Dish Network 1998 Annual Report Download

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
OR
[ ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the transition period from _______________ to ________________.
Commission file number: 0-26176
EchoStar Communications Corporation
(Exact name of registrant as specified in its charter)
Nevada 88-0336997
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
5701 S. Santa Fe
Littleton, Colorado 80120
(Address of principal executive offices) (Zip Code)
Registrant’s telephone number, including area code: (303) 723-1000
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Class A Common Stock, $0.01 par value
6 ¾% Series C Cumulative Convertible Preferred Stock
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein,
and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ]
As of March 5, 1999, the aggregate market value of Class A Common Stock held by non-affiliates* of the
Registrant approximated $846 million based upon the closing price of the Class A Common Stock as reported on the
Nasdaq National Market as of the close of business on that date.
As of March 5, 1999, the Registrant’s outstanding Common stock consisted of 15,517,910 shares of Class A
Common Stock and 29,804,401 shares of Class B Common Stock, each $0.01 par value.
DOCUMENTS INCORPORATED BY REFERENCE
The following documents are incorporated into this Form 10-K by reference:
Portions of the Registrant’s definitive Proxy Statement to be filed in connection with the Annual Meeting of
Shareholders of Registrant to be held April 16, 1999 are incorporated by reference in Part III herein.
*
Without acknowledging that any individual director or executive officer of the Company is an affiliate, the shares
over which they have voting control have been included as owned by affiliates solely for purposes of this
computation.

Table of contents

  • Page 1
    ...jurisdiction of incorporation or organization) 5701 S. Santa Fe Littleton, Colorado (Address of principal executive offices) 88-0336997 (I.R.S. Employer Identification No.) 80120 (Zip Code) Registrant's telephone number, including area code: (303) 723-1000 Securities registered pursuant to Section...

  • Page 2
    ... Disclosures About Market Risk ...Financial Statements and Supplementary Data...Changes In and Disagreements with Accountants on Accounting and Financial Disclosure ...PART III Item 10. Item 11. Item 12. Item 13. Directors and Executive Officers of the Registrant...Executive Compensation...Security...

  • Page 3
    ... design of digital set-top boxes, or satellite receivers, necessary for consumers to receive DISH Network programming, and set-top boxes sold to international direct-to-home satellite operators. We also provide uplink center design, construction oversight and other project integration services for...

  • Page 4
    ... quality audio programming services to the entire continental United States. We believe that the DISH Network offers programming packages that have a better "price-to-value" relationship than packages currently offered by most other subscription television providers, particularly cable TV operators...

  • Page 5
    ... "satellite receiver" or "set-top box"; and a television set. Set-top boxes communicate with our authorization center through telephone lines to report the purchase of pay-per-view movies and other events. We use digital video and audio compression to maximize the amount of programming we can offer...

  • Page 6
    ... to switch between DISH Network and off-air local programming using the remote control. Our mid-level model has all of the basic features but also includes a UHF remote control that allows subscribers to control their EchoStar receiver system from up to 150 feet away through walls, and a high-speed...

  • Page 7
    ... our direct sales efforts, customers can call a single telephone number (1-800-333-DISH) 24 hours a day, seven days a week, to order EchoStar receiver systems, activate programming services, schedule installation and obtain technical support. We believe that we are presently the only DBS provider to...

  • Page 8
    ...1998, we filed a $219.3 million insurance claim for a constructive total loss, as defined in the launch insurance policy, related to EchoStar IV. However, if we received $219.3 million for a constructive total loss on the satellite, the insurers would obtain the sole right to the benefits of salvage...

  • Page 9
    ... direct-to-home satellite, other DBS companies and companies that are developing new technologies. Many of our competitors have access to substantially greater financial and marketing resources than we have. We believe that quality and variety of programming, quality of picture and service, and cost...

  • Page 10
    ... buy an EchoStar receiver system to receive DISH Network programming. Cable operators lease their equipment to the consumer with little, if any, initial hardware payment required. This also may deter some potential customers from switching to DISH Network service. Additionally, cable operators pay...

  • Page 11
    ... EchoStar receiver systems for the DISH Network. Currently, we provide digital set-top boxes to two international direct-to-home satellite TV providers, one in Canada and one in Spain. A substantial portion of our ETC revenue in 1997 and 1998 resulted from sales to these two direct-to-home satellite...

  • Page 12
    ...to operate at our 119° WL orbital location, however, that satellite experienced malfunctions, as discussed above, that required us to change our plans. We currently operate EchoStar IV at the 148° WL orbital location under a special temporary authorization until permanent authority can be obtained...

  • Page 13
    ...Hawaii and Alaska with a dish a small as requested by Hawaii with the same degree of reliability as exists for our service generally, particularly in areas with heavy and consistent precipitation. In-orbit Authorizations We use specific C-band frequencies to control EchoStar I. The FCC conditionally...

  • Page 14
    ... to any protection from other satellites that are in conformance with the plan. To our knowledge, the United States government has filed modification requests with the ITU for EchoStar I, II and III. The ITU has requested certain technical information in order to process the requested modifications...

  • Page 15
    ... any new DBS rules might have on our business. Certain Other Communications Act Provisions. As a distributor of television programming, we are also affected by numerous laws and regulations, including the Communications Act. We believe that we remain free to set prices and serve customers according...

  • Page 16
    ... hours of the day when minors are unlikely to view the programming. The Cable Act. In addition to regulating pricing practices and competition within the franchise cable television industry, the Cable Act was intended to establish and support existing and new multi-channel video service providers...

  • Page 17
    ... offer contained an exemption from market opening commitments for, among other things, DBS and direct-to-home satellite services. In November 1997, the FCC released new rules that maintained the effective competitive opportunities test with respect to foreign-licensed satellites seeking to provide...

  • Page 18
    ...'s local market. In December 1997, we petitioned the Copyright Office to issue a rule confirming that the statutory license provided by the Satellite Home Viewer Act and related copyright law allow a satellite carrier to retransmit the local network signals of the respective local network affiliates...

  • Page 19
    ... on the sale of network channels imposed in the future could result in decreases in subscriber activations and subscription television services revenue and an increase in subscriber turnover. The Satellite Home Viewer Act permits satellite retransmission of distant network signals only to...

  • Page 20
    ... possibility of satellite launches by such non-U.S. providers for our next planned satellites, and cannot be sure that the requisite approvals will be received. PATENTS AND TRADEMARKS We use a number of trademarks for our products and services, including "EchoStar," "DISH Network," "America's Top 40...

  • Page 21
    ... Officer and President Executive Vice President and Director President, EchoStar Technologies Corporation Chief Operating and Financial Officer Senior Vice President, General Counsel, Secretary and Director Senior Vice President, Satellite Services Senior Vice President, Human Resources and Customer...

  • Page 22
    ... center ...Customer service center ...Office and distribution center ...Digital broadcast operations center ...Customer service center ...European headquarters and warehouse...Item 3. Legal Proceedings The News Corporation Limited Location Littleton, Colorado Englewood, Colorado Denver, Colorado...

  • Page 23
    ... directly. EchoStar has also implemented Satellite Home Viewer Act Section 119 compliance procedures which will materially restrict the market for the sale of network signals by EchoStar. CBS and other broadcast networks have informed EchoStar that they believe EchoStar's method of providing distant...

  • Page 24
    ...consent from the affected affiliate stations to receive their signals via satellite will not lose receipt of their distant network signals. We are not sure what effect this development will have on our business. On March 24, 1999, we have a hearing scheduled in a Denver court on similar matters with...

  • Page 25
    ... Chief Executive Officer. There is currently no trading market for our Class B common stock. We have never declared or paid any cash dividends on any class of our common stock and do not expect to declare dividends on our common stock in the foreseeable future. Payment of any future dividends will...

  • Page 26
    ... Revenue: DISH Network...DTH equipment sales and integration services ...Satellite services...C-band and other...Total revenue ...Costs and Expenses: DISH Network operating expenses ...Cost of sales - DTH equipment and integration services ...Cost of sales - C-band and other ...Marketing expenses...

  • Page 27
    ...forma effects assuming consummation of the 110 acquisition. See "- Management's Discussion and Analysis of Financial Condition and Results of Operations -Liquidity and Capital Resources" and "-Business- Agreement With News Corporation and MCI." (4) Restrictions on cash held in escrow under the terms...

  • Page 28
    ...; a decrease in sales of digital equipment and related services to international direct-to-home service providers; a decrease in DISH Network subscriber growth; an increase in subscriber acquisition costs; impediments to the retransmission of local or distant broadcast network signals which could...

  • Page 29
    ...in programming expenses on a per subscriber basis, which resulted from a change in product mix combined with price discounts received from certain content providers. Customer service center and other expenses principally consist of costs incurred in the operation of our DISH Network customer service...

  • Page 30
    ... oneyear commitment to subscribe to the America's Top 100 CD programming package and two premium channel packages, committing the subscriber to a monthly programming payment of at least $48.98. The consumer must pay the entire sales price of the system at the time of purchase, but is not required to...

  • Page 31
    ... in 1997, an increase of $35 million compared to 1996. Other DISH Network revenue primarily consists of incremental revenues over advertised subscription rates realized from our 1996 Promotion, whereby consumers were able to purchase a standard EchoStar receiver system for $199, conditioned upon the...

  • Page 32
    ... as compared to 1996. The increase in customer service center and other operating expenses was directly attributable to the operation of the DISH Network during the entirety of 1997, combined with the increase in the number of DISH Network subscribers. Cost of sales - DTH equipment and Integration...

  • Page 33
    ... related to the ongoing development of the EchoStar DBS system and the related commercial introduction of the DISH Network service in March 1996. Capital expenditures, including expenditures for satellite systems under construction and FCC authorizations, totaled $277 million, $232 million and $161...

  • Page 34
    ... for subscription television customers, significant satellite failures, or in the event of a general economic downturn, among other factors. Subscriber Acquisition Costs As previously described, we subsidize the cost of EchoStar receiver systems in order to attract new DISH Network subscribers...

  • Page 35
    ... 500 video and audio channels. In addition, we expect to expend over $100 million, and perhaps more than $125 million, during 1999 and 2000 in one-time expenses associated with repositioning subscriber satellite dishes toward the 110° WL orbital location. If we were able to acquire the high-powered...

  • Page 36
    ... plan by identifying all systems with potential Year 2000 problems. We are currently in the process of assessing these systems by communicating with our outside software and hardware vendors and reviewing their certifications of Year 2000 readiness, as well as reviewing internal custom programming...

  • Page 37
    ... and testing of our digital broadcast center is not expected to cause interruption of programming to DISH Network subscribers. During the assessment of our DBS satellites, we determined that our satellites do not operate under a calendardriven system. Therefore, we do not expect changes in dates and...

  • Page 38
    ...-rate debt and mortgages and other notes payable to be approximately $1.9 billion using quoted market prices where available, or discounted cash flow analyses. We estimated the fair value of our redeemable preferred stock (based on quoted market prices) to be approximately $259.9 million on December...

  • Page 39
    ...business experience of our executive officers is set forth on page 19 of this report under the caption "Executive Officers." Item 11. EXECUTIVE COMPENSATION The information required by this Item is set... CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this Item is set forth ...

  • Page 40
    ... 1993) ("Dish") (incorporated by reference to Exhibit 2.2 to the Registration Statement on Form S-1 of EchoStar, Registration No. 33-91276). Plan and Agreement of Merger made as of December 21, 1995 by and among EchoStar, Direct Broadcasting Satellite Corporation, a Colorado Corporation ("MergerCo...

  • Page 41
    ..., Continental Bank, N.A. and Martin Marietta Corporation ("Martin Marietta") (incorporated by reference to Exhibit 4.6 to the Registration Statement on Form S-1 of Dish, Registration No. 33-76450). Series A Preferred Stock Certificate of Designation of EchoStar (incorporated by reference to Exhibit...

  • Page 42
    ..., dated as of June 25, 1997, by and among DBS Corp., EchoStar Communications Corporation, a Nevada corporation formed in April 1995 ("EchoStar"), EchoStar Satellite Broadcasting Corporation, a Colorado corporation, Dish, Ltd. (formerly EchoStar Communications Corporation, a Nevada corporation formed...

  • Page 43
    ... Report on Form 10-Q of EchoStar for the quarter ended June 30, 1996, Commission File No. 0-26176). Master Purchase and License Agreement, dated as of August 12, 1986, between Houston Tracker Systems, Inc. ("HTS") and Cable/Home Communications Corp. (a subsidiary of General Instruments Corporation...

  • Page 44
    ...Services Contract, dated as of June 2, 1995, by and between EchoStar Space Corporation and Lockheed-Khrunichev-Energia International, Inc. (incorporated by reference to Exhibit 10.15 to the Registration Statement on Form S-1 of EchoStar, Registration No. 33-91276). EchoStar 1995 Stock Incentive Plan...

  • Page 45
    ...File No. 0-26176). Purchase Agreement, dated November 30, 1998, by and among American Sky Broadcasting, LLC ("ASkyB"), The News Corporation Limited ("News Corporation"), MCI Telecommunications Corporation and EchoStar (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed...

  • Page 46
    ...we filed a Current Report on Form 8-K to report that we had entered into an agreement with News Corporation and MCI providing for the transfer to us of the license to operate a high-powered DBS business at the 110° WL orbital location consisting of 28 frequencies and the sale of two satellites that...

  • Page 47
    ...or 15(d) of the Securities Exchange Act of 1934, EchoStar has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. ECHOSTAR COMMUNICATIONS CORPORATION By: /s/ Steven B. Schaver Steven B. Schaver Chief Financial Officer Date: March 17, 1999 Pursuant to the...

  • Page 48
    Page Consolidated Financial Statements: Report of Independent Public Accountants ...Consolidated Balance Sheets at December 31, 1997 and 1998 ...Consolidated Statements of Operations and Comprehensive Loss for the years ended December 31, 1996, 1997 and 1998 ...Consolidated Statements of Changes in ...

  • Page 49
    ... assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates...

  • Page 50
    ...-term deferred satellite services revenue and other long-term liabilities...Total long-term obligations, net of current portion ...Total liabilities ...12 1/8% Series B Senior Redeemable Exchangeable Preferred Stock, $.01 par value, 900,000 shares authorized; 200,000 and 225,301 shares issued and...

  • Page 51
    ...: DISH Network Operating Expenses: Subscriber-related expenses...Customer service center and other...Satellite and transmission ...Total DISH Network operating expenses ...Cost of sales - DTH equipment and integration services ...Cost of sales - C-band and other...Marketing: Subscriber promotion...

  • Page 52
    ... Exchangeable Preferred Stock dividends payable in-kind ...Issuance of Class A Common Stock: Acquisition of DBSC...Exercise of stock options and warrants ...Secondary public offering, net of stock issuance costs of $2,648 ...Employee benefits ...Employee Stock Purchase Plan...Cancellation of...

  • Page 53
    ...Offering proceeds and investment earnings placed in escrow...Purchases of property and equipment ...Issuance of notes receivable ...Payments received on note receivable ...Expenditures for FCC authorizations...Other ...Net cash flows from investing activities ...Cash Flows From Financing Activities...

  • Page 54
    ... newly acquired satellites at the 110° WL orbital slot and EchoStar's current satellites at the 119° WL orbital slot (subject to FCC approval), EchoStar expects that the DISH Network will have the capacity to provide more than 500 channels of programming, Internet and high-speed data services and...

  • Page 55
    ... a one-dish solution for satellite-delivered local programming to major markets across the United States. EchoStar also expects to be able to serve Alaska, Hawaii, Puerto Rico and the United States territories in the Caribbean from the 110° WL orbital slot. The transaction with News Corporation and...

  • Page 56
    ..., 225,301, and none shares issued and outstanding, respectively; subject to mandatory redemption on July 1, 2004 at a price of $1,000 per share plus all accumulated and unpaid dividends ...Stockholders' Equity (Deficit): Preferred Stock, 20,000,000 shares authorized (inclusive of 900,000 shares...

  • Page 57
    ... Space Corporation Direct Broadcasting Satellite Corporation EchoStar Satellite Broadcasting Corporation Dish, Ltd. EchoStar Satellite Corporation Echosphere Corporation EchoStar Technologies Corporation (formerly HTS, a Texas Corporation) Houston Tracker Systems, Inc., a Colorado Corporation formed...

  • Page 58
    ... COMMUNICATIONS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued During March 1999, EchoStar received FCC approval to implement a reorganization in order to streamline its organization and operations. EchoStar intends to place ownership of all of its direct broadcast satellites and...

  • Page 59
    ...DBSI...Satellite launch payment for EchoStar II applied to EchoStar I launch...Satellite vendor financing ...Other notes payable...The purchase price of DBSC was allocated as follows in the related purchase accounting: EchoStar III satellite under construction...FCC authorizations...Notes receivable...

  • Page 60
    ...and Series B Preferred Stock are based on quoted market prices. The fair values of EchoStar's mortgages and other notes payable are estimated using discounted cash flow analyses. The interest rates assumed in such discounted cash flow analyses reflect interest rates currently being offered for loans...

  • Page 61
    ... from the provision of DISH Network subscription television services and satellite services is recognized as revenue in the period such services are provided. Revenue from sales of digital set-top boxes and related accessories is recognized upon shipment to customers. Revenue from the provision...

  • Page 62
    ... issued Financial Accounting Standard No. 130, "Reporting Comprehensive Income" ("FAS No. 130"), which establishes standards for reporting and display of comprehensive income and its components (revenues, expenses, gains and losses) in a full set of general-purpose financial statements. EchoStar...

  • Page 63
    ... as they are antidilutive. New Accounting Pronouncements In March 1998, the American Institute of Certified Public Accountants issued Statement of Position 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use" ("SOP 98-1"), which provides guidance that requires...

  • Page 64
    ... based on existing data, EchoStar expects that approximately 16 transponders will probably be available over the entire expected 12 year life of the satellite, absent significant additional transponder or other failures. In September 1998, EchoStar filed a $219.3 million insurance claim for a total...

  • Page 65
    ECHOSTAR COMMUNICATIONS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued F-18

  • Page 66
    ...Seven and Ten Year Notes is payable semi-annually in cash in arrears on February 1 and August 1 of each year, commencing August 1, 1999. Concurrently with the closing of the Notes offering, EchoStar used approximately $1.658 billion of net proceeds received from the sale of the Notes to complete the...

  • Page 67
    ... 1999 plus an amount equal to 100% of the aggregate net cash proceeds received by DBS Corp and its subsidiaries from the issuance or sale of certain equity interests of DBS Corp or EchoStar. In the event of a change of control, as defined in the Indentures, DBS Corp will be required to make an offer...

  • Page 68
    ... CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued Mortgages and Other Notes Payable Mortgages and other notes payable consists of the following (in thousands): December 31, 1997 1998 8.25% note payable for satellite vendor financing for EchoStar I due in equal monthly installments...

  • Page 69
    ...1998, EchoStar had net operating loss carryforwards ("NOLs") for Federal income tax purposes of approximately $401 million. The NOLs expire beginning in the year 2011. The use of the NOLs is subject to statutory and regulatory limitations regarding changes in ownership. Financial Accounting Standard...

  • Page 70
    ... per share ("liquidation preference"). Dividends on the Series B Preferred Stock are payable quarterly in arrears, commencing on January 1, 1998. EchoStar may, at its option, pay dividends in cash or by issuing additional shares of Series B Preferred Stock having an aggregate liquidation preference...

  • Page 71
    ... placed in the Deposit Account. Between the date of issuance and November 2, 1999 (the date dividends begin to accrue), EchoStar is accreting the proceeds from the issuance of the Series C Preferred Stock to the face amount of $115 million. The Deposit Account will provide a quarterly cash payment...

  • Page 72
    ... 2004, plus in each case all accumulated and unpaid dividends to the redemption date. 8. Stock Compensation Plans Stock Incentive Plan In April 1994, EchoStar adopted a stock incentive plan (the "Stock Incentive Plan") to provide incentive to attract and retain officers, directors and key employees...

  • Page 73
    ..., EchoStar does not recognize compensation expense on the issuance of stock under its Stock Incentive Plan because the option terms are fixed and the exercise price equals the market price of the underlying stock on the date of grant. In October 1995, the Financial Accounting Standards Board issued...

  • Page 74
    ... of its stock-based compensation awards. 9. Employee Benefit Plans Employee Stock Purchase Plan During 1997, the Board of Directors and shareholders approved an employee stock purchase plan (the "ESPP"), effective beginning October 1, 1997. Under the ESPP, EchoStar is authorized to issue a total of...

  • Page 75
    ...contribution by EchoStar of $1,000 per employee. EchoStar also may make an annual discretionary contribution to the plan with approval by EchoStar's Board of Directors, subject to the maximum deductible limit provided by the Internal Revenue Code of 1986, as amended. EchoStar's cash contributions to...

  • Page 76
    ... any other lawsuits and/or claims will be filed. It is also too early to make an assessment of the probable outcome of the litigation or to determine the extent of any potential liability or damages. Broadcast Network Programming Section 119 of the Satellite Home Viewer Act authorizes EchoStar to...

  • Page 77
    ... directly. EchoStar has also implemented Satellite Home Viewer Act Section 119 compliance procedures which will materially restrict the market for the sale of network signals by EchoStar. CBS and other broadcast networks have informed EchoStar that they believe EchoStar's method of providing distant...

  • Page 78
    ... 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 and for related disclosures about products and services, geographic areas, and major customers...

  • Page 79
    ... include three interrelated business units: • • The DISH Network - a DBS subscription television service in the United States. EchoStar Technologies Corporation - the design, distribution and sale of EchoStar receiver systems for the DISH Network as well as for direct-to-home projects of other...

  • Page 80
    ... originated. Transactions with Major Customers During 1998, export sales to two customers together totaled $210 million and accounted for approximately 21% of EchoStar's total revenue. Revenues for these customers are included within the EchoStar Technologies Corporation business unit. Complete or...

  • Page 81
    ... satellite networking equipment for personal computers. In connection with the acquisition, EchoStar issued approximately 170,000 shares of its Class A common stock valued at approximately $10 million for 100% ownership of Media4. The acquisition of Media4 will be accounted for as a purchase...