AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 27, 1996
REGISTRATION NO. 333-3584
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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
________________________
AMENDMENT NO. 4
TO
FORM S-4
________________________
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
ECHOSTAR COMMUNICATIONS CORPORATION
(Exact name of registrant as specified in its charter)
NEVADA 5064 88-0336997
(State of Registrant's (Registrant's Standard Industrial (I.R.S. Employer
Incorporation) Classification Code Number) Identification No.)
________________________
DAVID K. MOSKOWITZ, ESQ.
90 INVERNESS CIRCLE EAST SENIOR VICE PRESIDENT, GENERAL COUNSEL AND SECRETARY
ENGLEWOOD, COLORADO 80112 ECHOSTAR COMMUNICATIONS COPORATION
(303) 799-8222 90 INVERNESS CIRCLE EAST
(Address, Including Zip Code, and ENGLEWOOD, COLORADO 80112
Telephone Number, including Area Code, (303) 799-8222 EXT. 5323
of Registrant's Principal Executive Office) (Name, Address, Including Zip Code, and
Telephone Number of Agent for Service)
COPIES TO:
WILLIAM APPLETON, ESQ. ROBERT N. HICKEY, ESQ.
BAKER & HOSTETLER SULLIVAN & WORCESTER LLP
3200 NATIONAL CITY CENTER 1025 CONNECTICUT AVENUE, N.W.
1900 E. 9TH STREET WASHINGTON, D.C. 20036
CLEVELAND, OHIO 44114-3485 (202) 775-8190
(216) 621-0200
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: Upon the
Effective Time of the Merger, as defined in the Information Statement --
Prospectus included herein.
If any of the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance
with General Instruction G, check the following box. / /
The Registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this
registration statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until the registration
statement shall become effective on such date as the Commission, acting
pursuant to said Section 8(a), may determine.
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ECHOSTAR COMMUNICATIONS CORPORATION
CROSS-REFERENCE SHEET PURSUANT TO ITEM 501(b) OF REGULATION S-K
FORM S-4 ITEM HEADING OR LOCATION IN
NUMBER AND CAPTION INFORMATION STATEMENT -- PROSPECTUS
------------------ -----------------------------------
A. Information about the Transaction
1. Forepart of Registration Statement and
Outside Front Cover Page of Information
Statement -- Prospectus . . . . . . . . . Outside Front Cover Page of Information
Statement -- Prospectus
2. Inside Front and Outside Back Cover
Pages of Information Statement --
Prospectus . . . . . . . . . . . . . . . . Inside Front Cover Page of Information
Statement -- Prospectus; Available
Information; Table of Contents
3. Risk Factors, Ratio of Earnings to Fixed
Charges and Other Information . . . . . . Summary of Information Statement --
Prospectus; Selected Financial
Information; Risk Factors
4. Terms of the Transaction . . . . . . . . . . Summary of Information
Statement -- Prospectus; The Merger;
Comparison of Shareholder Rights;
EchoStar Communications Corporation -
Description of Capital Stock
5. Pro Forma Financial Information . . . . . . . *
6. Material Contracts with Company Being
Acquired . . . . . . . . . . . . . . . . . Summary of the Exchange and Merger; the
Merger; Risk Factors
7. Additional Information Required for
Reoffering by Persons and Parties
Deemed to be Underwriters . . . . . . . . . *
8. Interests of Named Experts and Counsel. . . . *
9. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities . . . . . . . . . . . . . . . . *
B. Information About the Registrant
10. Information With Respect to S-3
Registrants . . . . . . . . . . . . . . . . *
11. Incorporation of Certain Information by
Reference . . . . . . . . . . . . . . . . . *
12. Information With Respect to S-2 or S-3
Registrants . . . . . . . . . . . . . . . . *
13. Incorporation of Certain Information by
Reference . . . . . . . . . . . . . . . . . *
14. Information With Respect to Registrants
Other Than S-2 or S-3
Registrants . . . . . . . . . . . . . . . Available Information; Summary of Information
Statement -- Prospectus; Selected Financial
DataEchoStar Communications Corporation;
Index to Financial Statements of EchoStar
Communications Corporation
C. Information About Company Being Acquired
15. Information With Respect to S-3
Companies . . . . . . . . . . . . . . . . *
16. Information With Respect to S-2 or S-3
Companies . . . . . . . . . . . . . . . . *
17. Information With Respect to Companies
Other Than S-2 or S-3
Companies . . . . . . . . . . . . . . . . Summary of Information Statement -- Prospectus; Direct
Broadcasting Satellite Corporation; Index
to Financial Statements of Direct
Broadcasting Satellite Corporation
D. Voting and Management Information
18. Information if Proxies, Consents or
Authorizations are to be Solicited *
19. Information if Proxies, Consents or
Authorizations are not to be Solicited in
an Exchange Offer . . . . . . . . . . . . Outside Front Cover Page of Information
Information Statement -- Prospectus; Summary of
Rights of Dissenting Shareholders; The
Merger
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* Answer is negative or item is not applicable.
[DBSC LETTERHEAD]
DIRECT BROADCASTING SATELLITE CORPORATION
November 27, 1996
To the Shareholders of Direct Broadcasting Satellite Corporation
On December 21, 1995, EchoStar Communications Corporation, a Nevada
corporation ("EchoStar"), and Direct Broadcasting Satellite Corporation, a
Delaware corporation ("DBSC"), entered into a Plan and Agreement of Merger,
approved by the Board of Directors of each company and by the written consent
of DBSC shareholders ("DBSC Shareholders") owning a majority of the voting
securities of DBSC, pursuant to which DBSC will be merged with Direct
Broadcasting Satellite Corporation, a Colorado corporation and a subsidiary
of EchoStar, resulting in DBSC becoming a wholly owned subsidiary of EchoStar
(the "Merger"). This Information Statement -- Prospectus relates to your
right to elect to receive, at your option, either cash or shares of Class A
Common Stock of EchoStar in exchange for your shares of Common Stock of DBSC.
We are not asking you for a proxy and you are requested not to send us a
proxy.
As a result of the Merger, each share of DBSC Common Stock will be converted
into and exchanged for the right to receive, at the election of each DBSC
Shareholder, either $7.99 in cash (the "Cash Value") or .67417 shares of
EchoStar Class A Common Stock ("EchoStar Common Stock"), subject to certain
limitations and adjustments as set forth in the Plan and Agreement of Merger
and as set forth in the enclosed Information Statement -- Prospectus. To elect
to receive either the Cash Value or the EchoStar Common Stock, each DBSC
Shareholder should complete the enclosed Election Form and return it by 5:00
p.m. on or before _____________, 1996. DBSC Shareholders electing to receive
shares of EchoStar Common Stock in connection with the Merger will not be
entitled to sell such shares for a period of 90 days following the effective
date of the Merger. Since the date that DBSC executed the Plan and Agreement
of Merger described in the Information Statement -- Prospectus, the price of
EchoStar's Class A Common Stock has increased from $19.12 per share to $27.13
per share as of November 25, 1996, which represents the closing price of a
share of Class A Common Stock of EchoStar as reported on the NASDAQ's National
Market System.
Management of EchoStar and DBSC believe that the proposed Merger will
provide shareholders of DBSC with the opportunity to participate in the
enhanced growth and other opportunities of EchoStar resulting from the Merger.
EchoStar launched its first direct broadcast satellite ("DBS"), EchoStar I, in
December 1995 and, during March 1996, began broadcasting its DISH Network-SM-
programming to the entire continental United States. On September 10, 1996,
EchoStar launched its second DBS, EchoStar II, and, as of November 11, 1996,
had approximately 260,000 subscribers to its DISH Network-SM- programming.
The Plan and Agreement of Merger is included as Annex I to the enclosed
Information Statement -- Prospectus. The Information Statement -- Prospectus
describes the Merger in detail and contains important information about DBSC
and EchoStar including financial statements and other financial information.
The Information Statement -- Prospectus also describes each shareholder's right
to seek appraisal of his or her shares of DBSC Common Stock as a result of the
Merger. The Board of Directors believes that the Merger is in the best
interests of DBSC Shareholders.
Sincerely,
HARLEY W. RADIN
CHAIRMAN OF THE BOARD AND
CHIEF EXECUTIVE OFFICER
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF
ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED NOVEMBER 27, 1996
ECHOSTAR COMMUNICATIONS CORPORATION
PROSPECTUS
DIRECT BROADCASTING SATELLITE CORPORATION
INFORMATION STATEMENT
This Information Statement -- Prospectus is being furnished to shareholders
of Direct Broadcasting Satellite Corporation ("DBSC Shareholders"), a
Delaware corporation ("DBSC"), in connection with the proposed merger (the
"Merger") of DBSC with Direct Broadcasting Satellite Corporation, a Colorado
corporation ("MergerCo"), and a wholly owned subsidiary of EchoStar
Communications Corporation, a Nevada Corporation ("EchoStar"). MergerCo is a
newly formed corporation that was organized by EchoStar for purposes of the
Merger. On the effective date of the Merger, each share of DBSC Common
Stock, $0.01 par value ("DBSC Common Stock"), other than shares held by
EchoStar and those for which Appraisal Rights have been perfected, as set
forth below, will be converted into and exchanged for the right to receive,
at the election of each shareholder of DBSC (together, "DBSC Shareholders"),
either $7.99 in cash (the "Cash Value") or .67417 shares of EchoStar Class A
Common Stock, $0.01 par value, ("EchoStar Common Stock") (collectively, the
"Merger Consideration"), subject to the conditions set forth in this
Information Statement -- Prospectus and in the accompanying Election Form (the
"Offer"). DBSC Shareholders who reject the Offer and follow certain
procedures may have the value of their shares of DBSC Common Stock appraised
pursuant to Delaware General Corporation Law (the "DGCL"), and thereby
receive the cash value of their shares of DBSC Common Stock as determined by
the Delaware Court of Chancery ("Appraisal Rights"). DBSC Shareholders not
returning the Election Form will be deemed to have accepted the Offer and
shall receive the Merger Consideration in the form of EchoStar Common Stock.
See "Rights of Dissenting Shareholders."
The Merger Consideration is subject to certain limitations and
adjustments, a detailed discussion of which is set forth in the Plan and
Agreement of Merger set forth as Annex I to this Information Statement --
Prospectus and described below under "The Merger -- Description of the Merger
Agreement -- Adjustments to Merger Consideration" (the "Merger Agreement").
No fractional shares of EchoStar Common Stock will be issued in the Merger
and cash will be paid to each DBSC Shareholder in lieu of any fractional
shares in an amount equal to such fractional interest multiplied by the value
of a share of EchoStar Common Stock at the Effective Time (as defined
herein). See "Rights of Dissenting Shareholders." Except for: (i) cash
payments in lieu of fractional shares; (ii) DBSC Shareholders who make
elections to receive all or part of their Merger Consideration in cash; or
(iii) DBSC Shareholders who reject the Offer and elect to exercise their
Appraisal Rights (collectively, "Cash Elections"), the Merger Consideration
will be paid in EchoStar Common Stock. See "The Merger -- Description of the
Merger Agreement." Based upon the best information available, the final per
share Merger Consideration offered for each share of DBSC Common Stock
exchanged in the Merger will be either $7.99 cash or .67417 shares of
EchoStar Common Stock, subject to certain limitations and adjustments as set
forth in the Plan and Agreement of Merger, valued at approximately $18.29
based on the market closing price of the EchoStar Common Stock of $27.13 on
November 25, 1996. If the final per share Merger Consideration materially
differs from this estimate, this Information Statement -- Prospectus will be
recirculated and DBSC Shareholders will be provided with an adequate period
to consider alternatives, including Appraisal Rights.
The Merger and related transactions described herein are complex
transactions. The above matters are discussed in detail in this Information
Statement -- Prospectus. DBSC Shareholders are urged to carefully read and
consider this Information Statement -- Prospectus in its entirety.
EchoStar has filed a Registration Statement on Form S-4 (the "Registration
Statement") under the Securities Act of 1933, as amended (the "Securities
Act"), covering 658,000 shares of EchoStar Common Stock that may be issued in
connection with the Merger. This Information Statement -- Prospectus
constitutes the Prospectus of EchoStar under the Securities Act in connection
with the offer and proposed sale of EchoStar Common Stock pursuant to the
Merger, and the Information Statement of DBSC. The financial statements and
other information contained herein with respect to DBSC have been provided by
DBSC, and all other information has been provided by EchoStar. This
Information Statement -- Prospectus does not cover resales of EchoStar Common
Stock that may be issued in the Merger, and no person is authorized to use
this Information Statement -- Prospectus in connection with any such resale.
EchoStar Common Stock is presently quoted on the NASDAQ National Market
under the symbol "DISH". The EchoStar Common Stock that may be issued in
connection with the Merger will be designated for inclusion for trading on the
NASDAQ National Market upon official notice of issuance. DBSC Shareholders
electing to receive shares of EchoStar Common Stock in connection with the
Merger will not be entitled to sell such shares for a period of 90 days
following the effective date of the Merger. See "The Merger -- Description of
the Merger Agreement -- Restrictions on Resale."
The DBSC Common Stock is not publicly traded and no other ready market
exists for valuation purposes.
WE ARE NOT ASKING YOU FOR A PROXY AND YOU ARE REQUESTED NOT TO SEND US A
PROXY.
DBSC Shareholders should carefully consider this Information Statement --
Prospectus in its entirety, particularly the factors discussed under the
heading "Risk Factors."
----------------------
THE SHARES OF ECHOSTAR COMMON STOCK THAT MAY BE ISSUED IN THE MERGER HAVE
NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION
OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
INFORMATION STATEMENT -- PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
----------------------
The date of this Information Statement -- Prospectus is ____________, 1996.
TABLE OF CONTENTS
PAGE
----
AVAILABLE INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . 3
SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
THE PARTIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
SUMMARY OF RISK FACTORS . . . . . . . . . . . . . . . . . . . . . . . 8
THE EXCHANGE AND MERGER . . . . . . . . . . . . . . . . . . . . . . . 9
SELECTED FINANCIAL DATA . . . . . . . . . . . . . . . . . . . . . . . 14
THE ECHOSTAR ORGANIZATION . . . . . . . . . . . . . . . . . . . . . . 18
COMPARATIVE PER SHARE DATA . . . . . . . . . . . . . . . . . . . . . 19
RISK FACTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
RIGHTS OF DISSENTING SHAREHOLDERS . . . . . . . . . . . . . . . . . . 37
THE MERGER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
COMPARISON OF SHAREHOLDER RIGHTS . . . . . . . . . . . . . . . . . . 47
PRICE RANGE OF ECHOSTAR CLASS A COMMON STOCK . . . . . . . . . . . . 50
DIVIDEND POLICY . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
CAPITALIZATION . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
ECHOSTAR COMMUNICATIONS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS. . . . . . . . . . . . . . . . . . . . . . . 53
BUSINESS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67
MANAGEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 105
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS . . . . . . . . . . . 111
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT . . . 113
DESCRIPTION OF CAPITAL STOCK . . . . . . . . . . . . . . . . . . . . 116
DESCRIPTION OF CERTAIN INDEBTEDNESS . . . . . . . . . . . . . . . . . 119
DIRECT BROADCASTING SATELLITE CORPORATION
BUSINESS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 121
MANAGEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 123
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS . . . . . . . . . . . 124
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT . . . 124
DESCRIPTION OF CAPITAL STOCK . . . . . . . . . . . . . . . . . . . . 125
LEGAL MATTERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 125
EXPERTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 125
INDEX TO FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . F-1
ANNEX I -- PLAN AND AGREEMENT OF MERGER . . . . . . . . . . . . . . . A-1
ANNEX II -- MERGER TRIGGER AGREEMENT . . . . . . . . . . . . . . . . B-1
ANNEX III -- DELAWARE GENERAL CORPORATION LAW SECTION 262 . . . . . . C-1
2
THIS INFORMATION STATEMENT -- PROSPECTUS CONTAINS STATEMENTS WHICH CONSTITUTE
FORWARD LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES
ACT AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. THOSE
STATEMENTS APPEAR IN A NUMBER OF PLACES IN THIS INFORMATION STATEMENT --
PROSPECTUS AND INCLUDE STATEMENTS REGARDING THE INTENT, BELIEF OR CURRENT
EXPECTATIONS OF ECHOSTAR WITH RESPECT TO, AMONG OTHER THINGS: (I) ECHOSTAR'S
FINANCING AND STRATEGIC TRANSACTION PLANS; (II) TRENDS AFFECTING ECHOSTAR'S
FINANCIAL CONDITIONS OR RESULTS OF OPERATIONS; (III) ECHOSTAR'S GROWTH
STRATEGY; (IV) ECHOSTAR'S ANTICIPATED RESULTS OF FUTURE OPERATIONS; AND (V)
REGULATORY MATTERS AFFECTING ECHOSTAR. PROSPECTIVE INVESTORS ARE CAUTIONED
THAT ANY SUCH FORWARD LOOKING STATEMENTS ARE NOT GUARANTEES OF FUTURE
PERFORMANCE AND INVOLVE SIGNIFICANT RISKS AND UNCERTAINTIES AND THAT ACTUAL
RESULTS MAY DIFFER MATERIALLY FROM THOSE PROJECTED IN THE FORWARD LOOKING
STATEMENTS AS A RESULT OF VARIOUS FACTORS.
AVAILABLE INFORMATION
EchoStar is subject to the informational requirements of the Securities
Exchange Act of 1934 (the "Exchange Act") and, in accordance therewith, files
reports and other information with the Securities and Exchange Commission (the
"Commission"). Such reports and other information may be inspected and copied
at the public reference facilities maintained by the Commission at 450 Fifth
Street, N.W., Judiciary Plaza, Washington D.C. 20549-1004, and at the following
Regional Offices of the Commission: Chicago Regional Office, Northwestern
Atrium Center, 500 West Madison Street, Chicago, Illinois 60661 and the New
York Regional Office, 7 World Trade Center, New York, New York 10048. Copies
of such materials may also be obtained by mail from the Public Reference
Section of the Commission at 450 Fifth Street, N.W., Washington, D.C.
20549-1004 at prescribed rates.
DBSC is not required to file any reports or other information with the
Commission under the Securities Act or the Exchange Act.
This Information Statement -- Prospectus, which constitutes a part of the
Registration Statement filed by EchoStar with the Commission under the
Securities Act, omits certain information contained in the Registration
Statement, and reference is hereby made to the Registration Statement and to
the exhibits relating thereto for further information with respect to EchoStar
and the EchoStar Common Stock offered hereby. Statements contained herein
concerning provisions of any document set forth all material elements of the
documents, are not necessarily complete, and each statement is qualified in its
entirety by reference to the copy of such document included herewith or filed
with the Commission.
No person is authorized to give any information or to make any
representations with respect to the matters described in this Information
Statement -- Prospectus other than those contained herein. Any information or
representations with respect to such matters not contained herein must not be
relied upon as having been authorized by EchoStar or DBSC. This Information
Statement -- Prospectus does not constitute an offer to sell or a solicitation
of an offer to buy any securities other than the registered securities in any
jurisdiction. Neither the delivery of this Information Statement -- Prospectus
nor any sale made hereunder shall, under any circumstances, create any
implication that there has been no change in the affairs of EchoStar or DBSC
since the date hereof or that the information in this Information Statement --
Prospectus is correct as of any time subsequent to the date hereof.
3
SUMMARY
The following is a summary of all material elements of certain information
contained in this Information Statement -- Prospectus. This summary is not
intended to be complete and is qualified in all respects by reference to the
detailed information appearing elsewhere in this Information Statement --
Prospectus and the Annexes hereto. All DBSC Shareholders are urged to review
carefully the entire Information Statement -- Prospectus and the Annexes.
Unless otherwise defined herein, capitalized terms have the meanings ascribed
to them in the Plan and Agreement of Merger set forth as Annex I to this
Information Statement -- Prospectus.
EchoStar Communications Corporation is a Nevada corporation, the Class A
Common Stock of which is quoted on the NASDAQ National Market under the symbol
"DISH." As used in this Information Statement -- Prospectus, unless the context
requires otherwise, "EchoStar" or the "Company" refers to EchoStar
Communications Corporation and its subsidiaries "MergerCo" refers to Direct
Broadcasting Satellite Corporation, a Colorado corporation and a wholly owned
subsidiary of EchoStar, and "DBSC" refers to Direct Broadcasting Satellite
Corporation, a Delaware corporation.
THE PARTIES
ECHOSTAR COMMUNICATIONS CORPORATION
EchoStar is one of only two DBS companies in the United States with the
capacity to provide comprehensive nationwide DBS programming service in 1996.
EchoStar's DBS service (the "DISH Network-SM-") commenced operations in
March 1996 after the successful launch of the Company's first satellite
("EchoStar I") in December 1995. EchoStar launched its second satellite
("EchoStar II") on September 10, 1996. EchoStar significantly increased the
channel capacity and programming offerings of the DISH Network-SM- when
EchoStar II became fully operational in November 1996. EchoStar now provides
approximately 120 channels of near laser disc-quality digital video
programming and over 30 channels of near CD-quality audio programming to
the entire continental United States ("CONUS").
EchoStar's primary objective is to become one of the leading providers of
pay television services in the United States. EchoStar's strategy to achieve
this objective is to:
- EXPAND THE MARKET FOR ITS SERVICES BY:
- USING AGGRESSIVE SALES PROMOTIONS, SUCH AS THE ECHOSTAR PROMOTION.
- PROVIDING SUBSCRIBERS WITH MORE QUALITY PROGRAMMING AT LOWER PRICES.
- EXPANDING THE DISTRIBUTION CHANNELS FOR THE ECHOSTAR RECEIVER SYSTEM.
- DEPLOY SATELLITES AT ADDITIONAL DBS ORBITAL SLOTS TO EXPAND ECHOSTAR'S
OFFERINGS WITH ADDITIONAL VIDEO, DATA, INTERACTIVE AND INTERNET
PRODUCTS.
- PROVIDE SUPERIOR, ONE-STOP CUSTOMER SERVICE FOR PURCHASING DISH
NETWORK-SM- HARDWARE AND PROGRAMMING AND OBTAINING FINANCING,
INSTALLATION AND CUSTOMER CARE.
- EMPLOY WORLD STANDARD MPEG-2 DIGITAL TECHNOLOGY TO ACHIEVE LOWER
MANUFACTURING COSTS AND ASSURE SUPERIOR PRODUCT CAPABILITY, INCLUDING
COMPATIBILITY WITH OTHER CONSUMER ELECTRONICS PRODUCTS.
4
The introduction of DBS receivers is widely regarded as the most successful
introduction of a consumer electronics product in U.S. history, surpassing the
rollout of color televisions, VCRs and compact disc players. As of October 1,
1996, approximately 3.8 million U.S. households subscribed to digital "direct-
to-home" ("DTH") service, which includes DBS service as well as programming
delivered via medium powered Ku-band satellite.
EchoStar has rights to more U.S. licensed DBS frequencies than any of its
competitors. EchoStar controls, or will control (subject to certain Federal
Communications Commission ("FCC") approvals and findings), as many as 90
frequencies, including 21 frequencies at one of the three orbital slots
currently capable of providing nationwide DBS service. See "Business --
Industry Overview -- DBS Industry." Each frequency can be utilized by one
transponder on a multiple transponder DBS satellite. With digital compression,
each transponder can provide up to 10 digital video channels to subscribers.
EchoStar believes that its exclusive rights to its substantial amount of
valuable DBS spectrum will enable the Company to achieve higher subscriber
penetration and revenue per subscriber than it would otherwise attain with its
current service. However, even though EchoStar has rights to more frequencies
than its competitors, two DTH providers, DirecTv, Inc. ("DirecTv") and
PrimeStar Partners ("PrimeStar"), currently dominate the DTH market, due to
their early entry. DirecTv and PrimeStar currently have approximately 1.9
million and 1.4 million subscribers, respectively, while EchoStar currently has
approximately 260,000 subscribers.
The Company's third satellite ("EchoStar III"), expected to be launched in
the fall of 1997 to serve the eastern half of the United States from 61.5DEG.
West Longitude ("WL"), and the Company's fourth satellite ("EchoStar IV"),
expected to be launched in the first quarter of 1998 to serve the western half
of the United States from 148DEG. WL, are expected to provide local programming
for the 40 largest U.S. television markets, niche and foreign language
programming, professional and college sporting events, high definition
television ("HDTV"), business and educational programming and high-speed
transmission of Internet data. In addition, the Company has been granted 11
frequencies at 175DEG. WL and has been conditionally granted fixed satellite
service ("FSS") orbital locations at 121DEG. WL and 83DEG. WL and has
applications for two extended Ku-band satellites and two Ka-band satellites
pending at the FCC. While firm business plans for these spectrum applications
have not yet been determined and development is not expected to commence in the
near term, the Company believes this spectrum will be important to the
Company's success and intends to use these frequencies to provide complimentary
services. However, absent significant additional capital, EchoStar will be
unable to retain all of its assigned frequencies and orbital slots.
EchoStar currently has the capacity to provide approximately 150 channels of
digital video programming. However, EchoStar's authority to provide 30 of
those channels (i.e. five of the frequencies) expires in December 1996, unless
the FCC further extends the short term authority ("STA") to operate those
channels on EchoStar I, of which there can be no assurance. The STA would be
terminated sooner if Tempo Satellite, Inc. ("Tempo"), to whom those five
frequencies have been assigned, launches a DBS satellite to the 119 DEG. WL
orbital slot this year. EchoStar is not currently using the STA to provide any
channels of programming to its subscribers.
Following the successful launch and deployment of four satellites, EchoStar
will have the capacity to provide over 500 channels of programming to the
United States. However, EchoStar does not currently have authorization from
the FCC to operate a sufficient number of frequencies to provide 500 channels.
EchoStar intends to apply for additional FCC authorizations but there can be no
assurance the FCC will grant additional STAs for or authorize operation from
frequencies sufficient to provide 500 channels.
EchoStar's target market includes approximately 110 million potential
subscribers in the continental United States, including approximately 96
million television households. DISH Network-SM- subscribers can choose from a
variety of programming packages that EchoStar believes have a better price-to-
value relationship than packages currently offered by most pay television
providers. For example, DISH Network's-SM- America's Top 50 CD-SM- (America's
Top 40 CD-SM- programming package prior to November 1, 1996) programming package
is priced at $24.99 per month, as compared to, on average, over $42 per month
for cable service. Although the EchoStar Receiver System does not presently
provide local programming via satellite into the local markets it
5
is serving, the EchoStar Receiver System allows its subscribers to receive
local programming from an off-air antenna without the payment of an
additional fee. America's Top 50 CD-SM- includes approximately 50 of the top
"expanded basic cable" channels, including The Disney Channel-Registered
Trademark-, which historically has been a premium service, and over 30
channels of near CD-quality audio programming. EchoStar also offers various
premium services, pay-per-view programming and, as of November 1996, offers
various regional sports networks, additional premium services and expanded
pay-per-view offerings. EchoStar has negotiated the right to broadcast
substantially all of the most popular programming, including A&E-SM-,
CNBC-Registered Trademark- CNN-Registered Trademark-, CNN International-SM-,
C-Span-Registered Trademark-, Cinemax-Registered Trademark-, The Discovery
Channel-Registered Trademark-, The Disney Channel-Registered Trademark-,
ESPN-Registered Trademark-, The Family Channel-Registered Trademark-,
HBO-Registered Trademark-, Headline News-Registered Trademark-, Lifetime
Television-SM-, MTV-Registered Trademark-, Nickelodeon-Registered Trademark-,
Showtime Network-Registered Trademark-, TNT-SM-, Turner Classic
Movies-Registered Trademark-, USA Network-Registered Trademark-,
VH-1-Registered Trademark- and many other programming services.
EchoStar has approximately 260,000 subscribers and is adding new
subscribers at a pace of nearly 60,000 per month, faster than any DBS
provider other than DirecTV as of the date of this Information
Statement--Prospectus. EchoStar believes that since June 1996 it has
captured approximately 25% of all new digital DTH satellite subscribers in
the U.S. By January 1997, EchoStar expects to have the production capacity
to add over 90,000 subscribers per month. Since August 1996, EchoStar has
introduced several marketing promotions, the most significant of which is a
nationwide marketing promotion (the "EchoStar Promotion") which offers a
standard EchoStar Receiver System to consumers for $199 (as compared to the
original average retail price in March 1996 of approximately $499),
conditioned upon the consumer's prepaid purchase of one year of America's Top
50 CD-SM- programming package for approximately $300. The EchoStar Promotion
has significantly increased the affordability of EchoStar Receiver Systems
for consumers. The primary purposes of the EchoStar Promotion are to
rapidly build a subscriber base, to expand retail distribution of EchoStar's
products and to build consumer awareness of the DISH Network-SM- brand.
This promotion is consistent with and emphasizes EchoStar's long-term
business strategy which focuses on generating the majority of its future
revenue through sales of DISH Network-SM- programming to a substantial
subscriber base. The EchoStar Promotion requires significant investment by
EchoStar to acquire subscribers, and EchoStar believes the investment is
fully recoverable from the DBS programming revenues expected to be generated.
EchoStar receivers process only DISH Network-SM- signals because of the
proprietary encryption technology employed. Consequently, the satellite
receivers and other reception equipment cannot be utilized with competitors'
DBS systems, and unlike the cellular phone industry, subscribers cannot
seamlessly migrate to alternative DBS providers. Further, based on high DBS
industry consumer satisfaction ratings, initial feedback from consumers and
dealers and low EchoStar subscriber turnover rates, EchoStar anticipates high
service renewal rates leading to an expected average minimum subscriber life
of at least three years.
Of the approximately 96 million television households in the United
States, it is estimated that over 60 million households pay an average of $42
per month for the average cable subscription. EchoStar believes that there
is significant unsatisfied demand for high quality, reasonably priced
television programming. Although primary target markets for the EchoStar
Receiver System include the approximately 11 million households not passed by
cable television systems and the approximately 20 million households
currently passed by cable television systems with relatively limited channel
capacity, EchoStar also targets cable subscribers in urban and suburban areas
who are dissatisfied with the quality or price of their cable programming.
In addition to the 96 million television households, EchoStar's target market
includes approximately 8 million businesses, 4.8 million commercial trucks, 3
million recreational vehicles and 200,000 schools, libraries and other
institutions.
DISH Network-SM- programming is available to any subscriber who purchases or
leases a low-cost EchoStar Receiver System, which consists of an 18-inch
satellite dish, a digital satellite receiver, a user-friendly remote control
and related components. The EchoStar Receiver System is fully compatible with
MPEG-2, the world digital standard for computers and consumer electronics
products, and provides image and sound quality superior to current analog cable
or multipoint multichannel distribution service ("MMDS") television services.
EchoStar markets EchoStar Receiver Systems through a nationwide network of
independent distribution and retail outlets
6
and through consumer electronics retailers. EchoStar is also working with
additional mass merchandisers, direct sales organizations and consumer
electronics retailers to establish expanded distribution channels for
EchoStar Receiver Systems.
DBS is presently the most efficient, least capital intensive means of
reaching the largest number of U.S. television households. If the launches of
EchoStar's third and fourth satellites during late 1997 and early 1998 are
successful, EchoStar's expanded service from its four DBS satellites will
transmit to the continental United States near laser disc quality, digital
television, potentially including local programming and high speed Internet
access, for an aggregate capital cost to EchoStar of less than $1 billion or
approximately $10 per U.S. television household. EchoStar's management
believes that this very attractive capital cost to provide state-of-the-art
programming service will permit EchoStar to become profitable at relatively low
levels of market penetration. EchoStar believes that the strategy outlined
above, together with its ability to exploit the more favorable cost structure
of DBS relative to other means of providing pay television programming, will
enable EchoStar to achieve its primary objective.
In addition to the Company's DBS business, EchoStar also designs,
manufactures, distributes and installs DTH products, distributes DTH
programming domestically and finances its domestic DTH products and services.
During the six years ended December 31, 1995, EchoStar sold over 1.7 million
DTH receivers worldwide.
EchoStar was incorporated under the laws of the State of Nevada in
April 1995 for purposes of facilitating the consummation of a public offering
of its Class A Common Stock, which occurred in June 1995. The principal
executive offices of EchoStar are located at 90 Inverness Circle East,
Englewood, Colorado 80112, and its telephone number is (303) 799-8222.
DIRECT BROADCASTING SATELLITE CORPORATION, A DELAWARE CORPORATION
DBSC, organized under Delaware law in 1981, has received authority from the
Federal Communications Commission ("FCC") to build two direct broadcast
satellites to transmit television and other signals throughout the continental
United States, Alaska and Hawaii. The FCC has awarded DBSC specific orbital
slot assignments with respect to 11 DBS frequencies located at 61.5DEG. WL and
11 DBS frequencies located at 175DEG. WL. DBSC has filed an application with
the FCC and intends to seek permission to transmit programming to parts of
Western Europe, North Africa and Asia, as well as Central and South America,
from its satellites. Subject to receipt of requisite approval and consent from
relevant authorities, the FCC has agreed to the provision of international or
foreign-domestic DBS service by DBSC. DBSC has entered into, and made a series
of progress payments under, a contract with Lockheed Martin Corporation
("Lockheed Martin") for the construction of two direct broadcast satellites
(the "DBSC Satellite Contract"), the first of which is anticipated to be
completed and launched in 1997, assuming DBSC has adequate financial resources
to complete construction. EchoStar currently owns approximately 40% of the
outstanding stock of DBSC. The principal executive offices of DBSC are located
at 4401-A Connecticut Avenue, N.W., Suite 400, Washington, D.C. 20008, and its
telephone number is (202) 966-5800.
DIRECT BROADCASTING SATELLITE CORPORATION, A COLORADO CORPORATION
MergerCo is a Colorado corporation and a wholly owned subsidiary of
EchoStar. MergerCo was recently formed to effect the Merger. See "The
Merger."
RESTRICTIONS ON RESALE
Shares of EchoStar Common Stock received by DBSC Shareholders in connection
with the Merger will not be eligible for resale, transfer or disposal until
90 days after the effective date of the Merger. Certificates representing such
shares will bear a restrictive legend setting forth the restrictions
prohibiting such sale, transfer or disposal during the 90 day period. If the
Merger is determined to be a taxable transaction to DBSC
7
Shareholders, the 90 day resale restriction will lapse with respect to 50% of
the shares of EchoStar's Common Stock received by DBSC shareholders.
POTENTIAL STRATEGIC TRANSACTIONS
Consistent with EchoStar's long-term strategy, the Company regularly
examines, and is currently examining, opportunities to expand its DBS business,
technology base and product lines through means such as licenses, joint
ventures, strategic alliances, strategic investments and acquisitions of assets
or ongoing businesses. EchoStar has made no commitment with respect to any new
strategic transaction. However, EchoStar may at any time agree to enter into a
new strategic transaction. Should EchoStar agree to enter into a new strategic
transaction, there can be no assurance as to the terms or timing of the
transaction, whether the transaction will be consummated or whether the
transaction would improve EchoStar's financial condition, results of
operations, business or prospects in any material manner.
SUMMARY OF RISK FACTORS
The complete deployment and on-going operation of the EchoStar DBS system
(the "EchoStar DBS System") is highly complex and involves substantial risks.
These risks generally include current or future competition from DBS and other
satellite system operators and terrestrial delivery systems such as cable
television, EchoStar's ability to integrate advanced and unproven technologies,
the potential loss or damage to EchoStar's satellites during launch or while in
orbit, the potential for impaired commercial operation resulting from incorrect
orbital placement, effect on cash flow resulting from subscriber acquisition
costs, EchoStar's ability to obtain insurance on favorable terms, the potential
for delay and cost overruns, dependence on a single manufacturer of receiving
equipment and effects of government regulation on the communications industry.
In addition, EchoStar is highly leveraged. These and certain other risks are
described in more detail under "Risk Factors" commencing on page 21.
8
THE EXCHANGE AND MERGER
APPROVAL OF THE MERGER
The Plan and Agreement of Merger, dated December 21, 1995, among EchoStar,
MergerCo and DBSC (the "Merger Agreement"), was approved by written consent of
DBSC's largest Shareholders (Harley W. Radin, DBS Industries, Inc. ("DBSI") and
EchoStar) owning in excess of 82% of the issued and outstanding DBSC Common
Stock on December 21, 1995. Pursuant to the Merger Agreement, among other
things, DBSC will be merged with MergerCo, resulting in DBSC becoming a wholly
owned subsidiary of EchoStar.
THE OFFER
The Merger Agreement provides that each issued and outstanding share of DBSC
Common Stock, other than shares held by EchoStar and those for which Appraisal
Rights have been perfected, will be converted into and exchanged for either
$7.99 in cash or .67417 shares of EchoStar Common Stock subject to certain
limitations and adjustments as set forth in the Merger Agreement attached as
Annex I to this Information Statement -- Prospectus and as described below under
"The Merger -- Description of the Merger Agreement." To elect to receive either
the Cash Value or the EchoStar Common Stock, each DBSC Shareholder should
complete the Election Form accompanying this Information Statement -- Prospectus
and return it by 5:00 p.m. on ________, 1996, to American Securities
Transfer, Inc. (the "Exchange Agent"). The mailing address of the Exchange
Agent is 1825 Lawrence Street, Suite 444, Denver, Colorado 80202. No
fractional shares will be issued in connection with the Merger, and each DBSC
Shareholder electing to receive EchoStar Common Stock will receive cash in lieu
of any fractional share in an amount equal to such fractional interest
multiplied by the value of a share of EchoStar Common Stock as of the effective
time of the Merger (the "Effective Time").
Since the date that DBSC executed the Merger Agreement, the price of each
share of EchoStar Common Stock has increased from $19.12 per share to $27.13
per share as of November 25, 1996, which represents the closing price of a
share of EchoStar Common Stock as reported on the Nasdaq National Market
System.
RIGHTS OF DISSENTING SHAREHOLDERS
Under the DGCL, DBSC Shareholders who comply with the applicable procedures
for dissenting from the Merger are entitled to Appraisal Rights. For more
information regarding such Appraisal Rights, see "Rights of Dissenting
Shareholders."
BACKGROUND OF THE MERGER
On November 15, 1994, EchoStar and DBSC entered into a Stock Purchase
Agreement pursuant to which EchoStar purchased 583,250 shares of DBSC Common
Stock in consideration for: (i) the payment by EchoStar to DBSC of
$2,960,000; (ii) the dismissal by EchoStar with prejudice of a lawsuit brought
by EchoStar against DBSC; and (iii) the cancellation and termination by
EchoStar of: (x) all of the issued and outstanding convertible notes of DBSC
held by EchoStar (the "DBSC Notes"); (y) all accounts receivable of DBSC owned
by EchoStar; and (z) all other debts of DBSC owned by EchoStar. DBSC also
granted EchoStar the right and option, under certain circumstances and subject
to certain conditions, to purchase additional shares of DBSC Common Stock
thereby providing EchoStar with certain rights even if the Merger had not
occurred (the "Option Shares"). The issuance of the Option Shares was
conditioned upon the receipt from the FCC of any required approvals for
issuance of the Option Shares. Under the terms of the Stock Purchase
Agreement, each of DBSC and EchoStar were given the right to require the
execution by the parties of the Merger Agreement, subject to certain
conditions, including approval of the Merger by the FCC ("FCC Approval") and by
the DBSC Shareholders. The FCC approved the Merger on August 30, 1996.
Harley W. Radin, Chairman of the Board and Chief Executive Officer of DBSC,
personally executed the Stock Purchase Agreement with respect to certain
9
covenants regarding the non-transferability of his DBSC Common Stock prior to
consummation of the Merger. See "The Merger -- Background and Reasons for the
Merger."
Contemporaneously with execution of the Merger Agreement, DBSC, EchoStar and
MergerCo entered into a Merger Trigger Agreement (the "Merger Trigger
Agreement") pursuant to which the parties agreed to, among other things,
execute and consummate the transactions contemplated by the Merger Agreement
and to enter into a Note Purchase Agreement and Security Agreement (together,
the "Loan Agreements"), pursuant to which EchoStar agreed to purchase from DBSC
$16.0 million in principal amount of promissory notes of DBSC and, in
EchoStar's sole and absolute discretion, up to an additional $134.0 million
principal amount of promissory notes, the proceeds from which are to be used by
DBSC to make certain payments to Lockheed Martin under the DBSC Satellite
Contract and to make deposits towards launch reservations. As of the date of
this Information Statement -- Prospectus, EchoStar has loaned DBSC
$41.0 million pursuant to the Loan Agreements. See "The Merger -- The Merger
Trigger Agreement".
In the event the Merger is not consummated for any reason, the parties also
agreed to structure a transaction or series of transactions that would have the
effect of providing to the parties, as nearly as is possible, the benefits
which would have accrued to the parties had the Merger been consummated, as
more particularly described in this Information Statement -- Prospectus under
"The Merger -- The Merger Trigger Agreement" (the "Substitute DBSC
Transaction"). The Merger Trigger Agreement also sets forth the
acknowledgement of the parties that certain DBSC Shareholders owning a majority
of the issued and outstanding shares of DBSC Common Stock had, by written
consent, approved the Merger. A copy of the Merger Trigger Agreement is
attached hereto as Annex II.
REASONS FOR THE MERGER
The DBSC Board believes that the Merger is in the best interests of DBSC and
is fair to and in the best interests of DBSC Shareholders. The Merger will
enable DBSC Shareholders to participate in the DBS industry as owners of
EchoStar, which recently began broadcasting its DISH Network-SM- programming to
the entire continental United States. See "The Merger -- Background and Reasons
for the Merger" and "EchoStar Communications Corporation -- Business."
DBSC has been an applicant for a full DBS license since 1982. As a
development stage company with no operations, DBSC has found it extremely
difficult to attract necessary financing to continuously comply with the
requirements imposed by the FCC to maintain its DBS authorizations ("Due
Diligence Requirements"), as well as to satisfy its other obligations. By late
summer of 1994, the construction of DBSC's satellite by Lockheed Martin was not
sufficiently advanced to permit DBSC to begin operation of its first satellite
by August 1995, and substantial working capital was needed to accelerate the
construction phase of the DBSC Satellite Contract. In addition, the specific
orbital locations assigned by the FCC to DBSC were not those widely considered
among the most desirable, making it even more difficult for DBSC to attract
partners, investors or programmers.
The launch of DBS service in mid-1994 by DirecTv, Inc., a subsidiary of
Hughes Communications, Inc. ("DirecTv"), and United States Satellite
Broadcasting, Inc. ("USSB"), and the prospect of a further competitive entry by
EchoStar in late 1995, raised the possibility that if DBSC were not able to
accelerate progress on its own DBS system, it would be unable to attract
necessary working capital to continue progress payments under the DBSC
Satellite Contract.
The Merger with EchoStar provides DBSC with the financial resources to build
and launch its DBS satellites, thereby providing DBSC Shareholders with the
opportunity to participate in the growth and other opportunities resulting from
the DBS system presently under construction by DBSC as well as the EchoStar DBS
System.
10
DESCRIPTION OF THE MERGER AGREEMENT
The Merger Agreement provides that, at the Effective Time, DBSC will be
merged with MergerCo, which shall be the surviving corporation. The Effective
Time of the Merger is expected to be as soon as practicable after the effective
date of the Registration Statement, subject to satisfaction or waiver of the
conditions precedent to the Merger as set forth in the Merger Agreement and
Merger Trigger Agreement. See "The Merger -- Effective Time." At the Effective
Time of the Merger, the separate corporate existence of DBSC will cease. DBSC
Shareholders accepting the Offer, other than EchoStar, will receive or become
entitled to receive either $7.99 in cash or .67417 shares of EchoStar Common
Stock for each share of DBSC Common Stock owned as of the Effective Time of the
Merger, payable at the election of each DBSC Shareholder and subject to certain
limitations and adjustments. The Merger Agreement provides that the number of
shares of DBSC Common Stock to be exchanged for cash, together with the number
of shares of DBSC Common Stock with respect to which Appraisal Rights have been
reserved, cannot exceed 50% of the shares of DBSC Common Stock held by DBSC
Shareholders other than EchoStar. A detailed discussion of these limitations
and adjustments is described below under "The Merger -- Description of the
Merger -- Adjustments to Merger Consideration". DBSC Shareholders not returning
the Election Form will be deemed to have accepted the Offer and will receive
shares of EchoStar Common Stock for their shares of DBSC Common Stock. DBSC
Shareholders receiving shares of EchoStar Common Stock in connection with the
Merger will not be entitled to sell such shares for a period of 90 days
following the effective date of the Merger. See "The Merger -- Description of
the Merger Agreement -- Restrictions on Resale." DBSC Shareholders who reject
this Offer may have the value of their shares of DBSC Common Stock appraised
pursuant to the DGCL. See "Rights of Dissenting Shareholders."
The Merger Consideration may be decreased according to a specific formula
set forth in the Merger Agreement to reflect, among other things described in
"The Merger -- Description of the Merger" below, certain liabilities of DBSC not
disclosed in the Merger Agreement, the exact amount of which may not be
precisely determined until the Effective Time of the Merger. Based upon the
best information available, the final per share Merger Consideration offered
for each share of DBSC Common Stock exchanged in the Merger will be either
$7.99 in cash or .67417 shares of EchoStar Common Stock, subject to certain
limitations and adjustments as set forth in the Plan and Agreement of Merger,
valued at approximately $18.29 based on the market closing price of the
EchoStar Common Stock of $27.13 on November 25, 1996. If the final per share
Merger Consideration materially differs from this estimate, this Information
Statement -- Prospectus will be recirculated and DBSC Shareholders will be
provided with an adequate period to consider alternatives, including Appraisal
Rights.
The Merger Agreement contains representations and warranties made by DBSC to
EchoStar and MergerCo (together, the "EchoStar Companies"), and representations
and warranties made by the EchoStar Companies to DBSC, which are described in
"The Merger -- Representations and Warranties." Such representations and
warranties are made as of December 21, 1995, when the Merger Agreement was
signed, and as of the Effective Time of the Merger.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
Harley W. Radin, the Chairman of the Board and Chief Executive Officer of
DBSC, owns approximately 18% of the issued and outstanding shares of DBSC
Common Stock and has previously voted his DBSC Common Shares to approve the
Merger. Mr. Radin may continue in some capacity, to be determined, with
MergerCo after consummation of the Merger. In addition, DBSI which owes
EchoStar $4.0 million plus accrued interest as of September 30, 1996, owns
approximately 25% of DBSC Common Stock. The $4.0 million owed to EchoStar is
secured by 125,000 shares of DBSC common stock, among other collateral. Fred
W. Thompson, a director of DBSC, is the President and Chief Executive Officer
of DBSI, as well as a significant shareholder of DBSI. Daniel E. Moore,
Executive Vice President and Chief Financial Officer of SSE Telecom, Inc.
("SSET"), owns 2,000 shares of DBSC Common Stock and SSET owns 912,717 shares
of EchoStar Class A Common Stock. In addition, SSET currently owes EchoStar
approximately $4.8 million plus accrued
11
interest related to its convertible non-recourse debentures. These
debentures are secured by the EchoStar Class A Common Stock owned by SSET.
Charles W. Ergen, Chairman of EchoStar, also serves on the Board of Directors
of SSET. See "Risk Factors -- Factors Concerning the Merger -- Interests of
Certain Persons in the Merger."
REGULATORY APPROVALS
Under the rules and regulations of the FCC, the Merger could not be
consummated until FCC Approval had been obtained. FCC Approval of the Merger
was obtained on August 30, 1996. See "The Merger -- Federal Communications
Commission Approval."
ACCOUNTING TREATMENT
The Merger will be accounted for under the purchase method for accounting
and financial reporting purposes. See "The Merger -- Accounting Treatment."
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
It is intended that the Merger constitute a "reorganization" within the
meaning of Sections 368(a)(1)(A) and 368(a)(2)(D) of the Internal Revenue Code
of 1986, as amended (the "Code"). Sullivan & Worcester LLP, counsel to DBSC,
has advised DBSC that, based in part on certain representations made by
EchoStar and by DBSC (assuming DBSC's largest shareholders elect to receive
EchoStar Common Stock rather than cash, and limit their resales of that stock),
under current law and assuming that: (i) the Merger will be consummated as
described in the Merger Agreement; and (ii) the representations made by
EchoStar remain true as of the date of consummation of the Merger, no gain or
loss will be recognized for Federal income tax purposes by any DBSC Shareholder
upon the receipt of EchoStar Common Stock exchanged for DBSC Common Stock.
EchoStar knows of no facts which would make the representations of EchoStar
untrue as of the date of this Information Statement -- Prospectus. Under
certain circumstances and in accordance with the Merger Agreement, EchoStar is
entitled to take certain actions which may modify the representations made by
EchoStar to Sullivan & Worcester LLP regarding treatment of the Merger as a non-
taxable event. Even if EchoStar takes action which changes the tax result of
the Merger, the Merger will be consummated, and EchoStar will not incur
liability for the modified tax consequence. In any event, the Federal income
tax treatment of a DBSC Shareholder who receives cash in the Merger in exchange
for part or all of his DBSC Common Stock, including cash received in lieu of
fractional shares, will depend upon such DBSC Stockholder's particular
circumstances. See "The Merger -- Certain Federal Income Tax Consequences."
COMPARISON OF SHAREHOLDER RIGHTS
Upon consummation of the Merger, DBSC Shareholders who elect to receive
shares of EchoStar Common Stock will become owners of EchoStar, a Nevada
corporation formed in April 1995. For a comparison of Nevada and Delaware laws
and charter and bylaw provisions of EchoStar and DBSC governing the rights of
Delaware and Nevada shareholders, see "Comparison of Shareholder Rights."
MECHANICS OF EXCHANGE OF CERTIFICATES
Each DBSC Shareholder shall make an election whether to receive the Cash
Value or shares of EchoStar Common Stock (the "Share Value"), on the "Election
By DBSC Shareholder" form delivered herewith (the "Election Form"). The
Election Form must be returned to the Exchange Agent at its principal offices
located at 1825 Lawrence Street, Suite 444, Denver, Colorado 80202 by 5:00 p.m.
on or before ____________, 1996. As soon as practicable after the
Effective Time of the Merger, the Exchange Agent will mail to DBSC Shareholders
instructions for surrendering their stock certificates in exchange for the
Merger Consideration. Except for cash
12
payments in lieu of fractional shares and to the extent DBSC Shareholders
make Cash Elections, the Merger Consideration will be paid in shares of
EchoStar Common Stock.
Upon surrender of certificates, EchoStar will promptly cause to be paid to
the persons entitled thereto the Merger Consideration. No interest will be
paid or will accrue on any amount payable upon the surrender of any
certificate. After the Effective Time of the Merger, certificates which
previously represented issued and outstanding shares of DBSC Common Stock will
represent solely the right to receive the Merger Consideration multiplied by
the number of shares of DBSC Common Stock previously represented thereby.
MECHANICS OF PERFECTING APPRAISAL RIGHTS
Any DBSC Shareholder who dissents from the Merger and who follows certain
procedures is entitled to receive in cash the "fair value" of their DBSC Common
Stock. Within 10 days after the Merger is effected, EchoStar will send notice
to each DBSC Shareholder who has the right of appraisal. Within 20 days of the
date of the mailing of such notice, a dissenting DBSC Shareholder must send a
written demand for appraisal to Direct Broadcasting Satellite Corporation, a
Colorado corporation, 90 Inverness Circle East, Englewood, Colorado 80112 in
order to perfect these Appraisal Rights under Delaware law.
Within 120 days after the Effective Time of the Merger, a dissenting DBSC
Shareholder who has complied with Delaware law may file a petition in the
Delaware Court of Chancery demanding a determination of the fair value of his
DBSC Common Stock. After determining which DBSC Shareholders have complied
with Delaware law regarding appraisal rights, the court will establish a fair
value of the DBSC Common Stock and direct payment to entitled DBSC
Shareholders. See "Rights of Dissenting Shareholders."
13
SELECTED FINANCIAL DATA
The following selected financial data as of and for each of the five years
in the period ended December 31, 1995 are derived from the financial statements
of EchoStar, and the predecessor entities of EchoStar, audited by Arthur
Andersen LLP, independent public accountants. The following selected financial
data for the nine months ended September 30, 1995 and 1996 are derived from
the unaudited financial statements of EchoStar and, in the opinion of EchoStar,
include all adjustments necessary for a fair presentation of such information.
Operating results for the nine months ended September 30, 1996 are not
necessarily indicative of the results that may be achieved for the year ended
December 31, 1996. The data set forth in this table should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations," EchoStar's Combined and Consolidated Financial
Statements and the Notes thereto and the other financial information included
elsewhere in this Information Statement -- Prospectus.
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------------------------------- -----------------------
1991 1992 1993 1994 1995 1995 1996
------- ------- ------- ------- -------- ------- -------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA, RATIOS AND SATELLITE RECEIVERS SOLD)
Statement of Income Data:
Revenue:
DTH products and technical services:
Domestic . . . . . . . . . . . . $103,510 $122,433 $152,818 $111,815 $87,274 $65,726 $ 104,028
International. . . . . . . . . . 31,605 35,040 53,493 60,938 59,578 44,789 30,330
Programming . . . . . . . . . . . . . 3,890 6,436 10,770 14,540 15,096 11,479 30,853
Loan origination and participation
income . . . . . . . . . . . . . . . 608 1,179 3,860 3,690 1,942 1,277 6,818
------- ------- ------- ------- -------- ------- -------
Total revenue . . . . . . . . . . 139,613 165,088 220,941 190,983 163,890 123,271 172,029
Expenses:
DTH products and technical services . 102,810 120,826 161,447 133,635 120,178 87,619 125,532
Programming . . . . . . . . . . . . 3,549 6,225 9,378 11,670 13,610 10,297 16,508
Selling, general and administrative . 26,736 25,708 30,235 30,219 35,015 23,454 53,552
14
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------------------- -----------------------
1991 1992 1993 1994 1995 1995 1996
------- ------- ------- ------ ------- ------- -------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA, RATIOS AND SATELLITE RECEIVERS SOLD)
Depreciation and amortization . . . . 1,112 1,043 1,677 2,243 3,058 1,490 20,021
------- ------- ------- ------- -------- ------- -------
Total expenses . . . . . . . . . 134,207 153,802 202,737 177,767 171,861 122,860 199,977
------- ------- ------- ------- -------- ------- -------
Operating income (loss) . . . . . . . . . 5,406 11,286 18,204 13,216 (7,971) 411 (43,584)
Net income (loss) . . . . . . . . . . . . $ 6,192 $10,833 $20,118 $ 90 $(11,486) $(4,387) $(52,293)
------- ------- ------- ------- --------- ------- -------
------- ------- ------- ------- -------- ------- -------
Net income (loss) attributable to common
shares . . . . . . . . . . . . . . . . . $ 6,192 $10,833 $20,118 $ (848) $(12,691) $(5,290) $(53,196)
------- ------- ------- ------- -------- ------- -------
------- ------- ------- ------- -------- ------- -------
Weighted average common shares
outstanding . . . . . . . . . . . . . . 32,442 35,562 34,965 40,455
------- -------- ------- -------
------- -------- ------- -------
Net loss per common and common equivalent
share . . . . . . . . . . . . . . . . . $(0.03) $(0.36) $(0.15) $(1.31)
------- -------- ------- -------
------- -------- ------- -------
Ratio of earnings to fixed charges (1). . 4.36x 7.32x 9.63x 1.02x 0.66x 0.81x (0.07)x
Pro forma (unaudited):
Pro forma net income (2) $4,468 $7,529 $12,272
Pro forma net income per share (2)(3) . 0.14 0.23 0.38
Weighted average shares
outstanding (3) . . . . . . . . . . . 32,221 32,221 32,221
Dividends per share (7) (8) $0.33 $0.09 $0.06
------- ------- -------
------- ------- -------
OTHER DATA:
EBITDA (4) . . . . . . . . . . . . . . . $12,818(5) $12,329 $19,881 $15,459 $(4,913) $1,901 $(23,563)
15
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------------------- -----------------------
1991 1992 1993 1994 1995 1995 1996
------- ------- ------- ------- ------- ------- -------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA, RATIOS AND SATELLITE RECEIVERS SOLD)
Satellite receivers sold (in units):
Domestic . . . . . . . . . . . . . . . . . 113,000 116,000 132,000 114,000 131,000 91,000 315,000
International . . . . . . . . . . . . . . 45,000 85,000 203,000 289,000 331,000 261,000 180,000
------- ------- ------- ------- ------- ------- -------
Total . . . . . . . . . . . . . . . 158,000 201,000 335,000 403,000 462,000 352,000 495,000
------- ------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- ------- -------
AT DECEMBER 31, AT SEPTEMBER 30,
----------------------------------------------- -----------------------
1991 1992 1993 1994 1995 1996
------- ------- ------- ------- ------- -------
(UNAUDITED)
(IN THOUSANDS)
Balance Sheet Data:
Cash, cash equivalents and marketable
investment securities . . . . . . . . . . $20,359 $22,031 $27,232 $245,375(6) $137,115(6) $ 250,111(6)
Working capital . . . . . . . . . . . . . . 38,597 44,268 35,563 52,711 52,999 91,797
Total assets . . . . . . . . . . . . . . . 72,547 88,529 106,476 472,492 623,091 1,081,489
Long-term obligations (less current portion):
1994 Notes, net . . . . . . . . . . . . . -- -- -- 334,206 382,218 422,777
1996 Notes, net . . . . . . . . . . . . . -- -- -- -- -- 372,570
Notes payable to stockholder . . . . . . 234 2,274 14,725 -- -- --
Other long-term obligations . . . . . . . 5,028 4,876 4,702 5,393 33,444 54,320
16
- ----------------------
(1) For purposes of the ratio of earnings to fixed charges, earnings consist
of earnings from continuing operations before income taxes, plus fixed
charges. Fixed charges consist of interest incurred on all indebtedness
and rental expense under non-cancelable operating leases.
(2) EchoStar's subsidiaries operated under Subchapter S of the Code and
comparable provisions of applicable state income tax laws until
December 31, 1993. The amounts shown reflect net income as if EchoStar
had been subject to corporate federal and state income taxes during such
periods. See Notes 2 and 7 of Notes to EchoStar's Combined and
Consolidated Financial Statements as of December 31, 1995 included
elsewhere in this Information Statement -- Prospectus.
(3) Earnings per share has been calculated and presented on a pro forma basis
as if the shares of EchoStar issued to reflect the December 31, 1993
reorganization were outstanding for all periods presented. See Notes 1
and 7 of EchoStar's Notes to Combined and Consolidated Financial
Statements as of December 31, 1995 included elsewhere in this
Information Statement -- Prospectus.
(4) EBITDA represents earnings before interest income, interest expense, net
of other income and expenses, income taxes, depreciation and amortization.
EBITDA is commonly used in the telecommunications industry to analyze
companies on the basis of operating performance, leverage and liquidity.
EBITDA is not intended to represent cash flows for the period, nor has it
been presented as an alternative to operating income as an indicator of
operating performance and should not be considered in isolation or as a
substitute for measures of performance prepared in accordance with
generally accepted accounting principles. See EchoStar's Combined and
Consolidated Statements of Cash Flows in EchoStar's Combined and
Consolidated Financial Statements contained elsewhere in this Information
Statement -- Prospectus.
(5) Excludes $6.3 million in non-recurring charges.
(6) Includes Restricted Cash and Marketable Investment Securities.
(7) Dividends per share have been adjusted for dividends declared to pay S
corporation stockholder tax payments and dividends which were reinvested
in EchoStar for the EchoStar DBS System.
(8) EchoStar has not paid any dividends on common stock since it reorganized
under a single holding company on December 31, 1993. See Notes 1 and 7
of EchoStar's Notes to Combined and Consolidated Financial Statements as of
December 31, 1995 included elsewhere in this Information Statement --
Prospectus.
17
THE ECHOSTAR ORGANIZATION(1)
The following chart illustrates where significant DBS assets and rights are,
or are expected to be, held:
ECHOSTAR
COMMUNICATIONS
CORPORATION(1)
NASDAQ: DISH
DIRECT BROADCASTING ECHOSTAR ECHOSTAR SATELLITE ECHOSTAR DISH NETWORK
SATELLITE DBS CORPORATION BROADCASTING SPACE CORPORATION CREDIT CORPORATION
CORPORATION CORPORATION
- - ECHOSTAR III SATELLITE(5) - ECHOSTAR IV SATELLITE ISSUER OF THE - LAUNCH CONTRACTS - CONSUMER FINANCING
- - 11 FREQUENCIES - 24 FREQUENCIES SENIOR ECHOSTAR III AND OF ECHOSTAR RECEIVER
62.5Deg. WL 148Deg. WL(2) SECURED ECHOSTAR IV SYSTEMS
- - 11 FREQUENCIES 175Deg. WL NOTES
DISH, LTD.
ISSUER OF THE
1994 NOTES
HOUSTON TRACKER ECHOSPHERE ECHOSTAR ECHOSTAR DIRECTSET
SYSTEMS, INC. CORPORATION SATELLITE INTERNATIONAL CORPORATION
CORPORATION CORPORATION
- - U.S. DISTRIBUTION OF - U.S. DISTRIBUTION OF - ECHOSTAR I - INTERNATIONAL - ECHOSTAR II SATELLITE(4)
DTH PRODUCTS AND DTH PRODUCTS AND SATELLITE(3) DISTRIBUTION - 10 FREQUENCIES
ECHOSTAR RECEIVER ECHOSTAR RECEIVER - LAUNCH CONTRACT FOR OF DTH 119Deg. WL
SYSTEMS TO SYSTEMS TO SATELLITE ECHOSTAR II PRODUCTS - 11 FREQUENCIES
ECHOSPHERE AND OTHER RETAILERS - 11 FREQUENCIES 119Deg. 175Deg. WL
DISTRIBUTORS WL - 1 FREQUENCY 110Deg. WL
- - DBS RESEARCH AND - 10 FREQUENCIES
DEVELOPMENT 175Deg. WL(2)
- 1 FREQUENCY 166Deg. WL(2)
- DBS PROGRAMMING
CONTRACTS
- DIGITAL BROADCAST
CENTER
- ----------
(1) Each subsidiary of EchoStar listed in this chart is directly or indirectly
wholly owned.
(2) Subject to FCC approvals and findings and pending court proceedings.
(3) EchoStar has also received an STA for the remaining five frequencies on
EchoStar I which has currently been extended through December 1996. There
can be no assurance that the EchoStar I STA will be further extended.
(4) The conditional permit for EchoStar's second satellite ("Directsat I") is
held by Directsat Corporation, a wholly-owned subsidiary of Dish, Ltd.
("Directsat"). Consequently, Dish, Ltd. effectively controls the Directsat
I Satellite, which is referred to elsewhere in this Information
Statement -- Prospectus as "EchoStar II."
(5) The conditional permit for EchoStar's third satellite ("DBSC I") is held
by DBSC which will be merged with and into MergerCo upon effectiveness of
the Merger. DBSC I is referred to elsewhere in this Information
Statement -- Prospectus as "EchoStar III."
18
COMPARATIVE PER SHARE DATA
The following table summarizes certain unaudited selected financial
information on a pro forma and pro forma equivalent per share basis and is
derived from, should be read in conjunction with, and is qualified in its
entirety by reference to, the historical financial statements of EchoStar and
DBSC which are included elsewhere in this Information Statement -- Prospectus.
The information presented in this table is for informational purposes only and
is not necessarily indicative of future combined earnings or financial position
or of combined earnings or financial position that would have been reported had
the Merger been completed at the beginning of the period or as of the date for
which such unaudited pro forma information is presented.
COMPARISON OF HISTORICAL AND EQUIVALENT STOCK VALUES
ECHOSTAR AND DBSC
(UNAUDITED)
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
1995 1996
------------- -------------
ECHOSTAR (1):
Historical net loss per common share, primary
and fully diluted . . . . . . . . . . . . . . $(0.36) $(1.31)
Pro forma combined loss from continuing
operations per common share, primary
and fully diluted (2)(3) . . . . . . . . . . . (0.36) (1.30)
Historical book value per common share,
primary and fully diluted . . . . . . . . . . 3.46 2.15
Pro forma combined book value per
common share, primary and fully
diluted (2)(4) . . . . . . . . . . . . . . . . 3.70 2.41
DBSC (1):
Historical net loss per common share,
primary and fully diluted . . . . . . . . . . . $(0.19) $(0.14)
Equivalent pro forma loss from continuing
operations per common share, primary
and fully diluted (5) . . . . . . . . . . . . . . (0.24) (0.87)
Historical book value per common share,
primary and fully diluted . . . . . . . . . . . 1.01 0.86
Equivalent pro forma book value per
common share, primary and fully diluted (5) . . . 2.49 1.63
- ----------
(1) EchoStar and DBSC have not paid cash dividends on common shares during the
year ended December 31, 1995, or the six months ended June 30, 1996.
(2) Pro forma combined loss from continuing operations and pro forma book
value per common share reflects the issuance of approximately 658,000
shares of EchoStar Class A Common Stock assumed to be issued in
connection with the Merger.
(3) Pro forma combined loss from continuing operations includes a pro forma
income tax benefit of approximately $100,000 and $83,000 for DBSC for
the year ended December 31, 1995, and the nine months ended
September 30, 1996, respectively.
(4) Pro forma combined book value per common share was computed by adding
658,000 shares of EchoStar Class A Common Stock assumed to be issued in
connection with the Merger multiplied by the assumed stock price of $18.54
which is the 10-day average closing price of EchoStar's Class A Common
Stock as of December 28, 1995. The average share price used in this
calculation represents the average price of EchoStar's Class A Common
Stock for the five days immediately preceding and immediately following
December 21, 1995, the date which EchoStar and DBSC entered into a Plan
and Agreement of Merger.
19
(5) Equivalent pro forma data for DBSC were computed by multiplying the pro
forma combined per share data of EchoStar by the .67417 Exchange Ratio. The
equivalent pro forma per share information can be used for a comparison
with the historical per share data of DBSC.
20
RISK FACTORS
THE FOLLOWING FACTORS RELATING TO ECHOSTAR AND THE MERGER SHOULD BE
CONSIDERED CAREFULLY BY DBSC SHAREHOLDERS IN MAKING AN ELECTION WITH RESPECT TO
THE MERGER CONSIDERATION.
FACTORS CONCERNING ECHOSTAR
COMPETITION FROM DBS AND OTHER SATELLITE SYSTEM OPERATORS. The pay
television provider industry is highly competitive. EchoStar faces competition
from companies offering video, audio, data, programming and entertainment
services. Many of these competitors have substantially greater financial and
marketing resources than EchoStar. See "EchoStar Communications Corporation --
Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
EchoStar competes with companies offering programming through various
satellite broadcasting systems. One competitor, DirecTv, has launched three
DBS satellites. DirecTv and USSB, which owns five transponders on one of
DirecTv's satellites, currently offer approximately 200 channels of combined
DBS video programming. DirecTv currently has approximately 1.9 million
subscribers, approximately one-half of which also subscribe to USSB
programming. EchoStar currently has the capacity to provide approximately
150 channels of digital video programming. However, EchoStar's authority to
provide 30 of those channels (i.e. five of the frequencies) expires in December
1996, unless the FCC further extends the EchoStar I STA (as described below) to
operate those channels, of which there can be no assurance. The STA would be
terminated sooner if Tempo, to whom those five frequencies have been assigned,
launches a DBS satellite to the 119 DEG.WL orbital slot this year. As a
result, EchoStar is currently at a competitive disadvantage to DirecTv and USSB
with regard to number of channels of programming, market entry, and, possibly,
volume discounts for programming offerings. In addition, in the event
desirable pay-per-view or other popular programming is secured by competitors
of EchoStar on an exclusive basis, it will be unavailable to EchoStar's DISH
Network-SM-. DirecTv currently offers subscribers the NFL Sunday Ticket-TM- ,
which is available to DirecTv on an exclusive basis. There may be additional
sports and other programming offered by other pay television providers that
will not be available on the DISH Network-SM-. See "EchoStar Communications
Corporation -- Business -- Competition -- DBS Industry -- Other DBS Operators."
AT&T Corporation ("AT&T") and DirecTv have an exclusive agreement for AT&T
to market and distribute DirecTv's DBS service and related equipment to AT&T's
customer base. As part of the agreement, AT&T made an initial investment of
approximately $137.5 million to acquire 2.5% of the equity of DirecTv with an
option to increase its investment to up to 30% over five years. This agreement
provides a significant base of potential customers for the DirecTv DBS system
and allows AT&T and DirecTv to offer customers a package of entertainment and
communications services. As a result, EchoStar is at a competitive
disadvantage marketing to these customers. AT&T and DirecTv also announced
plans to jointly develop new multi-media services for DirecTv under the
agreement. The AT&T and DirecTv agreement will increase the competition
EchoStar encounters in the overall market for pay television customers.
At a public auction of DBS satellite frequencies held by the FCC in January
1996 (the "FCC Auction"), MCI Communications Corporation ("MCI") entered the
winning bid of $682.5 million to acquire the permit for 28 of 32 frequencies at
the 110 DEG. WL orbital slot. MCI and News Corp. ("News") have formed a joint
venture to build and operate a DBS system at the 110 DEG. WL orbital location
offering television programming and business communications services. The
license will give MCI and News the capacity to offer over 200 channels of
digital video programming across the continental U.S. MCI and News reportedly
expect that building and launching the satellites for their system will cost
approximately an additional $1 billion and that DBS services will be offered to
consumers and businesses in approximately 18 months. However, if MCI and News
acquire satellites which have already been constructed, service could begin
sooner. MCI and News have substantially greater
21
resources than EchoStar and their joint venture will increase the competition
EchoStar encounters in the market for pay television customers.
PrimeStar, owned by a consortium of several cable companies, including
TeleCommunications, Inc. ("TCI"), the largest cable television company in the
United States, currently offers medium power Ku-band programming service to
customers using dishes which are generally three feet in diameter. PrimeStar's
earlier entry into the market, its relationship with cable programmers and its
substantial resources provide PrimeStar with certain competitive advantages
including an option whereby consumers can purchase the service for a monthly
fee which does not include a hardware purchase. PrimeStar currently has
approximately 1.4 million subscribers and is expected to offer medium power
programming services to customers using smaller dishes (approximately two feet
in diameter) upon the successful launch of a GE American Communications Inc.
("GE Americom") satellite during 1997. TCI also owns two DBS satellites that
are expected to be launched in the next six months. Tempo, a wholly-owned
subsidiary of TCI, has a DBS construction permit for 11 frequencies at each of
119 DEG. WL and 166 DEG. WL. PrimeStar may have the right to offer DBS
programming services from these satellites. If PrimeStar does not exercise its
right, it is expected that Tempo will use these satellites to directly enter
the DBS programming business, and may launch satellites capable of providing
service to the continental United States during early 1997. EchoStar is at a
competitive disadvantage to PrimeStar with regard to market entry, programming
and, possibly, volume discounts for programming offerings, particularly if
PrimeStar aggregates its DBS and cable affiliates' customers for volume
discounts.
During March 1996, Tee-Comm Electronics, Inc. ("Tee-Comm"), a Canadian
company, through an affiliate AlphaStar Television Network ("AlphaStar"), began
offering digital video and audio DTH programming in the United States on a
limited basis, and intends to expand to 120 channels later this year, and
200 channels by the end of 1997. The medium power Ku-band satellite on which
AlphaStar is leasing transponders requires that customers use dishes
approximately 24 to 36 inches in diameter. See "EchoStar Communications
Corporation -- Business -- Competition -- DBS Industry -- Other DBS Operators."
EchoStar's DBS competitors subsidize the price of their DBS receiver systems
to increase subscriber penetration. Since August 1996, EchoStar has
introduced several marketing promotions, the most significant of which is a
nationwide marketing promotion (the "EchoStar Promotion") which offers a
standard EchoStar Receiver System to consumers for $199 (as compared to the
original average retail price in March 1996 of approximately $499),
conditioned upon the consumer's prepaid purchase of one year of America's Top
50 CD-SM- programming package for approximately $300. The primary purposes of
the EchoStar Promotion are to rapidly build a subscriber base, to expand
retail distribution of EchoStar's products and to build consumer awareness of
the DISH Network-SM- brand. It is expected that in the near term, the EchoStar
Promotion will have a negative impact on the Company's profit margins and cash
flow as compared to the pricing of EchoStar Receiver Systems assumed for the
Company's original business strategy and growth projections.
In late August 1996, DirecTv announced a promotion which entitles a consumer
to purchase an entry level DirecTv compatible satellite system with the
prepayment of an annual basic programming package. The net cost of the
satellite system, including the annual programming package, is approximately
$559 after the consumer receives a $200 mail-in rebate from DirecTv. In early
October 1996, PrimeStar announced a similar promotion. These developments,
among others, will provide additional competition to EchoStar. See "EchoStar
Communications Corporation -- Business -- Competition."
The FCC has indicated that it may apply to the International
Telecommunications Union ("ITU"), which allocates spectrum worldwide, for the
allocation to the United States of additional orbital locations from which DBS
service could be provided to the entire continental United States. Further,
Canada, Mexico and other countries hold the rights to DBS orbital slots which
are capable of providing service to the continental United States. If the FCC
moves forward with this initiative, or if other countries authorize DBS
providers to utilize
22
their orbital slots to serve the continental United States and the FCC
authorizes such service to be received in the continental United States
(which is likely to occur), additional competition could be created, and
EchoStar's frequencies could become less valuable. TelQuest, Inc., a joint
venture including NYNEX and Bell Atlantic ("TelQuest"), has applied to the
FCC for authority to provide DBS service to the United States from a Canadian
DBS orbital location at 91 DEG. WL. A TCI subsidiary, Western
TeleCommunications, Inc. ("WTCI"), has made a similar application to the FCC
to provide DBS service to the United States from the Canadian 82 DEG. WL
orbital location. Telesat Canada ("Telesat") has received conditional
approval in principal from the Canadian Ministry of Industry to use these two
Canadian orbital slots in the manner proposed by TelQuest and WTCI. Both
locations are capable of providing DBS service to the entire continental
United States. Tempo has completed construction of two DBS satellites which
WTCI proposes to use to provide DBS service to the United States from the
82 DEG. WL orbital slot. One of the satellites is expected to be launched in
December 1996 and the other is expected to be launched early next year. The
FCC dismissed the WTCI and TelQuest applications without prejudice. The FCC
ruled that the applications were premature because the Canadian regulatory
authorities have not yet assigned Telesat the orbital locations from which
WTCI and TelQuest have requested the right to broadcast. The FCC stated that
WTCI and TelQuest could refile if and when the Canadian regulatory
authorities give clear direction that the 82 DEG. WL and 91 DEG. WL orbital
locations will be allocated to Telesat for use in the WTCI and TelQuest
ventures. The FCC noted that the Executive Branch, including the Office of
the United States Trade Representative and the United States Department of
Justice, raised concerns which any renewal application would need to
address. WTCI and TelQuest both asked that the FCC reconsider its decision
to dismiss their applications. The FCC has now declined the request for
reconsideration. TCI has also indicated that it may have an opportunity to
launch into a Mexican orbital location. TCI recently confirmed its
intention to launch a DBS satellite into the 119 DEG. WL orbital location
assigned to Tempo. Assuming a successful launch by TCI of a DBS satellite
into the 119 DEG. WL orbital location, then the applicable STA granted by the
FCC for EchoStar I, and presumably any granted in the future for EchoStar II
at that location, would terminate. If either STA granted by the FCC were
terminated, EchoStar could not provide as many channels as some of its
competitors without launching additional satellites at other orbital
locations and would be at a competitive disadvantage because the DISH Network
would be limited to a 21 frequency service at 119 DEG. WL. See "EchoStar
Communications Corporation -- Business -- Competition -- DBS Industry --
Other DBS Operators."
There are a number of additional methods by which programming can be
delivered via satellite, including low and medium power C-band satellite
services, Ka-band, Ku-band, and high power extended Ku-band satellite
services. As these and other services continue to develop they will provide
additional competition to EchoStar. See "EchoStar Communications Corporation
- -- Business -- Competition."
COMPETITION FROM CABLE TELEVISION AND OTHER TERRESTRIAL SYSTEMS. The
EchoStar DBS System encounters substantial competition in the overall market
for pay television households, including cable television. Cable television
operators have a large, established customer base, and many cable operators
have significant investments in, and access to, programming. Cable television
service is currently available to approximately 90% of the approximately
96 million U.S. television households, and over 60% of total television
households currently subscribe to cable. EchoStar's programming is not
available to households lacking a clear line of sight to EchoStar's current
orbital location, or to households in apartment complexes or other multiple
dwelling units that do not facilitate or allow the installation of EchoStar
Receiver Systems. In addition, subscribers to the DISH Network-SM- do not have
access to certain local broadcast channels which are otherwise generally
available from cable operators. DISH Network-SM- subscribers desiring to access
local broadcast channels are required to receive such channels via off-air
antenna, the quality of which may be inferior to the reception provided by
cable operators. See "EchoStar Communications Corporation -- Business --
Competition -- DBS Industry -- Cable Television."
In addition, TCI has announced that, if it should successfully launch a DBS
satellite into the 119 DEG. WL orbital slot, it may provide digital programming
from its DBS satellite to TCI and other cable subscribers who elect to
subscribe to this digital service for an additional fee. TCI's DBS satellite
would allow TCI to provide at least 65 digital video channels to cable
subscribers. These subscribers could maintain current cable
23
programming service, including local programming. Through the use of a
digital set top receiver system, a household subscribing to cable programming
and TCI's DBS digital programming could simultaneously view digital video
programming on one television and different cable programming on any number
of other televisions. DISH Network-SM- subscribers would have to purchase
multiple EchoStar Receiver Systems in order to view different programming on
different televisions simultaneously. TCI's complementary DBS service could
make cable a stronger competitor to the DISH Network-SM-.
There are also a number of other terrestrial systems for delivering
multiple channels of television programming. These include "wireless cable"
systems such as MMDS, and satellite master antenna television ("SMATV") and
private cable service for multiple dwelling units as well as new and advanced
technologies such as Local Multichannel Delivery Services ("LMDS"), and video
via existing telephone lines, each of which are still in the development
stage. In addition, digital video compression and fiber optic networks and
open video systems are being implemented and supported by entities such as
regional telephone companies which are likely to have greater resources than
EchoStar. When fully deployed, these new technologies could have a material
adverse effect on the demand for DBS services. There can be no assurance
that EchoStar will be able to compete successfully with existing competitors
or new entrants in the market for pay television services. See "EchoStar
Communications Corporation -- Business -- Competition -- DBS Industry --
Wireless Cable and Other Terrestrial Systems."
LIMITATIONS ON INSURANCE AND WARRANTIES. Pursuant to satellite construction
contracts between Lockheed Martin and each of DBSC and EchoStar DBS
Corporation ("EchoStar DBS") (collectively the "Satellite Contracts"), and
EchoStar Space Corporation's launch services contracts (the "Launch
Contracts"), DBSC and EchoStar DBS are the beneficiaries of certain limited
warranties on their satellites and launch vehicles. However, the limited
contractual warranties do not cover a substantial portion of the risk inherent
in satellite launches or satellite operations.
Although EchoStar has obtained launch insurance for EchoStar II, and
in-orbit insurance for EchoStar I, it is also required under the indenture
(the "1994 Indenture") pursuant to which a subsidiary of EchoStar, Dish,
Ltd., issued its 12 7/8 Senior Secured Discount Notes due 2004 (the "1994
Notes"), to obtain in-orbit insurance for EchoStar II, is required under the
indenture (the "1996 Indenture") pursuant to which another subsidiary, ESBC,
issued its 13 1/8 Senior Secured Discount Notes due 2004 (the "1996 Notes"),
to obtain launch and in-orbit insurance for EchoStar III. EchoStar has
obtained the launch insurance required for EchoStar II and has obtained
binders for the launch insurances required for EchoStar III and EchoStar IV
all including in-orbit insurance for 365 days after launch. However, there
can be no assurance that EchoStar will be able to obtain insurance for
EchoStar III and EchoStar IV or maintain insurances. The insurance policies
contain (or are expected to contain) standard commercial satellite insurance
provisions, including a material change condition, which, if successfully
invoked, will give carriers the ability to increase the cost of the insurance
(potentially to a commercially impracticable level), require exclusions from
coverage which would leave the risks uninsured or rescind their coverage
commitment entirely. See "EchoStar Communications Corporation -- Business --
Operation of the EchoStar DBS System -- Insurance."
If the launch of any EchoStar satellite is a full or partial failure or if,
following launch, any EchoStar satellite does not perform to specifications,
there may be circumstances in which insurance will not fully reimburse EchoStar
for its expenditures. In addition, insurance will not reimburse EchoStar for
business interruption, loss of business and similar losses which might arise
from delay in the launch of any EchoStar satellite. See "EchoStar
Communications Corporation -- Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources."
LIMITED MARKETING EXPERIENCE. EchoStar began marketing the EchoStar
Receiver System in March 1996. The Company is marketing its EchoStar Receiver
Systems throughout the United States through its own sales and marketing
organization using national and regional broadcast and print advertising,
independent distributors and retailers and consumer electronics stores and
outlets. At this early stage of product marketing, the Company's success
depends in large part upon the ability of EchoStar to successfully demonstrate
to consumers the ease of use, reliability and cost-effectiveness of the
EchoStar Receiver System and upon the Company's ability
24
to have the EchoStar Receiver System placed in widely used consumer marketing
channels, such as consumer electronics stores and outlets.
EchoStar is presently selling the EchoStar Receiver System, including its
HTS-branded EchoStar Receiver System, through a limited number of consumer
electronics stores. Some of EchoStar's competitors, including its principal
DBS competitor, DirecTv, began selling their products through consumer
electronics stores before EchoStar and, as a result, are carried by a greater
number of retailers and have a competitive advantage in the consumer
electronics distribution channel. This is particularly true in the case of
those consumer electronics outlet chains that have chosen, for the time being,
to sell only one or a limited number of DBS receiver products. Consequently,
there can be no assurance that EchoStar will be able to effectively market its
EchoStar Receiver Systems.
DEPENDENCE ON SINGLE RECEIVER MANUFACTURER. EchoStar has agreements with
two manufacturers to supply DBS receivers for EchoStar. Only one of EchoStar's
manufacturers has produced a receiver acceptable to EchoStar. EchoStar has
previously deposited $10.0 million with the nonperforming manufacturer and has
an additional $15.0 million in an escrow account as security for EchoStar's
payment obligations under that contract. EchoStar has given this nonperforming
manufacturer notice of its intent to terminate the contract, and therefore
EchoStar is currently dependent on one manufacturing source for its receivers.
The performing manufacturer is presently manufacturing receivers in sufficient
quantities to meet currently expected demand. If EchoStar's sole manufacturer
is unable for any reason to produce receivers in a quantity sufficient to meet
demand, EchoStar's liquidity and results of operations may be adversely
affected. There can be no assurance EchoStar will be able to recover all
amounts deposited with the nonperforming manufacturer or otherwise held in
escrow.
CONSUMER-DRIVEN DEMAND. EchoStar's current dependence on a single receiver
manufacturer also inhibits the Company's ability to market its receivers as
effectively as it would like. Some of the Company's competitors (such as
DirecTv) have arrangements with major consumer electronic product manufacturers
and distributors (such as Sony and RCA) whereby the major consumer products
companies manufacture and sell DBS receivers that bear the trademark of the
well-known consumer products company, while at the same time allowing consumers
to receive the programming of the DBS competitor. This type of arrangement
between the Company's DBS competitors and major consumer products companies
gives the Company's competitors a distinct, significant consumer marketing
edge.
At this time, EchoStar has its EchoStar Receiver System manufactured by one
manufacturer, SCI Technology, Inc. ("SCI"). The Company currently does not
have arrangements with large consumer products manufacturers like those of
DirecTv. As a result, EchoStar's receivers (and consequently its programming
services) are, for now, less well known to consumers than those of some of its
principal competitors, and EchoStar, due in part to the lack of consumer-driven
product recognition and demand, has not had as much success in having the
EchoStar Receiver System carried for sale in consumer electronic stores or
outlets as EchoStar would like or as may be necessary for EchoStar's financial
success.
IMPEDIMENTS TO BROADCASTING LOCAL PROGRAMMING. The Satellite Home Viewer
Act establishes a "compulsory" copyright license that allows a DBS operator,
for a statutorily-established fee, to retransmit network programming to
subscribers for private home viewing so long as that retransmission is limited
to those persons in unserved households who cannot receive through the use of a
conventional outdoor rooftop antenna a sufficient over-the-air signal of a
primary affiliate of that network and have not, within 90 days before
subscribing to the DBS service, subscribed to a cable service that provides the
signal of a primary network affiliate of that network. This compulsory license
therefore enables EchoStar to import distant network programming to those
otherwise unable to receive such programming through normal broadcast.
EchoStar's ability to transmit locally produced programming via satellite
into the local markets from which the programming is generated is important to
EchoStar's success. In order to retransmit local programming into a local
market, EchoStar must obtain the retransmission consent of the local carrier
and copyright licenses from the holders of the copyrights of the programming.
EchoStar intends to offer local programming in the 40 largest U.S. television
markets and may find negotiating the necessary consent and licenses in all
those markets
25
impractical. EchoStar accordingly believes that it needs to prepare, lobby
for and see enacted national legislation amending the Satellite Home Viewer
Act that would clarify or extend the application of the "compulsory"
copyright license to satellite operators transmitting local programming into
local markets. There can be no assurance that EchoStar will be successful in
having such copyright legislation enacted.
RISK OF SIGNAL THEFT. The delivery of subscription programming requires the
use of encryption technology. Historically, signal theft or "piracy" in the
C-band DTH, cable television and European DBS industries has been widely
reported. Recent published reports indicate that the DirecTv and USSB
encryption systems have been compromised. There can be no assurance that theft
of DBS programming will not adversely affect EchoStar's operations. Although
EchoStar has contracted with a vendor to provide an encryption system, there
can be no assurance that the encryption technology utilized in connection with
the EchoStar DBS System will be totally effective. If EchoStar's encryption
technology is compromised in a manner which is not promptly corrected,
EchoStar's revenue and its ability to contract for video and audio services
provided by programmers would be adversely affected.
EXPECTED OPERATING AND NET LOSSES. Due to the substantial expenditures
required to complete development, construction and deployment of the EchoStar
DBS System and the introduction of its DISH Network-SM- service to consumers,
EchoStar experienced operating and net losses in 1995 and anticipates that it
will experience operating losses through at least 1997 and net losses through
at least 1998. There can be no assurance that losses will not continue or that
EchoStar's operations will generate sufficient cash flows to pay its
obligations, including its obligations on the 1994 Notes and the 1996 Notes.
In addition, effective August 1, 1996, EchoStar began offering its EchoStar
Promotion nationwide. It is expected that in the near term, the EchoStar
Promotion will have a negative impact on the Company's net income and cash
flow as compared to the pricing of EchoStar Receiver Systems assumed for the
Company's original business strategy and growth projections.
POSSIBLE DELISTING OF ECHOSTAR COMMON STOCK FROM NASDAQ. In order to
continue to be designated as a NASDAQ National Market security, the issuer of
the security must meet certain maintenance criteria. Among other things, the
issuer of a NASDAQ National Market security must have net tangible assets of at
least: (i) $1 million; or (ii) $2 million if the issuer has sustained losses
from continuing operations and/or net losses in two of its three most recent
fiscal years; or (iii) $4 million if the issuer sustained losses from
continuing operations and/or net losses in three of its four most recent fiscal
years. It is possible that EchoStar's net tangible assets will not meet the
NASDAQ maintenance requirement as early as 1997. In the event EchoStar cannot
satisfy NASDAQ's listing criteria, the EchoStar Common Stock will be subject to
being delisted unless an exception is granted by the NASD. In that case,
EchoStar could request a review by a Committee of the NASD Board of Governors.
The Committee may grant or deny continued designation on the basis of written
submission by a company and any additional data it deems relevant.
Determinations of the Committee may be appealed to the NASD Board of Governors.
If an exception were not granted, trading in EchoStar Common Stock would
thereafter be conducted in the over-the-counter market. Consequently, an
investor may find it more difficult to dispose of, or to obtain accurate
quotations as to the price of, the EchoStar Common Stock.
RISK OF SATELLITE DEFECT, LOSS OR REDUCED PERFORMANCE. Satellites are
subject to significant risks, including satellite defects, launch failure,
destruction and damage that may result in incorrect orbital placement or
prevent proper commercial operation. Approximately 15% of all commercial
geosynchronous satellite launches have resulted in a total or constructive
total loss. The failure rate varies by launch vehicle and manufacturer.
Launch delays could result from weather conditions or technical problems
with any EchoStar satellite or any launch vehicle utilized by the launch
providers for EchoStar III, EchoStar IV, or from other factors beyond
EchoStar's control.
26
In the event of a launch failure of EchoStar III, under the 1996 Indenture
EchoStar would be required to use the proceeds from any launch insurance to
purchase satellites or, at ESBC's option, to make an offer to repurchase the
maximum amount of 1996 Notes that can be purchased with those proceeds. See
"EchoStar Communications Corporation -- Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
In addition, a number of satellites constructed by Lockheed Martin over the
past three years have experienced defects resulting in total or partial loss
following launch. The type of failures experienced have varied widely.
Lockheed Martin constructed EchoStar I and EchoStar II and is constructing
EchoStar III and EchoStar IV. No assurances can be given that EchoStar I,
EchoStar II, EchoStar III or EchoStar IV will perform according to
specifications.
FCC AUCTION RISKS. Several parties, including EchoStar, DBSC and
Directsat, have petitioned the U.S. Court of Appeals for the D.C. Circuit to
review on a variety of grounds the FCC's Report & Order which determined to
auction frequencies at 110 DEG. WL and 148 DEG. WL. Several other parties
have also appealed a related Order where the FCC reclaimed the channels that
were auctioned from another DBS permittee, Advanced, for failing to construct
its satellites in a timely manner. The Court has affirmed the FCC Order
reclaiming channels at 110 DEG. WL and 148 DEG. WL. The FCC's action
resulted in frequencies becoming available for FCC auction at which EchoStar
purchased 24 frequencies at 148 DEG. WL for $52.3 million. The FCC's
decision to auction the reclaimed frequencies has been appealed by EchoStar,
Directsat, DBSC and DirecTv. If the FCC's actions are overturned, EchoStar's
purchase of the 24 frequencies at 148 DEG. WL could be voided, EchoStar could
be required to repurchase up to $52.3 million of the 1996 Notes and EchoStar
could be granted up to 15 channels at 148 DEG. WL, without charge, pursuant
to an FCC policy that allocates unassigned frequencies to existing DBS
service providers.
RESTRICTIONS ON EXPORT OF TECHNOLOGY AFFECTING LAUNCH OF ECHOSTAR'S
SATELLITES. EchoStar has contracted with Lockheed-Khrunichev-Energia
International, Inc. ("LKE") for the launch of EchoStar IV. LKE is a joint
venture between Lockheed Martin and two Russian Federation state owned
enterprises. The proposed launch site is located in the Kazakh Republic in the
former Soviet Union. In order for EchoStar IV to be launched from Kazakhstan,
the satellite contractor will need to obtain a technical data exchange license
and a satellite export license from the United States government. There can be
no assurance those licenses can be obtained in a timely manner to avoid a
launch delay.
Given the potential instability of political, economic and social conditions
in the Russian Federation and Kazakhstan, and in light of certain demands by
the United States regarding human rights and arms proliferation, there can be
no assurance that the United States government will not at some future date
impose sanctions against Russia or Kazakhstan that would prevent issuance, or
result in revocation, of the technical data license and/or the export license
with respect to EchoStar IV. Any such action would prevent EchoStar from
launching EchoStar IV as and when intended, resulting in significant delays
that would adversely affect expected operating results for the EchoStar DBS
System. See "EchoStar Communications Corporation -- Business -- Government
Regulation -- Export Regulation."
POLITICAL RISKS PERTAINING TO LAUNCH PROVIDERS. EchoStar has contracted
with LKE for a 1998 launch. LKE launches occur in the Kazakh Republic and
require coordination with the governments of Russia and Kazakhstan. Any
political or social instability, such as that currently being experienced in
the former Soviet block countries, could affect the cost, timing and overall
advisability of utilizing LKE as launch provider for EchoStar's satellites.
See "EchoStar Communications Corporation -- Business -- Operation of the
EchoStar DBS System -- Satellite Launches."
RISKS OF ADVERSE EFFECTS OF GOVERNMENT REGULATION. EchoStar is subject to
the regulatory authority of the United States government and the national
communications authorities of the countries in which it operates.
27
The business prospects of EchoStar could be adversely affected by the
adoption of new laws, policies or regulations, or changes in the
interpretation or application of existing laws, policies and regulations,
that modify the present regulatory environment.
The FCC authorizations for all of EchoStar's satellites (including for
purposes of this paragraph, the satellites for which EchoStar Satellite
Corporation ("ESC"), Directsat, EchoStar DBS and DBSC hold or are expected to
hold authorizations) require EchoStar to comply with all applicable
requirements of the Communications Act of 1934, as amended (the "Communications
Act"), and FCC rules, policies and orders, including, specifically, compliance
with construction and launch milestones and periodic filing of progress
reports. In the event EchoStar at any time fails to comply with applicable
Communications Act requirements and FCC rules, policies and orders, including
FCC Due Diligence Requirements, the FCC has the authority to revoke, modify or
decline to extend or renew the authorizations for that and any subsequent
satellites and, in connection with that action, could exercise its authority to
rescind these authorizations. The FCC has granted EchoStar conditional
authority to use C-band frequencies for telemetry, tracking and control
("TT&C") functions for EchoStar I, stating that the required coordination
process with Canada and Mexico had been completed. However, the FCC
subsequently received a communication from an official of the Ministry of
Communications and Transportation of Mexico stating that EchoStar I's TT&C
operations could cause unacceptable interference to Mexican satellites. There
can be no assurance that such objections will not subsequently require EchoStar
to relinquish the use of these C-band frequencies for TT&C purposes. The
inability to control the satellite would result in a total loss of the
satellite. Further, the FCC has granted EchoStar conditional authority to use
C-band frequencies for TT&C function for EchoStar II, but only until January 1,
1999, at which time the FCC will review the suitability of those frequencies
for TT&C operations. There can be no assurance that the FCC will extend the
authorization to use C-band frequencies for TT&C purposes. The inability to
control EchoStar II would result in a total loss of the satellite. In
addition, EchoStar will require further FCC authorization to operate, or launch
and operate, all of EchoStar's satellites. Certain of EchoStar's pending and
future requests to the FCC for extensions, waivers and approvals have been, and
are expected to continue to be, opposed by third parties. There can be no
assurance that EchoStar's requests will be granted or, if granted, that they
will be granted on a timely basis or on terms favorable to EchoStar. The loss
of any of EchoStar's FCC authorizations, the failure to obtain requested
extensions or waivers or the imposition of conditions would adversely affect
EchoStar's plan of operations, and its current business plan could not be fully
implemented. See "EchoStar Communications Corporation -- Business -- Government
Regulation -- FCC Permits and Licenses."
The FCC Due Diligence Requirements require that DBS permittees proceed
with diligence to construct satellites and commence operations at their
assigned orbital locations. The FCC has indicated it may revoke DBS permits
if there are delays in the satellite construction schedule submitted by the
permittee to the FCC. The schedule submitted by DBSC calls for the
completion of construction at 61.5 DEG. WL of EchoStar III by July 31, 1997,
and a satellite at 175 DEG. WL by July 31, 1998. Any delay in this schedule
may cause total or partial revocation of DBSC's permits. Likewise, Directsat
may risk loss of its permit for channels at 175 DEG. WL if its satellite is
not completed by mid-1998. Further, the FCC has not yet completed its review
to determine whether EchoStar's contract for the construction of the western
satellite of its system meets the FCC's Due Diligence Requirements.
Therefore, the FCC has not yet assigned to EchoStar frequencies for that
satellite. EchoStar believes that it is most likely to be assigned 10
frequencies at the 175 DEG. WL and one frequency at the 166 DEG. WL orbital
locations assuming it is found to have met its due diligence obligations.
While it is possible that DBSC, Directsat and EchoStar may construct a
satellite for joint use by all three at 175 DEG. WL (provided that ESC is
found to have a firm contract and receives frequency assignments at 175 DEG.
WL), EchoStar will still be required to construct and launch two or more
satellites in addition to EchoStar I, EchoStar II and EchoStar III in order
to preserve all of its DBS permits (plus additional satellites for the single
frequencies at each of the 110 DEG. WL and 166 DEG. WL orbital slots in order
to avoid loss of those frequencies). EchoStar continues to study the
technical parameters of providing service from the 175 DEG. WL, 166 DEG. WL
and 110 DEG. WL orbital locations. With respect to the 24 frequencies at the
148 DEG. WL orbital slot, provided that the FCC approves EchoStar's request
for a one-satellite system at that slot (as opposed to the two-satellite
system currently contemplated by international regulations), EchoStar must
complete contracting for a satellite within one year of receiving the permit,
must complete construction within four years of receiving the permit and must
launch and operate a satellite within six years of receiving the permit.
28
EchoStar has an application pending before the FCC for a two satellite
U.S. FSS Ka-band system and a two satellite extended Ku-band satellite
system. EchoStar has been granted a license for a two satellite FSS Ku-band
system, which is conditioned on EchoStar making an additional financial
showing. There can be no assurance the FCC will consider EchoStar's
additional showing to be adequate. If the pending applications are granted,
and EchoStar successfully constructs and launches Ku-band, extended Ku-band
and Ka-band satellites, those satellites might be used to complement EchoStar
DBS System programming, or for a variety of other uses. It is possible that
the unique FSS Ku-band and Ka-band orbital locations requested by EchoStar
and others could permit construction of satellites with sufficient power to
allow dish sizes comparable to DBS. All of these projects are in an early
stage of development and there is no assurance that EchoStar's applications
will be granted by the FCC or that, if granted, EchoStar will successfully
exploit the resulting business opportunities. All of these applications are
currently being challenged by several companies with interests adverse to
EchoStar's. Absent infusion of additional significant capital, EchoStar will
not be able to retain all of its assigned frequencies and orbital slots.
There can be no assurance that EchoStar will be able to comply with the FCC's
Due Diligence Requirements or that the FCC will determine that EchoStar has
complied with such Due Diligence Requirements.
EchoStar has FCC permits to operate 11 frequencies at 119 DEG. WL and has
constructed a 16 transponder satellite, EchoStar I, to operate these
frequencies. The FCC has granted EchoStar an extension of the EchoStar I STA
until December 1996. Tempo opposed the grant of the STA. In its opposition
Tempo asserts, among other things, that there is no statutory basis for
granting an STA unless the STA recipient has an application pending for
frequencies with regard to which the STA is to be granted. As of the date of
this Information Statement -- Prospectus, the FCC has not ruled on Tempo's
opposition or on any further extension of the EchoStar I STA. EchoStar
believes, but can give no assurance, that the FCC will extend the EchoStar I
STA beyond December 1996.
Directsat has FCC permits to operate 10 frequencies at 119 DEG. WL, 10
frequencies at 175 DEG. WL and one frequency at 110 DEG. WL. It has launched a
16 transponder satellite, EchoStar II, to operate its frequencies at 119 DEG.
WL. Directsat has filed an application with the FCC for an STA covering the
remaining six transponders on the satellite. On October 10, 1996, the FCC
granted Directsat a five-week temporary permit to operate the remaining six
transponders in order to conduct preliminary testing. As of the date of this
Information Statement -- Prospectus, the FCC has not ruled on Directsat's STA
application to operate these transponders for a longer period of time in order
to provide regular programming service to subscribers. Tempo has opposed this
application and Directsat has responded to the opposition. Tempo has replied
to the FCC regarding Directsat's response. EchoStar believes, but can give no
assurance, that the FCC will grant the EchoStar II STA for a period of 180
days.
In addition, pursuant to an agreement (the "Dominion Agreement") between
certain of EchoStar's subsidiaries, DBSC and Dominion Video Satellite, Inc.
("Dominion"), Dominion has agreed to allow ESC to use three Dominion
frequencies transponders at 61.5 DEG. WL. There can be no assurance that the
FCC will approve the Dominion Agreement.
OPPOSITION TO, AND RISK OF LOSS OF, DIRECTSAT AUTHORIZATIONS. In connection
with the merger of Directsat with a subsidiary of EchoStar (which was approved
by the FCC in November 1994), Directsat's authorization to utilize ten
frequencies at 119 DEG. WL, the same orbital location for which EchoStar has
received authorization, became integral to the EchoStar DBS System.
Directsat's first satellite, EchoStar II, has been positioned at that location.
Dominion, the original permittee of Directsat's frequencies at 119 DEG. WL,
filed a petition with the FCC contesting the revocation of Dominion's orbital
slot assignment at 119 DEG. WL and the granting of Directsat's authorizations at
the same location. Dominion and several other parties challenged Directsat's
diligence in meeting its required construction schedule. Dominion also
challenged the merger of Directsat and EchoStar at the FCC, and has filed
objections to the FCC's approval of that merger. The FCC rejected Dominion's
petition for reconsideration of that revocation, and Dominion has appealed to
the U.S. Court of Appeals for the District of Columbia Circuit. If Dominion
were to prevail in its appeal, and in any subsequent FCC action on remand
EchoStar believes that Directsat's easterly orbital slot assignment would most
likely be moved from 119 DEG. WL to 61.5 DEG. WL, which would have an adverse
effect on EchoStar's proposed DBS operations. By order released
29
January 11, 1996, the FCC's International Bureau extended the DBS permit of
Directsat to 1999, subject to the condition that the FCC may reconsider the
extension and modify or cancel it, in whole or in part, if Directsat fails to
make progress toward construction and operation of its DBS system
substantially in compliance with its promised timetable, or with any more
expedited timetable the Company might adopt. In the same order the FCC
denied reconsideration of its earlier decision to assign channels and orbital
locations to Directsat at 119 DEG. WL and 175 DEG. WL for its DBS system.
PrimeStar has applied for full FCC review of this order. In addition, in the
event that EchoStar loses the Directsat frequencies at 119 DEG. WL, EchoStar
would be required to offer to repurchase one-half of the 1994 Notes. In the
event that a substantial number of holders of the 1994 Notes or the 1996
Notes accepted that offer, EchoStar's plan of operations, including its
liquidity, would be adversely affected and it might not be possible to
implement EchoStar's current business plan without obtaining additional
financing.
OPPOSITION TO, AND RISK OF LOSS OF, DBSC AUTHORIZATIONS. DBSC's
authorization to construct and operate two DBS satellites initially expired
on August 15, 1995. Prior to that date, DBSC applied for an extension of
time, based upon a variety of factors, including its initiation of the
construction period for its first satellites in May 1995. DBSC indicated
that it had signed an amendment to the DBSC Satellite Contract, by which DBSC
ordered a 32 transponder satellite in lieu of the previously contracted for
16 transponder satellite. DBSC filed an application for FCC approval of this
minor modification in design. In December 1995, the FCC staff approved
DBSC's request for an extension of time, giving it until 1998 to complete
construction of its satellites subject to continued compliance with the FCC's
Due Diligence Requirements. PrimeStar has sought full FCC review of this
decision. The FCC has not yet ruled on PrimeStar's petition and no
assurances can be given that the FCC will sustain the staff's determination.
The FCC's staff has declined to rule on DBSC's request for minor modification
of its authorization pending the submission to the FCC of interference data
based on the proposed new satellites design. By letter of November 4, 1996,
the FCC staff sought submission of such data no later than December 4, 1996.
DBSC has not yet prepared such data and there can be no assurance that upon
the submission of such data the FCC will grant the modification application.
POTENTIAL FOR DELAY AND COST OVERRUNS. Significant expenditures are
required to complete construction and deployment of the EchoStar DBS System.
Funds, in addition to existing cash balances, will be required in the event of
delays, cost overruns, increased costs associated with certain potential change
orders under the Satellite Contracts or the Launch Contracts, a change in
launch provider, material increases in estimated levels of operating cash
requirements, if increases in subscriber acquisition costs occur above current
and anticipated levels, or to meet other unanticipated expenses. There can be
no assurance that such financing will be available or that, if available, it
will be available on terms favorable to EchoStar. See "EchoStar Communications
Corporation -- Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources."
A significant delay in the delivery or launch of any EchoStar satellite
would adversely affect EchoStar's operations and may result in the cancellation
of any of the permits of ESC, Directsat, EchoStar DBS and DBSC by the FCC. See
"Risk of Satellite Defect, Loss or Reduced Performance." In addition, any
material delay in the delivery of EchoStar's DBS receivers or related
components would negatively affect EchoStar's financial condition and results
of operations. See "EchoStar Communications Corporation -- Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources."
SUBSTANTIAL LEVERAGE. A subsidiary of EchoStar, Dish, Ltd., is highly
leveraged, and EchoStar Satellite Broadcasting Corporation, a wholly owned
subsidiary of EchoStar ("ESBC"), as a result of the issuance of the 1996 Notes,
is also highly leveraged. This degree of leverage could make EchoStar
vulnerable to changes in general economic conditions. Substantially all of the
assets of Dish, Ltd. and its subsidiaries are pledged as collateral for the
1994 Notes, and a substantial portion of the assets of EchoStar's direct
subsidiaries are pledged as collateral for the 1996 Notes. Thus it is, and
will continue to be, difficult to obtain additional debt if required or desired
in order to implement EchoStar's business strategy. Dish, Ltd. and certain of
its subsidiaries are also parties to several agreements (in addition to the
1994 Indenture) that severely restrict their ability to obtain additional debt
financing for working capital, capital expenditures, and general corporate
purposes. As security for the performance of its obligations under these
agreements, certain subsidiaries of Dish, Ltd. have pledged
30
substantial assets as collateral. ESBC, including Dish, Ltd., had
outstanding approximately $860.5 million of long-term debt (including both
the current and long-term portion) (including the 1996 Notes, the 1994 Notes,
deferred satellite contract payments on EchoStar I and mortgage debt) as of
September 30, 1996. In addition, because interest on the 1994 Notes
currently is not payable in cash but accrues through June 1, 1999, liability
with respect to the 1994 Notes will increase by approximately $201.2 million
through that date to $624.0 million. Similarly, interest on the 1996 Notes
currently is not payable in cash but accrues through March 15, 2000, at which
time liability with respect to those notes will increase by approximately
$207.4 million to $580.0 million. Additional debt may be incurred by Dish,
Ltd. or ESBC (subject to limitations contained in the 1994 Indenture and 1996
Indenture, respectively) if unanticipated costs or delays are experienced in
the construction and completion of the EchoStar DBS System. The ability of
Dish, Ltd. and ESBC to meet their respective debt obligations will depend on
the success of EchoStar's business strategy, the success of which is subject
to uncertainties and contingencies beyond EchoStar's control.
HOLDING COMPANY STRUCTURE; STRUCTURAL SUBORDINATION. As of September 30,
1996, the liabilities of EchoStar and its subsidiaries aggregated approximately
$975.5 million. Since all of ESBC's and Dish, Ltd.'s operations are conducted
through subsidiaries, the cash flow of ESBC and Dish, Ltd. and their ability to
service debt, including the 1994 Notes and the 1996 Notes, are dependent upon
the earnings of their subsidiaries and the payment of funds by those
subsidiaries to Dish, Ltd. and ESBC in the form of loans, dividends or other
payments. The 1994 Indenture contains restrictions on the ability of Dish,
Ltd. to pay dividends to ESBC. See "EchoStar Communications Corporation --
Description of Certain Indebtedness -- 1994 Notes." Dish, Ltd. and its
subsidiaries have no current obligations, contingent or otherwise, to pay any
amounts due pursuant to the 1996 Notes or to make any funds available therefor,
whether by dividends, loans or other payments, other than the possible
guarantee of the 1996 Notes by Dish, Ltd. which will become effective when and
if permitted by the 1994 Indenture. The cash flow generated by Dish, Ltd.'s
subsidiaries will only be available to satisfy ESBC's obligations on the 1996
Notes after payment of all amounts then due and payable under the 1994 Notes
and then only if and to the extent that the 1994 Indenture permits Dish, Ltd.
to make such cash available to ESBC in the form of dividends, loans or other
payments. In addition, Dish, Ltd. generally may pay dividends on its equity
securities only if: (i) no default exists under the 1994 Indenture; and
(ii) after giving effect to such dividends, Dish, Ltd.'s ratio of total
indebtedness to cash flow would not exceed 4.0 to 1. Moreover, the aggregate
amount of such dividends generally may not exceed the sum of 50% of Dish,
Ltd.'s consolidated net income from the date of the 1994 Indenture, plus 100%
of the aggregate net proceeds to Dish, Ltd. from the sale and issuance of
certain equity interests of Dish, Ltd. If available cash flows of Dish Ltd.'s
subsidiaries are not sufficient to service the 1996 Notes, ESBC would be
required to obtain cash from other sources, such as sales of assets or equity
or debt securities by EchoStar or capital contributions or loans made by
EchoStar from proceeds thereof or cash otherwise available to EchoStar or its
other direct subsidiaries. There can be no assurance that those alternative
sources would be sufficient to service the 1996 Notes.
UNCERTAINTY OF SPRINGING GUARANTEES. Initially, ESBC's payment obligations
under the 1996 Notes are only guaranteed (on a subordinated basis) by EchoStar.
On and after the earliest to occur of: (i) the date upon which Dish, Ltd. is
permitted, pursuant to the terms of the 1994 Indenture to guarantee ESBC's
total payment obligations made on all of the then outstanding 1996 Notes; or
(ii) the first date upon which the 1994 Notes are no longer outstanding or have
been defeased (the "Dish Guarantee Date"), ESBC's payment obligations under the
1996 Notes will be guaranteed (on a PARI PASSU basis with all senior unsecured
debt of Dish, Ltd.) by Dish, Ltd. (the "Dish Guarantee"). Dish, Ltd. may not
incur or guarantee debt, subject to certain limited exceptions, unless, giving
effect to such debt or guarantee, its Indebtedness to Cash Flow Ratio would be
less than 5.0 to 1 (if prior to June 1, 1998) or 4.0 to 1 (if on or after
June 1, 1998). For the year ended December 31, 1995, Dish, Ltd. had negative
cash flow. Therefore, there can be no assurance that the Dish Guarantee will
be effected at any time. In addition, upon consummation of the Merger, ESBC's
payment obligations under the 1996 Notes will be guaranteed (on a PARI PASSU
basis with all senior unsecured debt of DBSC) by DBSC. If the Merger is not
consummated, DBSC will not guarantee the 1996 Notes. Although FCC Approval of
the Merger has been obtained, there can be no assurance that the Merger will be
consummated.
31
CONTINGENT COLLATERAL. The 1996 Notes are secured by certain collateral
relating to DBSC and EchoStar III. Following consummation of the Merger, the
1996 Notes will be secured by: (i) a first priority security interest, when
launched, in EchoStar III; (ii) a collateral assignment of all contracts
relating to construction, launch, insurance and TT&C of EchoStar III; and
(iii) a pledge of all of the issued and outstanding capital stock of MergerCo.
In the event that the Merger is not consummated but the Substitute DBSC
Transaction is consummated, the 1996 Notes will be secured by a collateral
assignment of all contracts and agreements relating to the Substitute DBSC
Transaction. In the event neither the Merger nor the Substitute DBSC
Transaction is consummated, no additional collateral will be provided to secure
the 1996 Notes, and ESBC will be required to make an offer to each holder of
1996 Notes to repurchase a portion of the holder's 1996 Notes. Although FCC
Approval of the Merger has been obtained, there can be no assurance that the
Merger or the Substitute DBSC Transaction will be consummated.
NEED FOR ADDITIONAL CAPITAL. EchoStar will require additional funds to
complete and launch of a third, fourth and fifth DBS satellite. Further,
EchoStar has an application pending with the FCC for a two satellite Ku-band
system, a two satellite extended Ku-band system and a six satellite low earth
orbit ("LEO") satellite system, and has been granted a conditional license for
a two-satellite fixed satellite service ("FSS") Ka-band system. EchoStar will
need to raise additional funds for the foregoing purposes. See "EchoStar
Communications Corporation -- Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources."
RESTRICTIVE COVENANTS. The 1996 Indenture contains restrictive covenants
that, among other things, limit the ability of ESBC and its subsidiaries to:
(i) incur additional indebtedness; (ii) issue preferred stock; (iii) sell
assets; (iv) create, incur or assume liens; (v) create dividend and other
repayment restrictions with respect to ESBC's subsidiaries; (vi) merge,
consolidate or sell assets; (vii) incur subordinated or junior debt;
(viii) enter into transactions with affiliates; and (ix) pay dividends. The
1994 Indenture contains restrictive covenants that, among other things, limit
the ability of Dish, Ltd. and its subsidiaries to: (i) incur additional
indebtedness; (ii) issue preferred stock; (iii) sell assets; (iv) create, incur
or assume liens; (v) create dividend and other repayment restrictions with
respect to Dish, Ltd.'s subsidiaries; (vi) merge, consolidate or sell assets;
(vii) incur subordinated or junior debt; (viii) enter into transactions with
affiliates; and (ix) pay dividends. These restrictions may inhibit EchoStar's
ability to manage its business and to react to changing market conditions.
EchoStar does not intend to pay any dividends in the near future. See
"EchoStar Communications Corporation -- Description of Certain Indebtedness --
1994 Notes" and "-- 1996 Notes."
DECLINE IN DOMESTIC C-BAND DTH PRODUCT SALES. Historically, EchoStar has
sold C-band direct-to-home ("DTH") products in the United States. The recent
growth of DBS service and equipment sales has and will continue to have a
material negative impact on EchoStar's domestic sales of C-band DTH products.
The significant growth of DBS is at least partially attributable to the lower
cost to the consumer of DBS systems compared to that for C-band DTH systems and
the smaller size of the DBS dish compared to the C-band dish. There can be no
assurance that EchoStar will not have to sell C-band DTH inventory at prices
below cost.
LIMITED LIFE OF SATELLITES. Each EchoStar satellite will have a limited
useful life. A number of factors will affect the useful lives of the
satellites, including the quality of their construction, the durability of
their component parts, the longevity of their orbits and the launch vehicle
used. The minimum design life of each of EchoStar I, EchoStar II, EchoStar III
and EchoStar IV is twelve years. There can be no assurance, however, as to the
useful life of the satellites. EchoStar's operating results would be adversely
affected in the event the useful life of any of these satellites were
significantly shorter than twelve years. The Satellite Contracts contain no
warranties in the event of a failure of EchoStar I, EchoStar II, EchoStar III
or EchoStar IV following launch. See "EchoStar Communications Corporation --
Business -- Operation of the EchoStar DBS System -- The Satellites."
DEPENDENCE ON SATELLITES AND SINGLE DIGITAL BROADCAST CENTER. Prior to the
end of the anticipated useful lives of EchoStar satellites, EchoStar will need
to obtain replacement satellites. There can be no assurance that those
replacements will be available when required or, if available, that they will
be available on terms acceptable
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to EchoStar. Various FCC approvals would be required with respect to
replacement satellites, including but not limited to, renewal of EchoStar's
ten year license. There is no assurance that the FCC will grant the
approvals.
EchoStar also relies upon a single digital broadcast center, in Cheyenne,
Wyoming (the "Digital Broadcast Center"), for key operations such as reception
of programming signals, encryption and compression. If a natural or other
disaster damaged the Digital Broadcast Center, there can be no assurance that
EchoStar would be able to continue to provide programming services to its
customers.
RISKS OF FAILURE OF COMPLEX TECHNOLOGY. The EchoStar DBS System is highly
complex. New applications and adaptations of existing and new technology
(including high-speed Internet access), and significant software development,
are integral to the EchoStar DBS System. As a result, the continued
development of the EchoStar DBS System may not continue to develop as expected.
Technology in the satellite television industry is in a rapid and continuing
state of change as new technologies develop. Although the digital compression
technology utilized in connection with the EchoStar DBS System is the world
standard, the integration and implementation of that technology is also
undergoing rapid change. There can be no assurance that EchoStar and its
suppliers will be able to keep pace with technological developments. In
addition, delays in the delivery of components or other unforeseen problems in
the EchoStar DBS System may occur that could adversely affect performance, cost
or timely deployment and operation of the EchoStar DBS System and could have an
adverse effect on EchoStar. Further, in the event that a competitive satellite
receiver technology becomes commonly accepted as the standard for satellite
receivers in the United States, EchoStar would be at a significant
technological disadvantage. See "EchoStar Communications Corporation --
Business -- Operation of the EchoStar DBS System."
EFFECT OF LOSS OF KEY PERSONNEL. EchoStar believes that its future success
will depend to a significant extent upon the performance of certain
individuals, particularly Charles W. Ergen, Chairman and Chief Executive
Officer of EchoStar, R. Scott Zimmer, Vice Chairman of EchoStar and President
of EchoStar International Corporation ("EIC"), James DeFranco, President of
Houston Tracker Systems, Inc. ("HTS") and Dish Network Credit Corporation
("DNCC"), and Carl E. Vogel, EchoStar's President and the President of ESC.
The loss of any of these four individuals could have an adverse effect on
EchoStar's business. EchoStar does not maintain "key man" insurance with
respect to any such individuals and, other than Mr. Vogel, it has not
negotiated employment agreements with such individuals.
CONTROL OF ECHOSTAR BY PRINCIPAL STOCKHOLDER. Although Charles W. Ergen,
the Chairman, Chief Executive Officer and President of EchoStar, currently owns
approximately 72% of the total equity securities of EchoStar (assuming
exercise of employee stock options), he currently possesses approximately 96%
of the total voting power. Thus, Mr. Ergen has, and after the Merger will
continue to have, the ability to elect a majority of the directors of EchoStar
and to control all other matters requiring the approval of EchoStar's
stockholders. See "EchoStar Communications Corporation -- Security Ownership of
Certain Beneficial Owners and Management." For Mr. Ergen's total voting power
in EchoStar to be reduced to below 51%, his percentage ownership of the equity
securities of EchoStar would have to be reduced to below 10%.
DEPENDENCE ON THIRD PARTY PROGRAMMERS. EchoStar is dependent on third
parties to provide EchoStar with programming. EchoStar's programming
agreements have remaining terms ranging from one to ten years and contain
various renewal and cancellation provisions. There can be no assurance that
any of these agreements will be renewed or will not be cancelled prior to
expiration of their original term. In the event that any such agreements are
not renewed or are cancelled, there is no assurance that EchoStar would be
able to obtain or develop substitute programming, or that such substitute
programming would be comparable in quality or cost to EchoStar's existing
programming. EchoStar's competitors currently offer substantially the same
programming as EchoStar. The ability of EchoStar to compete successfully
will depend on EchoStar's ability to continue to obtain desirable programming
and attractively package it to its customers at competitive prices. See
"EchoStar Communications Corporation -- Business -- Products and Services --
DBS and Related Services -- Programming."
33
Pursuant to the Cable Television Consumer Protection and Competition Act of
1992 (the "Cable Act"), programming developed by vertically integrated
cable-affiliated programmers generally must be offered to all potential buyers
on fair and reasonable terms. EchoStar purchases a substantial percentage of
its programming from cable-affiliated programmers. Certain of the restrictions
on cable-affiliated programmers will expire in 2002 unless the FCC extends
them. As a result, any expiration of, amendment to, or interpretation of, the
Cable Act that permits the cable industry to discriminate in the sale of
programming against competing businesses, such as that of EchoStar, could
adversely affect EchoStar's ability to acquire programming or acquire
programming on a cost-effective basis.
RISK OF INABILITY TO MANAGE RAPIDLY EXPANDING OPERATIONS. EchoStar must
expand its operations rapidly to achieve its business objectives. Several of
EchoStar's key activities, including satellite in-orbit control, satellite
receiver manufacturing, billing and subscriber management are out-sourced to
third party vendors. To manage its growth effectively, EchoStar must continue
to develop, install and improve its operating and information systems and
coordinate efforts with its third party vendors. EchoStar will also need to
continue to expand, train and manage its employee base, and its management
personnel will be required to assume even greater levels of responsibility. If
EchoStar is unable to manage its growth effectively, EchoStar's business and
results of operations could be materially adversely affected.
At September 30, 1996, EchoStar had approximately 85 employees dedicated to
installing and servicing EchoStar DTH and DBS receivers. EchoStar plans to
hire additional installation and service personnel as the demand for its
receivers, especially the EchoStar Receiver System, continues to grow.
EchoStar is attempting to effectively train, organize and manage its existing
installation force and consequently, its installation and service personnel
recruitment, training and management practices may, from time to time, reduce
EchoStar's subscribers' access to EchoStar's programming and may cause
subscribers to be added at a slower rate and potential subscribers to choose
other services.
RISKS OF INFRINGEMENT OF PATENTS AND PROPRIETARY RIGHTS. EchoStar does not
believe that patents and other intellectual property rights are material to its
business, although many of EchoStar's competitors and others have obtained, and
may be expected to obtain in the future, patents that cover or affect products
or services directly or indirectly related to those offered by EchoStar. There
can be no assurance that EchoStar is aware of all patents that may potentially
be infringed by its products. In addition, patent applications in the United
States are confidential until a patent is issued and, accordingly, EchoStar
cannot evaluate the extent to which its products may infringe claims contained
in pending patent applications. EchoStar has been notified that certain
features of the EchoStar Receiver System allegedly infringe on patents held by
others, and that royalties are therefore required to be paid. If it were
determined that the features at issue or any other of EchoStar's products
infringe on patents held by others, EchoStar would be required to cease
developing or marketing those products, to obtain licenses to develop and
market those products from the holders of the patents or to redesign those
products in such a way as to avoid infringing the patent claims. The extent to
which EchoStar may be required in the future to obtain licenses with respect to
patents held by others and the availability and cost of any such licenses is
currently unknown. There can be no assurance that EchoStar would be able to
obtain such licenses on commercially reasonable terms or, if it were unable to
obtain such licenses, that it would be able to redesign its products to avoid
infringement. In the event EchoStar was not able to obtain such licenses on
commercially reasonable terms, or if it was unable to obtain such licenses and
it could not otherwise redesign its products to avoid infringement, EchoStar's
business and results of operations could be materially adversely affected.
RISK OF SATELLITE DAMAGE OR LOSS FROM ACTS OF WAR, ELECTROSTATIC STORM AND
SPACE DEBRIS. The loss, damage or destruction of any EchoStar satellites as a
result of military actions or acts of war, anti-satellite devices,
electrostatic storm or collision with space debris would have a material
adverse effect on EchoStar. EchoStar's insurance policies include customary
exclusions including: (i) military or similar actions; (ii) laser, directed
energy or nuclear anti-satellite devices; and (iii) insurrection and similar
acts or governmental action.
34
RISK THAT INITIAL EQUIPMENT COSTS WILL LIMIT CONSUMER DEMAND FOR
DISH NETWORK-SM- PROGRAMMING. The retail price of a standard EchoStar
Receiver System is $199 plus approximately $300 for one year of DISH
Network's America's Top 50 CDSM programming. EchoStar is currently offering
the EchoStar Promotion nationwide. DISH Network's America's Top 50 CDSM
programming package, which is purchased as part of the EchoStar Promotion, is
priced at $24.99 per month, as compared to an average over $42 per month for
cable service (the EchoStar Receiver System does not presently provide local
programming via satellite into the local market it is serving, but allows the
subscriber to receive local programming from an off-air antenna without the
payment of an additional fee). The initial equipment cost required to receive
DISH NetworkSM programming may reduce the demand for EchoStar Receiver
Systems, since EchoStar Receiver Systems must be purchased, while cable and
certain of EchoStar's satellite competitors lease their equipment to the
consumer with little if any initial hardware payment required.
RISK THAT FAILURE TO FINANCE CONSUMERS WILL LIMIT DEMAND OF ECHOSTAR
RECEIVER SYSTEMS. Certain of EchoStar's subsidiaries have filed a civil
action against Associates Investment Corporation ("Associates") seeking
injunctive relief together with other remedies (the "Associates Lawsuit").
EchoStar alleges that the Associates, among other things, breached its
contract with EchoStar pursuant to which Associates agreed to finance the
purchase of EchoStar Receiver Systems by consumers. EchoStar alleges that
the Associates' refusal to finance certain prospective consumers has resulted
in the loss of approximately 700 to 1,000 prospective customers per day to
EchoStar's competitors. In addition, EchoStar alleges that the loss of sales
due to the Associates action has forced EchoStar to lower the price on its
products. As a result of the actions alleged by EchoStar to have been taken
by the Associates, EchoStar may be forced to seek a new finance company to
finance the purchase of EchoStar Receiver Systems. There can be no assurance
that such financing will be available or that, if available, it will be
available on terms favorable to EchoStar. In addition, any material delay in
the ability of EchoStar to obtain subscribers to DISH Network-SM-
programming would negatively affect EchoStar's financial condition and
results of operations. See "-- Possible Delisting of EchoStar Common Stock
from NASDAQ."
CORPORATE GUARANTEE UNDER SATELLITE CONSTRUCTION CONTRACTS. On July 18,
1996, the satellite construction contracts for construction of EchoStar I,
EchoStar II and EchoStar III were amended by the parties thereto (the
"Satellite Amendments"). Prior to July 18, 1996, certain post-launch payments
to Lockheed Martin by ESC for construction of EchoStar I, by Directsat for
construction of EchoStar II and by DBSC for construction of EchoStar III were
to be secured by letters of credit from reputable financial institutions, and,
with respect to EchoStar I and EchoStar II, by shares of EchoStar's 8% Series A
Cumulative Preferred Stock held of record by Charles W. Ergen. Subject to the
Satellite Amendments, the post-launch payments due from ESC, Directsat and DBSC
are now secured by a written corporate guarantee by EchoStar and not by letters
of credit. In addition, effective December 31, 1996 and on each subsequent
June 30 and December 31, certain of the shares of EchoStar's 8% Series A
Cumulative Preferred Stock owned by Mr. Ergen and held in escrow will be
released based upon the total outstanding post-launch payments due and the
price of the EchoStar Common Stock as quoted on NASDAQ. As a result of these
changes, EchoStar would be liable for the obligations of its subsidiaries under
these satellite construction contracts if ESC, Directsat or DBSC could not make
the post-launch payments.
FACTORS CONCERNING THE MERGER
ABSENCE OF FAIRNESS OPINION. In approving the Merger Agreement and the
transactions contemplated thereby, DBSC's Board of Directors (the "DBSC Board")
did not obtain, and did not seek, an opinion regarding the fairness of the
Merger from an independent financial advisor. See "The Merger -- Reasons for
the Merger."
INTERESTS OF CERTAIN PERSONS IN THE MERGER. Harley W. Radin, the Chairman
of the Board and Chief Executive Officer of DBSC, owns approximately 18% of
the issued and outstanding shares of DBSC Common Stock and has previously voted
his DBSC Common Shares to approve the Merger. Mr. Radin may continue in some
capacity, to be determined, with MergerCo after consummation of the Merger. In
addition, DBSI owns approximately 25% of the DBSC Common Stock. The $4.0
million and accrued interest owed to EchoStar is secured by 125,000 shares of
DBSC Common Stock, among other collateral. Fred W. Thompson, a director of
DBSC, is the President and Chief Executive Officer of DBSI, as well as a
significant shareholder of DBSI. Daniel E. Moore, Executive Vice President and
Chief Financial Officer of SSET, owns 2,000 shares of DBSC Common Stock and
SSET owns 912,717 shares of EchoStar Class A Common Stock. In
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addition, SSET currently owes EchoStar approximately $4.8 million
including accrued interest related to its convertible nonrecourse debentures.
These debentures are secured by the EchoStar Class A Common Stock owned by
SSET. Charles W. Ergen, Chairman of EchoStar, also serves on the Board of
Directors of SSET.
OPPOSITION TO, AND RISK OF RECONSIDERATION OF, MERGER APPLICATION. In
February 1996, DBSC, EchoStar and MergerCo filed an application with the FCC
for approval of the Merger. A timely objection to the Merger was filed by the
Consumer Project on Technology ("CPT"). CPT contended in its objection that
the Merger would permit EchoStar to acquire a dominant and anticompetitive
position in the DBS marketplace by aggregating an excessive number of DBS
channels. A series of letters objecting to the Merger were also filed
subsequently by the CPT and another public interest group. These letters
raised the same issues as the CPT's earlier objection. FCC Approval of the
Merger was obtained on August 30, 1996.
RISK OF ANTITRUST CHALLENGES TO MERGER. Under the Hart-Scott-Rodino
Antitrust Improvements Act of 1976 ("HSR Act") and the rules that have been
promulgated thereunder by the Federal Trade Commission (the "FTC"), certain
acquisition transactions may not be consummated unless certain information has
been furnished to the Antitrust Division of the Department of Justice (the
"Antitrust Division") and the FTC and certain waiting period requirements have
been satisfied. The acquisition of DBSC Common Stock by EchoStar in connection
with the Merger is subject to such requirements. On June 7, 1996 EchoStar and
DBSC each filed a Notification and Report Form with the Antitrust Division and
the FTC. On June 28, 1996, EchoStar and DBSC received early termination of the
waiting period requirements under the HSR Act.
Although both EchoStar and DBSC have received early termination of the
waiting period requirements under the HSR Act, the FTC and the Antitrust
Division may still scrutinize the legality under the antitrust laws of
transactions such as the Merger. At any time before or after EchoStar's
acquisition of DBSC Common Stock either the Antitrust Division or the FTC could
take such action under the antitrust laws as it deems necessary or desirable in
the public interest, including seeking to enjoin the acquisition of DBSC Common
Stock or otherwise seeking divestiture of DBSC Common Stock acquired by
EchoStar or divestiture of substantial assets of EchoStar or its subsidiaries.
Private parties and state attorneys general may also bring legal action under
the antitrust laws under certain circumstances. There can be no assurance that
a challenge to the Merger or other acquisition of DBSC Common Stock by EchoStar
on antitrust grounds will not be made, or, if such a challenge is made, of the
result.
36
RIGHTS OF DISSENTING SHAREHOLDERS
Section 262 of the DGCL, which is reprinted as Annex III to this Information
Statement -- Prospectus, entitles any DBSC Shareholder who dissents from the
Merger and who follows the procedures set forth therein to receive in cash the
"fair value" of their DBSC Common Stock, which fair value shall be determined
exclusive of any appreciation or depreciation in anticipation of the Merger, in
lieu of the Merger Consideration.
The following discussion is a summary of the procedures that a DBSC
Shareholder must follow to exercise dissenters' rights under the DGCL. This
summary sets forth all material elements of Section 262, but does not purport
to be a complete statement of Section 262, and it is qualified in its entirety
by reference to such Section of the DGCL (see Annex III) and to any amendments
to such Section adopted after the date of this Information Statement --
Prospectus.
A DBSC Shareholder who makes the demand described below with respect to such
shares, who continuously is the record holder of such shares through the
Effective Time and who otherwise complies with the statutory requirements of
Section 262 will be entitled to an appraisal by the Delaware Court of Chancery
(the "Court") of the fair value of his DBSC Common Stock.
MergerCo (Direct Broadcasting Satellite Corporation, a Colorado corporation)
must, within 10 days after the Merger is effected, send by certified or
registered mail to any such dissenting DBSC Shareholder written notice of the
Effective Date and that appraisal rights are available (the "Notice"). To
properly exercise dissenters' rights, a written demand for appraisal setting
forth information which reasonably informs MergerCo of the identity of the
stockholder (such as the DBSC Shareholder's name and address and the number of
shares of DBSC Common Stock owned) and a statement that he intends to demand
the appraisal of his shares, must be delivered by the dissenting DBSC
Shareholder to MergerCo at its principal executive offices at 90 Inverness
Circle East, Englewood, Colorado 80112 within 20 days after the date of mailing
of the Notice.
A demand for appraisal must be executed by or on behalf of the holder of
record, fully and correctly, as such DBSC Shareholder's name appears on the
certificate or certificates representing DBSC Common Stock. A person having a
beneficial interest in DBSC Common Stock that is of record in the name of
another person such as a broker, fiduciary or other nominee, must act promptly
to cause the record holder to follow the steps summarized herein properly and
in a timely manner to perfect whatever Appraisal Rights are available. If DBSC
Common Stock is owned of record by a person other than the beneficial owner,
including a broker, fiduciary (such as a trustee, guardian or custodian) or
other nominee, such demand must be executed by or for the record owner. If
DBSC Common Stock is owned of record by more than one person, as in a joint
tenancy or tenancy in common, such demand must be executed by or for all joint
owners. An authorized agent, including an agent for two or more joint owners,
may execute the demand for appraisal for a stockholder of record; however, the
agent must identify the record owner and expressly disclose the fact that, in
exercising the demand, such person is acting as agent for the record owner.
A record owner, such as a broker, fiduciary or other nominee, who holds DBSC
Common Stock as a nominee for others, may exercise Appraisal Rights with
respect to the shares held for all or less than all beneficial owners of shares
as to which such person is the record owner. In such case, the written demand
must set forth the number of shares covered by such demand. Where the number
of shares is not expressly stated, the demand will be presumed to cover all
DBSC Common Stock outstanding in the name of such record owner.
Within 120 days after the Effective Time of the Merger, MergerCo or a
dissenting DBSC Shareholder who has complied with the DGCL and who is otherwise
entitled to appraisal rights, may file a petition in the Court demanding a
determination of the fair value of the DBSC Common Stock. Notwithstanding the
foregoing, at any time within 60 days after the Effective Time of the Merger,
any DBSC Shareholder shall have the right to withdraw his demand for appraisal
and to accept the Merger Consideration. Within 120 days after the Effective
Time of the Merger, any DBSC Shareholder who has complied with DGCL shall, upon
written request, be entitled to receive from MergerCo a statement setting forth
that aggregate number of shares not voted in favor of the Merger with respect
to which demands for appraisal have been received and the aggregate number of
holders of such shares. Such statement shall be mailed to such DBSC
Shareholder within 10 days after his
37
written request for the statement is received by MergerCo or within 10 days
after the expiration of the period for delivery of demands for appraisal.
Upon the filing of the petition with the Court, service of a copy shall be
made upon MergerCo which shall within 20 days after such service file in the
office of the Register of Chancery a duly verified list of the names and
addresses of the DBSC Shareholders demanding appraisal and with whom agreements
as to the value of their shares have not been reached. The Register of
Chancery shall give notice of the time and place fixed for the hearing of such
petition by registered or certified mail to the DBSC Shareholders demanding
appraisal and to MergerCo. Notice shall also be given by at least one
publication at least one week before the day of the hearing. At the hearing,
the Court will determine the DBSC Shareholders who have complied with the DGCL
and who have become entitled to appraisal rights. After determining the DBSC
Shareholders entitled to an appraisal, the Court will appraise the DBSC Common
Stock, determining its fair value exclusive of any element of value arising
from the accomplishment or expectation of the Merger, together with the fair
rate of interest, if any, to be paid upon the amount determined to be fair
value. In determining such fair value, the Court will take into consideration
all relevant factors. The Court will direct the payment of the fair value of
the shares together with any interest to the DBSC Shareholders entitled
thereto. The costs of any appraisal proceeding may be determined by the Court
and assessed to the parties as the Court deems equitable in the circumstances.
A DBSC Shareholder who has exercised his appraisal rights will not be
entitled to vote, to receive dividends or to exercise any other rights of a
DBSC Shareholder, other than the right to receive payment for his DBSC Common
Stock under the DGCL, and his DBSC Common Stock shall not be considered issued
and outstanding for the purposes of any subsequent vote of DBSC Shareholders.
If the surviving corporation complies with the requirements of the DGCL, any
DBSC Shareholder who fails to comply with the requirements of the DGCL will not
be entitled to bring suit for the recovery of the value of his shares or money
damages.
The right of any dissenting DBSC Shareholder to be paid the fair value of
his DBSC Common Stock will cease and his status as a DBSC Shareholder will be
restored if: (i) a written withdrawal by the dissenting DBSC Shareholder is
sent to MergerCo at any time within 60 days after the Effective Time of the
Merger; or (ii) a court of competent jurisdiction determines that the DBSC
Shareholder is not entitled to exercise dissenters' rights. After the
consummation of the Merger, if the right of the DBSC Shareholder to be paid the
fair value of his shares of DBSC Common Stock has ceased and his rights as a
DBSC Shareholder have been restored, such rights will consist solely of the
right to receive the Cash Value of the Merger Consideration or the cash
payments in lieu of fractional shares to be paid the DBSC Shareholders pursuant
to the terms of the Merger Agreement.
38
THE MERGER
THE PLAN AND AGREEMENT OF MERGER AND THE TRANSACTIONS CONTEMPLATED THEREBY
ARE SUMMARIZED BELOW. THIS SUMMARY SETS FORTH ALL MATERIAL ELEMENTS OF THE
PLAN AND AGREEMENT OF MERGER AND SUCH TRANSACTIONS BUT DOES NOT PURPORT TO BE
COMPLETE AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE COMPLETE TEXT OF
THE MERGER AGREEMENT, REPRINTED WITH SELECTED EXHIBITS AS ANNEX I TO THIS
INFORMATION STATEMENT -- PROSPECTUS. ALL CAPITALIZED TERMS USED HEREIN, UNLESS
OTHERWISE DEFINED HEREIN, SHALL HAVE THE DEFINITIONS ASCRIBED TO THEM IN THE
MERGER AGREEMENT.
BACKGROUND AND REASONS FOR THE MERGER
The cost to develop, construct and launch a commercial DBS business requires
a substantial capital commitment. DBSC Management's principal goal since
DBSC's incorporation in 1981 has been to attract one or more suitable investors
or partners to provide such working capital. However, DBSC's attempts to raise
capital have been extremely difficult, principally because of widespread
skepticism about the viability of DBS as an industry and uncertainty about how
many participants, if any, could reasonably anticipate profitable operations
from DBS. Management of DBSC has sought investment from industry participants,
various cable companies, programmers, high-tech companies, investment banks,
private citizens, international media firms, venture capitalists and others.
Management's search for strategic or other investors has been time-consuming,
expensive and only moderately successful. In part these difficulties are
attributable to FCC delays in processing DBSC's filings. Prior to DBSC's
agreements with EchoStar, DBSC had been successful in obtaining financing, or
commitments to provide financing, for only approximately $2.5 million,
substantially below DBSC's long-term capital requirements of $500 to
$600 million.
In April 1990, DBSC entered into the DBSC Satellite Contract with Lockheed
Martin and began making periodic progress payments under the Contract. As of
October 1994 these payments totalled approximately $314,000. In order for DBSC
to maintain its DBS authorizations, the FCC required that the first DBSC
satellite be launched no later than August 1995, and the DBSC Satellite
Contract required delivery of a completed satellite for launch prior to that
date. DBSC's liabilities during this period continued to increase,
representing long overdue notes, bills for legal and accounting services and
other expenses. As of March 31, 1994, DBSC had total liabilities of
approximately $2.9 million and available cash of approximately $34,000.
EchoStar and DBSC initially explored common business interests in early
1994. However, EchoStar did not pursue the contact at that time. Thereafter,
EchoStar entered into an agreement to acquire Directsat through a merger (the
"Directsat Merger"), and successfully completed the 1994 Notes offering.
During late 1994, DirecTv and USSB launched their DBS service and public
interest in DBS accelerated sharply. At the same time, DBSC's financial
position was further deteriorating. In connection with the transaction with
Directsat, EchoStar had purchased many of DBSC's liabilities from SSE Telecom,
Inc. ("SSET"), the parent of Directsat, and was demanding immediate payment
from DBSC of in excess of $3.0 million. When early negotiations to settle this
claim were unsuccessful, EchoStar filed suit against DBSC. While DBSC believed
it had substantial defenses to the suit, it had no cash or other resources to
pay its existing or future legal expenses. In addition, DBSC was unable to pay
even minor administrative expenses.
The DBSC Board was therefore faced with a major lawsuit involving potential
damages in excess of $3.0 million, plus significant capital expenditures
representing other immediate obligations, including a scheduled progress
payment to Lockheed Martin under the DBSC Satellite Contract. However, DBSC
did not have existing cash or other resources adequate to satisfy these
obligations. In addition, due to delays at the FCC, and resulting delays in
entering the construction phase of the DBSC Satellite Contract, DBSC was no
longer in a position to launch its first satellite by August 1995, and was
facing the necessity of seeking FCC permission to extend the launch deadline, a
request that would have required the renegotiation of the DBSC Satellite
Contract to substantially extend the delivery date. As a result, DBSC believed
it would be desirable to have sufficient cash resources to assure that the
renegotiated contract would provide for acceleration of the construction phase
of the DBSC Satellite Contract so that the delay in completion could be coupled
with an immediate and significant boost in DBSC's financial commitment to the
construction of the satellite.
39
During the late summer of 1994, EchoStar renewed its interest in DBSC,
discussing with DBSC's Management the strategic synergies that might exist
between the two companies. EchoStar expressed its willingness to consider a
wide variety of potential arrangements with DBSC, including a merger. At the
time of EchoStar's discussions with DBSC, DBSC had no immediate prospects for
obtaining necessary short-term financing other than a proposed private equity
offering. However, DBSC was unable to obtain a commitment to attempt to raise
more than approximately $1.0 million and there were no assurances regarding
when the offering would be commenced, and if commenced, whether the offering
could be successfully consummated. At the DBSC Board's direction, Management
pursued certain earlier preliminary discussions with potential investors to
determine whether there were any other serious and imminent prospects for
obtaining necessary working capital and, as in prior instances, found that the
level of interest in entering into a transaction with DBSC was low.
The DBSC Board and EchoStar therefore explored a range of options that
contemplated an investment by EchoStar in DBSC. The DBSC Board considered that
a relatively modest infusion of working capital from EchoStar, while it might
solve certain short-term capital requirements, was not an attractive long-term
solution for DBSC because the necessity for a meaningful commitment to
construct its satellites could not be postponed and such construction typically
requires substantial cash payments. Moreover, the DBSC Board felt that
EchoStar was a highly desirable investor because of its demonstrated commitment
to the DBS industry and prior record of success in the DTH business. After
considering its alternatives, and taking into consideration the factors set
forth above, the DBSC Board concluded that a merger with EchoStar was in the
best interests of DBSC Shareholders, by allowing such Shareholders to
participate in the potential substantial opportunities presented by EchoStar
resulting from the Merger.
The Merger Consideration was determined by taking into consideration a
number of factors. With respect to EchoStar, such factors included the August
1994 public offering of EchoStar Common Stock to employees of Donaldson,
Lufkin & Jenrette Securities Corporation for approximately $11.82 (as adjusted
as a result of a reorganization of EchoStar in June 1995) a share. With
respect to DBSC, such factors included: (i) the fact that the most recent
sales of DBSC Common Stock were at prices ranging from $2.00 to $4.00 per
share; (ii) the valuation of Directsat in connection with the Directsat Merger
was approximately $10.0 million before deducting liabilities, and while
Directsat and DBSC were substantially comparable in terms of the development of
their respective DBS businesses, the 10 channels assigned to Directsat at
119 DEG. WL were substantially more valuable than the 11 channels assigned to
DBSC at 61.5 DEG. WL; and (iii) the substantial amount of DBSC's liabilities.
DBSC did not retain an investment banker to render a fairness opinion or
otherwise advise the DBSC Board as to the fairness of the Merger Consideration
to the DBSC Shareholders. The failure to obtain such an opinion was based
principally on the fact that DBSC lacked the financial resources to retain an
investment banker. Nonetheless, in the view of the DBSC Board and based on the
factors listed above, the Merger Consideration was fair to DBSC Shareholders.
After extensive negotiation, DBSC and EchoStar entered into a Stock Purchase
Agreement in November 1994 whereby EchoStar purchased 500,000 shares of DBSC
Common Stock for $2.96 million. The purpose of this purchase was to provide
DBSC with sufficient funds to pay its current liabilities, to make substantial
payments under the DBSC Satellite Contract and to provide necessary funds for
future operations. The Stock Purchase Agreement also provided for the
settlement of EchoStar's lawsuit against DBSC by the issuance to EchoStar of
83,250 shares of DBSC Common Stock. As a result of these issuances, EchoStar
currently owns 644,990 shares of DBSC Common Stock, representing approximately
40% of the issued and outstanding shares of DBSC Common Stock.
Pursuant to the Stock Purchase Agreement, EchoStar was also granted an
option, exercisable under certain circumstances and subject to certain
conditions, to purchase additional shares of DBSC Common Stock, thereby
providing EchoStar with certain rights even if the Merger had not occurred.
The Stock Purchase Agreement also included as an exhibit the form of Merger
Agreement. Upon the occurrence of certain events set forth in the Stock
Purchase Agreement, either EchoStar or DBSC could have required execution of
the Merger Agreement. EchoStar agreed to the initial investment in DBSC only
if it could be assured, if it so desired, that it could cause DBSC to execute
the Merger Agreement, thereby affecting the
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consummation of the Merger (subject to FCC Approval and approval of the
Merger by the holders of a majority of the DBSC Shareholders). DBSC
determined that it also needed the right to require the execution of the
Merger Agreement, and the Stock Purchase Agreement provided DBSC with such
right, exercisable by DBSC following FCC approval of the Directsat Merger.
Since the date that DBSC executed the Merger Agreement, the price of each
share of EchoStar Common Stock has increased from $19.12 per share to $27.13
per share, which represents the closing price of a share of EchoStar Common
Stock as reported on the Nasdaq National Market System on November 25, 1996.
DESCRIPTION OF THE MERGER AGREEMENT
The Merger Agreement provides that, at the Effective Time of the Merger DBSC
will be merged with MergerCo in accordance with the DGCL. At that time:
(i) the separate corporate existence of DBSC will cease; (ii) each share of the
issued and outstanding DBSC Common Stock, other than shares held by EchoStar
and those to which Appraisal Rights have been perfected, will be converted
into, at the election of each DBSC Shareholder, either the Share Value or the
Cash Value ("Cash Elections"); and (iii) MergerCo, as the surviving
corporation, will remain in existence as a wholly owned subsidiary of EchoStar.
In the event that the number of shares of DBSC Common Stock to be exchanged for
cash, together with the number of shares of DBSC Common Stock with respect to
which appraisal rights have been reserved and any cash required to be paid in
settlement of any fractional shares, exceed 50% of the total number of shares
of DBSC Common Stock issued and outstanding (other than those owned by
EchoStar), then each Cash Election shall be reduced pro rata so that the total
cash paid in connection with the Merger will not exceed 50% of the aggregate
Merger Consideration, and the stock portion of the Merger Consideration payable
to each affected DBSC Shareholder will be correspondingly increased.
ADJUSTMENTS TO MERGER CONSIDERATION. In the event that, on a date mutually
acceptable to EchoStar and DBSC for closing the Merger (the "Closing Date"):
(i) DBSC's liabilities exceed Permitted Liabilities, as defined in the Merger
Agreement, and EchoStar elects to proceed with the Merger notwithstanding such
excess; (ii) any liabilities are asserted against DBSC which are alleged to
have arisen on or before March 31, 1995, but which are not shown in DBSC's
financial statements for the fiscal year ended March 31, 1994 (the "Financial
Statements"); or (iii) any rights are asserted pursuant to which the holder
thereof is entitled to acquire shares of DBSC Common Stock ("Existing Equity
Rights"), which rights are not disclosed in a schedule to the Stock Purchase
Agreement ("Additional Equity Rights"), the Cash Value or the Share Value, as
applicable, shall be reduced (in the event an adjustment is necessary as a
result of clauses (i) or (ii) above) by the percentage obtained from the
quotient of "x" divided by $7,785,184, where "x" is equal to the amount by
which DBSC's liabilities exceed Permitted Liabilities, plus the amount (not to
exceed $5.0 million) of any liabilities set forth in clause (ii) above. In the
event the liabilities set forth in clause (ii) above exceed $7.0 million,
EchoStar may, at its option, either consummate the Merger and assume such
liabilities, or terminate the Merger Agreement. In the event an adjustment is
necessary as the result of clause (iii) above, the Share Value or the Cash
Value, as applicable, shall be reduced by the percentage obtained from the
quotient of "x"/"y" where "x" is the total number of shares of DBSC Common
Stock which would be issued pursuant to all Additional Equity Rights in the
aggregate and "y" is the total number of shares of DBSC Common Stock issued and
outstanding, excluding shares of DBSC Common Stock held by EchoStar.
Based upon the best information available, the final per share Merger
Consideration offered for each share of DBSC Common Stock exchanged in the
Merger will be either $7.99 in cash or .67417 shares of EchoStar Common Stock,
subject to certain limitations and adjustments as set forth in the Plan and
Agreement of Merger, valued at approximately $18.29 based on the market
closing price of the EchoStar Common Stock of $27.13 on November 25, 1996.
If the final per share Merger Consideration materially differs from this
estimate, this Information Statement -- Prospectus will be recirculated and DBSC
Shareholders will be provided with an adequate period to consider alternatives,
including Appraisal Rights.
41
RESTRICTIONS ON RESALE. Shares of EchoStar Common Stock received by DBSC
Shareholders in connection with the Merger will not be eligible for resale,
transfer or disposal until 90 days after the effective date of the Merger.
Certificates representing such shares will bear a restrictive legend setting
forth the restrictions prohibiting such sale, transfer or disposal during the
90 day period. In the event the Merger is determined to be a taxable
transaction to DBSC Shareholders, the 90 day resale restrictions will lapse
with respect to 50% of the shares of EchoStar's Common Stock received by DBSC
shareholders. In addition, in order to preserve the intended tax-free
treatment of the Merger to DBSC shareholders, Harley W. Radin, the President
and Chief Executive Officer of DBSC, DBSI and Kingswood, Inc., all significant
DBSC Shareholders, have represented that they have no present intention to
sell, transfer or otherwise dispose of more than approximately 44% of their
shares of EchoStar Common Stock received in connection with the Merger.
TREATMENT OF FRACTIONAL SHARES. No fractional shares of EchoStar Common
Stock will be issued in connection with the Merger. If as a result of a DBSC
Shareholder's election to receive the Share Value in lieu of the Cash Value, a
fractional share would otherwise be issued, cash shall be paid to the holder of
such interest in lieu of a fractional share. The cash paid in lieu of such
fractional share shall be equal to such fractional interest multiplied by the
value of a share of EchoStar Common Stock as of the Effective Time. Any cash
required to be paid to a DBSC Shareholder in lieu of fractional shares shall be
paid promptly following the Effective Time of the Merger upon surrender of the
certificate or certificates representing the shares of DBSC Common Stock held
by the DBSC Shareholder.
REPRESENTATIONS AND WARRANTIES. The Merger Agreement contains
representations and warranties made by DBSC to EchoStar and MergerCo (the
"EchoStar Companies"), and representations and warranties made by the
EchoStar Companies to DBSC, which are typical of agreements of this type.
Such representations and warranties are made as of December 21, 1995, when
the Merger Agreement was signed, and will be deemed to have been made as of
the Effective Time of the Merger.
DBSC represents and warrants the number of shares of each class of its
capital stock which are authorized and which are issued and outstanding, the
due organization, good standing and corporate power of DBSC, the due
authorization and execution of the Merger Agreement and the fact that the
execution, delivery and performance of that agreement will not violate any of
the charter documents, contracts or other types of obligations of DBSC. DBSC
further represents and warrants that its execution of the Merger Agreement and
consummation of the Merger will not violate any law, require any consent or
approval, except FCC Approval, which approval has now been received, and
approval of the DBSC Shareholders, which approval has been received, or result
in the acceleration of any of its obligations or the creation of any lien on
its assets, except as disclosed in the schedules to the Merger Agreement. It
also represents and warrants that its Financial Statements are a fair
representation of its financial position as of the date thereof and were
prepared in accordance with generally accepted accounting principles on a basis
consistent with prior periods, and that, other than approximately $300,000 in
liabilities, since the date of the Financial Statements, DBSC has incurred no
liabilities other than Permitted Liabilities.
DBSC also represents and warrants that it has paid all taxes which are
payable by it, has properly reserved on its Financial Statements for taxes
expected to be payable by it, has filed all required tax returns and has
received no notices of any tax deficiencies. DBSC further represents and
warrants that, since the date of the Financial Statements, DBSC has not
suffered any adverse change in working capital, financial condition, assets,
liabilities or in the business or prospects of DBSC other than approximately
$300,000 of liabilities in the aggregate and Permitted Liabilities. DBSC also
represents that it has been awarded by the FCC a conditional construction
permit and specific orbital slot assignments with respect to 11 DBS frequencies
located at 61.5 DEG. WL, and 11 DBS frequencies located at 175 DEG. WL (the "DBS
Rights"). DBSC also makes other representations and warranties which are
typical of transactions such as that contemplated by the Merger Agreement.
The Merger Agreement provides for the EchoStar Companies to make similar
representations and warranties to DBSC with respect to the due organization and
existence of such corporations, their capitalization,
42
their power and authority to conduct their business, the authorization and
valid and binding nature, with respect to each of them, of the Merger
Agreement. The EchoStar Companies also represent to DBSC that no defaults
have occurred under the 1994 Indenture which entitle the holders thereof to
accelerate the 1994 Notes. The EchoStar Companies also make other
representations and warranties which are typical of transactions such as that
contemplated by the Merger Agreement.
COVENANTS. The Merger Agreement contains certain covenants of DBSC and the
EchoStar Companies which are typical of agreements of this type. DBSC
covenants that, through the Effective Time of the Merger, it will carry on its
business diligently and in the ordinary course. It also covenants that it will
maintain its DBS Rights free and clear of all liens, charges or encumbrances.
DBSC further covenants to satisfy (provided it has available funds) each and
every liability which accrued subsequent to August 3, 1987 (other than
Permitted Liabilities so that at the Effective Time of the Merger there shall
exist absolutely no liabilities of DBSC other than Permitted Liabilities). In
the event that DBSC liabilities exceed Permitted Liabilities at the Effective
Time of the Merger, EchoStar may elect to satisfy such liabilities by adjusting
the Merger Consideration. See "The Merger -- Description of the Merger." Prior
to the Effective Time of the Merger, DBSC is also prohibited from: (i) issuing
any shares of DBSC Common Stock, or any securities convertible into such
shares, other than pursuant to Existing Equity Rights; (ii) selling or
otherwise transferring or encumbering any of its material assets, including the
DBS Rights; (iii) incurring any obligation or liability, other than Permitted
Liabilities; (iv) entering into any agreements with third parties relating to
certain transactions; (v) paying any dividends; or (vi) conducting any business
other than as required pursuant to certain contracts and as is otherwise
necessary in the ordinary course of business. DBSC is further required to use
its best efforts to comply with all FCC Due Diligence Requirements, and to take
certain actions, and to refrain from taking certain actions, which are typical
of transactions such as that contemplated by the Merger Agreement.
EchoStar is prohibited in the Merger Agreement from negotiating with any
DBSC Shareholders to purchase their DBSC Common Stock; provided, however, that,
under certain circumstances, EchoStar is not prohibited from accepting a pledge
of DBSC Common Stock from any DBSC Shareholder as security for the repayment of
obligations of such DBSC Shareholder to EchoStar. EchoStar is also required to
take certain actions, and to refrain from taking certain actions, which are
typical of transactions such as that contemplated by the Merger Agreement.
CONDITIONS OF THE MERGER. The Merger Agreement specifies that the
obligations of each of the parties to consummate the Merger are contingent upon
the occurrence of certain conditions precedent. However, the Merger Trigger
Agreement, which was executed by DBSC, EchoStar and MergerCo contemporaneously
with the execution of the Merger Agreement, specifies that the only remaining
conditions to the consummation of the Merger are that FCC Approval must be
received and the Merger must be approved by DBSC Shareholders. DBSC
Shareholders owning in excess of 82% of the issued and outstanding DBSC Common
Stock approved the Merger by written consent on December 21, 1995, therefore
satisfying the shareholder approval requirement. FCC Approval of the Merger
was obtained on August 30, 1996. Pursuant to the Merger Trigger Agreement,
however, any party may refuse to consummate the Merger if any other party
willfully and in bad faith acts, or fails to act, in a manner that materially
impedes the consummation of the Merger in material compliance with the terms
agreed to by the parties.
TERMINATION. Subject to the Merger Trigger Agreement, the Merger Agreement
may be terminated at any time prior to the Effective Time of the Merger upon
the mutual consent of DBSC and the EchoStar Companies. The Closing of the
Merger is to occur as soon as is practicable when all requisite clearances,
approvals, authorizations and consents have been obtained and the conditions to
the obligation of each of the parties to close have been met, but is to occur
in no event later than December 31, 1997, unless extended by mutual agreement
of the parties.
EFFECTIVE TIME. On the Closing Date, the parties will file a Certificate of
Merger with the Secretary of State of the States of Colorado and Delaware to
consummate the Merger. Upon the filing and acceptance of such Certificates of
Merger, the Merger shall become effective.
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THE MERGER TRIGGER AGREEMENT
Contemporaneous with execution of the Merger Agreement, the parties executed
the Merger Trigger Agreement. Pursuant to the Merger Trigger Agreement, the
parties agreed, among other things: (i) to execute the Merger Agreement;
(ii) to consummate the Merger without preconditions other than FCC Approval,
which approval was obtained on August 30, 1996, and approval by DBSC
Shareholders, which approval was obtained on December 21, 1995 by written
consent of DBSC Shareholders owning in excess of 82% of DBSC Common Stock
issued and outstanding; (iii) to enter into the Loan Agreements; and (iv) that,
in the event the Merger is not completed for any reason, the parties would
enter into the Substitute DBSC Transaction, as more particularly described
below. Under the terms of the Loan Agreements, EchoStar agreed to purchase
$16.0 million in principal amount of promissory notes of DBSC and, in
EchoStar's sole and absolute discretion, up to an additional $134.0 million
principal amount of promissory notes, the proceeds from which are to be used by
DBSC to make required payments to Lockheed Martin under the DBSC Satellite
Contract and to make deposits for launch reservations. As security for
repayment of all obligations of DBSC to EchoStar under the Loan Agreements,
DBSC granted EchoStar a first priority security interest in all assets of DBSC,
whether then existing or thereafter acquired, including by way of example, and
not by limitation, the DBS Rights and DBSC's satellites under construction by
Lockheed Martin. EchoStar purchased $16.0 million principal amount of
promissory notes on December 21, 1995, and an additional $2.5 million on each
of February 20, 1996, March 11, 1996, March 27, 1996, May 1, 1996, June 3,
1996, July 8, 1996, August 5, 1996, September 3, 1996 , October 7, 1996 and
November 4, 1996. Each of the promissory notes accrues interest at a rate, per
annum, equal to the prime rate of interest charged by Chase Manhattan Bank on
the date the applicable promissory note was executed, plus three percent.
For purposes of the Merger Trigger Agreement, a "Substitute DBSC
Transaction" is a transaction or series of transactions that will have the
effect of providing to DBSC Shareholders, as nearly as is possible, the cash
amount or number of shares of EchoStar Common Stock they would have received if
the Merger had been consummated, and which provides EchoStar, as nearly as is
possible, the benefits that would have accrued to EchoStar had the Merger been
completed, for as nearly as is possible, the total Cash Value or Share Value
that EchoStar would have provided to the DBSC Shareholders had the Merger been
completed. EchoStar intends to seek FCC approval of any Substitute DBSC
Transaction, if FCC approval is required. However, there are no assurances
that EchoStar could obtain FCC approval of a Substitute DBSC Transaction.
In order to carry out the intent of the parties in the event the Merger is
not consummated, the Merger Trigger Agreement further provides that:
(i) EchoStar shall have the right to convert any amounts owed it by DBSC
pursuant to the Loan Agreements to the right to receive from DBSC, in
perpetuity, profits of DBSC in accordance with formula "x/(x + $12,945,104)",
where "x" is equal to the aggregate amount, including accrued but unpaid
interest, due to EchoStar under the Loan Agreements at the time of conversion;
and (ii) the parties will enter into a Capacity Lease Agreement to provide
EchoStar with, subject to certain limitations, including compliance with FCC
rules and regulations and, if required, FCC Approval, the full and unfettered
use of DBSC's satellites, including its communications capacity, TT&C, uplink
arrangements and auxiliary or related functions or activities.
FEDERAL COMMUNICATIONS COMMISSION APPROVAL
DBSC filed an application for assignment of authorization with the FCC on
February 6, 1996. On March 15, 1996, one opposition to the Merger was filed at
the FCC by The Consumer Project on Technology ("CPT"), a public interest
advocacy group. CPT contended in its objection that the Merger would permit
EchoStar to acquire a dominant and anticompetitive position in the DBS
marketplace by aggregating an excessive number of DBS channels. A series of
letters objecting to the Merger were also filed subsequently by the CPT and
another public interest group. These letters raised the same issues as the
CPT's earlier objection. FCC Approval of the Merger was obtained on August 30,
1996.
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MECHANICS OF EXCHANGE OF CERTIFICATES
Each DBSC Shareholder shall make an election whether to receive the Cash
Value or the Share Value on the Election Form delivered herewith. The Election
Form must be returned to the Exchange Agent at its principal offices at
1825 Lawrence Street, Suite 444, Denver, Colorado 80202, by 5:00 p.m. on
, 1996. As soon as practicable after the Effective Time of the Merger, the
Exchange Agent will mail to DBSC Shareholders instructions for surrendering
their stock certificates in exchange for the Merger Consideration. Except for
cash payments in lieu of fractional shares and to the extent DBSC Shareholders
make Cash Elections, the Merger Consideration will be paid in EchoStar Common
Stock.
Upon the surrender of certificates, EchoStar will promptly cause to be paid
to the persons entitled thereto the Merger Consideration. No interest will be
paid or will accrue on any amount payable upon the surrender of any
certificate. After the Effective Time of the Merger, certificates which
previously represented issued and outstanding shares of DBSC Common Stock will
represent solely the right to receive the Merger Consideration multiplied by
the number of shares previously represented thereby. Prior to the surrender of
certificates, EchoStar may, at its option, refuse to pay any dividends or other
distributions with respect to EchoStar Common Stock; provided, however, that
upon surrender of such certificate, there shall be paid to the DBSC
Shareholders electing to receive the Share Value the amount, without interest,
of dividends and other distributions payable with respect to EchoStar Common
Stock, if any, which have become payable with respect to the EchoStar Common
Stock and which have not previously been paid.
To be eligible to qualify as a tax-free reorganization for federal income
tax purposes, no more than 50% of the aggregate Merger Consideration may be
paid in cash. Accordingly, if the amount of cash payable in order to give full
effect to all Cash Elections, to satisfy the exercise of any dissenters' rights
and in settlement of fractional shares, would exceed 50% of the aggregate
Merger Consideration, then each Cash Election will be reduced pro rata so that
the total cash paid will not exceed 50% of the aggregate Merger Consideration,
and the stock portion of the Merger Consideration payable to each affected DBSC
Shareholder will be correspondingly increased.
ACCOUNTING TREATMENT
The Merger will be accounted for by EchoStar under the "purchase" method of
accounting in accordance with generally accepted accounting principles.
Therefore, the aggregate consideration paid by EchoStar in connection with the
Merger will be allocated to DBSC's assets based on their fair values, and the
results of operations of DBSC will be included in the results of operations of
EchoStar only for periods subsequent to the Effective Time of the Merger.
FEDERAL INCOME TAX CONSEQUENCES
THE MERGER. The following discussion describes the principal federal income
tax consequences that are expected to result from the Merger and certain
transactions associated therewith.
DBSC and EchoStar expect the Merger to be a tax-free reorganization for
federal income tax purposes so that no gain or loss will be recognized by DBSC
Shareholders upon the exchange of DBSC Common Stock for EchoStar Common Stock
in the Merger, except with respect to cash received in lieu of fractional
shares of EchoStar Common Stock. Sullivan & Worcester LLP, counsel to DBSC,
has advised DBSC as follows:
(i) the Merger will constitute a "reorganization" within the meaning of
Sections 368(a)(1)(A) and 368(a)(2)(D) of the Code; and
(ii) the exchange in the Merger of DBSC Common Stock for EchoStar Common
Stock will not result in the recognition of gain or loss to the DBSC
Shareholders with respect to such exchange.
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Revenue Procedure 86-42 sets forth the representations required by the
Internal Revenue Service in connection with a request for a ruling that a
transaction will constitute a "reorganization" within the meaning of
Section 368 of the Code. It is assumed that DBSC, EchoStar and MergerCo can
make the representations required by the Internal Revenue Service in connection
with a request for a ruling that the Merger would constitute a "reorganization"
within the meaning of Sections 368(a)(1)(A) and 368(a)(2)(D) of the Code. Some
of the more significant of such assumptions include:
(i) There is no plan or intention by the DBSC Shareholders to sell,
exchange, or otherwise dispose of a number of shares of EchoStar Common Stock
received in the Merger that would reduce the DBSC Shareholders' ownership of
EchoStar Common Stock to a number of shares having a value as of the date of
the Merger, of less than 50 percent of the value of all of the formerly
outstanding DBSC Common Stock as of the same date (including, for this purpose,
shares of DBSC Common Stock exchanged for cash or other property, or exchanged
for cash in lieu of fractional shares of EchoStar Common Stock);
(ii) The Merger will be effected pursuant to the Colorado Business
Corporation Act;
(iii) MergerCo will acquire at least 90% of the fair market value of the net
assets and at least 70% of the fair market value of the gross assets held by
DBSC immediately prior to the transaction. For purposes of this assumption,
amounts paid by DBSC to dissenters, amounts paid by DBSC to shareholders who
receive cash or other property, DBSC's assets used to pay its reorganization
expenses, and all redemptions and distributions (except for regular, normal
dividends) made by DBSC immediately preceding the transfer, will be included as
assets of DBSC held immediately prior to the transaction;
(iv) EchoStar has no present plan or intention to liquidate MergerCo; to
merge MergerCo into another corporation; to sell or otherwise dispose of the
stock of MergerCo; or to cause MergerCo to sell or otherwise dispose of any of
the assets of DBSC, except for dispositions in the ordinary course of business
or transfers permitted by Section 368(a)(2)(C) of the Code, and except for
transfers not now contemplated which are caused by material changes in
EchoStar's business; and
(v) Following the Merger, MergerCo will continue the historic business of
DBSC or use a significant portion of DBSC's assets in a business, unless DBSC
loses its direct broadcast satellite authorization.
If any of the factual assumptions to be made become inaccurate, EchoStar
will take such steps as it deems reasonable and appropriate to notify
recipients of this Information Statement -- Prospectus of such inaccuracy. In
addition, the risk that the Merger would be held taxable increases and
Sullivan & Worcester LLP may have to modify or withdraw its opinion as to the
federal tax consequences of the Merger.
No ruling from the Internal Revenue Service concerning the tax consequences
of the Merger has been requested. If the Merger is consummated, but does not
qualify as a tax-free reorganization under the Code, each DBSC Shareholder
would recognize taxable gain or loss in the Merger equal to the difference
between the Merger Consideration, including the fair market value of the
EchoStar Common Stock, that he received and his tax basis in his DBSC Common
Stock. If the Internal Revenue Service determines that the Merger does not
qualify as a tax-free reorganization, presumably the Internal Revenue Service
will notify DBSC Shareholders of such determination. However, when and if
EchoStar is apprised of a successful challenge by the Internal Revenue Service
of the treatment by a DBSC Shareholder of the Merger as a "reorganization,"
EchoStar will take such steps as it deems reasonable and appropriate to notify
all of the recipients of EchoStar Common Stock pursuant to the Merger of such
determination.
If the Merger qualifies as a tax-free reorganization, the tax basis of the
EchoStar Common Stock received in the Merger by a DBSC Shareholder who receives
solely EchoStar Common Stock (including any fractional share of EchoStar Common
Stock that any such DBSC Shareholder may be deemed to receive) in the Merger
will be the same as the tax basis of such DBSC Shareholder in the DBSC Common
Stock exchanged for such EchoStar Common Stock. The tax basis of the EchoStar
Common Stock received by a DBSC Shareholder who receives both EchoStar Common
Stock and cash (other than cash in lieu of a fractional share of EchoStar
Common Stock) will equal the tax basis of such DBSC Shareholder in the DBSC
Common Stock exchanged,
46
decreased by the amount of cash received and increased by the amount of gain
recognized in the exchange. Cash received in the Merger by a DBSC
Shareholder in lieu of a fractional share of EchoStar Common Stock will be
treated under Section 302 of the Code as having been received in exchange for
such fractional share, and the DBSC Shareholder generally will recognize
capital gain or loss in such exchange equal to the difference between the
cash received and the DBSC Shareholder's tax basis allocable to the
fractional share exchanged for cash.
The federal income tax treatment of a DBSC Shareholder who elects under the
Merger Agreement and receives cash for his DBSC Common Stock will depend upon
such DBSC Shareholder's particular circumstances. Under the position taken by
the Internal Revenue Service in published rulings, cash received by a DBSC
Shareholder who receives solely cash in the Merger will be treated as having
been received by such DBSC Shareholder in a redemption of his DBSC Common Stock
subject to Section 302 of the Code. It is likely that such DBSC Shareholder
will recognize capital gain or loss equal to the difference between the amount
of cash received and such DBSC Shareholder's tax basis in his DBSC Common
Stock.
In connection with the intended tax-free treatment of the Merger, DBSC
Shareholders who own approximately 90% of DBSC Common Stock (excluding DBSC
Common Stock owned by EchoStar) have represented that they have no present
intention to sell, transfer or otherwise dispose of more than approximately 44%
of the EchoStar Shares received in connection with the Merger by those DBSC
Shareholders.
A DBSC Shareholder who exchanges his DBSC Common Stock for a combination of
EchoStar Common Stock and cash (other than cash received in lieu of a
fractional share of EchoStar Common Stock) will realize gain equal to the
excess, if any, of the fair market value of the EchoStar Common Stock and cash
received over such DBSC Shareholder's tax basis in his DBSC Common Stock. This
realized gain will be recognized, however, only in an amount that does not
exceed the amount of cash received. It is likely that this recognized gain
will be taxable to such DBSC Shareholder as capital gain, although it is
possible that this recognized gain will be taxable as dividend income if such
DBSC Shareholder's Cash Election does not result in a "meaningful reduction" in
the percentage ownership of EchoStar Common Stock that such DBSC Shareholder
otherwise would have received (taking into account both his actual ownership
and constructive ownership under the constructive ownership rules of
Section 318 of the Code). No loss realized by a DBSC Shareholder who receives
both EchoStar Common Stock and cash in the Merger will be recognized.
THE FEDERAL INCOME TAX DISCUSSION SET FORTH ABOVE IS INCLUDED FOR GENERAL
INFORMATION ONLY. DBSC SHAREHOLDERS ARE URGED TO CONSULT THEIR OWN TAX
ADVISERS AS TO THE SPECIFIC TAX CONSEQUENCES OF THE MERGER TO THEM, INCLUDING
INCOME TAX RETURN REPORTING REQUIREMENTS AND THE APPLICABILITY AND EFFECT OF
STATE, LOCAL AND OTHER TAX LAWS.
COMPARISON OF SHAREHOLDER RIGHTS
If the Merger is consummated, DBSC Shareholders will become stockholders of
EchoStar, which is a Nevada corporation, and their rights as such stockholders
will be governed by applicable Nevada corporation law ("NCL"), and by the
Articles of Incorporation and the By-Laws of EchoStar (the "EchoStar Articles "
and the "EchoStar By-Laws", respectively). Although it is not practical to
compare all of the differences between DGCL and the NCL, and between the
EchoStar Articles and the EchoStar By-Laws and the Certificate of Incorporation
and By-Laws of DBSC (the "DBSC Certificate" and the DBSC By-Laws",
respectively), the following is a summary of the material differences between
the rights of DBSC Shareholders and the rights of holders of EchoStar Common
Stock.
BUSINESS COMBINATION LEGISLATION
Under the DGCL, except under certain circumstances, a Delaware corporation
is prohibited from entering into specified business combinations with an
"Interested Stockholder" for the period of three years after such person
becomes an "Interested Stockholder." The DGCL defines an Interested
Stockholder to be a person or entity who has beneficial ownership of 15% or
more of the outstanding voting stock of a Delaware corporation.
47
This provision encourages a potential acquiror to negotiate with a company's
board of directors, and makes more difficult an acquisition of a Delaware
corporation that is not approved by its board of directors.
The NCL contains provisions relating to business combinations with an
"Interested Stockholder" similar to the DGCL except that under the NCL, an
"Interested Stockholder" is defined as a person or entity who has beneficial
ownership of 10% or more of the outstanding voting stock of the corporation.
See "Description of Capital Stock -- Nevada Law and Limitations on Changes in
Control."
APPRAISAL/DISSENTERS' RIGHTS
Stockholders of a Delaware corporation generally have appraisal rights with
respect to a merger or consolidation. Such appraisal rights are not available
(i) when a corporation is to be the surviving corporation and no vote of its
stockholders is required for the Merger or (ii) for shares of stock which, on
the record date fixed to determine the stockholders entitled to receive notice
of and vote on the agreement of merger, are listed on a national securities
exchange, designated as a national market system security on an interdealer
quotation system by the National Association of Securities Dealers, Inc., or
held of record by more than 2,000 stockholders, unless, in case of clauses (i)
or (ii) above, such stockholders are required by the terms of the merger to
accept consideration other than shares of stock of the surviving corporation,
shares of stock of another corporation that are so listed, designated or held
by such number of record holders, cash in lieu of fractional shares of such
stock, or any combination thereof. A Delaware corporation may provide in its
certificate of incorporation for appraisal rights in connection with
transactions other than mergers and consolidations.
The NCL provides appraisal rights with respect to mergers under
circumstances similar to those provided for in the DGCL, except that the NCL
specifies that the merger be one for which stockholder approval is required by
NCL Section 92A.120 to 92A.160 or by the articles of incorporation, and that
the dissenting stockholder is entitled to vote on the merger or if the
corporation is a subsidiary and is merged with its parent under NCL
Section 92A.180.
In addition, the NCL provides that shareholders may exercise their right to
dissent from and obtain payment for shares in the event of: a share exchange,
if the corporation is the party whose shares will be acquired, and if the
dissenting shareholder is entitled to vote on the exchange; any corporate
action taken pursuant to a shareholder vote, where appraisal rights are
provided to voting or nonvoting shareholders in the articles of incorporation,
the bylaws, or a resolution of the board of directors; and a proposal to
increase or decrease the number of authorized shares of stock, if certain
shareholders otherwise entitled to receive a fraction of a share must instead
accept money or scrip.
For a description of the procedures for asserting appraisal rights of
dissenting DBSC Shareholders under the DGCL, see "Rights of Dissenting
Shareholders."
SPECIAL MEETINGS OF STOCKHOLDERS; NOTICE PROVISIONS
The EchoStar By-Laws provide that special meetings of stockholders of
EchoStar may be called by the Board of Directors, the President, or the holders
of at least one-third of all shares entitled to vote at the meeting. Notice of
the special meeting and the business to be conducted thereat is to be given to
each stockholder entitled to vote at such meeting not less than ten nor more
than sixty days before the meeting.
The DBSC By-Laws provide that special meetings of DBSC Shareholders may be
called by the Board of Directors or the Chairman, and must be called by the
Chairman or the Secretary on the written request of the holders of at least ten
percent of the outstanding stock entitled to vote at the meeting. Notice of
DBSC's special meetings and the business to be conducted thereat is to be given
to each DBSC Shareholder entitled to vote at such meeting not less than ten
days before the meeting. The DBSC By-Laws could be amended under the DGCL to
provide for not less than ten nor more than sixty days notice comparable to the
DGCL and the NCL. Under the EchoStar By-Laws, at least thirty days notice must
be given for a meeting to increase authorized capital stock. The DBSC By-Laws
have no comparable provision.
48
ACTION BY WRITTEN CONSENT
Under the DGCL, stockholders may take action without a meeting, provided a
written consent setting forth the action so taken is signed by the holders of
the minimum number of shares required to take such action at a meeting.
The EchoStar Bylaws provide that Shareholders may take action without a
meeting if such action is set forth in a written consent. However, such
consent must be signed by all of EchoStar's shareholders entitled to vote with
respect to the subject matter.
DIRECTORS: NUMBER, FILLING VACANCIES, REMOVAL
The EchoStar By-Laws provide that the number of directors constituting the
Board of Directors shall be not less than three nor more than nine, which
number shall be fixed by resolution of the Board or stockholders. Any director
or the entire Board may be removed from office at a meeting called for the
express purpose of removing directors, with or without cause, by the
affirmative vote of the holders of a majority of the shares entitled to vote at
an election of directors. Any vacancy occurring in the EchoStar's Board of
Directors may be filled by vote of a majority of the remaining directors,
except that a directorship to be filled due to an increase in the number of
directors is to be filled by the vote of a majority of the directors then in
office or by election at an annual meeting, or a special shareholders' meeting.
The DBSC By-Laws provide that the number of directors constituting the Board
shall be five. Under the DBSC By-Laws, any director may be removed, with or
without cause, at a meeting specifically called for that purpose by the
affirmative vote of the holders of a majority of the outstanding shares
entitled to vote at an election of directors. Any vacancy occurring in DBSC's
Board may be filled by the affirmative vote of a majority of the remaining
directors.
LOANS TO AND GUARANTEES OF OBLIGATIONS OF OFFICERS AND EMPLOYEES
Under the DGCL, a loan to, guarantee of an obligation of, or other
assistance to an officer or employee of the corporation, including any officer
or employee who is a director, requires the determination of the Board of
Directors of the corporation that the loan, guarantee or assistance may
reasonably be expected to benefit the corporation. The NCL contains no
comparable provision, although it provides that directors exercising their
powers may consider, INTER ALIA, the interests of the employees and the
long-term as well as the short-term interests of the corporation and its
stockholders. Under the EchoStar By-Laws, a loan to, guarantee of an
obligation of, or other assistance to a director, officer or employee of the
corporation must comply with the NCL and be authorized by resolution of the
Board of Directors.
Under the DGCL, any contract or transaction (including a loan or guarantee)
between the corporation and any of its officers or directors, or between the
corporation and any other organization in which the corporation's directors or
officers are also directors or officers, or have a financial interest, is
voidable unless approved by a majority of the disinterested directors or the
shareholders after full disclosure of the material facts or if the transaction
is fair to the corporation at the time it is approved. The NCL has a similar
requirement except that such transactions may be approved by the majority vote
of stockholders holding a majority of the voting power, and such transactions
are also permissible if the fact of the common directorship, office or
financial interest is not disclosed or known to the director or officer when
the transaction is brought before the board for action.
AUTHORIZED CAPITAL STOCK
The authorized capital stock of EchoStar is substantially different from
that of DBSC. The Common Stock of EchoStar is divided into Class A Common
Stock, Class B Common Stock and Class C Common Stock. Each holder of Class A
Common Stock is entitled to one vote per share and votes together with Class B
and Class C Common Stock, as well as with the Preferred Stock. Each holder of
Class B Common Stock is entitled to ten votes per share. Each holder of
Class C Common Stock is entitled to one vote per share. Upon a Change in
49
Control (as defined herein), each holder of Class C Common Stock is entitled
to ten votes per share. Each share of Class B and Class C Common Stock is
convertible, at the option of the holder, into one share of Class A Common
Stock. Currently, there are no shares of Class C Common Stock outstanding.
All shares of DBSC Common Stock are identical and have one vote. Neither
EchoStar nor DBSC has granted any preemptive rights to its shareholders. In
addition, the number of EchoStar's authorized but unissued shares of Class A,
Class B and Class C Common Stock and Preferred Stock is substantially greater
than the number of shares already issued. EchoStar could issue shares of its
capital stock in an amount which would substantially dilute the voting power
of EchoStar's shareholders without obtaining shareholder approval of such
issuances. See "Description of Capital Stock."
DIVIDENDS
The DGCL permits corporations to pay dividends out of surplus, or if there
is no surplus, out of net profits for the fiscal year in which the dividend is
declared, or out of the net profits for the preceding fiscal year. Under the
NCL distributions are conditioned on a two-tier test: the equity solvency test
and the net value test. These tests prohibit a distribution if, after making
the distribution, (1) the corporation would not be able to pay its debts as
they become due in the usual course of business, or (2) the corporation's total
assets would be less than the sum of its total liabilities plus the amount that
would be needed, if the corporation were to be dissolved at the time of the
distribution, to satisfy the preferential rights upon dissolution of
shareholders whose preferential rights are superior to those receiving the
distribution.
PRICE RANGE OF ECHOSTAR CLASS A COMMON STOCK
The EchoStar Class A Common Stock has been quoted on the NASDAQ/National
Market System under the symbol "DISH" since June 20, 1995. The following table
sets forth, for the indicated fiscal periods, the high and low bid information
for the EchoStar Class A Common Stock as reported by NASDAQ.
HIGH LOW
---- ---
Fiscal Year Ended December 31, 1995
First quarter............................ N/A N/A
Second quarter........................... $18 $14 1/4
Third quarter............................ 17 12
Fourth quarter........................... 25 3/4 12 1/4
Fiscal Year Ended December 31, 1996
First quarter............................ 40 1/2 20
Second quarter........................... 36 1/2 27 3/4
Third quarter............................ 30 23 3/4
On November 25, 1996, the high and low bid information for the
EchoStar Class A Common Stock as reported by NASDAQ/National Market System
was $28 3/4 and $27 1/8, respectively. As of that date, there were
approximately 1,367 holders of record of the EchoStar Class A Common Stock.
DIVIDEND POLICY
Since the December 31, 1993 corporate reorganization, EchoStar has not paid
any dividends on common stock. EchoStar presently intends to retain future
earnings to support the growth of its business and therefore does not intend to
pay any dividends in the near future. The payment of any dividends will be
determined by the Board of Directors in light of conditions then existing,
including EchoStar's earnings, financial requirements and other factors.
EchoStar's ability to pay dividends is dependent upon results of operations.
In addition, the 1994 Indenture restricts the amount available for dividends on
the capital stock of Dish, Ltd. as well as the ability of Dish, Ltd. to loan or
otherwise distribute funds to EchoStar. In addition, the 1996 Indenture
restricts the ability of EchoStar to pay dividends. See "Description of
Certain Indebtedness -- 1994 Notes" and "-- 1996 Notes."
Since its inception, DBSC has had no earnings and has paid no dividends.
50
CAPITALIZATION
The following table sets forth as of September 30, 1996: (i) the unaudited
consolidated capitalization of EchoStar on a historical basis; (ii) the
unaudited consolidated capitalization of DBSC on a historical basis; and
(iii) the unaudited pro-forma consolidated capitalization of EchoStar after
giving effect to the proposed merger of EchoStar and DBSC. The historical
EchoStar information in this table is derived from the supplemental unaudited
Consolidated Financial Statements of EchoStar for the nine months ended
September 30, 1996, and should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
EchoStar's Consolidated Financial Statements and the Notes thereto included
elsewhere in this Information Statement -- Prospectus. The historical DBSC
information in this table is derived from the supplemental unaudited Financial
Statements of DBSC for the nine months ended September 30, 1996, and should
be read in conjunction with DBSC's Financial Statements and the Notes thereto
included elsewhere in this Information Statement -- Prospectus (in thousands).
AT SEPTEMBER 30, 1996 (UNAUDITED)
---------------------------------------------
AS
DBSC ADJUSTED
ECHOSTAR ACTUAL ACTUAL FOR MERGER
Cash, cash equivalents and marketable investment
securities.............................................. $250,111(1) $ 4 $ 250,115
------------ ------------ ------------
------------ ------------ ------------
Long-term obligations (excluding current portion):
Long-term deferred programming revenue.................. $ 6,790 $ -- $ 6,790
Mortgages and note payable.............................. 53,842 36,000(2) 53,842
1994 Notes, net......................................... 422,777 -- 422,777
1996 Notes, net......................................... 372,570 -- 372,570
Other Long-Term obligations............................. 478 -- 478
Accrued interest........................................ -- 2,196(3) --
------------ ------------ ------------
Total long-term obligations........................... 856,457 38,196 856,457
------------ ------------ ------------
------------ ------------ ------------
Stockholders' equity:
Preferred Stock, 20,000,000 shares authorized,
1,616,681 shares of Series A Cumulative
Preferred Stock issued and outstanding,
including accrued dividends of $3,046,000............. 18,098 -- 18,098
Common Stock, $0.01 par value, 3,000,000 shares
authorized, 1,620,138 shares issued and
outstanding........................................... -- 16 --
Class A Common Stock, $0.01 par value,
200,000,000 shares authorized,
10,996,621 shares issued and outstanding.............. 110 -- 117(5)
Class B Common Stock, $0.01 par value,
100,000,000 shares authorized, 29,804,401 shares
issued and outstanding................................ 298 -- 298
Common Stock Purchase Warrants (4)...................... 16 -- 16
Class C Common Stock, 100,000,000 shares
authorized, none outstanding.......................... -- -- --
51
Additional paid-in capital.............................. 154,142 5,849 166,334(5)
Unrealized holding gains on available-for-sale
securities, net of deferred taxes..................... 35 -- 35
Retained earnings (deficit)............................. (66,735) (4,466) (66,735)
------------ ------------ ------------
Total stockholders' equity............................ 105,964 1,399 118,163
------------ ------------ ------------
Total capitalization.................................. $962,421 $ 39,595 $ 974,620
------------ ------------ ------------
------------ ------------ ------------
- ------------------------------------------------
(1) Includes $135.4 million of cash restricted under the 1996 Indenture.
Also included is $35.0 million and $750,000 of restricted cash in escrow
accounts related to the manufacture of EchoStar Receiver Systems and for
the purpose of cash collateralizing certain standby letters of credit,
respectively. In addition, the total includes $5.7 million of cash
restricted to satisfy certain covenants regarding launch insurance required
by the 1994 Indenture related to the launch of EchoStar II.
(2) Represents DBSC's $36.0 million note payable to EchoStar at September 30,
1996.
(3) Represents accrued interest on DBSC's $36.0 million note payable to
EchoStar at September 30, 1996.
(4) Represents the value assigned to the Warrants issued on June 7, 1994 for
those Warrants outstanding at September 30, 1996.
(5) Reflects the fair value of the approximate 658,000 shares of EchoStar
Class A Common Stock to be issued in connection with the Merger, based on
the 10-day average closing price of EchoStar Class A Common Stock as of
December 28, 1995 of $18.54. The average share price used in this
calculation represents the average price of EchoStar's Class A Common Stock
for the five days immediately preceding and immediately following December
21, 1995, the date which EchoStar and DBSC entered into a Plan and
Agreement of Merger.
52
ECHOSTAR COMMUNICATIONS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis relates to the consolidated
financial condition and results of operations of EchoStar Communications
Corporation, and should be read in conjunction with the financial statements
and notes thereto included elsewhere in this Information
Statement--Prospectus.
THIS INFORMATION STATEMENT--PROSPECTUS CONTAINS STATEMENTS WHICH
CONSTITUTE FORWARD LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF
THE SECURITIES ACT AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS
AMENDED. THOSE STATEMENTS APPEAR IN A NUMBER OF PLACES IN THIS INFORMATION
STATEMENT--PROSPECTUS AND INCLUDE STATEMENTS REGARDING THE INTENT, BELIEF OR
CURRENT EXPECTATIONS OF ECHOSTAR WITH RESPECT TO, AMONG OTHER THINGS: (I)
ECHOSTAR'S FINANCING AND STRATEGIC TRANSACTION PLANS; (II) TRENDS AFFECTING
ECHOSTAR'S FINANCIAL CONDITIONS OR RESULTS OF OPERATIONS; (III) ECHOSTAR'S
GROWTH STRATEGY; (IV) ECHOSTAR'S ANTICIPATED RESULTS OF FUTURE OPERATIONS;
AND (V) REGULATORY MATTERS AFFECTING ECHOSTAR. PROSPECTIVE INVESTORS ARE
CAUTIONED THAT ANY SUCH FORWARD LOOKING STATEMENTS ARE NOT GUARANTEES OF
FUTURE PERFORMANCE AND INVOLVE SIGNIFICANT RISKS AND UNCERTAINTIES AND THAT
ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE PROJECTED IN THE FORWARD
LOOKING STATEMENTS AS A RESULT OF VARIOUS FACTORS.
OVERVIEW
EchoStar currently operates four related businesses: (i) operation of the
DISH Network-SM- and the EchoStar DBS System; (ii) design, manufacture,
marketing, installation and distribution of DTH products worldwide; (iii)
domestic distribution of DTH programming; and (iv) consumer financing of
EchoStar's domestic products and services. During March 1996 EchoStar began
broadcasting and selling programming packages available from the DISH
Network-SM-. EchoStar expects to derive its future revenue principally from
fees from subscribers toperiodic subscription fees for DISH Network-SM-
programming and, to a lesser extent, from the sale of equipment. The growth
of DBS service and equipment sales has had and will continue to have a
material negative impact on EchoStar's domestic sales of C-band DTH products;
however this negative impact has been more than offset for the nine months
ended September 30, 1996 by sales of EchoStar Receiver Systems. As sales of
EchoStar DBS programming and receivers increase, EchoStar expects the decline
in its sales of domestic C-band DTH products to continue at an accelerated
rate.
EchoStar generally bills for DISH Network-SM- programming periodically in
advance and recognizes revenue as service is provided. Revenue from the DISH
Network-SM- is a function of the number of subscribers,DISH Network-SM- revenue
is a function of: (i) the number of subscribers; (ii) the mix of programming
packages selected by subscribers and the rates charged subscribers, transaction
fees for; (iii) the rates charged subscribers; (iv) revenue from ancillary
programming activities (such as Pay-Per-View) and; and (v) revenue from
satellite usage time agreements. DBS programming costs are generally based
upon the number of subscribers to each programming offering; however, certain
programmers pay EchoStar for carriage of their signals. In August 1996,
EchoStar introduced. Since August 1996, EchoStar has introduced several
marketing promotions, the most significant of which is a nationwide marketing
promotion (the "EchoStar Promotion") which offers a standard EchoStar
Receiver System to consumers for $199 (as compared to the original average
retail price in March 1996 of approximately $499), conditioned upon the
consumer's prepaid purchase of one year of America's Top 40 CD-SM-
programming package (America's Top 50 CD-SM- programming package effective
November 1, 1996) for approximately $300. The EchoStar Promotion has
significantly increased the affordability of EchoStar Receiver Systems for
consumers. The primary purposes of the EchoStar Promotion are to rapidly
build a subscriber base, to expand retail distribution of EchoStar's products
and to build consumer awareness of the DISH Network-SM- brand. This promotion
is consistent with and emphasizes EchoStar's long-term business strategy
which focuses on generating the majority of its future revenue through sales
of DISH Network-SM- programming to a substantial subscriber base. The
EchoStar Promotion has successfully accelerated the development of EchoStar's
DBS subscriber base. The EchoStar Promotion requires significant investment
by EchoStar to acquire subscribers, EchoStar believes the investment is fully
recoverable from the DBS programming revenues expected to be generated.
EchoStar receivers process only DISH Network-SM- signals because of the
proprietary encryption technology employed. Further, because of high consumer
satisfaction ratings, EchoStar anticipates very high service renewal rates,
resulting in minimum subscriber lives of at Consequently, the satellite
receivers and other reception equipment can not be utilized with competitors'
DBS systems, and unlike the cellular phone industry, subscribers can not
seamlessly migrate to alternative DBS providers. Further, based on high DBS
industry consumer satisfaction ratings, initial feedback from consumers and
dealers and low EchoStar subscriber turnover rates, EchoStar anticipates high
service renewal rates leading to an expected average minimum subscriber life
of a least 3 years. However, as renewal data least three years. Initially,
however for subscribers to the DISH Network-SM- is not yet available, among
other things, EchoStar has elected to amortize its subscriber acquisition
costs over a one year period, which. This amortization period is equal to the
term of the prepaid programming package under the EchoStar Promotion. As
EchoStar's DISH Network-SM- subscriber base matures and EchoStar develops a
history of renewal rates, this amortization period may be adjusted to reflect
the expected average minimum life of a subscriber. In addition, EchoStar's
experience to date is that a majority of subscribers buy additional majority
of DISH Network-SM- subscribers have purchased premium and Pay-Per-View
programming for incremental amounts above the prepaid minimum required by
the EchoStar Promotion, which reduces the time necessary to recover the
average investment per subscriber. EchoStar's present marketing strategy is
based on current and anticipated competitive conditions which may change, and
such changes could be adverse to EchoStar. Future changes in marketing
strategy may include additional promotions, including promotions geared
toward further increasing the affordability of EchoStar Receiver Systems and
related accessories, which, among other things, which could increase
EchoStar's investment in its subscriber base.
53
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the
percentage of total revenues represented by certain revenue and expense items
in EchoStar's Statements of Income.
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
----------------------- -----------------
1993 1994 1995 1995 1996
---- ---- ---- ---- ----
(UNAUDITED)
Statement of Income Data:
Revenue:
DTH products and technical services:
Domestic................................ 69% 58% 54% 54% 60%
International........................... 24 32 36 36 18
Programming............................... 5 8 9 9 18
Loan origination and participation
income.................................. 2 2 1 1 4
--- --- --- --- ---
Total revenue......................... 100 100 100 100 100
--- --- --- --- ---
Expenses:
DTH products and technical services....... 73 70 73 72 72
Programming............................... 4 6 8 8 10
Selling, general and administrative....... 14 16 22 19 31
Depreciation and amortization............. 1 1 2 1 12
--- --- --- --- ---
Total expenses........................ 92 93 105 100 125
--- --- --- --- ---
Operating income (loss)..................... 8% 7% (5)% 0% (25)%
--- --- --- --- ---
--- --- --- --- ---
Net income (loss)........................... 9% 0% (7)% (4)% (30)%
OTHER DATA:
EBITDA...................................... 9% 8% (3)% 2% (14)%
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO THREE AND NINE MONTHS
ENDED SEPTEMBER 30, 1995
REVENUE. Total revenue for the three and nine months ended September 30,
1996 was $57.0 million and $172.0 million, respectively, an increase of $13.4
million, or 31%, and $48.8 million, or 40%, respectively, as compared to total
revenue for the three and nine months ended September 30, 1995 of $43.6 million
and $123.3 million, respectively. Revenue from domestic sales of DTH products
for the three and nine months ended September 30, 1996 was $29.1 million and
$104.0 million, respectively, an increase of $3.3 million, or 13%, and $38.3
million, or 58%, respectively, as compared to the same periods in 1995. The
increase in domestic revenue was primarily due to $22.3 million and $74.0
million in revenue from the sale of EchoStar Receiver Systems during the three
and nine months ended September 30, 1996, respectively. There were no EchoStar
Receiver System sales during the comparable periods in 1995. The increases in
domestic revenue were offset by a decrease of $5.7 million, or 48%, and $14.1
million, or 44%, in revenue from sales of C-band satellite receivers and related
accessories, during the three and nine months ended September 30, 1996,
respectively, as compared to the same periods in 1995. Additionally, domestic
revenue generated from satellite receivers sold for a competitor's DBS system
("Competitor DBS Receivers") decreased approximately $10.2 million, or 100%, and
$15.0 million, or 65%, for the three and nine months ended September 30, 1996,
respectively, compared to the same periods in 1995. There was no revenue and
$8.0 million of revenue from Competitor DBS Receiver sales for the three and
nine months ended September 30, 1996, respectively, as compared to $10.2 million
and $23.0 million for the same periods in 1995. The increases in domestic
revenue were also partially offset by a decrease of $3.0 million, or 82%, and
$6.6 million, or 63%, in revenue from sales of non-proprietary descrambler
modules, during the three and nine months ended September 30, 1996, as compared
to the same periods in 1995. The domestic market for C-band DTH products
continued to decline during the three and nine months ended September 30, 1996,
and this decline will continue to accelerate with the growth of DBS service and
equipment sales. Consistent with the increases in revenue noted above, EchoStar
has experienced a corresponding increase in trade accounts receivable at
September 30, 1996, and expects this trend to continue as EchoStar develops
additional channels of equipment distribution.
Domestically, EchoStar sold approximately 160,000 and 315,000 satellite
receivers in the three and nine months ended September 30, 1996, respectively,
an increase of 321% and 246%, respectively, as compared to approximately 38,000
and 91,000 satellite receivers, respectively, for the same periods in 1995. Of
the total number of satellite receivers sold for the three and nine months ended
September 30, 1996, approximately 154,000 and 274,000, respectively, were
EchoStar Receiver Systems. EchoStar Receiver System revenue represented
approximately 39% and 43%, respectively, of total revenue for the three and nine
months ended September 30, 1996. Although there was a significant increase in
the number of satellite receivers sold in 1996 as compared to 1995, overall
revenue did not increase proportionately as a result of the revenue recognition
policy being applied to satellite receivers sold under the EchoStar Promotion
combined with an approximate 26% reduction in the average selling price of C-
band satellite receivers. During the promotional period, EchoStar is recognizing
substantially less DTH product revenue and expense related to EchoStar Receiver
Systems sold pursuant to the EchoStar Promotion. Currently, EchoStar has chosen
to reduce the retail price of EchoStar's proprietary DBS reception equipment
at less than cost if they when consumers subscribe to and prepay for DISH
Network-SM- programming service for a minimum of one year. Transaction
proceeds to EchoStar applicable to the DISH Network-SM- programming (a
minimum of $300 per subscriber) are deferred and recognized as revenue over
the period of service. The remaining transaction proceeds are recognized as
equipment revenue on shipment and an equal amount is charged to expense.
EchoStar's investment in each subscriber is equal to the cost of the
equipment, less any remaining non-programming transaction proceeds to
EchoStar, measures EchoStar's investment in each new subscriber. This amount
is deferred and is being amortized over a one year period, which is equal to
the term of the prepaid programming package under the EchoStar Promotion. As
EchoStar's DISH Network-SM- subscriber base matures and EchoStar develops a
history of renewal rates, this amortization period may be adjusted to reflect
the expected average minimum life of a subscriber. This promotion is
consistent with and emphasizes EchoStar's long-term business strategy which
focuses on generating the majority of its future revenue through sales of
DISH Network-SM- programming to a substantial subscriber base.
Also included in the number of satellite receivers sold for the nine months
ended September 30, 1996 are approximately 19,000 Competitor DBS Receivers as
compared to 40,000, for the same period in 1995. During the nine months ended
September 30, 1996, the Competitor DBS Receivers were sold at an approximate 25%
reduction in the average selling price as compared to the nine months ended
September 30, 1995. Competitor DBS Receiver revenue represented approximately 5%
of total revenue for the nine months ended September 30, 1996. EchoStar's
agreement to
54
distribute Competitor DBS Receiver systems terminated on December 31, 1995
and during the first half of 1996, EchoStar sold all of its remaining
inventory of Competitor DBS Receivers. The elimination of Competitor DBS
Receiver inventory has been more than offset by a substantial increase in
inventory of EchoStar Receiver Systems and related components, the sale of
which has more than offset the elimination of revenue derived from the sale
of Competitor DBS Receivers.
DISH Network-SM- programming revenue was $15.3 million and $21.3 million
for the three and nine months ended September 30, 1996, respectively. Since
EchoStar did not begin broadcasting and selling programming packages
available on the DISH Network-SM- service until March 1996, there was no DISH
Network-SM- programming revenue generated during the comparable periods in
1995. DISH Network-SM- programming revenue represented 27% and 12% of total
revenue for the three and nine months ended September 30, 1996, respectively.
In future periods, EchoStar expects these percentages to continue to increase
as EchoStar expands its DISH Network-SM- subscriber base. EchoStar had
approximately 190,000 and 250,000 subscribers to DISH Network-SM- programming
as of September 30, 1996 and November 11, 1996, respectively.
C-band programming revenue was $2.9 million and $9.5 million for the three
and nine months ended September 30, 1996, respectively, a decrease of $906,000,
or 24%, and $2.0 million, or 17%, compared to the same periods in 1995. The
decrease is attributable to the industry-wide decline in domestic C-band
equipment sales and the related decline in domestic C-band programming revenue.
This decline in C-band equipment sales and the related programming revenue is
expected to continue and accelerate for the foreseeable future. The decline in
C-band DTH programming revenue in 1996 has been more than offset by sales of
DISH Network-SM- programming.
Loan origination and participation income for the three and nine months
ended September 30, 1996 was $1.7 million and $6.8 million, respectively, an
increase of $1.3 million, or 288%, and $5.5 million, or 434%, respectively,
compared to the same periods in 1995. The increase in loan origination and
participation income for the three and nine months ended September 30, 1996 was
primarily due to increased financed volume, including the financing of EchoStar
Receiver Systems.
Revenue from international sales of DTH products for the three and nine
months ended September 30, 1996 was $8.0 million and $30.3 million,
respectively, a decrease of $5.5 million, or 41%, and $14.5 million, or 32%,
respectively, as compared to the same periods in 1995. The decrease is directly
attributable to a decrease in the number of analog satellite receivers sold
combined with decreasing margins on products sold. Internationally, EchoStar
sold approximately 53,000 and 180,000 analog satellite receivers during the
three and nine months ended September 30, 1996, a decrease of 34% and 31%,
respectively, compared to approximately 80,000 and 261,000 units sold during the
same periods in 1995. Overall, EchoStar's international markets for analog DTH
products declined during the three and nine months ended September 30, 1996 as
anticipation for new international digital services continuesd to increase. This
international decline in demand for analog satellite receivers is similar to the
decline which has occurred in the United States and was expected by EchoStar. To
offset this anticipated decline in demand for analog satellite receivers,
EchoStar has been negotiating with digital service providers to distribute their
proprietary receivers in EchoStar's international markets. While EchoStar is
actively pursuing these distribution opportunities, no assurance can be given
that such negotiations will be successful.
OPERATING EXPENSES. Costs of DTH products sold were $35.3 million and
$125.5 million for the three and nine months ended September 30, 1996,
respectively, an increase of $4.5 million, or 14%, and $37.9 million, or 43%,
respectively, as compared to the same periods in 1995. The increase in DTH
operating expenses for 1996 resulted primarily from the increase in sales of
EchoStar Receiver Systems. Operating expenses for DTH products as a percentage
of DTH product revenue were 95% and 93% for the three and nine months ended
September 30, 1996, respectively, compared to 78% and 79% for the same periods
in 1995, respectively. This increase is principally attributable to the
accounting treatment applied to satellite receivers sold under the EchoStar
Promotion combined with an approximate 26% reduction in the average worldwide
selling price of C-band satellite receivers and a 25% reduction in the average
selling price of Competitor DBS Receivers, as described above.
The costs of DISH Network-SM- programming were $6.1 million and $7.9
million for the three and nine months ended September 30, 1996, respectively.
Since EchoStar did not begin broadcasting and selling DISH Network-SM-
programming packages until March 4, 1996, there were no DISH Network-SM-
programming expenses incurred during the comparable periods in 1995.
55
The costs of C-band programming were $2.6 million and $8.6 million for the
three and nine months ended September 30, 1996, respectively, a decrease of
$900,000, or 26%, and $1.7 million, or 16%, respectively, as compared to the
same periods in 1995. This decrease is mainly attributable to the decrease in C-
band programming revenue. C-band programming expenses as a percentage of C-band
programming revenue for the three and nine months ended September 30, 1996 were
89% and 91%, respectively, as compared to 92% and 90%, respectively for each of
the same periods in 1995. Although there was a decrease in C-band programming
revenue, gross profit margins earned on C-band programming remained relatively
consistent. As previously discussed, the domestic market for C-band DTH
products has continued to decline with the growth of DBS service and equipment
sales.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses were $23.7 million and $53.6 million for the three and
nine months ended September 30, 1996, respectively, an increase of $15.5
million, or 187%, and $30.1 million, or 128%, respectively, as compared to the
same periods in 1995. Selling, general and administrative expenses as a
percentage of total revenue increased to 42% and 31%, respectively, for the
three and nine months ended September 30, 1996, as compared to 19% for each of
the same periods in 1995. This increase was principally due to: (i) increased
personnel in all areas of the organization to support the DISH Network-SM-;
(ii) marketing and advertising prior to and in conjunction with the
introduction of DISH Network-SM- service (iii) costs related to the Digital
Broadcast Center, which commenced operations in the third quarter of 1995;
and (iv) costs associated with operation of the DISH Network-SM- Call Center
and related services which have been out-sourceds and subscription management
related services. In future periods, EchoStar believes that although total
selling, general and administrative expenses will continue to increase, the
increase as a percentage of future revenue will decrease as subscribers are
added and additional revenue from sales of DISH Network-SM- programming is
recognized.
Research and development costs totaled $1.6 million and $4.2 million for
the three and nine months ended September 30, 1996, respectively, as compared to
$1.5 million and $4.0 million for the same periods in 1995. The increase was
principally due to research and development costs related to digital DBS
receivers for domestic and international markets, principally offset by a
reduction in research related to C-band receivers for domestic and international
markets. EchoStar expenses research and development costs as incurred and
includes these costs in selling, general and administrative expenses.
EBITDA. As expected, EchoStar incurred operating losses for the three and
nine months ended September 30, 1996. EBITDA for the three and nine months ended
September 30, 1996 was a negative $10.6 million and a negative $23.6 million,
respectively, a decrease of $11.7 million and $25.5 million, respectively,
compared to the same periods in 1995. The decrease resulted from the factors
affecting revenue and expenses discussed above. EBITDA represents earnings
before interest income, interest expense net of other income, income taxes,
depreciation and amortization. EBITDA is commonly used in the telecommunications
industry to analyze companies on the basis of operating performance, leverage
and liquidity. EBITDA is not intended to represent cash flows for the period,
nor has it been presented as an alternative to operating income as an indicator
of operating performance and should not be considered in isolation or as a
substitute for measures of performance prepared in accordance with generally
accepted accounting principles. EchoStar expects to continue to report operating
losses through at least 1997.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization for the three
and nine months ended September 30, 1996 was $10.3 million and $20.0 million,
respectively, an increase of $9.5 million and $18.5 million, respectively, as
compared to the same periods in 1995. The overall increase primarily resulted
from depreciation on EchoStar I and the Digital Broadcast Center which were
placed in service during the first quarter of 1996 and the fourth quarter of
1995, respectively, and the amortization of subscriber acquisition costs.
Amortization of subscriber acquisition costs for the three and nine months ended
September 30, 1996 was approximately $3.3 million and $3.4 million,
respectively. As a result of the EchoStar Promotion, in future periods,
amortization expense will be of a magnitude which significantly exceeds
historical levels.
OTHER INCOME AND EXPENSE. Other expense, net for the three and nine months
ended September 30, 1996 was $14.6 million and $38.5 million, respectively, an
increase of $13.4 million and $31.0 million, respectively, as compared to the
same periods in 1995. The increase in other expense for the three and nine month
periods ending September 30, 1996 resulted primarily from an increase in
interest expense resulting from the issuance of the ESBC Notes. The increase has
been partially offset by an increase in interest income attributable to
increases in the balances of the ESBC Escrow Account, cash and marketable
investment securities accounts as a result of proceeds received from the
issuance of the ESBC Notes.
INCOME TAX BENEFIT. Income tax benefit for the three and nine months ended
September 30, 1996 was $13.0 million and $29.8 million, respectively, compared
to income tax benefit of $515,000 and $2.7 million during the same
56
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
REVENUE. Total revenue for 1995 was $163.9 million, a decrease of $27.1
million, or 14%, as compared to total revenue for 1994 of $191.0 million.
Revenue from domestic sales of DTH products for 1995 was $87.3 million, a
decrease of $24.5 million, or 22%, as compared to 1994. This decrease in
domestic revenues was primarily due to an expected decline of $26.9 million,
or 24%, in revenue from sales of satellite receivers and related accessories,
during 1995, as compared to 1994. The decrease in domestic revenues for 1995
was partially offset by $12.5 million in sales of non-proprietary descrambler
modules compared to $11.0 million in 1994. The domestic market for C-band
DTH products continued to decline during 1995 and this decline continued into
1996. The decline had been expected by EchoStar as described below. EchoStar
also decreased its emphasis on relatively high cost, low margin descrambler
modules beginning in the second quarter of 1994.
Domestically, EchoStar sold approximately 131,000 satellite receivers in
1995, an increase of 15% as compared to approximately 114,000 receivers sold
in 1994. Although there was an increase in the number of satellite receivers
sold in 1995 as compared to 1994, overall revenues declined as a result of a
change in product mix resulting from the introduction of lower priced DBS
receivers and related accessories, and an approximate 23% reduction in the
average selling price of C-band receivers. Included in the number of
satellite receivers sold are Competitor DBS Receivers manufactured and
supplied by the Competing DBS Manufacturer which totaled approximately 67,000
for 1995, as compared to 21,000 for 1994. Competitor DBS Receiver revenues
were $34.0 million for 1995, as compared to $12.0 million for 1994.
Competitor DBS Receiver revenues were 21% of total revenues for 1995.
In the second half of 1994 and throughout 1995, an increasing percentage
of domestic DTH satellite retailers relied on attractive financing packages
to generate sales. During most of 1994, certain of EchoStar's competitors
offered consumer financing that retailers considered more attractive than
financing offered by EchoStar. This competitive financing advantage resulted
in retailers selling competing products rather than EchoStar products and was
partially responsible for the decline in C-band DTH unit sales and revenue.
EchoStar has entered into an agreement with a national consumer finance group
permitting EchoStar to offer what it currently believes to be competitive
financing terms. However, once a retailer chooses an alternative financing
source, it is difficult to recapture that business. While volume and
participation payments increased throughout 1995, loan origination and
participation payments are not expected to reach historic levels in the short
term.
Commencing in 1995, EchoStar stopped receiving monthly participation
payments from Household Retail Services, Inc. ("HRSI") on its loan portfolio,
contributing to a decrease in loan origination and participation income from
1994. Loan origination and participation income for 1995 was $1.9 million, a
decrease of $1.7 million, or 47%, compared to 1994. EchoStar has filed suit
against HRSI for nonpayment of participation revenue, among other things.
EchoStar markets its current offering of C-band DTH products by offering
competitive pricing and financing in order to minimize the decline in
domestic C-band DTH sales resulting from the increased popularity of "small
dish" equipment. Additionally, EchoStar sold Competitor DBS Receivers for
reception of programming offered
57
by other service providers. Competitor DBS Receiver sales partially offset
the decline in domestic C-band sales in 1995 and more than offset these sales
in 1996, as discussed above. EchoStar's agreement to distribute Competitor
DBS Receivers terminated on December 31, 1995.
Programming revenue for 1995 was $15.1 million, an increase of $556,000,
or 4%, as compared to 1994. The increase was primarily due to additional
sales of programming packages through retailers and, to a lesser extent, the
renewal and retention of existing customers as a result of more attractive
pricing and more effective marketing. While EchoStar began to more
aggressively market its services in the second quarter of 1995, the
industry-wide decline in domestic C-band equipment sales has resulted in a
decline in C-band DTH programming revenues as well which has been fully
offset by sales of EchoStar DBS programming in 1996.
Revenue from international sales of DTH products for 1995 was $59.6
million, a decrease of $1.4 million, or 2%, as compared to 1994. The
decrease for 1995 resulted principally from reduced sales to the Middle East
where EchoStar's largest international DTH customer is based. This decline
was partially offset by increased sales in Africa. Revenue from sales of DTH
products in the Middle East suffered beginning in August 1995 as a result of
recently implemented restrictions against imports, and may not return to
historic levels even after import regulations are lifted, the timing of which
cannot be predicted. Historic sales levels may not be reached because of new
digital service planned for the Middle East beginning in 1996.
Internationally, EchoStar sold approximately 331,000 satellite receivers in
1995, an increase of 15%, compared to approximately 289,000 units sold during
1994. The increase was primarily due to a continued emphasis by EchoStar on
lower priced products in 1995 to meet marketplace demands. For 1995, the
effects of volume increases were offset by a 17% decrease in the average
selling price as compared to 1994.
OPERATING EXPENSES. Costs of DTH products sold were $120.2 million for
1995, a decrease of $13.5 million, or 10%, as compared to 1994. The decrease
in DTH operating expenses for 1995 resulted primarily from the decrease in
sales of DTH products. Operating expenses for DTH products as a percentage
of DTH product revenue were 82% for 1995, as compared to 77% for 1994. The
increase was principally the result of declining sales prices of C-band DTH
products as described above, during 1995 as compared to 1994 and the cost of
promotional campaigns.
Operating expenses for programming were $13.6 million for 1995, an
increase of $1.9 million, or 17%, as compared to 1994. Operating expenses
for programming as a percentage of programming revenue were 90% for 1995 as
compared to 80% for 1994. Programming expenses increased at a greater rate
than revenues from programming principally because the prior periods included
the flow through of certain volume discounts. Additionally, the C-band
program packaging business is extremely competitive, which restricts the
ability to pass on contracted affiliation agreement cost increases to
consumers.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses were $35.0 million for 1995, an increase of $4.8
million, or 16%, as compared to 1994. Selling, general and administrative
expenses as a percentage of total revenue increased to 22% for 1995 as
compared to 16% for 1994. The change was principally the result of the
reduction of revenues from domestic sales of DTH products and increased costs
to support, among other things, expansion of the EchoStar DTH product
installation network and administrative costs associated with development of
the DISH Network-SM-. In addition, $1.1 million of compensation expense was
recorded with regard to 55,000 shares of Class A Common Stock contributed by
EchoStar to EchoStar's 401(k) plan.
Research and development costs totaled $5.0 million for 1995 as compared
to $5.9 million for 1994. The decrease was principally due to the reduction
in research necessary to provide C-band receivers to domestic and
international markets, partially offset by increased research and development
costs related to digital DBS satellite receivers.
EBITDA. EBITDA for 1995 was a negative $4.9 million, a decrease of
$20.4 million, or 132%, as compared to 1994. The decrease resulted from the
factors affecting revenue and expenses discussed above.
58
DEPRECIATION. Depreciation for 1995 was $3.1 million, an increase of
$815,000, or 36%, as compared to 1994. The overall increase primarily
resulted from depreciation on assets placed in service during the third and
fourth quarters of 1995.
OTHER INCOME AND EXPENSE. Other expense for 1995 was $9.3 million, a
decrease of $3.5 million, or 27%, as compared to 1994. The difference in
other income and expense for 1995 compared to 1994 resulted primarily from
the amortization of original issue discount and deferred debt issuance costs
of $23.5 million, in 1995, and $20.7 million, in 1994, net of capitalized
interest, on the 1994 Notes, which were issued on June 7, 1994. Other
expense has been reduced by investment income on monies deposited in the 1994
Escrow Account of $8.8 million for 1995, and $6.5 million for 1994. Interest
capitalized relating to development of the EchoStar DBS System for 1995 was
$25.8 million as compared to $5.7 million for 1994.
PROVISION FOR INCOME TAXES. Income tax benefit for 1995 was $5.7
million as compared to the income tax provision for 1994 of $399,000. This
change is principally the result of changes in components of income and
expenses discussed above during 1995 and 1994, respectively. EchoStar's
deferred tax assets (approximately $13.9 million at December 31, 1995) relate
principally to temporary differences for amortization of original issue
discount on the 1994 Notes and various accrued expenses which are not
deductible until paid. No valuation allowance has been provided because
EchoStar currently believes it is more likely than not that these assets will
be realized. If future operating results differ materially and adversely
from EchoStar's current expectations, its judgment regarding the need for a
valuation allowance may change.
YEAR ENDED DECEMBER 31, 1994 COMPARED TO YEAR ENDED DECEMBER 31, 1993
REVENUE. Total revenue in 1994 was $191.0 million, a decrease of $30.0
million, or 14%, as compared to total revenue in 1993 of $221.0 million.
Revenue from domestic sales of DTH products in 1994 was $111.8 million, a
decrease of $41.0 million, or 27%, as compared to 1993. Approximately $22.8
million, or 56%, of the decrease was due to a decline in the number of
satellite receivers sold, reduced sales of equipment and accessories
typically sold in conjunction with receivers and lower selling prices for
that equipment. EchoStar also experienced a decrease of $18.2 million in
non-proprietary descrambler module sales during 1994, as compared to 1993.
This decrease in 1994 reflects the impact of higher than normal bulk sales of
modules to customers during 1993. EchoStar decreased its emphasis on sales
of these high cost, low margin products during 1994.
Domestically, EchoStar sold 114,000 receivers in 1994, a decline of 14%,
as compared to 1993. Two of the most important factors responsible for the
decline in EchoStar's satellite receiver sales were the unavailability of
competitive financing and a reduction in inventory as a result of EchoStar's
expectation of a decrease in DTH product sales resulting from the
introduction of DBS.
In 1994, an increasing percentage of domestic DTH satellite retailers
relied on attractive financing packages to generate sales. During most of
1994, certain of EchoStar's competitors offered consumer financing that
satellite retailers considered more attractive than financing offered by
EchoStar. This competitive financing advantage resulted in satellite
retailers selling competing products to their customers rather than EchoStar
products. EchoStar has entered into an agreement with a national bank
permitting EchoStar to offer what it presently believes to be competitive
financing terms.
Loan origination and participation income for 1994 was $3.7 million, a
decrease of $170,000, or 4%, as compared to 1993. The decrease resulted from
a decline in loan originations due to EchoStar's competitors offering
retailers financing considered more attractive than financing offered through
EchoStar prior to the new financing agreements entered into by EchoStar. The
decline was partially offset by revenue received from participation in
outstanding balances of EchoStar's financing portfolio during all of 1994.
Commencing in 1995, EchoStar stopped receiving monthly participation payments
on the loan portfolio.
Programming revenue for 1994 was $14.5 million, an increase of $3.7
million, or 34%, as compared to 1993. The increase was primarily due to
increased sales of programming packages through satellite retailers and, to
59
a lesser extent, the renewal and retention of existing customers as a result
of more attractive pricing and more effective marketing.
Revenue from international DTH products for 1994 was $60.9 million, an
increase of $7.4 million, or 14%, as compared to 1993. Such increases were
primarily the result of an increase in international consumer demand for DTH
products, especially in the Middle East and the Pacific Rim, in response to
growth in available satellite television programming. EchoStar sold 289,000
satellite receivers internationally during 1994, an increase of 43%, as
compared to 1993. The effects of volume increases were partially offset by a
17% decrease in the average selling price, as compared to 1993, due to an
emphasis by EchoStar on lower priced products in 1994 to meet marketplace
demands.
Although comparative revenues from domestic sales of DTH products
declined in 1994, fourth quarter 1994 total DTH revenues increased
approximately $3.3 million, or 7%, over third quarter 1994 revenues, which
were $6.0 million, or 16% higher than second quarter revenues. As a result
of sales of Competitor DBS Receivers and increased international sales,
fourth quarter DTH revenues of $47.6 million were higher than any other
quarter during 1994. This increase is primarily due to an increase in
domestic receiver sales to 66,000 in the second half of 1994 compared to
48,000 in the first half of 1994, which reflects the typically higher sales
volumes during the fall season and increased sales of Competitor DBS
Receivers.
OPERATING EXPENSES. Costs of DTH products sold were $133.6 million for
1994, a decrease of $27.8 million, or 17%, as compared to 1993. Operating
expenses for DTH products as a percentage of DTH product revenue were 77% and
78% for 1994 and 1993, respectively. The decrease in DTH operating expenses
in 1994 resulted primarily from the 42% decrease in non-proprietary
descrambler module sales, which sell at relatively low gross margins.
Operating expenses for programming were $11.7 million for 1994, an
increase of $2.3 million, or 25%, as compared to 1993. Operating expenses
for programming as a percentage of programming revenue in 1994 were 80% as
compared to 87% in 1993. Programming revenue increased at a greater rate
than operating expenses for programming principally because of discounts
available on wholesale programming prices as a result of the increased number
of subscribers and better pricing as a result of more favorable programming
contracts entered into during 1994.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses were $30.2 million in 1994 and 1993. Selling,
general and administrative expenses as a percentage of total revenue
increased to 16% for 1994 compared to 14% for 1993. The increase as a
percent of total revenue is principally the result of the reduction of
domestic sales of DTH products.
Research and development costs totaled $5.9 million for 1994, as
compared to $5.1 million in 1993. The increase is principally due to
additional research necessary to provide receivers to more international
markets and the initial development of EchoStar DBS receivers.
EBITDA. EBITDA for 1994 was $15.5 million, a decrease of $4.4 million,
or 22%, compared to 1993. EBITDA was 8% of total revenue for 1994, as
compared to 9% of total revenue for 1993. The decrease resulted from the
factors affecting revenue and expenses discussed above.
DEPRECIATION. Depreciation in 1994 was $2.2 million, an increase of
$566,000, or 34%, as compared to 1993. The increase primarily resulted from
purchases of manufacturing equipment and tooling during 1994 and a full
year's depreciation on equipment and tooling purchased throughout 1993.
OTHER INCOME AND EXPENSE. Other expense in 1994 was $12.7 million, an
increase of $13.3 million, as compared to 1993. The difference in other
income and expense compared to 1993 resulted primarily from the amortization
of original issue discount and deferred debt issuance costs which totaled
$26.4 million on the 1994 Notes. This amount was partially offset by $6.5
million of investment income in the Escrow Account and capitalized interest
of $5.7 million relating to the development of the EchoStar DBS System.
60
PROVISION FOR INCOME TAXES. Provision for income taxes for 1994 was
$399,000, an increase of $1.8 million, as compared to 1993. This increase is
principally the result of EchoStar's subsidiaries (other than ESC)
terminating their Subchapter S corporation status effective December 31,
1993. This change in tax status was recognized by establishing a net
deferred tax asset of $1.9 million on that date for temporary differences
between tax basis and amounts reported in EchoStar's Financial Statements.
The 1994 increase in the current and long term deferred tax asset was $7.3
million, which relates principally to the deferred deductibility of interest
related to the 1994 Notes. ESC terminated its Subchapter S corporation status
effective January 1, 1994. This change in tax status resulted in EchoStar
recognizing federal and state corporate income taxes for all of 1994.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operations totaled approximately $38.5 million for the
nine months ended September 30, 1996, as compared to $10.3 million used by
operations for the same period in 1995. The cash provided by operations for
the nine months ended September 30, 1996 was mainly a result of an increase
in deferred programming revenue related to the EchoStar Promotion, partially
offset by increases in accounts receivable, inventory and other current
assets. The cash provided by operations was invested in subscriber
acquisition costs.
Cash flows used by operations were $20.3 million for 1995. Cash flows
were used primarily for purchases of inventory and a $10.0 million DBS
inventory deposit. The increase of approximately $19.7 million in inventory
during 1995 principally represents: (i) purchase of integral components for
EchoStar Receiver Systems; (ii) a planned increase in inventory of Competitor
DBS Receivers; and (iii) an increase in international inventory to support
expected international demand. Funds necessary to increase these inventories
came from cash reserves.
Cash flows provided by operations were $24.2 million and $30.2 million
for 1994 and 1993, respectively. Cash flows were mainly expended for
purchases of property and equipment in 1994 and 1993, principally in
connection with development of the EchoStar DBS System and for distributions
to stockholders of EchoStar's subsidiaries in 1993. Distributions to
stockholders of EchoStar's subsidiaries were made to pay taxes on S
corporation taxable income in 1993. EchoStar is prohibited from making
further dividend payments by the terms of its debt agreements, except in
certain limited circumstances. Cash flows provided by operations in 1994
were invested in short-term interest-bearing marketable securities or
segregated as restricted cash and marketable securities.
From May 1994 to May 1996, the principal subsidiaries of Dish, Ltd.,
other than EchoStar Satellite Corporation (the "Borrowers"), were parties to
an agreement with Bank of America Illinois, which provided a revolving credit
facility (the "Credit Facility") for working capital advances and for letters
of credit necessary for inventory purchases and satellite construction
payments. The Credit Facility expired in May 1996 and EchoStar does not
currently intend to arrange a replacement credit facility.
During June 1994, EchoStar issued 624,000 units consisting of $624.0
million principal amount of the 1994 Notes and 3,744,000 Warrants
(representing 2,808,000 shares of EchoStar Class A Common Stock) for
aggregate net proceeds of approximately $323.3 million, which were placed in
the 1994 Notes Escrow Account. As of September 30, 1996, substantially all
of the Warrants issued in connection with the 1994 Notes Offering had been
exercised. Through September 30, 1996, $353.6 million had been withdrawn
from the 1994 Notes
61
Escrow Account. At September 30, 1996, approximately $328.7 million of these
proceeds had been applied to development and construction of the EchoStar DBS
System and approximately $24.9 million had been applied to other permitted
uses.
In March 1996, ESBC consummated a private placement of the 1996 Notes
which were subsequently registered with the Securities and Exchange
Commission. ESBC was formed in January 1996 for the purpose of the 1996
Notes Offering. In connection with the 1996 Notes Offering, EchoStar has
contributed all of the outstanding capital stock of its wholly owned
subsidiary, Dish, Ltd., to ESBC. ESBC issued $580.0 million principal amount
of the 1996 Notes for aggregate net proceeds of approximately $337.0 million
of which $177.3 million was placed in the 1996 Notes Escrow Account and the
remaining $159.7 million was placed in cash and cash equivalents or
marketable investment securities. Through September 30, 1996, $46.3 million
had been withdrawn from the 1996 Notes Escrow Account for development and
construction of EchoStar III and EchoStar IV. As of September 30, 1996,
approximately $135.4 million remained in the 1996 Escrow Account, which
included investment earnings. Subsequent to September 30, 1996, an
additional $25.5 million has been withdrawn from the 1996 Notes Escrow
Account. Total cash on hand and marketable investment securities at
September 30, 1996 were approximately $73.2 million. EchoStar guarantees the
1996 Notes on a subordinated basis.
EchoStar's Equity Offering in June 1995 resulted in net proceeds of
approximately $63.0 million. EchoStar's assets at September 30, 1996
included assets purchased with those proceeds. Substantially all of the
proceeds from the Equity Offering were used: (i) to secure launches for
EchoStar III and EchoStar IV; (ii) to support, through loans to DBSC,
construction of EchoStar III; (iii) to purchase, for $4.0 million,
convertible subordinated secured debentures from DBS Industries, Inc.; and
(iv) for general corporate purposes, including the down payment for the
frequencies at 148DEG. WL purchased at the FCC Auction in January 1996, which
will be reimbursed with the proceeds of the 1996 Notes Offering at the time
the final payment for the frequencies is made to the FCC.
EchoStar anticipates expending an additional $35 million in working
capital during the fourth quarter of 1996, including investment in subscriber
acquisition costs. This cash requirement could increase if any of the
following occur, among other things: (i) subscriptions to DISH Network-SM-
programming differ from anticipated levels; (ii) actual expenses exceed
present estimates; or (iii) investment in subscriber acquisition costs
continue to increase beyond planned levels. In addition to the working
capital requirements discussed above, during the fourth quarter of 1996,
EchoStar expects to expend: (i) approximately $3.9 million for contractor
financing on EchoStar I and EchoStar II; (ii) approximately $19.0 million in
connection with the launch of EchoStar III; (iii) approximately $37.0 million
for construction of EchoStar III and EchoStar IV; and (iv) approximately
$41.8 million for the purchase of the frequencies at 148DEG. WL. Funds for
these expenditures are expected to come from the 1996 Notes Escrow Account
and available cash and marketable investment securities. Beyond 1996,
EchoStar will expend approximately $68.7 million to repay contractor
financing debt related to EchoStar I and EchoStar II. Additionally, EchoStar
has committed to expend approximately an additional $260 million to build,
launch and support EchoStar III and EchoStar IV in 1997 and beyond. In order
to continue to build, launch and support EchoStar III and EchoStar IV beyond
the first quarter of 1997, EchoStar will need additional capital. Even if
EchoStar terminates the construction contracts with Lockheed Martin for the
construction of
62
EchoStar III and EchoStar IV, EchoStar will still need additional capital as
a result of termination penalties contained in the contracts. There can be
no assurances that additional capital will be available, or, if available,
that it will be available on terms favorable to EchoStar.
As a result of the factors discussed above, EchoStar will need to raise
additional capital to complete the construction and launch of EchoStar III
and EchoStar IV. There can be no assurance that necessary funds will be
available or, if available, that they will be available on terms favorable to
EchoStar. In anticipation of its future capital requirements and in order to
fully implement its business strategy, EchoStar regularly examines, and is
currently examining, opportunities to expand its DBS business, technology
base and product lines through means such as licenses, joint ventures,
strategic alliances, strategic investments and acquisitions of assets or
ongoing businesses. Currently, EchoStar has not made a commitment to any new
strategic transaction. At any time, however, EchoStar may agree to enter into
a new strategic transaction. Should EchoStar agree to enter into a new
strategic transaction, there can be no assurance as to the terms or timing of
the transaction, whether the transaction will be consummated or whether the
transaction would improve EchoStar's financial condition, results of
operations, business or prospects in any material manner. Further increases
in the investment in subscriber acquisition costs, inadequate supplies of DBS
receivers or significant delays or launch failures would significantly and
adversely affect EchoStar's operating results and financial condition.
EchoStar expects net losses to continue as it builds its subscription
television business, and therefore, absent additional capital, negative
stockholders' equity will result before December 31, 1997. EchoStar's
expected net losses will result primarily from: (i) the amortization of the
original issue discount on the 1994 Notes and 1996 Notes; (ii) increases in
depreciation expense on the satellites and other fixed assets; (iii)
amortization of subscriber acquisition costs; and (iv) increases in selling,
general and administrative expenses to support the DISH Network-SM-.
Although a negative equity position has significant implications, including,
but not limited to, non-compliance with NASDAQ National Market listing
criteria, EchoStar believes this event will not materially affect the
implementation and execution of its business strategy. When EchoStar ceases
to satisfy NASDAQ's National Market listing criteria, EchoStar's Common Stock
will be subject to being delisted unless an exception is granted by the
National Association of Securities Dealers. If an exception were not
granted, trading in EchoStar Common Stock would thereafter be conducted in
the over-the-counter market. Consequently, it would be more difficult to
dispose of, or to obtain accurate quotations as to the price of, the EchoStar
Common Stock. Delisting would result in a decline in EchoStar's Common Stock
trading market which could potentially depress stock and bond prices, among
other things.
EchoStar has entered into a contract with Lockheed Martin to begin the
construction phase of EchoStar IV. This contract also allows EchoStar to
begin the construction phase of EchoStar V. Concurrent with execution of this
contract, EchoStar waived all penalties due from Lockheed Martin for the late
delivery of EchoStar I and EchoStar II.
In July 1996, EchoStar and Lockheed Martin amended the contracts for
the construction of EchoStar I and EchoStar II. As collateral security for
contractor financing of EchoStar I and EchoStar II, EchoStar was required to
provide a letter of credit prior to the launch of EchoStar II in the amount
of $10 million (increasing to more than $40 million by 1999) and the
principal stockholder of EchoStar pledged all of his Preferred Stock to
Lockheed Martin ("Preferred Stock Guarantee"). Under the amended agreements,
EchoStar issued a corporate guarantee covering all obligations to Lockheed
Martin with respect to the contractor financing for EchoStar I and EchoStar
II. In consideration for the receipt of the corporate guarantee by EchoStar,
Lockheed Martin has agreed to eliminate the letter of credit requirements,
and to release the Preferred Stock Guarantee in accordance with a specified
formula based on the then outstanding contractor financing debt and the
market value of EchoStar's Class A Common Stock. This transaction has been
approved by EchoStar's board of directors with EchoStar's principal
stockholder
63
abstaining from the vote. Additionally, EchoStar will issue a corporate
guarantee covering all obligations to Lockheed Martin with respect to the
contractor financing for EchoStar III and EchoStar IV.
In addition to the commitments described above, EchoStar has entered
into agreements with various manufacturers to purchase DBS receivers and
related components manufactured based on EchoStar's supplied specifications.
As of September 30, 1996 the remaining commitments total approximately $148.7
million. As described previously, EchoStar has agreements with two
manufacturers to supply DBS receivers for EchoStar. Only one of the
manufacturers has produced a receiver acceptable to EchoStar. Since EchoStar
has given the non-performing manufacturer notice of its intent to terminate
the contract, EchoStar has not included amounts due under the contract in
EchoStar's purchase commitments. At September 30, 1996, the total of all
outstanding purchase order commitments with domestic and foreign suppliers
was approximately $150.0 million. All but approximately $19.2 million of the
purchases related to these commitments are expected to be made during 1996
and the remainder is expected to be made during 1997. EchoStar expects to
finance these purchases from available cash, marketable investment securities
and sales of its DISH Network-SM- programming.
EchoStar had outstanding $415.7 million and $849.2 million of long-term
debt (including the 1994 Notes and 1996 Notes, deferred satellite contract
payments on EchoStar I and EchoStar II and mortgage indebtedness) as of
December 31, 1995 and September 30, 1996, respectively. In addition, because
interest on the 1994 Notes is not payable currently in cash but accrues
through June 1, 1999, the 1994 Notes will accrete by $201.2 million through
that date. Similarly, because interest on the 1996 Notes is not payable in
cash but accrues through March 15, 2000, the 1996 Notes will accrete by
$207.4 million through that date. EchoStar is utilizing $28.0 million of
contractor financing for EchoStar II. The financing bears interest at 8.25%
and is payable in equal monthly principal and interest installments over five
years following launch. Contractor financing of $15.0 million and $12.0
million will be used for EchoStar III and EchoStar IV, respectively.
Interest on the contractor financing for EchoStar III and EchoStar IV will
range between 7.75% and 8.25%, with equal monthly installments due over five
years following the launch of the respective satellite.
AVAILABILITY OF OPERATING CASH FLOW TO ECHOSTAR
The 1994 Indenture and 1996 Notes Indenture impose various restrictions
on the transfer of funds among EchoStar and its subsidiaries. Although the
1996 Notes are collateralized by the stock of Dish, Ltd., various assets
expected to form an integral part of the EchoStar DBS System (and not
otherwise encumbered by the 1994 Notes Indenture), and guarantees of EchoStar
and certain of its other subsidiaries, ESBC's ability to fund interest and
principal payments on the 1996 Notes will depend on successful operation and
the acquisition of an adequate number of subscribers to the DISH Network-SM-
and ESBC having access to available cash flows generated by the DISH
Network-SM-, which in turn will depend on EchoStar's success in attracting
subscribers to the DISH Network-SM-. If cash available to ESBC is not
sufficient to service the 1996 Notes, EchoStar would be required to obtain
cash from other sources such as issuance of equity securities, new borrowings
or asset sales. There can be no assurance that those alternative sources
would be available, or available on favorable terms, or sufficient to meet
debt service requirements on the 1996 Notes.
OTHER
1994 AND 1996 NOTES
Three DBS orbital locations licensed by the FCC are generally
recognized as capable of providing satellite service to CONUS. EchoStar has
the right to utilize at least 21 DBS frequencies at one of those CONUS slots.
In the event the number of frequencies EchoStar has the right to use at a
CONUS orbital location is reduced to less than 21, then ESBC will be required
to make an offer to repurchase all of the outstanding 1996 Notes, and Dish,
Ltd. will be required to make an offer to repurchase one half of the
outstanding 1994 Notes. In the event the number of frequencies
64
EchoStar has the right to use at a full CONUS orbital location falls below
11, then Dish, Ltd. will be required to make an offer to repurchase all of
the outstanding 1994 Notes, rather than only half. Additionally, in the
event that EchoStar DBS, a wholly owned subsidiary of EchoStar, fails to
obtain authorization from the FCC for frequencies purchased at the FCC
Auction in January 1996, or in the event that such authorization is revoked
or rescinded, ESBC will be required under the 1996 Notes Indenture to
repurchase up to $52.3 million of principal amount of the 1996 Notes.
If the DBSC Merger or similar transaction does not occur on or before
March 1, 1997, ESBC will be required to repurchase at least $83.0 million
principal amount of the 1996 Notes. Further, in the event that EchoStar
incurs more than $7.8 million in expenses (as defined in the 1996 Notes
Indenture) in connection with the DBSC Merger, ESBC will be required to apply
an amount equal to such expenses minus $7.8 million to an offer to repurchase
the maximum principal amount of the 1996 Notes that may be purchased out of
such proceeds.
If any of the above described events were to occur, EchoStar's plan of
operations, including its liquidity, would be adversely affected and its
current business plan may not be fully implemented. Further, EchoStar's
short-term liquidity would be adversely affected in the event of: (i)
significant delay in the delivery of certain products and equipment necessary
for operation of the EchoStar DBS System; (ii) shortfalls in estimated levels
of operating cash flows; or (iii) unanticipated expenses in connection with
development of the EchoStar DBS System.
RECEIVER MANUFACTURERS
EchoStar has agreements with two manufacturers to supply DBS receivers
for EchoStar. Only one of the manufacturers has produced a receiver
acceptable to EchoStar. EchoStar previously deposited $10.0 million with the
non-performing manufacturer and has an additional $15.0 million in an escrow
account as security for EchoStar's payment obligations under that contract.
EchoStar has given this non-performing manufacturer notice of its intent to
terminate the contract and has filed suit against that manufacturer.
Consequently, EchoStar is currently dependent on one manufacturing source for
its receivers. Since EchoStar has given the non-performing manufacturer
notice of its intent to terminate the contract, EchoStar has not included
amounts due under the contract in EchoStar's future purchase commitments.
The performing manufacturer is presently manufacturing receivers in
sufficient quantities to meet currently expected demand. If EchoStar's sole
manufacturer is unable for any reason to produce receivers in a quantity
sufficient to meet demand, EchoStar's liquidity and results of operations
would be adversely affected. There can be no assurance EchoStar will be able
to recover any amounts deposited with the non-performing manufacturer or held
in escrow.
65
EFFECTS OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board ("FASB") issued Statement of
Financial Accounting Standards No. 121, "Accounting for Impairment Of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" ("SFAS No.
121"). EchoStar has adopted SFAS No. 121 in the first quarter of 1996 and
its adoption has not had a material impact on EchoStar's financial position,
results of operations or cash flows.
Statement of Financial Accounting Standards No. 123 "Accounting for
Stock-Based Compensation" ("SFAS No. 123"), issued by FASB in October 1995
and effective for fiscal years beginning after December 15, 1995, encourages,
but does not require, a fair value based method of accounting for employee
stock options or similar equity instruments. It also allows an entity to
elect to continue to measure compensation cost under Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB No.
25"), but requires pro forma disclosures of net income and earnings per share
as if the fair value based method of accounting had been applied. EchoStar
intends to continue to measure compensation cost under APB No. 25 and to
comply with the pro forma disclosure requirements. Therefore, this statement
has had no impact on EchoStar's results of operations.
IMPACT OF INFLATION; BACKLOG
Inflation has not materially affected EchoStar's operations during the
past three years. EchoStar believes that its ability to increase charges for
products and services in future periods will depend primarily on competitive
pressures. EchoStar does not have any material backlog of its products.
66
ECHOSTAR COMMUNICATIONS CORPORATION
BUSINESS
GENERAL
EchoStar is one of only two DBS companies in the United States with the
capacity to provide comprehensive nationwide DBS programming service in 1996.
EchoStar's DISH Network-SM- commenced operations in March 1996 after the
successful launch of EchoStar I in December 1995. EchoStar launched EchoStar
II on September 10, 1996. EchoStar significantly increased the channel
capacity and programming offerings of the DISH Network-SM- when EchoStar II
became fully operational in November 1996. EchoStar now provides
approximately 120 channels of near laser disc-quality digital video
programming and over 30 channels of near CD-quality audio programming to the
entire CONUS.
The introduction of DBS receivers is widely regarded as the most successful
introduction of a consumer electronics product in U.S. history, surpassing the
rollout of color televisions, VCRs and compact disc players. As of October 1,
1996, approximately 3.8 million U.S. households subscribed to digital DTH
service.
EchoStar has rights to more U.S. licensed DBS frequencies than any of
its competitors. EchoStar controls, or will control (subject to certain FCC
approvals and findings), as many as 90 frequencies, including 21 frequencies
at one of the three orbital slots currently capable of providing nationwide
DBS service. See "Business--Industry Overview--DBS Industry." Each
frequency can be utilized by one transponder on a multiple transponder DBS
satellite. With digital compression, each transponder can provide up to 10
digital video channels to subscribers. EchoStar believes that its exclusive
rights to its substantial amount of valuable DBS spectrum will enable the
Company to achieve higher subscriber penetration and revenue per subscriber
than it would otherwise attain with its current service. However, even
though EchoStar has rights to more frequencies than its competitors, two DTH
providers, DirecTv and PrimeStar, currently dominate the DTH market, due to
their early entry. DirecTv and PrimeStar currently have approximately 1.9
million and 1.4 million subscribers, respectively, while EchoStar currently
has approximately 260,000 subscribers.
EchoStar III, expected to be launched in the fall of 1997 to serve the
eastern half of the United States from 61.5DEG. WL, and EchoStar IV, expected to
be launched in the first quarter of 1998 to serve the western half of the United
States from 148DEG. WL, are expected to provide local programming for the 40
largest U.S. television markets, niche and foreign language programming,
professional and college sporting events, HDTV, business and educational
programming and high-speed transmission of Internet data. In addition, the
Company has been granted 11 frequencies at 175DEG. WL and has been conditionally
granted FSS orbital locations at 121DEG. WL and 83DEG. WL and has applications
for two extended Ku-band satellites and two Ka-band satellites pending at the
FCC. While firm business plans for these spectrum applications have not yet
been determined and development is not expected to commence in the near term,
the Company believes this spectrum will be important to the Company's success
and intends to use these frequencies to provide complimentary services.
However, absent significant additional capital, EchoStar will be unable to
retain all of its assigned frequencies and orbital slots.
EchoStar currently has the capacity to provide approximately 150
channels of digital video programming. However, EchoStar's authority to
provide 30 of those channels (i.e. five of the frequencies) expires in
December 1996, unless the FCC further extends the STA to operate those
channels on EchoStar I, of which there can be no assurance. The STA would be
terminated sooner if Tempo, to whom those five frequencies have been
assigned, launches a DBS satellite to the 119DEG. WL orbital slot this year.
EchoStar is not currently using the STA to provide any channels of
programming to its subscribers.
67
Following the successful launch and deployment of four satellites, EchoStar
will have the capacity to provide over 500 channels of programming to the United
States. However, EchoStar does not currently have authorization from the FCC to
operate a sufficient number of frequencies to provide 500 channels. EchoStar
intends to apply for FCC authorization but there can be no assurance the FCC
will grant additional STAs for or authorize operation from frequencies
sufficient to provide 500 channels.
EchoStar's target market includes approximately 110 million potential
subscribers in the continental United States, including approximately 96
million television households. DISH Network-SM- subscribers can choose from
a variety of programming packages that EchoStar believes have a better
price-to-value relationship than packages currently offered by most pay
television providers. For example, DISH Network's-SM- America's Top 50 CD-SM-
programming package is priced at $24.99 per month, as compared to, on
average, over $42 per month for cable service. Although the EchoStar
Receiver System does not presently provide local programming via satellite
into the local markets it is serving, the EchoStar Receiver System allows its
subscribers to receive local programming from an off-air antenna without the
payment of an additional fee. America's Top 50 CD-SM- includes approximately
50 of the top "expanded basic cable" channels, including The Disney
Channel-Registered Trademark-, which historically has been a premium service,
and over 30 channels of near CD-quality audio programming. EchoStar also
offers various premium services, pay-per-view programming and, as of November
1996, offers various regional sports networks, additional premium services
and expanded pay-per-view offerings. EchoStar has negotiated the right to
broadcast substantially all of the most popular programming, including A&E-SM-,
CNBC-Registered Trademark- CNN-Registered Trademark-, CNN International-SM-,
C-Span-Registered Trademark-, Cinemax-Registered Trademark-, The Discovery
Channel-Registered Trademark-, The Disney Channel-Registered Trademark-,
ESPN-Registered Trademark-, The Family Channel-Registered Trademark-,
HBO-Registered Trademark-, Headline News-Registered Trademark-, Lifetime
Television-SM-, MTV-Registered Trademark-, Nickelodeon-Registered Trademark-,
Showtime Network-Registered Trademark-, TNT-SM-, Turner Classic
Movies-Registered Trademark-, USA Network-Registered Trademark-,
VH-1-Registered Trademark- and many other programming services.
EchoStar has approximately 260,000 subscribers and is adding new
subscribers at a pace of nearly 60,000 per month. EchoStar believes that
since June 1996 it has captured approximately 25% of all new digital DTH
satellite subscribers in the U.S. By January 1997, EchoStar expects to have
the production capacity to add over 90,000 subscribers per month. Since
August 1996, EchoStar has introduced several marketing promotions, the most
significant of which is the EchoStar Promotion which offers a standard
EchoStar Receiver System to consumers for $199 (as compared to the original
average retail price in March 1996 of approximately $499), conditioned upon
the consumer's prepaid purchase of one year of America's Top 50 CD-SM-
programming package for approximately $300. The EchoStar Promotion has
significantly increased the affordability of EchoStar Receiver Systems for
consumers. The primary purposes of the EchoStar Promotion are to rapidly
build a subscriber base, to expand retail distribution of EchoStar's products
and to build consumer awareness of the DISH Network-SM- brand. This promotion
is consistent with and emphasizes EchoStar's long-term business strategy
which focuses on generating the majority of its future revenue through sales
of DISH Network-SM- programming to a substantial subscriber base. The
EchoStar Promotion requires significant investment by EchoStar to acquire
subscribers, and EchoStar believes the investment is fully recoverable from
the DBS programming revenues expected to be generated. EchoStar receivers
process only DISH Network-SM- signals because of the proprietary encryption
technology employed. Consequently, the satellite receivers and other
reception equipment cannot be utilized with competitors' DBS systems, and
unlike the cellular phone industry, subscribers cannot seamlessly migrate to
alternative DBS providers. Further, based on high DBS industry consumer
satisfaction ratings, initial feedback from consumers and dealers and low
EchoStar subscriber turnover rates, EchoStar anticipates high service renewal
rates leading to an expected average minimum subscriber life of at least
three years.
Of the approximately 96 million television households in the United
States, it is estimated that over 60 million households pay an average of $42
per month for the average cable subscription. EchoStar believes that there
is significant unsatisfied demand for high quality, reasonably priced
television programming. Although primary target markets for the EchoStar
Receiver System include the approximately 11.0 million households not passed
by cable television systems and the approximately 20 million households
currently passed by cable television systems with relatively limited channel
capacity, EchoStar also targets cable subscribers in urban and suburban areas
who are dissatisfied with the quality or price of their cable programming.
In addition to the 96
68
million television households, EchoStar's target market includes
approximately 8 million businesses, 4.8 million commercial trucks, 3 million
recreational vehicles and 200,000 schools, libraries and other institutions.
DISH Network-SM- programming is available to any subscriber who
purchases or leases a low-cost EchoStar Receiver System, which consists of an
18-inch satellite dish, a digital satellite receiver, a user-friendly remote
control and related components. The EchoStar Receiver System is fully
compatible with MPEG-2, the world digital standard for computers and consumer
electronics products, and provides image and sound quality superior to
current analog cable or MMDS television services. EchoStar markets EchoStar
Receiver Systems through a nationwide network of independent distribution and
retail outlets and through consumer electronics retailers. EchoStar is also
working with additional mass merchandisers, direct sales organizations and
consumer electronics retailers to establish expanded distribution channels
for EchoStar Receiver Systems.
DBS is presently the most efficient, least capital intensive means of
reaching the largest number of U.S. television households. If the launches
of EchoStar's third and fourth satellites during late 1997 and early 1998 are
successful, EchoStar's expanded service from its four DBS satellites will
transmit to the continental United States near laser disc-quality, digital
television, potentially including local programming and high speed Internet
access, for an aggregate capital cost to EchoStar of less than $1 billion or
approximately $10 per U.S. television household. EchoStar's management
believes that this very attractive capital cost to provide state-of-the-art
programming service will permit EchoStar to become profitable at relatively
low levels of market penetration. EchoStar believes that the strategy
outlined above, together with its ability to exploit the more favorable cost
structure of DBS relative to other means of providing pay television
programming, will enable EchoStar to achieve its primary objective.
In addition to the Company's DBS business, EchoStar also designs,
manufactures, distributes and installs DTH products, distributes DTH
programming domestically and finances its domestic DTH products and services.
During the six years ended December 31, 1995, EchoStar sold over 1.7 million
DTH receivers worldwide.
EchoStar's primary objective is to become one of the leading providers
of pay television services in the United States. EchoStar's strategy to
achieve this objective is to:
- EXPAND THE MARKET FOR ITS SERVICES BY:
- USING AGGRESSIVE SALES PROMOTIONS, SUCH AS THE ECHOSTAR PROMOTION.
- PROVIDING SUBSCRIBERS WITH MORE QUALITY PROGRAMMING AT LOWER PRICES.
- EXPANDING THE DISTRIBUTION CHANNELS FOR THE ECHOSTAR RECEIVER SYSTEM.
- DEPLOY SATELLITES AT ADDITIONAL DBS ORBITAL SLOTS TO EXPAND ECHOSTAR'S
OFFERINGS WITH ADDITIONAL VIDEO, DATA, INTERACTIVE AND INTERNET
PRODUCTS.
- PROVIDE SUPERIOR, ONE-STOP CUSTOMER SERVICE FOR PURCHASING DISH
NETWORK-SM- HARDWARE AND PROGRAMMING AND OBTAINING FINANCING,
INSTALLATION AND CUSTOMER CARE.
- EMPLOY WORLD STANDARD MPEG-2 DIGITAL TECHNOLOGY TO ACHIEVE LOWER
MANUFACTURING COSTS AND ASSURE SUPERIOR PRODUCT CAPABILITY, INCLUDING
COMPATIBILITY WITH OTHER CONSUMER ELECTRONICS PRODUCTS.
EXPAND MARKET FOR ECHOSTAR RECEIVER SYSTEM
AGGRESSIVE PROMOTIONS
EchoStar introduced the EchoStar Promotion nationwide on August 1, 1996, in
which the Company offers a standard EchoStar Receiver System to consumers for
$199 (as compared to the original retail cost in March 1996 of approximately
$499), conditioned upon the purchase of one year of America's Top 50 CD-SM-
69
for approximately $300 ($24.99 per month). The EchoStar Promotion has
increased the affordability of EchoStar Receiver Systems. The Company
believes that programming revenues generated by the increased subscriber base
resulting from the EchoStar Promotion will more than offset the cost to
EchoStar of subsidizing the EchoStar Promotion.
The Company intends to continue to expand its target market through
value-oriented promotions such as the EchoStar Promotion. As a result of the
generally lower invested capital per potential subscriber required of digital
DBS operators relative to cable television operators, EchoStar believes it is
currently one of the lowest cost providers of nationwide pay television
programming. Unlike cable television, DBS does not require access to public
rights-of-way, multiple origination facilities (commonly known as head-ends)
or ground construction to install, maintain or upgrade services, thus
eliminating a major portion of the significant capital required to operate a
technologically advanced cable television system. Cable industry trade
groups and research associations report that significant capital expenditures
would be necessary to upgrade existing analog coaxial cable television
systems to digital fiber optic technology. These expenditures are estimated
to exceed $500 per subscriber. As a result, EchoStar believes that DISH
Network-SM- services are generally less expensive than cable television
subscriptions, while providing better video quality, access to more channels
and greater choice in programming packages. EchoStar believes that cable
companies generally will be unable or unwilling to lower their prices to
subscribers given the higher implicit cost of the infrastructure necessary to
deliver programming to their customers as compared to DBS programming.
The Company has entered into a strategic marketing relationship with
Gateway 2000 ("Gateway"). Gateway intends to include with each computer
system it ships, a certificate enabling the consumer to receive a free
EchoStar Receiver System by purchasing the same annual programming package
included in the EchoStar Promotion for approximately $300.
LOWER PRICED PROGRAMMING PACKAGES
EchoStar's low cost infrastructure and high channel capacity due to
digital compression enables the DISH Network-SM- to offer a wide variety of
programming packages at attractive price points. In addition to the annual
programming package included in the nationwide promotion, the DISH
Network-SM- offers a variety of programming packages including popular cable
television networks. The America's Top 50 CD-SM- programming package, which
includes The Disney Channel-Registered Trademark-, a premium service, priced
at $24.99 per month. This package includes a diverse range of programming
including news, sports, general entertainment, movies, and family
programming. The America's Top 50 CD Premium Plus-SM- package, priced at an
additional $10 per month, and the America's Top 50 CD Deluxe Plus-SM-
package, priced at an additional $20 per month, includes the America's Top 50
CD-SM- package combined with one and two multiplexed premium services,
respectively, including HBO-Registered Trademark-, Cinemax-Registered
Trademark- or Showtime-Registered Trademark-. HBO-Registered Trademark- and
Cinemax-Registered Trademark- may also be combined for an additional $15 per
month. According to industry reports and trade press, multiplexed premium
services, which include three to five channels per service for the same
retail price as one service, have proven to be popular with consumers.
Additional packages and combinations are expected, including superstations,
network programming and regional sports offerings. The DISH Network-SM-
offers pay-per-view movies and niche services on an "a la carte" basis.
EchoStar's pay-per-view strategy focuses on the premier movie titles which
generate substantial viewer interest and, consequently, higher revenues and
gross profit.
EXPANDED DISTRIBUTION CHANNELS
EchoStar is currently in discussions with certain large brand name consumer
electronics companies to manufacture and provide greater retail distribution of
EchoStar Receiver Systems. EchoStar believes that these companies are
interested in manufacturing EchoStar DBS compatible equipment because of the
opportunity to package the receiver with an array of new digital consumer
electronics products, including audio and video playback equipment, HDTV and
personal computers. These manufacturers would augment EchoStar's distribution
through channels such as consumer electronics outlets and mass merchandisers.
EchoStar currently markets EchoStar Receiver Systems through a nationwide
network of independent distribution and retail outlets that have been developed
over the past 15 years and through a limited number of
70
consumer electronics retailers. EchoStar offers a commission program based
on sales of hardware and programming that it believes is competitive with
commissions programs offered by other DTH operators. EchoStar is working
with additional mass merchandisers, direct sales organizations and consumer
electronics retailers to establish expanded distribution channels for
EchoStar Receiver Systems. EchoStar believes that these distributors have an
interest in retailing EchoStar Receiver Systems due to its differentiated
program offerings and lower wholesale costs.
DEPLOY SATELLITES TO EXPAND PRODUCT OFFERINGS
EchoStar has the exclusive rights to 90 DBS frequencies, 36 more
frequencies than the Company's current closest competitor, DirecTv. EchoStar
believes that its access to this number of frequencies, and especially those
21 frequencies at one of the three orbital slots currently capable of
providing full CONUS DBS service, will allow EchoStar, after the full
deployment of its satellites, to sign up more subscribers per geographic area
and generate greater revenue from each subscriber than the Company's current
service. EchoStar believes that it will achieve this higher subscriber
penetration and higher revenue per subscriber as a result of the
comprehensive, high-quality programming signal coverage that its 90
frequencies will allow and the extensive programming alternatives that 90
frequencies will allow.
EchoStar intends to make use of its significant DBS capacity to offer
expanded product offerings to its customers, including video, data,
interactive and Internet products. EchoStar plans to launch two additional
satellites, EchoStar III, in the fall of 1997 to serve the eastern half of
the United States, and EchoStar IV, in the first quarter of 1998, to serve
the western half of the United States. EchoStar intends to use the capacity
that four satellites will create to provide local programming for the 40
largest U.S. television markets, niche and foreign language programming,
extensive professional and college sports events, HDTV, business and
educational programming and high-speed transmission of Internet data.
SUPERIOR, ONE-STOP CUSTOMER SERVICE
EchoStar provides integrated customer care through a single point of
contact. By calling 1-800-333-DISH, customers can purchase hardware and
programming, schedule installation, obtain technical support, make inquiries
regarding their accounts and receive information about the DISH Network-SM-.
In order to maximize its customer service, EchoStar maintains its own call
center in Thornton, Colorado and has also contracted with industry leader
Electronic Data Systems Inc. ("EDS") to provide call center services. In
contrast, DirecTv and USSB subscribers must make three separate telephone
calls to subscribe to typical popular programming combinations: one for
DirecTv programming, one for USSB programming and one for hardware customer
service.
EMPLOY WORLD STANDARD MPEG-2 TECHNOLOGY
The EchoStar DBS System is fully compatible with MPEG-2 digital
compression technology, the world standard for computers and digital consumer
electronics and products. MPEG-2 compatibility gives EchoStar the advantage
of seamlessly interfacing with future digital consumer electronics and
computer products. This compatibility will generally result in lower costs to
consumers as more manufacturers use common components to design their
products.
INDUSTRY OVERVIEW
DBS INDUSTRY
DBS, as used in this Information Statement--Prospectus, describes a high
power satellite broadcast service in the Ku frequency band which, by
international agreement, has been allocated to national administrations in the
Western Hemisphere with a unique nine degree orbital spacing (DBS orbital
spacing is six degrees in certain areas of the world) permitting higher powered
transmissions which can be received on an 18-inch satellite dish. Other DTH
services include FSS, which describes low power (C-band) and medium power
(Ku-band) satellite
73
services. EchoStar believes that the smaller, 18 inch dish size generally
increases consumer acceptance and provides a substantial competitive
advantage over other DTH services.
Although the concept of DBS was introduced in 1982, it did not become
commercially viable until recently because available satellite technology did
not allow for the power required to transmit to small dishes and digital
compression technology had not been adequately developed. Today, DBS
provides the most cost efficient national point to multi-point transport of
video, audio and data services. The advent of high powered satellites allows
for 18-inch dishes and digital compression technology permits the broadcast
of up to ten channels of programming per frequency.
Eight DBS orbital slots, each with 32 frequencies, have been or will be
assigned by the FCC for use by U.S. DBS providers. The FCC has indicated its
belief that only the 101DEG. WL, 110DEG. WL and 119DEG. WL slots provide full
CONUS coverage and, therefore, these three slots are considered the most
strategic.
The FCC has issued or is expected to issue licenses or construction
permits for DBS orbital locations as follows.
FREQUENCY ALLOCATIONS FOR U.S. DBS ORBITAL SLOTS
TOTAL -------------------------------------------------------------------------------
FREQUENCIES 61.5DEG. 101DEG. 110DEG. 119DEG. 148DEG. 157DEG. 166DEG. 175DEG.
----------- -------- ------- ------- ------- ------- ------- ------- -------
ECHOSTAR (1)... 90 11 1 21 24 1 32
DirecTv........ 54 27 27
MCI............ 28 28
Continental... 22 11 11
Tempo.......... 22 11 11
Dominion (2)... 16 8 8
USSB........... 16 5 3 8
Unassigned..... 8 2 5 1
--- -- -- -- -- -- -- -- --
Totals....... 256 32 32 32 32 32 32 32 32
--- -- -- -- -- -- -- -- --
--- -- -- -- -- -- -- -- --
- ---------------
(1) Includes one frequency at 110DEG. WL, 10 frequencies at 119DEG. WL and 11
frequencies at 175DEG. WL as a result of EchoStar's December 1994 merger
with Directsat. Excludes the five frequencies at 119DEG. WL for which
EchoStar has an STA. Also includes 11 frequencies at 61.5DEG. WL and 11
frequencies at 175DEG. WL controlled by DBSC. In January 1996, EchoStar
entered the winning bid in the FCC Auction for 24 frequencies at 148DEG.
WL. Also includes the additional 10 of the frequencies at 175DEG. WL and
the one frequency at 166DEG. WL, which EchoStar believes it will be
assigned if the FCC finds that EchoStar has a firm satellite construction
contract, but there is no such assurance.
(2) The Company has entered into the Dominion Agreement which, among other
things, would provide the Company beneficial use of three of Dominion's
frequencies at 61.5DEG. WL. The Dominion Agreement is subject to FCC
approval, of which there can be no assurance.
In the event that EchoStar is unable to raise substantial additional
capital, EchoStar may not be able to retain all of the licenses or
construction permits granted to it by the FCC. There can be no assurances
that additional capital will be available, or, if available, that it will be
available on terms favorable to EchoStar. In order to exploit all of its
frequencies, other than the one frequency at each of the 110DEG. WL and
166DEG., EchoStar will need to build a fifth satellite. EchoStar's business
plan to exploit these frequencies at the 110DEG. WL and 166DEG. WL orbital
slots has not been developed.
Currently, only EchoStar and DirecTv have authorizations for more than
11 frequencies in the strategic U.S. licensed orbital slots which provide for
full CONUS coverage. In the FCC Auction, MCI entered the winning
75
bid to acquire the permit for 28 of 32 frequencies at the 110DEG. WL orbital
slot. Issuance of the permit is subject to FCC approval. EchoStar presently
expects that MCI will be able to offer DBS services from this slot within
approximately 18 months or possibly sooner. See "Risk Factors--Competitive
Nature of the Industry" and "--Competition--DBS Industry--Other DBS Operators."
Programming for DBS is generally available from the majority of
programmers on the same terms as are offered to cable operators. The Cable
Act, subject to certain exceptions, requires programmers controlled by
vertically integrated cable companies to offer programming to all potential
buyers on fair and reasonable terms. Additionally, although not required by
law, in EchoStar's experience, substantially all unaffiliated programmers
have made their programming available on fair and reasonable terms.
Pay-per-view programming has also generally been made available to DBS
providers on substantially the same terms and conditions as are available to
cable operators. See "Risk Factors--Risks of Adverse Effects of Government
Regulation."
Pursuant to an agreement (the "Dominion Agreement"), dated July 19,
1996, by and among ESC, Directsat, MergerCo, DBSC (collectively, the
"Providers") and Dominion, the Providers agreed to permit Dominion to
broadcast from or to use transponders on EchoStar I, EchoStar II and EchoStar
III. Under the Dominion Agreement, DBSC will allow Dominion to use eight
transponders on EchoStar III to broadcast programming for a term commencing
upon the successful launch of EchoStar III and (subject to certain
exceptions) ending at the end of the useful operating life of EchoStar III.
Prior to that, EchoStar Satellite Corporation will permit Dominion to
broadcast programming on one channel from EchoStar I during the useful
operating life of EchoStar I subject to earlier termination if the EchoStar I
STA is revoked or if certain other events occur (the "EchoStar I Option").
In addition, Directsat granted Dominion the right to broadcast programming on
one full frequency from EchoStar II for the useful operating life of EchoStar
II subject to earlier termination upon certain events. In the event that
Dominion exercises its right to broadcast programming on one frequency from
EchoStar II, its rights under the EchoStar I Option terminate subject to the
option of Dominion to reinstate its right to broadcast from one channel on
EchoStar I pursuant to the EchoStar I Option in certain circumstances.
Dominion will make monthly satellite usage time payments in exchange for its
use rights under the Dominion Agreement. Upon the commencement of the
satellite usage time agreement for the transponders on EchoStar III, Dominion
has agreed to allow EchoStar Satellite Corporation to use three of the
original eight Dominion frequencies. In addition, pursuant to the Dominion
Agreement, Dominion has the right, for a fee, to make use of EchoStar's
Digital Broadcast Center in Cheyenne, Wyoming and EchoStar's telephone
marketing system. The eight transponders on EchoStar III, which EchoStar
will allow Dominion to use, would not otherwise be revenue-producing because
EchoStar has not been authorized to use those transponders for its own DBS
services. The satellite usage time arrangements, however, would require FCC
approval and no assurance can be given that the FCC will grant this approval.
C-BAND/DTH INDUSTRY
The C-band industry provides satellite television products and services,
including hardware and software for the reception and decryption of satellite
television programming. Satellite programming at the C-band radio frequency
typically requires dish sizes ranging from six to 12 feet in diameter, depending
upon geographic location. This large dish compensates for a relatively low
(under 20 Watts per transponder) power signal. As of December 31, 1995,
approximately 4.2 million C-band systems had been sold in the United States at
an average price of over $2,000.
THE MARKET
GENERAL
EchoStar believes that there is a significant unsatisfied demand for high
quality, reasonably priced television programming and that the domestic and
international markets for satellite products and services are growing as a
result of the following continuing fundamental characteristics: (i) cable
infrastructure is either weak or non-existent in many domestic and international
areas; (ii) a high percentage of current pay television subscribers are
dissatisfied with their current programming choices, service or pricing;
(iii) distribution of television
76
programming to national, regional and international audiences is increasing;
and (iv) technological advancements, such as higher powered satellites and
digital compression, have continued.
Although many cable operators are expected to commit significant capital
to upgrade their systems to a competitive digital configuration, EchoStar
believes that cable operators will focus upgrades on the nation's top twenty
to fifty television markets and will largely ignore the rural areas that are
among EchoStar's primary target markets. Although EchoStar believes major
upgrade programs will occur in the top cable television markets, many of
those markets have a divergent group of cable operators with varying
strategic initiatives. EchoStar believes this fragmentation will work in
EchoStar's favor as it attempts to gain market share in these areas.
EchoStar also believes that it is very unlikely that cable providers will
ever be able to provide the same quality and quantity of programming that
EchoStar will be able to provide with just two of its four satellites. In
order to provide consistent, competitive digital service over more than the
smallest of cable coverage areas, cable providers will need to coordinate
their businesses and activities in an intricate manner on a nationwide basis.
Given the fractionalized nature of the cable programming business in the
United States today, EchoStar does not believe that the required level of
coordination is likely to come about. Also, it is estimated that to upgrade
all the United States' existing cable systems to allow them to provide
competitive digital service would cost in excess of $30 billion. The Company
does not believe the cable industry is prepared to make such a substantial
investment in its systems, especially in light of the fact that DBS can
provide better nationwide coverage, more programming and a better quality
picture than upgraded cable, at a fraction of the cost to contract the
required delivery system.
Finally, wireless cable operators have capacity constraints and, like
wireline cable operators, comprise a group without a coordinated strategy.
Newer technologies, such as LMDS and open video systems ("OVS") using
telephone wires, have not yet begun to provide service.
EchoStar believes that the demand for satellite television services in
the U.S. has grown and will continue to grow and that the DISH Network-SM-
provides the most attractive alternative to cable. While the high-power DBS
share of the U.S. television market is currently small compared to cable, it
has been steadily increasing. Industry studies indicate that a substantial
number of consumers are dissatisfied with cable television and that former
cable subscribers who subscribe to a DBS system are generally more satisfied
with it than cable. This research also indicates that the most likely DBS
customers are homeowners with families who currently have or have had cable,
subscribed to the premium cable channels and consider television a
significant component of their entertainment activities. EchoStar believes,
based on this research, that the following factors will contribute to the
market growth of the DISH Network-SM-.
DEMAND FOR MORE CHOICE IN TELEVISION PROGRAMMING AND BETTER QUALITY
PICTURE AND SOUND. Prior to the growth of cable television services,
television viewers were offered a relatively limited number of channels. As
the number of channels increased, consumer demand for more programming
choices also increased. EchoStar expects that this trend will continue and
that consumers will desire even more programming choices than are available
through cable. EchoStar believes consumers are also increasingly demanding
improved picture quality compared to what has historically been offered by
over-the-air VHF and UHF broadcasters and by cable. EchoStar believes that
the EchoStar DBS System is well-positioned to benefit from these growing
demands.
WEAK CABLE INFRASTRUCTURE. There are many rural areas of the United
States with either limited capacity of less than 39 channels or no cable
television availability. Of the approximately 11,000 cable systems in the
United States, many are located in rural areas outside significant population
centers. The cost to upgrade these systems would be significant and, in many
cases, economically infeasible in a competitive environment absent a
strategic partner. Since DBS is the most economical way to deliver
programming over a large area, EchoStar believes that rural areas provide a
prime market for its satellite television products and services.
DISSATISFIED CABLE SUBSCRIBERS. EchoStar believes that a substantial
number of current cable subscribers are dissatisfied with the quality of
picture and sound, limited channel capability, complicated multi-tier
packaging, cost of service, and level of customer service provided by their
cable systems. Industry research has indicated
77
that the number of cable subscribers dissatisfied with cable television is
significant. EchoStar believes that those cable subscribers represent a
substantial market opportunity and will potentially be attracted to its DBS
service.
INCREASED DISTRIBUTION OF TELEVISION PROGRAMMING. The global television
market is experiencing significant growth, both in terms of the number of
broadcasters creating programming and the number of channels available to
viewers. Within the United States, the number of television programming
providers grew from three in 1970 to in excess of 200 currently. Similarly,
deregulation in other countries has fostered the entry into the market of
additional television broadcasters. The number of television channels and
viewing alternatives available to United States and international audiences
is expected to continue to grow dramatically.
EchoStar believes that national broadcasters and other service providers
will expand their use of satellites to distribute programming to national,
regional and international audiences. Major United States programmers are
undertaking efforts to transition from their current limited international
roles to global entertainment providers. In addition, EchoStar believes that
international broadcasters will expand their use of satellites to distribute
programming to domestic audiences of similar ethnic, linguistic or cultural
heritage, a cornerstone of EchoStar's niche programming strategy. This
programming is provided more economically by utilizing satellite television
systems rather than local cable and other programming delivery systems.
Likewise, consumer demand for additional programming choices has
increased as the availability of channels has increased. EchoStar believes
that this trend will continue and consumers will demand more programming
choices than those offered by their cable systems.
CONTINUING TECHNOLOGICAL ADVANCEMENTS. Recent technological
advancements, such as the advent of high powered satellites (which made
possible the reduction in the size of satellite dishes) and the development
of digital compression technology, have increased signal transmission
capacity and lowered costs.
THE MARKET FOR DBS
EchoStar believes that the potential United States DBS market includes
the approximately 96 million households with television sets, together with
approximately 8 million businesses, 4.8 million commercial trucks, 3 million
recreational vehicles and 200,000 schools, libraries and other institutions
that desire access to high quality video, audio and data programming. Based
upon recent statistics, over 60% of the 96 million United States households
with television sets currently pay for programming. Given the anticipated
relative low cost and greater programming choices of EchoStar's DBS service
compared to cable, EchoStar believes that it will be able to successfully
penetrate its target markets.
EchoStar also believes that, as a result of the large base of potential
customers, the EchoStar DBS System will be commercially viable even if only
low market penetration levels are achieved in any particular target market.
EchoStar has identified the following specific market segments as primary
targets for DBS:
NON-PASSED HOUSEHOLDS. One of the primary targets for EchoStar's DBS
services will be United States households with television sets that are not
presently passed by cable, a total of approximately 11 million homes. Of
these, in excess of 2 million are former cable subscribers who have relocated
and do not currently subscribe because cable is unavailable to them at their
new residences. The subscribers who are unserved by cable are generally
located in sparsely populated rural and remote areas beyond the economic
reach of cable systems. These households also include second homes. This
market presents an opportunity for DBS providers because, unlike cable
service, the economics of delivering DBS service are not affected by
population density or remoteness, and the same service can be provided to
subscribers in such areas on the same basis as provided in densely populated
urban areas. Although C-band satellite television services are available
throughout the country, EchoStar believes that many non-passed households
settle for local broadcasting due to the size and cost of C-band satellite
dishes. EchoStar believes that non-passed households will respond favorably
to the availability of programming services, especially to economically
priced DBS services and reception equipment.
78
HOUSEHOLDS PASSED BY CABLE. EchoStar also intends to target the 85
million households that are passed by cable television, including
approximately 20 million households that are passed by cable systems offering
limited channel capacity (less than 39 channels). Although programming
offerings of cable systems in major metropolitan areas are significant, most
cable systems have a typical analog capacity of 30 to 80 channels. In order
to expand their capacity to that to be offered by the DISH Network-SM-,
EchoStar believes that cable systems would have to upgrade their analog
networks to fiber-based digital service. Fiber upgrade implementation is in
progress in a few cable systems in select metropolitan markets, with a
resultant increase of channel capacity anticipated to be available in five to
ten years. Due to the substantial capital investment required for widescale
deployment of fiber-based services, several cable companies have pushed back
originally-announced deployment schedules. EchoStar believes that consumers
will continue to demand the improved audio and video quality, and expanded
programming offerings, that are currently available with DBS technology, but
not available from over-the-air VHF and UHF broadcasters or from cable.
INTERNATIONAL AND CULTURAL MARKETS. There are approximately 8 million
households headed by persons of foreign nationality living in the United
States, encompassing 22.6 million foreign born persons living in the United
States. Generally, it is not cost effective for traditional broadcasters or
cable companies to provide targeted programming to these households due to
the generally low number of such niche customers in any particular local
market. These customers, along with other customers interested in receiving
international and other cultural programming, will be an important target
market for EchoStar. EchoStar's incremental cost to provide multicultural
programming is relatively insignificant given the ability of digital DBS
service to utilize a national delivery system for all mainstream and
multicultural programming. EchoStar believes that, by directly marketing
international programming to these customers, it will also sell more of its
most popular programming.
MOBILE, COMMERCIAL AND INSTITUTIONAL MARKETS. Other target markets for
DBS services include mobile, commercial and institutional markets. Already,
many recreational vehicle owners have purchased C-band satellite dishes.
Management believes that lower equipment prices and the smaller dish size
will attract many more recreational vehicle owners to DBS service, similar to
the current experience in Europe. EchoStar also believes that businesses,
hotels, restaurants, schools, libraries, apartment buildings and other
commercial and institutional organizations will purchase EchoStar's DBS
programming and equipment in order to receive educational, foreign language
and niche video and audio programming. EchoStar also intends to market its
DBS service to the marine and other mobile markets requiring actuated systems.
BUSINESS COMMUNICATION NETWORKS. EchoStar also intends to target
professional and related business groups as potential markets for its
programming services. Such groups include multi-level marketing organizations
and legal, medical, accounting and real estate professionals, among others.
CURRENT EXPERIENCE OF DIGITAL DTH OPERATORS
The digital DTH satellite business in the United States has experienced
tremendous consumer acceptance. The introduction of DBS receivers is widely
regarded as the most successful introduction of a consumer electronics
product in U.S. history, surpassing the roll out of color televisions, VCRs
and compact disc players. As of October 1, 1996, approximately 3.8 million
U.S. households had subscribed to digital DTH satellite service (including
that of PrimeStar, a medium-power DTH service with larger dishes than those
for use with DBS service). DBS providers have been successful penetrating
households both passed and not passed by traditional cable operators.
EchoStar has also been encouraged by the willingness of early DBS
subscribers to pay relatively high monthly programming fees. Subscribers are
currently paying an average of approximately $34 per month for DISH Network-SM-
programming, which is similar to the approximate $42 per month for the average
cable subscription. In addition, subscribers of DirecTv's DBS programming are
currently paying an average of approximately $50 per month. EchoStar expects
its average monthly programming fee to increase substantially with the
introduction of more video and audio programming, including additional higher
priced programming (such as premium and Pay-per-View options) with the
commencement of operation of EchoStar II and future satellites.
79
DBS AND RELATED SERVICES
PROGRAMMING
EchoStar now provides the entire continental United States approximately
120 channels of near laser disc-quality digital video programming and over 30
channels of CD-quality audio programming. These channels include, but are
not limited to, the following:
80
- -----------------------------
EXPANDED BASIC CABLE CHANNELS
- -----------------------------
A&E............................. Cultural and entertainment programming.
CARTOON NETWORK................. Programming from the Hanna Barbera cartoon library.
CNBC............................ Late breaking market news and personal finance information.
CNN............................. In-depth news and commentary.
CNN FN.......................... Comprehensive business and financial news.
CNN INTERNATIONAL............... International news, sports and weather.
COUNTRY MUSIC TELEVISION........ Contemporary country music hits.
COURT TV........................ News from courtrooms around the world.
C-SPAN.......................... Coverage of U.S. congressional events and public affairs.
THE DISCOVERY CHANNEL........... Non-fiction entertainment and documentaries.
ESPN............................ Wide variety of sports programming including the NFL, NHL and MLB.
ESPN2........................... Differentiated sports programming targeting younger viewers, including the NHL.
E! ............................. Programming from the world of celebrities and entertainment.
EWTN ........................... Continuous family-oriented and religious programming.
THE FAMILY CHANNEL.............. Family-oriented entertainment.
HEADLINE NEWS.................. Concise, fast-paced 30 minute news updates.
THE LEARNING CHANNEL............ Diverse mix of how-to, cooking, science, history and educational shows.
LIFETIME........................ Movies, specials and feature films targeted to women.
MTV............................. Music video and entertainment network.
NICKELODEON..................... Top rated children's programming.
SCI-FI CHANNEL.................. Science fiction, fantasy, classic horror and factual science programming.
TBS............................. Movies, documentaries, comedies, children's shows and sports, including
the NBA and Atlanta Braves baseball.
TNT............................. Classic and original movies, NFL and comprehensive NBA schedule.
THE TRAVEL CHANNEL.............. Video visits and travel information and advice.
TURNER CLASSIC MOVIES........... Movies, special features and entertainment.
USA............................. Original series, movies, sports and animated children's programming.
VH-1............................ Music videos for adults and cultural programming.
THE WEATHER CHANNEL............. Local, national and international weather.
- ----------------
PREMIUM CHANNELS
- ----------------
CINEMAX......................... Three channels of popular movies.
THE DISNEY CHANNEL*............. Animated Disney classics, original series, entertainment specials
and movies.
HBO............................. Five channels of first run and original movies, sports and special
events and concerts.
THE MOVIE CHANNEL............... Two channels of first run movies.
SHOWTIME........................ Three channels of first run and original movies.
- -------------------
81
* Included in all DISH Network-SM- programming packages which include America's
Top 50-SM- and is also included in the EchoStar Promotion.
The DISH Network's-SM- America's Top 50 CD-SM- programming package is
priced at $24.99 per month, as compared to, on average, over $42 per month
for a comparable cable service. Although the EchoStar Receiver System does
not presently provide local programming via satellite into the local market
it is serving, the EchoStar Receiver System allows its subscribers to receive
local programming from any off-air antenna without the payment of an
additional fee. America's Top 50 CD-SM- includes approximately 50 of the
top "expanded basic cable" channels, including The Disney Channel-Registered
Trademark-, which historically has been a premium service, and over 30
channels of near-CD quality audio programming. For an additional $10 or $20
per month, EchoStar offers its America's Top 50 CD-SM- package with one or
two multiplexed premium services such as HBO-Registered Trademark-,
Cinemax-Registered Trademark-, The Movie Channel-Registered Trademark- and
Showtime-Registered Trademark-. HBO-Registered Trademark- and Cinemax-Registered
Trademark- may also be combined for an additional $15 per month. Additional
packages and combinations include superstations, network programming and
regional sports offerings.
To subscribe to the full complement of services offered by DirecTv and
USSB, a consumer would be required to pay approximately $66 per month.
EchoStar offers comparable programming for less than $50 per month. DirecTv
predominately markets a package of services available at a price point of
$29.95 per month, although other packages are available, including a more
limited selection of "basic cable" channels for $19.95. USSB predominately
markets a tier of popular basic services for $7.95 per month and premium
service packages ranging from $10.95 to $34.95 per month. EchoStar's
America's Top 50 CD-SM- programming package includes the best of DirecTv's
and USSB's basic programming, plus The Disney Channel-Registered Trademark-,
for less than $25 per month. The EchoStar Promotion requires prepayment of
one year of the America's Top 50 CD-SM- package for approximately $300
($24.99 per month). DirecTv's promotion requires prepayment of one year of
their Total Choice package for $360. The DirecTv package does not include
any USSB basic programming, which would cost an additional $96 per year and
also requires a mail rebate to match EchoStar's $199 price for a receiver
system. In addition, DISH Network-SM- subscribers receive a single bill for
all programming services while subscribers to DirecTv and USSB receive two
bills. Currently, DirecTv offers subscribers the NFL Sunday Ticket-TM- which
is available to DirecTv on an exclusive basis. The suggested retail price
to the consumer of satellite receiver systems offered by EchoStar and DirecTv
generally are comparable. See "--EchoStar Receiver Systems."
EchoStar's program offerings also include additional channels with
regional sports, niche programming, educational and cultural programming,
shopping services, pay-per-view options and certain subscriber selected
programming. In addition to these offerings, The DISH Network-SM- service
includes: (i) "Superstations," KTLA, WGN , WPIX and WSBK; and (ii) network
feeds of ABC, NBC and CBS from various time zones plus Fox and PBS.
Effective November 1, EchoStar further expanded its DISH Network-SM- program
offerings to include: (i) additional premium services; (ii) additional
regional sports services; (iii) expanded pay-per-view options; and (iv) niche
programming, including business programming. EchoStar is finalizing
agreements with major production studios, including Disney, Paramount, Warner
Brothers, Columbia TriStar, Sony and Universal Studios, to provide
pay-per-view movies and events. EchoStar has dedicated ten channels for
pay-per-view movies and may further expand pay-per-view channels in the
future. Pay-per-view options may include first run movies, live sporting and
entertainment events. These video offerings are complemented with near
compact disc quality audio programming provided by Muzak as well as library
and other data services, such as financial and weather information.
ECHOSTAR RECEIVER SYSTEMS
DISH Network-SM- programming is available to any subscriber who
purchases or leases an EchoStar Receiver System. A typical EchoStar Receiver
System includes an 18-inch satellite receiver dish, a receiver, which
processes and descrambles signals for television viewing, a remote control
and related components. The EchoStar Receiver System is also fully compatible
with local broadcast signals. The EchoStar Receiver System is generally
available in a standard and premium model. The premium model includes a
universal UHF remote,
82
an expanded favorite channel list and a high speed data port, all features
not available on the standard model. Households can receive local broadcast
signals, either through a standard television antenna (a traditional rooftop
or set-top antenna) or by subscribing to basic cable and can also switch
between DBS signals and local programming signals using the remote control.
According to the industry research, approximately 76% of DBS households
currently receive local programming signals from standard television
antennas. The initial equipment cost required to receive DISH Network-SM-
programming may reduce the demand for EchoStar Receiver Systems, since
EchoStar Receiver Systems must be purchased, while cable and certain of
EchoStar's satellite competitors lease their equipment to the consumer with
little or any initial hardware payment required. As part of the EchoStar
Promotion, the Company offers a standard EchoStar Receiver System to
consumers for $199 (as compared to the original average retail cost in March
1996 of approximately $499) conditioned upon the consumer's purchase of one
year of America's Top 50 CD-SM- for approximately $300 ($24.99 per month).
This programming package compares to, on average $42 per month for cable
service. Although the EchoStar Receiver System does not presently provide
local programming via satellite into the local market it is serving, the
EchoStar Receiver System allows its subscribers to receive local programming
from an off-air antenna without the payment of an additional fee. EchoStar
believes the suggested retail price of a DSS-TM- satellite receiver system for
DirecTv programming is currently between approximately $399 and $799,
although special dealer incentives and promotions, commenced in August 1995,
have decreased the cost to the customer.
In response to the EchoStar Promotion, several of EchoStar's competitors
have begun to offer their own promotional sales of receiver equipment and
programming. For example, in late August 1996, DirecTv announced a
promotion, whereby a consumer is able to purchase an entry level DirecTv
compatible satellite system with the prepayment of an annual basic
programming package. DirecTv's promotion requires prepayment of one year of
its Total Choice package for $360. The net cost of the satellite system,
including the annual programming package, is approximately $559 after the
consumer receives a $200 mail-in rebate from DirecTv. The DirecTv package
does not include any USSB basic programming, which would cost an additional
$96 per year and also requires the mail rebate to match EchoStar's $199 price
for a receiver system. PrimeStar also announced a promotion in early October
1996 offering a satellite receiver for $199 when the consumer purchasers one
year of programming. The Company believes that the EchoStar Promotion is and
will be preferred by consumers, because the EchoStar Promotion requires the
consumer to pay less money up front and, over the time period that
programming is provided pursuant to the EchoStar Promotion, provides more
high-quality programming at a lower price.
Authorization information for subscription programming is stored on
microchips placed on a credit card-sized access, or smart card. The smart
card, which can easily be updated or replaced periodically at low cost,
provides a simple and effective method to authorize and deauthorize
subscription programming. If the receiver's smart card is authorized for a
particular channel, the data is decrypted and passed on for audio and video
decompression.
The EchoStar DBS System integrates a number of technological advances,
including digital audio and video compression. The combination of these
elements in the EchoStar DBS System is intended to provide the consumer with
affordable access to a broad spectrum of entertainment and informational
products, home shopping and similar services, educational services and
databases.
EchoStar does not manufacture EchoStar Receiver Systems directly. Instead
EchoStar has contracted for the manufacture of EchoStar Receiver Systems with
high-volume contract electronics manufacturers. SCI is currently manufacturing
MPEG-2 DBS receivers in quantities which EchoStar believes will be adequate to
meet currently expected demand. EchoStar has given Sagem, its other
manufacturer, notice of its intent to terminate their contract, and therefore,
EchoStar is currently dependent on one manufacturing source for its receivers.
EchoStar is also in negotiations with several brand name consumer electronics
manufacturers to produce receivers for use with the DISH Network-SM-.
FINANCING
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EchoStar currently offers consumers the opportunity to lease or finance
their HTS branded EchoStar Receiver Systems, including installation costs and
certain programming packages, on competitive terms. EchoStar has agreements
with major consumer finance groups to make consumer credit available to
EchoStar customers. All EchoStar financing is provided by third parties and
is generally non-recourse to EchoStar. Under EchoStar's revolving charge
plan, customers are issued a DISH-TM- private label credit card allowing them
to increase service levels at any time.
At present, certain of EchoStar's subsidiaries have initiated a civil
action against the Associates, one of EchoStar's financing sources, alleging
a breach of contract. EchoStar alleges that the Associates, among other
things, breached its contract with EchoStar pursuant to which Associates
agreed to finance the purchase of EchoStar Receiver Systems by consumers.
EchoStar alleges that the Associates' refusal to finance certain prospective
consumers has resulted in the loss of approximately 700 to 1,000 prospective
customers per day to EchoStar's competitors. In addition, EchoStar alleges
that the loss of sales due to the Associates action has forced EchoStar to
lower the price on its products. As a result of the actions alleged by
EchoStar to have been taken by the Associates, EchoStar may be forced to seek
a new finance company to finance the purchase of EchoStar Receiver Systems.
There can be no assurance that such financing will be available or that, if
available, it will be available on terms favorable to EchoStar. In addition,
any material delay in the ability of EchoStar to obtain subscribers to DISH
Network-SM- programming would negatively affect EchoStar's financial
condition and results of operations. See "Risk Factors--Risk that Failure to
Finance Consumers Will Limit Demand of EchoStar Receiver Systems."
INSTALLATION
At September 30, 1996, EchoStar had approximately 85 employees
dedicated to installing and servicing EchoStar DTH and DBS receivers.
EchoStar plans to hire additional installation and service personnel as the
demand for its receivers, especially the EchoStar Receiver System, continues
to grow. EchoStar is attempting to effectively train, organize and manage
its existing installation force. EchoStar is determined to recruit, train
and manage effectively its installation and service force, as the Company
believes that quality installation and service will give EchoStar a distinct
advantage over its competitors, particularly cable providers. EchoStar has
attempted to retain a high level of quality and customer service and
consequently, its installation and service personnel recruitment, training
and management practices may, from time to time, reduce EchoStar's
subscribers' access to EchoStar's programming and may cause subscribers to be
added at a slower rate and potential subscribers to choose other services.
OTHER COMPONENTS
SUBSCRIBER MANAGEMENT. EchoStar has entered into an agreement with
Cable Services Group, Inc. ("CSG") to provide subscriber management, billing
and remittance services for Dish Network-SM- subscribers. Under the terms of
the agreement, EchoStar is also provided with access to a subscriber
management system maintained by CSG which facilitates the authorization of
particular programming and the issuance of updated access cards, and
coordinates billing and renewal functions.
CUSTOMER CARE CALL CENTER. EchoStar has entered into an agreement with
EDS to provide customer call center operations. These operations complement
those currently managed by EchoStar, while greatly expanding service
capacity. Potential and existing subscribers can call a single phone number
to receive assistance for hardware, programming, installation or service.
DIGITAL BROADCAST CENTER. The first step in the delivery of satellite
programming to the customer is the uplink of that programming to the
satellite. Uplink is the process by which signals are received from either
the programming originator or distributor and transmitted to a satellite.
EchoStar's Digital Broadcast Center is located in Cheyenne, Wyoming. The
Digital Broadcast Center contains fiber optic lines and downlink antennas to
receive programming and other data at the center, as well as a number of
large uplink antennas and other equipment necessary to modulate and
demodulate the programming and data signals. The compression and encryption
of the programming signals will also be done at this center.
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CONDITIONAL ACCESS SYSTEM. EchoStar has contracted with Nagra Plus, SA
to provide access control systems, as well as smart cards used with each
EchoStar Receiver System necessary to receive the authorization code. The
access control system is central to the security network that prevents
unauthorized viewing of programming. In the event the equipment or access
control systems fail to perform as intended, EchoStar's plan of operations
would be adversely affected. EchoStar believes the vendor it has chosen is
highly qualified, and has confidence that the access control system will
adequately prevent unauthorized access to programming. Further, the receiver
has been designed with the flexibility to completely change the access
control system in the event of a security breach. However, the technology is
still relatively new and success is not an absolute certainty. In the event
that such systems or products fail to operate as intended, EchoStar's
business would be adversely affected if the vendors could not rapidly
implement corrective measures.
COMPRESSION SYSTEM. EchoStar has entered into an agreement with
DiviCom, Inc. to provide the necessary equipment to digitize, compress and
encrypt the analog signals transmitted by programmers to EchoStar's digital
broadcast center. Digitized signals are then multiplexed and modulated into
an MPEG-2 transport stream for transmission to EchoStar's satellites. Once a
customer has ordered programming from EchoStar, an authorization code is
transmitted to the customer's satellite receiver, allowing the customer to
receive the programming within seconds after placing the order.
TRACKING, TELEMETRY AND CONTROL OF SATELLITES AFTER LAUNCH. Once a
satellite is placed at its orbital location, ground stations control it until
the end of its in-orbit lifetime. EchoStar has entered into an agreement
with AT&T to provide TT&C services with respect to EchoStar I and EchoStar
II, including orbital analysis and satellite engineering. The agreement
terminates upon the later to occur of December 31, 2005 or the end of the
useful life of EchoStar II. The agreement limits the liability of AT&T in
the event it negligently performs its services under the agreement or
otherwise terminates the agreement prior to the expiration of its term. It
is expected that such risks will be covered by in-orbit insurance; however,
no assurances can be given that such insurance can be obtained on
commercially reasonable terms.
The FCC has granted EchoStar conditional authority to use C-band
frequencies for TT&C for EchoStar I, stating that the required coordination
process with Canada and Mexico had been completed. However, the FCC
subsequently received a communication from an official of the Ministry of
Communications and Transportation of Mexico stating that EchoStar I's TT&C
operations could cause unacceptable interference to Mexican satellites.
There can be no assurance that such objections will not subsequently require
EchoStar to relinquish the use of such C-band frequencies for TT&C purposes.
The inability to control the satellite would result in a total loss of the
satellite. Further, the FCC has granted EchoStar conditional authority to
use C-band frequencies for TT&C function for EchoStar II, but only until
January 1, 1999, at which time the FCC will review the suitability of those
frequencies for TT&C operations. There can be no assurance that the FCC will
extend the authorization to use C-band frequencies for TT&C purposes. The
inability to control EchoStar II would result in a total loss of the
satellite.
While TT&C services have not yet been procured for EchoStar III or
EchoStar IV, EchoStar believes that these services can be timely obtained
from a number of vendors.
DBS AND OTHER PERMITS
EchoStar's subsidiaries have been assigned 21 DBS frequencies at 119DEG.
WL, one of the three U.S. licensed orbital slots that provide full CONUS
coverage. Of these frequencies, eleven are held by ESC. Eleven of the 16
transponders on EchoStar I will be utilized to operate those frequencies.
Ten frequencies were acquired as a result of a merger between Directsat and a
subsidiary of EchoStar, which was consummated in December 1994. Ten of the
sixteen transponders on EchoStar II will be utilized to operate these
frequencies. In addition, EchoStar has received an STA from the FCC to
operate the remaining five frequencies on EchoStar I (which, with digital
compression, could provide approximately 30 additional video channels, for
combined total of up to 150 video channels on EchoStar I and EchoStar II).
The EchoStar I STA expires in December 1996, unless further extended by the
FCC, or sooner if Tempo launches a satellite to the 119DEG. WL orbital
location this year.
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This extension has been opposed. There can be no assurance that EchoStar
will be permitted to operate the additional five transponders after that
period.
On October 10, 1996, the FCC granted Directsat a five-week temporary
permit to operate the remaining six frequencies on EchoStar II in order to
conduct preliminary testing. As of the date of this Information
Statement--Prospectus, the FCC has not ruled on Directsat's STA application
to operate these transponders for a longer period of time in order to provide
regular programming service to subscribers. Tempo has opposed this
application and Directsat has responded to the opposition. Tempo has replied
to the FCC regarding Directsat's response. EchoStar believes, but can give
no assurance, that the FCC will grant the EchoStar II STA for a period of 180
days.
Pursuant to the Dominion Agreement, the Providers agreed to permit
Dominion to broadcast from or to use transponders on EchoStar I, EchoStar II
and EchoStar III. Upon the commencement of the satellite usage time
agreement for the transponders on EchoStar III, Dominion has agreed to allow
ESC to use three of the original eight Dominion transponders. The eight
transponders on EchoStar III which EchoStar will allow Dominion to use would
not otherwise be revenue-producing for EchoStar because it has not been
authorized to use those transponders for its own DBS services. The satellite
usage time arrangements, however, would require FCC approval and no assurance
can be given that the FCC will grant such approval.
In addition to its frequencies at 119DEG. WL, Directsat has been
assigned 11 frequencies at 175DEG. WL, and EchoStar expects to be assigned an
additional ten frequencies at 175DEG. WL and one frequency at 166DEG. WL
provided the FCC finds that ESC has a firm contract for the construction of a
satellite at this orbital slot, but there can be no assurance in this regard.
These frequencies could be used to provide a high power DBS service to the
Western continental U.S., Hawaii and Alaska, and could also be potentially
valuable as a link for the provision of programming between the United States
and the Pacific Rim, if FCC and ITU coordination can be arranged.
EchoStar currently owns approximately 40% of the outstanding common
stock of DBSC, which holds a conditional satellite construction permit and
specific orbital slot assignments for eleven DBS frequencies at each of
61.5DEG. WL and 175DEG. WL. EchoStar expects to acquire 100% of DBSC
pursuant to the Merger. The Merger has been approved by DBSC's shareholders
and the FCC. A timely objection to the Merger was filed by the Consumer
Project on Technology ("CPT"). CPT contended in its objection that the Merger
would permit EchoStar to acquire a dominant and anticompetitive position in
the DBS marketplace by aggregating an excessive number of DBS channels. A
series of letters objecting to the Merger were also filed subsequently by the
CPT and another public interest group. These letters raised the same issues
as the CPT's earlier objection. Although FCC approval of the Merger was
obtained on August 30, 1996, CPT may seek reconsideration, full FCC review or
judicial review of the grant of the Merger application.
Assuming consummation of the Merger, EchoStar will hold, through its DBSC
subsidiary, the construction permit and slot assignments for these frequencies.
In connection with the Merger, EchoStar expects to issue approximately 658,000
shares of its Class A Common Stock to DBSC shareholders in exchange for all of
the DBSC stock that it does not already own.
ESC's, Directsat's and DBSC's permits are subject to continuing due
diligence requirements imposed by the FCC. See "--Governmental Regulation--
FCC Permits and Licenses." Each company's applications to extend their DBS
permits have been conditionally approved by the FCC and are subject to further
FCC and appellate review, but there can be no assurance that the FCC will
determine in the future that ESC, Directsat or DBSC have complied with the due
diligence requirements. Failure to comply with due diligence requirements
could result in the revocation of DBS permits.
During January 1996, the FCC held an auction for 28 frequencies at the
110DEG. WL orbital slot and 24 frequencies at the 148DEG. WL orbital slot.
At the FCC Auction, EchoStar entered the high bid of $52.3 million to acquire
a DBS construction permit for the use of 24 frequencies at the 148DEG. WL
orbital slot. To participate in the FCC Auction, EchoStar deposited $12
million with FCC. If the construction permit is granted, EchoStar will be
required to pay the remainder of the purchase price for the 148DEG. WL
orbital slot. EchoStar will be
86
required to complete construction of that satellite within four years of the
permit grant, and the satellite must be in operation within six years of the
grant. See "Risk Factors--FCC Auction Risks."
EchoStar has an application pending before the FCC for a two satellite
FSS Ka-band system and a two satellite extended Ku-band satellite system.
EchoStar has been granted a license for a two satellite FSS Ku-band system,
which is conditioned on EchoStar making an additional financial showing.
There can be no assurance the FCC will consider EchoStar's additional showing
to be adequate. If the pending applications are granted, and EchoStar
successfully constructs and launches Ku-band, extended Ku-band and Ka-band
satellites, those satellites might be used to complement EchoStar DBS System
programming, or for a variety of other uses. It is possible that the unique
FSS Ku-band and Ka-band orbital locations requested by EchoStar and others
could permit construction of satellites with sufficient power to allow dish
sizes comparable to DBS. All of these projects are in an early stage of
development and there is no assurance that EchoStar's applications will be
granted by the FCC or that, if granted, EchoStar will successfully exploit
the resulting business opportunities. All of these applications are
currently being challenged by several companies with interests adverse to
EchoStar's.
An 80% owned subsidiary of EchoStar has applied for construction permits
and authorizations to operate a six satellite low earth orbit satellite
system ("Little LEO"). While primary applications for that system are
unrelated to DBS, it is possible that the system could serve as a path for
wireless communication with EchoStar DBS customers, particularly for periodic
polling of units for pay-per-view purchases and relative rapid feedback on
viewer pay-per-view buy rates and preferences. This project is in an early
stage of development and there is no assurance that EchoStar's application
will be granted by the FCC or that, if granted, EchoStar will successfully
exploit the resulting business opportunity.
THE SATELLITES
EchoStar I and EchoStar II are Lockheed Martin Series 7000 satellites
equipped with 16 Ku-band transponders, each transponder with 130 Watts of
power, approximately eight times the power of typical C-band transponders.
EchoStar III will be a Lockheed Martin Series 2100AX satellite equipped with
3,840 Watts of power which can be divided among 16 to 32 Ku-band
transponders. EchoStar IV will be a Lockheed Martin Series 2100AX Satellite
equipped with 32 Ku-band transponders. Each transponder will be capable of
handling analog video channels or multiple digital video, audio and data
channels. The satellites have a minimum design life of 12 years and an
estimated orbital life of 15 years or more if optimally deployed. The
Satellite Contracts provide for the construction and delivery of multiple
high powered DBS satellites and related services.
All pre-launch payments due to Lockheed Martin with respect to EchoStar
I and EchoStar II have been made. The remainder of the aggregate purchase
price for each satellite is required to be paid, with interest ranging
between 7.75% and 8.25%, over a period of five years after the delivery and
launch of each satellite (the "Deferred Payments"). The majority of the
purchase price for EchoStar III and EchoStar IV will be required to be paid
in monthly payments during construction. EchoStar and Lockheed Martin have
agreed to Deferred Payments of $15.0 million and $12.0 million for EchoStar
III and EchoStar IV, respectively.
Except under limited circumstances, Lockheed Martin generally owns each
satellite it constructs for EchoStar, and the components thereof, until the
launch of each satellite. As security for the portion of the Deferred
Payments due to Lockheed Martin with respect to EchoStar I and EchoStar II,
Dish, Ltd. has: (i) granted to Lockheed Martin a security interest in
substantially all assets of Dish, Ltd. and its subsidiaries, other than the
stock of the subsidiaries and proceeds derived from the sale of the 1994
Notes, subordinate to the first security interest in the assets of ESC
granted to the Trustee under the 1994 Indenture, and to the liens granted to
any commercial bank which provides a revolving credit facility to Dish, Ltd.,
except that such security interest ranks PARI PASSU with the security
interest in the assets of ESC granted for the benefit of the holders of the
1994 Notes with respect to $30.0 million of the Deferred Payments; and (ii)
caused Dish, Ltd. and its subsidiaries to guarantee payment in full of the
Deferred Payments. Following any default on the Deferred Payments, Lockheed
Martin is prohibited from realizing on any of the collateral for a period of
at least five years following consummation of the 1994 Notes Offering, and in
any event for 180 days following such default.
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Lockheed Martin also has a security interest in certain assets of EchoStar's
subsidiaries other than ESC, which lien ranks senior to the lien on such
assets granted for the benefit of the holders of the 1994 Notes.
Subsequent to June 30, 1996, EchoStar and Lockheed Martin amended the
contracts for the construction of EchoStar I and EchoStar II. As collateral
security for contractor financing of EchoStar I and EchoStar II, EchoStar was
required to provide a letter of credit prior to the launch of EchoStar II in
the amount of $10.0 million (increasing to more than $40.0 million by 1999)
and the principal stockholder of EchoStar pledged all of his Preferred Stock
to Lockheed Martin pursuant to the Preferred Stock Guarantee. Under the
amended agreements, EchoStar will issue a corporate guarantee covering all
obligations to Lockheed Martin with respect to the contractor financing for
EchoStar I and EchoStar II. In consideration for the receipt of the corporate
guarantee by EchoStar, Lockheed Martin has agreed to eliminate the letter of
credit requirements, and to release the Preferred Stock Guarantee in
accordance with a specified formula based on the then outstanding contractor
financing debts and the market value of EchoStar's Class A Common Stock.
This transaction has been approved by EchoStar's board of directors with
EchoStar's principal stockholder abstaining from the vote. Additionally,
EchoStar will issue a corporate guarantee covering all obligations to
Lockheed Martin with respect to the contractor financing for Echostar III and
EchoStar IV.
EchoStar will require additional funds for the construction and launch
of its third, fourth and fifth DBS Satellites. See "Risk Factors--Need for
Additional Capital."
SATELLITE LAUNCHES
EchoStar has entered into a contract for launch services with Lockheed
Martin Commercial Launch Services, Inc. ("Lockheed Services") for the launch of
EchoStar III from Cape Canaveral Air Station, Florida during the fall of 1997,
subject to delay or acceleration in certain circumstances (the "Lockheed
Contract"). The Lockheed Contract provides for launch of the satellite
utilizing an Atlas IIAS launch vehicle. As of September 30, 1996, EchoStar has
made payments totalling $24.0 million and the remaining price is payable in
installments in accordance with the payment schedule set forth in the Lockheed
Contract. Under that schedule, substantially all of the price is required to
be paid before the launch.
EchoStar has the right, in its sole discretion, to terminate the Lockheed
Contract at any time subject to forfeiture of certain amounts paid to Lockheed
Services. In addition, EchoStar has a right to terminate the Lockheed Contract
and receive a full refund for all amounts paid to Lockheed Services if the total
launch delays (except certain excusable delays) caused by Lockheed Services
exceed 12 months.
EchoStar has contracted with LKE for the launch of an additional satellite
during 1998 from the Kazakh Republic, a territory of the former Soviet Union,
utilizing a Proton launch vehicle (the "LKE Contract"). Either party may
request a delay in the relevant launch period, subject to the payment of
penalties based on the length of the delay and the proximity of the request to
the launch date.
EchoStar has the right, in its sole discretion, to terminate the LKE
Contract at any time, subject to the forfeiture of certain amounts paid to
LKE. In addition, EchoStar has the right to terminate the LKE Contract and
receive a full refund of all amounts paid to LKE in certain circumstances,
including: (i) a launch delay caused by LKE which exceeds nine months from
the last day of the original launch period; (ii) an increase in the price or
change in payment or other terms necessitated by compliance with, or
implementation of, the trade agreement between the United States and Russia;
(iii) EchoStar's inability to obtain necessary export licenses; (iv) the
failure of Proton launch vehicles; and (v) EchoStar's inability to procure
launch insurance on commercially reasonable terms. In the event termination
of the LKE Contract is caused by the failure of Proton launch vehicles,
however, LKE would be entitled to retain up to $15.0 million, depending on
the number and proximity of Proton failures to EchoStar's scheduled launch.
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EchoStar expects to launch on a Proton D-le four stage launch vehicle.
Astra 1F, the first commercial launch on a Proton D-le, was successfully
launched on March 27, 1996. LKE currently has contracts providing for the
launch of at least five non-EchoStar western satellites through 1997.
INSURANCE
Under the terms of the Satellite Contracts, Lockheed Martin bears the
risk of loss of the EchoStar satellites during the construction phase up to
launch. At launch, title and risk of loss pass to EchoStar, at which time
the launch insurance becomes operative. EchoStar contracted for launch
insurance coverage for EchoStar II in the amount of $219.3 million and,
together with the cash segregated and reserved on its balance sheet,
satisfied its current insurance obligations under the 1994 Indenture.
The launch insurance policy for EchoStar II covers the period between
launch through completion of testing and commencement of commercial
operations and includes in-orbit insurance until 365 days after the launch of
EchoStar II. The policy protects against losses resulting from the failure
of a satellite to achieve its proper orbit parameters or to perform in
accordance with the satellite's operational performance parameters. The 1994
Indenture also requires in-orbit insurance to be kept in force for EchoStar I
and EchoStar II in specified amounts. EchoStar has procured the required
in-orbit insurance for EchoStar I and will procure the required in-orbit
insurance for EchoStar II for the period not already covered by the launch
insurance policy.
The launch insurance policy for EchoStar II contains, and the insurance
policy for EchoStar I with respect to in-orbit operation contains, standard
commercial satellite insurance provisions, including a material change
condition, that would result in the cancellation of insurance or alter the
effective rate, depending upon customary exclusions, including for: (i)
military or similar actions; (ii) laser, directed energy, or nuclear
anti-satellite devices; (iii) insurrection and similar acts; (iv)
governmental confiscation; (v) nuclear reaction or radiation contamination;
(vi) willful or intentional acts of EchoStar or its contractors; (vii) loss
of market, loss of revenue, extra expenses, incidental and consequential
damages; and (viii) third-party claims against EchoStar.
EchoStar has bound insurance for the launch of EchoStar III and EchoStar
IV and such policies include in-orbit insurance until 365 days after the
launch of EchoStar III and EchoStar IV, respectively. The 1996 Indenture
requires EchoStar to obtain in-orbit insurance for EchoStar III, in an amount
equal to the cost to construct, launch and insure EchoStar III (in the case
of in-orbit insurance with a deductible no greater than 20%). The Senior
Secured Indenture requires EchoStar to obtain in-orbit insurance for EchoStar
IV, in an amount equal to the cost to construct, launch and insure EchoStar
IV (in the case of in-orbit insurance with a deductible no greater than 20%).
OTHER PRODUCTS AND RELATED SERVICES
EchoStar currently offers a broad range of products, from approximately
$250 DTH systems in Europe that can receive signals from only one or two
co-located satellites, to approximately $3,000 systems at retail that are
capable of receiving signals from 20 or more satellites. Principal product
lines include EchoStar-Registered Trademark-, HTS Premier-TM- and HTS
Tracker-TM- name brands, with good, better and best options typically available
for each line and each geographic reception area. EchoStar sold approximately
462,000 satellite receivers worldwide in 1995. EchoStar's sales of DTH products
are somewhat seasonal, with higher domestic sales normally occurring in the late
summer and fall months in advance of increased consumer programming demand
during the fall and winter months.
DOMESTIC
Satellite retailers have historically sold large C-band satellite receiver
systems to consumers in rural areas through store fronts or small home-based
businesses. The decline in the number of conventional satellite retailers in
the United States, which form the core of EchoStar's distribution system, was
significant during 1995 and has continued in 1996 as a result of competition
from the sale of DBS systems through consumer electronic outlets. Those
satellite retailers which are not marketing DBS systems may be
89
particularly vulnerable. However, new satellite retailers continue to enter
the market, which partially offsets the decline.
INTERNATIONAL
EchoStar's international product line includes a broad range of DTH and
commercial satellite equipment and accessories, including satellite receivers,
integrated receiver decoders, antennas, actuators, feeds and LNBs. During 1995,
the equipment was distributed, primarily with the EchoStar-Registered Trademark-
brand name, through EchoStar's distribution centers. EchoStar's products are
tailored to each country's standard television formats. In addition, on-screen
instructions and pre-programmed channels are available in a variety of
languages. EchoStar's international receivers can process C-band and Ku-band
signals with both 110-and 240-volt power sources and have been designed to
withstand the fluctuating power sources often found in developing countries.
PROGRAMMING
Since 1986, EchoStar has acquired programming directly from top
programmers, and packaged and distributed that programming throughout the
United States to C-band system users through EchoStar's independent retailer
network. EchoStar has non-exclusive affiliation agreements for the
distribution of most top programming available from domestic satellites,
including A&E-Registered Trademark-, CNN-Registered Trademark-, The Discovery
Channel-Registered Trademark-, The Disney Channel-Registered Trademark-,
ESPN-Registered Trademark-, HBO-Registered Trademark-, MTV-Registered
Trademark-, Showtime-Registered Trademark-, TBS-TM-, TNT-TM-, USA-Registered
Trademark-, national networks, "Superstations" and other "best of cable"
programming.
FINANCING
Through financing arranged by EchoStar, consumers are able to finance
their DTH-related product and service home entertainment purchases in a
single package. Credit approval is often granted while customers are still
in a dealer's showroom, and funds are customarily forwarded to dealers within
24 hours of receiving the original completed loan documents. EchoStar's
consumer financing arrangement allows "one-stop shopping" for equipment,
programming and installation services, while avoiding many of the risks
inherent in financing consumer receivables.
At present certain of EchoStar's subsidiaries have initiated a civil
action against the Associates, one of its financing sources, alleging a
breach of contract. EchoStar alleges that the Associates, among other
things, breached its contract with EchoStar pursuant to which Associates
agreed to finance the purchase of EchoStar Receiver Systems by consumers.
EchoStar alleges that the Associates' refusal to finance certain prospective
consumers has resulted in the loss of approximately 700 to 1,000 prospective
customers per day to EchoStar's competitors. In addition, EchoStar alleges
that the loss of sales due to the Associates action has forced EchoStar to
lower the price on its products. As a result of the actions alleged by
EchoStar to have been taken by the Associates, EchoStar may be forced to seek
a new finance company to finance the purchase of EchoStar Receiver Systems.
There can be no assurance that such financing will be available or that, if
available, it will be available on terms favorable to EchoStar. In addition,
any material delay in the ability of EchoStar to obtain subscribers to DISH
Network-SM- programming would negatively affect EchoStar's financial condition
and results of operations. See "Risk Factors--Risk that Failure to Finance
Consumers Will Limit Demand of EchoStar Receiver Systems."
EchoStar also offers an option to lease DTH-related equipment for up to
a seventy-two month period, and to obtain programming during the lease term,
for one fixed monthly payment. The leases contain an annual purchase option
allowing the customer to purchase the equipment for a predetermined amount.
The lease program helps EchoStar compete more effectively and thereby
increase sales and customer loyalty.
SALES AND MARKETING
DBS
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EchoStar has a comprehensive marketing strategy designed to promote the
EchoStar DBS System under the DISH Network-SM- brand name and distinguish
itself from cable and other DBS providers. The first phase of the strategy
is designed to build market awareness of the DISH Network-SM-, reinforce
EchoStar's historical presence in the satellite industry and focus the
market's attention on EchoStar's motto of "A Dish in Every Home."
EchoStar's marketing strategy includes national and regional broadcast
and print advertising, promoting the benefits of the DISH Network-SM-, to
support the initial nationwide product rollout. EchoStar has comprehensive
dealer guides describing all aspects of the DISH Network-SM- and its
integrated product lines (programming, hardware, financing and installation)
were delivered to distributors during nationwide educational seminars.
EchoStar will continue offering a high level of retail support, and will
provide comprehensive point of sale literature, product displays, demonstration
kiosks and signage for retail outlets. EchoStar also provides a promotional
channel as well as a programming subscription for in-store viewing. EchoStar's
mobile sales and marketing team will visit retail outlets on a regular basis to
reinforce training and ensure point-of-sale needs are quickly fulfilled. A DISH
Network-SM- merchandise catalogue is also available for distributors to add to
their promotional materials.
EchoStar offers a commission program that it believes is competitive
with that offered by other DTH digital operators. The program pays qualified
distributors and retailers a percentage of programming revenues generated by
subscribers to whom they sell EchoStar Receiver Systems. Commissions will be
earned by distributors and retailers over an extended period and will be paid
regularly.
Following the nationwide launch of service, EchoStar has continued to
place national and regional broadcast and print advertisements, provide
retail support and offer co-operative marketing campaigns with distributors
on an ongoing basis. One channel of programming is provided on the DISH
Network-SM- to educate subscribers on additional services and promotions.
EchoStar is utilizing its existing nationwide network of independent
distribution and retail stores and outlets to market and distribute EchoStar
Receiver Systems and programming services to its target markets. EchoStar is
also distributing EchoStar Receiver Systems through consumer electronics
outlets under its own brand name. EchoStar also intends to expand into
other, less traditional distribution channels. Based on its knowledge of
these distribution channels from its marketing of C-band DTH products and
services domestically over the last 15 years and its marketing of DBS
products in Europe and the United States, EchoStar believes it will be able
to optimize the marketing of its DBS products and services to distinguish
itself from other DBS suppliers.
Considerable consumer education was required to develop the market for
DBS service. The initial entrants into the DBS market have incurred the
greatest educational burden because they introduced DBS to consumers.
OTHER PRODUCTS AND SERVICES
EchoStar's DTH sales and marketing efforts are concentrated in three
geographic regions: the Americas, Europe and Asia. The corporate marketing
department, located at EchoStar's corporate headquarters in Englewood,
Colorado, supports regional efforts by coordinating research, strategy,
promotion, pricing, advertising and new product development. EchoStar focuses
on marketing and distributing its DTH products and services, programming
services and consumer financing services through its independent retailer
network. EchoStar also provides its independent retailer network with
marketing support ranging from cooperative advertising funds to customized
advertising campaigns.
RESEARCH AND DEVELOPMENT AND MANUFACTURING
Satellite receivers designed by EchoStar's research and development
group have won numerous awards from dealers, retailers and industry trade
publications. EchoStar's research and development personnel focus on shaping
the EchoStar-Registered Trademark- and HTS-TM- product lines to meet specific
consumer needs and to compete effectively against products designed and
manufactured by larger consumer electronics companies. In addition to
overseeing the manufacture of its own products, EchoStar has also acted as
the original equipment manufacturer of satellite
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receivers for other large retailers and manufacturers. EchoStar's quality
assurance standards require all EchoStar-Registered Trademark- product models
to undergo extensive testing. EchoStar also sets and enforces product design
and quality assurance requirements at non-EchoStar manufacturing facilities
in the United States, France, Hong Kong, Korea, China, Malaysia, India and
the Philippines.
COMPETITION
Each of the businesses in which EchoStar operates is highly competitive.
EchoStar's existing and potential competitors comprise a broad range of
companies offering video, audio, data, programming and entertainment
services. EchoStar also faces competition from companies offering products
and services that perform similar functions, including companies that offer
hardwire cable television products and services, wireless cable products and
services, DTH products and services, as well as DBS programming and other
satellite programming, and companies developing new technologies. Many of
EchoStar's competitors have substantially greater financial and marketing
resources than EchoStar. EchoStar expects that quality and variety of
programming, quality of picture and service and cost will be the key bases of
competition. See "Risk Factors--Competitive Nature of the Industry."
SUBSCRIPTION TELEVISION
CABLE TELEVISION. Cable television service is currently available to
approximately 90% of the approximately 96 million U.S. television households.
The cable television industry in the United States currently serves
approximately 61 million subscribers, representing over 60% of U.S.
television households. As an established provider of programming, cable
television is a formidable competitor for many programming services, offering
30 to 80 channels at an average monthly subscription price of approximately
$42. While cable companies service a majority of the United States television
households today, EchoStar believes the cost to cable companies to upgrade
their coaxial systems to offer expanded digital video and audio programming
similar to that to be offered by DBS operators will be at least $500 per
subscriber, or approximately $30 billion nationwide. Upgrading those systems
to fiber optic technology would require a substantially greater investment.
Such upgrades, if undertaken, are expected to take five to ten years to
complete industry-wide. As a result, EchoStar believes that there will be a
substantial delay before cable systems can offer programming services
equivalent to satellite television providers on a national basis and that
many cable systems may never be upgraded. EchoStar intends to specifically
target markets served by such systems.
The DISH Network-SM- may encounter a number of difficulties competing
with cable television technology and substantial competition is expected in
the overall market for television households. Cable television has an
entrenched position in the domestic consumer marketplace. EchoStar believes
that anticipated advances of cable television, such as interactivity and
expanded channel capacity, may not be widely available in the near term at a
reasonable cost to the consumer. If the substantial capital costs of those
advances, when available, are passed on to the consumer, it will ultimately
enhance the attractiveness of low cost DBS programming.
Up-front costs are also a potential disadvantage of a DBS system. The
initial cost required to receive DISH Network-SM- programming may reduce the
demand for EchoStar Receiver Systems, since EchoStar Receiver Systems must be
purchased, while cable and certain of EchoStar's satellite competitors lease
their equipment to the consumer with little if any initial hardware payment
required. Although the initial retail price of an EchoStar Receiver System
before the EchoStar Promotion was between approximately $499 and $599,
depending on the features selected by the customer, among other factors,
EchoStar believes that technological advances and market growth of DBS will
eventually reduce the retail cost of DBS receiving equipment. EchoStar
intends to mitigate this disadvantage by offering lease and finance options
structured to produce minimum monthly payments competitive with cable rates.
In addition, EchoStar introduced the EchoStar Promotion nationwide in August
1996 whereby the Company offers a standard EchoStar Receiver System to consumers
for $199 (as compared to the original average retail cost in March 1996 of
approximately $499) conditioned upon the consumer's purchase of one year of
America's Top 50 CD-SM- for approximately $300 ($24.99 per month). This
programming package compares to, on average $42 per month for cable service.
Although the EchoStar Receiver System does not presently provide local
programming via satellite into the local
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market it is serving, the EchoStar Receiver System allows its subscribers to
receive local programming from an off-air antennae without the payment of an
additional fee. It is expected that in the near term, the EchoStar Promotion
will have a negative impact on the Company's net income and cash flow as
compared to its pricing of EchoStar Receiver Systems prior to the EchoStar
Promotion. See "Risk Factors--Possible Delisting of EchoStar Common Stock
from NASDAQ."
Since reception of DBS signals requires line of sight to the satellite,
it may not be possible for some households served by cable to receive DBS
signals. In addition, the DISH Network-SM- will not be available to households
in apartment complexes, or other multiple dwelling units that do not
facilitate or allow the installation of the EchoStar Receiver System.
Many of the largest cable systems in the United States have announced
plans to offer access to telephony services through their existing cable
equipment, and have entered into agreements with major telephony providers to
further these efforts. In some cases, certain cable systems have actually
commenced trials. If these trials are successful, many consumers may find
cable service to be more attractive than DBS for the reception of programming.
In addition, TCI has announced that, if it should successfully launch a
DBS satellite into the 119DEG. WL orbital slot, it may provide digital
programming from its DBS satellite to TCI and other cable subscribers who
elect to subscribe to this digital service for an additional fee. TCI's DBS
satellite would allow TCI to provide at least 65 digital video channels to
cable subscribers. These subscribers could maintain current cable
programming service, including local programming. Through the use of a
digital set top receiver system, a household subscribing to cable programming
and TCI's DBS digital programming could simultaneously view digital video
programming on one television and different cable programming on any number
of other televisions. DISH Network-SM- subscribers would have to purchase
multiple EchoStar Receiver Systems in order to view different programming on
different televisions simultaneously. TCI's complementary DBS service could
make cable a stronger competitor to the DISH Network-SM-.
OTHER DBS OPERATORS. In addition to EchoStar, several other companies
have DBS authorizations and are positioned to compete with EchoStar for home
satellite subscribers. DirecTv has channel assignments at what is recognized
as a strategic orbital slot due to its position over the central United
States. DirecTv successfully launched its first DBS satellite in December
1993, its second satellite in August 1994 and a third satellite in June 1995
as an in-orbit spare. That satellite might also be operated by DirecTv to
provide additional capacity, thereby making DirecTv more attractive to
potential consumers. USSB owns five transponders on DirecTv's first
satellite and offers a programming service separate from DirecTv's service,
with programming not available from DirecTv. Affiliates of the National
Rural Telecommunications Cooperative have acquired territories in rural areas
of the United States as distributors of DirecTv programming.
AT&T and DirecTv have an exclusive agreement for AT&T to market and
distribute DirecTv's DBS service. As part of the agreement, AT&T made an
initial investment of approximately $137.5 million to acquire 2.5% of the
equity of DirecTv with an option to increase its investment to up to 30% over
five years. This agreement provides a significant base of potential customers
for the DirecTv DBS system and allows AT&T and DirecTv to offer customers a
package of digital entertainment and communications services. As a result,
EchoStar is at a competitive disadvantage marketing to these customers. AT&T
and DirecTv also announced plans to jointly develop new multi-media services
for DirecTv under the agreement. The AT&T and DirecTv agreement will
increase the competition EchoStar encounters in the overall market for pay
television customers.
In the FCC auction, MCI entered the winning bid of $682.5 million to
acquire the permit for 28 of 32 frequencies at the 110DEG. WL orbital slot.
MCI and News announced that they have formed a joint venture to build and
operate a DBS system at 110DEG. WL. The permit will give MCI and News the
capacity to offer over 200 channels of digital video programming. MCI is
expected to take responsibility for developing business communication
services and News is expected to be responsible for consumer services. MCI
and News expect that building and launching the satellites for their system
will cost an additional $1 billion and that DBS services will be offered to
consumers and businesses in approximately two years. However, if MCI and
News acquire
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satellites which have already been constructed, service could begin sooner.
MCI and News have substantially greater resources than EchoStar and their
joint venture will increase the competition EchoStar encounters in the
overall market for pay television customers. Appeals are currently pending
of the FCC's decision to revoke the construction permit of a former DBS
permittee which resulted in frequencies becoming available for auction, and
of the FCC's decision to auction the reclaimed frequencies. If the FCC's
actions are overturned, MCI's purchase of the 28 frequencies at 110DEG. WL
could be voided in its entirety or the auction could be reopened and require
a higher winning bid.
PrimeStar currently offers medium power Ku-band programming service
to customers using dishes approximately three feet in diameter. In addition,
PrimeStar is believed to be the programming operator that will utilize
existing DBS authorizations of Tempo. TCI, which is the largest cable
television company in the United States, is currently constructing two
satellites that will be ready for launch in 1996 and either of which could be
utilized to offer DBS service from Tempo's channels at the 119DEG. WL orbital
slot. PrimeStar has the right to offer DBS programming services from these
satellites. Alternatively, PrimeStar may offer FSS service via its
satellites provided by GE Americom or others. In mid-1994, TCI and Tempo
entered into an agreement with Advanced Communications Corporation
("Advanced") whereby Tempo would purchase Advanced's FCC permit at 110DEG. WL
and lease the capacity available under the permit to PrimeStar. In October
1995, however, the FCC revoked Advanced's permit and announced its intention
to auction Advanced's DBS channels in January 1996. The D.C. Circuit
affirmed the revocation of the Advanced permit on May 6, 1996. Appeals have
been filed with the U.S. Supreme Court. EchoStar is unable to predict the
outcome of such litigation. It is possible Advanced or other parties may
prevail in their appeals challenging the FCC's decision to reclaim Advanced's
frequencies at 110DEG. WL and 148DEG. WL and, if they do, any award of a
construction permit by virtue of the FCC Auction may be rescinded. If
PrimeStar successfully launches a high-power DBS satellite, it will become a
more significant competitor, as it would have the ability to offer its
programming through a high-power DBS system similar to that offered by
EchoStar. If PrimeStar does not exercise its right, it is expected that TCI
will use these satellites to directly enter the DBS programming business, and
may launch satellites capable of providing service to the continental United
States during 1996. Assuming a successful launch by TCI of a DBS satellite
into the 119DEG. WL orbital location, EchoStar's STA for EchoStar I would be
terminated. EchoStar is at a competitive disadvantage to PrimeStar with
regard to market entry, programming and, possibly, volume discounts for
programming offerings, particularly if programming vendors aggregate
PrimeStar's DBS customers and cable customers of the PrimeStar partners to
obtain volume discounts from programming vendors.
DirecTv, USSB and PrimeStar have instituted aggressive promotional
campaigns marketing their respective DBS and Ku-band service. Their marketing
efforts have focused on the breadth of popular programming and cost of
service. In the case of DirecTv and USSB, their marketing efforts have been
joined by AT&T, RCA, Sony Electronics, Inc. and other manufacturers which
market DBS receivers and related components. Several other manufacturers have
begun manufacturing such equipment, including Uniden America Corp., Toshiba
America Consumer Products, Inc. and Hughes Network Systems, Inc. PrimeStar
currently offers a lease program whereby consumers can lease a PrimeStar
system for as little as approximately $1.00 per day (including approximately
30 channels of programming). PrimeStar's lease program is widely credited
for the recent success of PrimeStar's Ku-band service. EchoStar currently
offers a comparable program to finance or lease an EchoStar Receiver System.
DirecTv and USSB together offer approximately 200 channels of digital
video programming. EchoStar currently offers approximately 120 channels of
near laser disc-quality digital video programming. Due to their substantially
greater resources, earlier market entry, greater number of channels,
manufacturing alliances with low cost, high volume manufacturers with
established retail distribution, possible volume discounts for programming
offerings, and, in the case of PrimeStar, relationship with cable programmers,
EchoStar is at a competitive disadvantage to DirecTv, USSB and PrimeStar.
EchoStar believes that it can successfully compete with these companies given,
among other things, EchoStar's: (i) lower cost structure; (ii) programming
strategy; (iii) established dealer network; (iv) second generation digital
technology, which incorporates world standard full MPEG-2 technology; and (v)
intent to license EchoStar Receiver System technology to multiple
manufacturers. In addition, in response to the EchoStar Promotion, several
of EchoStar's competitors have begun to offer their own
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promotional sales of receiver equipment and programming. However, the
Company believes that the EchoStar Promotion is and will be preferred by
consumers, because the EchoStar Promotion requires the consumer to pay less
money up front and, over the time period that programming is provided
pursuant to the EchoStar Promotion, provides more high-quality programming at
a lower price.
DirecTv currently has approximately 1.9 million subscribers,
approximately one-half of whom subscribed to USSB programming, and PrimeStar
has approximately 1.4 million subscribers. As a result of the success
achieved by each of these programming providers, EchoStar may find it
difficult to successfully compete and attract sufficient subscribers to
achieve profitability.
During March 1996, AlphaStar which is owned by Tee-Comm, began offering
DTH programming in the United States on a limited basis, and intends to
expand to 120 channels later this year, and 200 channels by the end of 1997.
The service uses MPEG-2/DVB digital compression technology to receive medium
power Ku-band signals via 24 to 36 inch dishes. Although compliance with
certain regulatory requirements is necessary for the commencement of service
by a Canadian company, the entry of an additional programming provider will
result in additional competition for subscribers.
The FCC indicated that it may to apply to the ITU for additional orbital
locations for use to provide DBS service to the United States. Canada,
Mexico and other countries hold the rights to DBS orbital slots which are
capable of providing service to the United States. If the FCC moves forward
with this initiative or if other countries authorize DBS providers to utilize
their orbital slots to serve the United States, additional competition could
be created, and EchoStar's spectrum could become less valuable. At this
time, EchoStar cannot predict whether the FCC will move forward with this
initiative, whether other countries will authorize DBS providers to utilize
their orbital slots to serve the United States or whether the FCC initiative
or authorizations by other countries will ultimately result in any additional
service to the United States.
The FCC on January 22, 1996, announced its decision to authorize U.S.
licensed FSS operators which currently operate internationally to provide
wholly domestic service in the United States and U.S. DBS and FSS operators
to provide international service if they obtain the requisite authorization
from foreign countries. The FCC has also begun a proceeding to address
issues relating to the provision of services to, from, or within the U.S. via
non-U.S. licensed satellites. In the event U.S. licensed FSS operators which
currently operate internationally decide to provide programming wholly in the
United States or that non-U.S. licensed operators are permitted to provide
programming to the United States, the number of competitors offering DTH
service in the United States may increase.
WIRELESS CABLE AND OTHER TERRESTRIAL SYSTEMS. There are approximately
180 wireless cable systems presently operating in the United States.
Wireless cable served approximately 710,000 subscribers at the end of 1995.
Typically, these systems offer 20 to 40 channels of programming, which may
include local programming. Wireless cable operators currently provide an
analog signal, with limited capacity and inferior image and sound quality
compared to DBS. In order to upgrade their systems to implement digital
transmission of high quality audio and video wireless, operators will be
required to install digital decoders in each customer's home at a cost
comparable to the cost of an EchoStar Receiver System and make certain
modifications to their transmission facilities. The cost of this digital
upgrade will be significant and will have to be amortized over a smaller base
or potential customers. Wireless cable also requires direct line of sight
from the receiver to the transmitter tower, which creates the potential for
substantial interference from terrain, buildings and foliage in the line of
sight.
SMATV systems provide multiple channels of analog video programming to
residential, multiple dwelling units and various other buildings and
complexes that are commonly owned, controlled or managed. A typical SMATV
system is an unfranchised, stand alone system that services a single building
or complex, or a small number of buildings or complexes in relatively close
proximity to each other, and are sometimes referred to as "private cable"
systems. There were approximately 950,000 SMATV subscribers in 1995. The
FCC in 1995 amended its rules to permit cable operators to acquire SMATV
systems within their existing service territories, removing a significant
barrier to entry and making available a significant new source of capital.
Because of their
95
more limited scope of operations, SMATV operators would require a somewhat
smaller capital investment in order to upgrade their systems to enable
digital transmission of higher quality audio and video comparable to that
provided by DBS, but will also have a far smaller base of potential customers
over which to amortize that investment.
Certain wireless cable companies may become more competitive as a result
of recently announced affiliations with telephone companies. Two local
exchange carriers ("LECs"), Bell Atlantic and NYNEX, have invested, in the
aggregate, $100 million in CAI Wireless Systems, Inc., which operates
wireless cable systems in large urban markets which are primarily located in
Bell Atlantic's and NYNEX's areas of operations. In April 1995, Pacific
Telesis Group ("PacTel"), a LEC based in California, acquired Cross Country
Wireless, Inc., which operates a wireless cable system and holds channel
rights in southern California, for approximately $175 million. In November
1995, PacTel announced it would acquire Wireless Holdings, Inc., which
operates wireless cable systems and holds channel rights in California,
Washington, Florida and South Carolina, for approximately $170 million. Bell
Atlantic and NYNEX own a 10% interest in CS Wireless Systems, Inc., which
operates and is developing wireless cable systems primarily in the midwestern
United States. In May 1996, BellSouth Corp. announced it had secured rights
to serve the New Orleans, Louisiana market by successfully bidding $12
million for the wireless cable system there. On September 18, 1996,
BellSouth announced that it had entered into a non-binding letter of intent
for the purchase of wireless cable assets in Miami, Florida from National
Wireless Holdings, Inc. for $48 million in stock.
In 1993, the FCC proposed to redesignate the 28 GHz band to create a new
video programming delivery service referred to as LMDS. The FCC proposed to
allow at least two new wireless video program distributors with access to
more than 49 channels each. The FCC recently allocated 1,000 MHz of spectrum
in the 28 GHz band to LMDS despite opposition from both fixed and mobile
satellite operators who also will share portions of the band. In addition,
the FCC issued a further notice of proposed rulemaking to allocate additional
spectrum in the 31 GHz band to permit LMDS operators to offer two-way
services, and to consider competitive issues raised by the Telecommunications
Act of 1996 (the "1996 Act"), including the eligibility of LECs and cable
operators for LMDS licenses. Service rules are expected soon and the FCC has
announced its intention to begin auctioning LMDS spectrum in late 1996 or
early 1997.
TELEPHONE COMPANIES. Certain regional telephone operating companies and
long distance telephone companies could become significant competitors in the
future, as they have expressed an interest in becoming subscription
television and information providers. The legislation recently passed by
Congress permits these local telephone companies to own cable systems and
provide high-power DBS service, although any telephone company desiring to
become a high-power DBS broadcaster would still need to obtain an FCC license
for an available orbital location. The legislation recently passed by
Congress removes barriers to entry which previously inhibited, or made it
more difficult, for telephone companies to compete in the provision of video
programming and information services. That legislation permits LECs to
provide video programming directly to customers in their respective telephone
service areas. Under recently adopted FCC rules, an LEC may operate as an
open video system subject to streamlined regulations as long as the LEC
permits carriage of unaffiliated video programming providers on a just,
reasonable and nondiscriminatory basis which will permit end users to access
video programming services provided by others. Several large telephone
companies have announced plans to acquire or merge with existing wireline
cable systems. As more telephone companies begin to provide cable
programming and other information and communications services to their
customers, additional significant competition for subscribers will develop.
Among other things, telephone companies have an existing relationship with
substantially every household in their service area, substantial economic
resources, and an existing infrastructure and may be able to subsidize the
delivery of programming through their position as the sole source of
telephone service to the home.
VHF/UHF BROADCASTERS. Most areas of the United States are covered by
traditional terrestrial VHF/UHF broadcasts that typically offer three to ten
channels. These broadcasters are often low to medium power operators with a
limited coverage area and provide local, network and syndicated programming.
The local content nature of the programming may be important to the consumer,
and VHF/UHF programming is typically
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free of charge. Congress is expected to consider the release of additional
digital spectrum for use by these broadcasters later this year.
DTH INDUSTRY
DTH PRODUCTS. EchoStar faces competition in the sale of satellite
receivers in North America from other manufacturers and from other
distributors. The North American market is dominated by EchoStar, General
Instrument Corporation and Uniden America Corp.
Most major manufacturers of satellite receivers in North America offer a
variety of models, from relatively low priced units to more expensive
receivers with a greater number of features. There are few patented
components in DTH systems. Competition in the sale of DTH products occurs
primarily on quality, price, service, marketing and features. EchoStar
believes that it generally competes effectively in all of these areas. In
recent years, EchoStar has consistently been highly rated in most of these
categories by polls conducted by industry trade publications.
EchoStar also faces competition in the distribution of DTH systems from
approximately 30 distributors in North America. The large number of
distributors creates intense competition, primarily on price, marketing and
service. EchoStar responds to that competition by offering 24-hour
turnaround time on repairs, same day order fulfillment and what it believes
to be one of the top satellite retailer incentive programs in the industry.
In addition, EchoStar competes against DBS technology and medium power
Ku-band DTH systems. DBS and medium power Ku-band satellites use Ku-band
frequencies that can be received by significantly smaller dishes and less
expensive systems than C-band satellite systems. As a result of the smaller
dish size, DBS and medium power Ku-band systems are more widely accepted than
C-band systems, particularly in urban areas. DBS and medium power Ku-band
competition have negatively affected, and will continue to negatively affect,
C-band sales. However, EchoStar believes that many consumers may continue to
choose to purchase C-band systems for the next several years because of the
remaining orbital life of existing C-band satellites, the amount and quality
of programming available and the continuing marketing efforts by programmers
and others designed to attract and retain C-band subscribers, among other
factors. The decline in C-band sales by EchoStar was partially offset in 1994
and 1995 by the sale of Competitor DBS Receivers, which EchoStar distributed
in 18 states. During the first nine months of 1996, the decline in C-band sales
has been more than offset by sales of EchoStar Receiver Systems and, to a lesser
extent, sales of Competitor DBS Receivers.
Internationally, EchoStar competes against a variety of manufacturers
and distributors in different countries. In certain regions, EchoStar has a
small market share, while in others, such as Africa, EchoStar believes that
it has a larger market share than any of its competitors. In some markets,
EchoStar cannot effectively compete due to local restrictions on foreign
companies and due to the necessity of using proprietary products for which
EchoStar does not hold licenses.
DTH PROGRAMMING. EchoStar competes with many large DTH program
packages, some of whom are affiliated with well known, large program
originators, and some of whom are affiliated with cable operators. EchoStar
competes by offering promotional programming packages in conjunction with its
sales of DTH systems. Since a significant portion of EchoStar's programming
sales are generated through DTH retailers, EchoStar also competes for
retailer relationships on the basis of commission rates and quality of
service offered to the retailer and its customers. In addition, the
programming market faces competition from cable television as well as
emerging technologies such as DBS services, multichannel, multipoint
distribution systems and others. The largest competitors of EchoStar in
programming distribution include NetLink Satellite USA, owned by TCI,
SuperStar Satellite Entertainment, National Programming Service, Turner Home
Satellite, Inc., HBO Direct, Inc. and Showtime Satellite Networks. These
competitors have substantially greater financial resources than EchoStar,
have substantially more subscribers, and are therefore able to obtain more
favorable pricing from programmers compared to EchoStar.
97
DTH FINANCING AND LEASING. EchoStar currently offers financing and
leasing options in conjunction with its DTH products and services. Other
equipment manufacturers and distributors also offer financing to consumers
who purchase their products and services. Historically, certain of
EchoStar's competitors have offered consumers longer amortizations of their
loans than EchoStar has offered. Long amortizations are popular with DTH
retailers, who can then offer the consumer a lower monthly payment, or a more
expensive system for the same payment. With its financing arrangements with
national banks and a leasing organization, EchoStar is currently able to make
available financing which it believes is competitive with that available from
its competitors. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
GOVERNMENT REGULATION
GENERAL
Authorizations and permits issued by the FCC and foreign regulatory
agencies performing similar functions are required for the operation of
satellites and other components of the EchoStar DBS System, and the sale of
satellite receivers and other EchoStar-Registered Trademark- products in the
United States and certain foreign countries. In addition, as the prospective
operator of a privately owned United States satellite system, EchoStar is
subject to the regulatory authority of the FCC and the International Radio
Regulations promulgated by the ITU. As a distributor of television
programming, EchoStar is also affected by numerous laws and regulations,
including the Communications Act. EchoStar believes that it remains free to
set prices and serve customers according to its business judgment, without
rate regulation or the statutory obligation under Title II of the
Communications Act to avoid undue discrimination among customers, but
pursuant to the recently passed telecommunications legislation, EchoStar may
be classified as a telecommunications carrier subject to Title II. While
EchoStar believes that it is unlikely that such reclassification would
increase substantially the regulatory burdens imposed on EchoStar or have an
adverse impact on EchoStar's DBS operations, there can be no assurance in
this regard. EchoStar also requires import and general destination export
licenses issued by the United States Department of Commerce for the delivery
of its manufactured products to overseas destinations. Finally, because
EchoStar has engaged a Russian launch provider for EchoStar IV, United States
export regulations apply to the delivery of the satellite and to providing
related technical information to the launch provider.
While EchoStar has generally been successful to date in connection with
regulatory compliance matters, there can be no assurance that EchoStar will
succeed in obtaining or maintaining all requisite regulatory approvals for
its operations, or that it will do so without the imposition of conditions or
restrictions on EchoStar.
FCC PERMITS AND LICENSES
As the operator of a DBS system, EchoStar is subject to FCC jurisdiction
and review primarily for: (i) authorization of individual satellites (i.e.,
meeting minimum financial, legal and technical standards) and earth stations;
(ii) avoiding interference with other radio frequency emitters; (iii)
complying with rules the FCC has established specifically for holders of U.S.
DBS satellite authorizations and receivers; and (iv) complying with
applicable provisions of the Communications Act. The FCC has granted a
conditional satellite construction permit to EchoStar for two satellites. It
has assigned eleven specified frequencies for EchoStar I at an orbital slot
at 119DEG. WL. EchoStar's subsidiary Directsat, has a conditional permit for
ten additional frequencies at the same orbital location, one frequency at
110DEG. WL and eleven frequencies at 175DEG. WL.
EchoStar has an application pending before the FCC for a two satellite
U.S. FSS Ka-band system and a two satellite extended Ku-band satellite
system. EchoStar has been granted a license for a two satellite FSS Ku-band
system, which is conditioned on EchoStar making an additional financial
showing. There can be no assurance the FCC will consider EchoStar's
additional showing to be adequate. If the pending applications are granted,
and EchoStar successfully constructs and launches Ku-band, extended Ku-band
and Ka-band satellites, those satellites might be used to complement EchoStar
DBS System programming, or for a variety of other uses. It is possible that
the unique FSS Ku-band and Ka-band orbital locations requested by EchoStar
and others could permit construction of satellites with sufficient power to
allow dish sizes comparable to DBS. All of these projects are in an early
stage of development and there is no assurance that EchoStar's applications
will be
98
granted by the FCC or that, if granted, EchoStar will successfully exploit
the resulting business opportunities. All of these applications are
currently being challenged by several companies with interests adverse to
EchoStar's.
These permits are conditioned on satisfaction of ongoing construction
and related obligations. There can be no assurance that EchoStar and
Directsat will be able to comply with the FCC's due diligence obligations or
that the FCC will determine that they have complied with such due diligence
obligations. Directsat's and EchoStar's permits and extension requests have
been and may continue to be contested in FCC proceedings and in court by
Dominion, PrimeStar, Advanced, Tempo, MCI, DirecTv and others.
In November 1994, the FCC approved a merger of Directsat with a wholly
owned subsidiary of EchoStar. While Dominion filed what it styled as
comments objecting to the merger, the FCC issued an order approving the
merger and EchoStar believes that the likelihood of unfavorable
reconsideration of the order approving the merger is unlikely. The FCC's DBS
rules require, among other diligence obligations, that a DBS permittee place
its satellite system in operation within six years following the initial
grant of a construction permit.
By an Order released January 11, 1996 in File No. 129 -SAT-EXT-95, the
International Bureau of the FCC granted an extension of EchoStar's permit to
August 15, 1996 with respect to the 119DEG. WL orbital location. It deferred
decision on EchoStar's request for an extension of time with respect to the
175DEG. WL orbital location pending the FCC's analysis of EchoStar's 1992 due
diligence showing for that location. By separate Order released January 11,
1996, File No. DBS-88-1, the FCC's International Bureau conditionally granted
EchoStar launch and positioning authority for EchoStar I. On February 12,
1996, EchoStar filed an application for a license to operate EchoStar I.
EchoStar certified that the in-orbit operations of the satellite fully
conform to the specifications set forth in its application as modified and in
the FCC launch authorization, with only one exception: the satellite is
currently located at 119.0DEG. WL instead of 119.2DEG. WL. By order of the
International Bureau released March 4, 1996, EchoStar was granted special
temporary authority to operate at that location until the launch of EchoStar
II or until August 31, 1996, whichever is earlier, subject to the condition
that it cause no harmful interference to other satellites. EchoStar and
Directsat have filed a joint request for an STA to enable them to operate
EchoStar I at 118.95DEG. WL and EchoStar II at 119.05DEG. WL. That
application has not been opposed. EchoStar expects that the requested STA
should be issued in the very near future. By order of the International
Bureau released on March 4, 1996, EchoStar was initially granted an STA to
operate all 16 transponders on EchoStar I, until August 31, 1996, subject to
the same non-interference condition. The FCC has granted EchoStar an
extension of the EchoStar I STA until December 1996 but could terminate it
earlier if Tempo launches a satellite to the 119DEG. WL orbital location.
Tempo opposed the grant of the STA. In its opposition Tempo asserts, among
other things, that there is no statutory basis for granting an STA unless the
STA recipient has an application pending for frequencies with regard to which
the STA is to be granted. As of the date of this Information
Statement--Prospectus, the FCC has not ruled on any further extension of the
EchoStar I STA. EchoStar believes, but can give no assurance, that the FCC
will extend the EchoStar I STA beyond December 1996. In any event, the STA
would only be available until TCI launches its satellite at 119DEG. WL.
While the FCC has granted EchoStar conditional authority to use C-band
frequencies for TT&C functions for EchoStar I, stating that the required
coordination process with Canada and Mexico has been completed, the FCC
subsequently received a communication from an official of the Ministry of
Communications and Transportation of Mexico stating that EchoStar I's TT&C
operations could cause unacceptable interference to Mexican satellites.
While EchoStar believes that it is unlikely that the FCC will subsequently
require EchoStar to relinquish use of such C-band frequencies for TT&C
purposes, the inability to control the satellite would result in a total loss
of the satellite.
Among other regulatory requirements, the DBS systems of EchoStar and
Directsat are required to conform to the ITU Region 2 Plan for the Broadcast
Satellite Service ("BSS Plan"). Any operations that are not consistent with
the BSS Plan (including, among other things, digital transmission) can only
be authorized on a non-interference basis pending successful modification of
the BSS Plan or the agreement of all affected administrations to the
non-conforming operations. Accordingly, unless and until the BSS Plan is
modified to include the technical parameters of a DBS applicant's operations,
non-standard satellites must not cause harmful
99
electrical interference to, and are not entitled to any protection from,
interference caused by other assignments that are in conformance with the BSS
Plan.
By a separate Order released January 11, 1996 in File No. 131 -SAT-EXT-95,
the International Bureau extended the construction permit of Directsat to
August 15, 1999. This grant was subject to the condition that Directsat make
significant progress toward construction and operation of its DBS system
substantially in compliance with the timetable submitted pursuant to Amendment
No. 7 of its satellite construction contract, dated June 17, 1995, or with a
more expedited timetable. The International Bureau also urged Directsat to
expedite construction and launch of additional satellites for its DBS system.
PrimeStar has filed an application for review requesting that the FCC reverse
the International Bureau's decision to extend Directsat's construction permit.
See "--Operation of the EchoStar DBS System--DBS and Other Permits" and "--Legal
Proceedings." By Order released on September 9, 1996, in File No.
DBS-88-02/94-01M, the International Bureau granted Directsat's request for
authority to launch the EchoStar II satellite to 118.8DEG. WL and for approval
of certain modifications made to the design of that satellite. In a separate
order issued on the same date in File No. 53-SAT-ML-95, the International Bureau
granted Directsat conditional authority to use C-band frequencies to perform
TT&C functions for the EchoStar II satellite until January 1, 1999, subject to
the condition that it cause no harmful interference to other satellites, at
which time the FCC will review the suitability of those frequencies for TT&C
operations. There can be no assurance that the FCC will extend the
authorization to use these C-band frequencies for TT&C purposes. The inability
to control EchoStar II would result in a total loss of the satellite. Directsat
also intends to file an application for a license to operate EchoStar II in
orbit once the satellite has successfully completed the testing phase.
The FCC has also declared that it will carefully monitor the semi-annual
reports required to be filed by DBS permittees. Failure of EchoStar or
Directsat to file adequate semi-annual reports or to demonstrate progress in
the construction of their DBS systems may result in cancellation of their
permits.
EchoStar currently owns approximately 40% of the outstanding common
stock of DBSC, which holds a conditional satellite construction permit and
specific orbital slot assignments for eleven DBS frequencies at each of
61.5DEG. WL and 175DEG. WL. EchoStar expects to acquire 100% of DBSC
pursuant to the Merger. The Merger has been approved by DBSC's shareholders
and the FCC. A timely objection to the Merger was filed by the CPT with the
FCC. CPT contended in its objection that the Merger would permit EchoStar to
acquire a dominant and anticompetitive position in the DBS marketplace by
aggregating an excessive number of DBS channels. A letter objecting to the
Merger was filed also subsequently by the CPT and another public interest
group. This letter raised the same issues as the CPT's earlier objection.
FCC Approval for the Merger was obtained on August 30, 1996. Assuming
consummation of the Merger, EchoStar will hold, through its DBSC subsidiary,
the construction permit and slot assignments for these frequencies. See
"--DBS and Related Services--DBS and Other Permits."
The non-broadcast licenses which the FCC issues for an operational DBS
system to use frequencies at a specified orbital location are for a term of
ten years. At the expiration of the initial license term, the FCC may renew
the satellite operator's license or authorize the operator to operate for a
period of time on special authority, but there is no assurance that the FCC
will take such actions. EchoStar also requires FCC authority to operate
earth stations, including the earth stations necessary to uplink programming
to its satellites.
In addition, EchoStar has been granted conditional authorization for two
Ku-band FSS satellites to be located at 83DEG. WL and 121DEG. WL, respectively,
subject to an additional financial showing. EchoStar also has applications
pending with the FCC for two Ka-band FSS satellites to be located at 85DEG. WL
and 119DEG. WL, respectively, and for two extended Ku-band FSS satellites to be
located at 82DEG. WL and 121DEG. WL, respectively.
FCC AUCTION RULES
EchoStar submitted the winning bid for the 24 frequencies at the 148DEG.
WL orbital location and has paid the required approximate $10.5 million down
payment. EchoStar has also filed the "long-form" application for a
construction permit required of the winning bidder. EchoStar's application
was placed on public notice on
100
March 6, 1996, triggering a filing window of 30 days for members of the
public, including EchoStar's competitors, to file petitions to dismiss or
deny the application. No parties have objected to the application, but to
date the FCC has not granted the application, which is expected during the
fourth quarter of 1996. EchoStar must submit the balance of its $52.3
million bid within five business days of the grant of its application by the
FCC. If the FCC grants EchoStar's application, parties may seek FCC review
or reconsideration and/or judicial review of the FCC's action. See "Risk
Factors--FCC Auction Risks."
The FCC has imposed stringent disclosure obligations on a winning bidder
that seeks to transfer a DBS license acquired through competitive bidding
within six years of the initial permit grant. Together with its application
seeking approval of such a transfer, the winning bidder must submit all
contracts and related documents and full information on all agreed-upon
consideration negotiated with the purchase.
DBS RULES
The FCC has promulgated new rules which define the rights and
obligations of holders of DBS permits and licenses. Pursuant to the rules,
the FCC has extended the term of DBS non-broadcast licenses from five to ten
years. In addition to all pre-existing construction and operation
requirements, holders of new DBS permits must complete construction of the
first satellite in their DBS system within four years of authorization and
their entire systems within six years. The holders of new DBS authorizations
issued on or after January 19, 1996 must also provide DBS service to Alaska
and Hawaii where the service is technically feasible from the acquired
orbital locations, which includes 148DEG. WL. Those holding DBS permits as
of January 16, 1996 must either provide DBS service to Hawaii or Alaska from
at least one of their orbital locations or relinquish their western
assignments. Finally, a DBS licensee must begin DBS operations within five
years of receipt of its license, but may make unrestricted use of the
spectrum for non-DBS purposes during that time. After the first five years,
the licensee may continue to provide non-DBS service so long as at least half
of its total capacity at a given orbital location is used each day for DBS
service.
PENDING APPEALS
Several parties, including EchoStar, DBSC and Directsat, have petitioned
the U.S. Court of Appeals for the D.C. Circuit to review on a variety of
grounds the FCC's Report & Order which determined to auction frequencies at
110DEG. WL and 148DEG. WL. Several other parties have also appealed a
related Order where the FCC reclaimed the channels that were auctioned from
another DBS permittee, Advanced, for failing to construct its satellites in a
timely manner. The Court has affirmed the FCC Order reclaiming channels at
110DEG. WL and 148DEG. WL and an appeal has been filed in the U.S. Supreme
Court. Review of the Report & Order requiring the auction of the frequencies
at the 110DEG. WL and 148DEG. WL orbital locations may result in invalidation
of the FCC Auction in whole or in part. In such a case, the FCC may be
compelled to conduct a new auction, rescind the construction permits for the
channels which were auctioned or consider alternative means of assigning
available DBS channels.
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 services, such as "wireless"
cable and DBS, to provide television programming.
Although EchoStar can provide no assurance as to the impact of the Cable
Act and amendments thereto on its businesses, EchoStar believes that the
overall effects on its present operations and its proposed DBS operation will
be positive. EchoStar expects to benefit from the programming access
provision of the Cable Act in that it will be able to gain access to
previously unavailable programming services and may obtain reduced costs for
certain programming services. Any amendment to, or interpretation of, the
Cable Act that permits the cable companies or entities affiliated with cable
companies to discriminate against competitors such as EchoStar in making
available programming could adversely affect EchoStar's ability to acquire
programming on a cost-effective basis. Certain of the restrictions on cable
affiliated programmers will expire in 2002 unless the FCC extends them.
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SATELLITE HOME VIEWER ACT
The Satellite Home Viewer Act establishes a "compulsory" copyright
license that allows a DBS operator, for a statutorily-established fee, to
retransmit network programming to subscribers for private home viewing so
long as that retransmission is limited to those persons in unserved
households who cannot receive through the use of a conventional outdoor
rooftop antenna a sufficient over-the-air signal of a primary affiliate of
that network and have not, within 90 days before subscribing to the DBS
service, subscribed to a cable service that provides the signal of a primary
network affiliate of that network. This compulsory license therefore enables
EchoStar to import distant network programming to those otherwise unable to
receive such programming through normal broadcast.
EchoStar's ability to transmit locally produced programming via
satellite into the local markets from which the programming is generated is
important to EchoStar's success. In order to retransmit local programming
into a local market, EchoStar must obtain the retransmission consent of the
local carrier and copyright licenses from the holders of the copyrights of
the programming. EchoStar intends to offer local programming in the 40
largest U.S. television markets and may find negotiating the necessary
consent and licenses in all those markets impractical. EchoStar accordingly
believes that it needs to prepare, lobby for and see enacted national
legislation amending the Satellite Home Viewer Act that would clarify or
extend the application of the "compulsory" copyright license to satellite
operators transmitting local programming into local markets. There can be no
assurance that EchoStar will be successful in having such copyright
legislation enacted.
ZONING
The 1996 Act offers DBS operators relief from private and local
government-imposed restrictions on the placement of receiving antennae. In
some instances, DBS operators have been unable to serve areas due to laws,
zoning ordinances, homeowner association rules, or restrictive property
covenants banning the erection of antennae on or near homes. The FCC
recently promulgated rules designed to implement Congress' intent by
prohibiting any restriction, including zoning, land use, or building
regulation, or any private covenant, homeowners' association rule, or similar
restriction on property within the exclusive use or control of the antenna
user where the user has a direct or indirect ownership interest in the
property, to the extent it impairs the installation, maintenance or use of a
DBS receiving antenna that is one meter or less in diameter or diagonal
measurement, except where such restriction is necessary to accomplish a
clearly defined safety objective or to preserve a recognized historic
district. Local governments and associations may apply to the FCC for a
waiver of this rule based on local concerns of a highly specialized or
unusual nature. The FCC also issued a further notice of proposed rulemaking
seeking comment on whether the 1996 Act applies to restrictions on property
not within the exclusive use or control of the viewer and in which the viewer
has a direct or indirect property interest. While EchoStar can provide no
assurance as to the impact of this regulatory development on its business,
EchoStar believes that the overall effect on its operations will be positive.
EXPORT REGULATION
From time to time, EchoStar requires import licenses and general
destination export licenses to receive and deliver components of DTH systems.
EchoStar has contracted with LKE for the launch of EchoStar IV from the
Kazakh Republic, a territory of the former Soviet Union. Export licenses
will be required to be obtained from the Department of Commerce for the
transport of any satellites to the Kazakh Republic. Lockheed Martin will be
required to obtain technical data exchange licenses from the Department of
Commerce permitting the exchange between Lockheed Martin and LKE of certain
information necessary to prepare the satellites for launch. No assurances
can be given that the data exchange or export licenses will be granted, or
that implementation of the Trade Agreement will not negatively affect
EchoStar's ability to launch EchoStar IV on a Proton launch vehicle. LKE has
advised EchoStar, however, that, while no assurances can be given, it
believes the necessary technical data and hardware export licenses can be
obtained in time for the first scheduled launch of an EchoStar satellite.
There can be no assurance those licenses can be obtained in a timely manner
to avoid a launch delay.
PATENTS AND TRADEMARKS
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EchoStar uses a number of trademarks for its products and services,
including "EchoStar-Registered Trademark-," "DISH Network-Registered
Trademark-," "DISH Network-SM-," "America's Top 50 CD-SM-," and others.
Many of these trademarks are registered by EchoStar, and those trademarks
that are not registered are generally protected by common law and state
unfair competition laws. Although EchoStar believes that these trademarks
are not essential to EchoStar's business, EchoStar has taken affirmative
legal steps to protect its trademarks in the past and intends to actively
protect these trademarks in the future.
EchoStar is the assignee of certain patents for products and product
components manufactured and sold by EchoStar, none of which EchoStar
considers to be significant to its continuing operations. In addition,
EchoStar has obtained and, although no assurances can be given, expects to
obtain, licenses for certain patents necessary to the manufacture and sale by
EchoStar and others of DBS receivers and related components. EchoStar has
been notified that certain features of the EchoStar Receiver System allegedly
infringe on patents held by others, and that royalties are therefore required
to be paid. EchoStar has rejected the allegations of infringement and
intends to vigorously defend against any suit filed by the parties.
EMPLOYEES
EchoStar had approximately 1,090 employees at September 30, 1996,
approximately 1,015 of whom worked in EchoStar's domestic operations and
approximately 75 of whom worked in EchoStar's international operations.
EchoStar is not a party to any collective bargaining agreement and considers
its relations with its employees to be good. Additional personnel will be
hired to manage and operate the EchoStar DBS System.
PROPERTIES
EchoStar owns its corporate headquarters, its Digital Broadcast Center
in Cheyenne, Wyoming and four additional locations. The following table sets
forth certain information concerning EchoStar's principal properties.
APPROXIMATE OWNED OR
DESCRIPTION LOCATION SQUARE FOOTAGE LEASED
- ----------- -------- -------------- --------
Corporate Headquarters and Warehouse
Distribution Center..................... Englewood, Colorado 155,000 Owned
Office and Distribution Center ......... Sacramento, California 78,500 Owned
Digital Broadcast Center ............... Cheyenne, Wyoming 55,000 Owned
Call Center............................. Thornton, Colorado 55,000 Owned
European Headquarters and Warehouse..... Almelo, The Netherlands 53,800 Owned
Warehouse Facility ..................... Denver, Colorado 40,000 Owned
Office and Distribution Center ......... Bensenville, Illinois 19,000 Leased
Office and Distribution Center ......... Miami, Florida 16,500 Leased
Office and Distribution Center......... Norcross, Georgia 16,000 Leased
Office and Distribution Center ......... Dallas, Texas 11,200 Leased
Office and Distribution Center ......... Columbia, Maryland 13,400 Leased
Office and Distribution Center ......... Phoenix, Arizona 10,000 Leased
Asian Distribution Center............... Singapore 7,000 Leased
Office and Distribution Center ......... Anaheim, California 4,300 Leased
Office ................................. Madrid, Spain 2,100 Leased
Asian Headquarters ..................... Singapore 1,900 Leased
Office ................................. Bangalore, India 1,200 Leased
Office................................. Beijing, China 1,000 Leased
LEGAL PROCEEDINGS
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EchoStar is a party to certain legal proceedings arising in the ordinary
course of its business. EchoStar does not believe that any of these other
proceedings will have a material adverse effect on EchoStar's financial
position, results of operations or liquidity.
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MANAGEMENT
The following sets forth the name, age and offices with EchoStar of each
present executive officer of EchoStar, the period during which each executive
officer has served as such and each executive officer's business experience
during the past five years:
NAME AGE POSITION
- ---- --- --------
Charles W. Ergen 43 Chairman and Chief Executive Officer
R. Scott Zimmer 40 Vice Chairman, Vice President and Director
Alan M. Angelich 53 Director
Raymond L. Friedlob 51 Director
Carl E. Vogel 39 President
Steven B. Schaver 42 Chief Operating Officer and Chief Financial
Officer
James DeFranco 43 Executive Vice President and Director
David K. Moskowitz 38 Senior Vice President, General Counsel and
Secretary
J. Allen Fears 40 Vice President, Treasurer and Controller
CHARLES W. ERGEN. Mr. Ergen has been Chairman of the Board of Directors
and Chief Executive Officer since its formation and, during the past five
years, has held various positions with EchoStar's subsidiaries, including
President of EchoStar Communications Corporation, President and Chief
Executive Officer of EchoSphere, Echonet Business Network, Inc. ("EBN") and
ESC, and Director of EchoSphere, Houston Tracker Systems, Inc. ("HTS"),
EchoStar International Corporation ("EIC"), ESC and EBN. Mr. Ergen, along
with his spouse and James DeFranco, was a co-founder of EchoStar in 1980.
Commencing in March 1995, Mr. Ergen also became a director of SSE Telecom,
Inc. ("SSET"), a company principally engaged in the manufacture and sale of
satellite telecommunications equipment.
R. SCOTT ZIMMER. Mr. Zimmer has been Vice Chairman of EchoStar since
November 1996 and has been a Vice President and a Director of EchoStar since
its formation. For more than the past five years, Mr. Zimmer has managed the
international operations of EchoStar and its subsidiaries.
ALAN M. ANGELICH. Mr. Angelich has been a director of EchoStar and a
member of its Audit and Executive Compensation Committees since October 1995.
Mr. Angelich is presently a principal with Janco Partners, Inc., an
investment banking firm specializing in the telecommunications industry.
From May 1982 to October 1993, Mr. Angelich served in various executive
capacities with Jones Intercable, Inc., including Vice Chairman of its Board
of Directors from December 1988 to October 1993. From August 1990 to October
1993, Mr. Angelich was also the Chief Executive Officer of Jones Capital
Markets, Inc.
RAYMOND L. FRIEDLOB. Mr. Friedlob has been a director of EchoStar and a
member of its Audit and Executive Compensation Committees since October 1995.
Mr. Friedlob is presently a member of the law firm of Friedlob, Sanderson,
Raskin, Paulson & Tourtillot, LLC. Prior to 1995, Mr. Friedlob was a partner
of Raskin & Friedlob, where he had practiced since 1970. Mr. Friedlob
specializes in federal securities law, corporate law, leveraged acquisitions,
mergers and taxation.
CARL E. VOGEL. Mr. Vogel was named President of EchoStar Communications
Corporation in November of 1996, President of EchoStar Satellite in November
1995 and has been the President of SSI, since April 1994. Mr. Vogel was
Chief Operating Officer and Executive Vice President of EchoStar from April
1994 until November 1996. Prior to joining EchoStar, Mr. Vogel served as the
Chief Executive Officer of Jones Programming Services, Inc., a company
engaged principally in the acquisition and packaging of cable programming
services for distribution via cable television systems, from January 1990 to
April 1994, and the
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Group Vice President of Finance of Jones International, Ltd. and certain of
its subsidiaries, companies engaged principally in the cable television
industry, from February 1983 to April 1994.
STEVEN B. SCHAVER. Mr. Schaver was named the Chief Operating Officer of
EchoStar Communications Corporation in November 1996 and has been its Chief
Financial Officer since February 1996. From November 1993 to February 1996,
Mr. Schaver was the Vice President of EchoStar's European and African
operations. From July 1992 to November 1993, Mr. Schaver was the Director of
Sales and Marketing for EchoStar's largest Spanish customer, Internacional de
Telecomunicaciones, S.A. in Madrid, Spain. Prior to July 1992 and since
joining EchoStar in 1984, he has held various positions with subsidiaries of
EchoStar, including Vice President of European operations. Prior to joining
EchoStar Mr. Schaver was a Banking Officer with Continental Illinois National
Bank.
JAMES DEFRANCO. Mr. DeFranco is an Executive Vice President of EchoStar
and has been a Vice President and a Director of EchoStar since its formation
and, during the past five years, has held various positions with EchoStar's
subsidiaries, including President of HTS, EAC and HT Ventures, Inc. ("HTV"),
Executive Vice President of ESC, Senior Vice President of EchoSphere and EBN,
and Director of Satellite Source, Inc. ("SSI"), EchoSphere, HTS, EAC, EBN and
HTV. Mr. DeFranco, along with Mr. Ergen and Mr. Ergen's spouse, was a
co-founder of EchoStar in 1980.
DAVID K. MOSKOWITZ. Mr. Moskowitz has been the Senior Vice President
of EchoStar since January 1996, and Secretary and General Counsel since March
1994. Between March 1994 and January 1996 Mr. Moskowitz was Vice President
of EchoStar. Mr. Moskowitz joined EchoStar in March 1990. Mr. Moskowitz is
responsible for all legal affairs of EchoStar and its subsidiaries.
J. ALLEN FEARS. Mr. Fears has been the Vice President, Treasurer and
Controller of EchoStar since December 1992. Prior thereto Mr. Fears served
as Controller of all of EchoStar's subsidiaries from January 1988 to December
1992, and as Assistant Controller of a subsidiary of EchoStar from October
1985 to January 1988. Mr. Fears is responsible for the finance, accounting,
tax and budgeting systems of EchoStar and its subsidiaries.
There are no family relationships among the executive officers and
directors of EchoStar or arrangements or understandings between any executive
officer and any other person pursuant to which any executive officer was
selected as such. Pursuant to the Bylaws of EchoStar, executive officers
serve at the pleasure of the Board of Directors. Executive officers of
EchoStar are elected annually to serve until their respective successors are
elected and qualified.
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EXECUTIVE COMPENSATION
Executive officers are compensated by certain subsidiaries of EchoStar.
The following table sets forth the cash and non-cash compensation for the
fiscal years ended December 31, 1995, 1994 and 1993 of the Chief Executive
Officer of EchoStar and the next four most highly compensated executive
officers of EchoStar (collectively, the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
OTHER ANNUAL NUMBER OF ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION (1) OPTIONS GRANTED COMPENSATION (2)
- --------------------------- ---- -------- ------- ---------------- --------------- ----------------
Charles W. Ergen .......... 1995 $190,000 $ -- $ -- 14,705 $15,158
Chairman and Chief 1994 177,578 -- -- 53,568 888
Executive Officer 1993 156,000 -- -- -- 10,557
R. Scott Zimmer............ 1995 160,000 -- 88,229 14,705 32,390
Vice Chairman and 1994 148,006 -- 74,396 42,855 18,990
Vice President 1993 132,000 95,452 71,458 -- 19,195
James DeFranco............. 1995 156,923 -- -- 11,764 15,158
Vice President 1994 154,461 -- -- 42,855 1,000
1993 144,000 55,778 -- -- 10,117
Carl E. Vogel.............. 1995 150,000 -- -- 21,641 11,346
President 1994 107,308 -- -- 375,776 500
1993 -- -- -- -- --
David K. Moskowitz ........ 1995 130,000 10,000 -- 28,048 13,270
Senior Vice President, 1994 125,384 -- -- 53,568 1,000
Secretary and General 1993 115,000 41,833 -- -- 6,497
Counsel
- -------------------
(1) With respect to Mr. Zimmer, "Other Annual Compensation" includes housing
and car allowances related to Mr. Zimmer's overseas assignment. While
each Named Executive Officer enjoys certain other perquisites, such
perquisites do not exceed the lesser of $50,000 or 10% of each officer's
salary and bonus.
(2) "All Other Compensation" includes amounts contributed to EchoStar's 401(k)
plan and premiums paid on health insurance on behalf of the Named Executive
Officers. With respect to Mr. Zimmer "All Other Compensation" also
includes home leave and education allowances related to his overseas
assignment.
The following table provides information concerning grants of options to
purchase Class A Common Stock of EchoStar made in 1995 to the Named Executive
Officers.
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OPTION GRANTS IN LAST FISCAL YEAR
POTENTIAL REALIZABLE
VALUE AT ASSUMED RATES
OF STOCK PRICE
NUMBER OF PERCENT OF APPRECIATION FOR
SECURITIES TOTAL OPTIONS OPTION TERM
UNDERLYING GRANTED TO EXERCISE PRICE ----------------------
NAME OPTIONS GRANTED EXECUTIVE IN 1995 PER SHARE EXPIRATION DATE 5% 10%
- ---- --------------- ----------------- -------------- --------------- -------- --------
Charles W. Ergen.............. 14,705(1) 3.2% $17.00 06-20-05 $407,199 $648,397
R. Scott Zimmer............... 14,705(1) 3.2% 17.00 06-20-05 407,199 648,397
James DeFranco................ 11,764(1) 2.6% 17.00 06-20-05 325,759 518,717
Carl E. Vogel................. 11,764(1) 2.6% 17.00 06-20-05 325,759 518,717
Carl E. Vogel................. 9,877(2) 2.2% 20.25 12-22-05 325,794 518,772
David K. Moskowitz............ 13,234(1) 2.9% 17.00 06-20-05 366,466 583,535
David K. Moskowitz............ 14,814(2) 3.3% 20.25 12-22-05 488,642 778,079
- -------------------
(1) In June 1995, Echostar granted options to the Named Executive Officers,
among other key employees, to purchase shares of Class A Common Stock. The
options vest 20% on June 20, 1996, and 20% thereafter on June 20, 1997,
1998, 1999 and 2000. See "--Executive Compensation--Stock Incentive Plan."
The options expire five years from the date on which each portion of the
option first becomes exercisable, subject to early termination in certain
circumstances.
(2) In December 1995, Echostar granted options to the Named Executive Officers,
among other key employees, to purchase shares of Class A Common Stock. The
options vest 20% on December 22, 1996, and 20% thereafter on December 22,
1997, 1998, 1999 and 2000. See "--Stock Incentive Plan." The options
expire five years from the date on which each portion of the option first
becomes exercisable, subject to early termination in certain circumstances.
The following table provides information as of December 31, 1995,
concerning unexercised options to purchase Class A Common Stock. None of the
Named Executive Officers Exercised any stock options during 1995.
FISCAL YEAR END OPTION VALUES
NUMBER OF
SECURITIES UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
AT DECEMBER 31, 1995 AT DECEMBER 31, 1995 (1)
-------------------------- --------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- ------------- ----------- -------------
Charles W. Ergen..... 10,714 57,559 $ 159,821 $745,864
R. Scott Zimmer...... 8,571 48,989 127,854 618,025
James DeFranco....... 8,571 46,048 127,854 596,703
Carl E. Vogel........ 332,922 64,495 6,973,231 764,050
David K. Moskowitz... 10,714 70,902 159,821 794,455
- -------------------
(1) The dollar value of each exercisable and unexercisable option was
calculated by multiplying the number of shares of Class A Common Stock
underlying the option by the difference between the exercise price of
the option and the closing price (as quoted in the NASDAQ National Market)
of a share of Class A Common Stock on December 31, 1995.
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COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION. Prior to
October 1995, EchoStar did not have a Compensation Committee, and its Board
of Directors determined all matters concerning executive compensation.
DIRECTOR COMPENSATION. Directors of EchoStar who are not also executive
officers of EchoStar receive $500 for each meeting of the Board of Directors
attended and are reimbursed for reasonable travel expenses related to
attendance at Board meetings. Directors of EchoStar are elected annually by
the stockholders of EchoStar. Directors of ESBC are not compensated for
their services as directors. Directors of ESBC are elected annually by
EchoStar.
The Board of Directors of EchoStar has approved the Non-Employee Stock
Option Incentive Plan (the "Director Plan") pursuant to which directors who
are not also employees of EchoStar are granted options to acquire 1,000
shares of Class A Common Stock of EchoStar upon election to the Board. The
Director Plan is being submitted to shareholders of EchoStar for approval at
the 1996 Annual Meeting of Shareholders. Subject to such approval, the Board
approved issuance of options to Messrs. Angelich and Friedlob as of December
22, 1995. These options are 100% vested upon issuance with an exercise price
of $20.25 and a term of five years.
EMPLOYMENT AGREEMENT. In March 1994, EchoStar entered into an
employment agreement with Carl E. Vogel, pursuant to which Mr. Vogel acts as
President of EchoStar and currently receives an annual salary of $170,000.
EchoStar has no employment agreements with any of its executive officers
other than Mr. Vogel.
EchoStar may terminate Mr. Vogel's employment at any time, with or without
cause, but will be required to compensate Mr. Vogel a specified amount if
EchoStar terminates his employment prior to January 1, 1997. Such compensation
will depend on the duration of Mr. Vogel's employment with EchoStar. Similarly,
Mr. Vogel may voluntarily terminate his employment with EchoStar at any time and
receive severance compensation in an amount based on the duration of his
employment with EchoStar at the time of such termination. On or after
January 1, 1997, Mr. Vogel will have no right to receive any compensation from
EchoStar upon termination. For a period of one year following termination of
Mr. Vogel's employment with EchoStar, Mr. Vogel may not compete against EchoStar
by working, or acting in any other capacity, for a company in the DBS industry.
Mr. Vogel may, however, work for an affiliate of a company in the DBS industry,
in a role unrelated to that industry. Mr. Vogel also had an option to purchase
322,208 shares of Class A Common Stock of EchoStar for $3.10 per share (the
"Vogel Option"). Subsequent to December 31, 1995, Mr. Vogel has exercised the
Vogel Option.
STOCK INCENTIVE PLAN. EchoStar has adopted a stock incentive plan (the
"Incentive Plan") to provide incentives to attract and retain officers and
other key employees. EchoStar's Executive Compensation Committee administers
the Incentive Plan. Key employees are eligible to receive awards under the
Incentive Plan, in the Committee's discretion.
Awards available under the Incentive Plan include: (i) common stock
purchase options; (ii) stock appreciation rights; (iii) restricted stock and
restricted stock units; (iv) performance awards; (v) dividend equivalents;
and (vi) other stock-based awards. EchoStar has reserved up to ten million
shares of Class A Common Stock for granting awards under the Incentive Plan.
Under the terms of the Incentive Plan, the Committee retains discretion,
subject to plan limits, to modify the terms of outstanding awards and to
reprice awards.
EchoStar has granted to officers and other key employees options under the
Incentive Plan for a total of 1,303,147 shares of Class A Common Stock. The
options generally vest at the rate of 20% per year commencing one year from the
date of grant and 20% thereafter on each anniversary of the date of grant. The
exercise prices of these options range between $9.33 and $26.69 per share.
LAUNCH BONUS PLANS. Effective December 16, 1995, EchoStar granted a
performance award of 10 shares of Class A Common Stock to all full time
employees with more than 90 days service. The total number of shares
109
granted was approximately 4,870 shares. Effective September 9, 1996,
EchoStar granted a performance award of 10 shares of Class A Common Stock to
all full-time employees with more than 90 days of service. The total number
of shares granted was approximately 7,390 shares.
401(K) PLAN. In 1983, EchoStar adopted a defined-contribution
tax-qualified 401(k) plan. EchoStar employees become eligible for
participation in the 401(k) plan upon completing one-half year of service
with EchoStar and reaching age 21. The 401(k) plan participants may
contribute an amount equal to not less than 1% and not more than 15% of their
compensation in each contribution period. EchoStar may make a 50% matching
contribution up to a maximum of $1,000 per participant per calendar year.
EchoStar may also make an annual discretionary profit sharing or employer
stock contribution to the 401(k) plan with the approval of the Board of
Directors.
The 401(k) plan participants are immediately vested in their voluntary
contributions, plus actual earnings thereon. The balance of the vesting in
the 401(k) plan participants' accounts is based on years of service. A
participant becomes 10% vested after one year of service, 20% vested after
two years of service, 30% vested after three years of service, 40% vested
after four years of service, 60% vested after five years of service, 80%
vested after six years of service and 100% vested after seven years of
service.
Effective December 22, 1995, EchoStar contributed 55,000 shares of Class
A Common Stock to the 401(k) plan as a discretionary employer stock
contribution. EchoStar recognized expense, and an addition to its paid-in
capital, for the fair value (approximately $1.1 million) of the EchoStar
shares contributed to the Plan. No employee has voting or any other interest
in the Class A Common Stock unless still employed by EchoStar on December 31,
1996. Shares of the Class A Common Stock have been allocated to the 401(k)
accounts of the following executive officers of EchoStar in accordance with
the Plan: (i) Charles W. Ergen, 699 shares; (ii) R. Scott Zimmer, 699
shares; (iii) James DeFranco, 699 shares; (iv) Carl E. Vogel, 511 shares; (v)
David K. Moskowitz, 605 shares; and (vi) all officers and directors as a
group, 5,272 shares.
110
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Certain subsidiaries of EchoStar have agreed to indemnify Charles W.
Ergen, Chairman and Chief Executive Officer of EchoStar, James DeFranco, a
Vice President of EchoStar, R. Scott Zimmer, the Vice Chairman of EchoStar,
and Cantey M. Ergen, a former Director of HTS and the spouse of Charles W.
Ergen, for any adjustments to such individuals' federal, state or local
income taxes resulting from adjustments to EchoStar's subsidiaries' taxable
income or loss, tax credits or tax credit recapture for years during which
such individuals were stockholders of such subsidiaries and such subsidiaries
elected to be taxed as Subchapter S corporations. This indemnity agreement
also covers interest, penalties and additions to tax, as well as fees and
expenses, including attorneys' and accountants' fees, if any.
Charles W. Ergen beneficially owns 10% of the stock of Wright Travel
Corporation ("Wright Travel"), a privately held travel agency which EchoStar
uses for its travel arrangements and which leases office space from EchoStar.
For the year ended December 31, 1995, EchoStar paid approximately $769,000 to
Wright Travel. These payments were primarily related to travel expenses,
large events and seminars that were contracted with Wright Travel at rates
comparable to those obtainable from independent third parties. In 1995,
EchoStar earned approximately $27,000 from the lease by Wright Travel of
office space from EchoStar, which amount was offset by approximately $10,000
required to be credited by EchoStar to Wright Travel for the exclusive
services of an employee of Wright Travel.
EchoStar issued a long-term promissory note (the "Ergen Note") payable
to Charles W. Ergen in the principal amount of $14.7 million as of December
31, 1993. The proceeds of the Ergen Note were used to make payments toward
the construction and launch of EchoStar I. (see Note 6 of Notes to EchoStar's
Financial Statements). In connection with the 1994 Notes Offering, Dish,
Ltd. exchanged shares of its Series A Preferred Stock for the Ergen Note and
accrued interest thereon at the rate of 10% per annum. Subsequent to the
exchange, Mr. Ergen sold five percent of his Series A Preferred Stock of
Dish, Ltd. to James DeFranco for $753,000. In 1995, Series A Preferred Stock
of EchoStar was issued in exchange for Series A Preferred Stock of Dish, Ltd.
Pursuant to the 1994 Indenture, dividends may be paid on the Series A
Preferred Stock of EchoStar only if certain conditions are satisfied. See
"Description of Certain Indebtedness--1994 Notes." As of December 31, 1995,
dividends accrued but unpaid on the Dish, Ltd. Series A Preferred Stock and
the Series A Preferred Stock of EchoStar to Mr. Ergen and Mr. DeFranco,
respectively, aggregated $2.0 million and $107,000.
Since March 1995, Mr. Ergen has served on the Board of Directors of
SSET. In 1994, EchoStar provided SSET with $8.75 million of financing
through the issuance by SSET to EchoStar of its seven-year, 6.5% subordinated
convertible non-recourse debentures, which are convertible into approximately
12% of SSET's outstanding common stock, based on the number of shares of SSET
common stock outstanding at December 31, 1995. On September 6, 1996, SSET
repurchased $3.5 million of the outstanding convertible debentures and paid
all outstanding accrued interest through that date. EchoStar also purchased
all of SSET's minority interest in DBSC and certain notes and accounts
payable by DBSC to SSET for $1.25 million. In connection with these
transactions, Mr. Ergen advanced $4.0 million to EchoStar, all of which was
used to purchase convertible debentures and certain assets of SSET. These
advances were represented by a promissory note bearing interest at 8% per
annum and were repaid in June 1994 from the proceeds of the 1994 Notes
Offering.
In December 1994, Directsat, a subsidiary of SSET, was merged with a
wholly owned subsidiary of EchoStar. As a result of this merger, SSET
acquired 800,780 shares of EchoStar's Class A Common Stock. Daniel E. Moore,
Secretary and a Director of DBSC, is Vice President, Chief Financial Officer
and a Director of SSET. Mr. Moore became Secretary and a Director of DBSC in
September 1995.
On July 18, 1996, the satellite construction contracts for construction
of EchoStar I, EchoStar II and EchoStar III were amended by the parties
thereto (the "Satellite Amendments"). Prior to July 18, 1996, certain
post-launch payments to Lockheed Martin by ESC for construction of EchoStar
I, Directsat for construction of EchoStar II and DBSC for construction of
EchoStar III were to be secured by letters of credit from reputable financial
institutions, and, with respect to EchoStar I and EchoStar II, by shares of
EchoStar's 8% Series A Cumulative Preferred Stock held of record by Charles
W. Ergen. Subject to the Satellite Amendments, the post-
111
launch payments due from ESC, Directsat and DBSC are now secured by a written
corporate guarantee by EchoStar and not by letters of credit. In addition,
effective December 31, 1996 and on each subsequent June 30 and December 31,
certain of the shares of EchoStar's 8% Series A Cumulative Preferred Stock
owned by Mr. Ergen and held in escrow will be released based upon a formula
which takes into account the total outstanding post-launch payments due and
the then current price of the EchoStar Common Stock as quoted on NASDAQ.
In 1995 and 1996 EchoStar purchased an aggregate of $4.0 million of
DBSI's convertible subordinated debentures, of which $1.0 million are due
July 1, 1998, and $3.0 million are due January 12, 1999. The debentures are
secured by 125,000 shares of DBSC Common Stock and 2,000 shares of common
stock of E-SAT Corporation which is currently owned 80% by EchoStar. Fred W.
Thompson, a director of DBSC, is President, a Director and a significant
shareholder of DBSI.
Pursuant to the Loan Agreements, EchoStar agreed to purchase from DBSC
$16.0 million in principal amount of promissory notes of DBSC and, in
EchoStar's sole and absolute discretion, up to an additional $134.0 million
principal amount of promissory notes, the proceeds from which are to be used
by DBSC to make certain payments to Lockheed Martin under the DBSC Satellite
Contract and to make deposits towards launch reservations. As of the date of
this Information Statement--Prospectus, EchoStar has loaned DBSC $36.0
million pursuant to the Loan Agreements.
EchoStar believes that each of the transactions described above between
EchoStar and its affiliates were on terms comparable to those which would
have been obtainable from unaffiliated third parties.
112
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table and the accompanying notes set forth information
concerning the beneficial ownership of EchoStar's equity securities as of
October 31, 1996. The information is presented for: (i) each person known
by EchoStar to be the beneficial owner of more than five percent of any class
of EchoStar's capital stock; (ii) each director of EchoStar; (iii) each Named
Executive Officer; and (iv) all directors and executive officers as a group.
Except as otherwise indicated, each person listed in the following table has
informed EchoStar that such person has sole voting and investment power with
respect to such person's shares of capital stock.
PERCENTAGE
NAME (1) NUMBER OF SHARES OF CLASS(2)
- -------- ---------------- -----------
8% SERIES A CUMULATIVE PREFERRED STOCK
Charles W. Ergen. . . . . . . . . . . . . . 1,535,847(3) 95.0%
James DeFranco. . . . . . . . . . . . . . . 80,834 5.0%
All Directors and Executive Officers as
a Group (twelve persons). . . . . . . . . 1,616,681 100.0%
CLASS A COMMON STOCK
Charles W. Ergen. . . . . . . . . . . . . . 31,425,559(4) 72.4%(5)(6)
James DeFranco. . . . . . . . . . . . . . . 1,514,397(7) 3.5%(5)
SSE Telecom, Inc. . . . . . . . . . . . . . 912,717(8) 2.1%(5)
T. Rowe Price . . . . . . . . . . . . . . . 822,200(9) 1.9%(5)
R. Scott Zimmer . . . . . . . . . . . . . . 810,926(10) 1.9%(5)
Carl E. Vogel . . . . . . . . . . . . . . . 318,230(11)
David K. Moskowitz. . . . . . . . . . . . . 34,665(12)
All Directors and Executive Officers as
a Group (twelve persons). . . . . . . . . 34,171,054(13) 78.7%(5)
CLASS B COMMON STOCK
Charles W. Ergen. . . . . . . . . . . . . . 29,804,401 100.0%
All Directors and Executive Officers as
a Group (twelve persons) . . . . . . . . 29,804,401 100.0%
- ------------------------
* Less than 1%
(1) Except as otherwise noted, the address of each such person is 90 Inverness
Circle East, Englewood, Colorado 80112.
(2) For purposes of calculating the number of shares outstanding and percentage
ownership, it was assumed that all 657,415 shares of EchoStar Class A
Common Stock issuable pursuant to the Merger were in fact issued.
(3) Includes 1,125,000 shares of Series A Preferred Stock held in trust for the
benefit of Mr. Ergen's minor children and other members of his family.
Mr. Ergen's spouse is the trustee for that trust. All of the Series A
Preferred Stock is currently pledged to Lockheed Martin as security for the
performance of certain of ESC's obligations under the Satellite Contracts.
113
(4) Includes: (i) 24,368 shares of Class A Common Stock issuable to Mr. Ergen
upon exercise of employee stock options; (ii) 29,804,401 shares of Class A
Common Stock issuable upon conversion of Mr. Ergen's Class B Common Stock;
(iii) 410,847 shares of Class A Common Stock issuable upon conversion of
Mr. Ergen's Series A Preferred Stock; (iv) 1,125,000 shares of Class A
Common Stock issuable upon conversion of Series A Preferred Stock held in
trust for the benefit of Mr. Ergen's minor children and other members of
his family; and (v) 55,000 shares of Class A Common Stock held by the
EchoStar Communications Corporation 401(k) Plan, of which Mr. Ergen is a
trustee.
(5) The beneficial ownership percentage was calculated assuming exercise or
conversion of all Class B Common Stock, Preferred Stock, Warrants and
employee stock options ("Derivative Securities") into Class A Common Stock
by all holders of such Derivative Securities. Assuming exercise or
conversion of Derivative Securities by such person, and only by such
person, the beneficial ownership of Class A Common Stock would be as
follows: Mr. Ergen, 73.1%; Mr. DeFranco, 13.1%; Mr. Zimmer, 7.2%;
Mr. Vogel, 3.1%; and all officers and directors as a group, 79.2%. SSE
Telecom, Inc. and T. Rowe Price do not own any Derivative Securities. If
none of the holders of Derivative Securities exercise or convert such
securities, SSE Telecom, Inc. and T. Rowe Price would beneficially own
7.8% and 7.0%, respectively, of the outstanding Class A Common Stock.
(6) The percentage of total voting power held by Mr. Ergen is 95.9%, after
giving effect to the exercise of the Warrants and the employee stock
options.
(7) Includes: (i) 19,494 shares of Class A Common Stock issuable to
Mr. DeFranco upon exercise of employee stock options; (ii) 80,834 shares of
Class A Common Stock issuable upon conversion of Mr. DeFranco's Series A
Preferred Stock; (iii) 751 shares of Class A Common Stock held as custodian
for his minor children; and (iv) 375,000 shares of Class A Common Stock
controlled by Mr. DeFranco as general partner of a partnership.
(8) Includes 111,937 shares of Class A Common Stock owned by EchoSat
Corporation, a wholly owned subsidiary of SSE Telecom, Inc. The address of
SSE Telecom, Inc. is 8230 Leesburg Pike, Suite 710, Vienna, Virginia 22182.
(9) These securities are owned by various individual and institutional
investors (including T. Rowe Price Science & Technology Fund, Inc.
(which owns 450,000 shares, representing 3.9% of the shares outstanding),
for which T. Rowe Price Associates, Inc. ("Price Associates") serves as
investment adviser with power to direct investments and/or sole power to
vote the securities. For purposes of the reporting requirements of the
Securities Exchange Act of 1934, Price Associates is deemed to be a
beneficial owner of these securities, however, Price Associates expressly
disclaims that it is, in fact, the beneficial owner of such securities.
The address of T. Rowe Price is 100 East Pratt Street, Baltimore,
Maryland 21289.
(10) Includes: (i) 3,083 shares of Class A Common Stock issuable to Mr. Zimmer
upon exercise of employee stock options; (ii) 2,300 shares of Class A
Common Stock owned jointly with members of his family; and (iii) 100,000
shares of Class A Common Stock held in trust for the benefit of Mr.
Zimmer's children and other members of his family. Mr. Zimmer's spouse
is the trustee for that trust.
(11) Includes: (i) 25,755 shares of Class A Common Stock issuable to Mr. Vogel
upon exercise of employee stock options; and (ii) 247 shares of Class A
Common Stock owned jointly with Mr. Vogel's spouse.
(12) Includes: (i) 27,037 shares of Class A Common Stock issuable to
Mr. Moskowitz upon exercise of employee stock options; (ii) 3,000 shares of
Class A Common Stock owned by Mr. Moskowitz's spouse; (iii) 166 shares of
Class A Common Stock held as custodian for his
114
minor children; and (iv) 1,023 shares of Class A Common Stock held as
trustee for Mr. Ergen's children.
(13) Includes: (i) 158,765 shares of Class A Common Stock issuable upon
exercise of employee stock options; (ii) 55,000 shares held by the 401(k)
plan; (iii) 375,000 shares of Class A Common Stock held in a partnership;
(iv) 1,616,681 shares of Class A Common Stock issuable upon conversion of
Series A Preferred Stock; (v) 29,804,401 shares of Class A Common Stock
issuable upon conversion of Class B Common Stock; (vi) 102,041 shares of
Class A Common Stock held in the name of, or in trust for, minor children
and other family members; and (vii) 5,753 shares of Class A Common Stock
owned by or jointly with family members.
115
DESCRIPTION OF CAPITAL STOCK
GENERAL
Pursuant to EchoStar's Amended and Restated Articles of Incorporation,
as in effect on the date hereof, EchoStar's authorized capital stock consists
of: (i) 400,000,000 shares of Common Stock, of which 200,000,000 shares are
designated "Class A Common Stock," 100,000,000 shares are designated "Class B
Common Stock," and 100,000,000 shares are designated "Class C Common Stock;"
and (ii) 20,000,000 shares of Preferred Stock, par value $.01 per share. As
of November 11, 1996, 11,022,147 shares of Class A Common Stock were issued
and outstanding and held of record by 1,367 stockholders, 29,804,401 shares
of Class B Common Stock were issued and outstanding and held of record by
Charles W. Ergen, EchoStar's President and Chief Executive Officer, and no
shares of Class C Common Stock were issued and outstanding. See "Security
Ownership of Certain Beneficial Owners and Management." All outstanding
shares of the Class A Common Stock and Class B Common Stock are fully paid
and nonassessable. The designation and the powers, preferences and rights of
the shares of Common Stock and Preferred Stock and the qualifications,
limitations and restrictions thereof are as set forth below.
The transfer agent for EchoStar's capital stock, including the Class A
Common Stock, is American Securities Transfer, Inc. ("AST"). AST's address
is 1825 Lawrence Street, Suite 444, Denver, Colorado 80202.
CLASS A COMMON STOCK
Each holder of Class A Common Stock is entitled to one vote for each
share of Class A Common Stock owned of record on all matters submitted to a
vote of stockholders. Except as otherwise required by law, the Class A
Common Stock votes together with the Class B Common Stock, the Class C Common
Stock and the Preferred Stock on all matters submitted to a vote of
stockholders. Subject to the preferential rights of any outstanding series
of Preferred Stock and to the restrictions on payment of dividends imposed by
the 1994 Notes and the 1996 Notes (see "Description of Certain
Indebtedness--1994 Notes" and "--1996 Notes") and any other indebtedness of
EchoStar, the holders of Class A Common Stock are entitled to such dividends
as may be declared from time to time by the Board of Directors from funds
legally available therefor, and, together with the holders of the Class B
Common Stock, are entitled, after payment of all prior claims, to receive pro
rata all assets of EchoStar upon the liquidation, dissolution or winding up
of EchoStar. Holders of Class A Common Stock have no redemption, conversion
or preemptive rights.
CLASS B COMMON STOCK
Each holder of Class B Common Stock is entitled to ten votes for each
share of Class B Common Stock on all matters submitted to a vote of
stockholders. Except as otherwise required by law, the Class B Common Stock
votes together with the Class A Common Stock, the Class C Common Stock and
the Preferred Stock on all matters submitted to a vote of the stockholders.
Each share of Class B Common Stock is convertible, at the option of the
holder, into one share of Class A Common Stock. The conversion ratio is
subject to adjustment from time to time upon the occurrence of certain
events, including: (i) dividends or distributions on Class A Common Stock
payable in Class A Common Stock or certain other capital stock; (ii)
subdivisions, combinations or certain reclassifications of Class A Common
Stock; and (iii) issuances of Class A Common Stock or rights, warrants or
options to purchase Class A Common Stock at a price per share less than the
fair market value of the Class A Common Stock. Each share of Class B Common
Stock is entitled to receive dividends and distributions upon liquidation on
a basis equivalent to that of the Class A Common Stock.
CLASS C COMMON STOCK
Each holder of Class C Common Stock is entitled to one vote for each
share of Class C Common Stock on all matters submitted to a vote of
stockholders. Except with respect to transactions involving the issuance of
capital stock which negatively affect the rights of holders of Series A
Preferred Stock, or as otherwise required by law, the Class C Common Stock
votes together with Class A Common Stock, the Class B Common Stock and the
Series A Preferred Stock on all matters submitted to a vote of the
stockholders. Each share of Class C
116
Common Stock is convertible into Class A Common Stock on the same terms as
the Class B Common Stock. Each share of Class C Common Stock is entitled to
receive dividends and distributions upon liquidation on a basis equivalent to
that of the Class A Common Stock. Upon a Change in Control of EchoStar, each
holder of outstanding shares of Class C Common Stock is entitled to cast ten
votes for each share of Class C Common Stock held by such holder. "Change in
Control" has the same meaning as set forth in the 1994 Indenture and the 1996
Indenture. See "Description of Certain Indebtedness--1994 Notes" and "--1996
Notes." EchoStar has no present intention to issue any shares of Class C
Common Stock and, under current NASD rules, will not be able to issue any so
long as the Class A Common Stock is quoted on the NASDAQ National Market.
PREFERRED STOCK
EchoStar's Board of Directors is authorized to divide the Preferred
Stock into series and, with respect to each series, to determine the
preferences and rights and the qualifications, limitations, or restrictions
thereof, including the dividend rights, conversion rights, voting rights,
redemption rights and terms, liquidation preferences, sinking fund
provisions, the number of shares constituting the series and the designation
of such series. The Board of Directors may, without stockholder approval,
issue Preferred Stock with voting and other rights that could adversely
affect the voting power of the holders of Common Stock and could have certain
anti-takeover effects.
EchoStar has issued 1,616,681 shares of its 8% Series A Cumulative
Preferred Stock (the "Series A Preferred Stock"). Each share of Series A
Preferred Stock issued is convertible, at the option of the holder, into one
share of Class A Common Stock, subject to adjustment from time to time upon
the occurrence of certain events, including: (i) dividends or distributions
on Class A Common Stock payable in Class A Common Stock or certain other
capital stock; (ii) subdivisions, combinations or certain reclassifications
of Class A Common Stock; and (iii) issuances of Class A Common Stock or
rights, warrants or options to purchase Class A Common Stock at a price per
share less than the liquidation preference per share. The aggregate
liquidation preference for all outstanding shares of Series A Preferred Stock
is limited to approximately $15.1 million plus cumulative unpaid dividends.
At September 30, 1996, accrued and unpaid dividends of the Series A
Preferred Stock totalled approximately $3.0 million.
Each share of Series A Preferred Stock is entitled to receive dividends
equal to eight percent per annum of the liquidation preference for such
share. EchoStar currently has no intention to begin paying dividends on the
Series A Preferred Stock.
Shares of Series A Preferred Stock automatically convert into shares of
Class A Common Stock in the event they are transferred to any person other
than permitted transferees. Each share of Series A Preferred Stock is
entitled to the equivalent of ten votes for each share of Class A Common
Stock into which it is convertible and, except with respect to transactions
involving the issuance of capital stock which negatively affects the rights
of holders of Series A Preferred Stock (as more particularly described in the
Certificate of Designations, Preferences and Rights for the Series A
Preferred Stock) or as otherwise required by law, votes together with the
Class A Common Stock, Class B Common Stock and Class C Common Stock as a
single class on all matters submitted to a vote of stockholders.
WARRANTS
On June 7, 1994, Dish, Ltd. consummated the 1994 Notes Offering, selling
624,000 Units, consisting of $624.0 million aggregate principal amount of
1994 Notes and warrants to purchase 2,807,998 shares of Class A Common Stock
(the "Warrants"). Each Unit consists of $1,000 principal amount of 1994
Notes and Warrants to purchase 4.5 shares of Class A Common Stock. The 1994
Notes and Warrants are separately transferable. The Warrants were issued
under a Warrant Agreement (the "Warrant Agreement") between Dish, Ltd. and
First Trust National Association, as Warrant Agent (the "Warrant Agent"), a
copy of which is filed as an exhibit to the Registration Statement.
Each Warrant entitles the registered holder thereof (the "Holder"),
subject to and upon compliance with the provisions thereof and of the Warrant
Agreement, at such Holder's option, prior to 5:00 p.m., Eastern time,
117
on June 1, 2004, to purchase from Dish, Ltd. 0.75 shares (or such other
number as may result from adjustments as provided in the Warrant Agreement)
of Class A Common Stock at a purchase price of $0.01 per share (the "Exercise
Price"). If Dish, Ltd. is a party to a consolidation, merger or binding
share exchange, or certain transfers of all or substantially all of its
assets occur, the right to exercise a Warrant for Class A Common Stock will
represent a right to receive the same securities, cash or other assets of
EchoStar or another person that a holder of Class A Common Stock is entitled
to receive upon such consolidation, merger, share exchange or transfer (which
securities, cash or other assets may not necessarily be of equal value to the
Class A Common Stock). The Warrants are obligations of Dish, Ltd., but, in
connection with the merger of Dish, Ltd. and a wholly-owned subsidiary of
EchoStar, the Warrants currently entitle the Holders to acquire an aggregate
of 2,807,998 shares of EchoStar Class A Common Stock. The exercise price
with respect to all of the Warrants has been paid. No additional amounts are
required to be paid upon exercise of the Warrants. As of September 30,
1996, substantially all of the Warrants issued in connection with the 1994
Notes Offering had been exercised.
The number of shares of Class A Common Stock issuable upon exercise of a
Warrant (the "Exercise Rate") is subject to adjustment from time to time upon
the occurrence of certain events, including: (i) dividends or distributions
on common stock payable in common stock or certain other capital stock; (ii)
subdivisions, combinations or certain reclassifications of common stock;
(iii) distributions to all holders of common stock of rights, warrants or
options to purchase common stock at a price per share less than the current
market value at the time; and (iv) distributions to stockholders of assets,
debt securities or common stock of Dish, Ltd. or certain rights, warrants or
options to purchase securities of Dish, Ltd. (excluding cash dividends or
other cash distributions from current or retained earnings other than any
Extraordinary Cash Dividend). The Warrant Agreement permits Dish, Ltd.
voluntarily to increase the Exercise Rate, as defined therein, from time to
time for a period of time not less than 20 business days.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
The Amended and Restated Articles of Incorporation provide that a
director of EchoStar will not be personally liable to EchoStar or its
stockholders for monetary damages for any breach of fiduciary duty as a
director, except in certain cases where liability is mandated by the NCL.
The provision has no effect on any non-monetary remedies that may be
available to EchoStar or its stockholders, nor does it relieve EchoStar or
its directors from compliance with federal or state securities laws. The
Amended and Restated Articles of Incorporation and the By-Laws of EchoStar
provide for indemnification, to the fullest extent permitted by the NCL, of
any person who is or was involved in any manner in any investigation, claim
or other proceeding by reason of the fact that such person is or was a
director or officer of EchoStar, or is or was serving at the request of
EchoStar as a director or officer of another corporation, against all
expenses and liabilities actually and reasonably incurred by such person in
connection with the investigation, claim or other proceeding.
NEVADA LAW AND LIMITATIONS ON CHANGES IN CONTROL
The NCL prevents an "interested stockholder" (defined in Section 78.423
of the NCL, generally, as a person owning 10% or more of a corporation's
outstanding voting stock) from engaging in a "combination" (as defined in
Section 78.416) with a publicly-held Nevada corporation for three years
following the date such person became an interested stockholder unless,
before such person became an interested stockholder, the board of directors
of the corporation approved the transaction in which the interested
stockholder became an interested stockholder or approves the combination.
The provisions authorizing the Board of Directors to issue Preferred
Stock without stockholder approval and the provisions of the NCL relating to
combinations with interested stockholders could have the effect of delaying,
deferring or preventing a change in control of EchoStar or the removal of
existing management. The 1994 Indenture and the 1996 Indenture also contain
provisions with respect to a change of control of EchoStar. See "Description
of Certain Indebtedness--1994 Notes" and "--1996 Notes."
Charles W. Ergen, Chairman and Chief Executive Officer of EchoStar,
owns 29,804,401 shares of Class B Common Stock, which constitute all of the
outstanding shares of such stock. These shares are transferable to other
persons subject to securities laws limitations. In the event Mr. Ergen
transferred
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approximately 50% or more of his shares of Class B Common Stock, a change in
control of EchoStar would result and Mr. Ergen would receive any premium paid
for control of EchoStar. In addition, any such change in control would
result in an obligation on the part of Dish, Ltd. to offer to purchase at a
premium all 1994 Notes and ESBC to offer to purchase at a premium all 1996
Notes. See "Description of Certain Indebtedness--1994 Notes" and "--1996
Notes."
DESCRIPTION OF CERTAIN INDEBTEDNESS
Set forth below is a summary of certain indebtedness to which EchoStar
is subject. This summary describes all material elements of such
indebtedness, but does not purport to be complete, and it is qualified in its
entirety by reference to the applicable agreements filed as exhibits to the
Registration Statement of which this Information Statement--Prospectus is a
part.
1994 NOTES
In June 1994, Dish, Ltd. issued the 1994 Notes, which generated gross
proceeds of approximately $335.1 million. Interest on the 1994 Notes accrues
at the rate of 127 8% per annum, but is not payable in cash prior to June 1,
1999. Thereafter, interest will accrue at the same rate and will be payable
in cash semi-annually on June 1 and December 1 of each year. Principal of
the 1994 Notes accretes to $624 million in 1999, and matures on June 1, 2004.
The 1994 Notes are secured by, among other things: (i) a pledge of all of
the issued and outstanding capital stock of certain of EchoStar's
subsidiaries; (ii) a first priority security interest in the assets of ESC
(subject to the terms of an intercreditor agreement with, among others,
Lockheed Martin and the Bank) including a first priority security interest in
EchoStar I and, when launched, EchoStar II; (iii) a first priority security
interest in the 1994 Escrow Account and Dish, Ltd.'s customer lists and
related rights with respect to EchoStar I and EchoStar II; (iv) a collateral
assignment, insofar as they relate to EchoStar I and EchoStar II, of the
Satellite Contracts, the Launch Contracts, all programming contracts, all
TT&C contracts and each other contract necessary for the operation of
EchoStar I and EchoStar II; and (v) a subordinate lien on the assets of the
Credit Agreement Borrowers.
Except as set forth below, the 1994 Notes are not redeemable at Dish,
Ltd.'s option prior to June 1, 1999. Thereafter, the 1994 Notes are subject
to redemption at the option of Dish, Ltd., in whole or in part, at the
redemption prices set forth in the 1994 Indenture. In addition, at any time
prior to June 1, 1997, Dish, Ltd. may redeem the 1994 Notes at a redemption
price equal to 111.5% of the accreted value thereof on the repurchase date
with the net proceeds of one public or private sale of certain equity
interests of Dish, Ltd., provided that: (i) at least two-thirds of the 1994
Notes remain outstanding immediately after the occurrence of such redemption;
and (ii) such redemption occurs within 120 days of the date of the closing of
any such sale. On each of June 1, 2002 and June 1, 2003, Dish, Ltd. is
required to redeem 25% of the original aggregate principal amount of the 1994
Notes at a redemption price equal to 100% of the principal amount thereof,
together with accrued and unpaid interest to the redemption date.
The 1994 Indenture provides that in the event of a "Change of Control,"
Dish, Ltd. is required to make an offer to purchase all 1994 Notes at 101% of
the accreted value thereof (if prior to June 1, 1999) or 101% of the
principal amount thereof (if on or after June 1, 1999), plus accrued and
unpaid interest to the date of payment. For purposes of the 1994 Indenture
and the 1996 Indenture, certain terms are defined as follows: "Change of
Control" means: (i) any transaction or series of transactions, the result of
which is that the Principals and their Related Parties (as such terms are
hereinafter defined), or an entity controlled by the Principals and their
Related Parties, cease to be the "beneficial owners" (as defined in Rule
13d-3 under the Exchange Act) of at least 30% of the total equity interests
of Dish, Ltd. and to have the voting power to elect at least a majority of
the Board of Directors of Dish, Ltd.; or (ii) the first day on which a
majority of the members of the Board of Directors of Dish, Ltd. are not
Continuing Directors. "Principals" means Messrs. Ergen, DeFranco, Zimmer,
Vogel, Fears and Moskowitz. "Related Parties" means, with respect to any
Principal: (y) the spouse and each immediate family member of such
Principal; and (z) each trust, corporation, partnership or other entity of
which such Principal beneficially holds an 80% or more controlling interest.
"Continuing Director" means, with respect to the 1994 Notes, as of any date
of determination, any member of the Board of Directors of Dish, Ltd. who:
(a) was a member of such Board of Directors on the date of the 1994
Indenture; or (b) was nominated for
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election or elected to such Board of Directors with the affirmative vote of a
majority of the Continuing Directors who were members of such Board at the
time of such nomination or election, and with respect to the 1996 Notes,
"Continuing Director" means, as of any date of determination, any member of
the Board of Directors of EchoStar and ESBC, as the case may be, who: (a) was
a member of such Board of Directors on the date of the 1996 Indenture; or (b)
was nominated for election or elected to such Board of Directors with the
affirmative vote of a majority of the Continuing Directors who were members
of such Board at the time of such nomination or election.
The 1994 Indenture contains restrictive covenants that, among other
things, impose limitations on Dish, Ltd. and its subsidiaries with respect to
their ability to: (i) incur additional indebtedness; (ii) issue preferred
stock; (iii) apply the proceeds of certain asset sales; (iv) create, incur or
assume liens; (v) create dividend and other payment restrictions with respect
to Dish, Ltd.'s subsidiaries; (vi) merge, consolidate or sell assets; (vii)
incur subordinated or junior debt; and (viii) enter into transactions with
affiliates. In addition, Dish, Ltd., may pay dividends on its equity
securities only if: (y) no default is continuing under the 1994 Indenture;
and (z) after giving effect to such dividend, Dish, Ltd.'s ratio of total
indebtedness to cash flow (calculated in accordance with the 1994 Indenture)
would not exceed 4.0 to 1. Moreover, the aggregate amount of such dividends
generally may not exceed the sum of 50% of Dish, Ltd.'s consolidated net
income (calculated in accordance with the 1994 Indenture) from the date of
issuance of the 1994 Notes, plus 100% of the aggregate net proceeds to Dish,
Ltd. from the issuance and sale of certain equity interests of Dish, Ltd.
(including common stock).
1996 NOTES
In March 1996, ESBC issued $580 million aggregate principal amount of
the 1996 Notes, which generated gross proceeds of approximately $350.0
million. Interest on the 1996 Notes accrues at the rate of 131 8% per annum,
but is not payable in cash prior to September 15, 2000. Thereafter, interest
will accrue at the same rate and will be payable in cash semi-annually on
March 15 and September 15 of each year. The 1996 Notes mature March 15,
2004. Initially, the Notes are secured by: (i) a pledge of all of the
issued and outstanding capital stock of EchoStar DBS Corporation (which
pledge will be released following consummation of the Merger or the
Substitute DBSC Transaction) and Dish, Ltd.; (ii) a pledge of all of the
stock of MergerCo held by EchoStar; (iii) a pledge of certain notes of DBSC
held by EchoStar; and (iv) a first priority security interest in the 1996
Escrow Account. In addition, upon consummation of the Merger, the 1996 Notes
will be secured by: (i) a first priority security interest, when launched,
in EchoStar III; (ii) a collateral assignment of all contracts relating to
the construction, launch (other than with Great Wall), insurance and TT&C of
EchoStar III; and (iii) a pledge of all of the issued and outstanding capital
stock of MergerCo. If the Merger is not consummated but the Substitute DBSC
Transaction is consummated, the 1996 Notes will be secured by a collateral
assignment of all contracts and agreements relating to the Substitute DBSC
Transaction.
Except as set forth below, the 1996 Notes are not redeemable at ESBC's
option prior to March 15, 2000. Thereafter, the 1996 Notes are subject to
redemption at the option of ESBC, in whole or in part, at the redemption
prices set forth in the 1996 Indenture. In addition, at any time prior to
March 15, 1999, ESBC may redeem the 1996 Notes at a redemption price equal to
112.125% of the accreted value thereof on the repurchase date with the net
proceeds of one public or private sale of certain equity interests of
EchoStar, provided that: (i) at least two-thirds of the 1996 Notes remain
outstanding immediately after the occurrence of such redemption; and (ii)
such redemption occurs within 120 days of the date of the closing of any such
sale.
The 1996 Indenture provides that in the event of a "Change of Control,"
ESBC is required to make an offer to purchase all 1996 Notes at 101% of the
accreted value thereof (if prior to March 15, 2000) or 101% of the principal
amount thereof (if on or after March 15, 2000), plus accrued and unpaid
interest to the date of payment.
The 1996 Indenture restricts, among other things, the payment of
dividends, the repurchase of stock and subordinated indebtedness of ESBC and
the making of certain other restricted payments, the incurrence of
indebtedness and the issuance of preferred stock, certain asset sales, the
creation of certain liens, certain mergers and consolidations, and
transactions with affiliates.
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DIRECT BROADCASTING SATELLITE CORPORATION
BUSINESS
DBSC was formed as a Delaware corporation in 1981, making it one of the
earliest entities to focus on DBS technology. DBSC filed its initial FCC
application in the same year in which it was founded and was first granted a
construction permit by the FCC in 1982. As a result of financing
difficulties, DBSC was not able to satisfy FCC Due Diligence Requirements and
its initial authorization therefore expired in 1985. A second construction
permit was granted to DBSC by the FCC in 1986. The present authorizations
were granted in 1989.
By late summer of 1994, the construction of DBSC's satellite by Lockheed
Martin was not sufficiently advanced to permit DBSC to begin operation of its
first satellite by August 1995, and substantial working capital was needed to
accelerate the construction phase of the DBSC Satellite Contract. However,
by order released December 8, 1995, the FCC found that DBSC had successfully
maintained its due diligence status as required by FCC rule and precedent and
extended DBSC's authorizations through November 1998. In the same order, the
FCC's staff denied reconsideration of its earlier grant of orbit/spectrum
resources to DBSC but declined to rule on DBSC's June 1995 application for
minor modification of authority to permit DBSC to shift from the Lockheed
Martin Series 7000 16 transponder spacecraft to the more modern A2100 Series,
featuring 32 transponders and other enhancements. On December 21, 1995,
EchoStar and DBSC entered into the Merger Trigger Agreement pursuant to which
the parties agreed to, among other things, execute and consummate the
transactions contemplated by the Merger Agreement and to enter into the Loan
Agreements. See "The Merger--The Merger Trigger Agreement."
Pursuant to the DBSC Satellite Contract with Lockheed Martin, DBSC has
been making scheduled progress payments according to the Contract (as amended
from time to time) since April 1990. Effective May 31, 1995, DBSC and
Lockheed Martin again amended the DBSC Satellite Contract. As amended, the
DBSC Satellite Contract calls for the construction of two spacecraft based on
Lockheed Martin's A2100 bus, using the AX variant. These spacecraft,
containing 32 transponders each, are state-of-the-art. Lockheed Martin is
obligated to deliver the first satellite, referred to as EchoStar III in this
Information Statement--Prospectus, by July 31, 1997. The delivery date for
the second satellite, DBSC II, is subject to adjustment depending on the
payment schedule for the satellite. The delivery date for EchoStar III
constitutes an acceleration of delivery and launch dates from such dates as
set forth in the DBSC Satellite Contract prior to the amendment. DBSC made a
payment to Lockheed Martin in May 1995 of $500,000 and an additional payment
of $1.0 million on June 30, 1995. The next payment of $16.0 million was made
on December 29, 1995. Thereafter the balance for EchoStar III is due in
monthly payments, most of which are $2.5 million. As of the date of this
Information Statement--Prospectus, each monthly payment has been made. The
DBSC Satellite Contract imposes substantial termination liabilities on DBSC
if it is not able to continue to fund the DBSC Satellite Contract.
DBSC has entered into a Note Purchase Agreement (together with related
agreements) with EchoStar pursuant to which EchoStar agreed to purchase $16.0
million aggregate principal amount of promissory notes of DBSC and up to an
additional $134.0 million aggregate principal amount of promissory notes, the
proceeds from which are to be used by DBSC to make certain payments to
Lockheed Martin and to make deposits toward the launch reservations. See
"The Exchange and Merger--Reasons for the Merger." The Note Purchase
Agreement provides that EchoStar may, in its sole discretion, advance DBSC
funds to make the further progress payments to Lockheed Martin, but EchoStar
is not obligated to do so. However, EchoStar presently intends to continue to
advance DBSC funds to make such future progress payments or for other stated
purposes.
DBSC believes that it is entitled to a proportionate share of the 28
channels at 110DEG. WL recently forfeited by Advanced and auctioned by the
FCC in January 1996 because DBSC was awarded only 11 DBS channels as compared
to the 16 it initially sought. DBSC, as well as EchoStar and Directsat, have
filed suit against the FCC in the U.S. Court of Appeals for the D.C. Circuit
contesting the FCC's decision to auction the cancelled Advanced channels.
While DBSC believes that its case is meritorious there can be no assurance
that the court will reverse or remand the FCC's decision, or that if it does,
the FCC or the court would ultimately rule in DBSC's favor.
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DBSC does not presently have a launch contract or option for launch of
its proposed DBS satellites. However, EchoStar has entered into a launch
services contract for the launch of EchoStar III, one of DBSC's satellites.
See "EchoStar Communications Corporation--Business--Satellite Launches."
As part of its contractual agreements with EchoStar, DBSC has committed
to utilize EchoStar's TT&C and uplink facility.
A DBS provider must have a customer service facility adequate to take
service orders and inquiries, process programming requests and provide for
the necessary implementation. DBSC expects that it will be able to contract
with one or more customer service organizations for the provision of such
services at costs considered to be competitive.
DBSC's current cash resources, which as of September 30, 1996 were
approximately $4,000, are not sufficient to pay DBSC's ordinary operating
expenses. It is anticipated that the Effective Time of the Merger will be in
November or December 1996. Therefore, DBSC will have to defer paying a
portion of its expenses or will have to seek additional funds for ordinary
operating expenses (which pursuant to the terms of the Merger Agreement can
only be in the form of debt financing) from its existing DBSC shareholders or
outside sources. No assurances can be given that such funds would be
available to DBSC.
In the event the Merger is not consummated, DBSC and EchoStar have
agreed on alternative arrangements designed to assure comparable economic
benefits to both parties. However, as of the date of this Information
Statement--Prospectus, unless the Merger is consummated, DBSC may not have
sufficient funds to meet its obligations under the DBSC Satellite Contract or
to conduct its business operations. Therefore, DBSC may be required to
immediately seek additional investors or strategic partners in order to
continue its operations. In any event, DBSC Shareholders would receive the
Merger Consideration.
122
MANAGEMENT
The following table sets forth information concerning DBSC's Executive
Officers and Directors:
NAME AGE POSITION
---- --- --------
Harley W. Radin 59 Chairman, Chief Executive Officer,
Treasurer and Director
Daniel E. Moore 42 Secretary and Director
Fred W. Thompson 53 Director
HARLEY W. RADIN. Mr. Radin has been Chairman and Chief Executive
Officer of DBSC since 1987. Mr. Radin has general management responsibility
for the day-to-day business of DBSC. He is responsible for developing DBSC's
business plan and seeking business partners and financing. Mr. Radin spends
a substantial majority of his time on DBSC's business. Mr. Radin graduated
from Rensselaer Polytechnic Institute in 1959 with a Bachelor of Science
degree in Electrical Engineering and received a Masters degree in Electrical
Engineering from New York University in 1961.
DANIEL E. MOORE. Mr. Moore has been a Director of DBSC since September
1995, and served as a Director of SSE Telecom, Inc. since April 1989. Mr.
Moore joined SSE Telecom, Inc. in 1994 as Executive Vice President and Chief
Financial Officer. Mr. Moore is a founder and principal of Venture America,
a private venture capital and entrepreneurial services firm. Previously, Mr.
Moore was a Senior Manager with Arthur Andersen & Co. Mr. Moore received his
Master's Degree in Business Administration from the University of Pittsburgh
and his Bachelor's degree from Lafayette College.
FRED W. THOMPSON. Mr. Thompson has been a Director of DBSC since July
1993. Mr. Thompson is Chairman of the Board, President, Chief Executive
Officer, and Chief Financial Officer of DBS Industries, Inc. In early 1990
Mr. Thompson founded and served as Chairman and President of DBS Network,
Inc., a wholly owned subsidiary of DBS Industries, Inc., until its
dissolution in July 1995. He has over thirty years' experience in the
telecommunications industry. From 1986 to 1990, Mr. Thompson devoted his
time to consulting on various telecommunication matters as an independent
contractor. Mr. Thompson received a B.S. degree in Electrical Engineering
from California Polytechnic in 1962.
EXECUTIVE COMPENSATION
Harley W. Radin, DBSC's Chairman of the Board of Directors and Chief
Executive Officer, performs services for DBSC as an independent contractor.
Mr. Radin entered into a consulting agreement with DBSC as of November 16,
1993. Under the terms of the consulting agreement, Mr. Radin was paid $8,000
per month by DBSC for consulting services from November 16, 1993 through
March 31, 1994, and $10,000 per month for such services beginning on April 1,
1994. Commencing January 1, 1995, pursuant to the terms of a new consulting
agreement, Mr. Radin receives $12,000 per month for such services. Mr. Radin
is also entitled to reimbursement for certain reasonable out of pocket
expenses related to DBSC's business. The consulting agreement currently has
a month-to-month term. As of the date of this Information
Statement--Prospectus, Mr. Radin has received an aggregate of $372,000 since
November, 1993. No payments have been made since September 1996.
Directors of DBSC do not receive remuneration for their services as
directors. Charles A. Kase, a member of the DBSC Board until October, 1995,
has agreed to perform certain technical services for DBSC as requested from
time to time by DBSC. Under a consulting agreement dated April 28, 1994 and
which expired on December 31, 1994, Mr. Kase was paid at an hourly rate of
$125 with aggregate compensation not to exceed $36,000.
A new consulting agreement was entered into effective January 1, 1995
whereby Mr. Kase was to be paid an hourly rate of $125 with payments not to
exceed $8,000 per month. This consulting agreement expired on December 31,
1995. Under both agreements, Mr. Kase received $34,125 for his services to
DBSC.
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In connection with the election of Daniel E. Moore to the DBSC Board,
Mr. Moore received 2,000 shares of DBSC Common Stock as compensation for
services.
DBSC does not currently have any stock option plan or any officer or
director incentive arrangement.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During the last two years, in addition to matters described in
"Management--Executive Compensation" and "Certain Relationships and Related
Transactions" and in "Business" (regarding the loans to DBSC by EchoStar to
fund the satellite construction contract), the following transactions
occurred between DBSC and certain of its officers, directors, and five
percent (5%) or greater stockholders:
Fred W. Thompson, a DBSC director since July 1993, is the President and
Chief Executive Officer of DBSI. Effective January 29, 1993, DBSC entered
into a Stockholder Line of Credit and Investment Agreement with DBS Network,
Inc., a wholly-owned subsidiary of DBSI ("DBSN") pursuant to which DBSN
agreed to loan DBSC up to a total of $200,000 in exchange for the issuance by
DBSC of interest bearing notes (the "DBSN Notes") convertible into DBSC
Common Stock at a conversion price of $1.00 per share. The DBSN Notes
carried a five year term. The terms of the DBSN Notes specified that DBSC may
pay off the outstanding balance at any time including interest accrued to the
date of payment. The DBSN Notes were convertible into DBSC Common Stock
after approval was received from the FCC for DBSN to take control of DBSC.
Until the DBSN Notes were paid in full, DBSC also had the right to elect to
convert the principal amount of the DBSN Notes into shares of DBSC Common
Stock at the conversion price of $1.00 per share. As of November 15, 1994,
DBSC had borrowed a total of $152,500 in principal and had accrued interest
of approximately $20,710. The DBSN Notes plus accrued interest thereon have
been fully paid by DBSC.
In 1995 and 1996 EchoStar purchased an aggregate of $4.0 million of
DBSI's convertible subordinated debentures of which $1.0 million are due July
1, 1998 and $3.0 million are due January 12, 1999. The debentures are
secured by 125,000 shares of DBSC Common Stock and 2,000 shares of common
stock of E-SAT Corporation which is currently owned 80% by EchoStar. Fred W.
Thompson, a director of DBSC, is President, a director and a significant
shareholder of DBSI.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table and accompanying notes set forth information
concerning the beneficial ownership of DBSC Common Stock as of the date of
this Information Statement--Prospectus. Such information is presented for:
(i) each Director of DBSC who owns any such securities; (ii) each Executive
Officer of DBSC who owns any such securities; (iii) all Directors and
Executive Officers as a group; and (iv) any person beneficially owning more
than 5% of the DBSC Common Stock. The number of shares beneficially owned by
each Director or Executive Officer is determined according to the rules of
the Securities and Exchange Commission and the information is not necessarily
indicative of beneficial ownership for any other purpose. Under such rules,
beneficial ownership includes any shares as to which the individual or entity
has sole or shared voting power or investment power. As a consequence,
several persons may be deemed to be the "beneficial owners" of the same
shares. Except as noted below, each person listed in the following table has
informed DBSC that such person has sole voting power and investment power
with respect to such person's shares of DBSC Common Stock.
PERCENTAGE
NAME NUMBER OF SHARES OF CLASS
- ---- ---------------- ----------
Harley W. Radin (1). . . . . . . . . . . . . . 297,306 18.35%
Daniel E. Moore (2). . . . . . . . . . . . . . 2,000 0.12%
Fred W. Thompson (3) . . . . . . . . . . . . . 401,107(4) 24.76%
DBS Industries, Inc. (5). . . . . . . . . . . 401,107 24.76%
Kingswood, Inc. (6). . . . . . . . . . . . . . 175,000 10.80%
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EchoStar Communications Corporation (7). . . . 644,990(8) 39.81%
All Directors and Executive Officers as a
group (three persons) . . . . . . . . . . . 700,413 43.23%
- ------------------------
(1) Includes 10,384 shares of DBSC Common Stock owned by Mr. Radin's spouse.
Mr. Radin expressly disclaims that he is, in fact, the beneficial owner of
such securities. Mr. Radin's address is 4401-A Connecticut Avenue, N.W.,
Suite 400, Washington, D.C. 20008.
(2) Mr. Moore's address is 8230 Leesburg Pike, Suite 710, Vienna, VA 22182.
(3) Mr. Thompson's address is 495 Miller Avenue, Mill Valley, CA 94941.
(4) Consists of 401,107 shares of DBSC Common Stock owned by DBS Industries,
Inc. of which Mr. Thompson is President, a Director and a significant
shareholder.
(5) DBS Industries, Inc.'s address is 495 Miller Avenue, Mill Valley, CA 94941
(6) Kingswood, Inc.'s address is 5726 Corsa Avenue, Suite 202, Westlake
Village, CA 91362.
(7) EchoStar Communications Corporation's address is 90 Inverness Circle East,
Englewood, CO 80112.
(8) Excludes 333,333 shares of DBSC Common Stock issuable upon the option
granted to EchoStar pursuant to the Stock Purchase Agreement. See
"Background and Reasons for the Merger."
DESCRIPTION OF CAPITAL STOCK
COMMON STOCK
DBSC is authorized to issue up to 3,000,000 shares of DBSC Common Stock,
$.01 par value. Each holder of DBSC Common Stock is entitled to one vote for
each share held of record on each matter submitted to a vote of DBSC
Shareholders. Each holder of DBSC Common Stock is entitled to receive ratably
such dividends as may be declared by the DBSC Board out of funds legally
available therefor as well as any distributions to the DBSC Shareholders and,
in the event of the liquidation, dissolution or winding up of DBSC, is
entitled to share ratably in all assets of DBSC remaining after payment of
liabilities. Holders of DBSC Common Stock have no cumulative voting,
conversion, redemption or preemptive rights or other rights to subscribe for
additional shares. As of November 7, 1996, 1,620,138 shares of DBSC Common
Stock were issued and outstanding and held of record by 57 stockholders.
The outstanding shares of DBSC Common Stock are validly issued, fully paid
and nonassessable.
LEGAL MATTERS
The validity of the EchoStar Common Stock will be passed upon for
EchoStar by David K. Moskowitz, Senior Vice President, General Counsel and
Secretary of EchoStar.
EXPERTS
The audited financial statements and schedules of EchoStar included in
this Information Statement--Prospectus and elsewhere in the Registration
Statement have been audited by Arthur Andersen LLP, independent public
accountants, as indicated in their reports with respect thereto, and are
included herein in reliance upon the authority of such firm as experts in
giving such reports.
The audited financial statements and schedules of DBSC included in this
Information Statement--Prospectus and elsewhere in the Registration Statement
have been audited by Regardie, Brooks & Lewis,
125
independent public accountants, as indicated in their report with respect
thereto, and are included herein in reliance upon the authority of such firm
as experts in giving such report.
126
INDEX TO FINANCIAL STATEMENTS
PAGE
----
ECHOSTAR COMMUNICATIONS CORPORATION
Report of Independent Public Accountants................................... F-2
Consolidated Balance Sheets at December 31, 1994 and 1995.................. F-3
Combined and Consolidated Statements of Income for the Years Ended
December 31, 1993, 1994 and 1995......................................... F-4
Combined and Consolidated Statements of Stockholders' Equity for the Years
Ended December 31, 1993, 1994 and 1995................................... F-5
Combined and Consolidated Statements of Cash Flows for the Years Ended
December 31, 1993, 1994 and 1995......................................... F-6
Notes to Combined and Consolidated Financial Statements.................... F-8
DIRECT BROADCASTING SATELLITE CORPORATION
Report of Independent Public Accountants................................... F-35
Balance Sheets at March 31, 1995 and December 31, 1995..................... F-36
Statements of Income for the Years Ended March 31, 1994 and 1995, and the
nine months ended December 31, 1995...................................... F-37
Statements of Stockholders' Equity for the Years Ended March 31, 1994 and
1995, and for the Nine Month Period Ended December 31, 1995.............. F-38
Statements of Cash Flows for the Years Ended March 31, 1994 and 1995, and
the nine months ended December 31, 1995.................................. F-39
Notes to Financial Statements.............................................. F-40
SUPPLEMENTAL QUARTERLY FINANCIAL INFORMATION
ECHOSTAR COMMUNICATIONS CORPORATION
Consolidated Balance Sheet at December 31, 1995 and September 30, 1996
(Unaudited).............................................................. F-45
Consolidated Statements of income for the three months and nine months
ended September 30, 1995 and 1996 (Unaudited)............................ F-46
Consolidated Statement of Stockholders' Equity for the nine months ended
September 30, 1996 (Unaudited)........................................... F-47
Consolidated Statements of Cash Flow for the nine months ended
September 30, 1995 and 1996 (Unaudited).................................. F-48
Condensed Notes to Consolidated Financial Statements (Unaudited)........... F-50
DIRECT BROADCASTING SATELLITE CORPORATION
Balance Sheets at December 31, 1995 and September 30, 1996 (Unaudited)..... F-62
Statements of Income for the three months and nine months ended
September 30, 1995 and 1996 (Unaudited).................................. F-63
Statement of Stockholders' Equity for the nine months ended September 30,
1996 (Unaudited)......................................................... F-64
Statements of Cash Flow for the nine months ended September 30, 1995 and
1996 (Unaudited)......................................................... F-65
Notes to Financial Statements.............................................. F-66
F-1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To EchoStar Communications Corporation:
We have audited the accompanying consolidated balance sheets of EchoStar
Communications Corporation (a Nevada corporation) and affiliates and
subsidiaries, as described in Note 1, as of December 31, 1994 and 1995, and the
related combined and consolidated statements of income, stockholders' equity and
cash flows for each of the three years in the period ended December 31, 1995.
These financial statements are the responsibility of the Companies' management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of the Companies
as of December 31, 1994 and 1995, and the combined and consolidated results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1995, in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Denver, Colorado,
February 23, 1996.
F-2
ECHOSTAR COMMUNICATIONS CORPORATION AND AFFILIATES AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1994 AND 1995
(IN THOUSANDS)
ASSETS
1994 1995
--------- ---------
CURRENT ASSETS:
Cash and cash equivalents................................................................. $ 17,506 $ 21,754
Marketable investment securities.......................................................... 31,038 15,670
Trade accounts receivable, net............................................................ 8,097 9,179
Inventories............................................................................... 20,327 38,769
Income tax receivable..................................................................... -- 3,554
Deferred tax assets....................................................................... 1,840 1,779
Other current assets...................................................................... 2,573 13,037
--------- ---------
Total current assets.................................................................. 81,381 103,742
RESTRICTED CASH AND MARKETABLE SECURITIES:
Escrow.................................................................................... 185,431 73,291
Other..................................................................................... 11,400 26,400
PROPERTY AND EQUIPMENT, net................................................................. 151,240 354,000
OTHER NONCURRENT ASSETS..................................................................... 43,040 65,658
--------- ---------
Total assets.......................................................................... $ 472,492 $ 623,091
--------- ---------
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade accounts payable.................................................................... $ 14,895 $ 19,063
Deferred programming revenue.............................................................. 6,572 5,563
Accrued expenses and other current liabilities............................................ 6,965 21,335
Notes payable and current portion of long-term debt....................................... 238 4,782
--------- ---------
Total current liabilities............................................................. 28,670 50,743
1994 NOTES, net............................................................................. 334,206 382,218
LONG-TERM MORTGAGE DEBT AND NOTE PAYABLE, excluding current portion......................... 5,393 33,444
OTHER LONG-TERM LIABILITIES................................................................. 415 --
--------- ---------
Total liabilities..................................................................... 368,684 466,405
--------- ---------
COMMITMENTS AND CONTINGENCIES (Notes 1 and 11)
STOCKHOLDERS' EQUITY:
Preferred Stock, 20,000,000 shares authorized, 1,616,681 shares of Series A Cumulative
Preferred Stock issued and outstanding, including accrued dividends of $938,000 and
$2,143,000, respectively................................................................. 15,990 17,195
Class A Common Stock, $.01 par value, 200,000,000 shares authorized, 3,739,400 and
10,535,003 shares issued and outstanding, respectively................................... 38 105
Class B Common Stock, $.01 par value, 100,000,000 shares authorized, 29,804,401 shares
issued and outstanding................................................................... 298 298
Common Stock Purchase Warrants............................................................ 26,133 714
Class C Common Stock, 100,000,000 shares authorized, none outstanding..................... -- --
Additional paid-in capital................................................................ 62,197 151,674
Unrealized holding gains on available-for-sale securities, net of deferred taxes.......... -- 239
Retained earnings (deficit)............................................................... (848) (13,539)
--------- ---------
Total stockholders' equity............................................................ 103,808 156,686
--------- ---------
Total liabilities and stockholders' equity............................................ $ 472,492 $ 623,091
--------- ---------
--------- ---------
The accompanying notes to combined and consolidated financial
statements are an integral part of these balance sheets.
F-3
ECHOSTAR COMMUNICATIONS CORPORATION AND AFFILIATES AND SUBSIDIARIES
COMBINED AND CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
(IN THOUSANDS)
1993 1994 1995
--------- --------- ---------
REVENUE:
DTH products and technical services............................................ $ 206,311 $ 172,753 $ 146,852
Programming.................................................................... 10,770 14,540 15,096
Loan origination and participation income...................................... 3,860 3,690 1,942
--------- --------- ---------
Total revenue.............................................................. 220,941 190,983 163,890
--------- --------- ---------
EXPENSES:
DTH products and technical services............................................ 161,447 133,635 120,178
Programming.................................................................... 9,378 11,670 13,610
Selling, general and administrative............................................ 30,235 30,219 35,015
Depreciation................................................................... 1,677 2,243 3,058
--------- --------- ---------
Total expenses............................................................. 202,737 177,767 171,861
--------- --------- ---------
OPERATING INCOME (LOSS).......................................................... 18,204 13,216 (7,971)
--------- --------- ---------
OTHER INCOME (EXPENSE):
Interest income................................................................ 1,173 8,420 14,059
Interest expense, net of amounts capitalized................................... (632) (21,408) (23,985)
Losses on investments in joint ventures........................................ (50) (492) --
Minority interest in loss of consolidated joint venture and other.............. 39 753 666
--------- --------- ---------
Total other income (expense)............................................... 530 (12,727) (9,260)
--------- --------- ---------
NET INCOME (LOSS) BEFORE INCOME TAXES............................................ 18,734 489 (17,231)
BENEFIT (PROVISION) FOR INCOME TAXES............................................. 1,384 (399) 5,745
--------- --------- ---------
NET INCOME (LOSS)................................................................ $ 20,118 $ 90 $ (11,486)
--------- --------- ---------
--------- --------- ---------
NET LOSS ATTRIBUTABLE TO COMMON SHARES........................................... $ (848) $ (12,691)
--------- ---------
--------- ---------
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING....................................... 32,442 35,562
--------- ---------
--------- ---------
LOSS PER COMMON AND COMMON EQUIVALENT SHARE...................................... $ (0.03) $ (0.36)
--------- ---------
--------- ---------
PRO FORMA (UNAUDITED) NET INCOME (Note 7)
Historical net income before income taxes...................................... $ 18,734
Historical (provision) benefit for income taxes................................ 1,384
Pro forma income tax effects................................................... (7,846)
---------
Pro forma net income........................................................... $ 12,272
---------
---------
Pro forma common shares outstanding............................................ 32,221
---------
---------
Pro forma earnings per common share............................................ $ 0.38
---------
---------
The accompanying notes to combined and consolidated
financial statements are an integral part of these statements.
F-4
ECHOSTAR COMMUNICATIONS CORPORATION AND AFFILIATES AND SUBSIDIARIES
COMBINED AND CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
(IN THOUSANDS)
COMMON RETAINED
STOCK OF EARNINGS
SUBSIDIARIES (DEFICIT)
SHARES OF COMMON AND AND
COMMON STOCK ADDITIONAL UNREALIZED TOTAL
STOCK PREFERRED COMMON PURCHASE PAID-IN HOLDING STOCKHOLDERS'
OUTSTANDING STOCK STOCK WARRANTS CAPITAL GAINS EQUITY
--------------- --------- ------ -------- ------------ ------- -------------
(NOTES 1 AND 9)
BALANCES, at December 31, 1992... $ 6,881 $45,447 $ 52,328
Cash contributions to capital.. 2,497 2,497
Dividends declared............. (25,243) (25,243)
Net income..................... 20,118 20,118
Reorganization effective
December 31, 1993 -
Class A Common Stock......... 2,417 $ 24 (24) --
Class B Common Stock......... 29,804 298 (298) --
Termination of Subchapter S
Status of subsidiaries........ 40,322 (40,322) --
------- --------- ------ -------- ------------ ------- -------------
BALANCES, at December 31, 1993... 32,221 -- 322 -- 49,378 -- 49,700
Issuance of Class A Common
Stock:
For acquisition of DirectSat,
Inc......................... 999 11 8,989 9,000
For cash..................... 324 3 3,830 3,833
Issuance of 1,616,681 shares of
8% Series A Cumulative
Preferred Stock............... $15,052 15,052
Issuance of Common Stock
Purchase Warrants............. $26,133 26,133
Series A Cumulative Preferred
Stock dividends............... 938 (938) --
Net income..................... 90 90
------- --------- ------ -------- ------------ ------- -------------
BALANCES, at December 31, 1994... 33,544 15,990 336 26,133 62,197 (848) 103,808
Series A Cumulative Preferred
Stock dividends............... 1,205 (1,205) --
Issuance of Class A Common
Stock......................... 4,004 40 62,893 62,933
Common Stock Purchase Warrants
exercised..................... 2,731 26 (25,419 ) 25,393 --
Employee Savings Plan
Contribution and Launch
Bonuses Funded by Issuance of
Class A Common Stock.......... 60 1 1,191 1,192
Unrealized holding gains on
available-for-sale securities,
net........................... 239 239
Net loss....................... (11,486) (11,486)
------- --------- ------ -------- ------------ ------- -------------
BALANCES, at December 31, 1995... 40,339 $17,195 $403 $ 714 $151,674 $(13,300) $156,686
------- --------- ------ -------- ------------ ------- -------------
------- --------- ------ -------- ------------ ------- -------------
The accompanying notes to combined and consolidated
financial statements are an integral part of these statements.
F-5
ECHOSTAR COMMUNICATIONS CORPORATION AND AFFILIATES AND SUBSIDIARIES
COMBINED AND CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
(IN THOUSANDS)
1993 1994 1995
--------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).............................................................. $ 20,118 $ 90 $ (11,486)
Adjustments to reconcile net income (loss) to net cash flows from operating
activities--
Depreciation................................................................. 1,677 2,243 3,058
Provision for doubtful accounts.............................................. 254 (160) 920
Benefit for deferred taxes................................................... (1,941) (7,330) (4,763)
Amortization of deferred debt issuance costs................................. -- 719 1,279
Amortization of discount on 1994 Notes, net of amounts capitalized........... -- 19,943 22,249
Equity in losses in joint ventures........................................... -- 492 99
Employee benefits funded with Class A Common Stock........................... -- -- 1,192
Loss on dispositions of fixed assets......................................... -- 133 --
Change in reserve for excess and obsolete inventory.......................... (22) 502 1,212
Other, net................................................................... (30) (941) (528)
Changes in working capital items--
Trade accounts receivable.................................................. (3,439) 532 (2,002)
Inventories................................................................ 14,919 3,049 (19,654)
Income tax receivable...................................................... -- -- (3,554)
Other current assets....................................................... (1,659) (183) (10,464)
Liability under cash management program.................................... (4,018) (2,310) (57)
Trade accounts payable..................................................... 1,156 4,958 4,168
Deferred programming revenue............................................... 1,795 564 (1,009)
Accrued expenses........................................................... 1,637 611 (1,232)
Reserve for warranty costs................................................. (250) 50 (387)
Other current liabilities.................................................. 18 1,009 631
Other, net................................................................. -- 234 --
--------- --------- ---------
Net cash flows from operating activities................................. 30,215 24,205 (20,328)
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of marketable investment securities.................................. (18,227) (15,100) (25,230)
Sales of marketable investment securities...................................... 16,132 4,439 40,563
Purchases of restricted marketable investment securities....................... -- (11,400) (15,000)
Purchases of property and equipment............................................ (19,225) (4,030) (4,077)
Proceeds from sale of property and equipment................................... 383 523 29
Offering proceeds and investment earnings placed in escrow..................... -- (329,831) (9,589)
Funds released from escrow account............................................. -- 144,400 122,149
Accrued satellite contract costs............................................... -- (3,700) --
Investment in SSET............................................................. -- (8,750) --
Investment in DBSC............................................................. -- (4,210) --
Investment in DBSI............................................................. -- -- (1,000)
Long-term note receivable from DBSC............................................ -- -- (16,000)
Investments in joint ventures.................................................. (65) 1,614 --
Expenditures for satellite system under construction........................... -- (112,052) (129,506)
Expenditures from escrow for FCC authorization................................. -- (159) --
Expenditures for FCC authorizations............................................ -- -- (458)
Other.......................................................................... 92 (309) --
--------- --------- ---------
Net cash flows from investing activities................................. (20,910) (338,565) (38,119)
--------- --------- ---------
The accompanying notes to combined and consolidated financial
statements are an integral part of these statements.
F-6
ECHOSTAR COMMUNICATIONS CORPORATION AND AFFILIATES AND SUBSIDIARIES
COMBINED AND CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
(IN THOUSANDS)
1993 1994 1995
---------- ----------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Short-term loans from banks................................................ $ 6,000 $ -- $ --
Repayments of short-term loans from banks.................................. (7,256) -- --
Minority investor investment in and loan to consolidated joint venture..... 2,504 1,000 --
Net proceeds from issuance of 1994 Notes and Common Stock Purchase
Warrants.................................................................. -- 323,325 --
Expenditures from escrow for offering costs................................ -- (837) --
Proceeds from refinancing of mortgage indebtedness......................... -- 4,200 --
Repayments of mortgage indebtedness........................................ (152) (3,435) (238)
Loans from stockholder, net................................................ 12,451 4,000 --
Repayment of loans from stockholders....................................... -- (4,075) --
Net proceeds from issuance of Class A Common Stock......................... -- 3,833 62,933
Capital contributions...................................................... 2,497 -- --
Dividends paid............................................................. (22,243) (3,000) --
---------- ----------- ---------
Net cash flows from financing activities................................. (6,199) 325,011 62,695
---------- ----------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS.................................... 3,106 10,651 4,248
CASH AND CASH EQUIVALENTS, beginning of period............................... 3,749 6,855 17,506
---------- ----------- ---------
CASH AND CASH EQUIVALENTS, end of period..................................... $ 6,855 $ 17,506 $ 21,754
---------- ----------- ---------
---------- ----------- ---------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest, net of amounts capitalized....................... $ 633 $ 436 $ 461
Cash paid for income taxes............................................... 251 7,140 3,203
Cumulative Series A Preferred Stock dividends............................ -- 938 1,205
Dividends declared but not paid until 1994............................... 3,000 -- --
Accrued satellite contract costs......................................... 3,700 -- 15,000
Exchange of note payable to stockholder, and interest thereon, for Series
A Preferred Stock....................................................... -- 15,052 --
Issuance of Class A Common Stock to acquire investment in DirectSat
Corporation............................................................. -- 9,000 --
Property and equipment acquired under capital leases..................... -- 934 --
Note payable issued for deferred satellite construction payments......... -- -- 32,833
Employee Savings Plan Contribution and launch bonuses funded by issuance
of Class A Common Stock................................................. -- -- 1,192
The accompanying notes to combined and consolidated financial
statements are an integral part of these statements.
F-7
ECHOSTAR COMMUNICATIONS CORPORATION AND AFFILIATES AND SUBSIDIARIES
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1993, 1994 AND 1995
(1) ORGANIZATION AND BUSINESS ACTIVITIES
Certain companies principally owned and controlled by Mr. Charles Ergen were
reorganized in 1993 into Dish, Ltd., formerly known as EchoStar Communications
Corporation (together with its subsidiaries, "Dish, Ltd.").
The principal reorganized entities, Echosphere Corporation (formed in 1980)
and Houston Tracker Systems, Inc. (acquired in 1986), are primarily engaged in
the design, assembly, marketing and worldwide distribution of direct to home
("DTH") satellite television products. Satellite Source, Inc. contracts for
rights to purchase satellite delivered television programming for resale to
consumers and other DTH retailers. Echo Acceptance Corporation ("EAC") arranges
nationwide consumer financing for purchasers of DTH systems and programming. The
FCC has granted EchoStar Satellite Corporation ("ESC") a conditional satellite
construction permit and frequency assignments for eleven odd-numbered
frequencies at 119 DEG. West Longitude ("WL"). The reorganized group also
includes other less significant domestic enterprises and several foreign
entities involved in related activities outside the United States.
In January 1994, Dish, Ltd. announced its intention to merge a subsidiary of
Dish, Ltd. with DirectSat Corporation ("DirectSat"), an approximately 80% owned
subsidiary of SSE Telecom, Inc. ("SSET") at that time. The merger was approved
by the FCC and consummated in December 1994. DirectSat stockholders received an
approximate 3% equity interest in Dish, Ltd. in exchange for all of DirectSat's
outstanding stock. DirectSat's principal assets are a conditional satellite
construction permit and frequency assignments for ten even-numbered frequencies
at 119 DEG. WL granted by the FCC.
Dish, Ltd. has contracted for the construction and launch of communications
satellites. EchoStar I, a high powered direct broadcast satellite ("DBS"), was
launched on December 28, 1995. EchoStar II is currently under construction and
scheduled for launch during 1996.
In June 1994, Dish, Ltd. completed an offering of 12 7/8% Senior Secured
Discount Notes due 2004 (the "1994 Notes") (Note 5) and Common Stock Purchase
Warrants (the "Warrants") (collectively, the "Notes Offering"), receiving net
proceeds of approximately $323.3 million. Dish, Ltd. and its subsidiaries are
subject to the terms and conditions of the Indenture related to the 1994 Notes
(the "1994 Indenture").
EXCHANGE AND MERGER
In April 1995, a new company, EchoStar Communications Corporation (same name
as the original name of Dish, Ltd.), was formed to conduct a public offering of
its Class A Common Stock and to become the parent of Dish, Ltd. as described
below. The new company is described below as "ECC". Elsewhere in these
footnotes, unless otherwise indicated, "EchoStar" or the "Company" refers to ECC
and its subsidiaries, including Dish, Ltd. The assets of ECC, other than its
investment in Dish, Ltd., are not subject to the 1994 Indenture. Separate parent
only financial information for ECC is supplementally provided in Note 16.
Further, the 1994 Indenture places significant restrictions on the payment of
dividends or other transfers by Dish, Ltd. to ECC.
ECC completed an offering of its Class A Common Stock on June 26, 1995, and
received net proceeds of approximately $63.0 million. Concurrently, Charles W.
Ergen, President and Chief Executive Officer of both ECC and Dish, Ltd.,
exchanged all of his shares of Class B Common Stock and Series A Preferred Stock
of Dish, Ltd. for like shares of ECC (the "Exchange") in the ratio of 0.75
shares of ECC for each share of Dish, Ltd. capital stock (the "Exchange Ratio").
All employee stock options of Dish, Ltd. were also assumed by ECC, adjusted for
the Exchange Ratio. In December 1995, ECC merged Dish, Ltd. with a wholly owned
subsidiary of ECC (the "Merger") and all outstanding
F-8
ECHOSTAR COMMUNICATIONS CORPORATION AND AFFILIATES AND SUBSIDIARIES
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
(1) ORGANIZATION AND BUSINESS ACTIVITIES (CONTINUED)
shares of Dish, Ltd. Class A Common Stock and Series A Preferred Stock (other
than those held by ECC) were automatically converted into the right to receive
like shares of ECC in accordance with the Exchange Ratio. Also effective with
the Merger, all outstanding Warrants for the purchase of Dish, Ltd. Class A
Common Stock automatically became exercisable for shares of ECC's Class A Common
Stock, adjusted for the Exchange Ratio. As the result of the Exchange and
Merger, ECC owns all outstanding shares of Dish, Ltd. capital stock.
SIGNIFICANT RISKS AND UNCERTAINTIES
Execution of its business strategy to launch and operate DBS satellites has
dramatically changed the Company's operating results and financial position. At
December 31, 1993, Dish, Ltd.'s long-term debt, exclusive of amounts related to
its DBS projects, consisted of less than $5.0 million in mortgage indebtedness
and its investments in property and equipment, other than DBS satellite
payments, aggregated less than $20.0 million. At December 31, 1995, the Company
is committed to expend approximately $450 million to build and launch its first
two satellites and has completed the sale of the 1994 Notes for that purpose
(Notes 5 and 11). Annual interest expense on the 1994 Notes and depreciation of
the investment in the first two satellites will each be of a magnitude that
exceeds historical levels of income before taxes and the Company has reported
net losses beginning in 1995 and expects net losses to continue for the
foreseeable future. The Company's plans also include the construction and launch
of additional satellites and marketing programs to promote its DBS products and
services. The Company will need to raise significant additional funds for those
purposes and there can be no assurance that necessary funds will be available
or, if available, available on terms favorable to the Company. However,
management believes, but has no assurance, that demand for its DBS products and
services will develop to provide cash flow from operation of EchoStar's Dish
Network-SM- which, together with other sources of capital, will be sufficient to
satisfy future planned expenditures. Significant delays in commencing operations
of the EchoStar DBS System, or significant delays or mission failures in the
Company's satellite launch program, may subject the Company to significant
monetary penalties and would have significant adverse consequences to its
operating results and financial condition.
The preparation of financial statements in conformity with generally
accepted accounting principles requires the use of management estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses for each reporting
period. Actual results could differ from those estimates.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF COMBINATION AND CONSOLIDATION
The accompanying financial statements for 1993 combine the historical cost
financial statements of all reorganized entities. The financial statements for
1994 and 1995 present the consolidation of Dish, Ltd. and its subsidiaries
through the date of the Exchange (Note 1) and the consolidation of ECC and its
subsidiaries, including Dish, Ltd. thereafter. The Exchange and Merger was
accounted for as a reorganization of entities under common control and the
historical cost basis of consolidated assets and liabilities was not affected by
the transaction. All significant intercompany transactions have been eliminated
in the combined and consolidated financial statements.
Effective June 1993, the Company acquired a fifty-one percent joint venture
interest in FlexTracker Sdn. Bhd. ("FlexTracker"), a Malaysian limited liability
company. A Singapore electronics manufacturing company owned the forty-nine
percent minority interest. FlexTracker manufactured
F-9
ECHOSTAR COMMUNICATIONS CORPORATION AND AFFILIATES AND SUBSIDIARIES
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
integrated and stand-alone receivers and positioners exclusively for the
Company. In December 1994, the Company terminated the FlexTracker joint venture
and effectively sold its interest in the joint venture's net assets to the
Singapore company for $1.8 million. The Company's share of FlexTracker's losses
for 1993 and 1994 amounted to approximately $50,000 and $1.3 million,
respectively, and an additional $492,000 of loss was recognized upon sale of the
net assets. FlexTracker's financial statements have been consolidated in the
accompanying combined and consolidated financial statements from the date of
acquisition through the date of disposition.
The Company accounts for investments in fifty percent or less owned entities
using the equity method. At December 31, 1994 and 1995, these investments were
not material to the combined and consolidated financial statements of the
Company.
FOREIGN CURRENCY TRANSACTION GAINS AND LOSSES
The functional currency of the Company's foreign subsidiaries is the U.S.
dollar because their sales and purchases are predominantly denominated in that
currency. Transactions denominated in currencies other than U.S. dollars are
recorded based on exchange rates at the time such transactions arise. Subsequent
changes in exchange rates result in transaction gains and losses which are
reflected in income as unrealized (based on period end translation) or realized
(upon settlement of the transaction). Net transaction gains (losses) for 1993,
1994 and 1995 were $19,000, $40,000 and $70,000 respectively.
CASH AND CASH EQUIVALENTS
The Company considers all liquid investments purchased with an original
maturity of ninety days or less to be cash equivalents. Cash equivalents as of
December 31, 1994 and 1995 consist of money market funds, corporate notes and
commercial paper stated at cost which equates to market value.
MARKETABLE INVESTMENT SECURITIES AND RESTRICTED CASH AND MARKETABLE SECURITIES
At December 31, 1994 marketable investment securities were recorded in the
financial statements at amortized cost and were generally held to maturity. At
December 31, 1995, the Company has classified all marketable investment
securities as available for sale. Accordingly, these investments are reflected
at market value based on quoted market prices. Related unrealized gains and
losses are reported as a separate component of stockholders' equity, net of
related deferred income taxes of $146,000 at December 31, 1995. The specific
identification method is used to determine cost in computing realized gains and
losses. The major components of marketable investment securities as of December
31, 1994 and 1995 are as follows (in thousands).
F-10
ECHOSTAR COMMUNICATIONS CORPORATION AND AFFILIATES AND SUBSIDIARIES
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
DECEMBER 31, 1995
DECEMBER 31, 1994 -------------------------------------
---------------------- UNREALIZED
AMORTIZED MARKET AMORTIZED HOLDING MARKET
COST VALUE COST GAIN (LOSS) VALUE
----------- --------- ----------- ------------- ---------
Commercial paper........................... $ 19,976 $ 20,233 $ 1,126 $ -- $ 1,126
Corporate notes............................ 10,992 10,987 12,353 (19) 12,334
Municipal bonds............................ 70 70 -- -- --
Government bonds........................... -- -- 2,038 -- 2,038
Mutual funds............................... -- -- 188 (16) 172
----------- --------- ----------- --- ---------
$ 31,038 $ 31,290 $ 15,705 $ (35) $ 15,670
----------- --------- ----------- --- ---------
----------- --------- ----------- --- ---------
Restricted Cash and Marketable Securities in Escrow as reflected on the
accompanying balance sheets represent net proceeds received from the Notes
Offering, plus interest earned, less amounts expended to date in connection with
the development, construction and launch of EchoStar's Dish Network-SM-. The
escrow funds are held by an escrow agent in an account (the "Escrow Account")
for the benefit of the holders of the 1994 Notes and are invested in certain
debt and other marketable securities, as permitted by the 1994 Indenture, until
disbursed for the express purposes identified in the Notes Offering prospectus.
The major components of Restricted Cash and Marketable Securities as of December
31, 1994 and 1995 are as follows (in thousands):
DECEMBER 31, 1995
DECEMBER 31, 1994 -----------------------------------
------------------------ UNREALIZED
AMORTIZED MARKET AMORTIZED HOLDING MARKET
COST VALUE COST GAIN VALUE
----------- ----------- ----------- ----------- ---------
Commercial paper.......................... $ 94,315 $ 94,909 $ 66,214 $ -- $ 66,214
Corporate notes........................... 8,954 8,954 -- -- --
Government bonds.......................... -- -- 32,904 420 33,324
Municipal bonds........................... 92,513 93,010 -- -- --
Accrued interest.......................... 1,049 1,049 153 -- 153
----------- ----------- ----------- ----- ---------
$ 196,831 $ 197,922 $ 99,271 $ 420 $ 99,691
----------- ----------- ----------- ----- ---------
----------- ----------- ----------- ----- ---------
Other Restricted Cash includes $11.4 million to satisfy certain covenants
regarding launch insurance required by the 1994 Indenture. The Company is
required to maintain launch insurance and restricted cash totalling $225.0
million for each of EchoStar I and EchoStar II. The Company has obtained $219.3
million of launch insurance on each satellite, and, together with the cash
segregated and reserved on the accompanying balance sheets, has satisfied its
insurance obligations under the 1994 Indenture. In addition, as of December 31,
1995, $15.0 million was in an escrow account established pursuant to a
manufacturing contract for payment to the manufacturer as certain milestones are
reached.
REVENUE RECOGNITION AND TRADE ACCOUNTS RECEIVABLE
Revenue from sales of DTH products is recognized upon shipment to customers.
The Company maintains a reserve for potential losses in collection of its trade
accounts receivable based upon estimates of amounts that may ultimately be
uncollectible. The allowance for doubtful accounts was $186,000 and $1.1 million
as of December 31, 1994 and 1995, respectively.
F-11
ECHOSTAR COMMUNICATIONS CORPORATION AND AFFILIATES AND SUBSIDIARIES
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INVENTORIES
Inventories are stated at the lower of cost or market value. Cost is
determined using the first-in, first-out ("FIFO") method. Proprietary products
are manufactured by outside suppliers to the Company's specifications; however,
final testing and assembly is performed by the Company. The Company also
distributes non-proprietary products purchased from other manufacturers.
Manufactured inventories include materials, labor and manufacturing overhead.
Cost of other inventories includes parts, contract manufacturers' delivered
price, assembly and testing labor, and related overhead, including handling and
storage costs. The major components of inventory were as follows (in thousands):
DECEMBER 31,
--------------------
1994 1995
--------- ---------
DBS receiver components................................................ $ -- $ 9,615
Spare parts............................................................ 2,759 2,089
Competitor DBS Receivers............................................... 2,207 9,404
Finished goods......................................................... 16,946 20,458
Reserve for excess and obsolete inventory.............................. (1,585) (2,797)
--------- ---------
$ 20,327 $ 38,769
--------- ---------
--------- ---------
OTHER CURRENT ASSETS
Other current assets consisted of the following (in thousands):
DECEMBER 31,
--------------------
1994 1995
--------- ---------
DBS inventory deposit................................................... $ -- $ 10,000
Receivables for funded loans............................................ 257 437
Other................................................................... 2,316 2,600
--------- ---------
$ 2,573 $ 13,037
--------- ---------
--------- ---------
In conjunction with its commitments to purchase DBS satellite receivers
(Note 11), the Company has paid a deposit of $10.0 million to one of its
manufacturers. The deposit will be applied towards future payments for the DBS
satellite receivers as they are delivered during 1996.
Other current assets include receivables for consumer loans funded by EAC
but expected to be reimbursed to EAC on a nonrecourse basis by two unrelated
finance companies, normally within two business days after the credit is
accepted by those companies. Unreimbursed fundings were $257,000 and $437,000 as
of December 31, 1994 and 1995, respectively, all of which were subsequently
reimbursed. Total loans sourced by EAC during 1993, 1994 and 1995 were $85.6
million, $64.7 million and $50.1 million, respectively. In addition, EAC sourced
$8.6 million of leases in 1995.
Loan origination fees charged to the applicable DTH dealers are recognized
in income upon receipt of funding reimbursement from the purchaser of the loans.
EAC also receives a percentage of monthly finance charges billed by the
purchaser of the loans which is recognized in income as it becomes due to EAC.
FCC AUTHORIZATIONS AND ORGANIZATIONAL COSTS
FCC authorizations and organizational costs are recorded at cost and are
amortized using the straight-line method. Amortization periods for FCC
authorization costs are determined at the time
F-12
ECHOSTAR COMMUNICATIONS CORPORATION AND AFFILIATES AND SUBSIDIARIES
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
the services related to the applicable FCC authorization commences, or
capitalized costs are written off at the time efforts to provide services are
abandoned. FCC authorization costs are expected to have a useful life of
approximately 12 years. Organizational costs are being amortized over five
years.
DEFERRED DEBT ISSUANCE COSTS AND DEBT DISCOUNT
Costs of completing the Notes Offering have been deferred (Note 4) and are
being amortized to interest expense over the term of the 1994 Notes.
Amortization of the original issue discount related to the Notes Offering (Note
5) is also being amortized and included in interest cost incurred so as to
reflect a constant rate of interest on the accredited balance of the 1994 Notes.
DEFERRED PROGRAMMING REVENUE
Deferred programming revenue consists of payments received from consumers
and dealers for satellite television programming to be provided. The revenue is
recognized on a straight-line basis over the period the programming is provided,
which generally does not exceed one year.
ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
The composition of accrued expenses and other current liabilities is as
follows (in thousands):
DECEMBER 31,
--------------------
1994 1995
--------- ---------
Accrued satellite contract costs........................................ $ -- $ 15,000
Liability under cash management program................................. 57 --
Accrued expenses........................................................ 4,667 3,850
Reserve for warranty costs.............................................. 1,400 1,013
Other................................................................... 841 1,472
--------- ---------
$ 6,965 $ 21,335
--------- ---------
--------- ---------
The liability under cash management program represents checks written and
released in excess of balances presently on deposit with certain banks. As
checks clear these bank accounts, the resulting overdrafts are funded daily from
funds available in a concentration account at another bank.
The Company's proprietary products are under warranty against defects in
material and workmanship for one year from the date of original retail purchase.
The reserve for warranty costs is based upon historical units sold and expected
repair costs.
ADVERTISING COSTS
Advertising costs are expensed as incurred and totaled $3.2 million, $2.3
million and $1.9 million for the years ended December 31, 1993, 1994 and 1995,
respectively.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are expensed as incurred. Research and
development costs totaled $5.1 million, $5.9 million and $5.0 million for the
years ended December 31, 1993, 1994 and 1995, respectively.
INCOME TAXES
Prior to the December 31, 1993 reorganization (Note 1), the principal
combined entities were Subchapter S corporations and their income was taxable to
the stockholders rather than the companies. The provision for income taxes
reflected only amounts payable to states and foreign tax jurisdictions that did
not recognize Subchapter S status. Effective December 31, 1993, Subchapter S
status
F-13
ECHOSTAR COMMUNICATIONS CORPORATION AND AFFILIATES AND SUBSIDIARIES
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
terminated and the Company will prospectively file consolidated corporate
federal and state income tax returns. As required by Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS No. 109"),
this change in tax status was recognized by establishing deferred tax assets and
liabilities for temporary differences between the tax basis and amounts reported
in the accompanying combined and consolidated balance sheets (Note 7).
Under SFAS No. 109, the current provision for income taxes represents actual
or estimated amounts payable or refundable on tax returns filed or to be filed
for each year. Deferred tax assets and liabilities are recorded for the
estimated future tax effects of: (a) temporary differences between the tax basis
of assets and liabilities and amounts reported in the combined and consolidated
balance sheets, and (b) operating loss and tax credit carry forwards. The
overall change in deferred tax assets and liabilities for the period measures
the deferred tax expense for the period. Effects of changes in enacted tax laws
on deferred tax assets and liabilities are reflected as adjustments to tax
expense in the period of enactment. The measurement of deferred tax assets may
be reduced by a valuation allowance based on judgmental assessment of available
evidence if deemed more likely than not that some or all of the deferred tax
assets will not be realized.
EARNINGS PER SHARE
Earnings per share has been calculated based on the weighted average number
of shares of common stock issued and outstanding and, if dilutive, common stock
equivalents (warrants and employee stock options) during the years ended
December 31, 1994 and 1995; and net income has been adjusted for cumulative
dividends on the 8% Series A Cumulative Preferred Stock (the "Series A Preferred
Stock"). Earnings per share for the year ended December 31, 1993 has been
calculated and presented on a pro forma basis as if the shares issued to effect
the December 31, 1993 reorganization (Note 1) were outstanding during each
period.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board ("FASB") has issued Statement of
Financial Accounting Standards No. 121, "Accounting for Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of" ("SFAS No. 121"). The
Company will be required to adopt SFAS No. 121 in 1996 and expects that its
ultimate adoption will not have a significant impact on the Company's financial
position, results of operations or cash flows.
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("SFAS No. 123"), issued by the FASB in October 1995
and effective for fiscal years beginning after December 15, 1995, encourages,
but does not require, a fair value based method of accounting for employee stock
options or similar equity instruments. It also allows an entity to elect to
continue to measure compensation cost under Accounting Principles Board Opinion
No. 25 "Accounting for Stock Issued to Employees" ("APB No. 25"), but requires
pro forma disclosures of net income and earnings per share as if the fair value
based method of accounting had been applied. The Company expects to adopt SFAS
No. 123 in 1996. While the Company is still evaluating SFAS No. 123, it
currently expects to elect to measure compensation cost under APB No. 25 and
comply with the pro forma disclosure requirements. If the Company makes this
election, this statement will have no impact on the Company's results of
operations.
RECLASSIFICATIONS
Certain reclassifications have been made to the prior year's financial
statements to conform to the current year's financial statement presentation.
F-14
ECHOSTAR COMMUNICATIONS CORPORATION AND AFFILIATES AND SUBSIDIARIES
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
(3) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost less accumulated depreciation.
Cost includes interest capitalized of $370,000, $5.7 million and $25.8 million
during the years ended December 31, 1993, 1994 and 1995, respectively on the
EchoStar DBS System during construction at the Company's effective borrowing
rate. The major components of property and equipment were as follows (in
thousands):
ESTIMATED DECEMBER 31,
USEFUL ------------------------
LIFE 1995
(IN YEARS) 1994 -
---------- -----------
Construction in progress......................................... -- $ 139,500 $ 303,174
Land............................................................. -- 1,613 1,613
Buildings and improvements....................................... 7-40 8,936 21,006
Furniture, fixtures and equipment................................ 2-12 6,081 17,163
Vehicles......................................................... 7 992 1,310
Tooling.......................................................... 2 1,339 2,039
Furniture and equipment held for sale............................ -- 17,062
Computer equipment held for sale................................. -- 902
----------- -----------
Total property and equipment..................................... 158,461 364,269
Less-Accumulated depreciation.................................... (7,221) (10,269)
----------- -----------
Net property and equipment................................... $ 151,240 $ 354,000
----------- -----------
----------- -----------
Construction in progress includes capitalized costs related to the
construction and launch (Note 11) of EchoStar I, which was launched in late
December 1995, EchoStar II, which is scheduled for launch prior to the end of
1996 and EchoStar III.
Construction in progress consisted of the following (in thousands):
DECEMBER 31,
------------------------
1994 1995
----------- -----------
Progress amounts for satellite construction and launch, capitalized interest,
launch insurance, launch and in-orbit tracking, telemetry and control
services:
EchoStar I.................................................................. $ 75,613 $ 193,629
EchoStar II................................................................. 62,438 88,634
EchoStar III................................................................ -- 20,801
Uplink facility............................................................. 1,449 --
Other....................................................................... -- 110
----------- -----------
$ 139,500 $ 303,174
----------- -----------
----------- -----------
F-15
ECHOSTAR COMMUNICATIONS CORPORATION AND AFFILIATES AND SUBSIDIARIES
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
(4) OTHER NONCURRENT ASSETS
The major components of other noncurrent assets were as follows (in
thousands):
DECEMBER 31,
--------------------
1994 1995
--------- ---------
Deferred debt issuance costs, net of amortization...................... $ 11,891 $ 10,622
FCC authorizations..................................................... 9,519 11,309
SSET convertible subordinated debentures and accrued interest.......... 9,029 9,610
DBSI convertible subordinated debentures............................... -- 1,000
Deferred tax assets, net............................................... 7,431 12,109
Investment in DBSC..................................................... 4,210 4,111
Long-term note receivable from DBSC.................................... -- 16,000
Warehousing bond....................................................... 432 468
Prepaid travel......................................................... 315 293
Other.................................................................. 213 136
--------- ---------
$ 43,040 $ 65,658
--------- ---------
--------- ---------
The merger with DirectSat described in Note 1 was accounted for as a
purchase. DirectSat's assets were valued at $9.0 million by the Company at the
time of the merger and are included in FCC authorizations in the above summary.
DirectSat has been granted a conditional satellite construction permit, specific
orbital slot assignments and frequency assignments by the FCC. The DirectSat
permits conditionally authorize DirectSat to provide DBS service utilizing: (i)
ten even-numbered channels at 119 DEG. WL, the same orbital location that has
been assigned to ESC; (ii) one channel at 110 DEG. WL; and (iii) 11 odd-numbered
channels at 175 DEG. WL. The Company expects to use DirectSat's approved
frequencies at 119 DEG. WL for the EchoStar II satellite.
The Company also purchased $8.75 million of SSET's 6.5% convertible
subordinated debentures which, if converted, would represent approximately 11.6%
of SSET's common stock, based on the number of shares of SSET common stock
outstanding at December 31, 1995. Management estimates that the fair value of
the SSET debentures approximates their carrying value in the accompanying
financial statements based on current interest rates and the conversion features
contained in the debentures. SSET is a reporting company under the Securities
Exchange Act of 1934 engaged in the manufacture and sale of satellite
telecommunications equipment. In March 1994, SSET also sold to the Company for
$1.25 million an approximate 6% ownership interest in the stock of Direct
Broadcasting Satellite Corporation ("DBSC") and certain notes and accounts
receivable from DBSC.
In November 1994, the Company resolved a suit brought by the Company against
DBSC regarding enforceability of the notes and accounts receivable. The
receivables were exchanged for shares of DBSC common stock and the Company
purchased additional DBSC shares for $2,960,000 so that, together with the
shares of DBSC acquired from SSET, the Company presently owns approximately 40%
of the outstanding common stock of DBSC. DBSC's principal assets include an FCC
conditional satellite construction permit and specific orbital slot assignments
for eleven DBS frequencies at 61.5 DEG. WL and eleven DBS frequencies at
175 DEG. WL.
The Company has negotiated the merger of DBSC with a subsidiary of the
Company. The merger has been approved by DBSC shareholders but may not be
completed until the FCC has approved the merger. Assuming FCC approval for
consummation of this merger, the Company will hold, through its
F-16
ECHOSTAR COMMUNICATIONS CORPORATION AND AFFILIATES AND SUBSIDIARIES
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
(4) OTHER NONCURRENT ASSETS (CONTINUED)
DBSC subsidiary, the permit and slot assignments for these frequencies. In
connection with the merger, the Company expects to issue approximately 675,000
shares of its Class A Common Stock to DBSC shareholders in exchange for all
remaining DBSC stock.
In December 1995, the Company advanced DBSC $16.0 million to make payments
under their satellite construction contract. The Company has a note receivable
from DBSC which bears interest at 11.5% and matures December 29, 2003. Under the
terms of the promissory note, equal installments of principal and interest are
due annually commencing in December 1997. This note is secured by all the assets
of DBSC as defined in the Security Agreement. Management estimates that the fair
value of this note approximates its carrying value in the accompanying financial
statements based on current risk adjusted interest rates.
In 1995 the Company also purchased $1.0 million of DBS Industries, Inc.'s
("DBSI") convertible subordinated debentures which, if converted, would
represent less than 5% of DBSI's common stock, based on the number of shares of
DBSI common stock outstanding at December 31, 1995. The debentures bear interest
at prime plus 2%, adjusted and payable quarterly (10.5% at December 31, 1995),
and mature July 1, 1998. The debentures are secured by 125,000 shares of DBSC's
common stock and 2,000 shares of common stock of E-SAT Corporation which is
currently owned 80% by the Company. DBSI owns a minority interest in DBSC, is a
reporting company under the Securities Exchange Act of 1934 and is engaged in
the development of satellite and radio systems for use in automating the control
and distribution of gas and electric power by utility companies. Management
estimates that the fair value of the DBSI's debentures approximates their
carrying value in the accompanying financial statements based on current
interest rates and the conversion features contained in the debentures. In
January 1996, the Company purchased an additional $3 million of DBSI's
convertible subordinated debentures.
(5) SENIOR SECURED NOTES
On June 7, 1994, Dish, Ltd. completed the Notes Offering of 624,000 units
consisting of $624 million aggregate principal amount of the 12 7/8% Senior
Secured Notes (the "1994 Notes") and 3,744,000 Warrants for the purchase of
Dish, Ltd. Class A Common Stock. Effective with the Merger (Note 1), these
Warrants became exercisable for 2,808,000 Shares of ECC's Class A Common Stock
(Note 9). The Notes Offering resulted in net proceeds to Dish, Ltd. of $323.3
million. At December 31, 1994, the 1994 Notes were reflected in the financial
statements at $334.2 million, net of unamortized discount of $289.8 million. At
December 31, 1995, the 1994 Notes totaled $382.2 million, net of unamortized
discount of $241.8 million. A limited trading market exists for the 1994 Notes.
However, based on information available to the Company, the 1994 Notes traded
for approximately $690 per bond near December 31, 1995. This suggests a current
aggregate market value of the 1994 Notes of approximately $430.6 million.
The 1994 Notes rank senior in right of payment to all subordinated
indebtedness of Dish, Ltd. and PARI PASSU in right of payment with all other
senior indebtedness of Dish, Ltd., subject to the terms of an Intercreditor
Agreement between Dish, Ltd., certain of its principal subsidiaries and certain
creditors thereof. The 1994 Notes are secured by liens on certain assets of
Dish, Ltd., including EchoStar I and EchoStar II and all other components of the
EchoStar DBS System owned by Dish, Ltd. and its subsidiaries. The 1994 Notes are
guaranteed by each material direct subsidiary of Dish, Ltd. (Note 12). Although
the 1994 Notes are titled "Senior": (i) Dish, Ltd. has not issued, and does not
have any current arrangements to issue, any significant indebtedness to which
the 1994 Notes would be senior, however, Senior Secured Notes being offered for
sale subsequent to December 31, 1995, by
F-17
ECHOSTAR COMMUNICATIONS CORPORATION AND AFFILIATES AND SUBSIDIARIES
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
(5) SENIOR SECURED NOTES (CONTINUED)
EchoStar Satellite Broadcasting Corporation, another wholly owned subsidiary of
ECC, will effectively be subordinated to the 1994 Notes and all other
liabilities of Dish, Ltd. and its subsidiaries; and (ii) at December 31, 1994
and 1995, the 1994 Notes were effectively subordinated to approximately $5.6
million and $5.4 million of mortgage indebtedness, respectively, with respect to
certain assets of Dish, Ltd.'s subsidiaries, not including the EchoStar DBS
System. Further, the 1994 Notes are subordinate to advances under the Credit
Facility (Note 6), and will be ranked PARI PASSU with the security interest of
approximately $30.0 million of contractor financing.
Interest on the 1994 Notes currently is not payable in cash but accrues
through June 1, 1999, with the 1994 Notes accrediting to $624.0 million by that
date. Thereafter, interest on the 1994 Notes will be payable in cash
semi-annually on June 1 and December 1 of each year, commencing December 1,
1999. Except under certain circumstances requiring prepayment premiums, and in
other limited circumstances, the 1994 Notes are not redeemable at Dish, Ltd.'s
option prior to June 1, 1999. Thereafter, the 1994 Notes will be subject to
redemption, at the option of Dish, Ltd., in whole or in part, at redemption
prices ranging from 104.828% during the year commencing June 1, 1999 to 100% on
or after June 1, 2002 of principal, together with accrued and unpaid interest
thereon to the redemption date. On each of June 1, 2002 and June 1, 2003, Dish,
Ltd. will be required to redeem 25% of the original aggregate principal amount
of 1994 Notes at a redemption price equal to 100% of the principal amount
thereof, together with accrued and unpaid interest thereon to the redemption
date. The remaining principal of the 1994 Notes will mature on June 1, 2004.
In the event of a change of control and upon the occurrence of certain other
events, as described in the 1994 Indenture, Dish, Ltd. will be required to make
an offer to each holder of 1994 Notes to repurchase all or any part of such
holder's 1994 Notes at a purchase price equal to 101% of the accredited value
thereof on the date of purchase, if prior to June 1, 1999, or 101% of the
aggregate principal amount thereof, together with accrued and unpaid interest
thereon to the date of purchase, if on or after June 1, 1999.
The 1994 Indenture contains restrictive covenants that, among other things,
impose limitations on Dish, Ltd. and its subsidiaries with respect to their
ability to: (i) incur additional indebtedness; (ii) issue preferred stock; (iii)
apply the proceeds of certain asset sales; (iv) create, incur or assume liens;
(v) create dividend and other payment restrictions with respect to Dish, Ltd.'s
subsidiaries; (vi) merge, consolidate or sell assets; (vii) incur subordinated
or junior debt; and (viii) enter into transactions with affiliates. In addition,
Dish, Ltd., may pay dividends on its equity securities only if (1) no default is
continuing under the 1994 Indenture; and (2) after giving effect to such
dividend, Dish, Ltd.'s ratio of total indebtedness to cash flow (calculated in
accordance with the 1994 Indenture) would not exceed 4.0 to 1. Moreover, the
aggregate amount of such dividends generally may not exceed the sum of 50% of
Dish, Ltd.'s consolidated net income (calculated in accordance with the 1994
Indenture) from the date of issuance of the 1994 Notes, plus 100% of the
aggregate net proceeds to Dish, Ltd. from the issuance and sale of certain
equity interests of Dish, Ltd. (including common stock).
F-18
ECHOSTAR COMMUNICATIONS CORPORATION AND AFFILIATES AND SUBSIDIARIES
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
(6) SHORT-TERM AND LONG-TERM DEBT
LONG-TERM MORTGAGE DEBT
In addition to the 1994 Notes (Note 5), long-term debt consists of the
following as of December 31, 1994 and 1995 (in thousands):
1994 1995
--------- ---------
8.75% note payable for deferred satellite contract payments due in equal monthly
installments of $677,590, including interest, through February 2001; secured by
substantially all assets of Dish, Ltd., and Dish, Ltd.'s subsidiaries...................... $ -- $ 32,833
8.0% mortgage note payable due in equal monthly installments of $41,635, including interest,
through May 2008; secured by land and office building...................................... 4,088 3,909
10.5% mortgage note payable due in equal monthly installments of $9,442, including interest,
through November 1998; final payment of $854,000 due November 1998; secured by land and
warehouse building......................................................................... 927 910
9.9375% mortgage note payable due in equal quarterly principal installments of $10,625, plus
interest, through April 2009; secured by land and office building.......................... 616 574
--------- ---------
Total long-term debt, excluding the 1994 Notes.............................................. 5,631 38,226
Less current installments................................................................... (238) (4,782)
--------- ---------
Long-term debt, excluding current installments.............................................. $ 5,393 $ 33,444
--------- ---------
--------- ---------
Aggregate maturities of the above long-term mortgage debt are as follows:
1996, $4.8 million; 1997, $6.2 million; 1998, $7.6 million; 1999, $7.3 million;
2000, $8.0 million; and thereafter, $4.3 million. In addition, contractor
financing of $28.0 million at the prime rate is available for EchoStar II
payable in installments over five years following the launch (Note 11).
DEFERRED SATELLITE CONTRACT PAYMENTS
The majority of the purchase price for the satellites is required to be paid
in progress payments, with the remainder payable in the form of non-contingent
payments deferred until EchoStar I and EchoStar II are in orbit, with interest
at the prime rate over a period of five years after the delivery and launch of
each such satellite (the "Deferred Payments"). As security for the portion of
the Deferred Payments due to the contractor (Martin Marietta), Dish, Ltd. has:
(i) granted a security interest in substantially all assets of Dish, Ltd. and
Dish, Ltd.'s subsidiaries (the "Dish, Ltd. subsidiaries"), other than the stock
of the EchoStar subsidiaries and the proceeds derived from the sale of the 1994
Notes, subordinate to the first security interest in the assets of ESC granted
to the Trustee under the 1994 Indenture (Note 5), and to the liens granted to
any commercial bank which provides a revolving credit facility to Dish, Ltd.,
except that such security interest ranks PARI PASSU with the security interest
in the assets of ESC granted for the benefit of the holders of the 1994 Notes
with respect to $30.0 million of the Deferred Payments; and (ii) caused Dish,
Ltd. and its subsidiaries to guarantee payment in full of such Deferred
Payments.
Martin Marietta has a security interest in the EchoStar DBS System which,
with respect to $30.0 million of the Deferred Payments, ranks PARI PASSU with
the lien on such assets granted for the benefit of the holders of the 1994
Notes, and, with respect to the remainder of the Deferred Payments, is
subordinated to the lien on such assets granted for the benefit of the holders
of the 1994 Notes.
F-19
ECHOSTAR COMMUNICATIONS CORPORATION AND AFFILIATES AND SUBSIDIARIES
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
(6) SHORT-TERM AND LONG-TERM DEBT (CONTINUED)
However, following any default on the Deferred Payments, Martin Marietta is
prohibited from realizing on any of such collateral for a period of at least
five years following consummation of the Notes Offering, and in any event for
180 days following such default. Martin Marietta also has a security interest in
the assets of the Dish, Ltd. subsidiaries other than ESC which lien, with
respect to the assets of certain of the Dish, Ltd. subsidiaries, ranks senior to
the lien on such assets granted for the benefit of the holders of the 1994
Notes.
LONG-TERM NOTES PAYABLE TO STOCKHOLDER
As of December 31, 1993, ESC had a long-term note payable to its principal
stockholder, including cumulative accrued interest at prime, of $14.7 million.
The loan proceeds were used to make payments due pursuant to the satellite
construction project (Note 11). The note accrued interest at 10% per annum from
January 1, 1994 to March 21, 1994. The stockholder exchanged the note together
with accrued but unpaid interest for Series A Preferred Stock on May 6, 1994
(Note 16). The principal stockholder also advanced $4.0 million to EchoStar in
1994 used to fund transactions with SSET (Note 4) which was repaid from proceeds
of the 1994 Notes.
The Company also had a noninterest-bearing note payable to its principal
stockholder at December 31, 1993 of $75,000 which was repaid in January 1994.
BANK CREDIT FACILITY
On May 6, 1994, the principal subsidiaries of Dish, Ltd., except ESC (the
"Borrowers"), entered into an agreement with Bank of America Illinois (the
"Bank"), to provide a revolving credit facility (the "Credit Facility") for
working capital advances and for letters of credit necessary for inventory
purchases and satellite construction payments. The maximum amount available to
the Borrowers under the Credit Facility is the lesser of the "Borrowing Base"
(as defined in the Credit Facility) or $17.0 million, if prior to March 6, 1996,
or $14.5 million,
F-20
ECHOSTAR COMMUNICATIONS CORPORATION AND AFFILIATES AND SUBSIDIARIES
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
(6) SHORT-TERM AND LONG-TERM DEBT (CONTINUED)
if on or after March 6, 1996. The Borrowing Base includes specified percentages
of eligible receivables, inventory and marketable investment securities. At
December 31, 1995 the Borrowing Base exceeded $17.0 million. Advances under the
Credit Facility bear interest at: (i) the Bank's Reference Rate (as defined in
the Credit Facility); (ii) Eurodollar rate plus 2% per annum or (iii) the
secondary CD bid rate plus 2.25% per annum, at the Borrowers' choice. Advances
pursuant to the Credit Facility are secured by substantially all of the assets
of the Borrowers. At December 31, 1995, standby letters of credit totaled $15.5
million, and there were no documentary letters of credit or advances
outstanding.
The Credit Facility contains customary representations, covenants and
conditions to borrowing. The Credit Facility also contains a number of negative
covenants that restrict the Borrowers from, among other things, incurring
additional indebtedness, creating liens on their assets, providing guarantees,
entering into merger or consolidation transactions, or disposing of their assets
outside the ordinary course of business. Except in certain circumstances
specified in the Credit Facility, the Borrowers are able to pay dividends to
Dish, Ltd. in an amount not to exceed 50% of excess cash flow (as defined in the
Credit Facility) in 1995 and 1996.
(7) INCOME TAXES
As stated in Note 2, the combined entities terminated their Subchapter S
status on December 31, 1993. This change in tax status was recognized by
establishing a net deferred tax asset of $1.9 million on that date for temporary
differences between tax basis and amounts reported in the accompanying combined
and consolidated balance sheet. The current provision for income taxes for 1993
reflects only amounts payable to certain states and foreign tax jurisdictions
that do not recognize Subchapter S status. Beginning in 1994, the group filed
consolidated corporate federal and state income tax returns.
The components of the (provision) benefit for income taxes are as follows
(in thousands):
YEAR ENDED DECEMBER 31,
-------------------------------
1993 1994 1995
--------- --------- ---------
Current (provision) benefit
Federal..................................................... $ -- $ (5,951) $ 1,350
State....................................................... (128) (853) (67)
Foreign..................................................... (429) (925) (301)
--------- --------- ---------
(557) (7,729) 982
--------- --------- ---------
Deferred benefit
Federal..................................................... 1,686 6,342 4,383
State....................................................... 255 988 380
--------- --------- ---------
1,941 7,330 4,763
--------- --------- ---------
Total benefit (provision)................................. $ 1,384 $ (399) $ 5,745
--------- --------- ---------
--------- --------- ---------
F-21
ECHOSTAR COMMUNICATIONS CORPORATION AND AFFILIATES AND SUBSIDIARIES
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
(7) INCOME TAXES (CONTINUED)
The types of temporary differences that give rise to a significant portion
of net deferred tax assets and their approximate tax effects as of December 31,
1994 and 1995 are as follows (in thousands):
1994 1995
--------- ---------
Current deferred tax assets
Inventory reserves and cost methods................................... $ 438 $ 834
Reserve for warranty costs............................................ 532 385
Accrued customer incentives........................................... 234 --
Accrued employee incentives........................................... 418 168
Allowance for doubtful accounts....................................... 106 456
Unrealized holding gain on marketable investment securities........... -- (153)
Other................................................................. 112 89
--------- ---------
Net current deferred tax assets................................... 1,840 1,779
--------- ---------
Noncurrent deferred tax assets
Amortization of original issue discount (included in other noncurrent
assets).............................................................. 7,431 15,439
Other................................................................. -- 7
--------- ---------
7,431 15,446
--------- ---------
Noncurrent deferred tax liabilities
Capitalized costs deducted for tax.................................... -- (2,351)
Depreciation.......................................................... -- (986)
--------- ---------
-- (3,337)
--------- ---------
Noncurrent net deferred tax assets................................ 7,431 12,109
--------- ---------
Net deferred tax assets........................................... $ 9,271 $ 13,888
--------- ---------
--------- ---------
No valuation allowance has been provided for the above deferred tax assets
because the Company currently believes it is more likely than not that these
assets will be realized. If future operating results differ materially and
adversely from the Company's current expectations, its judgment regarding the
need for a valuation allowance may change.
PRO FORMA TAX EFFECTS
The combined and consolidated statements of income present, on an unaudited
pro forma basis, net income for 1993 as if the Company had filed consolidated C
Corporation federal and state income tax returns for that year. The pro forma
tax effects assume foreign taxes paid would have been fully creditable against
United States federal taxes payable and that the deferred tax assets established
on December 31, 1993 as described above, would have been provided for as the
related temporary
F-22
ECHOSTAR COMMUNICATIONS CORPORATION AND AFFILIATES AND SUBSIDIARIES
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
(7) INCOME TAXES (CONTINUED)
differences arose. The pro forma provisions for income taxes for 1993 and the
actual tax provisions for 1994 and 1995 are reconciled to the amounts computed
by applying the statutory federal tax rate to income before taxes as follows
(amounts in thousands):
1993 1994 1995
---------------------- ------------------------ ----------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
--------- ----------- ----------- ----------- --------- -----------
Statutory rate...................................... $ (6,557) (35.0)% $ (166) (34.0)% $ 6,031 35.0%
State income taxes, net of federal benefit.......... (450) (2.4) (88) (18.0) 203 1.2
Tax exempt interest income.......................... 350 1.9 60 12.3 10 0.1
Research and development credits.................... 195 1.0 156 31.9 31 0.2
Non-deductible interest expense..................... -- -- (258) (52.7) (293) (1.7)
Other............................................... -- -- (103) (21.1) (237) (1.5)
--------- ----- ----------- ----- --------- ---
Total (provision) benefit for income taxes (pro
forma in 1993)................................. (6,462) (34.5)% $ (399) (81.6)% $ 5,745 33.3%
----- ----------- ----- --------- ---
----- ----------- ----- --------- ---
Less: Historical benefit for income taxes........... 1,384
---------
Pro forma tax effects............................... $ (7,846)
---------
---------
(8) EMPLOYEE BENEFIT PLAN AND EXECUTIVE INCENTIVE BONUS PLANS
The Company has a 401(k) Employee Savings Plan (the "401(k) Plan") for
eligible employees. Voluntary employee contributions to the 401(k) Plan may be
matched 50% by the Company, subject to a maximum annual contribution by the
Company of $1,000 per employee. The Company may also make an annual
discretionary contribution to the plan with approval by the Company's Board of
Directors, subject to the maximum deductible limit provided by the Internal
Revenue Code of 1986, as amended. The Company's total cash contributions to the
401(k) Plan were $572,000, $170,000 and $177,000 for 1993, 1994 and 1995,
respectively. Also in 1995, the Company contributed 55,000 shares of its Class A
Common Stock (fair value of approximately $1.1 million) to the 401(k) Plan as a
discretionary contribution.
During the years ended December 31, 1993, 1994 and 1995, the Company's Board
of Directors declared discretionary bonuses totaling $834,000, $711,000 and
$75,000, respectively. Also, a launch bonus award of 10 shares of the Company's
Class A Common Stock to all full time employees with more than 90 days service
as of December 16, 1995 was awarded. A total of approximately 4,900 shares with
an aggregate value of approximately $78,000 was issued.
(9) STOCKHOLDERS' EQUITY
Ownership of each of the subsidiaries was generally uniform at the time of
formation of Dish, Ltd. described in Note 1. As of December 31, 1993, the
stockholders contributed their shares in the subsidiaries for an aggregate of
7,500 shares of Common Stock of Dish, Ltd. Retained earnings that had not been
distributed prior to the reorganization and related termination of Subchapter S
status were constructively distributed to the stockholders and contributed to
Dish, Ltd. as additional paid-in capital.
Dividends declared and paid during the three years ended December 31, 1994,
included amounts to allow the stockholders to pay taxes on Subchapter S income
and for investment in and advances to ESC related to construction of EchoStar I
and EchoStar II (Notes 2, 3 and 6).
F-23
ECHOSTAR COMMUNICATIONS CORPORATION AND AFFILIATES AND SUBSIDIARIES
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
(9) STOCKHOLDERS' EQUITY (CONTINUED)
COMMON STOCK
The Class A, Class B and Class C Common Stock are equivalent in all respects
except voting rights. Holders of Class A and Class C Common Stock are entitled
to one vote per share and holders of Class B Common Stock are entitled to ten
votes per share. Each share of Class B and Class C Common Stock is convertible
at the option of the holder, into one share of Class A Common Stock. Upon a
change in control of ECC, each holder of outstanding shares of Class C Common
Stock is entitled to ten votes for each share of Class C Common Stock held by
the holder. ECC's principal stockholder owns all outstanding Class B Common
Stock and all other stockholders own Class A Common Stock.
SERIES A PREFERRED STOCK
On May 6, 1994, the Company exchanged 1,616,681 shares of its Preferred
Stock with its principal stockholder in consideration for the cancellation of a
note, plus accrued and unpaid interest thereon. Approximately 5%, or 80,834
shares, of the Preferred Stock were subsequently sold to another stockholder and
officer of the Company. The principal stockholder has pledged all of his
Preferred Stock to Martin Marietta as collateral security for contractor
financing (Note 6).
Each share of the Preferred Stock is convertible, at the option of the
holder, into one share of Class A Common Stock, subject to adjustment from time
to time upon the occurrence of certain events, including, among other things:
(i) dividends or distributions on Class A Common Stock payable in Class A Common
Stock or certain other capital stock; (ii) subdivisions, combinations or certain
reclassifications of Class A Common Stock; and (iii) issuances of Class A Common
Stock or rights, warrants or options to purchase Class A Common Stock at a price
per share less than the liquidation preference per share. In the event of the
liquidation, dissolution or winding up of EchoStar, the holders of Preferred
Stock would be entitled to receive an amount equal to approximately $10.64 per
share as of December 31, 1995.
The aggregate liquidation preference for all outstanding shares of Series A
Preferred Stock is limited to the principal amount represented by the note, plus
accrued and unpaid dividends thereon. Each share of Series A Preferred Stock is
entitled to receive dividends equal to eight percent per annum of the initial
liquidation preference for such share. Each share of Series A Preferred Stock
automatically converts into shares of Class A Common Stock in the event they are
transferred to any person other than certain permitted transferees and is
entitled to the equivalent of ten votes for each share of Class A Common Stock
into which it is convertible. Except as otherwise required by law, holders of
Series A Preferred Stock vote together with the holders of Class A and Class B
Common Stock as a single class.
All accrued dividends payable to Mr. Ergen on his Dish, Ltd. Series A
Preferred Stock through the date of the Exchange ($1.4 million), and all accrued
dividends payable to the remaining holder of Dish, Ltd. Series A Preferred Stock
through the date of the Merger ($107,000), will remain obligations of Dish, Ltd.
(Note 1); however, no additional dividends will accrue with respect to the Dish,
Ltd. Series A Preferred Stock. The 1994 Indenture places significant
restrictions of payment of those dividends, and dividends are not expected to be
paid in the foreseeable future. Through December 31, 1995, additional accrued
dividends payable to Mr. Ergen by ECC on the ECC Series A Preferred Stock
totaled $588,000.
Cumulative but unpaid dividends totaled $938,000 and approximately $2.1
million at December 31, 1994 and 1995, respectively, including amounts which
remain the obligation of Dish, Ltd.
F-24
ECHOSTAR COMMUNICATIONS CORPORATION AND AFFILIATES AND SUBSIDIARIES
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
(9) STOCKHOLDERS' EQUITY (CONTINUED)
WARRANTS
The Warrants issued in connection with the Notes Offering were valued at
$26.1 million. The 1994 Notes and the Warrants became separately transferable
and exercisable effective December 1, 1994.
Each Warrant entitles the registered holder thereof, at such holder's
option, to purchase from ECC one share of Class A Common Stock at a purchase
price of $0.01 per share (the "Exercise Price"). The Exercise Price with respect
to all of the Warrants was paid in advance and, therefore, no additional amounts
are payable upon exercise of the Warrants.
Effective with the Merger (Note 1), or subsequently, all Warrants were
exercised and 2,808,000 Shares (as adjusted for the Exchange Ratio) of ECC's
Class A Common Stock were issued.
(10) STOCK OPTIONS
In April 1994, the Company adopted a stock incentive plan (the "Stock
Incentive Plan") to provide incentive to attract and retain officers, directors
and key employees. ECC assumed all outstanding options for the purchase of Dish,
Ltd. common stock effective with the Exchange and Merger and has reserved up to
10.0 million shares of its Class A Common Stock for granting awards under the
Stock Incentive Plan. Awards available under the Stock Incentive Plan include:
(i) common stock purchase options; (ii) stock appreciation rights; (iii)
restricted stock and restricted stock units; (iv) performance awards; (v)
dividend equivalents; and (vi) other stock-based awards. All options granted
through December 31, 1995 have included exercise prices not less than the fair
market value of the Shares at the date of grant and vest as determined by the
Company's Board of Directors, generally at the rate of 20% per year.
The following summarizes the activity relating to options for the years
ended December 31, 1994 and 1995:
1994 1995
--------- -------------------
(IN THOUSANDS EXCEPT FOR PER
SHARE DATA)
Incentive stock options --
Options outstanding at beginning of year........................ -- 745
Granted....................................................... 745 420
Exercised..................................................... -- (4)
Terminated.................................................... -- (44)
--------- -------------------
Options outstanding at end of year............................ 745 1,117
--------- -------------------
--------- -------------------
Options exercisable at end of year............................ -- 141
--------- -------------------
--------- -------------------
Price of granted options...................................... $9.33 $11.87 - $20.25
--------- -------------------
--------- -------------------
Price range of outstanding options............................ $9.33 $ 9.33 - $20.25
--------- -------------------
--------- -------------------
Price of terminated options................................... $-- $ 9.33 - $20.25
--------- -------------------
--------- -------------------
In March 1994, the Company entered into an employment agreement with one of
its executive officers. The officer was granted an option, containing certain
conditions to vesting, to purchase 322,208 shares of Class A Common Stock of the
Company for $1.0 million at any time prior to
F-25
ECHOSTAR COMMUNICATIONS CORPORATION AND AFFILIATES AND SUBSIDIARIES
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
(10) STOCK OPTIONS (CONTINUED)
December 31, 1999, subject to certain limitations. One-half of this option
became exercisable on December 31, 1994 and the remainder became exercisable on
December 31, 1995. The option was not granted pursuant to the Stock Incentive
Plan.
Effective March 1995, the Company granted an additional option to a key
employee to purchase 33,000 shares of Class A Common Stock, which vests 50% in
March 1996 and 50% in March 1997. The exercise price for each share of Class A
Common Stock is $11.87 per share. The option was not granted pursuant to the
Stock Incentive Plan.
(11) OTHER COMMITMENTS AND CONTINGENCIES
SATELLITE CONTRACTS
The Company has contracted with Martin Marietta Corporation ("Martin
Marietta") for the construction and delivery of high powered DBS satellites, and
for related services. EchoStar I was shipped to China on November 16, 1995 and
EchoStar II is expected to be delivered in the summer of 1996. Penalties of up
to $5.0 million are payable by Martin Marietta in the event of delays in the
delivery of EchoStar I by Martin Marietta. As of December 31, 1995, those
penalties totaled $3.2 million, which amount has been deducted from the
Company's deferred satellite payment obligation (Note 6).
The Company also has contracts with China Great Wall Industry Corporation
("Great Wall") for the launch of up to seven satellites, using LM-2E or LM-3C
launch vehicles, from a launch base in China. EchoStar I was launched on
December 28, 1995. The EchoStar I and EchoStar II launch contract (the "Great
Wall Launch Contract") calls for the launch of EchoStar II during July through
September 1996.
A significant delay in the delivery or launch of EchoStar II would adversely
affect the Company's operations. In June 1995, another subsidiary of ECC
contracted with Lockheed-Khrunichev-Energia-International, Inc. ("LKE") for the
launch of a satellite, using a Proton launch vehicle, from a launch base in the
Russian Federation.
The Company has filed applications with the Federal Communications
Commission ("FCC") for authorization to construct, launch and operate a domestic
fixed satellite service system ("FSS System") and a two satellite Ka-band
satellite system. No assurances can be given that the Company applications will
be approved by the FCC or that, if approved, the Company will successfully
develop the FSS System or the Ka-band satellite system. The Company believes
that establishment of the FSS System or the Ka-band system would enhance its
competitive position in the DTH industry. In the event the Company's FSS or
Ka-band satellite system applications are approved by the FCC, or if the Company
commits to a third launch with Great Wall, additional debt or equity financing
would be required. Financing alternatives related to the FSS and Ka-band
satellite systems are currently being pursued by the Company. No assurances can
be given that financing will be available, or that it will be available on terms
favorable to the Company.
F-26
ECHOSTAR COMMUNICATIONS CORPORATION AND AFFILIATES AND SUBSIDIARIES
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
(11) OTHER COMMITMENTS AND CONTINGENCIES (CONTINUED)
LEASES
Future minimum lease payments under noncancelable operating leases as of
December 31, 1995, are as follows (in thousands):
Year ending December 31 --
1996............................................. $ 1,061
1997............................................. 686
1998............................................. 275
1999............................................. 147
2000............................................. 24
Thereafter....................................... 2
---------
Total minimum lease payments................... $ 2,195
---------
---------
Total rental expense for operating leases was $1.2 million in 1993, $1.4
million in 1994 and $1.2 million in 1995.
PURCHASE COMMITMENTS
The Company has entered into agreements with various manufacturers to
purchase DBS satellite receivers and related components manufactured based on
Dish, Ltd. supplied specifications and necessary to receive DBS programming
proposed to be offered by the Company upon commencement of operations of
EchoStar's Dish Network-SM-. As of December 31, 1995 the remaining commitments
total approximately $502.9 million. At December 31, 1995, the total of all
outstanding purchase order commitments with domestic and foreign suppliers was
$515.8 million. All but $11.1 million of the purchases related to these
commitments are expected to be made during 1996 and the remainder is expected to
be made during 1997. The Company expects to finance these purchases from
available cash and sales of inventory, including the sale of DBS receiver
systems and related products.
OTHER RISKS AND CONTINGENCIES
Equipment sold by the Company includes, as an integral component,
descrambler modules purchased from an unrelated entity under a nonexclusive
right and license which expires in 2001.
The Company has agreed to indemnify its stockholders for any adjustments to
their individual income tax returns resulting from adjustments to taxable income
or tax credits for years prior to 1994 during which the Company elected to be
taxed as Subchapter S corporations. The indemnities cover additions to tax,
interest and penalties, as well as attorneys' and accountants' fees and
expenses, if any.
The Company is subject to other legal proceedings and claims which arise in
the ordinary course of its business. In the opinion of management, the amount of
ultimate liability with respect to these actions will not materially affect the
financial position, results of operations or liquidity of the Company.
F-27
ECHOSTAR COMMUNICATIONS CORPORATION AND AFFILIATES AND SUBSIDIARIES
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
(12) SUMMARY FINANCIAL INFORMATION FOR SUBSIDIARY GUARANTORS
The 1994 Notes are fully, unconditionally and jointly and severally
guaranteed by all subsidiaries of Dish, Ltd., except FlexTracker and certain DE
MINIMIS domestic and foreign subsidiaries. Summarized financial information for
Dish, Ltd. and the subsidiary guarantors is as follows (in thousands):
YEAR ENDED DECEMBER 31,
-------------------------------------
1993 1994 1995
----------- ----------- -----------
Income Statement Data --
Revenue.............................................. $ 217,360 $ 187,044 $ 163,228
Expenses............................................. 199,398 174,164 171,646
----------- ----------- -----------
Operating income (loss).............................. 17,962 12,880 (8,418)
Other income (expense)............................... 543 (12,707) (9,911)
----------- ----------- -----------
Net income (loss) before income taxes................ 18,505 173 (18,329)
(Provision) benefit for income taxes................. 1,384 (433) 6,182
----------- ----------- -----------
Net income (loss)................................ $ 19,889 $ (260) $ (12,147)
----------- ----------- -----------
----------- ----------- -----------
DECEMBER 31, DECEMBER 31,
1994 1995
------------ ------------
Balance Sheet Data --
Current assets................................................. $ 80,914 $ 81,959
Property and equipment, net.................................... 151,211 333,160
Other noncurrent assets........................................ 239,560 143,866
------------ ------------
Total assets............................................... $ 471,685 $ 558,985
------------ ------------
------------ ------------
Current liabilities............................................ $ 28,094 $ 50,710
Long-term liabilities.......................................... 340,014 415,662
Stockholders' equity........................................... 103,577 92,613
------------ ------------
Total liabilities and stockholders' equity................. $ 471,685 $ 558,985
------------ ------------
------------ ------------
Upon consummation of the merger with DirectSat, DirectSat became, by virtue
of the merger, a guarantor of the 1994 Notes on a full, unconditional and joint
and several basis, in addition to the guarantees of the previous subsidiaries.
F-28
ECHOSTAR COMMUNICATIONS CORPORATION AND AFFILIATES AND SUBSIDIARIES
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
(13) OPERATIONS IN GEOGRAPHIC AREAS
The Company sells its products on a worldwide basis and has established
operations in Europe and the Pacific Rim. Information about the Company's
operations in different geographic areas as of December 31, 1993, 1994 and 1995
and for the years then ended, were as follows (in thousands):
UNITED OTHER
1993 STATES EUROPE INTERNATIONAL TOTAL
- -------------------------------------------------------------- ----------- --------- ------------ -----------
Total revenue................................................. $ 175,453 $ 25,825 $ 19,663 $ 220,941
----------- --------- ------------ -----------
----------- --------- ------------ -----------
Export sales.................................................. $ 8,005
-----------
-----------
Operating income.............................................. $ 16,551 $ 96 $ 1,557 $ 18,204
----------- --------- ------------
----------- --------- ------------
Other income (expense), net................................... 530
-----------
Net income before income taxes................................ $ 18,734
-----------
-----------
Identifiable assets........................................... $ 84,656 $ 7,272 $ 10,478 $ 102,406
----------- --------- ------------
----------- --------- ------------
Corporate assets.............................................. 4,070
-----------
Total assets.................................................. $ 106,476
-----------
-----------
1994
- --------------------------------------------------------------
Total revenue................................................. $ 137,233 $ 24,072 $ 29,678 $ 190,983
----------- --------- ------------ -----------
----------- --------- ------------ -----------
Export sales.................................................. $ 7,188
-----------
-----------
Operating income.............................................. $ 10,811 $ 1,244 $ 1,161 $ 13,216
----------- --------- ------------
----------- --------- ------------
Other income (expense), net................................... (12,727)
-----------
Net income before income taxes................................ $ 489
-----------
-----------
Identifiable assets........................................... $ 77,172 $ 6,397 $ 2,359 $ 85,928
----------- --------- ------------
----------- --------- ------------
Corporate assets.............................................. 386,564
-----------
Total assets.................................................. $ 472,492
-----------
-----------
1995
- --------------------------------------------------------------
Total revenue................................................. $ 110,629 $ 31,351 $ 21,910 $ 163,890
----------- --------- ------------ -----------
----------- --------- ------------ -----------
Export sales.................................................. $ 6,317
-----------
-----------
Operating income (loss)....................................... $ (7,860) $ 146 $ (257) $ (7,971)
----------- --------- ------------
----------- --------- ------------
Other income (expense), net................................... (9,260)
-----------
Net income before income taxes................................ $ (17,231)
-----------
-----------
Identifiable assets........................................... $ 63,136 $ 10,088 $ 3,788 $ 77,012
----------- --------- ------------
----------- --------- ------------
Corporate assets.............................................. 546,079
-----------
Total assets.................................................. $ 623,091
-----------
-----------
F-29
ECHOSTAR COMMUNICATIONS CORPORATION AND AFFILIATES AND SUBSIDIARIES
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
(14) VALUATION AND QUALIFYING ACCOUNTS
The Company's valuation and qualifying accounts as of December 31, 1993,
1994 and 1995 are as follows (in thousands):
ADDITIONS
------------------------
BALANCE AT CHARGED TO CHARGED TO
BEGINNING OF COSTS AND OTHER BALANCE AT
YEAR EXPENSES ACCOUNTS DEDUCTIONS END OF YEAR
------------- ----------- ----------- ----------- -----------
Year ended December 31, 1993:
Assets:
Allowance for doubtful accounts.............. $ 92 $ 305 $ -- $ (51) $ 346
Loan loss reserve............................ 25 52 29 (56) 50
Reserve for inventory........................ 1,425 136 -- (158) 1,403
Liabilities:
Reserve for warranty costs................... 1,600 326 -- (576) 1,350
Other reserves............................... 110 -- -- (17) 93
Year ended December 31, 1994:
Assets:
Allowance for doubtful accounts.............. $ 346 $ 8 $ -- $ (168) $ 186
Loan loss reserve............................ 50 75 -- (30) 95
Reserve for inventory........................ 1,403 329 -- (147) 1,585
Liabilities:
Reserve for warranty costs................... 1,350 508 -- (458) 1,400
Other reserves............................... 93 -- -- -- 93
Year ended December 31, 1995:
Assets:
Allowance for doubtful accounts.............. $ 186 $ 1,160 $ -- $ (240) $ 1,106
Loan loss reserve............................ 95 19 -- (36) 78
Reserve for inventory........................ 1,585 1,511 -- (299) 2,797
Liabilities:
Reserve for warranty costs................... 1,400 562 -- (949) 1,013
Other reserves............................... 93 -- -- (1) 92
(15) QUARTERLY FINANCIAL DATA (UNAUDITED)
The Company's quarterly results of operations are summarized as follows (in
thousands):
QUARTER ENDED
---------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1994 1994 1994 1994
----------- --------- ------------- ------------
Total revenue..................................... $ 46,993 $ 42,748 $ 48,958 $ 52,284
Operating income.................................. 4,359 2,573 3,481 2,803
Net income (loss)................................. 2,893 678 (1,619) (1,862)
F-30
ECHOSTAR COMMUNICATIONS CORPORATION AND AFFILIATES AND SUBSIDIARIES
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
(15) QUARTERLY FINANCIAL DATA (UNAUDITED) (CONTINUED)
QUARTER ENDED
---------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1995 1995 1995 1995
----------- --------- ------------- ------------
Total revenue............................................... $ 40,413 $ 39,252 $ 43,606 $ 40,619
Operating (loss) income..................................... (698) 768 341 (8,382)
Net loss.................................................... (2,240) (1,787) (360) (7,099)
In the fourth quarter of 1995 the Company incurred operating and net losses
principally as a result of expenses incurred related to development of the
EchoStar DBS System and lower sales volumes at reduced gross margins. The
Company also increased reserves related to inventory and trade accounts
receivable in the fourth quarter of 1995.
(16) PARENT ONLY FINANCIAL INFORMATION
The following financial information reflects the condensed parent only
balance sheets, statements of income and cash flows for ECC, reflecting the
assumed consummation of the Exchange and Merger retroactive to January 1, 1993.
The Exchange and Merger described in Note 1 was accounted for as a
reorganization of entities under common control.
YEAR ENDED DECEMBER 31,
--------------------------------
1993 1994 1995
--------- --------- ----------
(IN THOUSANDS, EXCEPT SHARES AND
PER SHARE DATA)
Income Statement Data--
Equity in earnings (losses) of subsidiaries................................. $ 20,118 $ 90 $ (12,361)
Other income................................................................ -- -- 1,321
--------- --------- ----------
Net income (loss) before income taxes....................................... 20,118 90 (11,040)
Provision for income taxes.................................................. -- -- (446)
--------- --------- ----------
Net income (loss)......................................................... $ 20,118 $ 90 $ (11,486)
--------- --------- ----------
--------- --------- ----------
Loss Attributable to Common Shares............................................ $ (848) $ (12,691)
--------- ----------
--------- ----------
Weighted Average Common Shares Outstanding.................................... 32,442 35,562
--------- ----------
--------- ----------
Loss Per Common and Common Equivalent Share................................... $ (0.03) $ (0.36)
--------- ----------
--------- ----------
Pro Forma (Unaudited) Net Income and Earnings
Per Common Share (Note 7)
Historical net income before income taxes................................. $ 20,118
Pro forma income tax effects.............................................. (7,846)
---------
Pro forma net income...................................................... $ 12,272
---------
---------
Pro forma common shares outstanding....................................... 32,221
---------
---------
Pro forma earnings per common share....................................... $ 0.38
---------
---------
F-31
ECHOSTAR COMMUNICATIONS CORPORATION AND AFFILIATES AND SUBSIDIARIES
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
(16) PARENT ONLY FINANCIAL INFORMATION (CONTINUED)
DECEMBER 31,
------------------------
1994 1995
----------- -----------
(IN THOUSANDS)
Balance Sheet Data--
Current assets:
Cash and cash equivalents............................................................. $ -- $ 7,802
Marketable investment securities...................................................... -- 15,460
Advances to affiliates................................................................ -- 19,545
Other current assets.................................................................. -- 191
----------- -----------
Total current assets................................................................ -- 42,998
----------- -----------
Investments in subsidiaries:
Restricted (Note 12).................................................................. 103,577 92,613
Unrestricted.......................................................................... 231 280
----------- -----------
103,808 92,893
Other noncurrent assets................................................................. -- 21,111
----------- -----------
Total assets........................................................................ $ 103,808 $ 157,002
----------- -----------
----------- -----------
Current liabilities..................................................................... $ -- $ 316
Stockholders' Equity:
Preferred Stock, 20,000,000 shares authorized, 1,616,681 shares of Series A Cumulative
Preferred Stock issued and outstanding, including accrued dividends of $938,000 and
$2,143,000, respectively............................................................. 15,990 17,195
Class A Common Stock, $.01 par value, 200,000,000 shares authorized, 3,739,400 and
10,535,003 shares issued and outstanding, respectively............................... 38 105
Class B Common Stock, $.01 par value, 100,000,000 shares authorized, 29,804,401,
shares issued and outstanding........................................................ 298 298
Class C Common Stock, $.01 par value, 100,000,000 shares authorized, none
outstanding.......................................................................... -- --
Common Stock Purchase Warrants........................................................ 26,133 714
Additional paid-in capital............................................................ 62,197 151,674
Unrealized holding gain on available-for-sale securities, net......................... -- 239
Retained earnings (deficit)........................................................... (848) (13,539)
----------- -----------
Total stockholders' equity.......................................................... 103,808 156,686
----------- -----------
Total liabilities and stockholders' equity.......................................... $ 103,808 $ 157,002
----------- -----------
----------- -----------
F-32
ECHOSTAR COMMUNICATIONS CORPORATION AND AFFILIATES AND SUBSIDIARIES
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
(16) PARENT ONLY FINANCIAL INFORMATION (CONTINUED)
YEAR ENDED DECEMBER 31,
---------------------------------
1993 1994 1995
---------- --------- ----------
Cash Flows Data--
Cash flows from operating activities:
Net income (loss).............................................................. $ 20,118 $ 90 $ (11,486)
Adjustments--
Equity in (earnings) losses of subsidiaries.................................. (20,118) (90) 12,361
Changes in--
Other current assets....................................................... -- -- (191)
Current liabilities........................................................ -- -- 316
---------- --- ----------
Net cash flows from operating activities................................. -- -- 1,000
---------- --- ----------
Cash flows from investing activities:
Advances to affiliates....................................................... -- -- (19,545)
Purchases of marketable investment securities, net........................... -- -- (15,475)
Increase in noncurrent assets................................................ -- -- (21,111)
---------- --- ----------
Net cash flows from investing activities................................... -- -- (56,131)
---------- --- ----------
Cash flows from financing activities:
Net proceeds from issuance of Class A Common Stock........................... -- -- 62,933
---------- --- ----------
NET INCREASE IN CASH AND CASH EQUIVALENTS........................................ -- -- 7,802
CASH AND CASH EQUIVALENTS, beginning of period................................... -- -- --
---------- --- ----------
CASH AND CASH EQUIVALENTS, end of period......................................... $ -- $ -- $ 7,802
---------- --- ----------
---------- --- ----------
F-33
ECHOSTAR COMMUNICATIONS CORPORATION AND AFFILIATES AND SUBSIDIARIES
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
(17) SUBSEQUENT EVENTS
In March 1996, ECC announced that its wholly owned subsidiary, EchoStar
Satellite Broadcasting Corporation ("ESB"), is considering a private offering
(the "Offering") pursuant to Rule 144A under the Securities Act of 1933 of
Senior Secured Discount Notes due 2004 (the "Senior Secured Notes") expected to
provide net proceeds to ESB of $250.0 million. ESB was formed on January 24,
1996 for the purpose of the Offering. ECC will contribute all of the outstanding
capital stock of its wholly owned subsidiary, Dish, Ltd., to ESB.
EchoStar DBS Corporation ("EDC") was formed under Colorado law in January
1996 for purposes of participating in a Federal Communications Commission
auction ("FCC Auction") held on January 24 through January 26, 1996. EDC was
required to post a $10.0 million deposit to participate in the FCC Auction for
28 DBS frequencies at 110 DEG. WL and post a $2.0 million deposit to participate
in the FCC Auction for 24 DBS frequencies at 148 DEG. WL. EDC is a wholly owned
subsidiary of ECC.
On January 26, 1996, EDC submitted the winning bid of $52.3 million dollars
for 24 DBS frequencies at 148 DEG. WL. Previous deposits made with the FCC were
applied to satisfy the 20% down payment. The balance of the bid price must be
remitted to the FCC upon grant of the construction permit, which could occur as
early as April 1996.
Funds necessary to pay the balance of the purchase price are expected to be
provided by ECC from the proceeds of the Senior Secured Notes.
F-34
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors
Direct Broadcasting Satellite Corporation
Washington, D.C.
We have audited the accompanying balance sheets of Direct Broadcasting
Satellite Corporation, a development stage company, as of March 31, 1995, and
December 31, 1995, and the related statements of income and cash flows for each
of the two years ended March 31, 1995 and the nine months ended December 31,
1995 and the statements of stockholders' equity for each of the five years ended
March 31, 1995 and the nine months ended December 31, 1995. See Note 2. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Direct Broadcasting
Satellite Corporation, as of March 31, 1995 and December 31, 1995, and the
results of its operations and its cash flows for the two years in the period
ended March 31, 1995 and the nine months ended December 31, 1995, in conformity
with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Corporation will continue as a going concern. The Corporation's recurring
operating losses raise substantial doubt about its ability to continue as a
going concern at December 31, 1995. Management's plans in regard to these
matters are described in Note 1 of the notes to financial statements. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
REGARDIE, BROOKS & LEWIS, CHARTERED
CERTIFIED PUBLIC ACCOUNTANTS
Bethesda, Maryland,
January 23, 1996.
F-35
DIRECT BROADCASTING SATELLITE CORPORATION
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
ASSETS
MARCH 31, DECEMBER 31,
1995 1995
---------- ------------
CURRENT ASSETS:
Cash...................................................... $ 119,892 $ 72,950
Money Market Funds --
Crestfunds, Inc. -- Cash Reserves Fund.................. 2,131,988 285,978
Pacific Horizon Prime Fund.............................. -- 7,081
---------- ------------
Total current assets................................ 2,251,880 366,009
---------- ------------
PROPERTY AND EQUIPMENT, AT COST:
Satellite development in process (Note 4)................. 372,625 17,882,707
Computer equipment........................................ 5,073 5,073
Less:
Accumulated depreciation................................ (1,725) (2,730)
---------- ------------
Cost less accumulated depreciation...................... 375,973 17,885,050
---------- ------------
OTHER ASSETS:
FCC license (Note 3)...................................... 687,136 865,571
Unamortized loan costs.................................... -- 67,058
Deferred tax benefit (Note 7)............................. -- --
Security deposits......................................... 2,575 2,575
---------- ------------
Total other assets...................................... 689,711 935,204
---------- ------------
Total assets.......................................... $3,317,564 $ 19,186,263
---------- ------------
---------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.......................................... $ 79,589 $ 140,958
Unsecured notes payable (Note 6A)......................... -- 500,000
Accrued interest.......................................... -- 237,226
Unsecured note payable (Note 6B) (in arrears)............. 350,000 325,000
Accrued interest in arrears (Note 6)...................... 340,537 341,074
Due to shareholder........................................ 7,380 3,024
---------- ------------
Total current liabilities............................... 777,506 1,547,282
---------- ------------
LONG-TERM DEBT:
Secured note payable (Note 5)............................. -- 16,000,000
Unsecured notes payable (Note 6A)......................... 500,000 --
Accrued interest (Notes 5 & 6)............................ 199,680 10,082
---------- ------------
Total long-term debt.................................... 699,680 16,010,082
---------- ------------
Total liabilities..................................... 1,477,186 17,557,364
---------- ------------
COMMITMENTS (Note 4)
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value, 3,000,000 shares authorized;
shares issued and outstanding, 1,618,138 and 1,620,138,
respectively............................................. 16,181 16,201
Additional paid in capital................................ 5,833,066 5,849,046
Accumulated deficit (Note 1).............................. (2,755,808) (2,755,808)
Accumulated deficit during development stage.............. (1,253,061) (1,480,540)
---------- ------------
Total stockholders' equity.............................. 1,840,378 1,628,899
---------- ------------
Total liabilities and stockholders' equity................ $3,317,564 $ 19,186,263
---------- ------------
---------- ------------
See the accompanying report of independent public accountants.
The accompanying notes are an integral part of these financial statements.
F-36
DIRECT BROADCASTING SATELLITE CORPORATION
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF INCOME
YEARS ENDED MARCH 31
---------------------
1994 1995
--------- ---------- NINE MONTHS ENDED APRIL 1, 1990
DECEMBER 31, 1995 (INCEPTION) TO
----------------- DECEMBER 31, 1995
(NOTE 2) -----------------
(NOTE 1)
REVENUE:
Gain on settlement of indebtedness........................ $ -- $ -- $ 31,656 $ 31,656
Investment income......................................... -- 31,988 56,071 88,059
--------- ---------- ----------------- -----------------
Total revenue............................................... -- 31,988 87,727 119,715
--------- ---------- ----------------- -----------------
OPERATING EXPENSES:
Interest expense.......................................... 131,103 85,031 59,739 612,256
Legal fees................................................ 12,769 151,972 23,251 385,892
Consulting fees........................................... 36,370 148,303 167,654 417,327
Professional services..................................... 1,800 16,210 6,566 34,021
Rent...................................................... 2,206 19,369 24,975 46,550
Taxes and licenses........................................ 3,722 520 455 7,034
Other administrative expenses............................. 13,440 32,765 31,561 94,445
Depreciation.............................................. 154 1,571 1,005 2,730
--------- ---------- ----------------- -----------------
Total operating expenses................................ 201,564 455,741 315,206 1,600,255
--------- ---------- ----------------- -----------------
NET LOSS BEFORE INCOME TAXES................................ (201,564) (423,753) (227,479) (1,480,540)
--------- ---------- ----------------- -----------------
PROVISION FOR INCOME TAXES (Note 7)......................... -- -- -- --
--------- ---------- ----------------- -----------------
NET LOSS.................................................... $(201,564) $ (423,753) $ (227,479) $(1,480,540)
--------- ---------- ----------------- -----------------
--------- ---------- ----------------- -----------------
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING.................. 901,555 1,272,701 1,618,583 1,024,845
--------- ---------- ----------------- -----------------
LOSS PER COMMON SHARE....................................... $ (0.23) $ (0.33) $ (0.14) $ (1.44)
--------- ---------- ----------------- -----------------
--------- ---------- ----------------- -----------------
See the accompanying report of independent public accountants.
The accompanying notes are an integral part of these financial statements.
F-37
DIRECT BROADCASTING SATELLITE CORPORATION
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE FIVE YEARS ENDED MARCH 31, 1995
AND THE NINE MONTH PERIOD ENDED DECEMBER 31, 1995
ACCUMULATED
DEFICIT
COMMON STOCK ADDITIONAL DURING TOTAL
--------------------- PAID IN ACCUMULATED DEVELOPMENT STOCKHOLDERS'
SHARES PAR VALUE CAPITAL DEFICIT STAGE EQUITY
--------- ---------- ----------- ------------ ------------- ------------
(NOTE 1)
Balance at March 31, 1990................... 709,888 $ 7,099 $ 1,127,742 $(2,755,808) $ -- $(1,620,967)
Issuance of common stock -- October 15,
1990 at $0.01 per share.................. 150,000 1,500 (1,500) -- -- --
Net loss for the period April 1, 1990
through March 31, 1991................... -- -- -- -- (384,427) (384,427)
--------- ---------- ----------- ------------ ------------- ------------
Balance at March 31, 1991................... 859,888 8,599 1,126,242 (2,755,808) (384,427) (2,005,394)
--------- ---------- ----------- ------------ ------------- ------------
Net loss for the period April 1, 1991
through March 31, 1992................... -- -- -- -- (125,826) (125,826)
--------- ---------- ----------- ------------ ------------- ------------
Balance at March 31, 1992................... 859,888 8,599 1,126,242 (2,755,808) (510,253) (2,131,220)
--------- ---------- ----------- ------------ ------------- ------------
Net loss for the period April 1, 1992
through March 31, 1993................... -- -- -- -- (117,491) (117,491)
--------- ---------- ----------- ------------ ------------- ------------
Balance at March 31, 1993................... 859,888 8,599 1,126,242 (2,755,808) (627,744) (2,248,711)
--------- ---------- ----------- ------------ ------------- ------------
Issuance of common stock -- December 21,
1993 at $2.00 per share.................. 125,000 1,250 248,750 -- -- 250,000
Net loss for the period April 1, 1993
through March 31, 1994................... -- -- -- -- (201,564) (201,564)
--------- ---------- ----------- ------------ ------------- ------------
Balance at March 31, 1994................... 984,888 9,849 1,374,992 (2,755,808) (829,308) (2,200,275)
--------- ---------- ----------- ------------ ------------- ------------
Issuance of common stock --
April 12, 1994 at $3.00 per share......... 25,000 250 74,750 -- -- 75,000
June 13, 1994 at $4.00 per share............ 18,750 187 74,813 -- -- 75,000
August 5, 1994 at $4.00 per share......... 6,250 63 24,937 -- -- 25,000
November 15, 1994 at $7.14 per share,
net...................................... 583,250 5,832 4,283,574 -- -- 4,289,406
Net loss for the period April 1, 1994
through March 31, 1995................... -- -- -- -- (423,753) (423,753)
--------- ---------- ----------- ------------ -------------
Balance at March 31, 1995................... 1,618,138 16,181 5,833,066 (2,755,808) (1,253,061) 1,840,378
--------- ---------- ----------- ------------ ------------- ------------
Issuance of Common Stock -- November 16,
1995 at $8.00 per share.................. 2,000 20 15,980 -- -- 16,000
Net loss for the period April 1, 1995
through December 31, 1995.................. -- -- -- -- (227,479) (227,479)
--------- ---------- ----------- ------------ ------------- ------------
Balance at December 31, 1995................ 1,620,138 $ 16,201 $ 5,849,046 $(2,755,808) $(1,480,540) $1,628,899
--------- ---------- ----------- ------------ ------------- ------------
--------- ---------- ----------- ------------ ------------- ------------
See the accompanying report of independent public accountants.
The accompanying notes are an integral part of these financial statements.
F-38
DIRECT BROADCASTING SATELLITE CORPORATION
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31, 1994 AND 1995,
AND THE NINE MONTH PERIOD ENDED DECEMBER 31, 1995
APRIL 1, 1990
NINE MONTHS (INCEPTION)
ENDED TO
DECEMBER 31, DECEMBER 31,
YEARS ENDED MARCH 31, 1995 1995
----------------------- ------------- -------------
1994 1995 (NOTE 2) (NOTE 1)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss......................................... $ (201,564) $ (423,753) $ (227,479) $ (1,480,540)
Adjustments to reconcile net loss to net cash
applied to operating activities:
Depreciation................................... 154 1,571 1,005 2,730
Gain on settlement of indebtedness............. -- -- (31,656) (31,656)
Noncash consulting fees........................ -- -- 16,000 16,000
(Decrease) increase in accounts payable........ (51,331) 5,416 3,268 (49,074)
Increase in accrued interest payable........... 131,103 64,311 59,739 589,297
Increase (decrease) due to shareholders........ 1,667 4,378 (4,356) (5,230)
---------- ----------- ------------- -------------
Net cash applied to operating activities..... (119,971) (348,077) (183,479) (958,473)
---------- ----------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of furniture and equipment......... (3,089) (1,984) -- (5,073)
Increase in satellite development costs........ (63,500) (41,750) (17,517,375) (17,872,625)
Increase in FCC license........................ (106,097) (371,630) (170,017) (665,244)
---------- ----------- ------------- -------------
Net cash used in investing activities...... (172,686) (415,364) (17,687,392) (18,542,942)
---------- ----------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in secured notes payable.............. -- -- 16,000,000 16,000,000
Issuance of common stock....................... 250,000 3,134,999 -- 3,384,999
Increase notes payable......................... 76,250 -- -- 652,500
Increase in contract payable................... -- -- -- 62,500
Payment of contract payable.................... -- -- -- (62,500)
Payment of note payable........................ -- (152,500) (15,000) (167,500)
Increase in security deposit................... (1,463) (1,112) -- (2,575)
---------- ----------- ------------- -------------
Net cash provided by financing activities.. 324,787 2,981,387 15,985,000 19,867,424
---------- ----------- ------------- -------------
NET INCREASE (DECREASE) IN CASH.................. 32,130 2,217,946 (1,885,871) 366,009
CASH AT BEGINNING OF YEAR........................ 1,804 33,934 2,251,880 --
---------- ----------- ------------- -------------
CASH AT END OF YEAR.............................. $ 33,934 $ 2,251,880 $ 366,009 $ 366,009
---------- ----------- ------------- -------------
---------- ----------- ------------- -------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for interest..... $ -- $ 20,719 $ -- $ 22,958
---------- ----------- ------------- -------------
---------- ----------- ------------- -------------
SUPPLEMENTAL SCHEDULE OF NONCASH AND FINANCING
ACTIVITIES:
Additional common stock was issued upon the
conversion of notes payable in the amount
of $700,000, plus related accrued interest
totaling.................................. $ -- $ 1,329,406 $ -- $ 1,329,406
Additional common stock was issued in
exchange for consulting services.......... -- -- 16,000 16,000
Disclosure of accounting policy:
For the purposes of the statement of cash flows, the Company considers money
market funds to be cash equivalents.
See the accompanying report of independent public accountants.
The accompanying notes are an integral part of these financial statements.
F-39
DIRECT BROADCASTING SATELLITE CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1995 AND DECEMBER 31, 1995
(1) ORGANIZATION
Direct Broadcasting Satellite Corporation (the "Company" or "DBSC"), a
development stage company, was incorporated January 23, 1981 in the state of
Delaware. It is constructing satellites, and plans to operate a direct-to-home,
multi-channel satellite broadcast television service. Funding of the Company's
operations has been obtained through the private placement of common stock and
issuance of convertible debt, demand notes and accounts payable.
On December 21, 1995, the Company and EchoStar Communications Corporation
("EchoStar"), a 39.8% shareholder, agreed to a merger, subject to receipt of
requisite government approval. EchoStar holds direct broadcasting satellite
authorizations for 21 channels at 119the Company and EchoStar agreed to merge
DBSC into a wholly-owned subsidiary of EchoStar, and (2) the Company's
shareholders will be entitled to receive at their option $7.99 in cash or .67417
EchoStar shares for each of the Company's 975,148 shares not already owned by
EchoStar.
EchoStar also agreed, at its sole discretion, to loan the Company up to
$150,000,000 for expenses associated with the construction, launch, and
insurance of the Company's spacecraft. On December 29, 1995, the Company drew
down $16 million under its loan purchase agreement with EchoStar and paid
Lockheed Martin Corporation $16 million on the same day.
Without the EchoStar or other financing, the Company's ability to meet its
existing obligations and proceed with the construction of the satellite is
doubtful. In such case, the ultimate realization of the capitalized FCC license
application costs, as well as the deferred satellite development costs, are
doubtful, and the continuance of the Company as an operating entity would be
uncertain.
The Company's development activities were dormant for a period of years
ended March 31, 1990. During the year ended March 31, 1991, the Company began
development of two new satellites. In accordance with SFAS No. 7, development
stage activities for presentation purposes on the statements of income and
statements of stockholders' equity are for the period April 1, 1990 to December
31, 1995. Prior development stage activity losses amounting to $2,755,808 are
reflected in stockholders' equity as accumulated deficit.
(2) SIGNIFICANT ACCOUNTING POLICIES
Effective April 1, 1995, the Company changed its fiscal year to December 31
from March 31. All balances for the nine months ended December 31, 1995 include
activity from April 1, 1995 to December 31, 1995.
Loan costs will be amortized over the 8-year life of the $16 million secured
note, effective January 1, 1996.
Management uses estimates and assumptions in preparing financial statements.
Those estimates and assumptions affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities, and the
reported revenues and expenses. Actual results could differ from those
estimates.
(3) FCC LICENSE
The Company's application for authority to construct and operate a direct
broadcast satellite system was approved by the Federal Communications Commission
("FCC") and a conditional construction permit for two spacecraft was released on
August 15, 1989. On November 10, 1993, the FCC found that the Company had
complied with the necessary due diligence requirements and assigned specific
orbit/spectrum resources to the Company. On December 8, 1995, the FCC staff
granted the
F-40
DIRECT BROADCASTING SATELLITE CORPORATION
(A DEVELOPMENT STAGE COMPANY)
(3) FCC LICENSE (CONTINUED)
Company an extension of time through November 1998, to construct and launch two
spacecrafts. Pursuant to a FCC request, on January 31, 1994 the Company
submitted certain technical data to the FCC and asked for launch authority.
On June 30, 1995, the Company notified the FCC that it had signed a
spacecraft contract modification and sought approval thereof. The FCC has not
yet acted on either request. Certain costs incurred in connection with filing
the FCC license application and maintaining the authority have been capitalized.
Amortization periods for these costs will be determined at the time the services
related to the applicable FCC license commences, or capitalized costs will be
written off at the time efforts to provide services are abandoned. FCC licenses
are expected to have a useful life of approximately 12 years.
(4) SATELLITE DEVELOPMENT COSTS
The Company has entered into a contract for the construction of two
satellites. The contract, as amended May 31, 1995, provides for periodic,
non-refundable payments over a period extending to October 30, 2003, as well as
cancellation penalties if the contract is terminated before the satellites are
launched. As of December 31, 1995, payments made under the terms of the contract
totaled $17,838,500. The contract calls for additional payments of $30,000,000
in the year ending December 31, 1996. The total commitment under the contract is
in excess of $160 million.
At December 31, 1995, total satellite development costs amounted to
$17,882,707, including capitalized interest of $10,082.
During construction and prior to launch, the Company has granted to the
Contractor a full security interest in all hardware, software and work in
process (collectively "Security") related to the two satellites. In the event of
certain defaults by the Company, the Contractor shall immediately assume
ownership of the entire Security.
(5) SECURED NOTE PAYABLE
On December 29, 1995, the Company borrowed $16,000,000, per the terms of a
note purchase agreement and a security agreement between EchoStar and the
Company. The promissory note is secured by an assignment, pledge and grant of
security interest in all the estate, right, title, and interest of the Company,
whether now owned or hereafter acquired, in, to and under (1) the Satellites and
DBS Rights, (2) all agreements, contracts and documents related to the
Satellites, DBS Rights, and business of the Company, (3) all income and revenues
from all business operations, and (4) all tangible and/or intangible property of
the Company, including the Satellites. However, the security in the Satellites
is subordinate to the security interest in and to the Satellites held by Martin
Marietta.
Interest accrues at Chase Manhattan Bank prime rate plus 3 percent as of the
date of the loan. Principal and interest is payable in equal installments
beginning on December 29, 1997, and ending on December 29, 2003. The December
29, 1997 installment related to the $16,000,000 loan will be approximately
$3,713,300, including interest at 11.5%.
(6) UNSECURED NOTES PAYABLE
A. UNSECURED NOTE PAYABLE
Note payable in the amount of $500,000 is payable 90 days after the
successful launch and check-out of the Company's first Direct Broadcast
Satellite-Broadcast Satellite System, or on demand in certain other limited
circumstances. Interest is payable at Chase Manhattan Bank prime rate plus 1%
per annum or 4% after maturity, or in the event of default. At December 31,
1995, the note payable and
F-41
DIRECT BROADCASTING SATELLITE CORPORATION
(A DEVELOPMENT STAGE COMPANY)
(6) UNSECURED NOTES PAYABLE (CONTINUED)
the related accrued interest were payable on demand. At March 31, 1995, both the
principal and interest were classified as long-term debt since the launching of
the satellite was not within one year of the balance sheet date.
B. CONVERTIBLE NOTES PAYABLE
Convertible notes payable at December 31, 1995 amounted to $325,000, and at
March 31, 1995 amounted to $350,000. At December 31, 1995, notes totalling
$100,000 accrue interest at 75% of Chase Manhattan Bank prime rate, and notes
totalling $225,000 accrue interest at 100% of the prime rate.
Until November 15, 1994, notes totalling $475,000 accrue interest at 75% of
Chase Manhattan Bank prime rate, and notes totalling $500,000 accrue interest at
100% of the prime rate. The notes were issued on various dates from October 1,
1982 to March 6, 1984 and were due 24 months from date of issue. Interest
payments have not been made over the years. However, interest has been accrued
and is reflected in the accompanying financial statements. Both the principal
and interest are classified as currently payable since the notes are in arrears.
The notes provide that until they are paid in full, a note holder at his
option may convert principal into shares of the authorized common stock of the
Company as follows: $100,000 of principal at $6.67 per share, and $225,000 of
principal at $8.33 per share. On November 15, 1994, certain notes were converted
to common stock.
(7) INCOME TAXES
Effective April 1, 1992, the Company adopted SFAS No. 109, "Accounting for
Income Taxes", which requires an asset and liability approach to financial
accounting and reporting for income taxes. The difference between the financial
statement and tax bases of assets and liabilities are computed for those
differences that have future tax consequences using the currently enacted tax
laws and rates that apply to the periods in which they are expected to affect
taxable income. Valuation allowances are established, if necessary, to reduce
the deferred tax asset to the amount that will more likely than not be realized.
Income tax expense is the current tax payable or refundable for the period, plus
or minus the net change in the deferred tax assets and liabilities.
The adoption of SFAS No. 109 did not have an effect on the Company's
financial statements because the deferred income tax benefit has been offset by
a valuation allowance of equal amount. The valuation allowance was established
to reduce the deferred tax benefit to the amount that will more likely than not
be realized. This reduction is necessary due to the uncertainty of the Company's
ability to utilize all of the future tax deduction resulting from net operating
losses.
The gross deferred income tax benefit was approximately $849,382 at December
31, 1995, and $781,002 at March 31, 1995.
The deferred income tax benefit results primarily from net operating losses
for tax purposes. The net operating loss carryover to future years is $2,202,393
at December 31, 1995, none of which will expire until the year 1999. In
addition, the Company has not claimed as a tax deduction accrued interest
payable of $578,300. For income tax purposes, the Company reports its net income
(loss) on the cash basis.
(8) CONTINGENT LIABILITIES
In 1982, the Company entered into agreements with two French corporations
pursuant to which each corporation, in exchange for the Company's commitment to
procure satellite hardware, paid to a satellite launch provider, for the benefit
of the Company, a launch reservation fee of $100,000. The first agreement, as
amended, specified that payment of the $100,000 plus interest of 13% per annum
F-42
DIRECT BROADCASTING SATELLITE CORPORATION
(A DEVELOPMENT STAGE COMPANY)
(8) CONTINGENT LIABILITIES (CONTINUED)
was due on December 31, 1983. The second agreement provided that the Company was
obligated to issue 6,000 (as adjusted) shares of common stock no later than two
years from the date of the agreement.
No equipment was procured from either corporation, no shares of common stock
have been issued nor has the Company returned the $100,000 payment to either
corporation. The Company has not determined whether either obligation is
currently enforceable under French law. The Company is unaware of any request
for payment or for the issuance of the Company's shares from August 3, 1987 to
date.
(9) STOCKHOLDERS' EQUITY
In November 1994, the Company resolved a suit brought by EchoStar against
the Company regarding enforceability of certain notes and accounts payable of
the Company. Pursuant to the settlement, the payables were exchanged for shares
of the Company's common stock and EchoStar purchased additional shares of the
Company for $2,960,000 so that, together with the shares of DBSC previously
acquired, EchoStar presently owns approximately 40% of the outstanding common
stock of DBSC. As part of this settlement the Company issued an option to sell
at a fixed price of $2,000,000 the greater of 11.3% of its issued and
outstanding common stock at the date of exercise, or 333,333 shares of common
stock, and an Optional Merger Election, whereby the Company or the Purchaser's
wholly owned subsidiary can elect to merge with each other provided certain
conditions precedent have been met. On December 21, 1995, the Company and
EchoStar entered into a Merger Agreement. See Note 1.
Legal fees expense has been charged $125,000 for costs incurred in
connection with the above transaction.
(10) RELATED PARTY TRANSACTIONS
Consulting fees are paid to certain shareholders and officers.
F-43
SUPPLEMENTAL QUARTERLY FINANCIAL INFORMATION
(UNAUDITED)
AS OF AND FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1996
ECHOSTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
F-44
ECHOSTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
ASSETS
DECEMBER 31, SEPTEMBER 30,
1995 1996
------------ -------------
(UNAUDITED)
CURRENT ASSETS:
Cash and cash equivalents ............................................................. $ 21,754 $ 31,079
Marketable investment securities ...................................................... 15,670 42,122
Trade accounts receivable, net ........................................................ 9,179 18,958
Inventories, net ...................................................................... 38,769 44,246
Income tax receivable ................................................................. 3,554 6,527
Deferred tax assets ................................................................... 1,779 2,457
Subscriber acquisition costs, net ..................................................... -- 43,470
Other current assets .................................................................. 13,037 22,006
-------- ----------
Total current assets .............................................................. 103,742 210,865
RESTRICTED CASH AND MARKETABLE INVESTMENT SECURITIES:
Dish Notes escrow ..................................................................... 73,291 --
ESBC Notes escrow ..................................................................... -- 135,449
Other ................................................................................. 26,400 41,461
PROPERTY AND EQUIPMENT, net ............................................................. 354,000 555,243
OTHER NONCURRENT ASSETS ................................................................. 65,658 138,471
-------- ----------
Total assets ...................................................................... $623,091 $1,081,489
-------- ----------
-------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade accounts payable ................................................................ $ 19,063 $ 26,449
Deferred programming revenue - DISH Network-SM- ....................................... -- 63,008
Deferred programming revenue - C-band ................................................. 5,563 4,308
Accrued expenses and other current liabilities ........................................ 21,335 13,959
Notes payable and current portion of long-term debt ................................... 4,782 11,344
-------- ----------
Total current liabilities ......................................................... 50,743 119,068
LONG-TERM DEFERRED PROGRAMMING REVENUE - DISH Network-SM- ............................... -- 6,790
DISH NOTES, net ......................................................................... 382,218 422,777
ESBC NOTES, net ......................................................................... -- 372,570
LONG-TERM MORTGAGE DEBT AND NOTE PAYABLE, excluding current portion ..................... 33,444 53,842
OTHER LONG-TERM LIABILITIES ............................................................. -- 478
-------- ----------
Total liabilities ................................................................. 466,405 975,525
-------- ----------
COMMITMENTS AND CONTINGENCIES (Note 6)
STOCKHOLDERS' EQUITY:
Preferred Stock, 20,000,000 shares authorized, 1,616,681 shares of Series A
Cumulative Preferred Stock issued and outstanding, including accrued dividends of
$2,143,000 and $3,046,000, respectively ............................................. 17,195 18,098
Class A Common Stock, $.01 par value, 200,000,000 shares authorized, 10,535,003
and 10,996,621 shares issued and outstanding, respectively .......................... 105 110
Class B Common Stock, $.01 par value, 100,000,000 shares authorized, 29,804,401
shares issued and outstanding ....................................................... 298 298
Common Stock Purchase Warrants ........................................................ 714 16
Class C Common Stock, 100,000,000 shares authorized, none outstanding ................. -- --
Additional paid-in capital ............................................................ 151,674 154,142
Unrealized holding gains on available-for-sale securities, net of deferred taxes ...... 239 35
Retained earnings (deficit) ........................................................... (13,539) (66,735)
-------- ----------
Total stockholders' equity ........................................................ 156,686 105,964
-------- ----------
Total liabilities and stockholders' equity ........................................ $623,091 $1,081,489
-------- ----------
-------- ----------
The accompanying notes to consolidated financial
statements are an integral part of these balance sheets.
F-45
ECHOSTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- ---------------------
1995 1996 1995 1996
------- -------- -------- --------
REVENUE:
DTH products and technical services........... $39,373 $ 37,159 $110,515 $134,358
Programming - DISH Network-SM-................ -- 15,279 -- 21,325
Programming - C-band.......................... 3,791 2,885 11,479 9,528
Loan origination and participation income..... 442 1,715 1,277 6,818
------- -------- -------- --------
Total revenue............................. 43,606 57,038 123,271 172,029
------- -------- -------- --------
EXPENSES:
DTH products and technical services........... 30,803 35,254 87,619 125,532
Programming - DISH Network-SM-................ -- 6,108 -- 7,877
Programming - C-band.......................... 3,473 2,573 10,297 8,631
Selling, general and administrative........... 8,268 23,736 23,454 53,552
Depreciation and amortization................. 721 10,265 1,490 20,021
------- -------- -------- --------
Total expenses............................ 43,265 77,936 122,860 215,613
------- -------- -------- --------
OPERATING INCOME (LOSS)........................ 341 (20,898) 411 (43,584)
------- -------- -------- --------
OTHER INCOME (EXPENSE):
Interest income............................... 4,435 5,335 11,078 14,718
Interest expense, net of amounts capitalized.. (5,859) (19,996) (18,749) (53,180)
Other, net.................................... 208 91 168 (43)
------- -------- -------- --------
Total other income (expense).............. (1,216) (14,570) (7,503) (38,505)
------- -------- -------- --------
NET LOSS BEFORE INCOME TAXES................... (875) (35,468) (7,092) (82,089)
BENEFIT FOR INCOME TAXES....................... 515 12,950 2,705 29,796
------- -------- -------- --------
NET LOSS....................................... $ (360) $(22,518) $ (4,387) $(52,293)
------- -------- -------- --------
------- -------- -------- --------
NET LOSS ATTRIBUTABLE TO COMMON SHARES......... $ (661) $(22,819) $ (5,290) $(53,196)
------- -------- -------- --------
------- -------- -------- --------
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING..... 37,544 40,456 34,965 40,455
------- -------- -------- --------
------- -------- -------- --------
LOSS PER COMMON AND COMMON EQUIVALENT SHARE.... $ (.02) $ (.56) $ (.15) $ (1.31)
------- -------- -------- --------
------- -------- -------- --------
The accompanying notes to consolidated financial
statements are an integral part of these statements.
F-46
ECHOSTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
(IN THOUSANDS)
(UNAUDITED)
Retained
Earnings
(Deficit)
Shares of Common and
Common Stock Additional Unrealized Total
Stock Preferred Common Purchase Paid-In Holding Stockholders
Outstanding Stock Stock Warrants Capital Gain Equity
----------- --------- -------- -------- ---------- ---------- ------------
BALANCES, at December 31, 1995 . . . . . . . 40,339 $17,195 $403 $ 714 $151,674 $(13,300) $156,686
Series A Cumulative Preferred Stock
dividends . . . . . . . . . . . . . . . 903 (903) --
Issuance of Class A Common Stock. . . . . 380 4 1,564 1,568
Common Stock Purchase Warrants
exercised . . . . . . . . . . . . . . . 74 1 (698) 697 --
Employee Incentives Funded by
Issuance of Class A Common Stock. . . . 8 207 207
Unrealized holding gain on available-
for-sale securities, net. . . . . . . . (204) (204)
Net loss. . . . . . . . . . . . . . . . . (52,293) (52,293)
------ ------- ---- ----- -------- --------- ---------
BALANCES, at September 30, 1996. . . . . . . 40,801 $18,098 $408 $ 16 $154,142 $(66,700) $105,964
------ ------- ---- ----- -------- --------- ---------
------ ------- ---- ----- -------- --------- ---------
The accompanying notes to consolidated financial statements are an integral part
of this statement.
F-47
ECHOSTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------
1995 1996
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................... $ (4,387) $ (52,293)
Adjustments to reconcile net loss to net
cash flows from operating activities --
Depreciation and amortization............................. 1,490 20,021
Provision for doubtful accounts........................... -- 587
Benefit for deferred taxes................................ (6,509) (25,481)
Amortization of deferred debt issuance costs on
Dish Notes and ESBC Notes................................ 945 1,759
Amortization of discount on Dish Notes and
ESBC Notes, net of amounts capitalized................... 17,455 40,229
Equity in (earnings) losses of joint venture.............. (39) 62
Change in reserve for excess and obsolete inventory....... 277 2,579
Change in long-term deferred programming revenue.......... -- 6,790
Change in accrued interest on notes receivable from DBSC.. -- (2,220)
Change in accrued interest on convertible
subordinated debentures from SSET........................ (427) (418)
Other, net................................................ (401) 476
Changes in working capital items --
Trade accounts receivable................................ (1,284) (10,366)
Inventories.............................................. (6,358) (8,056)
Income tax receivable.................................... -- (2,973)
Other current assets..................................... (846) (8,969)
Liability under cash management program.................. (57) --
Trade accounts payable................................... (10,441) 7,386
Deferred programming revenue............................. (719) 61,753
Accrued expenses and other current liabilities........... 1,016 7,624
--------- ---------
Net cash flows from operating activities................ (10,285) 38,490
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of marketable investment securities............... (240,800) (54,111)
Sales of marketable investment securities................... 206,512 27,846
Purchases of restricted marketable investment securities.... (15,000) (20,761)
Funds released from restricted cash and marketable
investment securities - other.............................. -- 5,700
Purchases of property and equipment......................... (1,727) (13,400)
Proceeds from sale of property and equipment................ 27 --
Offering proceeds and investment earnings placed in escrow.. (7,570) (191,941)
Refund of launch payment placed in escrow................... -- (4,500)
Funds released from escrow accounts......................... 51,842 133,768
Payments received on convertible subordinated
debentures from SSET....................................... -- 5,252
Investment in convertible subordinated debentures from DBSI. (1,000) (3,000)
Long-term notes receivable from DBSC........................ -- (20,000)
Expenditures for satellite systems under construction....... (58,984) (167,829)
Investment in subscriber acquisition costs.................. -- (46,918)
Deposit on FCC authorization................................ -- (10,459)
Expenditures for FCC authorizations......................... -- (3,167)
--------- ---------
Net cash flows from investing activities................ (66,700) (363,520)
--------- ---------
The accompanying notes to consolidated financial
statements are an integral part of these statements.
F-48
ECHOSTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------
1995 1996
------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of mortgage indebtedness and note payable...... $ (167) $ (4,207)
Stock options exercised .................................. -- 1,568
Net proceeds from issuance of Class A Common Stock........ 62,933 --
Net proceeds from issuance of ESBC Notes.................. -- 336,994
------- --------
Net cash flows from financing activities................ 62,766 334,355
------- --------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS........ (14,219) 9,325
CASH AND CASH EQUIVALENTS, beginning of period ............. 17,506 21,754
------- --------
CASH AND CASH EQUIVALENTS, end of period ................... $ 3,287 $ 31,079
------- --------
------- --------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest, net of amounts capitalized......... $ 353 $ 11,192
Cash paid for income taxes................................. 1,739 --
Note payable issued for deferred satellite construction
payments for EchoStar II.................................. -- 28,000
Satellite launch payment for EchoStar II applied to
EchoStar I launch......................................... -- 15,000
Increase in note payable for deferred satellite
construction payments for EchoStar I...................... -- 3,167
Cumulative Series A Preferred Stock dividends.............. 903 903
Employee incentives funded by issuance of Class A
Common Stock.............................................. -- 207
See accompanying notes to consolidated financial
statements are an integral part of these statements.
F-49
ECHOSTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND SEPTEMBER 30, 1996
THIS SUPPLEMENTAL QUARTERLY FINANCIAL INFORMATION OF ECHOSTAR CONTAINS
STATEMENTS WHICH CONSTITUTE FORWARD LOOKING STATEMENTS WITHIN THE MEANING OF
SECTION 27A OF THE SECURITIES ACT AND SECTION 21E OF THE SECURITIES EXCHANGE
ACT OF 1934, AS AMENDED. THOSE STATEMENTS APPEAR IN A NUMBER OF PLACES IN THE
SUPPLEMENTAL QUARTERLY FINANCIAL INFORMATION AND INCLUDE STATEMENTS REGARDING
THE INTENT, BELIEF OR CURRENT EXPECTATIONS OF ECHOSTAR WITH RESPECT TO, AMONG
OTHER THINGS: (I) ECHOSTAR'S FINANCING PLANS; (II) TRENDS AFFECTING
ECHOSTAR'S FINANCIAL CONDITIONS OR RESULTS OF OPERATIONS; (III) ECHOSTAR'S
GROWTH STRATEGY; (IV) ECHOSTAR'S ANTICIPATED RESULTS OF FUTURE OPERATIONS;
AND (V) REGULATORY MATTERS AFFECTING ECHOSTAR. PROSPECTIVE INVESTORS ARE
CAUTIONED THAT ANY SUCH FORWARD LOOKING STATEMENTS ARE NOT GUARANTEES OF
FUTURE PERFORMANCE AND INVOLVE RISKS AND UNCERTAINTIES, AND THAT ACTUAL
RESULTS MAY DIFFER MATERIALLY FROM THOSE PROJECTED IN THE FORWARD LOOKING
STATEMENTS AS A RESULT OF VARIOUS FACTORS.
(1) BUSINESS AND BASIS OF PRESENTATION
PRINCIPAL BUSINESS AND FINANCING ACTIVITIES
EchoStar Communications Corporation and subsidiaries ("EchoStar") is
one of only two direct broadcast satellite ("DBS") companies in the United
States with the capacity to provide comprehensive nationwide DBS programming
service in 1996. EchoStar's DBS service (the "DISH Network-SM-") commenced
operations in March 1996 after the successful launch of its first satellite
("EchoStar I") in December 1995. EchoStar launched its second satellite
EchoStar II ("EchoStar II") on September 10, 1996. EchoStar significantly
increased the channel capacity and programming offerings of the DISH
Network-SM- when EchoStar II became fully operational in November 1996.
EchoStar now provides approximately 120 channels of near laser disc
quality digital video programming and over 30 channels of CD quality audio
programming to the entire continental United States ("CONUS"). In addition to
its DISH Network-SM- business, EchoStar is engaged in the design,
manufacture, distribution and installation of satellite direct to home
("DTH") products, domestic distribution of DTH programming and consumer
financing of EchoStar's domestic DTH products and services.
EchoStar's primary objective is to become one of the leading
providers of subscription television and other satellite delivered services
in the United States. EchoStar had approximately 190,000 and 250,000
subscribers to DISH Network-SM- programming as of September 30, 1996 and
November 11, 1996, respectively.
EchoStar's Satellite Broadcasting Corporation ("ESBC") is a
wholly-onwed direct subsidiary of EchoStar. Dish, Ltd. is a wholly-owned
direct subsidiary of ESBC. Substantially all of EchoStar's operating
activities are conducted by subsidiaries of Dish, Ltd.
In June 1994, Dish, Ltd. completed a public offering (the "Dish Notes
Offering") of 12 7/8% Senior Secured Discount Notes due 2004 (the "Dish
Notes") and Warrants (collectively, the "Dish Notes Offering"), resulting in
net proceeds of approximately $323.3 million. Dish, Ltd. and its subsidiaries
are subject to the terms and conditions of the Indenture related to the Dish
Notes (the "Dish Notes Indenture"). Substantially all of the Warrants issued
in connection with the Dish Notes Offering have been exercised. In June 1995,
EchoStar completed an offering of its Class A Common Stock, resulting in net
proceeds of approximately $63.0 million (the "Equity Offering").
In March 1996, ESBC completed a private offering (the "ESBC Notes
Offering") of 13 1/8% Senior Secured Discount Notes due 2004, resulting in
net proceeds of approximately $337.0 million. ESBC subsequently filed a
Registration Statement on Form S-1 to effect the exchange of those Notes for
publicly registered debentures (the "ESBC Notes") with the same terms.
Proceeds from the ESBC Notes Offering have been or will be used for: (i)
continued development, marketing and distribution of the DISH Network-SM-; (ii)
EchoStar's purchase of DBS
F-50
ECHOSTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
frequencies at 148DEG. WL (the "148 Frequencies"); (iii) partial funding of
the construction, launch and insurance of the satellites DBSC I ("EchoStar
III") and EchoStar IV; (iv) additional launch costs of EchoStar II; and (v)
other general corporate purposes. The 148 Frequencies were acquired by
EchoStar at a public auction held by the Federal Communications Commission
("FCC") in January 1996 (the "FCC Auction"). In connection with the ESBC
Notes Offering, EchoStar contributed all of the outstanding capital stock of
its wholly owned subsidiary, Dish, Ltd., to ESBC. This transaction has been
accounted for as a reorganization of entities under common control whereby
Dish, Ltd. has been treated as the predecessor to ESBC. ESBC is subject to
all, and EchoStar is subject to certain of, the terms and conditions of the
Indenture related to the ESBC Notes (the "ESBC Notes Indenture").
Unless otherwise stated herein, or the context otherwise requires,
references herein to EchoStar shall include EchoStar and all of its direct and
indirect wholly owned subsidiaries.
BASIS OF PRESENTATION
The accompanying unaudited Condensed Consolidated Financial
Statements have been prepared in accordance with generally accepted
accounting principles for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they
do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the
opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the three and nine months ended September 30, 1996 are
not necessarily indicative of the results that may be expected for the year
ended December 31, 1996. For further information, refer to the Combined and
Consolidated Financial Statements and footnotes thereto included in EchoStar
Communications Corporation's Annual Report on Form 10-K for the year ended
December 31, 1995. Certain prior year amounts have been reclassified to
conform with the current year presentation.
The preparation of financial statements in conformity with generally
accepted accounting principles requires the use of management 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 revenue and expenses for each
reporting period. Actual results could differ from those estimates.
SIGNIFICANT RISKS AND UNCERTAINTIES
The commencement of EchoStar's DBS business has dramatically changed
EchoStar's operating results and financial position when compared to its
historical results. EchoStar consummated the Dish Notes Offering, the ESBC
Notes Offering and the Equity Offering to partially satisfy the capital
requirements for the construction, launch and operation of EchoStar I,
EchoStar II, EchoStar III and EchoStar IV. Annual interest expense on the
Dish Notes and ESBC Notes and depreciation of the investment in the
satellites and related assets is of a magnitude that exceeds historical
levels of income before taxes. Consequently, beginning in 1995 EchoStar
reported significant net losses and expects net losses to continue through at
least 1998. As of September 30, 1996, EchoStar expects to invest
approximately an additional $400 million to fund contractor financing
obligations with respect to EchoStar I and EchoStar II and to complete the
construction phase and launch of EchoStar III and EchoStar IV (Note 6).
EchoStar's plans also include the financing, construction and launch of two
fixed service satellites, additional DBS satellites and Ku-band and KuX-band
satellites, assuming receipt of all required FCC licenses and permits.
In August 1996, EchoStar introduced a nationwide marketing promotion
(the "EchoStar Promotion") which offers a standard EchoStar Receiver System
to consumers for $199 (as compared to the original average retail price
in March 1996 of approximately $499), conditioned upon the consumer's prepaid
purchase of one year of America's Top 40 CD-SM- programming package
(America's Top 50 CD-SM- programming package effective November 1, 1996) for
approximately $300. The EchoStar Promotion has significantly increased the
affordability of EchoStar Receiver Systems for consumers. The primary
purposes of the EchoStar Promotion are to rapidly build a subscriber base, to
expand retail distribution of EchoStar's products and to build consumer
awareness of the DISH Network-SM- brand. This promotion is consistent with and
emphasizes EchoStar's long-term business strategy which focuses on generating
the majority of its future revenue through sales of DISH Network-SM-
programming to a substantial subscriber base. The
F-51
ECHOSTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
EchoStar Promotion requires significant investment by EchoStar to acquire
subscribers, but EchoStar believes the investment is fully recoverable from
the DBS programming revenues expected to be generated. EchoStar receivers
process only DISH Network-SM- signals because of the proprietary encryption
technology employed. Further, because of high consumer satisfaction ratings,
EchoStar anticipates very high service renewal rates, resulting in minimum
subscriber lives of atConsequently, the satellite receivers and other
reception equipment can not be utilized with competitors' DBS systems, and
unlike the cellular phone industry, subscribers can not seamlessly migrate to
alternative DBS providers. Further, based on high DBS industry consumer
satisfaction ratings, initial feedback from consumers and dealers and low
EchoStar subscriber turnover rates, EchoStar anticipates high service renewal
rates, leading to an expected average minimum subscriber life of at least
three years. However, as renewal data least three years. Initially,
howeverfor subscribers to the DISH Network-SM- is not yet available, among
other things, EchoStar has elected to amortize its subscriber acquisition
costs over a one year period, which. This amortization period is equal to the
term of the prepaid programming package under the EchoStar Promotion. As
EchoStar's DISH Network-SM- subscriber base matures and EchoStar develops a
history of renewal rates, this amortization period may be adjusted to reflect
the expected average minimum life of a subscriber. In addition, EchoStar's
experience to date is that a majority of subscribers buy additionala majority
of DISH Network-SM- subscribers have purchased premium and Pay-Per-View
programming for incremental amounts overabove the prepaid minimum required by
the EchoStar Promotion, which reduces the time necessary to recover the
average investment per subscriber. EchoStar's present marketing strategy is
based on current and anticipated competitive conditions which may change, and
such changes could be adverse to EchoStar.
EchoStar has agreements with two manufacturers to supply DBS
receivers for EchoStar. Only one of the manufacturers has produced a receiver
acceptable to EchoStar. EchoStar previously deposited $10.0 million with the
non-performing manufacturer and has an additional $15.0 million in an escrow
account (the "Non-Performing Manufacturer Escrow Account") as security for
EchoStar's payment obligations under that contract. EchoStar has given this
non-performing manufacturer notice of its intent to terminate the contract,
and therefore and has filed suit against that manufacturer. Consequently,
EchoStar is currently dependent on one manufacturing source for its
receivers. Since EchoStar has given the non-performing manufacturer notice of
its intent to terminate the contract, EchoStar has not included amounts due
under the contract in EchoStar's future purchase commitments. The performing
manufacturer is presently manufacturing receivers in sufficient quantities to
meet currently expected demand. If EchoStar's sole manufacturer is unable for
any reason to produce receivers in a quantity sufficient to meet demand,
EchoStar's liquidity and results of operations would be adversely affected.
There can be no assurance EchoStar will be able to recover any amounts
deposited with the non-performing manufacturer or held in escrow.
EchoStar expects net losses to continue as it builds its subscription
television business, and therefore, absent additional capital, EchoStar
expects negative stockholders' equity towill result before December 31, 1997.
EchoStar's expected net losses will result primarily from: (i) the
amortization of the original issue discount on the Dish Notes and ESBC Notes;
(ii) increases in depreciation expense on the satellites and other fixed
assets; (iii) amortization of subscriber acquisition costs; and (iv)
increases in selling, general and administrative expenses to support the DISH
Network-SM-. Although a negative equity position has significant
implications, including, but not limited to, non-compliance with NASDAQ
National Market listing criteria, EchoStar believes this event will not
materially affect the implementation and execution of its business strategy.
When EchoStar ceases to satisfy NASDAQ's National Market listing criteria,
EchoStar's Common Stock will be subject to being delisted unless an exception
is granted by the National Association of Securities Dealers. If an exception
were not granted, trading in EchoStar Common Stock would thereafter be
conducted in the over-the-counter market. Consequently, it an investor may
find itwould be more difficult to dispose of, or to obtain accurate
quotations as to the price of, the EchoStar Common Stock. Delisting would
result in a decline in EchoStar's Common Stock trading market which could
potentially depress stock and bond prices, among other things.
As a result of the factors discussed above, EchoStar will need to
raise additional capital to complete the construction and launch of EchoStar
III and EchoStar IV. There can be no assurance that necessary funds will be
available or, if available, that they will be available on terms favorable to
EchoStar. In anticipation of its future capital requirements and in order to
fully implement its business strategy, EchoStar regularly examines, and is
currently examining, opportunities to expand its DBS business, technology
base and product lines through means such as licenses, joint ventures,
strategic alliances, strategic investments and acquisitions of assets or
ongoing businesses. Currently, EchoStar has not made a commitment to any new
strategic transaction. At any time, however, EchoStar may agree to enter into
a new strategic transaction. Should EchoStar agree to enter into a new
strategic transaction, there can be no assurance as to the terms or timing of
the transaction, whether the transaction will be consummated or whether
F-52
ECHOSTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
the transaction would improve EchoStar's financial condition, results of
operations, business or prospects in any material manner. Further increases
in the investment in subscriber acquisition costs, inadequate supplies of DBS
receivers or significant delays or launch failures would significantly and
adversely affect EchoStar's operating results and financial condition.
(2) SUPPLEMENTAL ANALYSIS
CASH AND CASH EQUIVALENTS
EchoStar considers all investments purchased with an original
maturity of ninety days or less to be cash equivalents. Cash equivalents as
of December 31, 1995, and September 30, 1996 consist of money market funds,
corporate notes and commercial paper stated at cost which equates to market
value.
RESTRICTED CASH AND MARKETABLE INVESTMENT SECURITIES
EchoStar classifies all marketable investment securities as
available-for-sale. Accordingly, these investments are reflected at market
value based on quoted market prices. Related unrealized gains and losses are
reported as a separate component of stockholders' equity, net of related
deferred income taxes. The specific identification method is used to
determine cost in computing realized gains and losses.
Restricted Cash and Marketable Investment Securities in Escrow
Accounts as reflected on the accompanying consolidated balance sheets
represent the remaining net proceeds received from the Dish Notes Offering,
and a portion of the proceeds from the ESBC Notes Offering, plus interest
earned, less amounts expended to date in connection with the development,
construction and continued growth of the DISH NetworkSM. These proceeds are
held in separate escrow accounts (the "Dish Escrow Account" and the "ESBC
Escrow Account") for the benefit of the holders of the Dish Notes and ESBC
Notes, respectively, and are invested in certain debt and other marketable
investment securities, as permitted by the respective Indentures, until
disbursed for the express purposes identified in the Dish Notes Offering
Prospectus and the ESBC Notes Offering Prospectus, as the case may be.
Other Restricted Cash includes $11.4 million and $5.7 million at
December 31, 1995 and September 30, 1996, respectively, to satisfy certain
covenants in the Dish Notes Indenture regarding launch insurance for EchoStar
I and EchoStar II. In addition, as of December 31, 1995 and September 30,
1996, $15.0 million was in the Non-Performing Manufacturer Escrow Account
established pursuant to a DBS receiver manufacturing contract for payment to
the manufacturer as certain milestones are reachedAccount. As of September
30, 1996, approximately $20.0 million was in a separate escrow account
established pursuant to a second DBS receiver manufacturing agreement,
covering EchoStar's payment obligations and. Additionally, approximately
$750,000 was in an escrow account for the purpose of cash collateralizing
standby letters of credit to a vendor. The major components of Restricted
Cash and Marketable Investment Securities are as follows (in thousands):
DECEMBER 31, 1995 SEPTEMBER 30, 1996
------------------------------- ----------------------------------
UNREALIZED UNREALIZED
AMORTIZED HOLDING MARKET AMORTIZED HOLDING MARKET
COST GAIN VALUE COST (LOSS) VALUE
--------- ---------- ------- --------- ---------- --------
Commercial paper.......... $66,214 $ -- $66,214 $115,444 $ -- $115,444
Government bonds ......... 32,904 420 33,324 41,040 (33) 41,007
Corporate notes........... -- -- -- 19,111 (62) 19,049
Certificates of deposit... -- -- -- 750 -- 750
Accrued interest.......... 153 -- 153 660 -- 660
------- ---- ------- -------- ---- --------
$99,271 $420 $99,691 $177,005 $(95) $176,910
------- ---- ------- -------- ---- --------
------- ---- ------- -------- ---- --------
F-53
ECHOSTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
INVENTORIES
Inventories are stated at the lower of cost or market value. Cost is
determined using the first-in, first-out ("FIFO") method. Proprietary products
are manufactured by outside suppliers to EchoStar's specifications. EchoStar
also distributes non-proprietary products purchased from other manufacturers.
Manufactured inventories include materials, labor and manufacturing overhead.
Cost of other inventories includes parts, contract manufacturers' delivered
price, assembly and testing labor, and related overhead, including handling and
storage costs. The major components of inventory were as follows (in thousands):
DECEMBER 31, SEPTEMBER 30,
1995 1996
------------ -------------
EchoStar Receiver Systems.................... $ -- $20,878
DBS receiver components...................... 9,615 11,544
Consigned DBS receiver components............ -- 6,633
Finished goods - C-band...................... 11,161 4,246
Finished goods - International............... 9,297 3,518
Competitor DBS Receivers..................... 9,404 --
Spare parts.................................. 2,089 2,199
Reserve for excess and obsolete inventory.... (2,797) (4,772)
------- -------
$38,769 $44,246
------- -------
------- -------
SUBSCRIBER ACQUISITION COSTS
To attract subscribers to the DISH Network-SM-, EchoStar has
sponsored certain sales promotions through EchoStar's various distribution
outlets. EchoStar effectively allows consumers to buy Currently, EchoStar has
chosen to reduce the retail price of EchoStar's proprietary DBS reception
equipment at less than cost if they when consumers subscribe to and prepay
for DISH Network-SM- programming service for a minimum of one year.
Transaction proceeds to EchoStar applicable to the DISH Network-SM-
programming (a minimum of $300 per subscriber) are deferred and recognized as
revenue over the period of service. The remaining transaction proceeds are
recognized as equipment revenue on shipment and an equal amount is charged to
expense. EchoStar's investment in each subscriber is equal to the cost of the
equipment, less any remaining non-programming transaction proceeds to
EchoStar. This amount is deferred and is being amortized over a one year
period, which is equal to the length of the programming package available
under the EchoStar Promotion. As EchoStar's DISH Network-SM- subscriber base
matures and EchoStar develops a history of renewal rates, this amortization
period may be adjusted to reflect the expected average minimum life of a
subscriber. Amortization of subscriber acquisition costs for the three and
nine months ended September 30, 1996 was approximately $3.3 million and $3.4
million, respectively.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost less accumulated
depreciation. Cost includes interest capitalized on the EchoStar DBS System
during construction at EchoStar's effective borrowing rate. The major
components of property and equipment were as follows (in thousands).
F-54
ECHOSTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
ESTIMATED
USEFUL LIFE DECEMBER 31, SEPTEMBER 30,
(IN YEARS) 1995 1996
----------- ------------ -------------
Construction in progress................ -- $303,174 $281,353
EchoStar I satellite.................... 12 -- 201,607
Furniture, fixtures and equipment....... 2-12 35,127 65,320
Buildings and improvements.............. 7-40 21,006 25,729
Tooling and other....................... 2 2,039 4,382
Land.................................... -- 1,613 2,295
Vehicles................................ 7 1,310 1,324
-------- --------
Total property and equipment.......... 364,269 582,010
Less-Accumulated depreciation....... (10,269) (26,767)
-------- --------
Net property and equipment.......... $354,000 $555,243
-------- --------
-------- --------
Construction in progress includes capitalized costs related to the
construction, insurance and launch of EchoStar II, which was launched in
September 1996 and became fully operational in November 1996 and EchoStar IV,
which is currently scheduled for launch prior to the end of 1998. Construction
in progress for EchoStar III includes costs related to that launch, which is
scheduled prior to the end of 1997. Construction in progress consisted of the
following (in thousands):
DECEMBER 31, SEPTEMBER 30,
1995 1996
------------ -------------
Progress amounts for satellite construction, launch, launch
insurance, capitalized interest, launch and in-orbit
tracking, telemetry and control services:
EchoStar I.................................................... $193,629 $ --
EchoStar II................................................... 88,634 225,948
EchoStar III.................................................. 20,801 28,168
EchoStar IV................................................... -- 27,237
Other........................................................... 110 --
-------- --------
$303,174 $281,353
-------- --------
-------- --------
OTHER NONCURRENT ASSETS
The major components of other noncurrent assets were as follows (in
thousands):
DECEMBER 31, SEPTEMBER 30,
1995 1996
------------ -------------
Long-term notes receivable from DBSC and accrued interest............. $16,000 $ 38,220
Deferred tax assets, net.............................................. 12,109 37,036
FCC authorizations, net of amortization............................... 11,309 15,994
ESBC Notes deferred debt issuance costs, net of amortization.......... -- 12,240
Deposit on FCC authorization.......................................... -- 11,459
Dish Notes deferred debt issuance costs, net of amortization.......... 10,622 9,692
SSET convertible subordinated debentures and accrued interest......... 9,610 4,776
Investment in DBSC.................................................... 4,111 4,049
DBSI convertible subordinated debentures.............................. 1,000 4,000
Other, net............................................................ 897 1,005
------- --------
$65,658 $138,471
------- --------
------- --------
F-55
ECHOSTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
As of September 30, 1996, EchoStar owned approximately 40% of the
outstanding common stock of Direct Broadcasting Satellite Corporation, a
Delaware Corporation ("DBSC"). DBSC's principal assets include an FCC
conditional satellite construction permit and specific orbital slot assignments
for eleven DBS frequencies at 61.5DEG. WL and eleven DBS frequencies at 175DEG.
WL (the "DBS Rights"). EchoStar intends to merge DBSC with Direct Broadcasting
Satellite Corporation, a Colorado Corporation ("New DBSC"), a wholly owned
subsidiary of EchoStar (the "DBSC Merger"). As a result of the DBSC Merger,
EchoStar will hold, through New DBSC, DBSC's DBS Rights. The DBSC Merger has
been approved by a majority of DBSC's shareholders and the FCC. EchoStar is in
the process of registering shares of its Class A Common Stock which are expected
to be issued in connection with the DBSC Merger. On October 25, 1996, EchoStar
filed Amendment No. 3 to a Registration Statement on Form S-4 under the
Securities Act covering 658,000 shares of EchoStar Class A Common Stock.
FCC AUTHORIZATIONS
FCC authorizations are recorded at cost and are amortized using the
straight-line method. Amortization begins at the time the related satellite
becomes operational, or capitalized costs are written off at the time efforts to
provide services are abandoned. FCC authorization costs are amortized over 12
years, the expected useful life of the related satellite. The deposit on FCC
authorization represents a deposit paid by EchoStar to the FCC in January 1996,
for the 148 Frequencies plus capitalized interest thereon. The balance of $41.8
million due the FCC for the purchase of the frequencies will be drawn from the
ESBC Escrow Account, and is payable to the FCC five days after EchoStar receives
FCC approval for use of the orbital slot, which is expected to occur in the
fourth quarter of 1996.
DEFERRED PROGRAMMING REVENUE
Deferred programming revenue consists principally of prepayments
received from subscribers to the DISH Network-SM- which are recognized in the
period the related multi-month subscriptions to DISH Network-SM- programming
which are recognized as revenue in the period the programming is provided.
EchoStar likewise similarly defers prepayments received from subscribers to
C-band programming sold by EchoStar as an authorized distributor.
EchoStar also receives advance payments from certain programming
providers for carriage on the DISH Network-SM- which are deferred and recognized
as revenue on a straight-line basis over the contract term.
INTEREST EXPENSE
Interest expense, net of amounts capitalized, on the accompanying
income statements includes: (i) amortization of original issue discount on
the Dish Notes and the ESBC Notes; (ii) interest expense on contractor
financing of EchoStar I; (iii) interest expense on corporate mortgage
indebtedness; and (iv) discounts on accounts receivable for EchoStar Receiver
Systems and DISH Network-SM- programming which have been sold without credit
recourse to third party financing groups.
EARNINGS PER SHARE
Earnings per share have been calculated based on the weighted average
number of shares of common stock issued and outstanding. Common stock
equivalents (warrants and employee stock options) were excluded for the three
and nine months ended September 30, 1995 and 1996 because they were not dilutive
to loss per share amounts. Net loss has been adjusted for cumulative dividends
on the 8% Series A Cumulative Preferred Stock.
(3) LONG-TERM DEBT
DISH NOTES
During June 1994, Dish, Ltd. completed the Dish Notes Offering of
624,000 units consisting of $624.0 million aggregate principal amount of the
Dish Notes and 3,744,000 Warrants. The Dish Notes Offering resulted in net
F-56
ECHOSTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
proceeds to Dish, Ltd. of approximately $323.3 million. Substantially all of
the Warrants issued in connection with the Dish Notes Offering have been
exercised. Interest on the Dish Notes currently is not payable in cash but
accrues through June 1, 1999, with the Dish Notes accreting to $624.0 million
by that date. Thereafter, interest on the Dish Notes will be payable in cash
semi-annually on June 1 and December 1 of each year, commencing December 1,
1999. At September 30, 1996, the Dish Notes were reflected in the
accompanying financial statements at $422.8 million, net of unamortized
discount of $201.2 million.
ESBC NOTES
During March 1996, ESBC completed the ESBC Notes Offering consisting of
$580.0 million aggregate principal amount of the ESBC Notes. The ESBC Notes
Offering resulted in net proceeds to ESBC of approximately $337.0 million.
Interest on the ESBC Notes currently is not payable in cash but accrues through
March 15, 2000, with the ESBC Notes accreting to $580.0 million by that date.
Thereafter, interest on the ESBC Notes will be payable in cash semi-annually on
March 15 and September 15 of each year, commencing September 15, 2000. At
September 30, 1996, the ESBC Notes were reflected in the accompanying financial
statements at $372.6 million, net of unamortized discount of $207.4 million.
(4) BANK CREDIT FACILITY
From May 1994 to May 1996, the principal subsidiaries of EchoStar,
exceptDish, Ltd., other than EchoStar Satellite Corporation (the "Borrowers"),
were parties to an agreement with Bank of America Illinois, which provided a
revolving credit facility (the "Credit Facility") for working capital advances
and for letters of credit necessary for inventory purchases and satellite
construction payments. The Credit Facility expired in May 1996 and EchoStar does
not currently intend to arrange a replacement credit facility.
(5) INCOME TAXES
The components of the benefit for income taxes were as follows (in
thousands):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- -------------------
1995 1996 1995 1996
-------- -------- -------- -------
Current (provision) benefit
Federal........................ $ (939) $ (262) $(2,551) $ 4,204
State.......................... (215) (668) (586) 298
Foreign........................ (216) (67) (667) (187)
------- ------- ------- -------
(1,370) (997) (3,804) 4,315
------- ------- ------- -------
Deferred benefit
Federal........................ 1,594 12,691 5,410 23,792
State.......................... 291 1,256 1,099 1,689
------- ------- ------- -------
1,885 13,947 6,509 25,481
------- ------- ------- -------
Total benefit................ $ 515 $12,950 $ 2,705 $29,796
------- ------- ------- -------
------- ------- ------- -------
EchoStar's deferred tax assets (approximately $39.5 million at September
30, 1996) relate principally to temporary differences for amortization of
original issue discount on the Dish Notes and ESBC Notes, net operating loss
carryforwards, temporary differences for depreciation of property and equipment
and various accrued expenses which are not deductible until paid. No valuation
allowance has been provided because EchoStar currently believes it is more
likely than not that these deferred tax assets will ultimately be realized. If
future operating results differ materially and adversely from EchoStar's current
expectations, its judgment regarding the need for a valuation allowance may
change.
F-57
ECHOSTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
(6) OTHER COMMITMENTS AND CONTINGENCIES
SATELLITE CONTRACTS
EchoStar has contracted with Lockheed Martin Corporation ("Martin") for
the construction and delivery of high powered DBS satellites and for related
services. Martin constructed both EchoStar I and EchoStar II and is in the
construction phase on EchoStar III and EchoStar IV. The construction contract
for EchoStar III contains a provision whereby, beginning August 1, 1997,
includes a PER DIEM penalty of $3,333, to a maximum of $100,000, is payable
if EchoStar III is not delivered by July 31, 1997. Beginning September 1,
1997, additional delays in the delivery of EchoStar III would result in
additional PER DIEM penalties of $33,333, up to a maximum of $5.0 million in
the aggregate. The contract for EchoStar IV contains a provision whereby,
beginning February 16, 1998, includes a PER DIEM penalty of $50,000, to a
maximum of $5.0 million in the aggregate, is payable if EchoStar IV is not
delivered by February 15, 1998. The contract also contains a provision
whereby Martin is entitled to an early delivery incentive payment of $50,000
for each day before February 15, 1998 the satellite is delivered to the
launch site of Baikonur, Kazakhstan, up to a maximum of $5.0 million in the
aggregate. This contract also contains an option provision which allows
EchoStar to commence the construction phase of a fifth DBS satellite
("EchoStar V").
EchoStar is utilizing $28.0 million of contractor financing for EchoStar
II. The contractor financing for EchoStar II bears interest at 8.25% and is
payable in equal monthly principal and interest installments are due over five
years following launch. Contractor financing of $15.0 million each will be used
for EchoStar III and EchoStar IV. Interest on the contractor financing for
EchoStar III and EchoStar IV will range between 7.75% and 8.25% and principal
and interest payments are, with equal monthly installments due over five years
following the launch of the respective satellite.
EchoStar has entered into a contract for launch services with Lockheed
Martin Commercial Launch Services, Inc. ("Lockheed") for the launch of EchoStar
III from Cape Canaveral Air Station, Florida during the fall of 1997, subject to
delay or acceleration in certain circumstances (the "Lockheed Contract"). The
Lockheed Contract provides for launch of the satellite utilizing an Atlas IIAS
launch vehicle. EchoStar has made an initial payment to Lockheed of $5.0 million
and the remaining costprice is payable in installments in accordance with the
payment schedule set forth in the Lockheed Contract, which requires that
substantially all payments be made to Lockheed prior to the launch.
In July 1996, EchoStar and Martin amended the contracts for the
construction of EchoStar I and EchoStar II. As collateral security for
contractor financing of EchoStar I and EchoStar II, EchoStar was required to
provide a letter of credit prior to the launch of EchoStar II in the amount of
$10 million (increasing to more than $40 million by 1999) and the principal
stockholder of EchoStar pledged all of his Preferred Stock to Martin ("Preferred
Stock Guarantee"). Under the amended agreements, EchoStar issued a corporate
guarantee covering all obligations to Martin with respect to the contractor
financing for EchoStar I and EchoStar II. In consideration for the receipt of
the corporate guarantee by EchoStar, Martin has agreed to eliminate the letter
of credit requirements, and to release the Preferred Stock Guarantee in
accordance with a specified formula based on the then outstanding contractor
financing debt and the market value of EchoStar's Class A Common Stock. This
transaction has been approved by EchoStar's board of directors with EchoStar's
principal stockholder abstaining from the vote. Additionally, EchoStar will
issue a corporate guarantee covering all obligations to Martin with respect to
the contractor financing for EchoStar III and EchoStar IV.
EchoStar has contracted with Lockheed-Khrunichev-Energia-International,
Inc. ("LKE") for the launch of EchoStar IV during 1998 from the Kazakh Republic,
a territory of the former Soviet Union, utilizing a Proton launch vehicle (the
"LKE Contract"). Either party may request a delay in the relevant launch period,
subject to the payment of penalties based on the length of the delay and the
proximity of the request to the launch date. EchoStar has paid LKE $20.0 million
pursuant to the LKE Contract. No additional payments are currently required to
be made to LKE until 1997.
In connection with the satellite contracts discussed above and other
related commitments, in the fourth quarter of 1996 EchoStar expects to expend:
(i) approximately $3.9 million for contractor financing on EchoStar I and
EchoStar II; (ii) approximately $19.0 million in connection with the launch of
EchoStar III; (iii) approximately $37.0 million for construction of EchoStar III
and EchoStar IV; and (iv) approximately $41.8 million for the purchase of the
148 Frequencies. Funds for these expenditures are expected to come from the ESBC
Notes Escrow Account and available cash and marketable investment securities.
Beyond 1996, EchoStar will expend approximately $68.7 million
F-58
ECHOSTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
on contractor financing debt related to EchoStar I and EchoStar II.
Additionally, EchoStar has committed to expend approximately an additional
$260 million to build, launch and support EchoStar III and EchoStar IV in
1997 and beyond. In order to continue to build, launch and support EchoStar
III and EchoStar IV beyond the first quarter of 1997, EchoStar will need
additional capital. Even if EchoStar terminates the construction contracts
with Martin for the construction of EchoStar III and EchoStar IV, EchoStar
will still need additional capital as a result of termination penalties
contained in the contracts. There can be no assurances that additional
capital will be available, or, if available, that it will be available on
terms favorable to EchoStar.
PURCHASE COMMITMENTS
EchoStar has entered into agreements with various manufacturers to purchase
DBS receivers and related components manufactured based on EchoStar's supplied
specifications. As of September 30, 1996 the remaining commitments total
approximately $148.7 million. As described previously, EchoStar has agreements
with two manufacturers to supply DBS receivers for EchoStar. Only one of the
manufacturers has produced a receiver acceptable to EchoStar. Since EchoStar has
given the non-performing manufacturer notice of its intent to terminate the
contract and has filed suit against that manufacturer, EchoStar has not included
amounts due under the contract in EchoStar's purchase commitments. At September
30, 1996, the total of all outstanding purchase order commitments with domestic
and foreign suppliers was approximately $150.0 million. All but approximately
$19.2 million of the purchases related to these commitments are expected to be
made during 1996 and the remainder are expected to be made during 1997.
EchoStar expects to finance these purchases from available cash, marketable
investment securities and sales of its DISH Network-SM- programming.
OTHER RISKS AND CONTINGENCIES
EchoStar is subject to legal proceedings and claims which arise in the
ordinary course of its business. In the opinion of management, the amount of
ultimate liability with respect to these actions will not materially affect the
financial position or results of operations of EchoStar.
(7) SUMMARY FINANCIAL INFORMATION FOR SUBSIDIARY GUARANTORS
The Dish Notes are fully, unconditionally and jointly and severally
guaranteed by all subsidiaries of Dish, Ltd. (collectively, the "Dish Notes
Guarantors"), except for certain de minimis domestic and foreign subsidiaries.
The ESBC Notes are initially guaranteed by EchoStar on a subordinated
basis. On and after the Dish Guarantee Date (as defined in the ESBC Notes
Indenture), the ESBC Notes will be guaranteed by Dish, Ltd., which guarantee
will rank PARI PASSU with all senior unsecured indebtedness of Dish, Ltd. On and
after the date upon which the DBSC Merger is consummated, the ESBC Notes will be
guaranteed by New DBSC, which guarantee will rank PARI PASSU with all senior
unsecured indebtedness of New DBSC.
The consolidated net assets of Dish, Ltd., including the non-guarantors,
exceeded the consolidated net assets of the Dish Notes Guarantors by
approximately $277,000 and $134,000 as of December 31, 1995 and September 30,
1996, respectively. Summarized consolidated financial information for Dish, Ltd.
is as follows (in thousands).
F-59
ECHOSTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ -----------------
1995 1996 1995 1996
---- ---- ----- ----
Income Statement Data --
Revenue ........................................ $43,606 $ 55,507 $123,271 $165,887
Expenses ....................................... 43,265 77,069 122,860 214,010
------- -------- -------- --------
Operating income (loss) ........................ 341 (21,562) 411 (48,123)
Other income (expense), net .................... (2,111) (7,970) (8,440) (19,846)
------- -------- -------- --------
Net loss before income taxes ................... (1,770) (29,532) (8,029) (67,969)
Benefit for income taxes ....................... 854 11,391 3,060 25,340
------- -------- -------- --------
Net loss ................................... $ (916) $(18,141) $ (4,969) $(42,629)
------- -------- -------- --------
------- -------- -------- --------
DECEMBER 31, SEPTEMBER 30,
1995 1996
------------ -------------
Balance Sheet Data --
Current assets ......................................... $ 81,858 $146,940
Property and equipment, net ............................ 333,199 495,055
Other noncurrent assets ................................ 144,238 102,359
-------- --------
Total assets ....................................... $559,295 $744,354
-------- --------
-------- --------
Current liabilities .................................... $ 50,743 $210,509
Long-term liabilities .................................. 415,662 483,846
Stockholder's equity ................................... 92,890 49,999
-------- --------
Total liabilities and stockholder's equity ......... $559,295 $744,354
-------- --------
-------- --------
F-60
ECHOSTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- ------------------
1995 1996 1995 1996
-------- -------- -------- -------
Income Statement Data --
Revenue . . . . . . . . . . . . $43,606 $ 55,507 $123,271 $151,251
Expenses. . . . . . . . . . . . 43,265 68,433 122,860 205,374
-------- -------- -------- -------
Operating income (loss) . . . . 341 (27,562) 411 (54,123)
Other income (expense), net . . (2,111) (7,970) (8,440) (19,846)
-------- -------- -------- -------
Net loss before income taxes. . (1,770) (35,532) (8,029) (73,969)
Benefit for income taxes. . . . 854 13,391 3,060 27,340
-------- -------- -------- -------
Net loss. . . . . . . . . . . $ (916) $(22,141) $ (4,969) $(46,629)
-------- -------- -------- -------
-------- -------- -------- -------
DECEMBER 31, SEPTEMBER 30,
1995 1996
------------ -------------
Balance Sheet Data --
Current assets. . . . . . . . . . . . . . . . $ 81,858 $155,576
Property and equipment, net . . . . . . . . . 333,199 495,055
Other noncurrent assets . . . . . . . . . . . 144,238 104,359
------------ -------------
Total assets. . . . . . . . . . . . . . . . $559,295 $754,990
------------ -------------
------------ -------------
Current liabilities . . . . . . . . . . . . . $ 50,743 $225,145
Long-term liabilities . . . . . . . . . . . . 415,662 483,846
Stockholder's equity. . . . . . . . . . . . . 92,890 45,999
------------ -------------
Total liabilities and stockholder's
equity. . . . . . . . . . . . . . . . . . $559,295 $754,990
------------ -------------
------------ -------------
F-61
SUPPLEMENTAL QUARTERLY INFORMATION
(UNAUDITED)
AS OF AND FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1996
DIRECT BROADCASTING SATELLITE CORPORATIONS
(A DEVELOPMENT STAGE COMPANY)
F-62
DIRECT BROADCASTING SATELLITE CORPORATION
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
ASSETS
----------------- ------------------
DECEMBER 31, 1995 SEPTEMBER 30, 1996
----------------- ------------------
(AUDITED) (UNAUDITED)
CURRENT ASSETS:
Cash. . . . . . . . . . . . . . . . . . . . . . . . . $ 72,950 $ 4,324
Money Market Funds -. . . . . . . . . . . . . . . . . --
Crestfunds, Inc. - Cash Reserves Fund . . . . . . . 285,978 17,669
Pacific Horison Prime Fund. . . . . . . . . . . . . 7,081 1,725
----------------- ------------------
Total current assets. . . . . . . . . . . . . . . 366,009 23,718
----------------- ------------------
PROPERTY AND EQUIPMENT, AT COST:
Satellite development in process (Note 4) . . . . . . 17,882,707 42,569,121
Computer equipment. . . . . . . . . . . . . . . . . . 5,073 5,073
Less: Accumulated depreciation. . . . . . . . . . . . (2,730) (3,534)
----------------- ------------------
Cost less accumulated depreciation. . . . . . . . . 17,885,050 42,570,660
----------------- ------------------
OTHER ASSETS:
FCC license (Note 3). . . . . . . . . . . . . . . . . 865,571 1,052,938
Unamortized loan costs. . . . . . . . . . . . . . . . 67,058 60,772
Deferred tax benefit (Note 7) . . . . . . . . . . . . -- --
Security deposits . . . . . . . . . . . . . . . . . . 2,575 2,575
----------------- ------------------
Total other assets. . . . . . . . . . . . . . . . . 935,204 1,116,285
----------------- ------------------
Total Assets. . . . . . . . . . . . . . . . . . . $19,186,263 $43,710,663
----------------- ------------------
----------------- ------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Satellite development costs payable . . . . . . . . . $ -- $ 2,500,000
Accounts Payable. . . . . . . . . . . . . . . . . . . 140,958 150,435
Unsecured note payable (Note 6A). . . . . . . . . . . 500,000 500,000
Accrued interest. . . . . . . . . . . . . . . . . . . 237,226 272,538
Unsecured note payable (Note 6B) (in arrears) . . . . 325,000 325,000
Accrued interest in arrears (Note 6). . . . . . . . . 341,074 361,161
Due to shareholder. . . . . . . . . . . . . . . . . . 3,024 6,000
----------------- ------------------
Total current liabilities . . . . . . . . . . . . . 1,547,282 4,115,134
----------------- ------------------
LONG-TERM DEBT:
Secured notes payable (Note 5). . . . . . . . . . . . 16,000,000 36,000,000
Accrued interest (Note 5 & 6) . . . . . . . . . . . . 10,082 2,196,496
----------------- ------------------
Total long-term debt. . . . . . . . . . . . . . . . 16,010,082 38,196,496
----------------- ------------------
Total liabilities . . . . . . . . . . . . . . . . 17,557,364 42,311,630
----------------- ------------------
COMMITMENTS (Note 4)
STOCKHOLDERS' EQUITY:
Common Stock, $.01 per value, 3,000,000 shares
authorized; 1,620,138 shares issued
and outstanding . . . . . . . . . . . . . . . . . . 16,021 16,201
Additional paid in capital. . . . . . . . . . . . . . 5,849,046 5,849,046
Accumulated deficit (Note 1). . . . . . . . . . . . . (2,755,808) (2,755,808)
Accumulated deficit during development stage. . . . . (1,480,540) (1,710,406)
----------------- ------------------
Total stockholder's equity. . . . . . . . . . . . . 1,628,899 1,399,033
----------------- ------------------
Total liabilities and stockholders' equity. . . . $19,186,263 $43,710,663
----------------- ------------------
----------------- ------------------
The accompanying notes are an integral part of these financial statements.
F-63
DIRECT BROADCASTING SATELLITE CORPORATION
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF INCOME
(UNAUDITED)
APRIL 1 1990
(INCEPTION)
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30 1996
SEPTEMBER 30, SEPTEMBER 30, 1996
----------------------- ----------------------- -----------------
1995 1996 1995 1996 (NOTE 1)
---------- ---------- ---------- ---------- -----------------
REVENUE:
Gain on settlement of indebtedness. . . $ -- $ -- $ 31,656 $ -- $ 31,656
Investment income . . . . . . . . . . . 12,764 1,390 62,853 16,547 104,606
---------- ---------- ---------- ---------- ----------
Total revenue . . . . . . . . . . . . 12,764 1,390 94,509 16,547 136,262
---------- ---------- ---------- ---------- ----------
OPERATING EXPENSES:
Interest expense. . . . . . . . . . . . 20,106 18,540 59,530 55,398 667,654
Legal fees. . . . . . . . . . . . . . . 8,162 4,214 15,578 21,211 407,103
Consulting fees . . . . . . . . . . . . 51,000 36,000 139,956 108,000 525,327
Professional services . . . . . . . . . 3,566 4,500 8,226 17,010 51,031
Rent. . . . . . . . . . . . . . . . . . 20,509 5,175 36,019 15,425 61,975
Taxes and licenses. . . . . . . . . . . 130 95 455 890 7,924
Other administrative expenses . . . . . (3,692) 5,446 19,246 21,388 115,833
Depreciation and amortization . . . . . 335 2,364 1,361 7,091 9,821
---------- ---------- ---------- ---------- ----------
Total operating expenses. . . . . . . 100,116 76,334 280,371 246,413 1,846,668
---------- ---------- ---------- ---------- ----------
NET LOSS BEFORE INCOME TAXES . . . . . . . . (87,352) (74,944) (185,862) (229,866) 1,710,406
PROVISION FOR INCOME TAXES (Note 7). . . . . -- -- -- -- --
---------- ---------- ---------- ---------- ----------
NET LOSS . . . . . . . . . . . . . . . . . . $ (87,353) $ (74,944) $ (185,862) $ (229,866) $1,710,406
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING. . . . . . . . . . . . . . . . . $1,618,138 1,620,138 1,618,138 1,620,138 1,093,982
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
LOSS PER COMMON SHARE. . . . . . . . . . . . $ (0.05) $ (0.05) $ (0.11) $ (0.14) $ (1.56)
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
The accompanying notes are an integral part of these financial statements.
F-64
DIRECT BROADCASTING SATELLITE CORPORATION
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
(UNAUDITED)
COMMON STOCK
---------------------
ADDITIONAL ACCUMULATED DEFICIT TOTAL
PAID-IN ACCUMULATED DURING DEVELOPMENT STOCKHOLDERS'
SHARES PAR VALUE CAPITAL DEFICIT STAGE EQUITY
--------- --------- ---------- ----------- ------------------- ------------
BALANCE at
December 31, 1995. . . . 1,620,138 $16,201 $5,849,046 $(2,755,808) $(1,480,540) $1,628,899
Net Loss . . . . . . . -- -- -- -- (229,866) (229,866)
--------- -------- ---------- ----------- ------------ -----------
BALANCE at
September 30, 1996 . . . 1,620,138 $16,201 $5,849,046 $(2,755,808) $(1,710,406) $1,399,033
--------- -------- ---------- ----------- ------------ -----------
--------- -------- ---------- ----------- ------------ -----------
The accompanying notes are an integral part of these financial statements.
F-65
DIRECT BROADCASTING SATELLITE CORPORATION
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
(UNAUDITED)
APRIL 1, 1990
(INCEPTION)
NINE MONTHS ENDED SEPTEMBER 30,
SEPTEMBER 30, 1996
--------------------------- --------------
1995 1996 (Note 1)
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (185,862) $ (229,866) $(1,710,406)
Adjustment to reconcile net loss to net cash applied to
operating activities:
Depreciation and amortization. . . . . . . . . . . . . . . . . . 1,361 7,090 9,820
Gain on settlement of indebtedness . . . . . . . . . . . . . . . (31,655) -- (31,655)
Noncash consulting fees. . . . . . . . . . . . . . . . . . . . . -- -- 16,000
Increase in prepaid expenses . . . . . . . . . . . . . . . . . . (12,000) (1,725) (1,725)
Increase (decrease) in accounts payable. . . . . . . . . . . . . 6,637 14,267 (34,808)
Increase in accrued interest payable . . . . . . . . . . . . . . 59,529 55,398 644,695
Increase (decrease) due to shareholders. . . . . . . . . . . . . 2,850 2,976 (2,254)
------------ ------------ --------------
Net cash applied to operating activities . . . . . . . . . . . (159,140) (151,860) (1,110,333)
------------ ------------ --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of furniture and equipment . . . . . . . . . . . . . -- -- (5,073)
Increase in satellite development costs. . . . . . . . . . . . . (1,548,375) (20,000,000) (37,872,625)
Increase in FCC license. . . . . . . . . . . . . . . . . . . . . (219,104) (125,098) (790,342)
------------ ------------ --------------
Net cash used in investing activities. . . . . . . . . . . . . (1,767,479) (20,125,098) (38,668,040)
------------ ------------ --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in secured notes payable. . . . . . . . . . . . . . . . -- 20,000,000 36,000,000
Inssuance of common stock. . . . . . . . . . . . . . . . . . . . -- -- 3,384,999
Increase in notes payable. . . . . . . . . . . . . . . . . . . . -- -- 652,500
Increase in contract payable . . . . . . . . . . . . . . . . . . -- -- 62,500
Payment on contract payable. . . . . . . . . . . . . . . . . . . -- -- (62,500)
Increase in loan costs . . . . . . . . . . . . . . . . . . . . . -- (67,058) (67,058)
Payment of notes payable . . . . . . . . . . . . . . . . . . . . (15,000) -- (167,500)
Increase in security deposit . . . . . . . . . . . . . . . . . . (380) -- (2,575)
------------ ------------ --------------
Net cash provided (used) by financing activities . . . . . . . (15,380) 19,932,942 39,800,366
------------ ------------ --------------
NET INCREASE (DECREASE) IN CASH. . . . . . . . . . . . . . . . . . (1,941,999) (344,016) 21,993
CASH AT BEGINNING OF PERIOD. . . . . . . . . . . . . . . . . . . . 2,406,710 366,009 --
------------ ------------ --------------
CASH AT END OF PERIOD. . . . . . . . . . . . . . . . . . . . . . . $ 476,711 $ 21,993 $ 21,993
------------ ------------ --------------
------------ ------------ --------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the period for interest . . . . . . . . . . . . -- -- $ 22,958
------------ ------------ --------------
------------ ------------ --------------
SUPPLEMENTAL SCHEDULE OF NONCASH AND FINANCING
ACTIVITIES:
Additional common stock was issued upon the conversion of
notes payable in the amount of $700,000, plus related accrued
Interest totaling $629,406 . . . . . . . . . . . . . . . . . . -- -- $ 1,329,406
Additional common stock issued in exchange for consulting
services . . . . . . . . . . . . . . . . . . . . . . . . . . . -- -- 16,000
DISCLOSURE OF ACCOUNTING POLICY:
For the purposes of the statement of cash flows, the Company
considers money market funds to be cash equivalents
The accompanying notes are in integral part of these financial statements.
F-66
DIRECT BROADCASTING SATELLITE CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND SEPTEMBER 30, 1996
(1) ORGANIZATION
Direct Broadcasting Satellite Corporation (the "Company" or "DBSC"), a
development stage company, was incorporated January 23, 1981 in the State of
Delaware. It is constructing satellites, and plans to operate a direct-to-home,
multi-channel satellite broadcast television service. Funding of the Company's
operations has been obtained through the private placement of common stock and
issuance of convertible debt, demand notes and accounts payable.
On December 21, 1995, the Company and EchoStar Communications Corporation
("EchoStar"), a 39.8% shareholder, agreed to a merger, subject to receipt of
requisite government approval. EchoStar holds direct broadcasting satellite
authorizations for 21 channels at 119DEG. W.L. Under the terms of the Merger
Agreement: (1) the Company and EchoStar agreed to, merge DBSC into a
wholly-owned subsidiary of EchoStar, and (2) the Company's shareholders will be
entitled to receive at their option, $7.99 in cash or .67417 EchoStar shares for
each of the Company's 975,148 shares not already owned by EchoStar.
EchoStar also agreed, at its sole discretion, to loan the Company up to
$150,000,000 for expenses associated with the construction, launch, and
insurance of the Company's spacecraft. On December 29, 1995, the Company drew
down $16 million under its loan purchase agreement with EchoStar and paid
Lockheed Martin Corporation $16 million on the same day. During the nine months
ended September 30, 1996, the Company drew down an additional $20.0 million
under the agreement.
Without EchoStar or other financing, the Company's ability to meet its existing
obligations and proceed with the construction of the satellite is doubtful. In
that case, the ultimate realization of the capitalized Federal Communications
Commission ("FCC") license application costs, as well as the deferred satellite
development costs, are doubtful, and the continuance of the Company as an
operating entity would be uncertain.
The Company's development activities were dormant for a period of years ended
March 31, 1990. During the year ended March 31, 1991, the Company began
development of two new satellites. In accordance with SFAS No. 7, development
stage activities for presentation purposes on the statements of income and cash
flow are for the period April 1, 1990 to September 30, 1996. Prior development
stage activity losses amounting to $2,755,808 are reflected in stockholders'
equity as accumulated deficit.
(2) SIGNIFICANT ACCOUNTING POLICIES
Effective April 1, 1995, the Company changed its fiscal year to December 31 from
March 31.
Loan costs are being amortized over the eight-year life of the secured notes,
effective January 1, 1996.
Management uses estimates and assumptions in preparing financial statements.
Those estimates and assumptions affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities, and the
reported revenues and expenses. Actual results could differ from those
estimates.
Losses per share have been computed based on the weighted average number of
shares of common stock outstanding during each nine month period.
F-67
DIRECT BROADCASTING SATELLITE CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND SEPTEMBER 30, 1996
(CONTINUED)
(3) FCC LICENSE
The Company's application for authority to construct and operate a direct
broadcast satellite system was approved by the FCC and a conditional
construction permit for two spacecraft was released on August 15, 1989. On
November 10, 1993, the FCC found that the Company had complied with the
necessary due diligence requirements and assigned specific orbit/spectrum
resources to the Company. On June 30, 1995, the Company notified the FCC that
it had signed a spacecraft contract modification and sought approval, thereof.
On December 8, 1995, the FCC staff granted the Company an extension of time
through November 1998, to construct and launch two spacecraft but withheld
action on a modification of the spacecraft design pending submission of further
engineering data. On August 30, 1996 the FCC approved the merger of DBSC into a
wholly-owned subsidiary of EchoStar. The merger has not yet been consummated. A
request for an extension of time to consummate the merger is pending at the FCC.
Certain costs incurred in connection with filing the FCC license application and
maintaining the authority have been capitalized. Amortization periods for these
costs will be determined at the time the services related to the applicable FCC
license commences, or capitalized costs will be written off at the time efforts
to provide services are abandoned. FCC licenses are expected to have a useful
life of approximately 10 years.
(4) SATELLITE DEVELOPMENT COSTS
The Company has entered into a contract for the construction of two satellites.
The contract, as amended, provides for periodic, non-refundable payments over a
period extending to October 30, 2003, as well as cancellation penalties if the
contract is terminated before the satellites are launched. As of September 30,
1996, payments made under the terms of the contract totaled $37,838,500. The
contract calls for additional payments of up to $37,500,000 in the year ending
December 31, 1996. The total commitment under the contract is in excess of
$160 million. The latter two sums, however, assume that payments for DBSC-2
commenced on May 31, 1996 as contemplated in the contract through Amendment
No 9. However, in Amendment No. 10 the Company and the Contractor have
rescheduled monthly construction payments for DBSC's second spacecraft, and
payments for and construction of that spacecraft had not begun as of
September 30, 1996
At September 30, 1996, total satellite development costs amounted to
$42,569,121, including capitalized interest of $2,196,496.
During construction and prior to launch, the Company has granted to the
Contractor a full security interest in all hardware, software and work in
process (collectively "Security") related to the two satellites. In the event
of certain defaults by the Company, the Contractor shall immediately assume
ownership of the entire Security.
(5) SECURED NOTES PAYABLE
On December 29, 1995, the Company borrowed $16,000,000, and during the nine
months ended September 30, 1996, borrowed $20,000,000, per the terms of a note
purchase agreement and a security agreement between EchoStar and the Company.
The promissory notes are secured by an assignment, pledge and grant of security
interest in all the estate, right, title and interest of the Company, whether
now owned or hereafter acquired, in, to and under: (1) the Satellites and DBS
Rights; (2) all agreements, contracts and documents related to the Satellites,
DBS Rights, and business of the Company; (3) all income and revenues from all
business operations; and (4) all tangible and/or intangible property of the
Company, including the Satellites. However, the security in the Satellites is
subordinate to the security interest in and to the Satellites held by Lockheed
Martin.
F-68
DIRECT BROADCASTING SATELLITE CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND SEPTEMBER 30, 1996
(CONTINUED)
Interest accrues at Chase Manhattan Bank prime rate plus 3% as of the date of
each loan draw. Principal and interest is payable in seven equal annual
installments beginning two years after each loan draw. The December 29, 1997
installment related to the $16,000,000 loan will be approximately $3,713,300,
including interest at 11.5%. The annual installments related to the $20,000,000
of additional loans will be approximately $4,600,072, starting in February 1998,
including interest at 11.25%.
(6) UNSECURED NOTES PAYABLE
A. UNSECURED NOTE PAYABLE
A note payable in the amount of $500,000 is payable 90 days after the
successful launch and check-out of DBSC's first Direct Broadcast
Satellite-Broadcast Satellite System, or on demand in certain other
limited circumstances. Interest is payable at Chase Manhattan Bank
prime rate plus 1% per annum or 4% after maturity, or in event of
default. As of December 31, 1995, the note payable and the related
accrued interest were payable on demand.
B. CONVERTIBLE NOTES PAYABLE
Convertible notes payable amounted to $325,000 at December 31, 1995
and September 30, 1996. Notes totaling $100,000 accrue interest at
75% of Chase Manhattan Bank prime rate, and notes totaling $225,000
accrue interest at 100% of the prime rate.
The notes provide that until they are paid in full, a note holder at
his option may convert principal into shares of the authorized common
stock of the Company as follows: $100,000 of principal at
$6.67/share, and $225,000 of principal at $8.33/share.
(7) INCOME TAXES
Effective April 1, 1992, the Company adopted SFAS No. 109, "Accounting for
Income Taxes", which requires an asset and liability approach to financial
accounting and reporting for income taxes. The difference between the financial
statement and tax bases of assets and liabilities are computed for those
differences that have future tax consequences using the currently enacted tax
laws and rates that apply to the periods in which they are expected to affect
taxable income. Valuation allowances are established, if necessary, to reduce
the deferred tax asset to the amount that will more likely than not be realized.
Income tax expense is the current tax payable or refundable for the period, plus
or minus the net change in the deferred tax assets and liabilities.
The adoption of Statement 109 did not have an effect on the Company's financial
statements because the deferred income tax benefit has been offset by a
valuation allowance of equal amount. The valuation allowance was established to
reduce the deferred tax benefit to the amount that will more likely than not be
realized. This reduction is necessary due to the uncertainty of the Company's
ability to utilize all of the future tax deduction resulting from net operating
losses.
The gross deferred income tax benefit was approximately $849,382 at December 31,
1995, and $911,582 at September 30, 1996.
F-69
DIRECT BROADCASTING SATELLITE CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND SEPTEMBER 30, 1996
(CONTINUED)
The deferred income tax benefit results primarily from net operating losses for
tax purposes. The net operating loss carryover to future years is $2,202,393 at
December 31, 1995, and $2,376,861 at September 30, 1996, none of which will
expire until the year 1999. In addition, the Company has not claimed as a tax
deduction accrued interest payable of $633,699. For income tax purposes, the
Company reports its net loss on the cash basis.
(8) CONTINGENT LIABILITIES
In 1982, the Company entered into agreements with two French corporations
pursuant to which each corporation, in exchange for the Company's commitment to
procure satellite hardware, paid to a satellite launch provider, for the benefit
of the Company, a launch reservation fee of $100,000. The first agreement, as
amended, specified that payment of the $100,000 plus interest of 13% per annum
was due on December 31, 1983. The second agreement provided that the Company
was obligated to issue 6,000 (as adjusted) shares of common stock no later than
two years from the date of the agreement.
No equipment was procured from either corporation, no shares of common stock
have been issued nor has the Company returned the $100,000 payment to either
corporation. The Company has not determined whether either obligation is
currently enforceable under French law. The Company is unaware of any request
for payment or for the issuance of the Company's shares from August 3, 1987 to
date.
(9) RELATED PARTY TRANSACTIONS
Consulting fees are paid to certain shareholders and officers.
F-70
ANNEX I
PLAN AND AGREEMENT OF MERGER
This PLAN AND AGREEMENT OF MERGER ("Agreement") is made as of the 21st day
of December, 1995, by and among ECHOSTAR COMMUNICATIONS CORPORATION, a Nevada
corporation formed in April 1995 ("EchoStar"), DIRECT BROADCASTING SATELLITE
CORPORATION, a Colorado corporation ("DBSC"), and DIRECT BROADCASTING SATELLITE
CORPORATION, A Delaware corporation ("DBSD").
RECITALS
WHEREAS, DBSD and EchoStar Communications Corporation, a Nevada Corporation
formed in December 1993 ("Old EchoStar"), have entered into a Stock Purchase
Agreement, dated November 15, 1994 (the "Purchase Agreement"), pursuant to which
EchoStar purchased certain shares of DBSD's Common Stock, $0.01 par value (the
"DBSD Shares"), for the consideration set forth in the Purchase Agreement, and
was granted certain other rights as more particularly set forth therein;
WHEREAS, the Purchase Agreement contemplates the potential execution by Old
EchoStar, DBSD and DBSC or a plan and agreement of merger at the option of the
parties as provided in the Purchase Agreement;
WHEREAS, Old EchoStar has assigned its right to enter into this Agreement to
EchoStar;
WHEREAS, the parties hereto intend the Merger to constitute and do hereby
adopt this Agreement as a plan of reorganization pursuant to Section
368(a)(1)(A) of the Internal Revenue Code of 1986, as amended; and
WHEREAS, the Boards of Directors of DBSD, EchoStar and DBSC, deeming it
advisable for the mutual benefit of EchoStar, DBSC, DBSD and their respective
shareholders that DBSD merge with DBSC (the "Merger"), have approved this Plan
and Agreement of Merger under the terms and conditions hereinafter set forth.
AGREEMENT
NOW, THEREFORE, in consideration of the mutual covenants, agreements,
representations and warranties herein contained, the parties hereto agree that
DBSD and DBSC shall be merged and that the terms and conditions of the Merger
and the mode of carrying the same into effect shall be as follows:
ARTICLE I
DEFINITIONS
1.1 DEFINITIONS. For purposes of this Agreement, and except as otherwise
expressly provided, or unless the context otherwise requires, the following
terms shall have the meanings set forth below:
"Additional Equity Rights" shall mean any valid equity rights not disclosed
to EchoStar on the date of the Purchase Agreement pursuant to Schedule 5.2 of
the Purchase Agreement.
"Adverse Notice" shall have the meaning set forth in Subsection 8.3.2
herein.
"Affiliate" means as to any particular Person, any other Person or entity
that directly or indirectly, through one or more intermediaries, controls, is
controlled by, or is under common control with such particular Person.
"Agreement" means this Agreement.
"Appraisal Laws" shall have the meaning set forth in Subsection 2.5.1
herein.
A-1
"Cash Value" shall have the meaning set forth in Subsection 2.3.2 herein.
"Challenge" shall have the meaning set forth in Section 4.16.6 herein.
"DBSD Due Diligence" shall have the meaning set forth in Section 4.20
herein.
"DBSD Financial Statements" shall have the meaning set forth in Section
4.15.1 herein.
"DBSD Liabilities" has the meaning set forth in Subsection 6.3.2 hereof.
"DBSD Option" means the option granted by DBSD to EchoStar to acquire an
additional 333,333, or 11.3% of the, DBSD Shares.
"DBSD's Business" shall have the meaning set forth in Section 4.8 herein.
"DBS Rights" means the construction permits and related rights with respect
to eleven (11) frequencies at an eastern, and eleven (11) frequencies at a
western, orbital location, together with any further permits or rights requested
or granted to DBSD.
"DBSD Shares" has the meaning set forth in the RECITALS above.
"DBSD Stock Certificates" shall have the meaning set forth in Subsection
2.3.4 herein.
"Defaulting Party" shall have the meaning set forth in Section 12.3 herein.
"Deemed Acceleration" shall have the meaning set forth in Section 5.7
herein.
"DGCL" shall have the meaning set forth in Section 2.1 herein.
"Direct Broadcasting Satellite Corporation" shall have the meaning set forth
in Subsection 2.1.1 herein.
"Dissenting Shares" shall have the meaning set forth in Subsection 2.5.1
herein.
"Due Diligence" shall have the meaning set forth in Section 4.20 herein.
"EchoStar" shall mean, unless otherwise stated herein or the context
otherwise requires, EchoStar and Old EchoStar.
"EchoStar Common Stock" means the Class A Common Stock of EchoStar
Communications Corporation, a Nevada corporation formed in April 1995, $0.01 par
value.
"EchoStar Financials" shall have the meaning set forth in Subsection 5.6.1
herein.
"Effective Time of the Merger" has the meaning specified in Subsection 2.2.6
hereof.
"Entitle Acceleration" shall have the meaning set forth in Section 5.7
herein.
"Existing Equity Rights" shall have the meaning set forth in Section 6.4.2
herein.
"FCC" means the Federal Communications Commission and its staff, and
includes any governmental body or agency succeeding to the functions thereof.
"FCC Approval" shall have the meaning set forth in Subsection 8.4.1 herein.
"GAAP" shall have the meaning set forth in Section 4.15.1 herein.
"Governing Documents" shall have the meaning set forth in Section 4.12
herein.
"Indenture" shall have the meaning set forth in Section 7.3 herein.
"Merger Closing" or "Merger Closing Date" have the meanings specified in
Article X herein.
"Merger Price" shall have the meaning set forth in Subsection 2.3.2 herein.
"Negotiations" shall have the meaning set forth in Section 12.6 herein.
"Nondefaulting Party" shall have the meaning set forth in Section 12.3
herein.
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"Outstanding Common Shares" shall have the meaning set forth in Section 4.2
herein.
"Permitted Liabilities" shall mean the reasonable and prudent expenses
incurred by DBSD in connection with the transactions contemplated by the
Purchase Agreement and in the ordinary course of DBSD's pursuit of a successful
DBS business, and as required pursuant to the Satellite Contract, or otherwise
necessary to maintain the DBS Rights.
"Person" means an individual, a partnership, a corporation, a limited
liability company, an association, a trust, an organization, a governmental
entity or any department, agency or political subdivision thereof, or any other
legal entity.
"Purchase Agreement" shall have the meaning set forth in Section 8.1 herein.
"Purchase Closing" shall mean the closing of the purchase by EchoStar of
DBSD Shares pursuant to the Purchase Agreement.
"Registration Statement" shall have the meaning set forth in 6.12 herein.
"Satellite Contract" shall have the meaning set forth in Subsection 6.4.9
herein.
"SEC" means the Securities and Exchange Commission and includes any
governmental body or agency succeeding to the functions thereof.
"Securities Act" means the Securities Act of 1933, as amended, or any
similar federal law then in force.
"Securities Exchange Act" means the Securities Exchange Act of 1934, as
amended, or any similar federal law then in force.
"Senior Notes" shall have the meaning set forth in Section 7.3 herein.
"Share Value" shall have the meaning set forth in Subsection 2.3.2 herein.
"Subsidiaries" means, with respect to any Person, any corporation,
partnership, association or other business entity of which (i) if a corporation,
a majority of the total voting power of shares of stock entitled (without regard
to the occurrence of any contingency) to vote in the election of directors,
managers or trustees thereof is at the time owned or controlled, directly or
indirectly, by that Person or one or more of the other Subsidiaries of that
Person or a combination thereof, or (ii) if a partnership, association or other
business entity, a majority of the partnership of other similar ownership
interest thereof is at the time owned or controlled, directly or indirectly, by
any Person or one or more Subsidiaries of that Person or a combination thereof.
For purposes hereof, a Person or Persons shall be deemed to have a majority
ownership interest in a partnership, association or other business entity if
such Person or Persons shall be allocated a majority of partnership, association
or other business entity gains or losses and shall be or control the managing
director or general partner of such partnership, association or other business
entity.
"Tax Liabilities" shall have the meaning set forth in Section 4.17 herein.
"Transfer" shall have the meaning set forth in Subsection 6.4.3 herein.
1.1.1 In addition, other capitalized words and phrases used in this
Agreement shall have the meanings ascribed herein.
ARTICLE II
MERGER
2.1 ACTIONS TO BE TAKEN. Upon performance of all the covenants and
obligations of the parties contained herein required to be accomplished by the
Merger Closing and upon fulfillment (or waiver) of all the conditions to the
obligations of the parties contained herein required to be accomplished by
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the Merger Closing, at the Effective Time of the Merger and pursuant to the
Delaware General Corporation Law (the "DGCL") and the Colorado Business
Corporation Act (the "CBA"), the following shall occur:
2.1.1 DBSD shall be merged with and into DBSC, which shall be the
Surviving Corporation (the "Surviving Corporation"). The separate existence and
corporate organization of DBSD shall cease at the Effective Time of the Merger,
and thereupon, DBSD and DBSC shall be a single corporation, the name of which
shall be "Direct Broadcasting Satellite Corporation." DBSC, as the Surviving
Corporation, shall succeed, insofar as permitted by law to all of the rights,
assets, liabilities and obligations of DBSD in accordance with the CBA.
2.2.2 The Certificate of Incorporation of DBSC shall be and remain
the Certificate of Incorporation of the Surviving Corporation until amended as
provided by law.
2.2.3 The By-Laws of DBSC shall become the By-Laws of the Surviving
Corporation until amended as provided by law.
2.2.4 Until changed in accordance with the Certificate of
Incorporation and By-Laws of the Surviving Corporation, the directors of DBSC
immediately prior to the Effective Time of the Merger shall become the directors
of the Surviving Corporation.
2.2.5 Until changed in accordance with the Certificate of
Incorporation and By-Laws of the Surviving Corporation, the officers of DBSC
immediately prior to the Effective Time of the Merger shall become the officers
of the Surviving Corporation.
2.2.6 As soon as practicable after the terms and conditions of this
Agreement have been satisfied, and upon consummation of the closing referred to
in Article XI hereof (the "Merger Closing"), a Certificate of Merger and
Articles of Merger, consistent with this Agreement, in the form prescribed by,
and properly executed in accordance with, the DGCL and the CBA, respectively, in
form and substance satisfactory to counsel for the parties hereto and providing
for immediate effectiveness of the Merger, shall be filed with the Secretaries
of State of the States of Delaware and Colorado, respectively. The Merger shall
become effective when the Certificate of Merger and the Articles of Merger are
deemed filed with both such Secretaries of State pursuant to the DGCL and the
CBA, as the case may be. The date and time when the Merger shall become
effective is referred to in this Agreement as the "Effective Time of the
Merger."
2.3 CANCELLATION OR CONVERSION OF DBSD SHARES. As of the Effective Time of
the Merger, by virtue of the Merger and without any action on the part of any
shareholder:
2.3.1 Any DBSD Shares held in the treasury of DBSD, and any DBSD
Shares issued and outstanding immediately prior to the Effective Time of the
Merger which are owned by EchoStar or DBSC, shall be cancelled and retired. No
cash, securities or other consideration shall be paid or delivered in exchange
for such DBSD Shares under this Agreement.
2.3.2 Except with regard to DBSD Shares cancelled pursuant to
Subsection 2.3.1 hereof, and subject to Subsection 2.3.3 below, at the Effective
Time of the Merger, all DBSD Shares held by shareholders of DBSD other than
EchoStar shall, by virtue of the Merger and without any action on the part of
DBSD, be converted into and exchanged for: (i) .67417 EchoStar Shares (the
"Share Value"); or (ii) $7.99 in cash (the "Cash Value") (the Share Value and
the Cash Value being hereafter jointly referred to as the "Merger Price"). At
the time of the vote by DBSD shareholders on the Merger, each DBSD shareholder
in its sole discretion shall determine the portion of their DBSD Shares to be
exchanged for EchoStar Shares, and the portion of their DBSD Shares to be
exchanged for cash, provided that in the event the number of DBSD Shares to be
exchanged for cash, together with the number of DBSD Shares with respect to
which appraisal rights under Delaware law have been reserved, would exceed 50%
of the DBSD Shares held by shareholders other than EchoStar, the portion of the
DBSD Shares to be exchanged for cash, of each shareholder who elects to take a
combination of EchoStar Shares and cash, shall be reduced by the same percentage
for each such
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DBSD shareholder (i.e., for example, the number of DBSD Shares each such
shareholder may exchange for cash would each be reduced by 5%) and exchanged for
EchoStar Shares instead if numerically possible, so that the total number of
DBSD Shares exchanged for cash does not exceed 50%. Any DBSD Shareholder who
fails to make an election shall receive EchoStar Shares, not cash, for their
DBSD Shares. The number of EchoStar Shares set forth in clause (i) above shall
be adjusted, if at all, according to the provisions set forth in Section 2.4
below, and shall be appropriately adjusted to reflect any stock split, stock
dividend, combination or other similar transaction, involving EchoStar.
2.3.3 In lieu of the issuance or recognition of fractional EchoStar
Shares, cash equal to the value of such fractional shares shall be paid to each
holder of DBSD Shares electing to receive EchoStar Shares pursuant to Subsection
2.3.2 hereof.
2.3.4 After the Effective Time of the Merger, each holder of an
outstanding certificate or certificates theretofore representing DBSD Shares
converted into EchoStar Shares or cash pursuant to Subsection 2.3.2 hereof (the
"DBSD Stock Certificates"), upon surrender thereof to EchoStar or such other
entity as shall, prior to the Merger Closing, be designated by DBSD (and as
shall be reasonably acceptable to EchoStar) as exchange agent (the "Exchange
Agent"), shall be entitled to receive either: (i) the Cash Value; or (ii) a
Stock Certificate representing the number of EchoStar Shares into which the DBSD
Shares theretofore represented by such surrendered DBSD Stock Certificates shall
have been converted pursuant to Subsection 2.3.2 hereof. Until so surrendered,
each DBSD Stock Certificate shall be deemed for all purposes, other than as
provided below with respect to the payment of dividends or other distributions,
if any, in respect of EchoStar Shares, to represent the number of EchoStar
Shares into which the DBSD Shares theretofore represented thereby shall have
been converted, or the Cash Value, as the case may be. Until so surrendered,
EchoStar may, at its option, refuse to pay: (y) any dividend or other
distribution with respect to EchoStar Shares; or (z) any interest with respect
to the Cash Value, payable to such shareholders of DBSD; provided, however, that
upon surrender and exchange of such DBSD Stock Certificates there shall be paid
to DBSD's shareholders the amount, without interest, of dividends and other
distributions with respect to EchoStar Shares, if any, which have become payable
with respect to the EchoStar Shares and which have not previously been paid.
Whether or not a DBSD Stock Certificate is surrendered, from and after the
Effective Time of the Merger, such DBSD Stock Certificates shall under no
circumstances evidence, represent or otherwise constitute any stock or other
interest whatsoever in DBSC, the Surviving Corporation or any other Person, firm
or corporation other than EchoStar or its successors.
In the event any DBSD Stock Certificate shall have been lost, stolen or
destroyed, upon the making of an affidavit of that fact by the person claiming
such Certificate to be lost, stolen or destroyed and subject to such other
conditions as the Board of Directors of EchoStar may impose, EchoStar shall
issue in exchange for such lost, stolen or destroyed Certificate the Merger
Price deliverable in respect thereof as determined in accordance with Section
2.3.2. When authorizing such issue of the Merger Price in exchange therefor, the
Board of Directors of EchoStar may, in its discretion and as a condition
precedent to the issuance thereof, require the owner of such lost, stolen or
destroyed Certificate to give EchoStar a bond or other surety in such sum as
EchoStar may reasonably direct as indemnity against any claim that may be made
against EchoStar with respect to the Certificates alleged to have been lost,
stolen or destroyed.
2.4 ADJUSTMENT TO THE SHARE VALUE OR CASH VALUE. The Share Value or Cash
Value, as the case may be, shall be appropriately adjusted in the event that:
(i) on the Merger Closing Date DBSD Liabilities exceed the Permitted
Liabilities, but EchoStar desires to proceed with the Merger Closing
notwithstanding; (ii) any liabilities are asserted against DBSD which are
alleged to have arisen on or before March 31, 1994, but which are not shown in
the DBSD Financial Statements; or (iii) any Additional Equity Rights are
asserted. In the event an adjustment is necessary as a result of Subsection
2.4(i) or (ii) above, the Share Value or the Cash Value, as applicable, shall be
reduced by the percentage obtained from the quotient of "x"/$7,785,184, where
"x" is equal to the amount by which
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DBSD Liabilities exceed Permitted Liabilities, plus the amount (not to exceed
$5,000,000) of any liabilities contemplated by Subsection 4.2(ii) above. In the
event that liabilities contemplated by Subsection 4.2(ii) above exceed
$7,000,000, EchoStar may at its option either consummate the Merger and assume
those liabilities, or terminate this Agreement. In the event EchoStar elects to
terminate this Agreement as a result, then the DBSD Option shall terminate on
the close of business on the 90th day following the date of such termination. In
the event an adjustment is necessary as the result of Subsection 2.4(iii) above,
the Share Value or the Cash Value, as applicable, shall be reduced by the
percentage obtained from the quotient of "x"/"y" where "x" is the total number
of DBSD Shares which would be issued pursuant to all Additional Equity Rights in
the aggregate, if all such Additional Equity Rights were determined to be valid,
and "y" is the total number of DBSD Shares outstanding excluding DBSD Shares
held by EchoStar or its Affiliates. DBSD shall have the right to contest any
Additional Equity Rights and may incur reasonable expenses in that regard. In
the event any such Additional Equity Rights are being contested by DBSD on the
Merger Closing, EchoStar shall withhold the portion of the Merger Price which
would be allocable to holders of the Additional Equity Rights being contested.
To the extent the contested Additional Equity Rights are ultimately determined
to be invalid, EchoStar shall promptly release the portion of the Merger Price
withheld to the former DBSD shareholders entitled to receipt thereof. Following
Merger Closing, DBSD shall be required to continue to contest those Additional
Equity Rights only to the extent the costs and expenses of doing so are
reasonable.
2.5 DISSENTERS' RIGHTS.
2.5.1 The DBSD Shares held by those shareholders of DBSD who have
timely and properly exercised their dissenters' rights in accordance with the
provisions of the DGCL applicable to dissenters' rights (the "Appraisal Laws")
are referred to herein as "Dissenting Shares." Each Dissenting Share, the holder
of which, as of the Effective Time of the Merger, has not effectively withdrawn
or lost his dissenters' rights under the Appraisal Laws, shall not be converted
into or represent a right to receive EchoStar Shares or the Cash Value, as the
case may be, in connection with the Merger, but the holder thereof shall be
entitled only to such rights as are granted by the Appraisal Laws. Each holder
of Dissenting Shares who becomes entitled to cash pursuant to the provisions of
the Appraisal Laws shall receive payment therefor from the Surviving Corporation
from funds provided by EchoStar. EchoStar shall also be obligated to pay the
costs and expenses of both DBSD and EchoStar in connection with the exercise of
any appraisal rights, but not the costs of any dissenting DBSD shareholder,
unless required to do so by the Appraisal Laws. If any holder of Dissenting
Shares shall effectively withdraw or lose his dissenters' rights under the
Appraisal Laws, such Dissenting Shares shall be converted into the right to
receive cash in accordance with the Cash Value as set forth in Subsection 2.3.2
hereof.
2.5.2 Immediately following the expiration of the time for Dissenting
Shares to be paid pursuant to the Appraisal Laws, EchoStar shall make available,
by delivery to the Exchange Agent, Stock Certificates for such number of
EchoStar Shares as shall be required for exchange in accordance with this
Agreement and the Cash Value.
2.6 FURTHER ASSURANCES. From time to time, on and after the Effective Time
of the Merger, as and when requested by EchoStar or its successors or assigns,
the proper officers and directors of DBSD immediately before the Effective Date
of the Merger, all of whom shall submit their resignations to be effective at
the Effective Time of the Merger, shall, at EchoStar's expense and for and on
behalf and in the name of DBSD or otherwise, take or cause to be taken such
further or other actions as EchoStar or their respective successors or assigns
may deem necessary or desirable in order to confirm or record or otherwise
transfer to the Surviving Corporation title to and possession of all the
properties, rights, privileges, powers, franchises and immunities of DBSD and
otherwise to carry out fully the provisions and purposes of this Agreement.
2.7 INTENTION. The parties agree and acknowledge that prior to receipt, if
ever requested, of FCC Approval for a transfer of control of DBSD to EchoStar:
(i) it is not the intent of the parties to
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affect a transfer of control of DBSD to EchoStar, nor shall EchoStar assert
control over DBSD; and (ii) DBSD, acting through its Board of Directors, shall
retain sole and exclusive responsibility for and authority over, by example and
not by limitation, its corporate policy and actions, day to day operations,
finances, personnel policy and actions, FCC authorizations and the privileges
and obligations it has as a DBS conditional permittee.
2.8 RESTRICTIONS ON TRANSFER.
2.8.1 Each DBSD shareholder electing to receive EchoStar Shares in
connection with the Merger shall not offer, sell, contract to sell, grant any
option to purchase, pledge or otherwise dispose of, transfer or hypothecate any
of its EchoStar Shares, or in any other manner transfer all or a portion of the
economic consequences associated with ownership of the EchoStar Shares until
ninety (90) days following the Effective Time of the Merger (the "Lock Up" and
the "Lock Up Period"). Each certificate for EchoStar Shares issued in the Merger
shall contain a legend restricting the transfer of the EchoStar Shares except in
compliance with this Section 2.8.1.
2.8.2 If just prior to the Effective Time of the Merger, EchoStar is
unable to make the representations referenced in Section 5.8 below, and as a
result of this and no other significant factors, tax counsel in connection with
the Merger is unable to provide assurance that the Merger will qualify for
tax-free status, then the Lock Up will terminate on that date with respect to
50% of the EchoStar Shares held by each shareholder, but shall continue with
respect to the remainder of the EchoStar Shares for the remainder of the Lock Up
Period. As used in this Section 2.8.2, tax counsel shall mean the law firm of
Sullivan & Worcester, except that if EchoStar disagrees with the opinion of
Sullivan & Worcester, EchoStar shall be free to engage counsel reasonably
acceptable to DBSD, at EchoStar's expense, and if that counsel renders an
opinion that would not trigger partial or full release of the Lock Up, then the
Lock Up shall not terminate.
ARTICLE III
THIS ARTICLE HAS BEEN INTENTIONALLY DELETED.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF DBSD
DBSD hereby represents and warrants to EchoStar and DBSC as follows, which
representations and warranties shall be deemed to have been made on the date
hereof and at the Effective Time of the Merger:
4.1 ORGANIZATION. DBSD is a corporation, duly organized, validly existing,
and in good standing under the laws of the State of Delaware, and has all the
requisite corporate power and authority to own its property and conduct the
business in which it is engaged. Attached as Schedule 4.1 are true and complete
copies of DBSD's Certificate of Incorporation and By-Laws as amended to the date
hereof.
4.2 CAPITALIZATION. DBSD is authorized to issue three million (3,000,000)
DBSD Shares and no other capital stock of any kind or class. As of the date
hereof, there are 1,618,138 DBSD Shares issued and outstanding (the "Outstanding
Common Shares"). DBSD does not have any other shares of capital stock issued and
outstanding other than the Outstanding Common Shares. All of the Outstanding
Common Shares are validly issued, fully paid and non-assessable. To the best of
DBSD's knowledge, following diligent investigation, other than the DBSD Option,
DBSD does not have outstanding any options or warrants to purchase, or contracts
to issue, or contracts or any other rights entitling anyone to acquire, DBSD
Shares, or securities convertible into such DBSD Shares, other than as set forth
in Schedule 4.2 attached hereto. There are no Existing Equity Issuances pending
as of the date of this Agreement.
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4.3 SUBSIDIARIES. DBSD has no Subsidiaries or equity interest in any
corporation, partnership or other entity.
4.4 QUALIFICATION. DBSD is not qualified as a foreign corporation in any
jurisdiction other than as set forth in Schedule 4.4 attached hereto. The nature
of the business of DBSD does not make qualification of it as a foreign
corporation necessary under the laws of any jurisdiction other than as set forth
in Schedule 4.4 which are the only jurisdictions in which the nature of its
business requires qualification.
4.5 OWNED REAL ESTATE. DBSD does not have title to any real estate.
4.6 LEASED REAL ESTATE. DBSD does not lease any real estate other than as
set forth in Schedule 4.6.
4.7 LEASED TANGIBLE PERSONAL PROPERTY. DBSD does not lease any personal
property other than as set forth in Schedule 4.7.
4.8 ALL CONTRACTS. Schedule 4.8 attached hereto lists all contracts or
other obligations to which DBSD is a party or by which it is bound, which
constitute all of the contracts and other obligations to which DBSD is a party
or by which it is bound except to the extent any such contract or obligation is
clearly not material to DBSD's business operations, governance, or prospects
(collectively "DBSD's Business"). DBSD is not in default under any of such
contracts, obligations or commitments, is not aware of any facts which, with
notice and/or the passage of time, would constitute such a default and is not
aware of any default by any party thereto except: (i) for such defaults as do
not and will not have in the aggregate any material adverse effect on DBSD's
Business, or the ability of DBSD to perform any of its obligations under this
Agreement or limit in any way the benefits EchoStar expects to obtain pursuant
to this Agreement, or (ii) as limited in Schedule 4.8. No consent is required
under the contracts, obligations and commitments referred to in this Section 4.8
in connection with the Merger, other than as set forth in Schedule 4.8. To the
extent Schedule 4.8 overlaps with matters required by other Schedules to this
Agreement, DBSD shall list the matter on each applicable Schedule.
4.9 TRANSACTIONS WITH DIRECTORS, OFFICERS, EMPLOYEES AND AFFILIATES. Since
August 3, 1987 except as set forth in Schedule 4.9 attached hereto, there have
been no transactions between DBSD and any director, officer, employee of
affiliate (as defined in Rule 405 under the Securities Act) of DBSD. Since
August 3, 1987 none of the officers, directors, employees or affiliates of DBSD,
or any member of the immediate family of any such persons, has been a director
or officer of, or has had a material interest in, any firm, corporation,
association or business enterprise which during such period has been a supplier,
customer or sales agent of DBSD or has completed to any extent with DBSD, except
as otherwise set forth in Schedule 4.9.
4.10 LITIGATION. Other than as set forth in Schedule 4.10, there are no
legal, administrative, arbitration or other proceedings or claims pending or, to
the best of DBSD's knowledge, threatened against DBSD, nor is DBSD subject to
any existing judgment, nor has DBSD received any inquiry from an agency of the
Federal or of any state or local government regarding the transactions
contemplated hereby, or regarding any violation or possible violation of any
law, regulation or ordinance affecting its business or assets.
4.11 LICENSES AND PERMITS. Other than: (i) as set forth in Schedule 4.11;
(ii) the DBS Rights; and (iii) DBSD's foreign qualification to do business in
the District of Columbia, DBSD has no other licenses, permits, orders, approvals
or authorizations of any nature, and to DBSD's knowledge, no such licenses,
permits, orders, approvals, or authorizations of any nature are required for
DBSD's current business, except to the extent any such failures are clearly not
material to DBSD's Business.
4.12 AUTHORITY RELATIVE TO AGREEMENT; ENFORCEABILITY. The execution,
delivery and performance of this Agreement are within the legal capacity and
power of DBSD; have been duly authorized by all requisite corporate action on
the part of DBSD; require the approval or consent of no other Persons, entities
or agencies (except for: (i) FCC notifications, consents and approvals; and (ii)
approval of the
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shareholders of DBSD); and will neither violate nor constitute a default under,
nor create a lien or breach under, nor result in the acceleration of performance
or right to accelerate a lien or breach under, nor result in the acceleration of
performance or right to accelerate performance under (whether or not after
giving of notice or lapse of time or both), the terms of the Certificate of
Incorporation or By-Laws of DBSD or of any agreement, obligation or commitment
binding upon DBSD (the "Governing Documents") except: (i) as set forth in
Schedule 4.12; or (ii) to the extent any such argument, obligation, commitment,
or the acceleration or breach thereof, is clearly not material to DBSD's
Business. This Agreement is a legal, valid and binding obligation of DBSD
enforceable against DBSD in accordance with its terms, except insofar as the
enforcement thereof may be limited by bankruptcy, insolvency, moratorium or
similar laws affecting the enforcement of creditors rights generally and subject
to equitable principles limiting the availability of equitable remedies, and
except insofar as the enforcement thereof may be limited by the rules,
regulations or orders of the FCC.
4.13 COMPLIANCE WITH APPLICABLE LAWS. To the best of DBSD's knowledge,
DBSD is in compliance in all material respects with all Federal, state, county
and municipal laws, ordinances, regulations, rules, reporting requirements,
judgments, orders, decrees and requirements of common law applicable to the
conduct and business of DBSD (together, the "General Laws") except to the extent
any such violation is clearly not material to DBSD's Business.
4.14 EMPLOYMENT MATTERS.
4.14.1 No employee of DBSD has a written or oral agreement (or an
assurance pursuant to any employee manual) which would preclude DBSD from
terminating such employee's employment at any time with no obligation to DBSD to
make any payment except wages to the date of termination. DBSD has not engaged
in any discriminatory hiring or employment practices nor have any employment
discrimination complaints been filed against DBSD with any state or Federal
agency. DBSD has not been threatened by any former employee with any suit
alleging wrongful termination.
4.14.2 To the best of DBSD's knowledge there is no arrangements or
contracts with any present or former director, officer, employee or independent
contractor of DBSD, or any other Person, that require any deferred compensation,
retirement or welfare benefits to be paid or provided following termination of
services, except as set forth on Schedule 4.14.2.
4.15 FINANCIAL STATEMENTS.
4.15.1 The financial statements of DBSD provided to EchoStar for the
fiscal year ended March 31, 1995, a copy of which are attached hereto as Exhibit
D (the "DBSD Financial Statements"), fairly represent the financial position of
DBSD and the results of its operations at the dates and for the periods to which
they apply. To the best of DBSD's knowledge, following diligent investigation,
the DBSD Financial Statements reflect all Existing Equity Rights, as such term
is defined in Subsection 6.4.2 below. Such DBSD Financial Statements have been
prepared in conformity with generally accepted accounting principles, applied on
a consistent basis throughout the periods involved ("GAAP") except as
specifically noted therein.
4.15.2 The DBSD Financial Statements reflect substantially all of the
liabilities and obligations (whether absolute, accrued, contingent or otherwise)
of DBSD. Other than the $300,000 of liabilities referenced in Subsection 5.15.2
of the Purchase Agreement, since the date of the DBSD Financial Statements, DBSD
has incurred no liabilities (whether absolute, accrued, contingent or otherwise)
other than Permitted Liabilities.
4.16 BUSINESS CHANGES. Except as set forth on Schedule 4.16 attached
hereto, since the date of the DBSD Financial Statements there has not been:
4.16.1 any adverse changes in the working capital, financial
condition, assets, liabilities, or in the business or prospects of DBSD (except
to the extent such adverse change is clearly not
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material to DBSD's Business and except for: (i) the $300,000 of liabilities
referenced in Subsection 5.15.2 of the Purchase Agreement; and (ii) Permitted
Liabilities incurred subsequent to the Purchase Closing and disclosed in a
permitted amendment to Schedule 5.16 to the Purchase Agreement;
4.16.2 any damage, destruction or loss affecting the business of DBSD
(except to the extent clearly not material to DBSD's Business);
4.16.3 any amendment or termination of any contract, lease or license
to which DBSD is a party or by which it is, or may be bound (except to the
extent clearly not material to DBSD's Business);
4.16.4 any dividend or distribution declared, set aside or paid in
respect of the DBSD Shares;
4.16.5 any sale or other disposition of assets of DBSD having a value
in excess of $1,000; or
4.16.6 any actual or threatened challenge to the DBS Rights (a
"Challenge").
4.17 TAXES. As of the date of this Agreement, all tax and information
returns required to have been filed by DBSD have been filed with the appropriate
authority; and all Federal, state and local taxes (including without limitation
income, franchise, property, sales, use, value added, withholding, excise,
capital or other tax liabilities), charges, assessments, penalties and interest
of DBSD (collectively, the "Tax Liabilities") required to be paid on or before
the date of this Agreement were paid or have been accrued on DBSD's books. Such
returns were correct in all material respects as filed. As of the date of this
Agreement, no assessments or additional Tax Liabilities have been proposed or
threatened against DBSD or any of its assets, and DBSD has not executed any
waiver of the statute of limitations on the assessments or collection of any Tax
Liabilities. The representations above shall continue to be true and complete on
the date of consummation of the Merger, except as to those Tax Liabilities which
are currently being contested in good faith and with respect to which adequate
provision for the payment thereof has been reserved and set aside by DBSD. The
DBSD Financial Statements include adequate provision for Tax Liabilities
incurred or accrued as of the date thereof. True and complete copies of DBSD's
most recent federal, state and local tax returns have delivered previously by
DBSD to EchoStar.
4.17.1 Since August 3, 1987, no federal tax returns of DBSD have ever
been audited or examined by the Internal Revenue Service. There are no pending
investigations of DBSD or its tax returns by any Federal, state or local taxing
authority and there are no Federal, state or local tax liens upon any of DBSD's
assets.
4.17.2 DBSD and EchoStar intend the Merger to constitute a plan of
reorganization pursuant to Section 368(a)1(A) of the Internal Revenue Code of
1986, as amended, provided, however, that notwithstanding this statement of
intent and the similar statement in the third Recital of this Agreement, DBSD
has concluded that the Merger, and the transactions contemplated hereby, as
currently structured and under existing tax law, will provide the tax treatment
to DBSD and its shareholders desired by them, and that regardless of the actual
tax outcome of the transactions, DBSD shall not raise such tax treatment as an
impediment to the Merger.
4.18 VALID ISSUANCE OF DBSD SHARES. The Outstanding Common Stock is all
duly and validly authorized and issued, fully paid and nonassessable. All
Outstanding Common Stock issued since August 3, 1987 has been issued in
compliance with all applicable Federal and state securities laws. With respect
to Outstanding Common Stock issued prior to August 3, 1987, nothing has come to
the attention of DBSD which would lead it to believe that any such stock was
issued in violation of any applicable Federal or state securities laws. The
Option Shares issuable upon exercise of the DBSD Option have been duly and
validly reserved for issuance and, upon issuance in accordance with the terms of
the DBSD Option pursuant to Section 2.2 of the Purchase Agreement, shall be duly
and
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validly issued, fully paid and nonassessable, and issued in compliance with all
applicable Federal and state securities laws. Such DBSD Option Shares are not
subject to any preemptive rights of any Person.
4.19 BROKERAGES. DBSD has not engaged any broker or finder to render
services in connection with this Agreement. No fee or other amount is payable by
DBSD with respect to such type of services. A list of all brokers and finders
DBSD has retained since August 3, 1987, together with a copy of each such
agreement (or if oral a summary of all material terms thereof), is attached as
Schedule 4.19. With respect to any broker, finders' or similar contracts,
regardless of when entered into, nothing has come to the attention of DBSD which
would lead it to believe that any fee would be payable by DBSD at any time in
the future in connection with any possible transaction unless, at the request of
DBSD, any such broker or finder brings a Person to the attention of DBSD, with
which Person DBSD ultimately consummates an agreement.
4.20 DBS LICENSES. DBSD has been awarded by the FCC a conditional
construction permit and specific orbital slot assignments with respect to eleven
(11) DBS frequencies located at 61.5 degrees West Longitude, and eleven (11) DBS
frequencies located at 175 degrees West Longitude. Other than those filed by
Dominion Video Services, Inc. ("DVS") and others as may be set forth in Schedule
4.20, there are no Challenges to the DBS Rights and DBSD reasonably believes
that such Challenges will not be successful. As of the date hereof, DBSD is in
full compliance with all FCC "due diligence" requirements (hereinafter, "DBSD
Due Diligence") to the best of its knowledge.
4.21 PENDING OR CONTEMPLATED TRANSACTIONS. DBSD is not a party to any
agreement, express or implied, with any party, other than EchoStar, regarding a
transaction involving the DBS Rights, or otherwise related to the transactions
contemplated by this Agreement.
4.22 SHAREHOLDER APPROVAL. Pursuant to applicable law, and the Governing
Documents: (i) approval of the Merger by fifty percent (50%), plus one DBSD
Share, of the total Outstanding Common Stock shall be sufficient to approve the
Merger; and (ii) neither EchoStar nor Harley Radin (DBSD's Chairman) shall be
prohibited from voting any of their DBSD Shares in favor of the Merger.
4.23 BOARD APPROVAL. The Board of DBSD has voted to approve all of the
transactions contemplated by this Agreement, including but not limited to the
recommendation that DBSD's shareholders vote to approve the Merger, and that the
DBSD Board shall recommend that DBSD's shareholders approve the Merger except in
the circumstances specified in Section 6.8 below. DBSD shall not assert that an
appraisal or valuation or either DBSD or EchoStar is required, or request any
appraisal or valuation, in connection with Board approval of the Merger, the
solicitation of its shareholders or otherwise, unless required by Federal or
state securities laws.
4.24 RELIANCE. In determining whether to enter into this Agreement and the
transactions contemplated hereby, DBSD has not relied upon any representations
or warranties or other information (whether oral or written) furnished by
EchoStar other than as set forth in, or scheduled pursuant to, this Agreement or
the Purchase Agreement.
4.25 FULL DISCLOSURE. No representation or warranty made by DBSD in this
Agreement, no certification furnished or to be furnished to EchoStar pursuant to
this Agreement, and no document delivered by DBSD to EchoStar or its counsel
hereunder, contains or will contain any untrue statement of a material fact or
omits or will omit to state a material fact necessary to make the statements
contained herein or therein not misleading.
DBSD shall be permitted to amend any Schedule provided pursuant to this
Article IV at any time to reflect action taken by DBSD as permitted by this
Agreement or as necessary to reflect any subsequent Challenges in Schedule 4.20;
provided that: (i) DBSD shall provide such revised Schedule to EchoStar within
five (5) business days of the event which results in the necessity of an update;
and (ii) this provision shall only apply prospectively (i.e., it shall not be
construed as allowing DBSD to cure a representation or schedule which was false,
incomplete or inaccurate at the time it was made or provided, through a
subsequent amendment thereto).
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ARTICLE V
REPRESENTATIONS AND WARRANTIES OF ECHOSTAR AND DBSC
EchoStar and DBSC hereby represent and warrant to DBSD as follows, which
representations and warranties shall be deemed to have been made on the date
hereof and as of the Effective Time of the Merger:
5.1 ORGANIZATION. EchoStar and DBSC are each corporations duly organized,
validly existing, and in good standing under the laws of the States of Nevada
and Colorado, respectively, and have all requisite corporate power and authority
to own their property and conduct the business in which each is engaged.
Attached as Schedule 5.1.1 are true and complete copies of EchoStar's and DBSC's
Articles of Incorporation and By-Laws as amended to the date hereof.
5.2 CAPITALIZATION. All outstanding shares of EchoStar are validly issued,
fully paid and non-assessable.
5.3 AUTHORITY RELATIVE TO AGREEMENT; ENFORCEMENT. The execution, delivery
and performance of this Agreement is within the legal capacity and power of
EchoStar and DBSC; have been duly authorized by all requisite corporate action
on the part of EchoStar and DBSC; require the approval or consent of no persons,
entities or agencies, other than such approval required from the FCC and as
shown on Schedule 5.3.1 attached hereto, and will neither violate nor constitute
a default under, nor create a lien or breach under, nor result in the
acceleration of performance or right to accelerate performance under (whether or
not after the giving of notice or lapse of time or both), the terms of the
Articles of Incorporation and By-Laws of EchoStar or DBSC or of any material
agreement, obligation or commitment binding upon EchoStar (other than agreements
as to which appropriate consents, if obtained, shall avoid any defaults, which
consents have been, or will be, obtained). This Agreement is a legal, valid and
binding obligation of EchoStar and DBSC enforceable against EchoStar and DBSC in
accordance with its terms, except insofar as the enforcement thereof may be
limited by bankruptcy, insolvency, moratorium or similar laws affecting the
enforcement of creditors rights generally and subject to equitable principles
limiting the availability of equitable remedies, and except insofar as the
enforcement thereof may be limited by the rules, regulations or orders of the
FCC.
5.4 INAPPLICABILITY OF SPECIFIED STATUTES. EchoStar is not a "holding
company," or a "subsidiary company" or an "affiliate" of a "holding company," as
such terms are defined in the Public Utility Holding Company Act of 1935, as
amended, or an "investment company" or a company controlled by or acting on
behalf of an "investment company," required to be registered under the
Investment Company Act of 1940, as amended.
5.5 ISSUANCE OF SHARES. EchoStar has reserved for issuance the EchoStar
Shares to be issued pursuant to this Agreement, and upon issuance in accordance
with the terms hereof the EchoStar Shares will be duly and validly issued, fully
paid and nonassessable, and issued in compliance with all applicable federal and
state securities laws. Such EchoStar Shares are not subject to the preemptive
rights of any Person.
5.6 FULL DISCLOSURE. No representation or warranty made by EchoStar in
this Agreement, no certification furnished or to be furnished by EchoStar or
DBSD pursuant to this Agreement, and no document delivered by EchoStar to DBSD
or its counsel hereunder, contains or will contain any untrue statement of a
material fact or omits or will omit to state a material fact necessary to make
the statements contained herein or therein not misleading, as of the date made
furnished or delivered.
5.7 NO INDENTURE DEFAULTS. There are no defaults under the Indenture
pursuant to which EchoStar issued its Senior Discount Notes dated May 31, 1994
(the "Indenture" and the "Senior Notes") which entitle the holders of the Senior
Notes (the "Holders") to accelerate (as defined in the Indenture) the Senior
Notes, or any default EchoStar has notified the Holders of, and which would
entitle the Holders to declare a default and accelerate the Senior Notes (in
either event "Entitle
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Acceleration"). If the Senior Notes have been retired as of any date this
representation is required to be made, EchoStar represents and warrants that if
the Senior Notes were still outstanding there would be no defaults which Entitle
Acceleration ("Deemed Acceleration").
5.8 TAX REPRESENTATIONS. In addition to the representations and warranties
contained in this Article V, EchoStar shall make the representations and
warranties set forth in Schedule 5.8 attached hereto as of the date of this
Agreement only, which representations and warranties shall be incorporated
herein, and made a part hereof, by this reference.
EchoStar shall be permitted to amend any Schedule provided pursuant to this
Article V at any time to reflect action taken by EchoStar as permitted by this
Agreement; provided that: (i) EchoStar shall provide such revised Schedule to
DBSD within five (5) business days of the event which results in the necessity
of an update; and (ii) this provision shall only apply prospectively (i.e., it
shall not be construed as allowing EchoStar to cure a representation or schedule
which was false, incomplete or inaccurate at the time it was made or provided,
through a subsequent amendment thereto).
ARTICLE VI
COVENANTS OF DBSD
6.1 REGULAR COURSE OF BUSINESS. Through to the Effective Time of the
Merger DBSD shall carry on its business diligently and in the ordinary course
and use its best efforts to preserve its present business organization intact
and preserve its present relationships with Persons having business dealings
with it. DBSD shall not, and shall instruct its agents (including without
limitation its directors, officers, attorneys, accountants and investment
bankers) not to take any action which DBSD is prohibited from taking pursuant to
this Agreement, or which could reasonably be expected to increase the
liabilities or obligations, or decrease the rights, which EchoStar expects to
obtain consistent with the terms of this Agreement.
6.2 OUTSTANDING COMMON SHARES. Immediately prior to the Effective Time of
the Merger, the Outstanding Common Stock shall not exceed the number set forth
in Section 4.2 and Schedule 4.2 hereof, plus any Additional Equity Rights.
6.3 DBSD ASSETS AND LIABILITIES.
6.3.1 Through the Effective Time of the Merger, DBSD shall maintain
the DBS Rights free and clear of all liens, charges, encumbrances, pledges,
leases or any other restrictions which could limit in any way the uses which
EchoStar can make of the DBS Rights (other than those limitations imposed by the
FCC on all DBS licensees).
6.3.2 Prior to the Effective Time of the Merger, DBSD shall satisfy
in full each and every liability of DBSD, contingent, fixed, actual, accrued or
otherwise (including, without limitation, all current and long term liabilities
shown on the DBSD Financial Statements) (hereinafter referred to as the "DBSD
Liabilities") which accrued subsequent to August 3, 1987 (other than the debt to
TCI-K1, Inc. in the original principal amount of $500,000, which DBSD shall only
be required to repay if such debt is then due and owing and then only to the
extent of available cash or cash equivalents on hand on the day immediately
preceding the Merger Closing Date), so that there shall exist absolutely no DBSD
Liabilities at the Effective Time of the Merger other than Permitted Liabilities
(to the extent that DBSD does not have cash and cash equivalents on hand
adequate to pay such Permitted Liabilities).
6.3.3 If DBSD fails to satisfy Section 6.3.2 above prior to Closing,
then in addition to all other remedies available to EchoStar pursuant to this
Agreement, EchoStar shall be entitled, to the extent necessary in order to
satisfy all of the DBSD Liabilities in full, to adjust and amend the Share
Value, or the Cash Value, as the case may be, as set forth in Section 2.4 of
this Agreement.
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6.4 RESTRICTED ACTIVITIES AND TRANSACTIONS. Prior to the Effective Time of
the Merger, DBSD shall not:
6.4.1 amend its Certificate of Incorporation or By-Laws;
6.4.2 issue, sell or deliver, or agree to issue, sell or deliver or
grant, or declare any stock dividend or stock split with respect to, any DBSD
Shares or any securities convertible into any such DBSD Shares or convertible
into securities in turn so convertible, to any options, warrants or other rights
calling for the issuance, sale or delivery of any such shares or convertible
securities, provided, however, nothing in this Subsection 6.4.2 shall prohibit
DBSD from issuing DBSD Shares pursuant to any obligations, contingent or
absolute, in existence on the date of this Agreement and disclosed in the DBSD
Financial Statements and Schedule 4.2 to this Agreement ("Existing Equity
Rights") or Additional Equity Rights as permitted elsewhere in this Agreement;
6.4.3 sell, mortgage, pledge, lease or otherwise transfer or encumber
(a "Transfer"), or grant or agree to grant any rights to Transfer, any of the
DBSD Rights or any of its other material assets, property or rights, tangible or
intangible;
6.4.4 borrow, or agree to borrow, any funds or voluntarily incur,
assume or become subject to, whether directly or by way of guarantee or
otherwise, any obligation or liability, absolute or contingent, other than
Permitted Liabilities;
6.4.5 acquire control or ownership of any other corporation,
association, joint venture, partnership, business trust or other business
entity, or acquire control or ownership of all or a substantial portion of the
assets of any of foregoing, or enter into any agreement providing for any of the
foregoing;
6.4.6 solicit, discuss, negotiate or enter into any agreement with
any third party, or provide any information to any third party, with respect to
any inquiry, proposal, offer or possible offer from a third party relating to:
(i) the purchase of DBSD Shares or the acquisition of any option, warrant or
other right to purchase or otherwise acquire any such DBSD Shares or convertible
securities; (ii) an exchange offer for any DBSD Shares; (iii) a purchase, lease
or other acquisition of all or a substantial portion of the assets of DBSD; (iv)
a merger, consolidation or other combination involving DBSD; (v) any transaction
involving the DBS Rights; or (vi) any similar matter; provided, however, nothing
in this Subsection 6.4.6 shall prohibit DBSD from continuing its discussions
with foreign governments and foreign or domestic Persons regarding international
applications for the DBS Rights and joint venture opportunities with respect
thereto, provided that DBSD: (x) discloses all such discussions in existence on
the date of this Agreement in Schedule 6.4.6 attached hereto; (y) notifies
EchoStar in writing regarding the substance and content of any further
discussions; and (z) enters into no agreements, contracts, arrangements or
commitments which limit in any respect the uses to which EchoStar can put the
DBS Rights in the event the Merger is consummated, otherwise diminishes or
restricts the benefits or rights EchoStar expects to obtain from the
transactions contemplated by this Agreement, or exposes DBSD to any obligations
or liabilities, contingent, absolute or otherwise. DBSD shall immediately notify
EchoStar of any inquiries received with respect to any of matters set forth in
clauses (i) through (vi) above.
6.4.7 declare or pay any dividend with respect to DBSD Shares in
cash, stock or property, or redeem, purchase (or otherwise acquire any DBSD
Shares) or any options, warrants or other rights to purchase or to be issued
DBSD Shares;
6.4.8 enter into any contract (other than in the ordinary course of
its business or as otherwise permitted by this Agreement), or any licensing
arrangement;
6.4.9 conduct no business other than: (i) exercising its rights as
required by this Agreement; (ii) satisfying its obligation pursuant to its
Satellite Contract, by and between DBSD and
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Martin Marietta Corporation, dated March 12, 1990, as amended (the "Satellite
Contract"), or necessary to maintain its DBS Rights; or (iii) otherwise
necessary in the ordinary course of business; or
6.4.10 except as set forth in Section 8.8, take any action or fail to
take any action that could: (i) prevent any of its warranties and
representations herein from being true in all material respects as of the
Effective Time of the Merger; (ii) jeopardize the performance or fulfillment of
any of its obligations or commitments under this Agreement; or (iii) reasonably
be expected to have a material adverse effect on any of the benefits EchoStar
may derive from the transactions contemplated by this Agreement or from its
ownership of the DBSD Shares following the Effective Time of the Merger.
6.5 NO DEFAULT OR VIOLATION. Prior to the Effective Time of the Merger,
DBSD shall not: (i) violate, or commit a breach of or a default under, any
contract, obligation or commitment to which it is a party or to which any of its
assets may be subject (except to the extent clearly not material to DBSD's
Business); or (ii) violate any applicable General Law or judgments binding upon
DBSD (except to the extent clearly not material to DBSD's Business) or which
would prevent the consummation of the transactions contemplated by this
Agreement.
6.6 REPORTS; TAXES, ETC. Prior to the Effective Time of the Merger:
6.6.1 DBSD shall duly and timely (by the due date or any duly granted
extension thereof) file all reports and returns required to be filed with the
Federal, state and local authorities; and
6.6.2 DBSD shall: (i) promptly pay all Tax Liabilities indicated by
such returns or otherwise lawfully levied or assessed upon it or any of its
properties (except those Tax Liabilities which are currently being contested in
good faith and with respect to which adequate provision for the payment thereof
has been reserved and set aside by DBSD); and (ii) withhold or collect and pay
to the proper governmental authorities or hold in separate bank accounts for
such payment all taxes and other assessments which it believes in good faith to
be required by law to be so withheld or collected.
6.7 ADVICE OF CHANGES. DBSD shall promptly advise EchoStar orally and in
writing of: (i) any event occurring subsequent to the date of this Agreement
which would render any representation or warranty of DBSD contained in this
Agreement, if made on or as of the date of such event or the Merger Closing
Date, untrue, inaccurate or incomplete in any material respect; and (ii) any
material adverse change in the DBSD Financial Statements, working capital,
financial condition, assets, liabilities (whether absolute, accrued, contingent
to otherwise), operating profits, business or prospects of DBSD not otherwise
disclosed to EchoStar through permitted schedule updates to the Purchase
Agreement.
6.8 CONSENTS, APPROVALS AND FILINGS. DBSD shall use its best efforts to
obtain as promptly as possible all necessary approvals, authorizations,
consents, licenses, clearances or orders of governmental and regulatory
authorities required in order for DBSD to perform its obligations hereunder.
DBSD shall, as soon as practicable after the execution of this Agreement and the
effectiveness of the Form S-4 registration statement referenced in Section 6.12
hereof, and within the time provided by DGCL, call a special meeting of its
shareholders for the express purpose of voting upon this Agreement. DBSD shall
fully coordinate with EchoStar the preparation and timing of distribution of
those materials to its shareholders, including in those materials all materials
requested to be included by EchoStar, and no other material other than a proxy
and the Board recommendation described in this Section 6.8, provided that all
such materials must be in compliance with all applicable Federal and state
securities laws. The Board of DBSD shall recommend that the shareholders approve
the Merger and DBSD shall use its best efforts to obtain that approval, unless
at the time the materials are forwarded EchoStar is in material breach of this
Agreement, which breach has not been cured following required notice and the
expiration of all cure periods, or in the event of a Deemed Acceleration or a
default under the Indenture which Entitles Acceleration.
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6.9 DBSD DUE DILIGENCE. From the date hereof through the Effective Time of
the Merger, DBSD shall use its best efforts to comply with all DBSD Due
Diligence requirements imposed by the FCC. Unless and until the FCC has approved
a transfer of control of DBSD to EchoStar, nothing herein shall be construed as
limiting the sole prerogative of DBSD's Board and management to file FCC
applications and any responses to FCC inquiries.
6.10 ACCESS TO RECORDS AND PROPERTIES. EchoStar may, prior to the
Effective Time of the Merger, through its employees, agents and representatives,
make or cause to be made a detailed review of the business and financial
condition of DBSD and make or cause to made such investigation as it deems
necessary or advisable of the properties, assets, businesses, books and records
of DBSD. DBSD agrees to reasonably assist EchoStar in conducting such review and
investigation and will provide, and will cause its independent public
accountants to provide, EchoStar and its employees, agents and representatives
during regular business hours, in a manner that does not unreasonably interfere
with the operation of the business of DBSD, full access to, and complete
information concerning, all aspects of the businesses of DBSD, including its
books, records (including tax returns filed or in preparation), FCC filings,
contracts, projections, personnel and premises, the audit work papers and other
records of its independent public accountants and any documents (including any
documents filed on a confidential basis) included in any report filed with any
governmental agency.
6.11 BEST EFFORTS. DBSD shall use its best efforts to: (i) cause to be
fulfilled and satisfied all of the conditions to the Merger Closing to be
fulfilled and satisfied by it; (ii) cause to be performed all of the matters
required of it at or prior to the Merger Closing; (iii) fully comply with all
General Laws (except to the extent clearly not material to DBSD's Business) and
DBSD Due Diligence; (iv) use its good faith best efforts to obtain approval of
the Merger by DBSD's shareholders and the FCC at the earliest possible date; and
(v) cooperate with EchoStar, in all reasonable respects in order to comply in
full with the spirit and intent of this Agreement. DBSD shall further take all
steps as shall be necessary to the end that the transactions contemplated hereby
shall be timely consummated; shall not commit or cause to be committed any act
which would prohibit the consummation of the transactions contemplated by this
Agreement; and shall not refrain or cause any Affiliate to refrain from taking
any action necessary or appropriate in furtherance of the consummation of the
transactions contemplated by this Agreement. DBSD shall use its best efforts to
make all of its warranties and representations contained in this Agreement true
and correct in all material respects as at the Merger Closing, with the same
effect as if the same had been made and this Agreement had been dated as at the
Merger Closing.
6.12 REGISTRATION STATEMENT, PROXY STATEMENT AND PROSPECTUS.
6.12.1 EchoStar and DBSD shall prepare, and EchoStar file with the
SEC as soon as is reasonably practicable after the date hereof a Form S-4
registration statement (the "S-4 Registration Statement") and a Proxy Statement
and Prospectus and shall use their best efforts to have the S-4 Registration
Statement declared effective by the Commission as promptly as practicable. The
S-4 Registration Statement shall provide for the registration under the
Securities Act of that number of EchoStar Shares which is sufficient to satisfy
EchoStar's obligations to issue EchoStar Shares in the Merger. EchoStar and DBSD
shall also take any action required to be taken under applicable law in
connection with the consummation of the transactions contemplated by this
Agreement, including, without limitation, in the case of EchoStar, all filings
under applicable state blue sky or securities laws in connection with the
issuance of the EchoStar Shares. EchoStar and DBSD shall promptly furnish to
each other all information, and take such other actions, as may reasonably be
requested in connection with any action by either of them in connection with the
provisions of this Section. DBSD and EchoStar shall cooperate in the preparation
and filing of the S-4 Registration Statement, Proxy Statement and Prospectus and
all information furnished for use therein by either party shall be reasonably
satisfactory to the other; PROVIDED, HOWEVER, that neither party shall have any
liability to the other or to any third party for any information contained
therein which is furnished by the other party. The information provided and to
be provided by DBSD and EchoStar, respectively, for use in the
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Proxy Statement and Prospectus shall be true and correct in all material
respects and shall not omit to state any material fact necessary in order to
make such information and the Proxy Statement and Prospectus not misleading as
of the date of the Proxy Statement and Prospectus.
6.12.2 Prior to the date of approval of the Merger by DBSD's
shareholders, each of DBSD and EchoStar shall correct promptly any information
provided by it to be used specifically in the Proxy Statement, Prospectus and
S-4 Registration Statement that shall have become false or misleading in any
material respect and EchoStar shall take all steps necessary to file with the
SEC and have declared effective or cleared by the SEC any amendment or
supplement to the Prospectus or the S-4 Registration Statement and together with
DBSD to cause the Prospectus as so corrected to be disseminated to the
shareholders of DBSD, in each case to the extent required by applicable law.
Without limiting the generality of the foregoing, EchoStar shall notify DBSD
promptly of the receipt of the comments of the SEC and of any request by the SEC
for amendments or supplements to the Prospectus and S-4 Registration Statement,
or for additional information, and EchoStar shall supply DBSD with copies of all
correspondence between EchoStar on the one hand, and the SEC on the other hand,
with respect to the Prospectus and S-4 Registration Statement. If at any time
prior to the DBSD shareholder meeting any event should occur relating to DBSD or
EchoStar or their respective officers or directors which should be described in
an amendment or supplement to the Prospectus and S-4 Registration Statement, the
parties shall promptly inform each other. Whenever any event occurs which should
be described in an amendment or a supplement to the Proxy Statement, Prospectus
or S-4 Registration Statement, DBSD and EchoStar shall, upon learning of such
event, cooperate in promptly preparing, filing and clearing with the SEC and
mailing to DBSD's shareholders such amendment or supplement; PROVIDED, HOWEVER,
that prior to such mailing (i) DBSD and EchoStar shall consult with each other
with respect to such amendment or supplement, (ii) shall afford each other
reasonable opportunity to comment thereon and (iii) each such amendment or
supplement shall be reasonably satisfactory to the other.
ARTICLE VII
COVENANT OF ECHOSTAR
7.1 BEST EFFORTS. EchoStar shall: (i) cause to be fulfilled and satisfied
all of the conditions to the Merger Closing to be fulfilled and satisfied by it;
(ii) cause to be performed all of the matters required of it at or prior to the
Merger Closing; (iii) cooperate with DBSD in order to obtain FCC Approval at the
earliest possible date; and (iv) cooperate with DBSD in all reasonable respects
in order to comply in full with the spirit and intent of this Agreement.
EchoStar shall further take all steps as shall be necessary to the end that the
Merger and the transactions contemplated hereby shall be timely consummated;
shall not commit or cause to be committed any act which would prohibit the
consummation of the transactions contemplated by this Agreement (other than
pursuing actions at the FCC with respect to applicants other than DBSD); and
shall not refrain or cause any Subsidiary to refrain from taking any action
necessary or appropriate in furtherance of the consummation of the transactions
contemplated by this Agreement. Nothing herein or anywhere else in this
Agreement shall be construed as obligating EchoStar to provide any additional
funds or guarantees to DBSD or otherwise to finance DBSD's business. EchoStar
shall use its best efforts to make all of its warranties and representations
contained in this Agreement which are expressly deemed made as of the Effective
Time of the Merger, true and correct in all material respects as at the Merger
Closing, with the same effect as if the same had been made and this Agreement
had been dated as at the Merger Closing.
7.2 CONSENTS, APPROVALS AND FILINGS. EchoStar shall use its best efforts
to obtain as promptly as possible all necessary approvals, authorizations,
consents, licenses, clearances or orders of governmental and regulatory
authorities required in order for EchoStar to perform its obligations hereunder.
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7.3 ADVICE OF CHANGES. EchoStar shall promptly advise DBSD orally and in
writing of: (i) any event occurring subsequent to the date of this Agreement
which would render any representation or warranty of EchoStar contained in this
Agreement, which representation or warranty is expressly deemed made as of the
Effective Time of the Merger, if made on or as of the date of such event or the
Merger Closing Date, untrue, inaccurate or incomplete in any material respect;
and (ii) any default under the Indenture which Entitles Acceleration or a Deemed
Acceleration.
7.4 RESTRICTED ACTIVITIES AND TRANSACTIONS. Prior to the Merger Closing,
EchoStar shall not take any action or fail to take any action that: (i) will
prevent any of its warranties and representations herein from being true in all
material respects as of the Merger Closing; (ii) will jeopardize the performance
or fulfillment of any of its obligations or commitments under this Agreement; or
(iii) could reasonably be expected to have a material adverse effect on any of
the benefits DBSD may derive from the transactions contemplated by this
Agreement following the Merger Closing (other than pursuing actions at the FCC
with respect to applicants other than DBSD).
7.5 NEGOTIATIONS WITH DBSD SHAREHOLDERS. Until such time as the Merger is
approved by DBSD's shareholders, EchoStar shall not, and shall cause its
officers, directors, employees, representatives and agents not to, directly or
indirectly, negotiate with any shareholder of DBSD to purchase their DBSD
Shares, provided, however, nothing contained in this Section 7.5 or elsewhere in
this Agreement shall prohibit EchoStar from accepting a pledge of DBSD Shares
from any DBSD shareholder as security for the repayment of obligations of such
shareholder to EchoStar, provided that such pledge: (i) shall not limit the
ability of such shareholder to vote their DBSD Shares without influence by
EchoStar, unless and until an event of default occurs, and then only provided
that any required FCC notifications and approvals have been obtained; and (ii)
shall not occur until after the Merger Trigger Date. Any transfer of DBSD Shares
following an event of default shall not be recognized as effective by DBSD
unless and until any required FCC notifications and approvals have been
obtained.
7.6 ACCESS TO RECORDS AND PROPERTIES.
7.6.1 DBSD may, prior to the Effective Time of the Merger, through
its employees, agents and representatives, make or cause to be made a detailed
review of the business and financial condition of EchoStar and make or cause to
be made such investigation as it deems necessary or advisable of the properties,
assets, businesses, books and records of EchoStar, in order to aid in the
preparation of materials for distribution to its shareholders to seek approval
of the Merger. EchoStar agrees to reasonably assist DBSD in conducting such
review and investigation and will provide and will cause its independent public
accountants to provide, DBSD and its employees, agents and representatives
reasonable access during regular business hours, in a manner that does not
unreasonably interfere with the operation of the business of EchoStar, to, and
complete information concerning, all aspects of the business of EchoStar,
including its books, records (including tax returns filed or in preparation),
projections, personnel and premises, the audit work papers and other records of
its independent public accountants and any documents (excluding any documents
filed on a confidential basis) included in any report filed with a governmental
agency.
7.6.2 All materials provided to DBSD pursuant to Subsection 7.6.1
hereof shall be used by DBSD solely in connection with its due diligence
examination of EchoStar and the preparation of materials necessary or required
to seek shareholder approval of the Merger; provided, however, unless such
materials or the contents thereof have been publicly disclosed to the SEC under
the Securities Act or the Securities Exchange Act, such materials or the
contents thereof shall not be disclosed to such shareholders in connection with
a proxy solicitation or otherwise. Without limiting the generality of the
foregoing, and notwithstanding any prior public disclosure with the SEC or
otherwise, DBSD shall not provide to its shareholders, or any Person, any
projections obtained from EchoStar, or materials based on projections obtained
from EchoStar. The restrictions and prohibitions contained in this Subsection
7.6.2 are in addition to any confidentially agreements between the parties,
whether contained in this Agreement or otherwise.
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7.7 REGISTRATION STATEMENT, PROXY STATEMENT AND JOINT PROSPECTUS.
7.7.1 EchoStar and DBSD shall prepare, and EchoStar shall file with
the SEC as soon as is reasonably practicable after the date hereof the S-4
Registration Statement and a Proxy Statement and Prospectus and shall use their
best efforts to have the S-4 Registration Statement declared effective by the
Commission as promptly as practicable. The S-4 Registration Statement shall
provide for the registration under the Securities Act of that number of EchoStar
Shares which is sufficient to satisfy EchoStar's obligations to issue EchoStar
Shares in the Merger. EchoStar and DBSD shall also take any action required to
be taken under applicable law in connection with the consummation of the
transactions contemplated by this Agreement, including, without limitation, in
the case of EchoStar all filings under applicable state blue sky or securities
laws in connection with the issuance of the EchoStar Shares. EchoStar and DBSD
shall promptly furnish to each other all information, and take such other
actions, as may reasonably be requested in connection with any action by either
of them in connection with the provisions of this Section. DBSD and EchoStar
shall cooperate in the preparation and filing of the S-4 Registration Statement,
Proxy Statement and Prospectus and all information furnished for use therein by
either party shall be reasonably satisfactory to the other; PROVIDED, HOWEVER,
that neither party shall have any liability to the other or to any third party
for any information contained therein which is furnished by the other party. The
information provided and to be provided by DBSD and EchoStar, respectively, for
use in the Proxy Statement and Prospectus shall be true and correct in all
material respects and shall not omit to state any material fact necessary in
order to make such information and the Proxy Statement and Prospectus not
misleading as of the date of the Proxy Statement and Prospectus.
7.7.2 Prior to the date of approval of the Merger by DBSD's
shareholders, each of DBSD and EchoStar shall correct promptly any information
provided by it to be used specifically in the Proxy Statement, Prospectus and
S-4 Registration Statement that shall have become false or misleading in any
material respect and EchoStar shall take all steps necessary to file with the
SEC and have declared effective or cleared by the SEC any amendment or
supplement to the Prospectus or the S-4 Registration Statement and together with
DBSD to cause the Prospectus as so corrected to be disseminated to the
shareholders of DBSD, in each case to the extent required by applicable law.
Without limiting the generality of the foregoing, EchoStar shall notify DBSD
promptly of the receipt of the comments of the SEC and of any request by the SEC
for amendments or supplements to the Prospectus and S-4 Registration Statement,
or for additional information, and EchoStar shall supply DBSD with copies of all
correspondence between EchoStar on the one hand, and the SEC on the other hand,
with respect to the Prospectus and S-4 Registration Statement. If at any time
prior to the DBSD shareholder meeting any event should occur relating to DBSD or
EchoStar or their respective officers or directors which should be described in
an amendment or supplement to the Prospectus and S-4 Registration Statement, the
parties shall promptly inform each other. Whenever any event occurs which should
be described in an amendment or a supplement to the Proxy Statement, Prospectus
or S-4 Registration Statement, DBSD and EchoStar shall, upon learning of such
event, cooperate in promptly preparing, filing and clearing with the SEC and
mailing to DBSD's shareholders such amendment or supplement; PROVIDED, HOWEVER,
that, prior to such mailing, (i) DBSD and EchoStar shall consult with each other
with respect to such amendment or supplement, (ii) shall afford each other
reasonable opportunity to comment thereon and (iii) each such amendment or
supplement shall be reasonably satisfactory to the other.
7.8 REPORTS. Subsequent to consummation of the Merger, EchoStar shall
provide to the former DBSD shareholders such periodic reports as it furnishes to
the other shareholders of EchoStar generally, for as long as they remain
EchoStar shareholders.
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ARTICLE VIII
CONDITIONS PRECEDENT TO OBLIGATIONS
OF ECHOSTAR AND DBSC
The obligations of EchoStar and DBSC under this Agreement to consummate the
Merger shall be subject to the satisfaction, or to the waiver by them in the
manner contemplated by Section 12.2 hereof, on or before the Merger Closing
Date, of the following conditions:
8.1 REPRESENTATIONS AND WARRANTIES TRUE. The representations and
warranties of DBSD contained in this Agreement, and of DBSD and Radin contained
in Section 4.3 of the Stock Purchase Agreement between EchoStar, DBSD and Radin
dated November 15, 1994 (the "Purchase Agreement"), shall be in all material
respects true and accurate as of the date when made and, except as to
representations and warranties (consisting solely of representations and
warranties regarding the DBSD Financial Statements and as to Additional Equity
Rights), which are expressly limited to a state of facts existing at a time
prior to the Merger Date, shall be in all material respects true and accurate at
and as of the Merger Closing Date as if made on the Merger Closing Date.
8.2 PERFORMANCE OF COVENANTS. DBSD shall have performed and complied in
all material respects with each and every covenant, agreement and condition
required by this Agreement to be performed or complied with by it prior to or on
the Merger Closing Date.
8.3 NO GOVERNMENTAL OR OTHER PROCEEDING OR LITIGATION.
8.3.1. No order of any court or administrative agency shall be in
effect which restrains or prohibits any transaction contemplated hereby or which
would limit or materially adversely affect EchoStar's ownership of DBSD; no
suit, action, investigation, inquiry or proceeding by any governmental body or
other Person or entity shall be pending or threatened against EchoStar, DBSC or
DBSD which challenges the validity or legality, or seeks to restrain the
consummation, of the transactions contemplated hereby or which seeks to limit or
otherwise materially adversely affect EchoStar's ownership of DBSD; and no
written advice shall have been received by EchoStar, DBSC, DBSD or their
respective counsel from any governmental body, which remains in effect, stating
that an action or proceeding will, if the Merger is consummated or sought to be
consummated, be filed seeking to invalidate or restrain the Merger or limit or
otherwise affect EchoStar's ownership of DBSD as contemplated by this Agreement.
8.3.2 In addition to the conditions to the Merger Closing set forth
in Subsection 8.3.1 hereof, EchoStar shall have received no oral or written
notice from the FCC that consummation of the transactions contemplated hereby
could reasonably be expected to result in a loss of any of EchoStar's DBS
licenses or rights, or the DBS Rights (an "Adverse Notice"); provided, however,
that in the event that any such Adverse Notice by the FCC is orally provided to
EchoStar the condition to the Merger Closing set forth in this Subsection 8.3.2
shall not be satisfied until the FCC confirms the Adverse Notice to counsel to
DBSD.
8.4 APPROVALS AND CONSENTS.
8.4.1 The transfer of control of DBSD, resulting from the
transactions contemplated by this Agreement, shall have received the approval
and consent of the FCC as required by applicable rules and regulations of the
FCC ("FCC Approval") in a "Final Order". For the purposes of this Agreement,
"Final Order" means an action or decision as to which: (i) no request for a stay
is pending, no stay is in effect, and any deadline for filing such request that
may be designated by statute or regulation has passed; (ii) no petition for
rehearing or reconsideration or application for review is pending and the time
for the filing of any such petition or application has passed; (iii) the FCC or
other
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regulatory agency does not have the action or decision under reconsideration on
its own motion and the time within which it may effect such reconsideration has
passed; and (iv) no appeal is pending or in effect and any deadline for filing
any such appeal that may be designated by statute or rule has passed.
8.4.2 The approval of shareholders of DBSD to the Merger, and all
approvals of applications to public authorities, Federal, state, or local, if
any, and all consents or approvals of any nongovernmental Persons, the granting
of which is necessary for the consummation of the Merger or for preventing the
termination or material breach of any right, privilege, license or agreement of
EchoStar of DBSD which is material to the business of EchoStar or DBSD, or for
preventing any material loss or disadvantage to EchoStar or DBSD, by reason of
the Merger, shall have been obtained; and no such consents or approvals shall
have imposed a condition to such consent or approval which in the reasonable
opinion of EchoStar is unduly burdensome to the consolidated financial condition
or operations of EchoStar or to DBSD's business.
8.5 OPINIONS OF COUNSEL. EchoStar shall have received an opinion of
Sullivan & Worcester, counsel to DBSD, dated the Merger Closing Date and
addressed to EchoStar, in substantially the form and substance set forth in
Schedule 8.5 attached hereto.
8.6 CERTIFICATES. DBSD shall have furnished EchoStar with a certificate of
DBSD in form and substance satisfactory to EchoStar, signed by DBSD's President,
to the effect that DBSD's representations and warranties contained in this
Agreement are true and correct in all material respects on and as of the Merger
Closing Date as though such representations and warranties were made at such
time (except as contemplated in Section 8.1 hereof) and that DBSD has performed
and complied in all material respects with all terms, covenants and provisions
of this Agreement required to be performed or complied with or by it prior to or
on the Merger Closing Date.
8.7 RESIGNATIONS. DBSD shall have received resignations (in form and
substance satisfactory to EchoStar) for each of its directors and officers, in
each case effective as of the Effective Time of the Merger.
8.8 ADVERSE CHANGES. DBSD shall have experienced no material adverse
change in its business, business prospects or financial condition between the
date of this Agreement and the consummation of the Merger other than such change
as is unrelated to events arising prior to the Merger Trigger Date, and: (i) is
the direct or indirect result of action within the control of DBSD which DBSD
takes or fails to take; and (ii) is contrary to a reasonable alternative course
of action which, following reasonable prior written notice of the change,
EchoStar suggested that DBSD pursue.
8.9 DBS RIGHTS. The DBS Rights shall continue to be held by DBSD free and
clear of any Challenges, mortgages, pledges, leases, or other encumbrances,
absolute or contingent which could limit in any way the uses which EchoStar can
make of the DBS Rights (other than those limitations imposed by the FCC on all
DBS licensees), except as limited by Section 8.8 above.
ARTICLE IX
CONDITIONS PRECEDENT TO OBLIGATIONS OF DBSD
The obligations of DBSD under this Agreement to consummate the Merger shall
be subject to the satisfaction, or to the waiver by it in the manner
contemplated by Section 12.2 hereof, on or before the Merger Closing Date of the
following conditions:
9.1 REPRESENTATIONS AND WARRANTIES TRUE. The representations and
warranties of EchoStar contained in this Agreement shall be in all material
respects true and accurate as of the date when made, and the representations and
warranties which are expressly deemed made as of the Effective Time of the
Merger shall be in all material respects true and accurate at and as of the
Merger Closing Date as if made on the Merger Closing Date.
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9.2 PERFORMANCE OF COVENANTS. EchoStar and DBSC shall have performed and
complied in all material respects with each and every covenant, agreement and
condition required by this Agreement to be performed or complied with or by it
prior to or on the Merger Closing Date.
9.3 NO GOVERNMENTAL OR OTHER PROCEEDING OR LITIGATION. No order of any
court or administrative agency shall be in effect which restrains or prohibits
any transaction contemplated hereby.
9.4 APPROVALS AND CONSENTS. The approval of the shareholders of DBSD to
the Merger.
9.5 OPINION OF COUNSEL. DBSD shall have received an opinion of David K.
Moskowitz, Esquire, counsel for EchoStar, dated the Merger Closing Date and
addressed to DBSD, in the form and substance set forth in Schedule 9.5 attached
hereto.
9.6 CERTIFICATES. EchoStar shall have furnished DBSD with a certificate of
EchoStar in form and substance satisfactory to DBSD, signed by its President or
Executive Vice President, to the effect that the representations and warranties
contained in this Agreement are true and correct in all material respects on and
as of the Merger Closing Date as though such representations and warranties were
made at such time and that it has performed and complied in all material
respects with all terms, covenants and provisions of this Agreement required to
be performed or complied with by it prior to or on the Merger Closing Date.
ARTICLE X
CLOSING; CLOSING DATE
Unless this Agreement shall have been terminated and the Merger shall have
been abandoned pursuant to a provisions of Article XI hereof, a closing (the
"Merger Closing") will be held on a date mutually acceptable to EchoStar and
DBSD as soon as practicable after the Effective Time of the Merger, at the
offices of EchoStar Communications Corporation commencing at 10:00 a.m. At such
time and place, the documents referred to in Articles VIII and IX hereof shall
be exchanged by the parties and, immediately thereafter, the Certificate of
Merger and the Articles of Merger shall be filed by DBSC and DBSD with the
Secretaries of State of the States of Delaware and Colorado; provided, however,
that if any of the conditions provided for in Articles VIII and IX hereof shall
not have been met or waived by the date on which the Merger Closing is otherwise
scheduled, then, subject to Section 11.1.3 hereof, the party to this Agreement
which is unable to meet such condition or conditions shall be entitled (provided
that such party is acting in good faith) to postpone the Merger Closing for a
reasonable period of time by notice to the other parties until such condition or
conditions shall have been met (which such notifying party will seek to cause to
happen at the earliest practicable date) or waived. The date on which the Merger
Closing occurs is hereinafter referred to as the "Merger Closing Date."
ARTICLE XI
TERMINATION
11.1 TERMINATION AND ABANDONMENT. This Agreement may be terminated and the
Merger may be abandoned before the Effective Time of the Merger, notwithstanding
any approval and adoption of this Agreement by the Board of Directors or
shareholders of DBSD, EchoStar or DBSC:
11.1.1 by the mutual consent of the Boards of Directors of EchoStar,
DBSC and DBSD; or
11.1.2 by EchoStar or DBSC if there has been a material
misrepresentation or material breach on the part of DBSD in the representations,
warranties or covenants of DBSD set forth herein or in the Purchase Agreement,
or if there has been any material failure on the part of DBSD to comply with its
obligations hereunder or in the Purchase Agreement, or by DBSD if there has been
a material misrepresentation or material breach on the part of EchoStar or DBSC
in the representations, warranties or covenants of EchoStar or DBSC set forth
herein or in the Purchase Agreement, or if
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there has been any material failure on the part of EchoStar or DBSC to comply
with their obligations hereunder or in the Purchase Agreement; in either event
only if the other party does not materially cure such breach within five (5)
business days following written notice from the non-breaching party.
11.1.3 by EchoStar if the FCC notifies EchoStar at any time that
consummation of the transactions contemplated hereby could reasonably be
expected to result in loss of any of EchoStar's DBS licenses or rights, or the
DBS Rights. In the event that any such notification is provided orally, Echostar
shall only be permitted to rely on this provision to terminate if the FCC
confirms those comments to counsel for DBSD.
11.1.4 by EchoStar if all the conditions set forth in Article VIII,
or by DBSD if all of the conditions set forth in Article IX, are not satisfied
by December 31, 1997.
11.1.5 by EchoStar as provided in Section 2.4 herein.
11.2 TERMINATION PROCEDURES. The power of termination provided for by this
Article XI may be exercised for EchoStar, DBSC or DBSD only by its respective
Board of Directors and will be effective only after written notice thereof,
signed on behalf of the party for which it is given by its President or other
duly authorized officer, shall have been given to the other.
11.3 EFFECT OF TERMINATION. If this Agreement is terminated in accordance
with this Article XI then the Merger shall be abandoned without further action
by DBSD, EchoStar or DBSC, and their officers shall not file the Certificate of
Merger or the Articles of Merger with the Secretaries of State of the states of
Delaware and Colorado. Nothing in this Article XI shall relieve any party to
this Agreement of liability for breach of this Agreement.
ARTICLE XII
MISCELLANEOUS PROVISIONS
12.1 AMENDMENT AND MODIFICATION.
12.1.1 To the fullest extent permitted by applicable law, this
Agreement may be amended, modified and supplemented with respect to any of the
terms contained herein by mutual consent of DBSD and EchoStar, and the
respective Boards of Directors of EchoStar and DBSD, or by their respective
officers duly authorized by such Board of Directors, by an appropriate written
instrument executed at any time prior to the Merger Closing.
12.1.2 In the event that the inclusion herein of any provision of
this Agreement would cause EchoStar or DBSD to be in violation of any FCC rule
or regulation, or any other applicable law, or would cause a loss of, or
materially adversely affect EchoStar's DBS licenses or rights, or the DBS
Rights, those provisions shall be deemed automatically rewritten, without any
further action by the parties hereto, to the minimum extent required in order to
permit their intent to be carried out as best as is possible without so
violating FCC rules or regulations or causing the loss or material adverse
affect. The parties agree to promptly use their best efforts to reflect in
writing any modification or amendment to this Agreement that may be required in
order to carry out the intentions of this Subsection 12.1.2.
12.2 WAIVER OF COMPLIANCE. To the fullest extent permitted by law, each of
EchoStar, DBSC and DBSD may, pursuant to action by its respective Board of
Directors, or its respective officers duly authorized by its Board of Directors,
by an instrument in writing extend the time for or waive the performance of any
of the obligations of the other or waive compliance by the other with any of the
covenants, or waive any of the conditions of its obligations, contained herein.
No such extension of time or waiver shall operate as a waiver of, or estoppel
with respect to, any subsequent failure to comply with any of the covenants in
this Agreement.
12.3 ENFORCEMENT REMEDIES. If a party (the "Defaulting Party") materially
breaches any obligation or covenant made in this Agreement, or fails to fulfill
any condition, or if any representation or
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warranty made by or on behalf of the Defaulting Party in this Agreement or in
any certificate or other instrument delivered under or pursuant to any term
hereof shall be untrue or incorrect in any material respect as of the date of
this Agreement or as of the date it was made, furnished or delivered, the
nondefaulting party (the "Nondefaulting Party") may proceed to protect and
enforce its rights by suit in equity or action at law. The parties acknowledge
that the representations, covenants, agreements and obligations hereunder are
unique and that, in the event of breach of such, remedies at law would be
inadequate, it would be difficult to determine the amount of damages resulting
therefrom, and such breach would cause irreparable injury to the Nondefaulting
Party. The Nondefaulting Party shall be entitled, in addition to any other legal
or equitable right, to the remedy of specific performance of any term contained
in this Agreement, or to a preliminary or permanent injunction against the
breach of any such term or in aid of the exercise of any power or right granted
in this Agreement, or any combination thereof. Except as provided above, none of
the rights, powers or remedies conferred herein shall be mutually exclusive, and
each such right, power or remedy shall be cumulative and in addition to every
other right, power or remedy, whether conferred hereby or hereafter available at
law, in equity, by statute or otherwise.
12.4 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. The respective
representations and warranties of each party hereto contained herein shall not
be deemed to be waived or otherwise affected by any investigation made by the
other parties hereto. The representation and warranty of EchoStar that the
information contained in its S-4 registration statement to be filed with the SEC
in connection with the Merger complied with all SEC rules when declared
effective, shall survive the Merger Closing.
12.5 NO THIRD PARTY RIGHTS. Except as otherwise provided in this
Agreement, nothing herein expressed or implied is intended, nor shall they be
construed, to confer upon or give any Person, firm or corporation (other than
EchoStar, DBSC and DBSD, and their respective security holders), any rights or
remedies under or by reason of this Agreement.
12.6 CONFIDENTIALITY. EchoStar and DBSD shall honor the confidentiality
agreements previously delivered by each such party to the other with respect to
matters pertaining to the transactions contemplated by this Agreement. In
addition to the terms of such agreements, this Agreement, the negotiations
leading to it, together with all terms and conditions of each, and all
information disclosed in the course of either party's due diligence
investigation (collectively, the "Negotiations"), shall be kept and treated as
strictly confidential, unless and until one week prior to the date that the
parties intend to file for FCC Approval of the Merger, or the parties sooner
agree that confidentially is no longer desired with respect to all or certain
portions of the Negotiations. Notwithstanding anything above to the contrary,
the parties shall have the right to disclose the fact of the existence of this
Agreement and the transactions contemplated hereby, together with the minimum
amount of other information deemed necessary by securities or other regulatory
counsel to either party, if such securities or other regulatory counsel in good
faith determines that public disclosure of the information is necessary under
Federal or state securities or other laws applicable to such party. Disclosure
of such information shall be coordinated in advance with the other party. Any
such disclosure shall not permit the disclosing party to issue any press release
or otherwise discuss or further disseminate the information contained in the
securities or other regulatory filing in any manner. Additionally, EchoStar
shall be permitted to disclose the Negotiations to DirectSat, Donaldson, Lufkin
& Jenrette Securities Corporation ("DLJ") and to potential strategic investors
in EchoStar, provided that DirectSat, DLJ and such other investors agree to
maintain the confidentiality of the Negotiations pursuant to a standard
confidentiality agreement.
12.7 EXPENSES. Each party hereto shall bear all expenses incurred by it in
connection with this Agreement and the transactions contemplated hereby and
thereby.
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12.8 NOTICES. All notices, requests, demands and other communications
required or permitted hereunder shall be in writing and shall be deemed to have
been duly given when delivered by hand or when mailed by registered or certified
mail, postage paid, or when given by telex or facsimile transmission (promptly
confirmed in writing), as follows:
(a) If to DBSD:
Harley W. Radin, Chairman and Chief Executive Officer
Direct Broadcasting Satellite Corporation
4401-A Connecticut Avenue, N.W., Suite 400
Washington, D.C. 20008
Fax No. (202) 364-2288
with a copy to:
William L. Fishman
Sullivan & Worcester
1025 Connecticut Ave., N.W.
Washington, D.C. 20036
Fax No. (202) 293-2275
or to such other Person as DBSD shall designate in writing, such writing to be
delivered to EchoStar in the manner provided in this Section 12.8; and
(b) if to EchoStar:
Charles Ergen
President and Chief Executive Officer
EchoStar Communications Corporation
90 Inverness Circle East
Englewood, CO 80112
Fax No. 303-799-6222
with a copy to:
David K. Moskowitz, Esquire
Vice President and General Counsel
EchoStar Communications Corporation
90 Inverness Circle East
Englewood, Colorado 80112
Fax No. 303-799-0354
or to such other Person as EchoStar shall designate in writing to be delivered
to DBSD in the manner provided in this Section 12.8.
12.9 ASSIGNMENT. This Agreement and all of the provisions hereof shall be
binding upon and inure to the benefit of the parties hereto and their respective
successors and permitted assigns, but neither this Agreement nor any of the
rights, interests or obligations hereunder shall be assigned by any of the
parties hereto without prior written consent of the other parties; provided,
however, that EchoStar or DBSC may assign this Agreement and its rights,
interests and obligations hereunder to a Subsidiary without the consent of DBSD
provided that EchoStar remains liable for each of its assigned obligations
hereunder in the event such assignee fails to perform such obligations.
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12.10. GOVERNING LAWS AND EXCLUSIVE JURISDICTION.
12.10.1 This Agreement and the legal relations between the parties
hereto, including all disputes and claims, whether arising in contract, tort or
under statute, shall be governed by and construed in accordance with the laws of
the State of Colorado without giving effect to its conflict of law provisions.
12.10.2 Any and all disputes arising out of or in connection with the
interpretation, performance or the nonperformance of this Agreement or any and
all disputes arising out of or in connection with transaction in any way related
to this Agreement and/or the relationship between the parties shall be litigated
solely and exclusively before the United States District Court for the District
of Colorado. The parties consent to the in personam jurisdiction of such court
for the purposes of any such litigation, and waive, fully and completely, any
right to dismiss and/or transfer any action pursuant to 28 U.S.C. Section 1404
or 1406 (or any successor statute). In the event the United States District
Court for the District of Colorado does not have subject matter jurisdiction of
such matter, then such matter shall be litigated solely and exclusively before
the appropriate state court of competent jurisdiction located in Arapahoe
County, State of Colorado.
12.11 COUNTERPARTS. This Agreement may be executed simultaneously in two
or more counterparts and by the different parties hereto on separate
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
12.12 HEADINGS AND REFERENCES. The headings of the Sections, Subsections
and Articles of this Agreement are inserted for convenience of reference only
and shall not constitute a part hereof. All references herein to Sections,
Subsection and Articles are to Sections, Subsections and Articles of this
Agreement, unless otherwise indicated.
12.13 ENTIRE AGREEMENT. This Agreement (including the exhibits hereto and
thereto and the documents referred to herein and therein, all of which form a
part hereof), together with the confidentiality agreements delivered by EchoStar
and DBSD to each other, contain the entire understanding of the parties hereto
and thereto in respect of the subject matter contained herein and therein and
supersede all prior agreements and understandings between the parties with
respect to such subject matter. There are no restrictions, promises,
representations, warranties, covenants or undertakings, other than those
expressly set forth or referred to herein or therein.
12.14 FURTHER ASSURANCES. Each party shall, at and from time to time after
the Merger Trigger Date, upon request of the other party, and without any
further consideration, execute and deliver any additional instruments or
documents to such party as that party may reasonably request, and take such
other actions as may be reasonably requested from time to time by the other
party hereto, as is necessary in order to carry out, evidence and confirm the
intent of the parties in connection with the transactions contemplated by this
Agreement.
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly
executed as of the date and year first written above.
ECHOSTAR COMMUNICATIONS CORPORATION
By: /s/ CHARLIE ERGEN
-----------------------------------
Charlie Ergen, President
DIRECT BROADCASTING SATELLITE
CORPORATION
By: /s/ HARLEY RADIN
-----------------------------------
Harley Radin, Chairman
DIRECT BROADCASTING SATELLITE
CORPORATION
By: /s/ CHARLIE ERGEN
-----------------------------------
Charlie Ergen, President
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ANNEX II
MERGER TRIGGER AGREEMENT
EchoStar Communications Corporation, a Nevada corporation formed in 1995
("EchoStar"), Direct Broadcasting Satellite Corporation, a Colorado corporation
("DBSC") and Direct Broadcasting Satellite Corporation, a Delaware corporation
("DBSD"), in consideration of the benefit which will accrue to each as a result
of the matters described below, and for other good and valuable consideration,
the receipt and sufficiency of which are hereby mutually acknowledged, enter
into this Merger Trigger Agreement (the "Agreement") as of the 21st day of
December, 1995, and agree as follows:
1. DBSD hereby provides notice to EchoStar of its exercise, and EchoStar
hereby provides notice to DBSD of its exercise, effective immediately, of their
respective rights to require a merger agreement to be signed among EchoStar,
DBSC and DBSD (the "Merger Agreement" and the "Merger")).
2. EchoStar, DBSC and DBSD (together, the "Parties") agree that the Merger
Agreement, in the form attached as Exhibit A hereto, shall be entered into by
all of them contemporaneous with execution of this Agreement.
3. The Parties hereby irrevocable agree to consummate the Merger without
preconditions, except as specifically set forth below. Further, the Parties
hereby irrevocably waive any right they have had, may now have, or which might
at any time in the future otherwise be available to them, to terminate or refuse
to complete the Merger, whether: a) based upon covenants or conditions to be
fulfilled by the other Party, as set forth in the Merger Agreement; or b) events
which must occur (or not occur) prior to the Merger, as set forth in the Merger
Agreement; or c) based on any other legal, contractual or common law theory,
other than the condition that: d) the Merger must be approved by the Federal
Communications Commission (the "FCC"); and e) the Merger must be approved by
DBSD shareholders.
Notwithstanding anything set forth above, a Party may refuse to complete the
Merger if the other Party wilfully and in bad faith acts, or fails to act, in a
manner that materially impedes consummation of the Merger in material compliance
with the terms the Parties have agreed upon.
Nothing herein shall be construed as relieving any Party of its good faith
obligations to take actions required of it pursuant to the Merger Agreement, or
as limiting the right of a nondefaulting Party to pursue the remedies of
specific performance and other equitable remedies provided in Section 12.3 of
the Merger Agreement.
4. DBSD acknowledges that contemporaneous with execution of this Agreement
and the Merger Agreement, DBSD shareholders owning greater than 50% of the
outstanding shares of DBSD (including EchoStar), will be executing shareholder
consent minutes in the form attached as Exhibit B to this Agreement in
satisfaction of the condition to the Merger set forth in Paragraph 3 e) above,
and ratifying this Agreement and any transactions or agreements entered into
pursuant to this Agreement. DBSD acknowledges and affirms the effectiveness of
those minutes to achieve the intended result.
5. The Parties agree to enter into the Note Purchase Agreement and the
Security Agreement, and DBSD agrees to execute the Direct Broadcasting Satellite
Corporation Promissory Note (the "DBSD Note"), all in the forms attached as
Exhibits C, D and E, respectively, with such reasonable changes as the Parties
mutually agree upon.
6. The Parties agree that in the event the Merger is not completed for any
reason, it is the intent of the Parties to structure a transaction or series of
transactions which will have the effect of providing to DBSD's existing
shareholders as of the date of this Agreement (the "Existing Shareholders"), as
nearly as is possible, the cash amount or number of shares of EchoStar Class A
Common Stock they would have received if the Merger had been completed, and that
it is further the intent of the Parties,
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in those circumstances, to structure a transaction or series of transactions
which will have the effect of providing to EchoStar, as nearly as is possible,
the benefits which would have accrued to EchoStar had the Merger been completed,
for, as nearly as is possible, the cash amount or number of shares of EchoStar
Class A Common Stock EchoStar would have provided to the Existing Shareholders
had the Merger been completed (the "Intent", and the "Intent Consideration").
The Parties intend that the Intent Consideration would be paid in full as soon
as the Intent has been accomplished. Notwithstanding anything in this Agreement
which might otherwise be construed to the contrary, in no event shall EchoStar
be obligated to pay both the Intent Consideration and the Non-Duplication
Payment (as defined below), and payment by EchoStar of either shall extinguish
any obligation to pay the other at any time in the future, but shall not
extinguish the obligation of DBSD to fulfill the Intent, or to abide by the
Non-Duplication Agreement.
In structuring the transaction or series of transactions, the Parties agree
to attempt to provide tax-free treatment under the Internal Revenue Code,
provided that such structuring does not have the effect of decreasing any of the
full rights or benefits, or increasing any of the obligations, that EchoStar or
DBSC expect to obtain as a result of the Merger.
In the event either Party reasonably determines that the Merger is unlikely
to be completed, the Parties agree to negotiate in good faith, and use their
best efforts to effectuate the Intent. If at any time the Parties are unable to
agree on the best method to effectuate the Intent, the parties hereby commit to
submit any dispute to mandatory fast track binding arbitration in accordance
with the procedures set forth below.
7. In order to fulfill the Intent, the Parties agree that in addition to
any other actions which the Parties may take, that EchoStar shall have the
right, at any time and from time to time, to convert the DBSD Note, and any
other Notes issued to EchoStar or its affiliates pursuant to the Note Purchase
Agreement, to a pay out for perpetuity of profits of DBSD (and a participation
in any distributions to shareholders, spinoffs or similar transactions). The pay
out will be a percentage of the total profits -- paid quarterly within thirty
(30) days of the end of each calendar quarter (or distribution -- paid when
distributed to shareholders) of DBSD at any time, in accordance with the formula
"X/ (X+$12,945,104)", where "X" is equal to the aggregate amount, including
accrued but unpaid interest, due to EchoStar under the Notes at the time of
conversion (the "Profit Pay Out Percentage"). The Profit Pay Out Percentage
shall be in addition to EchoStar's equity ownership interest in DBSD.
Notwithstanding the above, EchoStar shall not have any right to a Profit Pay Out
Percentage unless and until either the Intent Consideration or the
Non-Duplication Payment has been paid.
8. In the event the Merger is not consummated for any reason, the parties
irrevocably commit to enter into a Capacity Lease Agreement (the "CPA"). The
Parties shall cooperate in good faith and use their best efforts to agree upon
provisions which so far as is reasonably possible give EchoStar the full and
unfettered use of DBSD's spacecraft, including its communications capacity,
TT&C, uplink arrangements and auxiliary or related functions or activities
subject only to the limitation that: a) the terms of the CLA must not be
inconsistent with the full exercise by DBSD of its obligations as an FCC
licensee; b) the terms of the CLA must not interfere with DBSD's right to
control the satellite for technical purposes as required by FCC regulations; and
c) the terms of the CLA must not be inconsistent with the Communications Act of
1934, as amended. The Parties agree that the amount EchoStar shall be obligated
to pay for the capacity, shall be payable in full upon final FCC approval of the
CLA, and shall be the Intent Consideration.
In negotiation of the CLA, which shall commence promptly following execution
of this Agreement, the Parties shall negotiate in good faith, and use their best
efforts to effectuate the intent of the Parties, as described above. If at any
time the Parties are unable to agree on a method to effectuate the intent of the
Parties, the Parties hereby commit to submit any dispute to mandatory fast track
binding arbitration in accordance with the procedures set forth below.
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In the event that the FCC rejects the CLA, or that EchoStar determines that
the Intent would not be adequately fulfilled by a CLA which would be acceptable
to the FCC, then no CLA shall be implemented.
9. DBSD hereby irrevocably commits to utilize EchoStar's DBS operating
system for DBSD's DBS system, including but not limited to utilization of
EchoStar's conditional access and compression system, and EchoStar's uplink
facility (all to be administered through EchoStar), and to purchase from
EchoStar all of its "smart cards" needed to allow customer access to the DBSD
programming. Commencing with the commercial operation of DBSD's first satellite,
DBSD shall pay to EchoStar on a monthly basis, DBSD's pro rata share of the
costs of EchoStar's DBS operating system. The Parties shall enter into an
agreement or agreements as is reasonably requested by any other Party in order
to more fully reflect the terms of this agreement. In the negotiation of those
agreements, the Parties shall negotiate in good faith, and use their best
efforts to effectuate the intent of the Parties, as described above. If at any
time the Parties are unable to agree on a method to effectuate the intent of the
Parties, the Parties hereby commit to submit any dispute to mandatory fast track
binding arbitration in accordance with the procedures set forth below.
10. DBSD hereby irrevocably commits that it will not at anytime, for
perpetuity, carry on any of its DBS satellites any video, audio or data
programming which duplicates any programming carried by EchoStar on any of the
satellites in its DBS system at the time DBSD desires to carry any such
programming (the "Non-Duplication Agreement").
The Non-Duplication Agreement is initially being provided by DBSD in
consideration for the execution by EchoStar of the Note Purchase Agreement. No
additional consideration will be due for continuation of the Non-Duplication
Agreement for perpetuity unless on July 1, 1998: a) approval of the Merger by
the FCC is still pending; or b) the FCC has rejected the Merger and the Intent
has not yet been effectuated, nor the Intent Consideration paid, because FCC
approval is required but that approval has not yet been completed. If either of
the events described in the sentence immediately above exist on July 1, 1998,
then EchoStar shall make an additional one time payment for the continued
applicability, for perpetuity, of the Non-Duplication Agreement. The amount of
the payment shall be equal to the amount of the Intent Consideration (the
"Non-Duplication Payment").
11. In the event any agreement or action of the Parties pursuant to this
Agreement requires FCC approval, and the FCC does not provide that approval, the
Parties agree to restructure the agreement or action to the minimum extent
necessary in order to preserve the transaction, as nearly as is possible, and to
most closely effectuate the Intent and the Intent Consideration, and to
otherwise effectuate the intention of the Parties as expressed in this
Agreement.
12. At the election of any Party, any matter not resolved amicably among the
Parties to the satisfaction of the other Parties, shall be subject to mandatory
binding arbitration, and the other Parties shall submit to arbitration. Within
ten (10) days of receipt of notice from the electing party, each Party shall
select an arbitrator, and within five (5) days thereafter the two (2) selected
arbitrators shall select a third arbitrator. The Parties hereby express their
desire that the arbitration be concluded on an expedited basis. The decision of
a majority of the arbitrators shall be considered the decision of all, except
that if no two can agree, then the decision of the arbitrator chosen by the
other two shall be considered the decision of all. Such arbitration shall
proceed in accordance with the Commercial Arbitration Rules of the American
Arbitration Association then pertaining (the "Rules"), insofar as such Rules are
not inconsistent with the provisions expressly set forth in this Agreement,
unless the parties mutually agree otherwise, and pursuant to the following
procedures: a) the minimum amount of discovery deemed necessary by the
arbitrators shall be allowed in arbitration; b) the costs and fees of the
arbitration, including attorneys' fees, shall be allocated by the arbitrators,
as they deem reasonably appropriate; c) the award rendered by the arbitrators
shall be binding on the Parties, shall be final, and judgment may be entered in
accordance with applicable law and in any court having
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jurisdiction thereof; d) the existence and resolution of the arbitration shall
be kept confidential by the Parties in the same manner as confidential
information is required to be kept under Paragraph 13 below, and shall also be
kept confidential by the arbitrators.
13. This Agreement, the negotiations leading to it, and the fact of the
Agreement, together with all terms and conditions of each (collectively the
"Negotiations"), shall be kept confidential, and treated as strictly
confidential pursuant to the Confidentiality Agreement previously entered into
between the Parties, unless and until the Negotiations are no longer required to
be kept confidential pursuant to the terms of the Confidentiality Agreement, or
if EchoStar sooner, in its sole discretion, determines that confidentiality is
no longer needed or is no longer possible with respect to all or certain
portions of the Negotiations. Notwithstanding the above, DBSD shall have the
right to disclose the fact of the existence of this Agreement, together with the
minimum amount of other information deemed necessary by counsel to DBSD, if
counsel in good faith determines that disclosure of the information is
necessary. Disclosure of such information shall be coordinated in advance with
EchoStar.
14. Each of the Parties hereby agrees to take or cause to be taken such
further actions, to execute, acknowledge, deliver, and file or cause to be
executed, acknowledged, delivered, and filed such further documents and
instruments, and to use best efforts to obtain such consents, as may be
necessary or as may be reasonably requested in order to fully effectuate the
purposes, terms, and conditions of this Agreement, whether before, at, or after
the occurrence of the transactions contemplated by this Agreement.
15. The invalidity of any provisions of this Agreement, or of any other
agreement or instrument given pursuant to or in connection with this Agreement
("Other Agreements") shall not affect the remaining portions of this Agreement
or the Other Agreements, all of which are inserted conditionally on their being
held valid in law. In the event any provisions of this Agreement or Other
Agreements are found to be invalid, or would operate to render this Agreement or
any Other Agreement invalid, this Agreement and such Other Agreements shall be
construed as if the invalid provisions had not been inserted, and the offending
provisions shall be rewritten to the minimum extent necessary in order to permit
their intent to be carried out as best as is possible without invalidity. The
Parties agree to promptly use their good faith best efforts to reflect in
writing any modification to this Agreement which may be necessary in order to
carry out the intentions of this provision.
16. It is the express intention and agreement of the Parties that all
covenants, agreements, statements, representations, and warranties made in this
Agreement shall survive execution of this Agreement.
17. Except as otherwise specifically provided in this Agreement, this
Agreement may be modified or amended only by a writing executed by the parties
which, by its terms, expressly modifies, alters or amends any term or provision
contained herein.
18. Each party acknowledges that it has read, understands and agrees to the
terms and conditions of this Agreement. Each party represents that it has the
full power and authority to enter into this Agreement, and intends to be bound
by all of the terms and conditions of this Agreement. Further, each Party
acknowledges that the delivery of this Agreement by that Party has not been
induced by any representations, statements, warranties, or agreements other than
those expressly set forth herein.
19. To facilitate execution, this Agreement may be executed in as many
counterparts as may be required, and it shall not be necessary that the
signatures of, or on behalf of, each Party, or that the signatures of all
persons required to bind any Party, appear on each counterpart; but it shall be
sufficient that the signature of, or on behalf of, each Party, or that the
signatures of the persons required to bind any Party, appear on one or more of
the counterparts. This Agreement shall be binding and enforceable upon execution
of counterparts by all the Parties hereto, and such counterparts shall thereupon
collectively constitute a single agreement.
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20. The validity, interpretation and enforcement of this Agreement shall be
governed by the laws of the State of Colorado without giving effect to the
conflict of law principles thereof.
IN WITNESS WHEREOF, the undersigned have duly executed this Agreement, or
have caused this Agreement to be duly executed on their behalf, as of the day
and year set forth above.
DIRECT BROADCASTING SATELLITE
CORPORATION, a Delaware Corporation
By: /s/ HARLEY RADIN
-----------------------------------
Harley Radin, President
ECHOSTAR COMMUNICATIONS CORPORATION
By: /s/ CHARLIE ERGEN
-----------------------------------
Charlie Ergen, President
DIRECT BROADCASTING SATELLITE
CORPORATION, a Colorado Corporation
By: /s/ CHARLIE ERGEN
-----------------------------------
Charlie Ergen, President
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ANNEX III
262 APPRAISAL RIGHTS. (a) Any stockholder of a corporation of this State
who holds shares of stock on the date of the making of a demand pursuant to
subsection (d) of this section with respect to such shares, who continuously
holds such shares through the effective date of the merger or consolidation, who
has otherwise complied with subsection (d) of this section and who has neither
voted in favor of the merger or consolidation nor consented thereto in writing
pursuant to Section 228 of this title shall be entitled to an appraisal by the
Court of Chancery of the fair value of his shares of stock under the
circumstances described in subsections (b) and (c) of this section. As used in
this section, the word "stockholder" means a holder of record of stock in a
stock corporation and also a member of record of a nonstock corporation; the
words "stock" and "share" mean and include what is ordinarily meant by those
words and also membership or membership interest of a member of a nonstock
corporation; and the words "depository receipt" mean a receipt or other
instrument issued by a depository representing an interest in one or more
shares, or fractions thereof, solely of stock of a corporation, which stock is
deposited with the depository.
(b) Appraisal rights shall be available for the shares of any class or
series of stock of a constituent corporation in a merger or consolidation to be
effected pursuant to Section 251 (other than a merger effected pursuant to
subsection (g) of section 251), 252, 254, 257, 258, 263 or 264 of this title:
(1) Provided, however, that no appraisal rights under this section shall
be available for the shares of any class or series of stock, which stock, or
depository receipts in respect thereof, at the record date fixed to
determine the stockholders entitled to receive notice of and to vote at the
meeting of stockholders to act upon the agreement of merger or
consolidation, were either (i) listed on a national securities exchange or
designated as a national market system security on an interdealer quotation
system by the National Association of Securities Dealers, Inc. or (ii) held
of record by more than 2,000 holders; and further provided that no appraisal
rights shall be available for any shares of stock of the constituent
corporation surviving a merger if the merger did not require for its
approval the vote of the holders of the surviving corporation as provided in
subsection (f) of Section 251 of this title.
(2) Notwithstanding paragraph (1) of this subsection, appraisal rights
under this section shall be available for the shares of any class or series
of stock of a constituent corporation if the holders thereof are required by
the terms of an agreement of merger or consolidation pursuant to
SectionSection 251, 252, 254, 257, 258, 263 and 264 of this title to accept
for such stock anything except:
a. Shares of stock of the corporation surviving or resulting from
such merger or consolidation, or depository receipts in respect thereof,
b. Shares of stock of any other corporation, or depository receipts
in respect thereof, which shares of stock or depository receipts at the
effective date of the merger or consolidation will be either listed on a
national securities exchange or designated as a national market system
security on an interdealer quotation system by the National Association
of Securities Dealer, Inc. or held of record by more than 2,000 holders;
c. Cash in lieu of fractional shares or fractional depository
receipts described in the foregoing subparagraphs a. and b. of this
paragraph; or
d. Any combination of the shares of stock, depository receipts and
cash in lieu of fractional shares or fractional depository receipts
described in the foregoing subparagraphs a., b. and c. of this paragraph.
(3) In the event all of the stock of a subsidiary Delaware corporation
party to a merger effected under Section 253 of this title is not owned by
the parent corporation immediately prior to the merger, appraisal rights
shall be available for the shares of the subsidiary Delaware corporation.
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(c) Any corporation may provide in its certificate of incorporation that
appraisal rights under this section shall be available for the shares of any
class or series of its stock as a result of an amendment to its certificate of
incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all or substantially all of the assets of
the corporation. If the certificate of incorporation contains such a provision,
the procedures of this section, including those set forth in subsections (d) and
(e) of this section, shall apply as nearly as is practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal rights are
provided under this section is to be submitted for approval at a meeting of
stockholders, the corporation, not less than 20 days prior to the meeting,
shall notify each of its stockholders who was such on the record date for
such meeting with respect to shares for which appraisal rights are available
pursuant to subsections (b) or (c) hereof that appraisal rights are
available for any or all of the shares of the constituent corporations, and
shall include in such notice a copy of this section. Each stockholder
electing to demand the appraisal of his shares shall deliver to the
corporation, before the taking of the vote on the merger or consolidation, a
written demand for appraisal of his shares. Such demand will be sufficient
if it reasonably informs the corporation of the identity of the stockholder
and that the stockholder intends thereby to demand the appraisal of his
shares. A proxy or vote against the merger or consolidation shall not
constitute such a demand. A stockholder electing to take such action must do
so by a separate written demand as herein provided. Within 10 days after the
effective date of such merger or consolidation, the surviving or resulting
corporation shall notify each stockholder of each constituent corporation
who has complied with this subsection and has not voted in favor of or
consented to the merger or consolidation of the date that the merger or
consolidation has become effective; or
(2) If the merger or consolidation was approved pursuant to
Section 228 or 253 of this title, the surviving or resulting
corporation, either before the effective date of the merger or consolidation
or within 10 days thereafter, shall notify each of the stockholders entitled
to appraisal rights of the effective date of the merger or consolidation and
that appraisal rights are available for any or all of the shares of the
constituent corporation, and shall include in such notice a copy of this
section. The notice shall be sent by certified or registered mail, return
receipt requested, addressed to the stockholder at his address as it appears
on the records of the corporation. Any stockholder entitled to appraisal
rights may, within 20 days after the date of mailing of the notice, demand
in writing from the surviving or resulting corporation the appraisal of his
shares. Such demand will be sufficient if it reasonably informs the
corporation of the identity of the stockholder at that the stockholder
intends thereby to demand the appraisal of his shares.
(e) Within 120 days after the effective date of the merger or consolidation,
the surviving or resulting corporation or any stockholder who has complied with
subsections (a) and (d) hereof and who is otherwise entitled to appraisal
rights, may file a petition in the Court of Chancery demanding a determination
of the value of the stock of all such stockholders. Notwithstanding the
foregoing, at any time within 60 days after the effective date of the merger or
consolidation, any stockholder shall have the right to withdraw his demand for
appraisal and to accept the terms offered upon the merger or consolidation.
Within 120 days after the effective date of the merger or consolidation, any
stockholder who has complied with the requirements of subsections (a) and (d)
hereof, upon written request, shall be entitled to receive from the corporation
surviving the merger or resulting from the consolidation a statement setting
forth the aggregate number of shares not voted in favor of the merger or
consolidation and with respect to which demands for appraisal have been received
and the aggregate number of holders of such shares. Such written statement shall
be mailed to the stockholder within 10 days after his written request for such a
statement is received by the surviving or resulting corporation or within 10
days after expiration of the period for delivery of demands for appraisal under
subsection (d) hereof, whichever is later.
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(f) Upon the filing of any such petition by a stockholder, service of a copy
thereof shall be made upon the surviving or resulting corporation, which shall
within 20 days after such service file in the office of the Register in Chancery
in which the petition was filed a duly verified list containing the names and
addresses of all stockholders who have demanded payment for their shares and
with whom agreements as to the value of their shares have not been reached by
the surviving or resulting corporation. If the petition shall be filed by the
surviving or resulting corporation, the petition shall be accompanied by such a
duly verified list. The Register in Chancery, if so ordered by the Court, shall
give notice of the time and place fixed for the hearing of such petition by
registered or certified mail to the surviving or resulting corporation and to
the stockholders shown on the list at the addresses therein stated. Such notice
shall also be given by 1 or more publications at least 1 week before the day of
the hearing in a newspaper of general circulation published in the City of
Wilmington, Delaware or such publication as the Court deems advisable. The forms
of the notices by mail and by publication shall be approved by the Court, and
the costs thereof shall be borne by the surviving or resulting corporation.
(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with this section and who have become entitled to
appraisal rights. The Court may require the stockholders who have demanded an
appraisal for their shares and who hold stock represented by certificates to
submit their certificates of stock to the Register in Chancery for notation
thereon of the pendency of the appraisal proceedings; and if any stockholder
fails to comply with such direction, the Court may dismiss the proceedings as to
such stockholder.
(h) After determining the stockholders entitled to an appraisal, the Court
shall appraise the shares, determining their fair value exclusive of any element
of value arising from the accomplishment or expectation of the merger or
consolidation, together with a fair rate of interest, if any, to be paid upon
the amount determined to be the fair value. In determining such fair value, the
Court shall take into account all relevant factors. In determining the fair rate
of interest, the Court may consider all relevant factors, including the rate of
interest which the surviving or resulting corporation would have had to pay to
borrow money during the pendency of the proceeding. Upon application by the
surviving or resulting corporation or by any stockholder entitled to participate
in the appraisal proceeding, the Court may, in its discretion, permit discovery
or other pretrial proceedings and may proceed to trial upon the appraisal prior
to the final determination of the stockholder entitled to an appraisal. Any
stockholder whose name appears on the list filed by the surviving or resulting
corporation pursuant to subsection (f) of this section and who has submitted his
certificates of stock to the Register in Chancery, if such is required, may
participate fully in all proceedings until it is finally determined that he is
not entitled to appraisal rights under this section.
(i) The Court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting corporation to the
stockholders entitled thereto. Interest may be simple or compound, as the Court
may direct. Payment shall be so made to each such stockholder, in the case of
holders of uncertificated stock forthwith, and the case of holders of shares
represented by certificates upon the surrender to the corporation of the
certificates representing such stock. The Court's decree may be enforced as
other decrees in the Court of Chancery may be enforced, whether such surviving
or resulting corporation be a corporation of this State or of any state.
(j) The costs of the proceeding may be determined by the Court and taxed
upon the parties as the Court deems equitable in the circumstances. Upon
application of a stockholder, the Court may order all or a portion of the
expenses incurred by any stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorney's fees and the
fees and expenses of experts, to be charged pro rata against the value of all
the shares entitled to an appraisal.
(k) From and after the effective date of the merger or consolidation, no
stockholder who has demanded his appraisal rights as provided in subsection (d)
of this section shall be entitled to vote such stock for any purpose or to
receive payment of dividends or other distributions on the stock (except
dividends or other distributions payable to stockholders of record at a date
which is prior to
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the effective date of the merger or consolidation); provided, however, that if
no petition for an appraisal shall be filed within the time provided in
subsection (e) of this section, or if such stockholder shall deliver to the
surviving or resulting corporation a written withdrawal of his demand for an
appraisal and an acceptance of the merger or consolidation, either within 60
days after the effective date of the merger or consolidation as provided in
subsection (e) of this section or thereafter with the written approval of the
corporation, then the right of such stockholder to an appraisal shall cease.
Notwithstanding the foregoing, no appraisal proceeding in the Court of Chancery
shall be dismissed as to any stockholder without the approval of the Court, and
such approval may be conditioned upon such terms as the Court deems just.
(l) The shares of the surviving or resulting corporation to which the shares
of such objecting stockholders would have been converted had they assented to
the merger or consolidation shall have the status of authorized and unissued
shares of the surviving or resulting corporation.
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PART II
INFORMATION NOT REQUIRED IN INFORMATION STATEMENT -- PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Chapter 78.751(1) of the Nevada Revised Statutes allows EchoStar to
indemnify any person made or threatened to be made a party to any action (except
an action by or in the right of EchoStar, a "derivative action"), by reason of
the fact that he is or was a director, officer, employee or agent of EchoStar,
or is or was serving at the request of EchoStar as a director, officer, employee
or agent of another corporation, against expenses including attorneys' fees,
judgments, fines and amounts paid in settlement actually and reasonably incurred
by him in connection with the action, suit or proceeding if he acted in a good
faith manner which he reasonably believed to be in or not opposed to the best
interests of EchoStar, and, with respect to any criminal proceeding, had no
reasonable cause to believe that his conduct was unlawful. Under Chapter
78.751(2), a similar standard of care applies to derivative actions, except that
indemnification is limited solely to expenses (including attorneys' fees)
incurred in connection with the defense or settlement of the action and court
approval of the indemnification is required where the person seeking
indemnification has been found liable to EchoStar. In addition, Chapter
78.751(5) allows EchoStar to advance payment of indemnifiable expenses prior to
final disposition of the proceeding in question. Decisions as to the payment of
indemnification are made by a majority of the Board of Directors at a meeting at
which a quorum of disinterested directors is present, or by written opinion of
special legal counsel, or by the stockholders.
Provisions relating to liability and indemnification of officers and
directors of EchoStar for acts by such officers and directors are contained in
Article IX of the Amended and Restated Articles of Incorporation of EchoStar,
Exhibit 3.1(a) hereto and Article IX of EchoStar's Bylaws, Exhibit 3.2(a)
hereto, which are incorporated herein by reference. These provisions state,
among other things, that, consistent with and to the extent allowable under
Nevada law, and upon the decision of a disinterested majority of EchoStar's
Board of Directors, or a written opinion of outside legal counsel, or EchoStar's
stockholders: 1) EchoStar shall indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative and
whether formal or informal (other than an action by or in the right of EchoStar)
by reason of the fact that he is or was a director, officer, employee, fiduciary
or agent of EchoStar, or is or was serving at the request of EchoStar as a
director, officer, employee, fiduciary or agent of another corporation,
partnership, joint venture, trust, employee benefit plan or other enterprise,
against expenses (including attorneys' fees), judgments, fines and amounts paid
in settlement actually and reasonably incurred by him in connection with such
action, suit or proceeding, if he conducted himself in good faith and in a
manner he reasonably believed to be in or not opposed to the best interests of
EchoStar, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful; and 2) EchoStar shall
indemnify any person who was or is a party or is threatened to be made a party
to any threatened, pending or completed action or suit by or in the right of
EchoStar to procure a judgment in its favor by reason of the fact that he is or
was a director, officer, employee, fiduciary or agent of EchoStar, or is or was
serving at the request of EchoStar as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust, employee benefit plan or
other enterprise against expenses (including attorneys' fees) actually and
reasonably incurred by him in connection with the defense or settlement of such
action or suit if he acted in good faith and in a manner he reasonably believed
to be in or not opposed to the best interests of EchoStar and except that no
indemnification shall be made in respect of any claim, issue or matter as to
which such person shall have been adjudged to be liable for negligence or
misconduct in the performance of his duty to EchoStar unless and only to the
extent that the court in which such action or suit was brought shall determine
upon application that, despite the adjudication of liability but in view of all
circumstances of the case, such person is fairly and reasonably entitled to
indemnity for such expenses which such court shall deem proper.
II-1
ITEM 21. EXHIBITS.
SEQUENTIALLY
EXHIBIT NO. DESCRIPTION NUMBERED PAGE
- ----------- ---------------------------------------------------------------------------------- ---------------
2.1 * Amended and Restated Agreement for Exchange of Stock and Merger, dated as of May
31, 1995, by and among EchoStar Communications Corporation, a Nevada corporation
formed in April 1995 ("EchoStar"), Charles W. Ergen and EchoStar (Incorporated
herein by reference to Exhibit 2.2 to the Registration Statement Form S-1 of
EchoStar, Registration No. 33-91276).
2.2 * Agreement regarding purchase of debentures between Dish, Ltd. (formerly EchoStar
Communications Corporation, a Nevada corporation formed in December 1993
("Dish")), EchoStar and SSE Telecom, Inc. ("SSET"), dated March 14, 1994,
including Plan and Agreement of Merger, by and among Dish, DirectSat Merger
Corporation, DirectSat Corporation and SSE Telecom, Inc. ("SSET") (Incorporated
herein by reference to Exhibit 2.2 to the Registration Statement on Form S-1 of
Dish, Registration No. 33-76450).
2.3 + Plan and Agreement of Merger made as of December 21, 1995 by and among EchoStar,
Direct Broadcasting Satellite Corporation, a Colorado corporation ("MergerCo") and
Direct Broadcasting Satellite Corporation, a Delaware corporation ("DBSC").
2.4 + Merger Trigger Agreement entered into as of December 21, 1995 by and among
EchoStar, MergerCo and DBSC.
3.1 (a)* Amended and Restated Articles of Incorporation of EchoStar (Incorporated herein by
reference to Exhibit 3.1(a) to the Registration Statement on Form S-1 of EchoStar,
Registration No. 33-91276).
3.1 (b)* Bylaws of EchoStar (Incorporated by reference to Exhibit 3.1(b) to the
Registration Statement on Form S-1 of EchoStar, Registration No. 33-91276).
4.1 * Indenture of Trust between Dish and First Trust National Association ("First
Trust"), as Trustee (incorporated herein by reference to the Registration
Statement on Form S-1 of Dish, Registration No. 33-76450).
4.2 * Warrant Agreement between EchoStar and First Trust, as Warrant Agent (incorporated
herein by reference to the Registration Statement on Form S-1 of Dish,
Registration No. 33-76450).
4.3 * Security Agreement in favor of First Trust, as Trustee under the Indenture filed
as Exhibit 4.1 (incorporated herein by reference to the Registration Statement on
Form S-1 of Dish, Registration No. 33-76450).
4.4 * Escrow and Disbursement Agreement between Dish and First Trust (incorporated
herein by reference to the Registration Statement on Form S-1 of Dish,
Registration No. 33-76450).
4.5 * Pledge Agreement in favor of First Trust, as Trustee under the Indenture filed as
Exhibit 4.1 herein (incorporated herein by reference to the Registration Statement
on Form S-1 of Dish, Registration No. 33-76450).
II-2
SEQUENTIALLY
EXHIBIT NO. DESCRIPTION NUMBERED PAGE
- ----------- ---------------------------------------------------------------------------------- ---------------
4.6 * Intercreditor Agreement among First Trust, Continental Bank, N.A. and Martin
Marietta Corporation ("Martin Marietta") (incorporated herein by reference to the
Registration Statement on Form S-1 of Dish, Registration No. 33-76450).
4.7 * Series A Preferred Stock Certificate of Designation of EchoStar (Incorporated
herein by reference to Exhibit 4.7 to the Registration Statement on Form S-1 of
EchoStar, Registration No. 33-91276).
4.8 * Registration Rights Agreement by and between EchoStar and Charles W. Ergen
(incorporated herein by reference to Exhibit 4.8 to the Registration Statement on
Form S-1 of EchoStar, Registration No. 33-91276).
4.9 * Indenture of Trust between EchoStar Satellite Broadcasting Corporation ("ESBC")
and First Trust, as Trustee (incorporated herein by reference to Exhibit 4.9 to
the Annual Report on Form 10-K of EchoStar, Commission File No. 0-26176).
4.10 * Security Agreement of ESBC in favor of First Trust, as Trustee under the Indenture
filed as Exhibit 4.9 (incorporated herein by reference to Exhibit 4.10 to the
Annual Report on Form 10-K of EchoStar, Commission File No. 0-26176).
4.11 * Escrow and Disbursement Agreement between ESBC and First Trust (incorporated
herein by reference to Exhibit 4.11 to the Annual Report on Form 10-K of EchoStar,
Commission File No. 0-26176).
4.12 * Pledge Agreement of ESBC in favor of First Trust, as Trustee under the Indenture
filed as Exhibit 4.9 herein (incorporated herein by reference to Exhibit 4.12 to
the Annual Report on Form 10-K of EchoStar, Commission File No. 0-26176).
4.13 * Pledge Agreement of EchoStar in favor of First Trust, as Trustee under the
Indenture filed as Exhibit 4.9 hereunder (incorporated herein by reference to
Exhibit 4.13 to the Annual Report on Form 10-K of EchoStar, Commission File No.
0-26176).
4.14 * Registration Rights Agreement by and between ESBC, EchoStar, Dish, MergerCo and
Donald, Lufkin & Jenrette Securities Corporation (incorporated herein by reference
to Exhibit 4.14 to the Annual Report on Form 10-K of EchoStar, Commission File No.
0-26176)
5.1 + Opinion of David Moskowitz regarding legality of securities being registered.
8.1 + Opinion of Sullivan & Worcester LLP regarding certain tax consequences of the
Merger [3 pages].
10.1 (a)* Satellite Construction Contract, dated as of February 6, 1990, between EchoStar
Satellite Corporation ("ESC") and Martin Marietta Corporation as successor to
General Electric EchoStar, Astro-Space Division ("General Electric") (incorporated
herein by reference to the Registration Statement on Form S-1 of Dish,
Registration No. 33-76450).
II-3
SEQUENTIALLY
EXHIBIT NO. DESCRIPTION NUMBERED PAGE
- ----------- ---------------------------------------------------------------------------------- ---------------
10.1 (b)* First Amendment to the Satellite Construction Contract, dated as of October 2,
1992, between ESC and Martin Marietta as successor to General Electric
(incorporated herein by reference to the Registration Statement on Form S-1 of
Dish, Registration No. 33-76450).
10.1 (c)* Second Amendment to the Satellite Construction Contract, dated as of October 30,
1992, between ESC and Martin Marietta as successor to General Electric
(incorporated herein by reference to the Registration Statement on Form S-1 of
Dish, Registration No. 33-76450).
10.1 (d)* Third Amendment to the Satellite Construction Contract, dated as of April 1, 1993,
between ESC and Martin Marietta (incorporated herein by reference to the
Registration Statement on Form S-1 of Dish, Registration No. 33-76450).
10.1 (e)* Fourth Amendment to the Satellite Construction Contract, dated as of August 19,
1993, between ESC and Martin Marietta (incorporated herein by reference to the
Registration Statement on Form S-1 of Dish, Registration No. 33-76450).
10.1 (f)* Form of Fifth Amendment to the Satellite Construction Contract, between ESC and
Martin Marietta (incorporated herein by reference to the Registration Statement on
Form S-1 of Dish, Registration No. 33-81234).
10.1 (g)* Sixth Amendment to the Satellite Construction Contract, dated as of June 7, 1994,
between ESC and Martin Marietta (incorporated herein by reference to the
Registration Statement on Form S-1 of Dish, Registration No. 33-81234).
10.2 * Satellite Launch Contract, dated as of September 27, 1993, between ESC and the
China Great Wall Industry Corporation (incorporated herein by reference to the
Registration Statement on Form S-1 of Dish, Registration No. 33-76450).
10.3 * Distributor Agreement, dated as of July 30, 1993, between Echosphere Corporation
("Echosphere") and Thomson Consumer Electronics, Inc. (incorporated herein by
reference to the Registration Statement on Form S-1 of Dish, Registration No.
33-76450).
10.4 * 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) (incorporated herein by reference
to the Registration Statement on Form S-1 of Dish, Registration No. 33-76450).
10.5 * Master Purchase and License Agreement, dated as of June 18, 1986, between
Echosphere and Cable/Home Communications Corp. (a subsidiary of General
Instruments Corporation) (incorporated herein by reference to the Registration
Statement on Form S-1 of Dish, Registration No. 33-76450).
10.6 * Merchandise Financing Agreement, dated as of June 29, 1989, between Echo
Acceptance Corporation ("EAC") and Household Retail Services, Inc. (incorporated
herein by reference to the Registration Statement on Form S-1 of Dish,
Registration No. 33-76450).
II-4
SEQUENTIALLY
EXHIBIT NO. DESCRIPTION NUMBERED PAGE
- ----------- ---------------------------------------------------------------------------------- ---------------
10.7 * Key Employee Bonus Plan, dated as of January 1, 1994 (incorporated herein by
reference to the Registration Statement on Form S-1 of Dish, Registration No.
33-76450).
10.8 * Consulting Agreement, dated as of February 17, 1994, between ESC and Telesat
Canada (incorporated herein by reference to the Registration Statement on Form S-1
of Dish, Registration No. 33-76450).
10.9 * Form of Satellite Launch Insurance Declarations (incorporated herein by reference
to the Registration Statement on Form S-1 of Dish, Registration No. 33-76450).
10.10 * Dish 1994 Stock Incentive Plan (incorporated herein by reference to the
Registration Statement on Form S-1 of Dish, Registration No. 33-76450).
10.11 * Form of Tracking, Telemetry and Control Contract between AT&T Corporation and ESC
(incorporated herein by reference to the Registration Statement on Form S-1 of
Dish, Registration No. 33-81234).
10.12 * Manufacturing Agreement, dated as of March 22, 1995, between HTS and SCI
Technology, Inc. (Incorporated herein by reference to Exhibit 10.12 to the Annual
Report on Form 10-K of Dish, Commission File No. 33-81234).
10.13 * Manufacturing Agreement, dated as of April 14, 1995, by and between ESC and Sagem
Group. (Incorporated herein by reference to Exhibit 10.13 to the Registration
Statement on Form S-1 of EchoStar, Registration No. 33-91276).
10.14 + Confidential Amendment to contract between DBSC and Martin Marietta Corp. effective
as of May 31, 1995.
10.15 + Amendment No. 9 to contract between DirectSat Corporation and Martin Marietta
Corporation effective as of January 31, 1995.
11 * Computation of Earnings Per Sharse for fiscal year ended December 31, 1995
(incorporated herein by reference to Exhibit 11 to the Annual Report on Form 10-K
of EchoStar, Commission File No. 0-26176).
21 * List of EchoStar Subsidiaries (incorporated herein by reference to Exhibit 21 to
the Annual Report on Form 10-K of EchoStar, Commission File No. 0-26176).
23.1 Consent of Arthur Andersen LLP. [1 page]
23.2 Consent of Regardie, Brooks & Lewis, Chartered, Certified Public Accountants [1
page]
23.3 + Consent of David Moskowitz - Included in Exhibit 5.1.
23.4 + Consent of Sullivan & Worcester LLP - Included in Exhibit 8.1.
24 + Powers of Attorney authorizing signature of Charles W. Ergen, R. Scott Zimmer,
James DeFranco, J. Allen Fears and Steven B. Schaver. [2 pages]
- ------------------------
+ Previously filed
* Incorporated by reference
(b) Financial Statement Schedules.
None.
ITEM 22. UNDERTAKINGS
(a) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the foregoing
II-5
provisions, or otherwise, the Registrant has been advised that in the opinion of
the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question of whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
(b) The undersigned Registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the Information Statement --
Prospectus pursuant to items 4, 10(b), 11, or 13 of this Form, within one
business day of receipt of such request, and to send the incorporated documents
by first class mail or other equally prompt means. This includes information
contained in the documents filed subsequent to the effective date of the
registration statement through the date of responding to the request.
(c) The undersigned Registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
II-6
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
the Registrant has duly caused this Amendment No. 4 to the Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Englewood, State of Colorado, as of November 27,
1996.
ECHOSTAR COMMUNICATIONS
CORPORATION
By: /s/ J. ALLEN FEARS
-----------------------------------
J. Allen Fears
VICE PRESIDENT, TREASURER AND
CONTROLLER
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Amendment No. 4 to the Registration Statement has been signed by the following
persons in the capacities and as of the dates indicated.
SIGNATURE TITLE DATE
- ------------------------------------------------------ --------------------------------------- -----------------
*/s/ CHARLES W. ERGEN Chief Executive Officer, President and November 27, 1996
------------------------------------------- Director
Charles W. Ergen (Principal Executive Officer)
*/s/ STEVEN B. SCHAVER Vice President and Chief Financial November 27, 1996
------------------------------------------- Officer
Steven B. Schaver (Principal Financial Officer)
/s/ J. ALLEN FEARS Vice President, Treasurer and Corporate November 27, 1996
------------------------------------------- Controller (Principal Accounting
J. Allen Fears Officer)
*/s/ JAMES DEFRANCO Director November 27, 1996
-------------------------------------------
James DeFranco
*/s/ R. SCOTT ZIMMER Director November 27, 1996
-------------------------------------------
R. Scott Zimmer
*/s/ ALAN M. ANGELICH Director November 27, 1996
-------------------------------------------
Alan M. Angelich
*/s/ RAYMOND L. FRIEDLOB Director November 27, 1996
-------------------------------------------
Raymond L. Friedlob
*By: /s/ J. ALLEN FEARS
-------------------------------------------
J. Allen Fears
ATTORNEY-IN-FACT
II-7
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
the Registrant has duly caused this Amendment No. 4 to the Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Englewood, State of Colorado, as of November 27,
1996.
ECHOSTAR COMMUNICATIONS
CORPORATION
By: /s/ J. ALLEN FEARS
-----------------------------------
J. Allen Fears
VICE PRESIDENT, TREASURER AND
CONTROLLER
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Amendment No. 4 to the Registration Statement has been signed by the following
persons in the capacities and as of the dates indicated.
SIGNATURE TITLE DATE
- ------------------------------------------------------ --------------------------------------- ------------------
* Chief Executive Officer, President and November 27, 1996
------------------------------------------- Director
Charles W. Ergen (Principal Executive Officer)
* Vice President and Chief Financial November 27, 1996
------------------------------------------- Officer
Steven B. Schaver (Principal Financial Officer)
Vice President, Treasurer and Corporate November 27, 1996
------------------------------------------- Controller (Principal Accounting
J. Allen Fears Officer)
* Director November 27, 1996
-------------------------------------------
James DeFranco
* Director November 27, 1996
-------------------------------------------
R. Scott Zimmer
* Director November 27, 1996
-------------------------------------------
Alan M. Angelich
* Director November 27, 1996
-------------------------------------------
Raymond L. Friedlob
*By:
-------------------------------------------
J. Allen Fears
ATTORNEY-IN-FACT
II-7
Exhibit 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
reports and to all references to our Firm included in or made a part of this
Registration Statement File No. 333-3584.
/s/ ARTHUR ANDERSEN LLP
Denver, Colorado,
November 27, 1996.
EXHIBIT 23.2
[LETTERHEAD]
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our report
dated January 23, 1996 with respect to the financial statements of Direct
Broadcasting Satellite Corporation and to all references to our Firm included in
or made a part of this Registration Statement on Form S-4.
/s/ Regardie, Brooks & Lewis, Chartered
by Nathan J. Rosen, CPA, V. President
Bethesda, Maryland
November 27, 1996
