WE WILL NEED ADDITIONAL FINANCING TO OPERATE OUR BUSINESS AND OUR FUNDING
NEEDS MAY BE HIGHER THAN ANTICIPATED
In order to fund the continued operation of our Rainbow DBS business, our
subsidiary, Rainbow National Services LLC, has entered into debt financing
arrangements totaling $1.75 billion. These financing arrangements are described
under "Our Debt Financing." As described below, we will require substantial
additional financing in the future as we seek to exploit our Ku-band, Ka-band
and MVDDS licenses. It is also possible that we will need to raise additional
funds in the future even if we do not pursue these initiatives.
Our actual funding needs may be substantially higher than our expectations.
Our funding needs will depend to a significant extent upon the levels of
subscribers and subscriber revenues and our subscriber acquisition and other
costs. So, for example, if our Rainbow DBS business fails to achieve expected
levels of subscribers and subscriber revenues or the subscriber acquisition or
other costs are higher than we expect, our funding needs could be significantly
higher than anticipated. These same developments could also make it harder or
impossible to obtain the additional needed funding.
Ku-Band Capacity. Our current estimates of required funding do not take
into account the cost of utilizing the rights to FCC licenses for which we were
the successful bidder at a July 14, 2004 auction and which cover Ku-band
capacity at two orbital locations over the Pacific Ocean. The continued validity
of these licenses will be subject to certain requirements, including the
requirement to construct and launch satellites according to specific milestones
and deadlines. We anticipate that the cost of the two satellites to utilize
these frequencies will be between $400 million and $500 million. We do not
currently have any funding available to construct and launch either of these
satellites. Accordingly, we cannot assure you that we will have the required
funding to satisfy the FCC milestones. In any case, we will not be in a position
to launch and operate either of these satellites for a number of years and there
can be no assurance that we will ever be in a position to do so.
Ka-Band Capacity. Our current estimates of required funding do not take
into account the cost of acquiring and utilizing our Ka-band capacity. We have
FCC authority to construct, launch and operate five FSS Ka-band communications
satellites. We have posted a bond (and cash collateral) of $5 million for each
of these authorizations granted by the FCC. Pursuant to recent changes to FCC
rules, the amount of the bond soon will be reduced to $3 million per
authorization. The continued validity of the Ka-band licenses and authorizations
are subject to certain requirements, including the requirement to construct and
launch satellites according to specific milestones and deadlines. The bond for a
particular authorization would be forfeited if we failed to meet any FCC-imposed
satellite construction milestones for that authorization without an adequate
reason, such as technical problems with a satellite launch vehicle. We are in
the process of soliciting information from up to five leading manufacturers of
Ka-band satellites. Once we have reviewed this information, we will be
requesting bids from some or all of them for the manufacture and in-orbit
delivery of up to five satellites to be used in the five orbital locations.
While we have not received any bids, we anticipate that the cost of these
satellites will aggregate between $1 billion and $2 billion. We do not currently
have any funding available to construct and launch any of these satellites, nor
have we initiated any discussions to acquire such funding. Accordingly, we
cannot assure you that we will have the required funding to ensure satisfaction
of the build-out targets in accordance with the FCC's grant of such authority.
In any case, we will not be in a position to launch and operate any or all of
the five Ka-band communications satellites for a number of years and there can
be no assurance that we will ever be in a position to do so.
Multichannel Video Distribution and Data Service. Our current estimates of
required funding do not take account of the cost of utilizing our investment in
multichannel video distribution and data service, or MVDDS. In January 2004, we
invested $100,000 for a 49% stake in DTV Norwich, which was the high
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bidder in an FCC auction for MVDDS licenses in 46 markets in the United States,
including New York, Los Angeles, Miami and Cleveland. MVDDS licensees will
operate in the same radio spectrum as satellite television services like
DirecTV, DISH Network and VOOM(SM). The MVDDS signal is transmitted from local,
ground based, microwave towers, with enough bandwidth for hundreds of channels
and high-speed Internet service. Concurrently with our equity investment, we
funded DTV Norwich with an additional $84.6 million loan for the acquisition of
these licenses in the auction. Under the terms of the promissory note with DTV
Norwich, the loan will be forgiven as the FCC grants the MVDDS licenses to DTV
Norwich. Our current investment does not cover any of the costs of building out
the infrastructure or other costs necessary to utilize the licenses. We have
agreed with DTV Norwich to fund these costs but we do not currently have any
funding available for these additional build-out costs nor have we initiated any
discussions to acquire such funding. If we are unable to obtain required funding
DTV Norwich might not be able to retain these licenses and we could lose our
investment.
We have also agreed to a put/call option with George S. Blumenthal and
Company, LLC, DTV Norwich's majority owner. Once the FCC has granted the company
its MVDDS licenses, our agreement gives us a call option to purchase a 41%
membership interest in DTV Norwich from Blumenthal at an exercise price of $4.23
million. If we do not exercise our call option within 60 days, the agreement
gives Blumenthal the right to put the 41% membership interest to us at the same
exercise price of $4.23 million. If either party exercises its put or call
option, Blumenthal will then have the right, for ten years, to put its remaining
10% interest to us at fair market value to be determined by a process involving
independent valuation experts.
