and by a decrease in
Other income, principally related to $9.5 million in net losses realized from the sale of
certain securities from our marketable and non-marketable investment portfolio
together with increases in our Subscriber-related expenses and Satellite and
transmission expenses as a percentage of Subscriber-related revenue. EBITDA
does not include the impact of capital expenditures under our new and
existing subscriber equipment lease
programs of approximately $147.4 million and $29.8 million during the three
months ended June 30, 2004 and 2003, respectively. As previously discussed,
to the extent we introduce more aggressive marketing promotions and our
subscriber acquisition costs materially increase, our EBITDA results will be
negatively impacted because subscriber acquisition costs are generally expensed
as incurred.
The following table reconciles EBITDA to the accompanying financial statements:
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 condensed
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 (SFAS 109)
regarding the recoverability of any tax assets recorded on the balance sheet
and provide any necessary allowances as required. Determining necessary
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 approximately $1.1 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 both historical evidence, including trends, and future
expectations in each reporting period. In the future, if we believe that it is
more likely than not that some or all of our deferred tax assets will be
realized, the current valuation allowance, or some
27
portion of it, would be reversed. Reversing our current recorded valuation
allowance would have a material positive impact on our Net income (loss) for
future periods. 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 $85.3 million during the three months
ended June 30, 2004, a decrease of $43.5 million compared to $128.8 million for
the same period in 2003. The decrease was primarily attributable to decreases
in Operating income and Other income resulting from the factors discussed
above, partially offset by a decrease in Interest expense, net of amounts
capitalized. Our future net income (loss) results will be negatively
impacted to the extent we introduce more aggressive marketing promotions that
materially increase our subscriber acquisition costs since these subscriber
acquisition costs are generally expensed as incurred.
28
Six Months Ended June 30, 2004 Compared to the Six Months Ended June 30, 2003.
29
Subscriber-related revenue.
DISH Network Subscriber-related revenue totaled
$3.154 billion for the six months ended June 30, 2004, an increase of $517.8
million or 19.6% 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. The increase in Subscriber-related
revenue was partially offset by our free and reduced price programming
promotions. This increase was also partially offset by credits issued to our
subscribers as a result of Viacoms decision, during the first quarter of 2004,
to temporarily revoke our right to distribute their programming channels.
ARPU
.
Monthly average revenue per DISH Network subscriber was approximately
$53.71 during the six months ended June 30, 2004 and approximately $51.65
during the same period in 2003. The $2.06 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, the
increased availability of local channels by satellite and an increase in
subscribers with multiple set-top boxes. This increase was also partially
attributable to revenue from equipment sales, installation and other services
related to our relationship with SBC. These increases were partially offset by
subscriber promotions under which new subscribers received selected free
programming for the first three months of their term of service, other
promotions under which new subscribers received discounted programming, and the
credits issued to our subscribers for the temporary unavailability of Viacom
programming discussed above.
Equipment sales
.
For the six months ended June 30, 2004, Equipment sales
totaled $162.3 million, an increase of $43.1 million compared to the same
period during 2003. This increase principally resulted from an increase in
unsubsidized sales of DBS accessories to DISH Network subscribers and to
retailers and other distributors of our equipment domestically. The increase
in sales of DBS accessories primarily relates to, among other things,
subscriber equipment upgrades to support the launch of additional programming,
including local markets. The increase in Equipment sales was partially
offset by a decrease in sales of non-DISH Network receivers and other
accessories sold by our EchoStar International Corporation subsidiary to
international customers.
Subscriber-related expenses.
Subscriber-related expenses totaled $1.672
billion during the six months ended June 30, 2004, an increase of $384.9
million or 29.9% 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 53.0% and
48.8% of Subscriber-related revenue during the six months ended June 30, 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 our SuperDISH. This increase also resulted from an approximate $13.0 million
charge during the six months ended June 30, 2004 to establish a
reserve for estimated expenses related to prior periods, and further to cost of sales and
expenses from equipment sales, installation and other services related to our
relationship with SBC. The increase in the expense to revenue ratio from 2003
to 2004 was partially offset by an increase in monthly average revenue per DISH
Network subscriber discussed above.
Satellite and transmission expenses
.
Satellite and transmission expenses
totaled $53.6 million during the six months ended June 30, 2004, a $21.2
million increase compared to the same period in 2003. This increase primarily
resulted from launch and operational costs, including lease payment obligations
pursuant to our Fixed Satellite Service (FSS) agreements, associated with the
increasing number of markets in which we offer local network channels by
satellite as previously discussed. Satellite and transmission expenses
totaled 1.7% and 1.2% of Subscriber-related revenue during each of the six
months ended June 30, 2004 and 2003, respectively. The
increase in the expense to revenue ratio principally resulted from additional operational costs to support launches of our local markets
discussed above.
30
Cost of sales equipment.
Cost of sales equipment totaled $120.9 million
during the six months ended June 30, 2004, an increase of $36.4 million
compared to the same period in 2003. This increase related primarily to the
increase in unsubsidized sales of DBS accessories to DISH Network subscribers
and to retailers and other distributors of our equipment domestically discussed
above and a $6.7 million write-off of certain defective DBS accessories
provided by a bankrupt supplier. Cost of sales equipment represented 74.5%
and 70.9% of Equipment sales, during the six months ended June 30, 2004 and
2003, respectively. The increase in the expense to revenue ratio principally
related to the write-off of certain defective DBS accessories discussed above.
Subscriber acquisition costs.
Subscriber acquisition costs totaled
approximately $781.6 million for the six months ended June 30, 2004, an
increase of $187.8 million or 31.6% compared to the same period in 2003. The
increase in Subscriber acquisition costs was directly attributable to a
larger number of gross DISH Network subscriber additions during the six months
ended June 30, 2004 compared to the same period in 2003. Subscriber
acquisition costs during the six months ended June 30, 2003 included a benefit
of approximately $34.4 million resulting from a litigation settlement which
also contributed to the increase. This increase was 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 below.
SAC.
Subscriber acquisition costs per new DISH Network subscriber activation
(SAC) were approximately $478 for the six months ended June 30, 2004 and
approximately $428 during the same period in 2003. SAC during the six months
ended June 30, 2003 included the benefit of approximately $34.4 million
discussed above. Absent this benefit, our SAC for the six months ended June
30, 2003 would have been approximately $25 higher, or $453. The increase in
SAC during the six months ended June 30, 2004 as compared to the same period in
2003 (excluding this benefit) was primarily attributable to more
expensive promotions we 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 the six months ended
June 30, 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 the same period in 2003. Finally,
subscribers added during the six months ended June 30, 2004 received more free
equipment and less discounted programming than new subscribers activated during
the comparable period in 2003. This change in promotional mix increased both
SAC and ARPU for the six months ended June 30, 2004 as compared to the same
period in 2003. These factors were partially offset by an increase in DISH
Network subscribers participating in our equipment lease program, the
acquisition of co-branded subscribers during 2004, and reduced subscriber
acquisition advertising.
We exclude the value of equipment capitalized under our equipment lease program
from our calculation of SAC. We also exclude payments and the value of
returned equipment relating to disconnecting lease program subscribers from our
calculation of SAC. If these amounts were included, our SAC would have been
approximately $590 during the six months ended June 30, 2004 compared to $460
during the same period in 2003. As discussed above, Subscriber acquisition
costs during the six months ended June 30, 2003 included a benefit of
approximately $34.4 million or $25 per subscriber related to a litigation
settlement. Absent this benefit, our SAC, including the value of equipment
capitalized under our equipment lease program and including payments and the
value of returned equipment relating to disconnecting lease program subscribers
would have been $485 for the six months ended June 30, 2003. Our equipment
lease penetration increased during the six months ended June 30, 2004 as
compared to the same period in 2003.
General and administrative expenses.
General and administrative expenses
totaled $184.9 million during the six months ended June 30, 2004, an increase
of $13.5 million 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 5.5% and 6.2% of Total
revenue during the six months ended June 30, 2004 and 2003, respectively. The
decrease in this expense to revenue ratio resulted primarily from higher total
revenues discussed above and administrative efficiencies.
Depreciation and amortization.
Depreciation and amortization expense totaled
$224.5 million during the six months ended June 30, 2004, a $26.1 million
increase 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 additional depreciable assets placed in service
during the second
31
half of 2003 and the six months ended June 30, 2004. As of December 31, 2003,
EchoStar IV was fully depreciated and accordingly, we recorded no expense for
this satellite during the six months ended June 30, 2004. This partially
offset the increase in depreciation expense discussed above.
Interest expense, net of amounts capitalized.
Interest expense totaled
$274.8 million during the six months ended June 30, 2004, an increase of $36.6
million compared to the same period in 2003. This increase primarily resulted
from prepayment premiums and the write-off of debt issuance costs totaling
approximately $78.7 million related to the redemption of our 9 3/8% Senior
Notes due 2009 during February 2004 and the repurchase of $8.8 million of our 9
1/8% Senior Notes due 2009 during the second quarter of 2004. The increase
also resulted from additional interest expense totaling approximately $80.1
million related to our $500.0 million 3% Convertible Subordinated Note due 2010
issued during July 2003 and our $2.5 billion aggregate of senior notes issued
during October 2003. This increase was partially offset by a reduction in
interest expense of approximately $105.3 million as a result of the debt
redemptions and repurchases during 2003 and 2004, and prepayment premiums and
the write-off of debt issuance costs totaling approximately $20.6 million
related to the redemption of our 9 1/4 % Senior Notes due 2006 during February
2003.
Earnings Before Interest, Taxes, Depreciation and Amortization
. EBITDA was
$519.0 million during the six months ended June 30, 2004, compared to $601.3
million during the same period in 2003. EBITDA during the six months ended
June 30, 2003 included a benefit of approximately $34.4 million related to a
litigation settlement which contributed to the current period $82.3 million decrease
in EBITDA. The decrease in EBITDA was primarily attributable to a higher
number of gross DISH Network subscribers additions during the six months ended
June 30, 2004 as compared to the same period in 2003 and by a decrease in
Other income, principally related to $8.5 million in net losses realized from
the sale of certain securities from our marketable and non-marketable
investment portfolio together with increases in our Subscriber-related
expenses and Satellite and transmission expenses as a percentage of
Subscriber-related revenue. These factors were partially offset by increases
in ARPU and in the number of DISH Network subscribers and an increase in the
number of DISH Network subscribers participating in our equipment lease program
(which results in an increase in capital expenditures and less SAC). The
decrease in EBITDA was also partially offset in part to the acquisition of
co-branded subscribers, which reduces overall SAC. EBITDA does not include the
impact of capital expenditures under our new and existing subscriber
equipment lease programs of
approximately $221.8 million and $54.9 million during the six months ended June
30, 2004 and 2003, respectively.
The following table reconciles EBITDA to the accompanying financial statements:
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.
32
Net income (loss).
Net income was $42.4 million during the six months ended
June 30, 2004, a decrease of $144.3 million compared to $186.7 million for the
same period in 2003. The decrease was primarily attributable to decreases in
Operating income and Other income and increases in Interest expense, net
of amounts capitalized resulting from the factors discussed above.
LIQUIDITY AND CAPITAL RESOURCES
Cash Sources
All liquid investments purchased with an original maturity of 90 days or less
are classified as cash equivalents. See
Item 3. Quantitative and
Qualitative Disclosures About Market Risk
for further discussion regarding our
marketable investment securities. As of June 30, 2004, our restricted and
unrestricted cash, cash equivalents and marketable investment securities
totaled $1.856 billion, including $107.1 million of cash reserved for satellite
insurance and approximately $30.5 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
restricted cash and marketable investment securities, as of December 31, 2003.
As previously discussed, effective February 2, 2004, EDBS redeemed the
remainder of its 9 3/8% Senior Notes due 2009. The redemption reduced our
unrestricted cash by approximately $1.490 billion. As an indirect result of
this redemption, during February 2004, we were able to reclassify approximately
$57.2 million representing the depreciated cost of two of our satellites from
cash reserved for satellite insurance to cash and cash equivalents.
Repurchases of our Class A Common Stock further reduced our unrestricted cash
and marketable investment securities by approximately $703.0 million during the
six months ended June 30, 2004. Subsequent to June 30, 2004, we repurchased
additional shares of our Class A Common stock for approximately $87.1 million.
Free Cash Flow
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 for debt
obligations and investments but excluding purchases of property and equipment.
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 is not the same as residual cash available for discretionary
expenditures, since it excludes cash required for debt service. Free cash flow
also excludes cash which may be necessary for acquisitions, investments and
other needs that may arise.
Free cash flow was $149.2 million and $276.0 million for the six months ended
June 30, 2004 and 2003, respectively. The decrease from 2003 to 2004 of
approximately $126.8 million resulted from an approximately $164.7 million
increase in Purchases of property and equipment partially offset by an
increase in Net cash flows from operating
activities of approximately $38.0 million. 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, partially offset by lower net income for the six months ended
June 30, 2004 as compared to net income for the same period in 2003. Cash flow
from changes in operating assets and liabilities was $169.5 million during the
six months ended June 30, 2004 compared to $35.9 million for the same period in
2003. The improvement in cash flow from changes in operating assets and
liabilities resulted from increases in accounts payable and accrued programming
expenses due to the timing of certain payments, and an increase in deferred
revenue primarily attributable to equipment sales and development and
implementation fees related to our relationship with SBC. The improvement in
cash flows from changes in operating assets and liabilities was
partially offset by rising inventory levels and our deferral of costs related
to equipment sales to SBC. The improvement was also partially offset by
increases in accounts receivable attributable to continued DISH Network
subscriber growth, receivables from subscribers previously subsidized through
our free and discounted programming promotions and receivables related to our
relationship with SBC. The increase in Purchases of property and equipment
was primarily attributable to increased spending for equipment under our lease
program and for satellite construction.
33
The following table reconciles free cash flow to Net cash flows from operating
activities.
During the six months ended June 30, 2004 and 2003, 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 Condensed
Consolidated Statements of Cash Flows. 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 and control of
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.
Investment Securities
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 component of Accumulated other comprehensive income,
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 condensed consolidated statements of operations, thereby
establishing a new cost basis for the 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 these declines are other than temporary. Declines in the fair
market value of
34
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 June 30, 2004 and December 31, 2003, we had unrealized gains of
approximately $29.2 million and $79.6 million, respectively, as a part of
Accumulated other comprehensive income within Total stockholders deficit.
During the six months ended June 30, 2004, we did not record any charges to
earnings for other than temporary declines in the fair market value of our
marketable investment securities, and we realized net losses of approximately
$8.5 million on the sales of marketable and non-marketable investment
securities. Our approximately $1.856 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 $153.2 million as of June 30, 2004. During the six months ended
June 30, 2004, our portfolio generally, and our strategic investments
particularly, experienced 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 value.
We also have made, and may continue in the future to make, strategic equity
investments in securities that are not publicly traded, including equity
interests we received in exchange for cash and non-cash consideration (See Note
6 to our Condensed Consolidated Financial Statements). 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. We evaluate our non-marketable
investment securities on a quarterly basis to determine whether the carrying
value of each investment is impaired. This quarterly evaluation consists of
reviewing, among other things, company business plans and current financial
statements, if available, for factors which may indicate an impairment in our
investment. These factors may include, but are not limited to, cash flow
concerns, material litigation, violations of debt covenants and changes in
business strategy. During the six months ended June 30, 2004, we did not
record any impairment charges with respect to these instruments.
Subscriber Turnover
Our percentage monthly subscriber churn for the six months ended June 30, 2004
was approximately 1.60%, compared to our percentage subscriber churn for the
same period in 2003 of approximately 1.51%. 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,
impacts from 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.
While these subscribers typically churn at a higher rate, they 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 promotion.
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
since 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. Since the number of our DISH Network
subscribers with expiring commitments currently exceeds the number of new
multi-period commitment subscribers we are acquiring, subscriber churn has been
and will be adversely impacted for approximately the next 12 months
while these changes in
promotional mix are being absorbed. However, we believe that any impact on our
overall economic return has been, and will continue to be, mitigated by the
35
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 143 markets across
the United States. In 38 of those markets, two dishes are necessary to receive
all local channels in the market. In connection with reauthorization of the
Satellite Home Viewer Improvement Act this year, Congress is considering
requiring that all local broadcast channels delivered by satellite to any
particular market be available from one dish. We currently plan to transition
all markets to a single dish by 2008. If a two-dish prohibition with a shorter
transition period is enacted, we would be forced by capacity limitations to
move the local channels in as many as 30 markets to new satellites, requiring
subscribers in those markets to install a second dish to continue receiving
their local channels. We may be forced to stop offering local channels in some
of those markets altogether. The transition would result in disruptions of
service for a substantial number of customers, and the cost of compliance could
exceed $100.0 million. To the extent 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, it is expected that subscriber churn would be
negatively impacted.
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 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.
Increases in piracy or theft of our signal, or our competitors signals, also
could cause subscriber churn to increase in future periods. 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 spending for subscriber acquisition costs, and to a
lesser extent subscriber retention costs, can vary significantly from period to
period and can cause material variability to our net income (loss) and free
cash flow. Our average subscriber acquisition costs were approximately $478
per new subscriber activation during the six months ended June 30, 2004. 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, will attract better long-term
subscribers. Our Subscriber acquisition costs, both in the aggregate and on
a per new subscriber activation basis may materially increase in future periods
to the extent that we introduce more aggressive promotions if we determine that
they are necessary to respond to competition, or for other reasons. We
anticipate that our per activation subscriber acquisition costs will continue
to be positively impacted as we continue to add co-branded subscribers to our
subscriber base.
36
We exclude the value of equipment capitalized under our equipment lease program
from our calculation of SAC. We also exclude payments and the value of
returned equipment relating to disconnecting lease program subscribers from our
calculation of SAC. Equipment capitalized under our lease program for
new customers totaled
approximately $209.4 million and $55.6 million for the six months ended June
30, 2004 and 2003, respectively. Returned equipment relating to disconnecting
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, totaled approximately $27.8 million and
$11.2 million during the six months ended June 30, 2004 and 2003, respectively.
Our equipment lease penetration increased during the six months ended June
30, 2004 as compared to the same period in 2003. Our per activation subscriber acquisition costs will
be positively impacted to the extent our equipment lease penetration continues
to increase. Additional penetration of our equipment lease program will also
increase capital expenditures.
We also 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. Costs related to subscriber retention programs are expected to
continue to increase during the remainder of 2004.
Cash necessary to fund subscriber acquisition and retention costs are expected
to be satisfied from existing cash and marketable investment securities
balances 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
As of June 30, 2004, the indentures related to certain of EDBS outstanding
senior notes contain restrictive covenants that required us to maintain
satellite insurance with respect to at least the depreciated cost of three of
the ten satellites EDBS owns or leases. We currently do not carry traditional
insurance for any of our satellites. To satisfy insurance covenants related to
EDBS senior notes, we classify an amount equal to the depreciated cost of
three of our satellites as Cash reserved for satellite insurance on our
balance sheet. As of June 30, 2004, cash reserved for satellite insurance
totaled approximately $107.1 million. We will continue to reserve cash for
satellite insurance on our balance sheet until such time, if ever, as we again insure our satellites on acceptable terms and for acceptable amounts or
until the covenants requiring that insurance are no longer applicable. We
believe we have satellite capacity sufficient to expeditiously recover
transmission of most programming in the event one of our satellites fails.
However, the Cash reserved for satellite insurance is not adequate to fund
the construction, launch and insurance for a replacement satellite,
and it typically takes several years to design, construct and launch
a satellite. Programming continuity cannot be assured in
the event of multiple satellite losses.
As of June 30, 2004, our purchase obligations, primarily consisting of binding
purchase orders for EchoStar satellite receiver systems and related equipment
and for products and services related to the operation of our DISH Network,
totaled approximately $935.4 million. 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. The future maturities of our
satellite-related obligations and operating leases did not change
materially during the six months ended June 30, 2004.
We expect that our future working capital, capital expenditure and debt service
requirements will be satisfied primarily from existing cash and marketable
investment securities 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 that we will be successful in achieving any or all of
our goals. The amount of capital required to fund our future working capital
and capital expenditure needs will vary, depending, among other things, on the
rate at which we acquire new subscribers and the cost of subscriber
acquisition, including capitalized costs associated with our lease program.
Our capital expenditures will also vary depending on the number of satellites
leased or under construction at any point in time. Our working capital and
capital expenditure
37
requirements could increase materially in the event of increased competition
for subscription television customers, significant satellite failures, or in
the event of a continued general economic downturn, among other factors. These
factors could require that we raise additional capital in the future.
From time to time, we evaluate opportunities for strategic investments or
acquisitions that would complement our current services and products, enhance
our technical capabilities or otherwise offer growth opportunities. Future
material investments or acquisitions may require that we obtain additional
capital. Further, effective August 9, 2004 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 (See Note 12 to the Condensed
Consolidated Financial Statements). Finally the indenture governing our $1.0 billion outstanding
principal amount of 10 3/8% Senior Notes due 2007 provides that we can redeem
them commencing October 1, 2004 at a price of 105.188% for a total of $1.052
billion plus accrued and unpaid interest. While we have not reached any decision whether to redeem or
repurchase the notes, the redemption or repurchase of these notes also 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.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market Risks Associated With Financial Instruments
As of June 30, 2004, our restricted and unrestricted cash, cash equivalents and
marketable investment securities had a fair market value of approximately
$1.856 billion. Of that amount, a total of approximately $1.703 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 six months ended
June 30, 2004 of approximately 1.9%. A hypothetical 10.0% decrease in interest
rates would result in a decrease of approximately $5.4 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 June 30, 2004, all of the $1.703 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 June 30, 2004, we held strategic and financial debt and equity investments
of public companies with a fair market value of approximately $153.2 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 $15.3
38
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 component of Accumulated other comprehensive income,
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 condensed consolidated statements of operations, thereby
establishing a new cost basis for the 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 these 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 June 30, 2004 and December 31, 2003, we had unrealized gains of
approximately $29.2 million and $79.6 million, respectively, as a part of
Accumulated other comprehensive income within Total stockholders deficit.
During the six months ended June 30, 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
$8.5 million on the sales of marketable and non-marketable investment
securities. During the six months ended June 30, 2004, our portfolio
generally, and our strategic investments particularly, experienced and continue
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 made, and may continue in the future to make, strategic equity
investments in securities that are not publicly traded, including equity
interests we received in exchange for cash and non-cash consideration (See Note
6 to our Condensed Consolidated Financial Statements). 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. We evaluate our non-marketable
investment securities on a quarterly basis to determine whether the carrying
value of each investment is impaired. This quarterly evaluation consists of
reviewing, among other things, company business plans and current financial
statements, if available, for factors which may indicate an impairment in our
investment. These factors may include, but are not limited to, cash flow
concerns, material litigation, violations of debt covenants and changes in
business strategy. During the six months ended June 30, 2004, we did not
record any impairment charges with respect to these instruments.
As of June 30, 2004, we estimated the fair market value of our fixed-rate debt
and mortgages and other notes payable to be approximately $5.635 billion using
quoted market prices where available, or discounted cash flow analyses. 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 market 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 market value of our
debt by approximately $131.0 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 June 30, 2004, a hypothetical 10.0% increase in
assumed interest rates would increase our annual interest expense by
approximately $36.4 million.
We have not used derivative financial instruments for hedging or speculative
purposes.
39
Item 4. CONTROLS AND PROCEDURES
The Company, under the supervision and with the participation of its
management, including the Chief Executive Officer and the Chief Financial
Officer, evaluated the effectiveness of the design and operation of the
Companys disclosure controls and procedures (as defined in Rule 13a-15(e)
under the Securities Exchange Act of 1934 (the Exchange Act)) as of the end
of the period covered by this report. Based on that evaluation, the Chief
Executive Officer and the Chief Financial Officer concluded that the Companys
disclosure controls and procedures are effective in timely making known to them
material information relating to the Company and the Companys consolidated
subsidiaries required to be disclosed in the Companys reports filed or
submitted under the Exchange Act. There has been no change in the Companys
internal control over financial reporting during the quarter ended June 30,
2004 that has materially affected, or is reasonably likely to materially
affect, the Companys internal control over financial reporting.
40
(Dollars in thousands)
(Unaudited)
As of
June 30,
December 31,
2004
2003
$
688,857
$
1,290,859
1,029,383
2,682,115
451,610
345,673
333,885
155,147
144,351
99,321
2,648,086
4,573,115
30,520
19,974
107,143
176,843
1,957,956
1,876,459
696,409
696,409
106,000
106,000
491,162
136,218
$
6,037,276
$
7,585,018
$
248,572
$
173,637
699,103
514,831
610,440
366,497
437,045
478,973
14,230
14,995
1,423,351
2,009,390
2,972,284
1,000,000
1,000,000
1,000,000
1,000,000
446,153
455,000
500,000
500,000
500,000
500,000
1,000,000
1,000,000
1,000,000
1,000,000
42,165
44,327
279,400
145,931
5,767,718
5,645,258
7,777,108
8,617,542
2,476
2,463
2,384
2,384
1,755,961
1,733,805
(1,180
)
30,369
80,991
(2,618,166
)
(2,660,596
)
(912,856
)
(190,391
)
(1,739,832
)
(1,032,524
)
$
6,037,276
$
7,585,018
Table of Contents
(In thousands, except per share amounts)
(Unaudited)
For the Three Months
For the Six Months
Ended June 30,
Ended June 30,
2004
2003
2004
2003
$
1,660,502
$
1,343,041
$
3,154,012
$
2,636,186
85,700
63,272
162,330
119,267
31,511
8,254
41,167
18,162
1,777,713
1,414,567
3,357,509
2,773,615
900,808
654,699
1,672,442
1,287,525
27,550
16,315
53,562
32,341
67,642
44,715
120,884
84,510
11,260
973
12,132
1,904
133,558
96,884
308,885
220,882
198,559
148,892
409,778
299,529
33,227
39,925
62,980
73,477
365,344
285,701
781,643
593,888
97,158
89,089
184,944
171,469
(217
)
1,180
1,772
123,934
100,299
224,539
198,465
1,593,696
1,191,574
3,051,326
2,371,874
184,017
222,993
306,183
401,741
11,370
14,959
26,659
30,475
(93,388
)
(107,715
)
(274,848
)
(238,216
)
(11,874
)
1,713
(11,709
)
1,099
(93,892
)
(91,043
)
(259,898
)
(206,642
)
90,125
131,950
46,285
195,099
(4,809
)
(3,157
)
(3,855
)
(8,389
)
$
85,316
$
128,793
$
42,430
$
186,710
467,933
483,372
473,389
482,241
471,509
488,385
477,302
487,557
$
0.18
$
0.27
$
0.09
$
0.39
$
0.18
$
0.26
$
0.09
$
0.38
Table of Contents
(In thousands)
(Unaudited)
For the Six Months
Ended June 30,
2004
2003
$
42,430
$
186,710
224,539
198,465
(631
)
(111
)
8,452
38
1,180
1,772
3,822
(2,371
)
14,759
8,036
(44,525
)
(51,333
)
68,311
(2,872
)
7,165
4,863
145,759
90,065
471,261
433,262
(1,527,095
)
(2,121,902
)
3,103,974
1,858,783
(322,022
)
(157,289
)
69,680
16,140
(236,610
)
(26,684
)
(2,589
)
780
1,058,654
(403,488
)
(375,000
)
(1,423,351
)
(8,847
)
(702,977
)
(2,926
)
(1,089
)
6,184
15,204
(2,131,917
)
(360,885
)
(602,002
)
(331,111
)
1,290,859
1,483,078
$
688,857
$
1,151,967
$
248,483
$
233,812
$
1,006
$
4,591
$
36,343
$
32,800
$
4,423
$
5,717
$
27,685
$
$
72,357
$
$
19,488
$
$
$
2,394
Table of Contents
(Unaudited)
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 Networ
k which provides a direct broadcast satellite
subscription television service in the United States, which we refer to
as DBS; 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.
Table of Contents
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued
(Unaudited)
For the Three Months
For the Six Months
Ended June 30,
Ended June 30,
2004
2003
2004
2003
(In thousands)
(In thousands)
$
85,316
$
128,793
$
42,430
$
186,710
(24
)
211
(181
)
211
(45,912
)
35,126
(17,636
)
57,151
(32,805
)
195
(32,805
)
1,966
$
6,575
$
164,325
$
(8,192
)
$
246,038
Table of Contents
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued
(Unaudited)
Table of Contents
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued
(Unaudited)
For the Three Months
For the Six Months
Ended June 30,
Ended June 30,
2004
2003
2004
2003
(In thousands)
$
85,316
$
128,793
$
42,430
$
186,710
(209
)
1,139
1,710
(5,606
)
(6,972
)
(10,908
)
(13,207
)
$
79,710
$
121,612
$
32,661
$
175,213
$
0.18
$
0.27
$
0.09
$
0.39
$
0.18
$
0.26
$
0.09
$
0.38
$
0.17
$
0.25
$
0.07
$
0.36
$
0.17
$
0.25
$
0.07
$
0.36
Table of Contents
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued
(Unaudited)
Table of Contents
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued
(Unaudited)
As of
June 30,
December 31,
2004
2003
(In thousands)
$
210,370
$
103,274
89,168
32,693
23,894
15,000
15,704
9,577
2,356
1,373
(7,607
)
(6,770
)
$
333,885
$
155,147
Table of Contents
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued
(Unaudited)
Table of Contents
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued
(Unaudited)
Table of Contents
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued
(Unaudited)
$
1,184
3,749
260,546
$
265,479
(26,269
)
(600
)
(26,869
)
$
238,610
As of
June 30, 2004
December 31, 2003
Intangible
Accumulated
Intangible
Accumulated
Assets
Amortization
Assets
Amortization
(In thousands)
$
222,733
$
(34,258
)
$
35,528
$
(26,715
)
73,298
(3,470
)
17,181
(17,069
)
17,181
(16,221
)
$
313,212
$
(54,797
)
$
52,709
$
(42,936
)
Table of Contents
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued
(Unaudited)
Table of Contents
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued
(Unaudited)
Table of Contents
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued
(Unaudited)
Table of Contents
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued
(Unaudited)
Table of Contents
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued
(Unaudited)
Table of Contents
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued
(Unaudited)
Table of Contents
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued
(Unaudited)
Table of Contents
Table of Contents
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Continued
Table of Contents
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Continued
Table of Contents
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Continued
For the Three Months
Ended June 30,
Variance
2004
2003
Fav/(Unfav)
%
Statements of Operations Data
(In thousands)
$
1,660,502
$
1,343,041
$
317,461
23.6
%
85,700
63,272
22,428
35.4
%
31,511
8,254
23,257
281.8
%
1,777,713
1,414,567
363,146
25.7
%
900,808
654,699
(246,109
)
(37.6
%)
54.2
%
48.7
%
27,550
16,315
(11,235
)
(68.9
%)
1.7
%
1.2
%
67,642
44,715
(22,927
)
(51.3
%)
78.9
%
70.7
%
11,260
973
(10,287
)
N/A
365,344
285,701
(79,643
)
(27.9
%)
97,158
89,089
(8,069
)
(9.1
%)
5.5
%
6.3
%
(217
)
(217
)
(100.0
%)
123,934
100,299
(23,635
)
(23.6
%)
1,593,696
1,191,574
(402,122
)
(33.7
%)
184,017
222,993
(38,976
)
(17.5
%)
11,370
14,959
(3,589
)
(24.0
%)
(93,388
)
(107,715
)
14,327
13.3
%
(11,874
)
1,713
(13,587
)
N/A
(93,892
)
(91,043
)
(2,849
)
(3.1
%)
90,125
131,950
(41,825
)
(31.7
%)
(4,809
)
(3,157
)
(1,652
)
(52.3
%)
$
85,316
$
128,793
$
(43,477
)
(33.8
%)
10.125
8.800
1.325
15.1
%
340,000
270,000
70,000
25.9
%
1.71
%
1.67
%
(0.04
%)
(2.4
%)
$
431
$
408
$
(23
)
(5.6
%)
$
55.59
$
51.69
$
3.90
7.5
%
$
296,077
$
325,005
$
(28,928
)
(8.9
%)
Table of Contents
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Continued
Table of Contents
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Continued
Table of Contents
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Continued
Table of Contents
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Continued
Table of Contents
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Continued
Table of Contents
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Continued
For the Six Months
Ended June 30,
Variance
2004
2003
Fav/(Unfav)
%
Statements of Operations Data
(In thousands)
$
3,154,012
$
2,636,186
$
517,826
19.6
%
162,330
119,267
43,063
36.1
%
41,167
18,162
23,005
126.7
%
3,357,509
2,773,615
583,894
21.1
%
1,672,442
1,287,525
(384,917
)
(29.9
%)
53.0
%
48.8
%
53,562
32,341
(21,221
)
(65.6
%)
1.7
%
1.2
%
120,884
84,510
(36,374
)
(43.0
%)
74.5
%
70.9
%
12,132
1,904
(10,228
)
N/A
781,643
593,888
(187,755
)
(31.6
%)
184,944
171,469
(13,475
)
(7.9
%)
5.5
%
6.2
%
1,180
1,772
592
33.4
%
224,539
198,465
(26,074
)
(13.1
%)
3,051,326
2,371,874
(679,452
)
(28.6
%)
306,183
401,741
(95,558
)
(23.8
%)
26,659
30,475
(3,816
)
(12.5
%)
(274,848
)
(238,216
)
(36,632
)
(15.4
%)
(11,709
)
1,099
(12,808
)
N/A
(259,898
)
(206,642
)
(53,256
)
(25.8
%)
46,285
195,099
(148,814
)
(76.3
%)
(3,855
)
(8,389
)
4,534
54.0
%
$
42,430
$
186,710
$
(144,280
)
(77.3
%)
10.125
8.800
1.325
15.1
%
700,000
620,000
80,000
12.9
%
1.60
%
1.51
%
(0.09
%)
(6.0
%)
$
478
$
428
$
(50
)
(11.7
%)
$
53.71
$
51.65
$
2.06
4.0
%
$
519,013
$
601,305
$
(82,292
)
(13.7
%)
Table of Contents
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Continued
Table of Contents
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Continued
Table of Contents
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Continued
Table of Contents
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Continued
Table of Contents
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Continued
For the Six Months
Ended June 30,
2004
2003
(In thousands)
$
149,239
$
275,973
322,022
157,289
$
471,261
$
433,262
Table of Contents
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Continued
Table of Contents
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Continued
Table of Contents
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Continued
Table of Contents
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Continued
Table of Contents
Item 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK - continued
Table of Contents
Table of Contents
PART II OTHER INFORMATION
Item 1. 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 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 the Satellite Home Viewer Act 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 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 Court issued a final judgment in
June 2003. The 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 appealed the fee award and the Court recently vacated the fee award. 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 attorney 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 none-the-less receive those channels by satellite.
Further, even though the Satellite Home Viewer Improvement Act 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.
41
PART II OTHER INFORMATION
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 argument
occurred on February 26, 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 will 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.
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 6 to the Condensed
Consolidated Financial Statements).
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.
It is our understanding that these patents may be licensed by Superguide to
Gemstar. Gemstar was added as a party to this case and asserted these patents
against us. Gemstars claim against us was resolved as a part of the
settlement discussed above.
A Markman ruling interpreting the patent claims was issued by the Court and in
response to that ruling; we filed motions for summary judgment of
non-infringement for each of the asserted patents. Gemstar filed a motion for
summary judgment of infringement with respect to one of the patents. During
July 2002, the Court ruled that none of our products infringe the 5,038,211 and
5,293,357 patents. With respect to the 4,751,578 patent, the Court ruled that
none of our current products infringed that patent and asked for additional
information before it could rule on certain low-volume products that are no
longer in production. During July 2002, the Court summarily ruled that the
low-
volume products did not infringe any of the asserted patents. Accordingly, the
Court dismissed the case and awarded us our court costs and the case was
appealed to the United States Court of Appeals for the Federal Circuit.
On February 12, 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. A petition for reconsideration of the Federal
42
PART II OTHER INFORMATION
Circuit Decision was denied. Based upon the settlement with Gemstar, 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, LLC
In November of 2001, Broadcast Innovation, LLC 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.
On January 23, 2004, the judge issued an order finding the 066 patent invalid.
Motions with respect to the infringement, invalidity and construction of the
094 patent remain pending. 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.
In January of 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. We intend to
vigorously defend this case and we have moved to have it transferred to the
United States District Court for the Northern District of California. 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.
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 as to 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
43
PART II OTHER INFORMATION
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. 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 have
filed a motion for additional time to conduct discovery to enable them to
respond to our motion. The Court has not ruled on either of the two motions.
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 for lack of personal
jurisdiction. 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 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, a broadband Internet satellite venture in which we
invested. 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). 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.
44
PART II OTHER INFORMATION
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. 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.
Acacia
In June of 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 although Acacias complaint does not identify any products
or services that it believes are infringing these patents. These 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. 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.
Fox Sports Direct
On June 14, 2004, Fox Sports Direct (Fox) sued us in the United States
District Court Central District of California for alleged breach of contract.
Fox claims, among other things, that we underpaid license fees for the period
from January 2000 through December 2001 and has requested an accounting for the
period from January 2000 through June 2003. Fox has claimed damages of $25.0
million, plus interest. An answer has not yet been filed and no discovery has commenced. It
is too early to determine whether or not we will have liability for
license fees in excess of our paid and accrued programming costs, or
for interest.
Satellite Insurance
In September 1998, 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 Aviation Underwriters, Inc., 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
45
PART II OTHER INFORMATION
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. The insurers assert, among other things, that EchoStar IV was not a
total loss, as that term is defined in the policy, and that we did not abide by
the exact terms of the insurance policies. We strongly disagree and filed
arbitration claims against the insurers for breach of contract, failure to pay
a valid insurance claim and bad faith denial of a valid claim, among other
things. Due to forum selection clauses in certain of the policies, we are
pursuing our arbitration claims against Ace Bermuda Insurance Ltd. in London,
England, and our arbitration claims against all of the other insurance carriers
in New York, New York. The New York arbitration commenced on April 28, 2003,
and the Arbitration Panel has conducted approximately thirty-five days of
hearings. The insurers have requested additional proceedings in the New York
arbitration before any final arbitration award is made by the Panel. The
parties to the London arbitration have agreed to stay that proceeding pending a
ruling in the New York arbitration. There can be no assurance as to when an
arbitration award may be made and what amount, if any, we will receive in
either the New York or the London arbitrations or, if we do, that we will
retain title to EchoStar IV with its reduced capacity.
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.
46
PART II OTHER INFORMATION
Issuer Purchases of Equity Securities
The following table provides information regarding purchases of our Class A
Common stock made by us for the period from January 1 through July 15, 2004.
As of July 15, 2004, we completed our stock repurchase plan, having purchased a
total of 31.8 million shares of our Class A Common stock for a total of $1.0
billion:
47
PART II OTHER INFORMATION
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The following matters were voted upon at the annual meeting of our shareholders
held on May 6, 2004:
All matters voted on at the annual meeting were approved. The voting results
were as follows:
48
PART II OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the second quarter of 2004.
49
Table of Contents
Table of Contents
Table of Contents
Table of Contents
Table of Contents
Table of Contents
Item 2.
CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY
SECURITIES
Total
Total Number of
Maximum Approximate
Number of
Average
Shares Purchased as
Dollar Value of Shares
Shares
Price
Part of Publicly
that May Yet be
Purchased
Paid per
Announced Plans or
Purchased Under the
Period
(a)
Share
Programs
Plans or Programs (b)
(In thousands, except share data)
$
$
809,639
$
$
809,639
2,085,000
$
32.73
2,085,000
$
741,371
3,098,800
$
32.93
3,098,800
$
639,300
10,964,600
$
31.11
10,964,600
$
298,065
6,797,658
$
31.02
6,797,658
$
87,144
2,932,356
$
29.71
2,932,356
$
25,878,414
$
31.28
25,878,414
$
(a)
During the period from January 1 through July 15, 2004 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 November 22, 2003. 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
November 28, 2003 and which expires on the earlier of December 1, 2004
or when an aggregate amount of $1.0 billion of stock has been
purchased. All purchases were made 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 January 1 through July 15,
2004. Purchased shares have and will be held as Treasury shares and
may be used for general corporate purposes. The maximum approximate
dollar value of our stock that may yet be purchased under the plan
reflects the $1.0 billion authorized by our Board of Directors
during November 2003 less,
the cost of the purchases of approximately $809.6 million and $190.4
million for the period from January 1 through July 15, 2004 and during
November and December 31, 2003, respectively. As of July 15, 2004, we
completed the November 2003 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, which is not included in the table above. We may
make repurchases of our Class A Common stock under this plan through open
market purchases or privately negotiated transactions subject to market
conditions and other factors. Our repurchase programs do not require us
to acquire any specific number or amount of securities and any of those
programs may be terminated at any time. We may enter into Rule 10b5-1
plans from time to time to facilitate repurchases of our securities.
Table of Contents
a.
The election of James DeFranco, Michael T. Dugan, Cantey
Ergen, Charles W. Ergen, Raymond L. Friedlob, Steven R. Goodbarn,
David K. Moskowitz and C. Michael Schroeder as directors to serve
until the 2005 annual meeting of shareholders; and
b.
Ratification of the appointment of KPMG LLP as our
independent auditors for the fiscal year ending December 31, 2004.
Votes
For
Against
Withheld
2,525,783,836
69,786,621
2,525,776,901
69,793,556
2,525,752,843
69,817,614
2,526,413,514
69,156,943
2,571,491,735
24,078,722
2,571,483,473
24,086,984
2,525,771,816
69,798,641
2,571,527,345
24,043,112
2,583,224,245
12,236,587
109,625
Table of Contents
Amendment No. 2 to Satellite Service Agreement, dated April 30, 2004, between
SES Americom, Inc. and EchoStar.
Second Amendment to Whole RF Channel Service Agreement, dated May 5, 2004,
between Telesat Canada and Echostar.
Section 302 Certification by Chairman and Chief Executive Officer
Section 302 Certification by Executive Vice President and Chief Financial Officer
Section 906 Certification by Chairman and Chief Executive Officer
Section 906 Certification by Executive Vice President and Chief Financial Officer
***
Certain provisions have been omitted and filed separately
with the Securities and Exchange Commission pursuant to a request
for confidential treatment. A conforming electronic copy is being
filed herewith.
Table of Contents
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: August 9, 2004
50
ECHOSTAR COMMUNICATIONS CORPORATION
By:
/s/
Charles W. Ergen
Charles W. Ergen
Chairman and Chief Executive Officer
(Duly Authorized Officer)
By:
/s/
Michael R. McDonnell
Michael R. McDonnell
Executive Vice President and Chief Financial Officer
(Principal Financial Officer)
Table of Contents
EXHIBIT INDEX
Amendment No. 2 to Satellite Service Agreement, dated April 30, 2004, between
SES Americom, Inc. and EchoStar.
Second Amendment to Whole RF Channel Service Agreement, dated May 5, 2004,
between Telesat Canada and Echostar.
Section 302 Certification by Chairman and Chief Executive Officer
Section 302 Certification by Executive Vice President and Chief Financial Officer
Section 906 Certification by Chairman and Chief Executive Officer
Section 906 Certification by Executive Vice President and Chief Financial Officer
***
Certain provisions have been omitted and filed separately
with the Securities and Exchange Commission pursuant to a request
for confidential treatment. A conforming electronic copy is being
filed herewith.
Exhibit 10.1
AMENDMENT #2 TO SATELLITE SERVICE AGREEMENT
THIS AMENDMENT #2 ("Amendment #2") to the Satellite Service Agreement for AMC-16 effective as of February 19, 2004, as amended by Amendment #1 effective as of March 10, 2004 (collectively the "Original Agreement"), between SES Americom, Inc., as agent for SES Americom California, Inc. (for the period prior to the In-Service Date) and SES Americom Colorado, Inc. (for the period on and after the In-Service Date), on the one hand, and EchoStar Satellite L.L.C., formerly known as EchoStar Satellite Corporation ("Customer") ***, is made effective as of April 30, 2004 (the "Amendment #2 Effective Date"). All references to "SES Americom" herein shall include SES Americom California, Inc., SES Americom Colorado, Inc., and SES Americom, Inc. as agent for each. Defined terms used in this Amendment #2 have the meanings specified herein or in the Original Agreement. The Original Agreement as amended by this Amendment #2 is referred to as the "Agreement".
SES Americom and Customer agree to amend the Original Agreement in accordance with the terms and conditions set forth below. ***
(3) Section 11.WW. The definition of Launch Service Agreement in
Section 11.WW is replaced with the following: ***
(4) General. Except as expressly modified herein, the Original Agreement shall remain in full force and effect in accordance with its terms and conditions.
This AMENDMENT #2 contains the complete and exclusive understanding of the parties with respect to the subject matter hereof and supersedes all prior negotiations and agreements between the parties with respect thereto.
ECHOSTAR SATELLITE L.L.C. SES AMERICOM, INC., as agent for SES AMERICOM CALIFORNIA, INC. and By: EchoStar DBS Corporation, its SES AMERICOM COLORADO, INC. sole member By: By: ------------------------------ ------------------------------------- (Signature) (Signature) Name: Name: ---------------------------- ----------------------------------- (Typed or Printed Name) (Typed or Printed Name) Title: Title: --------------------------- ---------------------------------- |
***Certain confidential portions of this exhibit were omitted by means of redacting a portion of the text. Copies of the exhibit containing the redacted portions have been filed separately with the Securities and Exchange Commission subject to a request for confidential treatment pursuant to Rule 24b-2 under the Securities Exchange Act.
Exhibit 10.2
May 5, 2004
VIA FACSIMILE ONLY: ***
EchoStar Satellite L.L.C.
9601 S. Meridian Blvd.
ENGLEWOOD, Colorado 80112
U.S.A.
Attn: Charles W. Ergen, President and Chief Executive Officer EchoStar DBS Corporation, its sole member
Dear Mr. Ergen:
RE: SECOND AMENDMENT TO THE WHOLE RF CHANNEL SERVICE AGREEMENT
BETWEEN TELESAT CANADA ("TELESAT") AND ECHOSTAR SATELLITE L.L.C. ("ECHOSTAR") DATED AS OF FEBRUARY 4, 2004 (THE "ANIK F3 AGREEMENT")
Telesat acknowledges and agrees that the Anik F3 Agreement shall be amended as
follows:
***
All capitalized terms not defined herein shall have the meaning ascribed to them
in the Anik F3 Agreement. Except as expressly modified herein, the Anik F3
Agreement shall remain in full force and effect in accordance with its terms and
conditions. ***
Please acknowledge EchoStar's agreement with the above amendment by signing where indicated below.
Yours truly,
TELESAT CANADA
***Certain confidential portions of this exhibit were omitted by means of redacting a portion of the text. Copies of the exhibit containing the redacted portions have been filed separately with the Securities and Exchange Commission subject to a request for confidential treatment pursuant to Rule 24b-2 under the Securities Exchange Act.
ACKNOWLEDGED AND AGREED:
ECHOSTAR SATELLITE L.L.C.
By: EchoStar DBS Corporation, its sole member
***Certain confidential portions of this exhibit were omitted by means of redacting a portion of the text. Copies of the exhibit containing the redacted portions have been filed separately with the Securities and Exchange Commission subject to a request for confidential treatment pursuant to Rule 24b-2 under the Securities Exchange Act.
EXHIBIT 31.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
Section 302 Certification
I, Charles W. Ergen, certify that:
1. I have reviewed this quarterly report on Form 10-Q of EchoStar Communications Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
c) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected , or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Date: August 9, 2004 /s/ Charles W. Ergen ------------------------------------------ Chairman and Chief Executive Officer |
EXHIBIT 31.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER
Section 302 Certification
I, Michael R. McDonnell, certify that:
1. I have reviewed this quarterly report on Form 10-Q of EchoStar Communications Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
c) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected , or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Date: August 9, 2004 /s/ Michael R. McDonnell ---------------------------------------------------- Executive Vice President and Chief Financial Officer |
EXHIBIT 32.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
Section 906 Certification
Pursuant to 18 U.S.C. Section 1350, the undersigned officer of EchoStar
Communications Corporation (the "Company"), hereby certifies that to the best of
his knowledge the Company's Quarterly Report on Form 10-Q for the six months
ended June 30, 2004 (the "Report") fully complies with the requirements of
Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934
and that the information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Company.
Dated: August 9, 2004 Name: /s/ Charles W. Ergen --------------------------------------- Title: Chairman of the Board of Directors and Chief Executive Officer |
A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.
EXHIBIT 32.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER
Section 906 Certification
Pursuant to 18 U.S.C. Section 1350, the undersigned officer of EchoStar
Communications Corporation (the "Company"), hereby certifies that to the best of
his knowledge the Company's Quarterly Report on Form 10-Q for the six months
ended June 30, 2004 (the "Report") fully complies with the requirements of
Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934
and that the information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Company.
Dated: August 9, 2004 Name: /s/ Michael R. McDonnell --------------------------------------- Title: Executive Vice President and Chief Financial Officer |
A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.