================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(b) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to ________________.
Commission file number: 0-26176
ECHOSTAR COMMUNICATIONS CORPORATION
(Exact name of registrant as specified in its charter)
NEVADA 88-0336997
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
90 INVERNESS CIRCLE EAST
ENGLEWOOD, COLORADO 80112
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (303) 799-8222
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Class A Common Stock, $0.01 par value
-------------------------
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED
TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING
THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS
REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENTS FOR THE PAST 90 DAYS. YES [X] NO [ ]
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM 405
OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE
BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS
INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO THIS
FORM 10-K. [X]
As of March 17, 1997, the aggregate market value of Class A Common Stock
held by non-affiliates* of the Registrant approximated $147.0 million based upon
the closing price of the Class A Common Stock as reported on the Nasdaq National
Market as of the close of business on that date.
As of March 17, 1997, the Registrant's outstanding voting stock consisted
of 11,768,276 shares of Class A Common Stock, 29,804,401 shares of Class B
Common Stock, and 1,616,681 shares of 8% Series A Cumulative Preferred Stock,
each $0.01 par value.
-------------------------
DOCUMENTS INCORPORATED BY REFERENCE
The following documents are incorporated into this Form 10-K by reference:
Portions of the Registrant's definitive Proxy Statement to be filed in
connection with the Annual Meeting of Shareholders of Registrant to be held June
9, 1997 are incorporated by reference in Part III herein.
-------------------------
* Without acknowledging that any individual director or executive officer of
the Company is an affiliate, the shares over which they have voting
control have been included as owned by affiliates solely for purposes
of this computation.
================================================================================
TABLE OF CONTENTS
PART I
Item 1. Business 1
Item 2. Properties 24
Item 3. Legal Proceedings 24
Item 4. Submission of Matters to a Vote of Security Holders 25
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 26
Item 6. Selected Financial Data 27
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations 28
Item 8. Financial Statements and Supplementary Data 38
Item 9. Changes In and Disagreements with Accountants on Accounting and
Financial Disclosure 38
PART III
Item 10. Directors and Executive Officers of the Registrant 39
Item 11. Executive Compensation 39
Item 12. Security Ownership of Certain Beneficial Owners and Management 39
Item 13. Certain Relationships and Related Transactions 39
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 40
Signatures 44
Index to Financial Statement and Report of Independent Public
Accountants F-1
PART I
ITEM 1. BUSINESS
ALL STATEMENTS CONTAINED HEREIN, AS WELL AS STATEMENTS MADE IN PRESS
RELEASES AND ORAL STATEMENTS THAT MAY BE MADE BY THE COMPANY OR BY OFFICERS,
DIRECTORS OR EMPLOYEES OF THE COMPANY ACTING ON THE COMPANY'S BEHALF, THAT
ARE NOT STATEMENTS OF HISTORICAL FACT, CONSTITUTE "FORWARD-LOOKING
STATEMENTS" WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM
ACT OF 1995. SUCH FORWARD-LOOKING STATEMENTS INVOLVE KNOWN AND UNKNOWN RISKS,
UNCERTAINTIES AND OTHER FACTORS THAT COULD CAUSE THE ACTUAL RESULTS OF THE
COMPANY TO BE MATERIALLY DIFFERENT FROM THE HISTORICAL RESULTS OF OR FROM ANY
FUTURE RESULTS EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS.
AMONG THE FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY ARE
THE FOLLOWING: THE AVAILABILITY OF SUFFICIENT CAPITAL ON SATISFACTORY TERMS
TO FINANCE THE COMPANY'S BUSINESS PLAN; INCREASED COMPETITION FROM CABLE,
DIRECT BROADCAST SATELLITE ("DBS"), OTHER SATELLITE SYSTEM OPERATORS, AND
OTHER PROVIDERS OF SUBSCRIPTION TELEVISION SERVICES; THE INTRODUCTION OF NEW
TECHNOLOGIES AND COMPETITORS INTO THE SUBSCRIPTION TELEVISION BUSINESS;
INCREASED SUBSCRIBER ACQUISITION COSTS AND SUBSCRIBER PROMOTION SUBSIDIES;
THE ABILITY OF THE COMPANY TO OBTAIN NECESSARY SHAREHOLDER AND BOND-HOLDER
APPROVAL OF ANY STRATEGIC TRANSACTIONS, INCLUDING THE ASKYB TRANSACTION (AS
DEFINED HEREIN); THE ABILITY OF THE COMPANY TO OBTAIN NECESSARY
AUTHORIZATIONS FROM THE FEDERAL COMMUNICATIONS COMMISSION ("FCC"); GENERAL
BUSINESS AND ECONOMIC CONDITIONS AND OTHER RISK FACTORS DESCRIBED FROM TIME
TO TIME IN THE COMPANY'S REPORTS FILED WITH THE SECURITIES AND EXCHANGE
COMMISSION ("SEC"). IN ADDITION TO STATEMENTS THAT EXPLICITLY DESCRIBE SUCH
RISKS AND UNCERTAINTIES, READERS ARE URGED TO CONSIDER STATEMENTS LABELED
WITH THE TERMS "BELIEVES," "BELIEF," "EXPECTS," "PLANS," "ANTICIPATES," OR
"INTENDS" TO BE UNCERTAIN AND FORWARD-LOOKING. ALL CAUTIONARY STATEMENTS
MADE HEREIN SHOULD BE READ AS BEING APPLICABLE TO ALL RELATED FORWARD-LOOKING
STATEMENTS WHEREVER THEY APPEAR. IN THIS CONNECTION, INVESTORS SHOULD
CONSIDER THE RISKS DESCRIBED HEREIN.
GENERAL
EchoStar Communications Corporation ("ECC"), together with its
subsidiaries ("EchoStar" or the "Company"), currently is one of only three
DBS companies in the United States with the capacity to provide comprehensive
nationwide DBS programming service. 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") on September 10, 1996. EchoStar II
significantly increased the channel capacity and programming offerings of the
DISH Network-SM- when it became fully operational in November 1996. EchoStar
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 various satellite direct to home ("DTH")
products, domestic distribution of DTH programming, and consumer financing of
EchoStar's domestic DISH Network-SM- and DTH products and programming
services. EchoStar had approximately 350,000 subscribers to DISH Network-SM-
programming as of December 31, 1996.
As more fully described herein (see - Strategic Alliance), on February
24, 1997, EchoStar announced the formation of a DBS alliance (the "ASkyB
Transaction") with The News Corporation Limited ("News"). Pursuant to a
binding letter agreement, American Sky Broadcasting, LLC, an entity
controlled by News ("ASKyB"), will contribute to EchoStar, or to an entity in
which EchoStar would have an equity interest, or make available for
EchoStar's use, cash, satellites and other DBS assets. These assets are
expected to have a total value of approximately $1.7 billion, including an
FCC license purchased during 1996 for approximately $682.5 million. In
return, ASkyB will acquire an approximate 50% equity interest in EchoStar. As
a result of its contributions to ASkyB, MCI Communications Corporation
("MCI") will have an approximate 19.9% interest in ASkyB. Four DBS
satellites are currently under construction for use by ASkyB. ASkyB also is
constructing a digital broadcast center in Gilbert, Arizona, which, upon
completion, will provide EchoStar with fully redundant digital broadcast
center operations. Assuming consummation of the ASkyB Transaction, EchoStar's
business plan would contemplate the eventual deployment of a total of seven
DBS satellites. The Company anticipates that more than 200 channels of
digital video and audio programming would be available for purchase by most
continental U.S. television households. The Company is planning, subject to
obtaining necessary regulatory and other approvals, to use the remaining
portion of its DBS capacity to provide local programming to major population
centers within the continental United States. The eventual use of the eighth
DBS satellite has not been determined.
1
While definitive agreements are expected to be executed in the near future,
in the absence of definitive agreements, the letter agreement will continue
as a binding commitment between the parties. Consummation of the ASkyB
Transaction is subject only to certain regulatory and other approvals and
consents. While EchoStar and News intend to consummate the ASkyB
Transaction, there can be no assurance that necessary regulatory or other
approvals or consents will be obtained or that the transaction will be
consummated.
Certain companies principally owned and controlled by Mr. Charles W. Ergen
were reorganized in 1993 into Dish, Ltd., formerly known as EchoStar
Communications Corporation (together with its subsidiaries, "Dish, Ltd."). The
principal reorganized entities included EchoStar Satellite Corporation ("ESC"),
which holds licenses for certain DBS frequencies and is the operator of the DISH
Network-SM-, and Echosphere Corporation and Houston Tracker Systems, Inc.
("HTS"), which are primarily engaged in the design, assembly, marketing and
worldwide distribution of direct to home ("DTH") satellite television
products. The reorganized group also includes other less significant domestic
enterprises and several foreign entities involved in related activities
outside the United States.
In June 1994, Dish, Ltd. completed an offering of 12 7/8% Senior Secured
Discount Notes due 2004 (the "Dish Notes") and Common Stock Warrants (the
"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").
In June 1995, ECC completed an initial public offering (the "IPO") of its
Class A Common Stock, resulting in net proceeds to ECC of approximately $62.9
million. To facilitate the IPO, EchoStar's principal subsidiary, Dish, Ltd.,
was merged with a wholly-owned subsidiary of ECC in December 1995 (the
"Merger"). As a result of the Merger, all capital stock of Dish, Ltd. was
automatically converted into capital stock of ECC on the basis of 0.75 shares
of ECC for each share of Dish, Ltd. (the "Exchange Ratio"). All employee
stock options of Dish, Ltd were also assumed by ECC, as adjusted for 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, as adjusted for the
Exchange Ratio. As a result of the Merger, ECC owned all outstanding shares
of Dish, Ltd. capital stock.
In March 1996, EchoStar Satellite Broadcasting Corporation ("ESBC"), a
wholly-owned subsidiary of ECC, completed an offering (the "ESBC Notes
Offering") of 13 1/8% Senior Secured Discount Notes due 2004 (the "ESBC
Notes"), which resulted in net proceeds to the Company of approximately
$337.0 million. In connection with the ESBC Notes Offering, EchoStar
contributed all of the outstanding capital stock of Dish, Ltd. to ESBC. This
transaction was accounted for as a reorganization of entities under common
control whereby Dish, Ltd. was treated as the predecessor to ESBC. ESBC is
subject to all, and ECC is subject to certain of, the terms and conditions of
the indenture related to the ESBC Notes (the "ESBC Notes Indenture"). As a
result of the above transactions, ESBC is a wholly-owned 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.
2
In December 1994, DirectSat Corporation ("DirectSat") was merged with a
subsidiary of Dish, Ltd. DirectSat stockholders received an approximate 3%
equity interest in Dish, Ltd. (subsequently exchanged for stock of ECC) in
exchange for all of DirectSat's outstanding stock. At the time of the merger,
DirectSat's principal assets were a conditional satellite construction permit
and assignments for certain DBS frequencies granted by the FCC.
On January 8, 1997, EchoStar consummated the merger of one of its
wholly-owned subsidiaries with Direct Broadcasting Satellite Corporation
("DBSC"). As a result of the merger, EchoStar acquired a conditional
satellite construction permit and specific orbital slot assignments for
additional DBS frequencies. EchoStar expects to issue a total of
approximately 658,000 shares (of which approximately 592,000 shares had been
issued as of March 17, 1997) of its Class A Common Stock to DBSC shareholders
in exchange for the approximate 60% interest in DBSC that ECC did not already
own at the time of the DBSC merger.
BUSINESS STRATEGY
EchoStar's primary business objective is to become one of the leading
providers of subscription television and other satellite delivered services in
the United States. EchoStar's current strategy to achieve this objective is to:
- ENTER INTO STRATEGIC ALLIANCES TO ENHANCE ECHOSTAR'S COMPETITIVE
POSITION IN THE DBS MARKET.
- EXPAND THE MARKET FOR ITS SERVICES BY:
(i) USING AGGRESSIVE SALES PROMOTIONS.
(ii) RETRANSMITTING LOCAL BROADCAST SIGNALS TO MAJOR POPULATION
CENTERS WITHIN THE CONTINENTAL UNITED STATES.
(iii) OFFERING A VARIETY OF NICHE, FOREIGN LANGUAGE, CULTURAL,
EDUCATIONAL, AND BUSINESS PROGRAMMING.
(iv) PROVIDING SUBSCRIBERS WITH QUALITY PROGRAMMING AT COMPETITIVE
PRICES.
(v) EXPANDING THE DISTRIBUTION CHANNELS FOR ECHOSTAR RECEIVER
SYSTEMS.
- DEPLOY SATELLITES AT ADDITIONAL DBS ORBITAL SLOTS TO EXPAND ECHOSTAR'S
SERVICE OFFERINGS.
STRATEGIC ALLIANCE
On February 24, 1997, EchoStar and News announced that News had agreed to
acquire an approximate 50% ownership interest in EchoStar. In connection
therewith, ASKyB will contribute to EchoStar or an entity controlled by
EchoStar, or make available for EchoStar's use, cash, satellites and other
DBS assets of its ASkyB subsidiary. Four satellites are currently under
construction for use by ASkyB. Three of these satellites will have 32
tansponders that will operate at approximately 120 watts per channel
(switchable to 16 transponders operating at over 200 watts per channel). The
fourth satellite will have eight transponders. Assuming completion of the
ASKyB transaction, EchoStar anticipates that it will be able to offer more
than 200 channels of digital audio and video programming to most continental
U.S. television households. Currently, EchoStar provides approximately 150
channels of digital video and audio programming. The Company expects to use
its expanded capacity to provide additional niche, foreign language,
cultural, educational, business, sports, Pay-Per-View and other programming.
The Company also is planning, subject to obtaining necessary regulatory and
other approvals, to use the remaining portion of its DBS capacity to provide
local programming to major population centers within the continental United
States. The EchoStar/News alliance will operate under the trade name "Sky."
EchoStar will continue to be headquartered in Englewood, Colorado.
Consummation of the ASkyB Transaction is subject only to certain regulatory
and other approvals and consents. While EchoStar believes that the necessary
regulatory or other approvals and consents will be obtained and that the
ASkyB Transaction will be consummated, there can be no assurance that the
Company will be successful in these efforts.
EXPAND MARKET FOR DISH NETWORK-SM- SERVICE
AGGRESSIVE SALES PROMOTIONS. The primary purposes of EchoStar promotions
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. These promotions are consistent with, and emphasize, 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 large subscriber base.
3
Since August 1996, EchoStar has introduced several marketing promotions,
the most significant of which is a nationwide-marketing promotion (the
"EchoStar Promotion") which allows independent retailers to offer a standard
EchoStar Receiver System to consumers for a suggested retail price of $199
(as compared to the original average retail price in March 1996 of
approximately $499), conditioned upon the consumer's prepaid purchase of a
one-year subscription to the DISH Network's-SM- America's Top 50 CD-SM-
programming package for approximately $300. Total transaction proceeds to
EchoStar are less than EchoStar's cost of the equipment and programming for
the initial prepaid year of DISH Network-SM- service. The excess of the total
costs incurred (equipment, programming and other) over transaction proceeds
is expensed upon shipment of the equipment and reflected in EchoStar's
consolidated financial statements as subscriber promotion subsidies.
While promotions such as the EchoStar Promotion have significantly
increased the affordability of DISH Network-SM- equipment and service for
customers, such promotions have resulted in EchoStar incurring significant
costs to acquire subscribers. Additionally, such promotions have had, and
will continue to have, a negative impact on the Company's profit margins and
cash flows. EchoStar believes such costs will be fully recouped from future
DBS revenues expected to be generated from customers obtained as a result of
EchoStar's various promotions, primarily because, unlike the cellular phone
industry, DISH Network-SM- reception equipment cannot be utilized with
competitors' DBS systems. Therefore, subscribers cannot seamlessly migrate to
alternative DBS providers after the initial prepaid year of DISH Network-SM-
service. Further, based on high DBS industry consumer satisfaction ratings,
initial feedback from consumers and dealers, and low initial DISH Network-SM-
subscriber turnover rates, EchoStar anticipates high service renewal rates
leading to an expected average minimum subscriber life of at least three
years.
RETRANSMISSION OF LOCAL BROADCAST SIGNALS. Historically, DBS providers
have not had adequate channel capacity to retransmit local broadcast signals
via satellite. As a result, DBS subscribers generally are required to use an
off-air antenna or subscribe to an existing cable service to receive local
programming. While there can be no assurance that EchoStar will be able to
successfully implement its plans to deliver local programming, the Company
believes its ability to transmit local programming via satellite into the
markets from which such programming is originated may attract incremental
subscribers who would not otherwise be willing to purchase satellite systems.
In order to retransmit local programming into a market, EchoStar must obtain
the retransmission consent of the local carrier and either compulsory
statutory copyright licenses or actual copyright licenses from the holders of
copyrighted programming. EchoStar intends to offer local programming in the
largest U.S. television markets. Upon consummation of the ASkyB Transaction,
EchoStar believes that it will have the necessary frequency capacity to
enable it to provide local programming to major population centers within the
continental United States. See "-- DBS and Related Services -- The
Satellites."
VARIETY OF PROGRAMMING SERVICES. Assuming consummation of the ASkyB
Transaction, EchoStar expects that its ability to transmit programming to the
entire continental United States, coupled with its significant DBS capacity,
may enable it to expand the types of programming services currently offered
by the DISH Network-SM-. The Company expects that these programming services
may include additional niche, foreign language, cultural, educational and
business television services currently not widely offered by other providers of
subscription television services. By expanding its programming services to
include those services described above, EchoStar believes, but can give no
assurance, that it may be able to differentiate itself from other providers
of subscription television services, which may not be able to
cost-effectively, or do not have the capacity to, offer similar services.
The Company expects that subscribers interested in niche, foreign language,
cultural, educational and business television services also might subscribe
to EchoStar's core programming services, thereby increasing EchoStar's
overall subscriber base.
COMPETITIVELY PRICED PROGRAMMING PACKAGES. EchoStar's low cost per
potential subscriber (relative to cable providers) and significant channel
capacity enable the DISH Network-SM- to offer a wide variety of programming
packages at competitive price points. Management believes that after taking
into account projected subscriber levels and subscriber promotional subsidies
from the EchoStar Promotion and other similar promotions, EchoStar's per
subscriber costs of delivery will be lower than those of its cable
competitors. The DISH Network-SM- offers a variety of programming packages
including popular cable television networks. The Company's America's Top 50
CD-SM- programming package, which includes 50 of the most popular "cable"
channels, together with The Disney Channel-Registered Trademark-
(historically a premium service), currently is priced at $24.99 per month
when purchased as an annual prepaid subscription. This programming package
includes a diverse range of programming including news, sports, general
entertainment, movies, and family programming. The Company's America's Top 50
CD Premium Plus-SM- package, priced at an additional $10 per month, and the
Company's America's Top 50 CD Deluxe Plus-SM- package, priced at an
additional $20 per month, include the Company's America's Top 50 CD-SM-
package combined with one and two multichannel movie services (such as
HBO-Registered Trademark- or Showtime-Registered Trademark-), respectively.
Each multichannel movie service includes from two to five different movie
channels available for approximately the same price charged by cable
operators for a single movie channel. Additional packages and combinations
include superstations, network programming and regional sports offerings. The
DISH Network-SM- also offers Pay-Per-View movies and niche services on an "a
la carte" basis. EchoStar's Pay-Per-View strategy focuses on premier movie
titles which generate substantial viewer interest.
4
EXPANDED DISTRIBUTION CHANNELS. 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 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 DBS
operators. EchoStar continues to seek additional mass merchandisers, direct
sales organizations and consumer electronics retailers to establish expanded
distribution for EchoStar Receiver Systems. EchoStar also is negotiating with
certain large brand-name consumer electronics companies to manufacture and
provide greater retail distribution of EchoStar Receiver Systems. No
assurance can be given that any such manufacturing or distribution
arrangements will be entered into at all, or on terms favorable to EchoStar.
DEPLOY SATELLITES TO EXPAND SERVICE OFFERINGS
EchoStar intends to launch additional satellites (see - Satellites) to
make use of its significant DBS capacity to expand service offerings to its
customers. EchoStar presently intends 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. News plans to launch a total of three satellites,
one in each of the third quarter of 1997, the first quarter of 1998, and the
third quarter of 1998. While there can be no assurance as to successful
deployment of any of these satellites, EchoStar anticipates that its
additional service offerings resulting from the deployment of the satellites
described above may include the provision of local programming to major
population centers within the continental United States, niche (i.e., foreign
language, cultural, educational, business television, etc.) programming, and
increased sports programming and Pay-Per-View offerings. While there can be
no assurance, additional services offered by the Company may also include new
services such as the high-speed transmission of Internet data.
DBS AND RELATED SERVICES
PROGRAMMING
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. The
Company's America's Top 50 CD-SM- programming package is priced at $24.99 per
month. Comparatively, on a national average, a similar package of cable
programming costs the consumer approximately $42 per month.
The Company's America's Top 50 CD-SM- programming package includes 50 of
the most popular basic and "expanded basic" cable channels. This service
includes, among other offerings, such popular programming services as
CNN-Registered Trademark-, ESPN-Registered Trademark-, USA Network-Registered
Trademark-, The Nashville Network-Registered Trademark-, The Disney
Channel-C-, broadcast superstations (e.g., WTBS and WGN), and one regional
sports network (e.g., Fox Sports). The DISH Network-SM- also offers
multichannel premium (i.e., movie) services, niche and cultural programming,
sports programming, and Pay-Per-View services. Premium services available on
the DISH Network-SM- include HBO-Registered Trademark-, Cinemax-Registered
Trademark-, Showtime-Registered Trademark-, The Movie Channel-Registered
Trademark-, Sundance-TM- and Flix-TM-. EchoStar's DISH Network-SM- service
currently offers ten channels of Pay-Per-View programming. EchoStar's future
plans include, among other things, increasing the number of Pay-Per-View
channels offered to subscribers.
Although the DISH Network-SM- does not presently provide local
programming via satellite, subscribers are able to receive local programming
from an off-air antenna without the payment of an additional fee. Upon the
successful launch of additional satellites, and assuming consummation of the
ASkyB Transaction, EchoStar intends to eventually offer local programming
directly via satellite to major population centers within the continental
United States.
ECHOSTAR RECEIVER SYSTEMS
DISH Network-SM- programming is available to consumers in the continental
U.S. who purchase or lease 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. EchoStar Receiver Systems are available in a
variety of models. Subscribers can receive local broadcast signals, either
through a standard television antenna (a traditional rooftop or set-top
antenna) or by subscribing to basic cable. The basic EchoStar Receiver
System incorporates infrared remote control technology, an on-screen program
guide and the ability to switch between DISH Network-SM- and local
programming signals using the remote control. In addition to the on-screen
program guide and local programming access features of the basic model, the
mid-level model features UHF remote control technology (which allows the
subscriber to control their EchoStar Receiver System
5
from up to 150 feet away through walls), and a high-speed data port.
EchoStar's premium receiver system includes UHF remote control technology, a
high-speed data port, enhanced on-screen program guide capabilities
(including local program information and seamless integration of local and
satellite channels), and on-screen caller identification capability.
The EchoStar DBS System integrates digital audio and video compression.
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 adjust a subscriber's level of
programming services. If the receiver's smart card is authorized for a
particular channel, the data is decrypted and passed on for audio and video
decompression.
While EchoStar Receiver Systems are internally designed and engineered,
EchoStar does not manufacture EchoStar Receiver Systems directly. Rather,
EchoStar has contracted for the manufacture of EchoStar Receiver Systems with
a high-volume contract electronics manufacturer. SCI Technology, Inc. ("SCI")
is currently manufacturing MPEG-2 DBS receivers in quantities which EchoStar
believes will be adequate to meet its expected demand for 1997. As previously
described, EchoStar also is negotiating with several brand-name consumer
electronics manufacturers to produce receivers for use with the DISH
Network-SM-. No assurances can be provided regarding the ultimate success of
such negotiations.
FINANCING
Historically, EchoStar has maintained agreements with third-party finance
companies to make consumer credit available to EchoStar customers. These
financing plans provide consumers the opportunity to lease or finance their
EchoStar Receiver Systems, including installation costs and certain DISH
Network-SM- programming packages, on competitive terms. Consumer financing
provided by third parties is generally non-recourse to EchoStar. The
third-party finance company that provides the program currently utilized by
has notified the Company that it does not intend to renew the agreement,
which expires during 1997. EchoStar is currently negotiating similar
agreements with other third-party finance companies. There can be no
assurance that EchoStar will be successful in these negotiations, or if
successful, that any such new agreements will commence prior to the
termination of the existing agreement. In the event that EchoStar is unable
to enter into any new consumer credit agreements, or is unable to do so prior
to the expiration of its existing agreement, growth of the DISH Network-SM-
subscriber base may be adversely impacted.
During March 1997, EchoStar's wholly-owned subsidiary, DISH Network-SM-
Credit Corporation ("DNCC"), began offering an internally-financed consumer
lease plan to prospective DISH Network-SM- customers. This plan provides for
a four-year lease term at competitive rates to qualified consumers.
Initially, EchoStar plans to implement DNCC's consumer lease program on a
limited basis. Additional capital will be required for EchoStar to implement
the program on a larger scale. There can be no assurance additional capital
will be available for the lease program on terms acceptable to EchoStar, or
at all.
INSTALLATION
Currently, a majority of EchoStar Receiver System installations are
performed either by third-parties or are self-installed by consumers. A
subsidiary of EchoStar also offers installation services. EchoStar
anticipates that demand for its installation services may increase as demand
for its DISH Network-SM- service grows.
OTHER COMPONENTS OF DBS SERVICE
SUBSCRIBER MANAGEMENT. EchoStar outsources its subscriber management,
billing and remittance services for DISH Network-SM- subscribers. Under the
terms of the outsourcing agreement, EchoStar is provided with access to a
subscriber management system maintained by the service provider. The provider
facilitates the authorization of programming to the subscriber and
coordinates billing and renewal functions.
CUSTOMER CARE CALL CENTER. EchoStar currently maintains call centers in
Thornton, Colorado and Harrisburg, Pennsylvania. Potential and existing
subscribers can call a single phone number to receive assistance for
hardware, programming, installation or service. The call center in Thornton,
Colorado is owned by the Company. The Pennsylvania facility is operated by a
third party.
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
6
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 is also performed at EchoStar's Digital Broadcast
Center.
CONDITIONAL ACCESS SYSTEM. EchoStar has contracted exclusively with
Nagra Plus, SA for the provision of access control systems, including smart
cards used with each EchoStar Receiver System. The smart cards contain the
authorization codes necessary to receive DISH Network-SM- programming. The
access control system is central to the security network that prevents
unauthorized viewing of programming. Access control systems of other DBS
providers have been commercially pirated. To date, the Company is unaware of
any compromises of its access control system. While there can be no
assurance that breaches of EchoStar's access control system will not occur in
the future, the Company believes its access control system will adequately
prevent commercially viable unauthorized access to programming. Further, the
smart cards have been designed with the flexibility to completely change the
access control system in the event of a security breach. In the event that
such systems or products fail to operate as intended, EchoStar's business
would be adversely affected if the vendor could not rapidly implement
corrective measures.
COMPRESSION SYSTEM. EchoStar has entered into an agreement with a third
party 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 minutes 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 contracted for tracking,
telemetry and control ("TT&C") services with respect to EchoStar I, EchoStar
II and EchoStar III, including orbital analysis and oversight of the
construction phase-related to the satellite. The agreement limits the
liability of the contractor 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 continue to be obtained on commercially reasonable terms. While TT&C
services have not yet been procured for EchoStar IV, EchoStar believes that
these services can be timely obtained from a number of providers.
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.
Although it is highly unlikely, there can be no guarantee 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 EchoStar
I would result in a total loss of the satellite. Further, the FCC has granted
EchoStar conditional authority to use "extended" 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
these C-band frequencies for TT&C purposes. The inability to control EchoStar
II would result in a total loss of the satellite.
DBS AND OTHER PERMITS
EchoStar's subsidiaries have been assigned 21 DBS frequencies at 119 DEG.
WL, one of the three U.S. licensed orbital slots that provide full CONUS
coverage. Of these frequencies, 11 are held by ESC and ten are held by
DirectSat. Eleven of the 16 transponders on EchoStar I and ten of the 16
transponders on EchoStar II are being utilized to operate those frequencies.
7
In addition to its frequencies at 119 DEG. WL, DirectSat has been
assigned 11 frequencies at 175 DEG. WL and one frequency at 110 DEG. WL. DBSC
holds a conditional satellite construction permit and specific orbital slot
assignments for 11 DBS frequencies at each of 61.5 DEG. WL and 175 DEG. WL.
ESC has a permit for 11 unassigned western frequencies. While a firm business
plan has not yet been finalized, DirectSat's, DBSC's and ESC's frequencies at
175 DEG. WL could be used to provide a high power DBS service to the western
continental U.S., Hawaii and Alaska. These frequencies also could provide a
satellite programming link between the United States and the Pacific Rim, if
FCC and International Telecommunication Union ("ITU") coordination can be
arranged and authorization in the receiving countries obtained.
Pursuant to an agreement dated July 19, 1996, by and among certain of
EchoStar's subsidiaries, DBSC (collectively, the "Providers") and Dominion
Video Satellite, Inc. ("Dominion"), the Providers agreed to permit Dominion
to use transponders on EchoStar I, EchoStar II and EchoStar III to transmit
programming. Currently, Dominion transmits programming using one full
transponder on EchoStar II. Under the Dominion Agreement, DBSC will allow
Dominion to use eight transponders at 61.5 DEG. W.L. on EchoStar III for a
term commencing upon the successful launch of EchoStar III and (subject to
certain exceptions) terminating at the end of the useful operating life of
EchoStar III. At that time, Dominion will retain a right to transmit from one
channel at 119 DEG. W.L. Upon 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
transponders made available by DBSC for use by Dominion. 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 by the FCC to use those transponders for its own DBS services. The
use by Dominion of transponders on EchoStar III to satisfy Dominion's FCC due
diligence obligations requires FCC approval. No assurance can be given that
the FCC will grant this approval.
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 (or, in the case of ESC's western assignments, are still
pending), 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 EchoStar's DBS permits.
During January 1996, the FCC held an auction for 28 frequencies at the
110 DEG. WL orbital slot and 24 frequencies at the 148 DEG. WL orbital slot.
EchoStar acquired a DBS construction permit for the use of the 24 frequencies
at the 148 DEG. WL orbital slot for $52.3 million. EchoStar will be required to
complete construction of that satellite by December 20, 2000, and the
satellite must be in operation by December 20, 2002. Upon consummation of the
ASkyB Transaction previously described, MCI will make available for
EchoStar's use MCI's 28 full CONUS frequencies at 110 DEG. WL, which it
acquired in the FCC auction.
EchoStar has an application pending before the FCC for a two-satellite
fixed service 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. EchoStar also has requested a modification of its
proposed Ku-band system to add C-band capabilities to one satellite. GE Americom
Communications, Inc. ("GE Americom") and PrimeStar Partners, L.P. ("PrimeStar")
have filed petitions for reconsideration or cancellation and petitions to deny
against EchoStar's' Ku-band conditional licenses, the additional financial
showing made by EchoStar, and EchoStar's C-band modification application. There
can be no assurance that the FCC will consider EchoStar's additional showing to
be adequate or that it will deny GE Americom's or PrimeStar's petitions. 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 the Company's DISH Network-SM- business, 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 reception of satellite signals by
dishes with 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 be able to successfully
capitalize on the resulting business opportunities. All of these applications
are currently being challenged by several companies with interests adverse to
those of EchoStar.
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 the Little LEO system
8
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 relatively 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 be
able to successfully capitalize on any resulting business opportunity.
SATELLITES
EchoStar I and EchoStar II are each Lockheed Martin Series 7000
satellites equipped with 16 Ku-band transponders. Each transponder is
equipped with 130 Watts of power, approximately eight times the power of
typical C-band transponders. EchoStar III and EchoStar IV each will be
Lockheed Martin Series 2100AX satellites equipped with 32 transponders that
will operate at approximately 120 watts per channel (switchable to 16
transponders operating at over 200 watts per channel). Each transponder will
be capable of transmitting multiple digital video, audio and data channels.
EchoStar's satellites have a minimum design life of 12 years. 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
which are deferred until the respective satellites are in orbit (the
"Deferred Payments"). The loss, damage or destruction of any EchoStar
satellite 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.
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. 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.
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.
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 in 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. Pursuant to the Lockheed Contract, substantially
all of the price is required to be paid prior to 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 total
launch delays (except certain excusable delays) caused by Lockheed Services
exceed 12 months.
EchoStar has contracted with Lockheed-Khrunichev-Energia-International,
Inc. ("LKE") for the launch of EchoStar IV during the first quarter of 1998
from the Baikonur Cosmodrome in the Republic of Kazakhstan, a territory of
the former Soviet Union (the "LKE Contract"). EchoStar will launch EchoStar
IV on a Proton K/Block DM four stage launch vehicle. Astra 1F, the first
commercial launch on a Proton K/Block DM, was successfully launched on April
9, 1996 and Inmarsat 3 F2, the second such commercial launch was successfully
launched on September 6, 1996. LKE now markets commercial Proton launches
under a new organization called International Launch Services ("ILS"), a
joint venture between LKE and Lockheed Services. ILS currently has contracts
providing for the launch of at least six non-EchoStar western satellites
throughout 1997. The first commercial Proton launched in 1997 is tentatively
scheduled for May 24, carrying the Telstar 5 payload. ILS has a current
commercial backlog of 18 satellites to be launched by the end of 1999 on
Proton. 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. Any political or social instability, such as that recently
experienced in the former Soviet block countries, could affect the cost,
timing and overall advisability of utilizing LKE as a launch provider for
EchoStar's satellites.
Either party may request a delay in the 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, a 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.
9
INSURANCE
Under the terms of the satellite contracts for EchoStar III and EchoStar
IV, 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 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 insurance obligations under the Dish Notes Indenture.
The launch insurance policy for EchoStar II covered the period from
launch through completion of testing and commencement of commercial
operations. The policy also provides for in-orbit insurance for EchoStar II
through September 9, 1997. The policy protects against losses resulting from
the failure of the satellite to perform in accordance with its operational
performance parameters. The Dish Notes 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 expects to procure the required in-orbit insurance for EchoStar II, to
commence contemporaneous with the expiration of the launch insurance policy.
In-orbit insurance for EchoStar I and EchoStar II includes standard
exclusions and is subject to annual renewal provisions. While the Company
expects it will be able to renew such policies as they expire, there can be
no assurance that such renewals will be at rates or terms favorable to the
Company. For example, in the event EchoStar I, EchoStar II or other similar
satellites experience anomalies while in orbit, the cost to renew in-orbit
insurance could increase significantly.
The launch insurance policies for EchoStar III and EchoStar IV contain
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: (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;
and (vi) willful or intentional acts of EchoStar or its contractors. The
policies also contain provisions limiting insurance for incidental and
consequential damages and third-party claims against EchoStar.
The ESBC Notes 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%). EchoStar has bound approximately $219.3 million of
insurance for the launch of each of EchoStar III and EchoStar IV including
in-orbit insurance until 365 days after the launch.
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 264,000 C-band
satellite receivers worldwide in 1996. 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 continued during 1996 as
a result of competition from the sale of DBS systems through consumer
electronic outlets. Those satellite retailers who do not market DBS systems
or cannot adapt to a high-volume, low-margin market, may be particularly
vulnerable. However, new satellite retailers continue to enter the market,
which partially offsets the aforementioned decline in the number of satellite
retailers.
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 1996,
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,
10
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.
The Company has entered into an agreement with ExpressVu, Inc.
("ExpressVu"), a majority owned affiliate of BEC, Inc. (Bell Canada). Pursuant
to this agreement, EchoStar is assisting ExpressVu with the contruction of a
digital broadcast center for use in conjunction with ExpressVu's planned DTH
service and will act as a distributor of satellite receivers and related
equipment for ExpressVu's planned DTH service in Canada. Among other things,
EchoStar has agreed not to provide DTH service in Canada and ExpressVu has
agreed not to provide DTH service, including DBS service, in the United States.
Information regarding EchoStar's operations in different geographic areas
as of December 31, 1994, 1995 and 1996, and for the years then ended, is
presented in Note 13 to EchoStar's consolidated financial statements.
PROGRAMMING
Since 1986, EchoStar has acquired DTH programming directly from programming
providers, 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 many
of the most popular programming services 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, broadcast superstations, and other "best of
cable" programming.
C-BAND CONSUMER FINANCING
During 1996, EchoStar maintained agreements with consumer finance
companies to make credit available to consumers for the purchase of new
C-band DTH-related product and services. These agreements terminated in
early 1997. Presently, the Company does not intend to execute any new
agreements. EchoStar expects that the discontinuance of consumer financing
of C-Band DTH-related products and services will negatively impact future
C-band revenues (see - Management's Discussion and Analysis of Financial
Condition and Results of Operations).
11
SALES AND MARKETING
EchoStar's marketing strategy includes national and regional broadcast
and print advertising, promoting the benefits of the DISH Network-SM-.
EchoStar has comprehensive dealer guides describing all aspects of the DISH
Network-SM- and its integrated product lines (programming, hardware,
financing and installation). These dealer guides are provided to distributors
during nationwide educational seminars. EchoStar expects to continue to offer
a high level of retail support and to 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 visits 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.
Additionally, one channel of programming on the DISH Network-SM- provides
information about additional services and promotions offered by the DISH
Network-SM-. That channel is geared towards educating retailers, satellite
dealers and current and potential subscribers.
EchoStar offers a commission program that it believes is competitive with
that offered by other DBS operators. The program pays qualified distributors
and retailers a percentage of programming revenues generated by subscribers
to whom they sell DISH Network-SM- systems. Commissions are earned by
distributors and retailers over an extended period.
EchoStar utilizes its existing nationwide network of independent
distribution and retail stores and outlets to market and distribute DISH
Network-SM- systems and programming services to its target markets. EchoStar
also distributes DISH Network-SM- systems through consumer electronics
outlets under its own brand name. EchoStar intends to expand into other less
traditional distribution channels such as direct sales, among other things.
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.
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 and HTS product lines to meet specific consumer needs and to
compete effectively against products designed and manufactured by larger
consumer electronics companies. EchoStar's quality assurance standards
require all EchoStar 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, Taiwan, 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 include a wide 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 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.
12
SUBSCRIPTION TELEVISION
CABLE TELEVISION. Cable television service is currently available to the
vast majority of U.S. television households. The U.S. cable television
industry currently serves over 60 million subscribers, representing over 60%
of U.S. television households. As an established provider of subscription
television services, cable television is a formidable competitor in the
overall market for television households. Cable television systems generally
offer 30 to 80 analog channels of video programming. Many cable television
operators have either announced their intention to, or are in the process of,
upgrading their distribution systems to expand their existing channel
capacity for purposes of providing digital product offerings similar to those
offered by DBS providers. In addition, such expanded capacity may be used to
provide interactive and other new services.
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 trial offerings of such services. If such trials are successful,
may consumers may find cable service to be more attractive that DBS for the
reception of programming.
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- is not available to households in
apartment complexes or other multiple dwelling units that do not facilitate
or allow the installation of EchoStar Receiver Systems. Additionally, 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.
In addition, Tele-Communications, Inc. ("TCI"), the largest cable
television company in the United States, has announced that it currently
intends to provide digital programming to TCI and other cable subscribers
from its DBS satellite launched in March 1997. 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. Currently,
DISH Network-SM- subscribers must 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, Inc. ("DirecTv") has channel assignments at a full CONUS orbital
slot. United States Satellite Broadcasting Corporation ("USSB") owns and
operates five transponders on DirecTv's first satellite and offers a
programming service separate from, and complimentary to, DirecTv's service.
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. DirecTv currently offers
subscribers, on an exclusive basis, professional sports programming, such as
NFL Sunday Ticket-TM-. While EchoStar intends to offer similar services in
the future, its current inability to provide such programming places it at a
competitive disadvantage. DirecTv currently has approximately 2.5 million
subscribers, approximately 1.2 million of whom subscribe to USSB programming.
AT&T Corporation ("AT&T") and DirecTv have entered into 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 a five-year period. This agreement provides
a significant base of potential customers for the DirecTv DBS system and
allows AT&T and DirecTv to offer customers a bundled package of digital
entertainment and communications services. As a result, EchoStar is at a
competitive disadvantage marketing to these customers. The AT&T and DirecTv
agreement has increased the competition EchoStar encounters in the overall
market for pay television customers. Affiliates of the National Rural
Telecommunications Cooperative have acquired territories in rural areas
13
of the United States as distributors of DirecTV programming, thereby increasing
the distribution capacity of DirecTv.
PrimeStar currently offers medium power Ku-band programming service to
customers using dishes approximately three feet in diameter. PrimeStar is
owned by a group of multiple-system cable operators and provides nationwide
service. PrimeStar is expected to offer medium-power programming services to
customers using smaller dishes (approximately two feet in diameter) during
April 1997. In addition, PrimeStar is expected to have access to significant
DBS capacity via TCI's DBS satellite, which is capable of providing full CONUS
service. PrimeStar currently has approximately 1.8 million subscribers.
The FCC has allocated certain additional U.S. licensed DBS frequencies to
DirecTv, USSB and other parties. These frequencies could provide additional
capacity for existing DBS operators thereby enhancing their competitive
position relative to the Company. Further, such presently unused frequencies
could enable new competitors to enter the DBS market.
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.
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 currently at a competitive
disadvantage to DirecTv, USSB and PrimeStar.
OTHER POTENTIAL PROVIDERS OF DBS OR SIMILAR SERVICES. During March 1996,
AlphaStar Television Network which is owned by Tee-Comm Electronics, Inc. a
Canadian company, began offering DTH programming in the United States on a
limited basis, and intends to expand to 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.
The FCC has indicated that it may to apply to the ITU for allocation of
additional DBS orbital locations capable of providing service to the United
States. Further, Canada, Mexico, and other countries have been allocated
various DBS orbital locations which are capable of providing service to part
or all of the continental United States. In general, non-U.S. licensed
satellites are not allowed to provide domestic DBS or DTH service in the
United States. However, in November 1996, the United States and Mexico
signed a Protocol for cross-border DBS and DTH service, and Mexico has
indicated that it will auction one or more of its DBS orbital locations later
this year. In addition, the United States has indicated its willingness to
enter into similar agreements with other countries in North, Central, and
South America. If the United States government moves forward with these
initiatives, or if other countries authorize DBS providers to use their
orbital slots to serve the United States, additional competition could be
created, and EchoStar's DBS authorizations could become less valuable. At
this time, EchoStar cannot predict whether these or other recent
developments will ultimately result in any additional service to the United
States.
14
Additionally, it may be possible to utilize extended Ku-band spectrum and
mid- and high-power FSS spectrum to serve the U.S. DTH market. A significant
amount of available full CONUS spectrum exists in these bands. Further, it
may be possible to utilize Ka-band spectrum for DTH satellite applications,
particularly for spot beam applications.
WIRELESS CABLE. Multichannel, multipoint distribution ("wireless cable")
systems typically 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 signals, wireless cable 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 such digital
upgrades will be significant and will have to be amortized over a smaller
base of potential customers. Wireless cable also requires direct line of
sight from the receiver to the transmission tower, which creates the
potential for substantial interference from terrain, buildings and foliage in
the line of sight. Wireless cable served approximately 1.0 million
subscribers at the end of 1996.
TELEPHONE COMPANIES. Certain regional bell 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 Telecommunications Act of 1996 (the
"1996 Act"), which was enacted in February 1996, permits telephone companies
to own cable systems and provide high-power DBS service, although any
telephone company desiring to become a high-power DBS broadcaster must still
obtain an FCC license for an available orbital location. The 1996 Act 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. Several large telephone companies have announced plans
to acquire or merge with existing wireline and wireless 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 free of charge. The FCC is considering
an additional digital spectrum allocation to licensed broadcasters.
PRIVATE CABLE. Private cable is a multi-channel subscription television
service where the programming is received by a satellite receiver and then
transmitted via coaxial cable throughout private property, often multiple
dwelling units ("MDUs"), without crossing public rights of way. Private cable
operates under an agreement with a private landowner to service a specific
MDU, commercial establishment or hotel. The FCC recently amended its rules to
allow the provision of point-to-point delivery of video programming by
private cable operators and other video delivery systems in the 18 Ghz
bandwidth. Private cable operators compete with EchoStar for customers within
the general market of consumers of subscription television services.
LOCAL MULTI-POINT DISTRIBUTION SERVICE ("LMDS"). In March 1997, the FCC
announced its intention to offer two LMDS licenses, one for 1150 MHz and the
other for 150 MHz, in each of 493 Basic Trading Areas ("BTAs") pursuant to an
auction in the case of mutually exclusive applications. Incumbent local
exchange carriers and cable operators will not be allowed to obtain in-region
licenses for the larger spectrum block for three years. The LMDS auction date
has not yet been set, but is expected to occur some time during 1997. The
broadband 28 GHz LMDS spectrum allocation may enable LMDS providers to offer
subscribers a wide variety of audio, video and interactive service options.
15
DTH INDUSTRY
DTH PRODUCTS. EchoStar faces competition in the sale of satellite
receivers in North America from other manufacturers and distributors.
EchoStar, General Instrument Corporation and Uniden America Corporation
comprise the three largest competitors in the North American DTH products
market (exclusive of DBS products).
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 the basis of 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 with respect to 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. 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.
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 programming
packages, some of which are affiliated with well-known, large program
originators, and some of which 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, wireless cable 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 than EchoStar.
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 amortization periods on their loans
than EchoStar has offered. Long amortization periods 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."
16
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 products in certain 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 of 1934, as amended
(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 1996
Act, 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 ESC a
license to cover 11 specified frequencies for EchoStar I at 119 DEG. WL. ESC
also has a conditional construction permit for 11 unspecified western
frequencies. EchoStar's subsidiary DirectSat, has a license to cover ten
additional frequencies at the 119 DEG. WL orbital location. The FCC also has
issued DirectSat a conditional permit for one frequency at 110 DEG. WL and 11
frequencies at 175 DEG. WL. DBSC holds a conditional satellite construction
permit and specific orbital slot assignments for 11 DBS frequencies at each
of 61.5 DEG. WL and 175 DEG. WL. Upon consummation of the ASkyB Transaction
previously described, MCI will make available for EchoStar's use MCI's 28
full CONUS frequencies at 110 DEG. WL, which it acquired in the FCC auction.
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. Echostar also has requested a modification
of its proposed Ku-band system to add C-band capabilities to one satellite.
GE American and PrimeStar have filed petitions for reconsideration or
cancellation and petitions to deny against EchoStar's Ku-band conditional
licenses, the additional financial showing made by EchoStar, and EchoStar's
C-band modification application. There can be no assurance that the FCC will
consider EchoStar's additional showing to be adequate or that it will deny GE
Americom's or PrimeStar's petitions. 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
those of EchoStar.
EchoStar's FCC permits are conditioned on satisfaction of ongoing
construction and related obligations. There can be no assurance that EchoStar
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. 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, DirecTv and others.
17
By an Order released January 11, 1996 in File No. 129 -SAT-EXT-95, the
International Bureau of the FCC granted an extension of ESC's permit to
August 15, 1996 with respect to the 119 DEG. WL orbital location. It deferred
decision on ESC's request for an extension of time with respect to ESC's
western assignments pending the FCC's analysis of EchoStar's 1992 due
diligence showing for these assignments. By separate Order released January
11, 1996, File No. DBS-88-1, the FCC's International Bureau conditionally
granted ESC launch and positioning authority for EchoStar I. ESC and
DirectSat have licenses to cover their satellites at 119 DEG. WL. EchoStar
and DirectSat have filed a joint request for an STA to enable them to operate
EchoStar I at 118.95 DEG. WL and EchoStar II at 119.05 DEG. WL. That
application has not been opposed.
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 its total loss.
Among other regulatory requirements, EchoStar's DBS systems are required
to conform to the ITU Region 2 Plan for 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 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. 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 118.8 DEG. 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.
By Order released December 8, 1995, DA 95-2439, in File No.
129-SAT-EXT-95, the FCC has also conditionally granted the request of DBSC
for an extension of its permit to November 30, 1998 subject to the condition
that the FCC may reconsider the extension and modify or cancel it if DBSC
fails to progress towards construction and operation of its system in
accordance with the timetable DBSC has submitted to the FCC. By Order
released August 30, 1996, DA-96-1482, in File Nos. DBS 87-01, 55-SAT-AL-96,
the FCC consented to the assignment of DBSC's permit to a subsidiary of
EchoStar. The FCC also has declared that it will carefully monitor the
semi-annual reports required to be filed by DBS permittees. Failure of
EchoStar to file adequate semi-annual reports or to demonstrate
progress in the construction of their DBS systems may result in cancellation
of their 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.
18
In addition, EchoStar has been granted conditional authorization for two
Ku-band FSS satellites to be located at 83 DEG. WL and 121 DEG. WL,
respectively, subject to an additional financial showing and to pending
petitions for reconsideration and cancellation filed by GE Americom and
PrimeStar. EchoStar also has requested FCC authorization to modify its
proposed Ku-band system to add C-band capabilities to one satellite.
EchoStar also has applications pending with the FCC for two Ka-band FSS
satellites to be located at 85 DEG. WL and 119 DEG. WL, respectively, and for
two extended Ku-band FSS satellites to be located at 82 DEG. WL and 121 DEG.
WL, respectively. These applications and requests for modification have been
opposed by various parties. There can be no assurance that the FCC will
grant any of these applications or requests for modifications.
The ASkyB Transaction will require FCC approval and review by the
antitrust enforcement agencies. However, appropriate applications have not
yet been filed and there can be no assurance that the FCC and the antitrust
agencies will approve the ASkyB Transaction.
DBS RULES
Pursuant to FCC rules, the term of DBS non-broadcast licenses is 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 148 DEG. 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.
EchoStar will be required to have a DBS satellite construction contract in
place by December 1997 as a result of its purchases of the permit for 24
frequencies at the 148 DEG. WL orbital location. Further, completion of the
construction of such DBS satellite is required by December 2000, and such
satellite must be in operation by December 2002.
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
110 DEG. WL and 148 DEG. WL. Several other parties 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 and the U.S. Supreme Court has denied the petition for
certiorari. Review of the Report & Order requiring the auction of the
frequencies at the 110 DEG. WL and 148 DEG. 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. Oral arguments related to this matter
have been heard by the U.S. Court of Appeals for the D.C. Circuit but no
decision has been made.
THE 1996 ACT
The 1996 Act clarifies that the FCC has exclusive jurisdiction over DTH
satellite services, and that criminal penalties may be imposed for piracy of
DTH satellite services. The 1996 Act also 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 installation 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
19
within the exclusive use or control of the viewer and in which the viewer has
a direct or indirect property interest. The 1996 Act also preempted local
(but not state) governments from imposing taxes or fees on DTH services,
including DBS. Finally, the 1996 Act required that multichannel video
programming distributors such as DBS operators scramble or block channels
providing indecent or sexually explicit adult programming.
THE CABLE ACT
In addition to regulating pricing practices and competition within the
franchise cable television industry, the Cable Television Consumer Protection
and Competition Act of 1992 (the "Cable Act") was intended to establish and
support existing and new multi-channel video services, such as wireless cable
and DBS, to provide subscription television services. EchoStar has benefited
from the programming access provision of the Cable Act in that it has been
able to gain access to previously unavailable programming services and, in
some circumstances, has obtained reduced costs for certain programming
services. Any amendment to, or interpretation of, Cable Act that permits the
cable companies or entities affiliated with cable companies to discriminate
against competitors such as EchoStar in making programming available 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 such restrictions. The
constitutionality of that statutory provision has been upheld by the Court of
Appeals for the D.C. Circuit, and the FCC is currently conducting a
rulemaking proceeding to impose such requirements. The Cable Act also
requires the FCC to conduct a rulemaking that will impose public interest
requirements for providing video programming on DBS licensees including, at a
minimum, reasonable and non-discriminatory access to qualified candidates for
office and the obligation to set aside 4-7% of the licensee's channel
capacity for non-commercial programming of an educational or informational
nature, in certain circumstances, at below cost rates.
While DBS operators like EchoStar currently are not subject to the "must
carry" requirements of the Cable Act, the cable industry has argued that DBS
operators should be subject to these requirements. In the event the "must
carry" requirements of the Cable Act are revised to include DBS operators, or
to the extent that new legislation of a similar nature is enacted, EchoStar's
future plans to provide local programming may be adversely impacted.
SATELLITE HOME VIEWER ACT
The Satellite Home Viewer Act ("SHVA") 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. In general, an "unserved household" is one that cannot receive,
through the use of a conventional outdoor rooftop antenna, a sufficient over-
the-air network signal, and that has not, within 90 days prior to subscribing
to the DBS service, subscribed to a cable service that provides that network
signal. While the scope of the compulsory license is not certain, the U.S.
Copyright Office has indicated it would not object to the filing of statements
of account in connection with the provision by satellite of local network
signals into the non-overlapping Grade B contour of a network affiliate.
Following consummation of the ASkyB Transaction, EchoStar intends to
offer local programming to major population centers within the continental
United States. In order to retransmit local programming into a market,
EchoStar must obtain the retransmission consent of the local carrier.
EchoStar's ability to transmit locally-produced programming via satellite
into the markets from which the programming is generated may attract
incremental subscribers who would not otherwise be willing to purchase
satellite systems.
The Company believes that the Copyright Office's position confirms that the
SHVA provides a "compulsory" copyright license permitting the Company to
transmit locally-broadcast programming via satellite into the markets in which
the programming was generated. However, the Copyright Office has noted that
its position would not preclude private copyright holders from challenging the
position of the Copyright Office in private litigation against the Company. As
a result, and because the Company would like clarification with regard to
overlapping Grade B contours, EchoStar intends to prepare, lobby for, and see
enacted national legislation amending the SHVA, which 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.
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
Republic of Kazakhstan, a territory of the former Soviet Union. Export
licenses will be required to be obtained from
20
the Department of Commerce for the transport of any satellites to the
Republic of Kazakhstan. 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 a
trade agreement between the United States and Russia will not negatively
affect EchoStar's ability to launch EchoStar IV. 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
scheduled launch of EchoStar IV. There can be no assurance those licenses
will be obtained in a timely manner to avoid a launch delay.
PATENTS AND TRADEMARKS
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.
Certain 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 (see Item 3. Legal
Proceedings).
EMPLOYEES
EchoStar had approximately 1,200 employees at December 31, 1996, of which
approximately 1,100 worked in EchoStar's domestic operations and
approximately 100 of which 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. EchoStar intends to hire
additional personnel as required.
21
EXECUTIVE OFFICERS
The following sets forth, as of March 24, 1997, the name, age and offices
with EchoStar of each 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 44 Chairman and Chief Executive Officer
James DeFranco 44 Executive Vice President and Director
Steven B. Schaver 43 Chief Operating and Financial Officer
R. Scott Zimmer 40 Vice Chairman and Director
David K. Moskowitz 38 Senior Vice President, General Counsel
and Secretary
CHARLES W. ERGEN. Mr. Ergen has been Chairman of the Board of Directors and
Chief Executive Officer of EchoStar since its formation and, during the past
five years, has held various positions with EchoStar's subsidiaries, including
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.
JAMES DEFRANCO. Mr. DeFranco became the Executive Vice President of
EchoStar in November 1996. Previously Mr. DeFranco was Vice President and a
Director of EchoStar since its formation. During the past five years, Mr.
DeFranco has held various positions with EchoStar's subsidiaries, including
President of HTS, Echo Acceptance Corporation ("EAC") and HT Ventures, Inc.
("HTV"), Executive Vice President of ESC, Senior Vice President of Echosphere
and EBN, and Director of 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.
R. SCOTT ZIMMER. Mr. Zimmer assumed the role of Vice Chairman of EchoStar
in November 1996. Previously, Mr. Zimmer had been a Vice President and a
Director of EchoStar since its formation. For the past five years, Mr. Zimmer
has managed the international operations of EchoStar and its subsidiaries.
DAVID K. MOSKOWITZ. Mr. Moskowitz is the Senior Vice President, Secretary
and General Counsel of EchoStar. Mr. Moskowitz joined EchoStar in March 1990.
Mr. Moskowitz is responsible for all legal affairs of EchoStar and its
subsidiaries.
STEVEN B. SCHAVER. Mr. Schaver was named the Chief Financial Officer of
EchoStar in February 1996. Mr. Schaver also assumed the role of Chief Operating
Officer in November 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.
During March 1997, Mr. Carl E. Vogel, formerly the President of EchoStar,
tendered his resignation.
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.
Assuming consummation of the ASkyB Transaction, K. Rupert Murdoch, 66, will
become Chairman of EchoStar. Mr. Murdoch has been Chairman of the Board of
Directors of News since August 1991. Mr. Murdoch has also been the Executive
Director and Chief Executive of News since 1979. Additionally, Mr. Murdoch has
been a Director of News International plc, News' principal subsidiary in the
United Kingdom since 1969 and has been a
22
Director of News America Holdings Incorporated ("NAHI"), News' principal
subsidiary in the United States, since 1973. Through December 31, 1996, Mr.
Murdoch was also the Chairman, Chief Executive Officer and President of NAHI.
Mr. Murdoch has also held various other executive positions within the News
organization.
Assuming consummation of the ASkyB Transaction, Paul F. Haggerty, 37,
will become Chief Financial Officer of EchoStar. Mr. Haggerty has served as
the Senior Vice President and Chief Financial Officer of ASkyB since April
1996. Mr. Haggerty served as Senior Vice President and Deputy Financial
Officer for News since 1990. Mr. Haggerty has been with News since 1984.
23
ITEM 2. PROPERTIES
EchoStar owns its corporate headquarters, its Digital Broadcast Center in
Cheyenne, Wyoming, its customer call center in Thornton, Colorado, and
office/warehouse facilities in three additional locations. The following table
sets forth certain information concerning EchoStar's properties.
APPROXIMATE
SQUARE OWNED OR
DESCRIPTION/USE LOCATION 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
Customer 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 Columbia, Maryland 17,600 Leased
Office and Distribution Center Dallas, Texas 11,200 Leased
Office and Distribution Center Phoenix, Arizona 10,000 Leased
Asian Distribution Center Singapore 7,000 Leased
Office Madrid, Spain 2,100 Leased
Asian Headquarters Singapore 1,900 Leased
Office Bombay, India 1,200 Leased
Office Beijing, China 1,000 Leased
Office Bangalore, India 1,200 Leased
ITEM 3. LEGAL PROCEEDINGS
On July 29, 1996, EAC, DNCC, ESC and Echosphere Corporation (collectively,
"EchoStar Credit"), filed a civil action against Associates Investment
Corporation ("Associates") which is currently pending in the United States
District Court in the District of Colorado. EchoStar Credit alleges that
Associates, among other things, breached its contract with EchoStar Credit
pursuant to which Associates agreed to finance the purchase of EchoStar Receiver
Systems by consumers. EchoStar Credit alleges that Associates' refusal to
finance certain prospective consumers has resulted in the loss of prospective
customers to EchoStar's competitors. In addition, EchoStar Credit alleges that
the loss of sales due to Associate's action forced EchoStar to lower the price
on its products. Associate's filed counterclaims against EAC for fraud and
breach of contract. Associates seeks approximately $10.0 million by way of its
counterclaims. EAC intends to vigorously defend against such counterclaims. A
trial date has not yet been set. It is too early in the litigation to make an
assessment of the probable outcome.
On September 26, 1996, ESC filed suit against Sagem, S.A., ("Sagem") a
French corporation, in connection with a manufacturing agreement entered into
in April 1995. Sagem, Inc., a wholly owned subsidiary of Sagem, was added as
a party to the litigation in a subsequent amendment. Under the agreements
between the parties, Sagem and Sagem, Inc. were to provide 560,000 digital
satellite receivers to ESC throughout 1995 and 1996. Sagem and Sagem, Inc.
failed to deliver any production receivers to ESC. ESC thereafter terminated
the agreements between the parties. ESC brought claims against Sagem and
Sagem, Inc. for breach of contract and declaratory relief. ESC seeks return
of a $10.0 million down payment made to Sagem, $15.0 million placed in escrow
with Bank of America, a $373,000 prepayment made to Sagem, Inc. for finished
goods, contractual late fees, lost profits, interest, attorneys' fees, costs,
and expenses. Sagem and Sagem, Inc. filed counterclaims seeking damages of
approximately $25.0 million. ESC intends to vigorously defend the
counterclaims. A trial date has not yet been set nor has discovery commenced.
The Company believes, but can give no assurance that, ESC will be able to
recover most, if not all, of the amounts deposited with Sagem and held in
escrow.
Certain purchasers of C-band and DISH Network-SM- systems have filed
actions in various state courts in Alabama naming EchoStar, EAC or Echosphere
Corporation as a defendant and seeking actual and punitive damages. At least
ten actions have been filed. EchoStar believes additional actions may be
filed. Plaintiffs' attorneys also may attempt to certify a class and/or add
additional plaintiffs to the existing actions and seek greater damages. A
24
trial date (March 2, 1998) has been established for only one of the
aforementioned actions. The actions filed to date also name as defendants the
dealer and its employees who sold the equipment and the EAC financing source,
which owns the consumer loans, made to the purchasers. Four of the actions
involve EAC and Household Retail Services, Inc. ("HRSI") and six claims
involve EAC and Bank One Dayton, N.A. EchoStar denies liability and intends
to vigorously defend against the claims, which include allegations of fraud
and lending law violations. While the actual damages claimed are not
material, EchoStar is aware that juries in Alabama have recently issued a
number of verdicts awarding substantial punitive damages on actual damage
claims of less than $10,000.
EAC and HRSI entered into a Merchandise Financing Agreement in 1989 (the
"Merchant Agreement") pursuant to which HRSI acted as a consumer financing
source for the purchase of, among other things, satellite systems distributed
by Echosphere Corporation, a subsidiary of EchoStar to consumers through EAC
dealers. HRSI terminated the Merchant Agreement as of December 31, 1994.
During February 1995, EAC and Echosphere (the "EAC Parties") filed suit against
HRSI. The case is pending in U.S. District Court in Colorado (the "HRSI
Litigation"). The EAC Parties have alleged, among other things, breach of
contract, breach of fiduciary duty, fraud and wanton and willful conduct by HRSI
in connection with termination of the Merchant Agreement and related matters.
The EAC parties are seeking damages in excess of $10 million. HRSI's
counterclaims have been dismissed with prejudice. Summary judgment motions
have been pending on all remaining issues since May 1996. A trial date has
not been set.
On March 4, 1997, Feature Film Services ("Feature Films") filed a civil
action against EchoStar in the U.S. District Court in the District of Chicago.
Feature Films alleges that EchoStar has infringed against one of its patents.
EchoStar believes that strong defenses against these claims are available and
intends to vigorously defend against such claims. While no assurance can be
given, EchoStar believes that indemnification from a vendor may be available in
the event of an unfavorable outcome, and that a licensing agreement could be
reached with Feature Films at reasonable terms.
EchoStar is a party to certain other legal proceedings arising in the
ordinary course of its business. EchoStar does not believe that any of these
proceedings will have a material adverse affect on EchoStar's financial
position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No items were submitted to a vote of security holders of EchoStar during
the fourth quarter of 1996.
25
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Class A Common Stock is quoted on the Nasdaq Stock Market
under the symbol "DISH." Prior to June 21, 1995, there was no established
trading market for the Company's Class A Common Stock. The high and low closing
sale prices of the Common Stock for 1995 and 1996 on the Nasdaq Stock Market (as
reported by Nasdaq) are set forth below:
1995 High Low
- ---- ------ ------
Second Quarter (beginning June 21, 1995) 17 14 3/4
Third Quarter 17 13 1/2
Fourth Quarter 24 1/4 12 3/4
1996
- ----
First Quarter 38 3/4 21 9/16
Second Quarter 35 3/4 27 3/4
Third Quarter 28 1/2 24
Fourth Quarter 32 1/4 23 3/4
As of March 17, 1997, there were approximately 1,475 record holders of the
EchoStar's Class A Common Stock, not including stockholders who beneficially own
Class A Common Stock held in nominee or street name. As of March 17, 1997, all
29,804,401 outstanding shares of the Company's Class B Common Stock were held by
Charles W. Ergen, EchoStar's Chief Executive Officer. There is currently no
trading market for EchoStar's Class B Common Stock.
EchoStar has never declared or paid any cash dividends on any class of its
common stock and does not expect to declare dividends in the foreseeable future.
Payment of any future dividends will depend upon the earnings and capital
requirements of EchoStar, EchoStar's debt facilities, and other factors the
Board of Directors considers appropriate. EchoStar currently intends to retain
its earnings, if any, to support future growth and expansion. EchoStar's ability
to declare dividends is affected by covenants in its debt facilities that
prohibit it from declaring dividends and EchoStar's subsidiaries from
transferring funds in the form of cash dividends, loans or advances to EchoStar.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources."
26
Item 6. SELECTED FINANCIAL DATA
The selected consolidated financial data as of and for each period in the
five year period ended December 31, 1996 have been derived from, and are
qualified by reference to, EchoStar's, and the predecessor entities of EchoStar,
Consolidated Financial Statements which have been audited by Arthur Andersen
LLP, independent public accountants. This data should be read in conjunction
with EchoStar's Consolidated Financial Statements and related Notes thereto for
the three years ended December 31, 1996, and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" included elsewhere in
this Report.
YEARS ENDED DECEMBER 31,
---------------------------------------------------------
1992 1993 1994 1995 1996
-------- -------- -------- -------- ----------
(In thousands, except ratios, subscribers and
satellite receivers sold)
STATEMENTS OF OPERATIONS DATA:
Revenue:
DTH products and technical services:
Domestic $122,433 $152,818 $119,003 $ 93,649 $ 98,320
International 35,040 53,493 53,750 53,261 37,492
DISH Network-SM- subscription television
services -- -- -- -- 37,898
DISH Network-SM- promotions -
subscription television services and
products -- -- -- -- 22,746
C-band programming 6,436 10,770 14,540 15,232 11,921
Loan origination and participation
income 1,179 3,860 3,690 1,748 3,034
-------- -------- -------- -------- ----------
Total revenue 165,088 220,941 190,983 163,890 211,411
Expenses:
DTH products and technical services 120,826 161,447 133,635 116,758 123,790
Subscriber promotion subsidies -- -- -- -- 33,591
DISH Network-SM- programming -- -- -- -- 19,079
C-band programming 6,225 9,378 11,670 13,520 10,510
Selling, general and administrative 25,708 30,235 30,219 38,525 90,372
Amortization of subscriber acquisition
costs -- -- -- -- 15,991
Depreciation and amortization 1,043 1,677 2,243 3,114 27,423
-------- -------- -------- -------- ----------
Total expenses 153,802 202,737 177,767 171,917 320,756
-------- -------- -------- -------- ----------
Operating income (loss) $ 11,286 $ 18,204 $ 13,216 $ (8,027) $ (109,345)
-------- -------- -------- -------- ----------
-------- -------- -------- -------- ----------
Net income (loss) $ 10,833 $ 20,118 $ 90 $(11,486) $ (100,986)
-------- -------- -------- -------- ----------
-------- -------- -------- -------- ----------
Pro forma (unaudited):
Pro forma net income (1) $ 7,529 $ 12,272 $ -- $ -- $ --
-------- -------- -------- -------- ----------
-------- -------- -------- -------- ----------
OTHER DATA:
EBITDA (2) $ 12,329 $ 19,881 $ 15,459 $ (4,913) $ (65,931)
-------- -------- -------- -------- ----------
-------- -------- -------- -------- ----------
DBS subscribers -- -- -- -- 350,000
-------- -------- -------- -------- ----------
-------- -------- -------- -------- ----------
Satellite receivers sold (in units):
Domestic 116,000 132,000 114,000 131,000 518,000
International 85,000 203,000 289,000 331,000 239,000
-------- -------- -------- -------- ----------
Total 201,000 335,000 403,000 462,000 757,000
-------- -------- -------- -------- ----------
-------- -------- -------- -------- ----------
BALANCE SHEET DATA:
Cash, cash equivalents and marketable
investment securities (3) $ 22,031 $ 27,232 $245,375 $137,115 $ 137,329
Total assets 88,529 106,476 472,492 623,091 1,141,380
Long-term obligations (less current portion):
Dish Notes -- -- 334,206 382,218 437,127
ESBC Notes -- -- -- -- 386,165
Notes payable to stockholder 2,274 14,725 -- -- --
Other long-term debt 4,876 4,702 5,393 33,444 51,428
- ------------------
(1) EchoStar's subsidiaries operated under Subchapter S of the Internal Revenue
Code of 1986, as amended (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 Note 1 of Notes to EchoStar's
Consolidated Financial Statements.
(2) Earnings (loss) before interest, taxes, depreciation and amortization
(including amortization of subscriber acquisition costs of $15,991).
"EBITDA" is a commonly used measure of performance in the telecommunications
industry. However, EBITDA does not purport to represent cash used by
operating activities and should not be considered in isolation or as a
substitute for measures of performance prepared in accordance with
generally accepted accounting principles.
(3) Includes Restricted Cash and Marketable Investment Securities.
27
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
ALL STATEMENTS CONTAINED HEREIN, AS WELL AS STATEMENTS MADE IN PRESS
RELEASES AND ORAL STATEMENTS THAT MAY BE MADE BY THE COMPANY OR BY OFFICERS,
DIRECTORS OR EMPLOYEES OF THE COMPANY ACTING ON THE COMPANY'S BEHALF, THAT
ARE NOT STATEMENTS OF HISTORICAL FACT, CONSTITUTE "FORWARD-LOOKING
STATEMENTS" WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM
ACT OF 1995. SUCH FORWARD-LOOKING STATEMENTS INVOLVE KNOWN AND UNKNOWN RISKS,
UNCERTAINTIES AND OTHER FACTORS THAT COULD CAUSE THE ACTUAL RESULTS OF THE
COMPANY TO BE MATERIALLY DIFFERENT FROM THE HISTORICAL RESULTS OF OR FROM ANY
FUTURE RESULTS EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS.
AMONG THE FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY ARE
THE FOLLOWING: THE AVAILABILITY OF SUFFICIENT CAPITAL ON SATISFACTORY TERMS
TO FINANCE THE COMPANY'S BUSINESS PLAN; INCREASED COMPETITION FROM CABLE,
DBS, OTHER SATELLITE SYSTEM OPERATORS, AND OTHER PROVIDERS OF SUBSCRIPTION
TELEVISION SERVICES; THE INTRODUCTION OF NEW TECHNOLOGIES AND COMPETITORS
INTO THE SUBSCRIPTION TELEVISION BUSINESS; INCREASED SUBSCRIBER ACQUISITION
COSTS AND SUBSCRIBER PROMOTION SUBSIDIES; THE ABILITY OF THE COMPANY TO
OBTAIN NECESSARY SHAREHOLDER AND BOND-HOLDER APPROVAL OF ANY STRATEGIC
TRANSACTIONS, INCLUDING THE ASKYB TRANSACTION (AS DEFINED HEREIN); THE
ABILITY OF THE COMPANY TO OBTAIN NECESSARY AUTHORIZATIONS FROM THE FCC;
GENERAL BUSINESS AND ECONOMIC CONDITIONS AND OTHER RISK FACTORS DESCRIBED
FROM TIME TO TIME IN THE COMPANY'S REPORTS FILED WITH THE SEC. IN ADDITION
TO STATEMENTS, WHICH EXPLICITLY DESCRIBE SUCH RISKS AND UNCERTAINTIES,
READERS ARE URGED TO CONSIDER STATEMENTS LABELED WITH THE TERMS "BELIEVES,"
"BELIEF," "EXPECTS," "PLANS," " ANTICIPATES," OR "INTENDS" TO BE UNCERTAIN
AND FORWARD-LOOKING. ALL CAUTIONARY STATEMENTS MADE HEREIN SHOULD BE READ AS
BEING APPLICABLE TO ALL RELATED FORWARD-LOOKING STATEMENTS WHEREVER THEY
APPEAR. IN THIS CONNECTION, INVESTORS SHOULD CONSIDER THE RISKS DESCRIBED
HEREIN.
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 various DTH products worldwide
(including EchoStar Receiver Systems and C-band systems); (iii) domestic
distribution of DTH programming services; and (iv) consumer financing of
EchoStar's domestic products and programming 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 periodic subscription fees for DISH Network-SM- programming
and, to a lesser extent, from the sale of DBS 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,
during the year ended December 31, 1996, such negative impact was more than
offset by sales of EchoStar Receiver Systems. EchoStar expects the decline in
its sales of domestic C-band DTH products to continue at an accelerated rate.
As more fully described herein (see - Strategic Alliance), on February
24, 1997, EchoStar announced the formation of a DBS alliance News. Pursuant
to a binding letter agreement, ASkyB will contribute to EchoStar, or to an
entity in which EchoStar would have an equity interest, or make available for
EchoStar's use, cash, satellites and other DBS assets. These assets are expected
to have a total value of approximately $1.7 billion, including an FCC license
purchased during 1996 for approximately $682.5 million. In return, ASkyB will
acquire an approximate 50% equity interest in EchoStar. As a result of its
contributions to ASkyB, MCI will have an approximate 19.9% interest in ASkyB.
Four DBS satellites are currently under construction for use by ASkyB.
ASkyB also is constructing a digital broadcast center in Gilbert, Arizona,
which, upon completion, will provide EchoStar with fully redundant digital
broadcast center operations. Assuming consummation of the ASkyB Transaction,
EchoStar's business plan would contemplate the eventual deployment of a total
of seven DBS satellites. The Company anticipates that more than 200 channels
of digital video and audio programming would be available for purchase by
most continental U.S. television households. The Company is planning, subject
to obtaining necessary regulatory and other approvals, to use the remaining
portion of its DBS capacity to provide local programming to major population
centers within the continental United States. The eventual use of the eighth
DBS satellite has not been determined. While definitive agreements are
expected to be executed in the near future, in the absence of definitive
agreements, the letter
28
agreement will continue as a binding commitment between the parties.
Consummation of the ASkyB Transaction is subject only to certain regulatory
and other approvals and consents. While EchoStar and News intend to
consummate the ASkyB Transaction; however, there can be no assurance that
necessary regulatory or other approvals or consents will be obtained or that
the transaction will be consummated.
EchoStar generally bills its customers for DISH Network-SM- programming
periodically in advance and recognizes related revenues as service is
provided. DISH Network-SM- revenue is a function of: (i) the number of
subscribers; (ii) the mix of programming packages selected by subscribers;
(iii) the rates charged subscribers; (iv) revenue from ancillary programming
activities (such as Pay-Per-View); and (v) signal carriage revenue. DBS
programming costs are generally based upon the number of subscribers to each
programming offering.
ECHOSTAR MARKETING PROMOTIONS. Since August 1996, EchoStar has
introduced several marketing promotions, the most significant of which is the
EchoStar Promotion, which allows independent retailers to offer a standard
EchoStar Receiver System to consumers for a suggested retail price of $199
(as compared to the original average retail price in March 1996 of
approximately $499), conditioned upon the consumer's prepaid one-year
subscription to the DISH Network-SM-'s America's Top 50 CD-SM- programming
package for approximately $300. Total transaction proceeds to EchoStar
(approximately $350) are less than its aggregate costs (equipment,
programming and other) for the initial prepaid subscription period for DISH
Network-SM- service. The excess of such aggregate costs over related
transaction proceeds is expensed upon shipment of the equipment and reflected
in the Company's consolidated statements of operations as subscriber
promotion subsidies. Remaining transaction costs (excluding programming) are
capitalized as subscriber acquisition costs and amortized over the initial
prepaid subscription period. Programming costs are accrued and expensed as
the service is provided. Excluding expected incremental revenues from
premium and Pay-Per-View programming, the accounting treatment described
above results in revenue recognition over the initial period of service
equal to the sum of programming costs and amortization of subscriber
acquisition costs.
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. The EchoStar
Promotion has significantly increased the affordability of EchoStar Receiver
Systems for consumers. This promotion is consistent with, and emphasizes,
EchoStar's long-term business strategy which focuses on generating the
majority of its future revenue through the sale of DISH Network-SM-
programming to a large subscriber base. The EchoStar Promotion has resulted
in EchoStar incurring significant costs to acquire subscribers. EchoStar
believes such costs will be fully recouped from future subscription (i.e.,
programming) revenues expected to be generated from customers obtained as a
result of the EchoStar Promotion. Unlike the cellular phone industry, DISH
Network-SM- reception equipment cannot be utilized with competitors' systems.
Consequently, subscribers cannot seamlessly migrate to alternative DBS
providers after the initial prepaid year of DISH Network-SM- service.
Further, based on high DBS industry consumer satisfaction ratings, initial
feedback from consumers and dealers, and low DISH Network-SM-subscriber
turnover rates (less than 1.0% per month during 1996), EchoStar anticipates
high service renewal rates leading to an expected average minimum subscriber
life of at least three years. Furthermore, a majority of DISH Network-SM-
subscribers have purchased premium and Pay-Per-View programming for
incremental amounts above the prepaid minimum subscription required by the
EchoStar Promotion. Such incremental revenues reduce the length of time
necessary to recoup the average cost of acquiring new subscribers.
EchoStar's present marketing strategy is based on current competitive
conditions, which may change; any such changes could be adverse to EchoStar.
Future changes in marketing strategy may include additional promotions,
including promotions geared toward further increasing the affordability to
consumers of EchoStar Receiver Systems and related accessories which, among
other things, could increase EchoStar's cost of acquiring new subscribers.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
REVENUE. Total revenue for 1996 was $211.4 million, an increase of $47.5
million, or 29%, as compared to total revenue for 1995 of $163.9 million. The
increase in total revenue in 1996 was primarily attributable to the
introduction of EchoStar's DISH Network-SM- service during March 1996. In the
future, EchoStar expects to derive its
29
revenue principally from DISH Network-SM- subscription television services.
As of December 31, 1996, EchoStar had approximately 350,000 DISH Network-SM-
subscribers.
The increase in total revenue in 1996 was partially offset by a decrease
in international and domestic sales of C-band satellite receivers and equipment.
The domestic and international markets for C-band DTH products continued to
decline during 1996; this decline is expected to continue for the foreseeable
future and had been expected by EchoStar as described below. Consistent with
the increases in total revenue during 1996, EchoStar experienced a
corresponding increase in trade accounts receivable at December 31, 1996. The
Company expects this trend to continue as the number of DISH Network-SM-
subscribers increases, and as EchoStar develops additional channels of
distribution for DISH Network-SM- equipment.
Revenue from domestic sales of DTH products and technical services
increased $4.7 million, or 5%, to $98.3 million during 1996. Domestically,
EchoStar sold approximately 518,000 satellite receivers in 1996, an increase
of 295% as compared to approximately 131,000 receivers sold in 1995. Of the
total number of satellite receivers sold during 1996, approximately 474,000
were EchoStar Receiver Systems. 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 applied to DBS satellite receivers sold under the EchoStar
Promotion, combined with decreasing sales of, and lower prices charged for,
C-band products. Included in the number of DTH satellite receivers sold are
sales of a competitor's DBS receiver manufactured and supplied by a
third-party manufacturer. Such sales, which ceased during the second quarter
of 1996 coincident with the launch of DISH Network-SM- service, totaled
approximately 19,000 units during 1996, as compared to 67,000 units sold in
1995. Revenues generated from the sale of competitor DBS receivers aggregated
$8.0 million during 1996, compared to $34.0 million in 1995. No revenue will
be generated from the sale of competitor DBS receivers in 1997.
Revenue from international sales of DTH products for the year ended
December 31, 1996 was $37.5 million, a decrease of $15.8 million, or 30%, as
compared to 1995. This decrease was directly attributable to a decrease in
the number of analog satellite receivers sold, combined with decreased prices
on products sold. Internationally, EchoStar sold approximately 239,000 analog
satellite receivers in 1996, a decrease of 28%, compared to approximately
331,000 units sold in 1995. Overall, EchoStar's international markets for
analog DTH products declined in 1996 as consumer anticipation of new
international digital services continued to increase. This international
decline in demand for analog satellite receivers, which was expected by the
Company, is similar to the decline which has occurred in the United States.
To offset the 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.
C-band programming service revenue totaled $11.9 million in 1996, a
decrease of $3.3 million, or 22%, compared to 1995. This decrease was
primarily attributable to the industry-wide decline in demand for domestic
C-band programming services. C-band programming revenue is expected to
continue to decrease for the foreseeable future.
Loan origination and participation income in 1996 was $3.0 million, an
increase of $1.3 million or 74%, compared to 1995. The increase in loan
origination and participation income during the year ended December 31, 1996
was primarily due to an increase in the number of consumer loans and leases
funded. Such increased volume was directly attributable to the introduction
of DISH Network-SM- service during 1996. Historically, EchoStar has
maintained agreements with third-party finance companies to make consumer
credit available to EchoStar customers. These financing plans provide
consumers the opportunity to lease or finance their EchoStar Receiver
Systems, including installation costs and certain DISH Network-SM-
programming packages, on competitive terms. Consumer financing provided by
third parties is non-credit recourse to EchoStar. EchoStar currently
maintains one such agreement which expires during 1997. The third-party
finance company with which EchoStar maintains the above mentioned agreement
has notified the Company that it does not intend to renew the agreement.
EchoStar is currently negotiating similar agreements with other third-party
finance companies. There can be no assurance that EchoStar will be
successful in these negotiations, or if successful, that any such new
agreements will commence prior to the termination of the existing agreement.
In the event that EchoStar is unsuccessful in executing a new agreement with
a third-party finance company during 1997, future loan origination income
will be adversely affected and growth of the DISH Network-SM- subscriber base
may be negatively impacted.
30
DTH AND DISH NETWORK-SM- EXPENSES. DTH and DISH Network-SM- expenses in
1996 aggregated $187.0 million, an increase of $56.7 million, or 44% compared
to 1995. This increase is directly attributable to the introduction of DISH
Network-SM- service in March 1996, partially offset by decreases in other DTH
expenses. DTH products and technical services expense increased $7.0 million,
or 6.0%, to $123.8 million during 1996. These expenses include the costs of
EchoStar Receiver Systems and related components sold prior to commencement
of the EchoStar Promotion. Subscriber promotion subsidies aggregated $33.6
million during 1996 and represent expenses associated with the EchoStar
Promotion. DISH Network-SM-programming expenses totaled $19.1 million for the
year ended December 31, 1996. The Company expects that DISH Network-SM-
programming expenses will increase in future periods in proportion to
increases in the number of DISH Network-SM-subscribers. Such expenses,
relative to related revenues, will vary based on the services subscribed to
by DISH Network-SM- customers, the number and types of Pay-Per-View events
purchased by subscribers, and the extent to which EchoStar is able to realize
volume discounts from programming providers.
C-band programming expenses totaled $10.5 million during the year ended
December 31, 1996, a decrease of $3.0 million, or 22%, as compared to 1995.
This decrease is consistent with the decrease in C-band programming revenue.
Gross margins realized on C-band programming sales remained relatively
constant. As previously described, domestic demand for C-band DTH products
has continued to decrease as a result of the introduction and widespread
consumer acceptance of DBS products and services.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative ("SG&A") expenses totaled $90.4 million in 1996, an increase
of $51.8 million or 135%, as compared to 1995. Such expenses as a percentage
of total revenue increased to 43% in 1996 as compared to 24% in 1995. The
increase in SG&A expenses was principally attributable to: (i) increased
personnel expenses as a result of introduction of DISH Network-SM- service in
March 1996 (EchoStar's number of employees doubled during 1996 as compared to
1995); (ii) marketing and advertising expenses associated with the launch and
ongoing operation of the DISH Network-SM-; (iii) increased expenses related
to the Digital Broadcast Center, which commenced operations in the third
quarter of 1995; and (iv) increased expenses associated with operation of
DISH Network-SM- call centers and subscription management related services.
In future periods, EchoStar expects that SG&A expenses as a percentage of
total revenue will decrease as subscribers are added.
EARNINGS BEFORE INTEREST, TAXES, DEPRECIATION AND AMORTIZATION. EBITDA
(including amortization of subscriber acquisition costs of $16.0 million) for
the year ended December 31, 1996 was a negative $65.9 million, a decrease of
$61.0 million, compared to 1995. This decrease resulted from the factors
affecting revenue and expenses discussed above.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense for
the year ended December 31, 1996, including the amortization of subscriber
acquisition costs, aggregated $43.4 million, an increase of $40.3 million, as
compared to 1995. The increase in depreciation and amortization expenses
resulted from depreciation expenses associated with the Digital Broadcast
Center, EchoStar I and EchoStar II (placed in service during the fourth
quarter of 1995, the first quarter of 1996, and the fourth quarter of 1996,
respectively), and amortization of subscriber acquisition costs.
OTHER INCOME AND EXPENSE. Other expense, net totaled $46.3 million in
1996, an increase of $37.1 million, as compared to 1995. The increase in
other expense in 1996 resulted primarily from an increase in interest expense
associated with the issuance of the ESBC Notes. This increase in interest
expense was partially offset by an increase in interest income attributable
to increases in invested balances as a result of the investment of proceeds
received from the issuance of the ESBC Notes. Interest capitalized relating
to development of the EchoStar DBS System during 1996 was $31.8 million
(compared to $25.8 million during 1995).
INCOME TAX BENEFIT. The increase in the income tax benefit of $48.9
million (from $5.7 million in 1995 to $54.7 million in 1996) principally
resulted from the increase in EchoStar's loss before income taxes. EchoStar's
net deferred tax assets (approximately $66.8 million at December 31, 1996)
relate to temporary differences for amortization of original issue discount
on the Dish and ESBC Notes, net operating loss carryforwards, 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.
31
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 $93.6 million, a
decrease of $25.3 million, or 21%, as compared to 1994. This decrease in
domestic revenues was primarily due to an expected decline of $26.9 million,
or 23%, 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 is expected to
continue. 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 those sold for a competitor's DBS system
("Competitor DBS Receivers") manufactured and supplied by a third party
manufacturer ("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 $15.0 million for 1994.
Competitor DBS Receiver revenues were 21% of total revenues for 1995.
Revenue from international sales of DTH products for 1995 was $53.3
million, a decrease of approximately $500,000, or 1%, 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
restrictions implemented 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 the first quarter of 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.
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.
Commencing in 1995, EchoStar stopped receiving monthly participation
payments from 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 $1.7 million, a decrease of $1.9 million,
or 53%, compared to 1994.
EchoStar aggressively 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 by other service providers.
Competitor DBS Receiver sales partially offset the decline in domestic C-band
sales in 1995. The decline is also expected to be offset by sales of
EchoStar's proprietary DBS products commencing in 1996.
Programming revenue for 1995 was $15.2 million, an increase of $692,000,
or 5%, 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 is expected to
result in a decline in C-band DTH programming revenues as well over
32
time. EchoStar believes that the decline in C-band DTH programming revenues
will be fully offset by sales of EchoStar DBS programming in 1996.
DTH EXPENSES. Costs of DTH products sold were $116.8 million for 1995, a
decrease of $16.9 million, or 13%, as compared to 1994. The decrease in DTH
operating expenses for 1995 resulted primarily from the decrease in sales of DTH
products. DTH product expenses as a percentage of DTH product revenue were 79%
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.
C-band programming expenses were $13.5 million for 1995, an increase of
$1.9 million, or 16%, as compared to 1994. Programming expenses as a
percentage of programming revenue were 89% 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. SG&A expenses totaled $38.5
million for 1995, an increase of $8.3 million, or 27%, as compared to 1994.
Such expenses as a percentage of total revenue increased to 24% 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 during 1995 as
compared to $5.9 million during 1994. The decrease was principally due to the
reduction in research necessary to provide C-band receivers to domestic and
international markets. EchoStar expenses such costs as incurred and includes
such costs in selling, general and administration expenses.
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.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expenses
totaled $3.1 million during 1995, an increase of $871,000, or 39%, 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 $9.2 million, a
decrease of $3.5 million, or 28%, 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 Dish Notes, which were issued on June 7, 1994. Other expense
was reduced by investment income on monies deposited in an escrow account
(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 totaled $25.8 million as compared to $5.7 million for 1994.
BENEFIT FROM/PROVISION FOR INCOME TAXES. An income tax benefit of $5.7
million was recognized during 1995 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 Dish 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.
LIQUIDITY AND CAPITAL RESOURCES
EchoStar's working capital and capital expenditure requirements were
substantial during the three-year period ended December 31, 1996. Such
expenditures principally resulted from the construction of EchoStar's DBS
33
system during 1994, 1995 and 1996, and the commercial launch of DISH
Network-SM- service in March 1996. Capital expenditures, including
expenditures for satellite systems under construction, totaled $119.3
million, $133.6 million and $221.9 million during the years ended December
31, 1994, 1995 and 1996, respectively. Additionally, during 1996, EchoStar
expended $55.4 million for DBS authorizations obtained from the FCC,
principally relating to the Company's acquisition of 24 DBS frequencies at
the 148 DEG. WL orbital slot. Those frequencies were acquired at the FCC's
January 1996 auction of certain DBS frequencies. EchoStar anticipates that
its capital expenditure and working capital requirements will be significant
for the foreseeable future as its constructs, launches and deploys additional
satellites in connection with its DBS business, and as it aggressively builds
its DISH Network-SM- subscriber base.
During 1994, 1995 and 1996, EchoStar's capital expenditure and working
capital requirements principally were funded from proceeds of the 1994 Dish
Notes Offering, the 1995 IPO, and the 1996 ESBC Notes Offering. In June 1994,
EchoStar issued 624,000 units consisting of $624.0 million principal amount
at stated maturity of the Dish Notes and 3,744,000 Warrants (representing
2,808,000 shares of EchoStar Class A Common Stock) for aggregate net proceeds
to the Company of approximately $323.3 million. In June 1995, ECC completed
the IPO of 4.0 million shares of its Class A Common Stock, resulting in net
proceeds to the Company of approximately $62.9 million. In March 1996, ESBC
consummated the ESBC Notes Offering. In connection therewith, ESBC issued
$580.0 million principal amount at stated maturity of ESBC Notes, resulting
in aggregate net proceeds to the Company of approximately $337.0 million. As
of December 31, 1996, substantially all of the Warrants issued in connection
with the Dish Notes Offering had been exercised.
During the years ended December 31, 1995 and 1996, net cash flows used in
operations totaled $20.3 million and $27.4 million, respectively. EchoStar
anticipates that its working capital requirements, including its investment
in subscriber acquisition costs, will increase substantially in 1997. Such
working capital requirements could vary if any of the following, among other
factors, occur: (i) subscriptions to DISH Network-SM- programming differ from
anticipated levels; (ii) actual expenses differ from present estimates; (iii)
the investment in subscriber acquisition costs increases from planned levels;
or (iv) future EchoStar promotions no longer require the annual prepayment of
a one-year subscription to DISH Network-SM- programming. In addition to the
working capital requirements discussed above, during 1997 EchoStar expects to
expend: (i) approximately $118.7 million in connection with the launch,
insurance and deployment of EchoStar III and EchoStar IV; (ii) approximately
$50.0 million related to the construction of EchoStar III and EchoStar IV;
and (iii) approximately $16.7 million for debt service relating to contractor
financing of EchoStar I, EchoStar II and EchoStar III. Expected capital
expenditures may increase in the event of delays, cost overruns, increased
costs associated with certain potential change orders under the Company's
satellite or launch contracts, or a change in launch providers.
In addition, EchoStar has agreements with various manufacturers for the
purchase of DBS satellite receivers and related components manufactured to
EchoStar's specifications. These DBS satellite receivers and components are
necessary to receive DISH Network-SM- programming. As of December 31, 1996,
EchoStar's commitments relative to such agreements totaled approximately
$82.9 million, and the total of all outstanding purchase order commitments
with domestic and foreign suppliers approximated $85.9 million. All purchases
related to these commitments are expected to be made during 1997. EchoStar
expects that its 1997 purchases of DBS satellite receivers and related
components will significantly exceed its existing contractual commitments.
EchoStar's 1997 working capital, capital expenditure and debt service
requirements are expected to be funded from existing cash and marketable
investment securities balances, balances held in the ESBC Notes Escrow, cash
generated from operations, proceeds of the ASkyB Transaction (as more fully
described below), and additional debt, equity or other financings. There can
be no assurance that additional debt, equity or other financing will be
available on terms acceptable to EchoStar, or at all. Further increases in
subscriber acquisition costs, inadequate supplies of DBS receivers, or
significant launch delays or failures would significantly and adversely
affect EchoStar's operating results and financial condition.
During March 1997, EchoStar's wholly-owned subsidiary, DISH
Network-SM-Credit Corporation ("DNCC"), began offering an internally-financed
consumer lease plan to prospective DISH Network-SM- customers. This plan
provides for a four-year lease term at competitive rates to qualified
consumers. EchoStar will assume all credit risk related to the lease
program. Initially, EchoStar plans to implement DNCC's consumer lease
program on a limited basis. Additional capital will be required for EchoStar
to implement the program on a larger scale. There can be no assurance
additional capital will be available for the lease program on terms
acceptable to EchoStar, or at all.
Beyond 1997, EchoStar will expend approximately $88.6 million to repay
contractor financing of EchoStar I, EchoStar II, EchoStar III and EchoStar
IV. Additionally, EchoStar has committed to expend in 1998 approximately
$69.7 million to construct, launch and support EchoStar IV. EchoStar's
contracts with Lockheed Martin for the construction of EchoStar III and
EchoStar IV provide for the payment by EchoStar of substantial penalties in
the event of termination of such contracts. To meet the aforementioned
requirements and to fully execute its business plan, EchoStar will require
significant additional capital. The Company anticipates that its
34
future capital requirements will be met from additional debt or equity
financings and from cash generated by operations. There can be no assurance
that additional debt, equity or other financing will be available on terms
acceptable to EchoStar, or at all.
As previously described, EchoStar intends to consummate the ASkyB
Transaction during 1997. Cash proceeds to EchoStar from the ASkyB
Transaction are dependent upon the timing of closing of the transaction. The
cash proceeds will be equal to $1.0 billion less actual amounts paid to
vendors through the date of closing for the satellites and other DBS assets
to be transferred to EchoStar at closing. Prior to the closing of the ASkyB
Transaction and pursuant to the terms of the binding letter agreement, News
has agreed to provide EchoStar with interim financing, as needed, in an
aggregate amount of up to $200.0 million. This interim financing will be in
the form of either purchases by News of EchoStar Class A Common Stock or
non-interest bearing advances to EchoStar, dependent upon when necessary
regulatory approvals are obtained. Any interim financing amounts received by
EchoStar will be used for purposes of funding its near-term working capital,
capital expenditure and debt service requirements. To the extent that News
advances funds to EchoStar or purchases shares as described above, the amount
paid by News shall be credited against News' total cash consideration and the
number of shares purchased shall be credited against the number of shares of
EchoStar's Class A Common Stock to be received by News at the closing.
ASkyB currently has four DBS satellites under construction, one of which
is scheduled to be launched in late 1997. ASkyB also has other DBS assets
under construction, including a digital broadcast center in Gilbert, Arizona.
EchoStar will acquire ownership of the ASkyB assets, and assume future
obligations necessary to complete construction and deployment of such assets,
in connection with the ASkyB Transaction. There can be no assurance as to the
final terms or timing of the ASkyB Transaction or whether the ASkyB
Transaction will be consummated. EchoStar will require additional debt or
equity financing following the closing of the ASkyB transaction to complete
construction and deployment of the assets acquired, and to fully implement
its business plan. There can be no assurance that such additional debt or
equity financing will be available on terms acceptable to EchoStar, or at all.
Consent of EchoStar's bondholders may be required in connection with the
ASkyB Transaction. EchoStar is currently assessing the financial and other
requirements associated with the consent solicitation necessary to consummate
the ASkyB Transaction. In connection therewith, the Company also is
evaluating the feasibility of refinancing its outstanding Dish Notes and ESBC
Notes. Additional financing would be required to refinance the Dish Notes and
ESBC Notes. There can be no assurance that such additional financing will be
available on terms acceptable to EchoStar, or at all. While there can be no
assurance, EchoStar believes it will be able to obtain any necessary consents
of its bondholders relative to the ASkyB Transaction.
EchoStar expects that its net losses will continue as it builds its
subscription television business such that, prior to consummation of the
ASkyB Transaction, negative stockholders' equity will result during the
second quarter of 1997 unless it receives additional equity financing from
the interim financing described above, or from other sources. EchoStar's
expected net losses will result primarily from: (i) the amortization of
original issue discount associated with the Dish Notes and the ESBC Notes;
(ii) increases in depreciation expense attributable to EchoStar's satellites
and other fixed assets; (iii) amortization of subscriber acquisition costs;
(iv) subscriber promotion subsidies; and (v) increases in SG&A 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 that such 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 Class A Common Stock will be subject to being delisted
unless an exception is granted by the National Association of Securities
Dealers. If an exception is not granted, trading in EchoStar Class A Common
Stock would thereafter be conducted in the over-the-counter market.
Consequently, it may be more difficult to dispose of, or to obtain accurate
quotations for, EchoStar Class A Common Stock. Accordingly, delisting may
result in a decline in the trading market for EchoStar's Class A Common
Stock, which could, among other things, potentially depress EchoStar's stock
and bond prices and impair EchoStar's ability to obtain additional financing.
As of December 31, 1996, EchoStar had approximately $886.1 million of
outstanding long-term debt (including the Dish Notes, the ESBC Notes,
deferred satellite contract payments on EchoStar I and EchoStar II, and
mortgage notes payable). Interest on the Dish Notes and the ESBC Notes
accretes, but currently is not payable in cash. Semiannual cash interest
payments associated with the Dish Notes commence December 1, 1999 and will
approximate $40.2 million. The Dish Notes Indenture requires principal
reductions of $156.0 million on each of June 1, 2002 and 2003. These
principal reductions will result in decreases in semiannual cash interest
payments to $30.1 million and $20.1 million, effective December 1, 2002 and
December 1, 2003, respectively. Semiannual cash
35
interest payments of $38.1 million associated with the ESBC Notes commence on
September 15, 2000. EchoStar utilized approximately $64.0 million of
contractor financing for EchoStar I and EchoStar II. As of December 31, 1996,
approximately $57.6 million of such contractor financing was outstanding. The
contractor financing bears interest at 8.25% and is payable in equal monthly
installments over five years following launch of the respective satellites.
Contractor financing of $15.0 million will be used for each of EchoStar III
and EchoStar IV. The terms of such contractor financing for EchoStar III and
EchoStar IV will be similar to that associated with EchoStar I and EchoStar II.
From May 1994 to May 1996, certain of EchoStar's subsidiaries maintained
a revolving credit facility (the "Credit Facility") with a bank for the
purposes of funding working capital advances and meeting letter of credit
requirements associated with certain inventory purchases and satellite
construction payments. The Credit Facility expired in May 1996. EchoStar
currently does not intend to arrange a replacement credit facility.
AVAILABILITY OF OPERATING CASH FLOW TO ECHOSTAR
The indentures related to the Dish Notes and ESBC Notes impose various
restrictions on the transfer of funds among EchoStar and its subsidiaries.
The Dish Notes 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 Dish Notes
Indenture; and (2) after giving effect to such dividend, Dish, Ltd.'s ratio
of total indebtedness to cash flow (calculated in accordance with the Dish
Notes Indenture) would not exceed 4.0 to 1.0. 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 Dish Notes
Indenture) from the date of issuance of the Dish 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).
The ESBC Notes Indenture contains restrictive covenants that, among other
things, impose limitations on ESBC with respect to its 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 ESBC's subsidiaries;
(vi) merge, consolidate or sell assets; (vii) incur subordinated or junior
debt; and (viii) enter into transactions with affiliates. In addition, ESBC
may pay dividends on its equity securities only if (1) no default is
continuing under the ESBC Notes Indenture; and (2) after giving effect to
such dividend, ESBC's ratio of total indebtedness to cash flow (calculated in
accordance with the ESBC Notes Indenture) would not exceed 5.0 to 1.0.
Moreover, the aggregate amount of such dividends generally may not exceed the
sum of 50% of ESBC's consolidated net income (calculated in accordance with
the ESBC Notes Indenture) from the date of issuance of the ESBC Notes, plus
100% of the aggregate net cash proceeds received by ESBC and its subsidiaries
from the issue or sale of certain equity interests of EchoStar (including
common stock).
If cash generated from the operation of the DISH Network-SM- is not
sufficient to meet the debt service requirements of the Dish Notes and the
ESBC Notes, EchoStar would be required to obtain cash from other financing
sources. There can be no assurance that such financing would be available on
terms acceptable to EchoStar, or if available, that the proceeds of such
financing would be sufficient to meet debt service requirements associated
with Dish Notes and the ESBC Notes.
DISH NOTES AND ESBC NOTES
In the event of a change of control and upon the occurrence of certain
other events, as described in the Dish Notes Indenture, Dish, Ltd. will be
required to make an offer to each holder of Dish Notes to repurchase all or
any part of such holder's Dish Notes at a purchase price equal to 101% of the
accreted 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.
Similarly, in the event of a change of control, as described in the ESBC
Notes Indenture, ESBC will be required to make an offer to each holder of
ESBC Notes to repurchase all of such holder's ESBC Notes at a purchase price
equal to 101% of the accreted value thereof on the date of purchase, if prior
to March 15, 2000, or 101% of the aggregate principal amount at stated
maturity thereof, together with accrued and unpaid interest thereon to the
date of purchase, if on or after March 15, 2000.
Three DBS orbital locations licensed by the FCC are generally recognized
as capable of providing satellite service to the entire continental United
States. EchoStar has the right to utilize at least 21 DBS
36
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, ESBC will be required to make an offer to repurchase all of the
outstanding ESBC Notes, and Dish, Ltd. will be required to make an offer to
repurchase one half of the outstanding Dish Notes. In the event the number of
frequencies EchoStar has the right to use at a full CONUS orbital location
falls below 11, Dish, Ltd. will be required to make an offer to repurchase
all of the outstanding Dish Notes, rather than only half. Additionally, in
the event that EchoStar's FCC authorization to use frequencies purchased at
the January 1996 FCC auction is revoked or rescinded, ESBC will be required,
under the terms of the ESBC Notes Indenture, to repurchase up to $52.3
million of principal amount of the 1996 Notes.
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 contracted for the manufacture of EchoStar Receiver Systems
with SCI, a high-volume contract electronics manufacturer. SCI is currently
manufacturing EchoStar Receiver Systems in quantities which EchoStar believes
will be adequate to meet its demand for 1997. EchoStar is negotiating with
several brand-name consumer electronics manufacturers to produce receivers
for use with the DISH Network-SM-. No assurances can be provided regarding the
ultimate success of those negotiations. If SCI is unable for any reason to
produce receivers in a quantity sufficient to meet EchoStar's demand, its
liquidity and results of operations would be adversely affected.
EFFECTS OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In March 1995, 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") which requires impairment losses to be recognized for
long-lived assets used in operations when indications of impairment are
present and the future undiscounted cash flows are not sufficient to recover
the assets carrying amount. EchoStar adopted SFAS No. 121 in the first
quarter of 1996. The adoption of SFAS No. 121 did not have a material effect
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 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. EchoStar elected
to continue to apply APB No. 25 for expense recognition purposes. The pro
forma disclosures required by SFAS No. 123 are included in EchoStar's
consolidated financial statements incorporated by reference herein.
INFLATION
Inflation has not materially affected EchoStar's operations during the
past three years. EchoStar believes that its ability to increase charges for
its products and services in future periods will depend primarily on
competitive pressures. EchoStar does not have any material backlog of its
products.
37
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
EchoStar's consolidated financial statements, which are included in this
report on pages F-1 through F-29, are incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
38
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item with respect to the identity and
business experience of the directors of EchoStar is set forth in EchoStar's
Proxy Statement for the Annual Meeting of Shareholders to be held on June 9,
1997, under the caption "Election of Directors," which information is hereby
incorporated herein by reference.
The information required by this Item with respect to the identity and
business experience of EchoStar's executive officers is set forth on page 22 of
this Report under the caption "Executive Officers."
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is set forth in EchoStar's Proxy
Statement for the Annual Meeting of Shareholders to be held on June 9, 1997,
under the caption "Executive Compensation and Other Information," which
information is hereby incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is set forth in EchoStar's Proxy
Statement for the Annual Meeting of Shareholders to be held on June 9, 1997,
under the captions "Election of Directors" and "Equity Security Ownership,"
which information is hereby incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is set forth in EchoStar's Proxy
Statement for the Annual Meeting of Shareholders to be held on June 9, 1997,
under the caption "Certain Relationships and Related Transactions," which
information is hereby incorporated herein by reference.
39
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Report:
(1) FINANCIAL STATEMENTS PAGE
----
Report of Independent Public Accountants F-2
Consolidated Balance Sheets at December 31, 1995 and 1996 F-3
Consolidated Statements of Operations for the years ended
December 31, 1994, 1995 and 1996 F-4
Consolidated Statements of Stockholders' Equity for the
years ended December, 1994, 1995, and 1996 F-5
Consolidated Statements of Cash Flows for the years
ended December 31, 1994, 1995 and 1996 F-6
Notes to Consolidated Financial Statements F-7
(2) FINANCIAL STATEMENT SCHEDULES
None. All schedules have been included in the Consolidated Financial
Statements or Notes thereto.
(3) EXHIBITS
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 by reference to Exhibit 2.2 to the Registration
Statement on Form S-1, Registration No. 33-91276).
2.2 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")
(incorporated by reference to Exhibit 2.3 to the Registration
Statement on Form S-4, Registration No. 333-03584).
2.3 Merger Trigger Agreement entered into as of December 21, 1995
by and among EchoStar, MergerCo and Direct Broadcasting
Satellite Corporation, a Delaware Corporation ("DBSC")
(incorporated by reference to Exhibit 2.3 to the Registration
Statement on Form S-4, Registration No. 333-03584).
3.1(a) Amended and Restated Articles of Incorporation of EchoStar
(incorporated by reference to Exhibit 3.1(a) to the
Registration Statement on Form S-1, 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, Registration
No. 33-91276).
4.1 Indenture of Trust between Dish, Ltd. and First Trust National
Association ("First Trust"), as Trustee (incorporated by
reference to Exhibit 4.1 to the Registration Statement on Form
S-1 of Dish, Ltd., Registration No. 33-76450).
4.2 Warrant Agreement between EchoStar and First Trust, as Warrant
Agent (incorporated by reference to Exhibit 4.2 to the
Registration Statement on Form S-1 of Dish, Ltd., Registration
No. 33-76450).
4.3 Security Agreement in favor of First Trust, as Trustee under
the Indenture of Trust between Dish, Ltd. and First Trust, as
Trustee Exhibit 4.1 (incorporated by reference to Exhibit 4.3
to the Registration Statement on Form S-1 of Dish, Ltd.,
Registration No. 33-76450).
4.4 Escrow and Disbursement Agreement between Dish, Ltd. and First
Trust (incorporated by reference to Exhibit 4.4 to the
Registration Statement on Form S-1 of Dish, Ltd., Registration
No. 33-76450).
40
4.5 Pledge Agreement in favor of First Trust, as Trustee under the
Indenture of Trust between Dish, Ltd. and First Trust, as
Trustee (incorporated by reference to Exhibit 4.5 to the
Registration Statement on Form S-1 of Dish, Ltd., Registration
No. 33-76450).
4.6 Intercreditor Agreement among First Trust, Continental Bank,
N.A. and Martin Marietta Corporation ("Martin Marietta")
(incorporated by reference to Exhibit 4.6 to the Registration
Statement on Form S-1 of Dish, Ltd., Registration No.
33-76450).
4.7 Series A Preferred Stock Certificate of Designation of
EchoStar (incorporated 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 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 ESBC and First Trust, as Trustee
(incorporated by reference to Exhibit 4.9 to the Annual Report
on Form 10-K of EchoStar for the year ended December 31, 1995,
Commission File No. 0-26176).
4.10 Security Agreement of ESBC in favor of First Trust, as Trustee
under the Indenture of Trust between ESBC and First Trust
(incorporated by reference to Exhibit 4.10 to the Annual
Report on Form 10-K of EchoStar for the year ended December
31, 1995, Commission File No. 0-26176).
4.11 Escrow and Disbursement Agreement between ESBC and First Trust
(incorporated by reference to Exhibit 4.11 to the Annual
Report on Form 10-K of EchoStar for the year ended December
31, 1995. Commission File No. 0-26176).
4.12 Pledge Agreement of ESBC in favor of First Trust, as Trustee
under the Indenture of Trust between ESBC and First Trust
(incorporated by reference to Exhibit 4.12 to the Annual
Report on Form 10-K of EchoStar for the year ended December
31, 1995, Commission File No. 0-26176).
4.13 Pledge Agreement of EchoStar in favor of First Trust, as
Trustee under the Indenture of Trust between ESBC and First
Trust (incorporated by reference to Exhibit 4.13 to the Annual
Report on Form 10-K of EchoStar for the year ended December
31, 1995, Commission File No. 0-26176).
4.14 Registration Rights Agreement by and between the ESBC,
EchoStar, Dish, Ltd., New DBSC and Donaldson, Lufkin &
Jenrette Securities Corporation (incorporated by reference to
Exhibit 4.14 to the Annual Report on Form 10-K of EchoStar for
the year ended December 31, 1995, Commission File No.
0-26176).
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 by reference to Exhibit 10.1(a) to the
Registration Statement on Form S-1 of Dish, Ltd., Registration
No. 33-76450).
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 by reference to
Exhibit 10.1(b) to the Registration Statement on Form S-1 of
Dish, Ltd., 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 by reference to
Exhibit 10.1(c) to the Registration Statement on Form S-1 of
Dish, Ltd., Ltd. 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 by reference to Exhibit 10.1(d) to the
Registration Statement on Form S-1 of Dish, Ltd., Registration
No. 33-76450).
41
10.1(e) Fourth Amendment to the Satellite Construction Contract, dated
as of August 19, 1993, between ESC and Martin Marietta
(incorporated by reference to Exhibit 10.1(e) to the
Registration Statement on Form S-1 of Dish, Ltd., Registration
No. 33-76450).
10.1(f) Form of Fifth Amendment to the Satellite Construction
Contract, between ESC and Martin Marietta (incorporated by
reference to Exhibit 10.1(f) to the Registration Statement on
Form S-1 of EchoStar, 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 by reference to Exhibit 10.1(g) to the
Registration Statement on Form S-1 of Dish, Ltd., Registration
No. 33-81234).
10.1(h) Eighth Amendment to the Satellite Construction Contract, dated
as of July 18, 1996, between ESC and Martin Marietta
(incorporated by reference to Exhibit 10.1(h) to the Form 10-Q
of EchoStar as of June 30, 1996, Commission File No. 0-26176).
10.2 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 by reference to Exhibit
10.4 to the Registration Statement on Form S-1 of Dish, Ltd.,
Registration No. 33-76450).
10.3 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 by reference to Exhibit 10.5 to the Registration
Statement on Form S-1 of Dish, Ltd., Registration No.
33-76450).
10.4 Merchandising Financing Agreement, dated as of June 29, 1989,
between Echo Acceptance Corporation ("EAC") and Household
Retail Services, Inc. (incorporated by reference to Exhibit
10.6 to the Registration Statement on Form S-1 of Dish, Ltd.,
Registration No. 33-76450).
10.5 Key Employee Bonus Plan, dated as of January 1, 1994
(incorporated by reference to Exhibit 10.7 to the Registration
Statement on Form S-1 of Dish, Ltd., Registration No.
33-76450).*
10.6 Consulting Agreement, dated as of February 17, 1994, between
ESC and Telesat Canada (incorporated by reference to Exhibit
10.8 to the Registration Statement on Form S-1 of Dish, Ltd.,
Registration No. 33-76450).
10.7 Form of Satellite Launch Insurance Declarations (incorporated
by reference to Exhibit 10.10 to the Registration Statement on
Form S-1 of Dish, Ltd., Registration No. 33-81234).
10.8 Dish, Ltd. 1994 Stock Incentive Plan (incorporated by
reference to Exhibit 10.11 to the Registration Statement on
Form S-1 of Dish, Ltd., Registration No. 33-76450).*
10.9 Form of Tracking, Telemetry and Control Contract between AT&T
Corp. and ESC (incorporated by reference to Exhibit 10.12 to
the Registration Statement on Form S-1 of Dish, Ltd.,
Registration No. 33-81234).
10.10 Manufacturing Agreement, dated as of March 22, 1995, between
HTS and SCI Technology (incorporated by reference to Exhibit
10.12 to the Registration Statement on Form S-1 of Dish, Ltd.,
Commission File No. 33-81234).
10.11 Manufacturing Agreement dated as of April 14, 1995 by and
between ESC and Sagem Group (incorporated by reference to
Exhibit 10.13 to the Registration Statement on Form S-1 of
EchoStar, Registration No. 33-91276).
- -------------------
* Constitutes a management contract or compensatory plan or arrangement.
42
10.12 Statement of Work, dated January 31, 1995 from EchoStar
Satellite Corporation Inc. to Divicom Inc. (incorporated
by reference to Exhibit 10.14 to the Registration Statement
on Form S-1, Registration No. 33-91276).
10.13 Launch Services Contract, dated as of June 2, 1995, by and
between EchoStar Satellite Corporation and Lockheed-
Khrunichev-Energia International, Inc. (incorporated by
reference to Exhibit 10.15 to the Registration Statement on
Form S-1, Registration No. 33-91276).
10.14 EchoStar 1995 Stock Incentive Plan (incorporated by reference
to Exhibit 10.16 to the Registration Statement on Form S-1,
Registration No. 33-91276).*
10.15(a) Eighth Amendment to Satellite Construction Contract, dated as
of February 1, 1994, between DirectSat Corporation and Martin
Marietta Corporation (incorporated by reference to Exhibit
10.17(a) to the Form 10-Q of EchoStar as of June 30, 1996,
Commission File No. 0-26176).
10.15(b) Ninth Amendment to Satellite Construction Contract, dated as
of February 1, 1994, between DirectSat Corporation and Martin
Marietta Corporation (incorporated by reference to Exhibit
10.15 to the Registration Statement of Form S-4, Registration
No. 333-03584).
10.15(c) Tenth Amendment to Satellite Construction Contract, dated as
of July 18, 1996, between DirectSat Corporation and Martin
Marietta Corporation (incorporated by reference to Exhibit
10.17(b) to Form 10-Q of EchoStar as of June 30, 1996,
Commission File No. 0-26176).
10.16 Satellite Construction Contract, dated as of July 18, 1996,
between EchoStar DBS Corporation and Lockheed Martin
Corporation (incorporated by reference to Exhibit 10.17(b)
to Form 10-Q of EchoStar as of June 30, 1996, Commission File
No. 0-26176).
10.17 Confidential Amendment to Satellite Construction Contract
between DBSC and Martin Marietta Corporation, dated as of
May 31, 1995 (incorporated by reference to Exhibit 10.15 to
the Registration Statement of Form S-4, Registration No.
333-03584).
10.18 Right and License Agreement by and among Houston Tracker
Systems, Inc. and Asia Broadcasting and Communications
Network, Ltd., dated December 19, 1996 (being filed
simultaneously in hard copy). P
10.19 Agreement between Houston Tracker Systems, Inc. and EchoStar
Satellite Corporation and ExpressVu Inc., dated January 8,
1997 (being filed simultaneously in hard copy). P
21 Subsidiaries of EchoStar Communications Corporation.
23 Consent of Independent Public Accountants.
24 Powers of Attorney authorizing signature of Charles W. Ergen,
R. Scott Zimmer, James DeFranco, Alan M. Angelich and Raymond
L. Friedlob.
27 Financial Data Schedule.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the fourth quarter of 1996.
- -------------------
* Constitutes a management contract or compensatory plan or arrangement.
43
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, EchoStar has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
ECHOSTAR COMMUNICATIONS CORPORATION
By: /s/ STEVEN B. SCHAVER
-----------------------------------
Steven B. Schaver
Vice President, Chief Operating
Officer and Chief Financial Officer
Date: March 28, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of EchoStar and
in the capacities and on the dates indicated:
SIGNATURE TITLE DATE
- --------- ----- ----
* Chief Executive Officer and March 28, 1997
- --------------------------- Director (PRINCIPAL EXECUTIVE
Charles W. Ergen OFFICER)
/s/ STEVEN B. SCHAVER Vice President, Chief Operating March 28, 1997
- --------------------------- Officer and Chief Financial
Steven B. Schaver Officer (PRINCIPAL FINANCIAL
OFFICER)
/s/ JOHN R. HAGER Controller March 28, 1997
- --------------------------- (PRINCIPAL ACCOUNTING OFFICER)
John R. Hager
* Director March 28, 1997
- ---------------------------
James DeFranco
* Director March 28, 1997
- ---------------------------
R. Scott Zimmer
* Director March 28, 1997
- ---------------------------
Alan M. Angelich
* Director March 28, 1997
- ---------------------------
Raymond L. Friedlob
*By: /s/ STEVEN B. SCHAVER
---------------------------
Steven B. Schaver
Attorney-in-Fact
44
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
CONSOLIDATED FINANCIAL STATEMENTS:
Report of Independent Public Accountants F-2
Consolidated Balance Sheets at December 31, 1995 and 1996 F-3
Consolidated Statements of Operations for the years ended
December 31, 1994, 1995 and 1996 F-4
Consolidated Statements of Stockholders' Equity for the years
ended December, 1994, 1995 and 1996 F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1994, 1995 and 1996 F-6
Notes to Consolidated Financial Statements F-7
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 subsidiaries, as described
in Note 1, as of December 31, 1995 and 1996, and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
three years in the period ended December 31, 1996. 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 EchoStar
Communications Corporation and subsidiaries as of December 31, 1995 and 1996,
and the consolidated results of their operations and their cash flows for each
of the three years in the period ended December 31, 1996, in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Denver, Colorado,
March 14, 1997
F-2
ECHOSTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
DECEMBER 31,
----------------------
ASSETS 1995 1996
----------------------
Current Assets:
Cash and cash equivalents $ 21,754 $ 39,231
Marketable investment securities 15,670 18,807
Trade accounts receivable, net of allowance
for uncollectible accounts of
$1,106 and $1,494, respectively 9,179 13,516
Inventories 38,769 72,767
Income tax refund receivable 3,554 4,830
Deferred tax assets 1,779 --
Subscriber acquisition costs, net -- 68,129
Other current assets 13,037 18,356
----------------------
Total current assets 103,742 235,636
Restricted Cash and Marketable Investment Securities:
Dish Notes escrow 73,291 --
ESBC Notes escrow -- 47,491
Other 26,400 31,800
Property and equipment, net 354,000 590,621
FCC authorizations, net 11,309 72,667
Deferred tax assets 12,109 79,339
Other noncurrent assets 42,240 83,826
----------------------
Total assets $623,091 $1,141,380
----------------------
----------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Trade accounts payable $ 19,063 $ 40,819
Deferred revenue - DISH Network-SM- subscriber promotions -- 97,959
Deferred programming revenue - DISH Network-SM- -- 4,407
Deferred programming revenue - C-band 584 734
Accrued expenses and other current liabilities 26,314 30,495
Deferred tax liabilities -- 12,563
Current portion of long-term debt 4,782 11,334
----------------------
Total current liabilities 50,743 198,311
Long-term deferred signal carriage revenue -- 5,949
Dish Notes 382,218 437,127
ESBC Notes -- 386,165
Mortgage and other notes payable, excluding current portion 33,444 51,428
Other long-term liabilities -- 1,203
----------------------
Total liabilities 466,405 1,080,183
COMMITMENTS AND CONTINGENCIES (NOTE 11)
Stockholders' Equity (Notes 2 and 9):
Preferred Stock, 20,000,000 shares authorized,
1,616,681 shares of 8% Series A Cumulative
Preferred Stock issued and outstanding, including
accrued dividends of $2,143,000 and $3,347,000,
respectively 17,195 18,399
Class A Common Stock, $.01 par value, 200,000,000
shares authorized, 10,535,003 and 11,115,582 shares
issued and outstanding, respectively 105 111
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 Warrants 714 16
Additional paid-in capital 151,674 158,113
Unrealized holding gains (losses) on available-for-sale
securities, net of deferred taxes 239 (11)
Accumulated deficit (13,539) (115,729)
----------------------
Total stockholders' equity 156,686 61,197
----------------------
Total liabilities and stockholders' equity $623,091 $1,141,380
----------------------
----------------------
See accompanying Notes to Consolidated Financial Statements.
F-3
ECHOSTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
YEARS ENDED DECEMBER 31,
------------------------------
1994 1995 1996
------------------------------
Revenue:
DTH products and technical services $172,753 $146,910 $ 135,812
DISH Network-SM- promotions - subscription
television services and products -- -- 22,746
DISH Network-SM- subscription television
services -- -- 37,898
C-band programming 14,540 15,232 11,921
Loan origination and participation income 3,690 1,748 3,034
------------------------------
Total revenue 190,983 163,890 211,411
Expenses:
DTH products and technical services 133,635 116,758 123,790
DISH Network-SM- programming -- -- 19,079
C-band programming 11,670 13,520 10,510
Selling, general and administrative 30,219 38,525 90,372
Subscriber promotion subsidies -- -- 33,591
Amortization of subscriber acquisition costs -- -- 15,991
Depreciation and amortization 2,243 3,114 27,423
------------------------------
Total expenses 177,767 171,917 320,756
------------------------------
Operating income (loss) 13,216 (8,027) (109,345)
Other Income (Expense):
Interest income 8,420 14,059 15,630
Interest expense, net of amounts capitalized (21,408) (23,985) (61,487)
Minority interest in loss of consolidated
joint venture and other 261 722 (477)
------------------------------
Total other income (expense) (12,727) (9,204) (46,334)
------------------------------
Net income (loss) before income taxes 489 (17,231) (155,679)
Income tax (provision) benefit, net (399) 5,745 54,693
------------------------------
Net income (loss) $ 90 $(11,486) $(100,986)
------------------------------
------------------------------
Net loss attributable to common shares $ (849) $(12,690) $(102,190)
------------------------------
------------------------------
Weighted average common shares outstanding 32,442 35,562 40,548
------------------------------
------------------------------
Loss per common and common equivalent share $ (0.03) $ (0.36) $ (2.52)
------------------------------
------------------------------
See accompanying Notes to Consolidated Financial Statements.
F-4
ECHOSTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands)
ACCUMULATED
SHARES OF DEFICIT
COMMON COMMON ADDITIONAL AND UNREALIZED
STOCK PREFERRED COMMON STOCK PAID-IN HOLDING GAINS
OUTSTANDING STOCK STOCK WARRANTS CAPITAL (LOSSES) TOTAL
------------------------------------------------------------------------------------------
(Notes 1 and 9)
Balance, 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 Warrants -- -- -- 26,133 -- -- 26,133
8% Series A Cumulative Preferred
Stock dividends -- 939 -- -- -- (939) --
Net income -- -- -- -- -- 90 90
------------------------------------------------------------------------------------------
Balance, December 31, 1994 33,544 15,991 336 26,133 62,197 (849) 103,808
8% Series A Cumulative Preferred
Stock dividends -- 1,204 -- -- -- (1,204) --
Issuance of Class A Common Stock
pursuant to initial public offering,
net of stock issuance costs of $5,067 4,004 -- 40 -- 62,893 -- 62,933
Exercise of Common Stock Warrants 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)
------------------------------------------------------------------------------------------
Balance, December 31, 1995 40,339 17,195 403 714 151,674 (13,300) 156,686
8% Series A Cumulative Preferred
Stock dividends -- 1,204 -- -- -- (1,204) --
Exercise of Class A Common
Stock options 442 -- 4 -- 2,255 -- 2,259
Exercise of Common Stock Warrants 75 -- 1 (698) 697 -- --
Income tax benefit of deduction for
income tax purposes on exercise of
Class A Common Stock options -- -- -- -- 2,372 -- 2,372
Employee Savings Plan contribution
issuable and launch bonuses funded
by issuance of Class A Common Stock 64 -- 1 -- 1,115 -- 1,116
Unrealized holding losses on
available-for-sale securities, net -- -- -- -- -- (250) (250)
Net loss -- -- -- -- -- (100,986) (100,986)
------------------------------------------------------------------------------------------
Balance, December 31, 1996 40,920 $18,399 $409 $ 16 $158,113 $(115,740) $ 61,197
------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements.
F-5
ECHOSTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
YEARS ENDED DECEMBER 31,
------------------------------------
1994 1995 1996
------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 90 $(11,486) $(100,986)
Adjustments to reconcile net income (loss) to
net cash flows from operating activities:
Depreciation and amortization 2,243 3,114 27,423
Amortization of subscriber acquisition costs -- -- 15,991
Deferred income tax benefit (7,330) (4,763) (50,365)
Amortization of debt discount and deferred
financing costs 20,662 23,528 61,695
Employee benefits funded by issuance of
Class A Common Stock -- 1,192 1,116
Change in reserve for excess and obsolete
inventory 502 1,212 2,866
Change in long-term deferred signal
carriage revenue -- -- 5,949
Change in accrued interest on notes
receivable from DBSC -- -- (3,382)
Change in accrued interest on convertible
subordinated debentures from SSET (279) (860) (484)
Other, net (37) 375 1,215
Changes in current assets and current
liabilities, net (see Note 2) 8,354 (32,640) 11,537
------------------------------------
Net cash flows provided by (used in)
operating activities 24,205 (20,328) (27,425)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of marketable investment securities (15,100) (25,230) (138,295)
Sales of marketable investment securities 4,439 40,563 135,176
Purchases of restricted marketable
investment securities (11,400) (15,000) (21,100)
Funds released from restricted cash and
marketable investment securities - other -- -- 15,700
Purchases of property and equipment (3,507) (4,048) (50,954)
Offering proceeds and investment earnings
placed in escrow (329,831) (9,589) (193,972)
Funds released from escrow accounts 144,400 122,149 219,352
Investment in SSET (8,750) -- --
Payments received on convertible subordinated
debentures from SSET -- -- 6,445
Investment in convertible subordinated
debentures from DBSI -- (1,000) (3,640)
Long-term notes receivable from and
investment in DBSC (4,210) (16,000) (30,000)
Expenditures for satellite systems under
construction (115,752) (129,506) (170,935)
Expenditures for FCC authorizations (159) (458) (55,419)
Other 1,305 -- --
------------------------------------
Net cash flows used in operating activities (338,565) (38,119) (287,642)
CASH FLOWS FROM FINANCING ACTIVITIES:
Minority investor investment in and loan
to consolidated joint venture 1,000 -- --
Net proceeds from issuance of Dish Notes
and Common Stock Warrants 323,325 -- --
Net proceeds from issuance of Class A
Common Stock 3,833 62,933 --
Net proceeds from issuance of ESBC Notes -- -- 336,916
Expenditures from escrow for offering costs (837) -- --
Proceeds from refinancing of mortgage
indebtedness 4,200 -- --
Repayments of mortgage indebtedness and
notes payable (3,435) (238) (6,631)
Loans from stockholder, net 4,000 -- --
Repayment of loans from stockholder (4,075) -- --
Stock options exercised -- -- 2,259
Dividends paid (3,000) -- --
------------------------------------
Net cash flows provided by financing activities 325,011 62,695 332,544
------------------------------------
Net increase in cash and cash equivalents 10,651 4,248 17,477
Cash and cash equivalents, beginning of year 6,855 17,506 21,754
------------------------------------
Cash and cash equivalents, end of year $ 17,506 $ 21,754 $ 39,231
------------------------------------
------------------------------------
See accompanying Notes to Consolidated Financial Statements.
F-6
ECHOSTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND BUSINESS ACTIVITIES
PRINCIPAL BUSINESS
EchoStar Communications Corporation ("ECC"), together with its
subsidiaries ("EchoStar" or the "Company") currently is one of only three
direct broadcast satellite ("DBS") companies in the United States with the
capacity to provide comprehensive nationwide DBS programming service.
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") on
September 10, 1996. EchoStar II significantly increased the channel capacity
and programming offerings of the DISH Network-SM- when it became fully
operational in November 1996. EchoStar currently 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"). 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 DISH Network-SM- and
domestic DTH products and services.
EchoStar's primary business objective is to become one of the leading
providers of subscription television and other satellite-delivered services
in the United States. EchoStar had approximately 350,000 subscribers to DISH
Network-SM- programming as of December 31, 1996.
As more fully described in Note 17, on February 24, 1997, EchoStar
announced the formation of a DBS alliance (the "ASkyB Transaction") with The
News Corporation Limited ("News"). Pursuant to a binding letter agreement,
American Sky Broadcasting, LLC, an entity controlled by News ("ASkyB"), will
contribute to EchoStar, or to an entity in which EchoStar would have an
equity interest, or make available for EchoStar's use, cash, satellites and
other DBS assets. These assets are expected to have a total value of
approximately $1.7. billion. In return, ASkyB will acquire an approximate 50%
equity interest in EchoStar. As a result of its contributions to ASkyB, MCI
Communications Corporation ("MCI") will have an approximate 19.9% interest in
ASkyB. Consummation of the ASkyB Transaction is subject only to certain
regulatory and other approvals and consents. While EchoStar and News
intend to consummate the ASkyB Transaction, there can be no assurance that
necessary regulatory or other approvals or consents will be obtained or that
the transaction will be consummated.
ORGANIZATION AND LEGAL STRUCTURE
Certain companies principally owned and controlled by Mr. Charles W.
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 C-band satellite delivered television programming for
resale to consumers and other DTH retailers. Through January 1996, Echo
Acceptance Corporation ("EAC") arranged nationwide consumer financing for
purchasers of DTH systems and programming. The FCC has granted EchoStar
Satellite Corporation ("ESC") licenses for certain DBS frequencies. The
reorganized group also includes other less significant domestic enterprises
and several foreign entities involved in related activities outside the
United States.
During 1994, Dish, Ltd. merged one of its subsidiaries with DirectSat
Corporation ("DirectSat"), an approximately 80% owned subsidiary of SSE
Telecom, Inc. ("SSET") at that time. DirectSat's stockholders received an
approximate 3% equity interest in Dish, Ltd. (subsequently exchanged for
Stock of ECC) in exchange for all of DirectSat's then outstanding stock.
DirectSat's principal assets are a conditional satellite construction permit
and frequency assignments for ten DBS frequencies.
In June 1994, Dish, Ltd. completed an offering of 12 7/8% Senior Secured
Discount Notes due 2004 (the "Dish Notes," see Note 6) and Common Stock
Warrants (the "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"). The assets of ECC are not
subject to the Dish Notes Indenture. Separate parent company only financial
information for ECC is supplementally provided in Note 16. As described in
Note 6, the Dish Notes Indenture places significant restrictions on the
payment of dividends or other transfers by Dish, Ltd. to ECC.
F-7
ECHOSTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
1. ORGANIZATION AND BUSINESS ACTIVITIES - CONTINUED
In June 1995, ECC completed an initial public offering (the "IPO") of its
Class A Common Stock, which resulted in net proceeds to the Company of
approximately $62.9 million. Concurrently, Charles W. Ergen, President and
Chief Executive Officer of both ECC and Dish, Ltd., exchanged all of his then
outstanding shares of Class B Common Stock and 8% Series A Cumulative
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
shares of Dish, Ltd. Class A Common Stock and 8% Series A Cumulative
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
a result of the Exchange and Merger, ECC owned all outstanding shares of
Dish, Ltd. capital stock.
In March 1996, EchoStar Satellite Broadcasting Corporation ("ESBC"), a
wholly-owned subsidiary of ECC, completed an offering (the "ESBC Notes
Offering") of 13 1/8% Senior Secured Discount Notes due 2004, which resulted
in net proceeds of approximately $337.0 million. In connection with the
ESBC Notes Offering, EchoStar contributed all of the outstanding capital
stock of Dish, Ltd. to ESBC. This transaction was accounted for as a
reorganization of entities under common control whereby Dish, Ltd. was
treated as the predecessor to ESBC. ESBC is subject to all, and ECC is
subject to certain of, the terms and conditions of the Indenture related to
the ESBC Notes (the "ESBC Notes Indenture"). As a result of the above
transactions, ESBC is a wholly-owned 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.
The following summarizes the Company's organizational structure for
EchoStar and its significant subsidiaries as described above:
LEGAL ENTITY REFERRED TO HEREIN AS OWNERSHIP
- --------------------------------------------------------------------------------------------------
EchoStar Communications Corporation ECC Publicly owned
EchoStar Satellite Broadcasting Corporation ESBC Wholly-owned by ECC
Dish Network Credit Corporation DNCC Wholly-owned by ECC
Dish, Ltd. Dish, Ltd. Wholly-owned by ESBC
EchoStar Satellite Corporation ESC Wholly-owned by Dish, Ltd.
Echosphere Corporation EchoCorp Wholly-owned by Dish, Ltd.
Houston Tracker Systems, Inc. HTS Wholly-owned by Dish, Ltd.
EchoStar International Corporation EIC Wholly-owned by Dish, Ltd.
F-8
ECHOSTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
1. ORGANIZATION AND BUSINESS ACTIVITIES - CONTINUED
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 IPO to partially satisfy the capital requirements for
the construction, launch and operation of its first four DBS satellites
(EchoStar I, EchoStar II, EchoStar III, and EchoStar IV.) Annual interest
expense on the Dish and ESBC Notes, and depreciation of the investment in the
satellites and related assets are each of a magnitude that exceeds historical
levels of income before income taxes. Consequently, beginning in 1995
EchoStar reported significant net losses and expects such net losses to
continue through at least 1999. As of December 31, 1996, EchoStar expects to
invest approximately an additional $344 million to fund contractor financing
obligations with respect to its first four satellites and to complete the
construction phase and launch of EchoStar III and EchoStar IV (see Note 11).
Upon consummation of the ASkyB Transaction, EchoStar will acquire various DBS
assets and assume future obligations necessary to complete construction and
deployment of such assets. DBS assets to be acquired in connection with the
ASkyB Transaction include, among other assets, four DBS satellites and a
digital broadcast center located in Gilbert, Arizona, all of which are
currently under construction. 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.
As previously described, EchoStar expects that its net losses will
continue as it builds its subscription television business such that, prior
to consummation of the ASkyB Transaction, negative stockholders' equity will
result during the second quarter of 1997 unless it receives additional equity
financing from News (see Note 17) or other sources. EchoStar's expected net
losses will result primarily from: (i) the amortization of original issue
discount associated with the Dish Notes and the ESBC Notes; (ii) increases in
depreciation expense attributable to EchoStar's satellites and other fixed
assets; (iii) amortization of subscriber acquisition costs; (iv) subscriber
promotion subsidies; and (v) increases in SG&A 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 that such 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 Class A Common Stock will be subject to being delisted unless an
exception is granted by the National Association of Securities Dealers. If an
exception is not granted, trading in EchoStar Class A Common Stock would
thereafter be conducted in the over-the-counter market. Consequently, it may
be more difficult to dispose of, or to obtain accurate quotations for,
EchoStar Class A Common Stock. Accordingly, delisting may result in a decline
in the trading market for EchoStar's Class A Common Stock, which could, among
other things, potentially depress EchoStar's stock and bond prices and impair
EchoStar's ability to obtain additional financing.
As a result of the factors discussed above, EchoStar requires additional
capital to complete the construction and launch of EchoStar III and EchoStar
IV and fully implement its business plan. There can be no assurance that
necessary funds will be available or, if available, that they will be
available on terms acceptable to EchoStar. Further increases 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. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The financial statements for 1995 present the consolidation of Dish, Ltd.
and its subsidiaries through the date of the Exchange (see 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
accounts and transactions have been eliminated.
Effective June 1993, the Company acquired a 51% joint venture interest in
FlexTracker Sdn. Bhd. ("FlexTracker"), a Malaysian limited liability company.
A Singapore electronics manufacturing company owned the 49% minority
interest. FlexTracker manufactured integrated and stand-alone receivers and
positioners exclusively for the Company.
F-9
ECHOSTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
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 1994 amounted to approximately $1.3 million, and an additional
loss of $492,000 was recognized in 1994 upon the sale of the Company's
interest in FlexTracker. FlexTracker's financial statements were consolidated
in the accompanying consolidated financial statements from the date of
acquisition through the date of disposition.
The Company accounts for investments in 50% or less owned entities using
the equity method. At December 31, 1995 and 1996, these investments were not
material to the consolidated financial statements.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses for each
reporting period. Actual results could differ from those estimates.
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) during 1994, 1995 and 1996 were not material to the Company's
results of operations.
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, 1995 and 1996 consist of money market funds, corporate notes
and commercial paper; such balances are stated at cost which equates to
market value.
STATEMENTS OF CASH FLOWS DATA
The following summarizes net cash flows from changes in the Company's
current assets and current liabilities:
YEARS ENDED DECEMBER 31,
1994 1995 1996
-----------------------------
Trade accounts receivable $ 372 $ (1,082) $ (4,337)
Inventories 3,049 (19,654) (36,864)
Income tax refund receivable -- (3,554) (1,276)
Subscriber acquisition costs -- -- (84,120)
Other current assets (183) (10,464) (5,319)
Trade accounts payable 2,648 4,111 21,756
Deferred revenue - DISH Network-SM-
subscriber promotions -- -- 97,959
Deferred programming revenue 564 (1,009) 4,557
Accrued expenses and other current
liabilities 1,670 (988) 19,181
Other, net 234 -- --
-----------------------------
Net increase (decrease) in current
assets and current liabilities $8,354 $(32,640) $ 11,537
-----------------------------
-----------------------------
F-10
ECHOSTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
The following presents the Company's supplemental cash flow statement
disclosure:
YEARS ENDED DECEMBER 31,
---------------------------
1994 1995 1996
---------------------------
Cash paid for interest, net of amounts capitalized $ 436 $ 461 $ 3,007
Cash paid for income taxes 7,140 3,203 --
8% Series A Cumulative Preferred Stock dividends 939 1,204 1,204
Accrued satellite contract costs -- 15,000 --
Satellite launch payment for EchoStar II applied
to EchoStar I launch -- -- 15,000
Exchange of note payable to stockholder, and
interest thereon, for 8% Series A Cumulative
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 for EchoStar I -- 32,833 3,167
Note payable issued for deferred satellite
construction payments for EchoStar II -- -- 28,000
Employee Savings Plan Contribution and launch bonuses
funded by issuance of Class A Common Stock -- 1,192 1,116
MARKETABLE INVESTMENT SECURITIES AND RESTRICTED CASH AND MARKETABLE INVESTMENT
SECURITIES
At December 31, 1995 and 1996, 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 and $6,000 at December 31, 1995
and 1996, respectively. 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, 1995 and 1996 are as follows (in
thousands):
DECEMBER 31, 1995 DECEMBER 31, 1996
----------------------------- ----------------------------
UNREALIZED UNREALIZED
AMORTIZED HOLDING MARKET AMORTIZED HOLDING MARKET
COST GAIN (LOSS) VALUE COST GAIN (LOSS) VALUE
----------------------------- ----------------------------
Commercial paper $ 1,126 $ -- $ 1,126 $16,065 $ -- $16,065
Corporate notes 12,353 (19) 12,334 -- -- --
Government bonds 2,038 -- 2,038 2,540 -- 2,540
Mutual funds 188 (16) 172 219 (17) 202
----------------------------- ----------------------------
$15,705 $(35) $15,670 $18,824 $(17) $18,807
----------------------------- ----------------------------
----------------------------- ----------------------------
Restricted Cash and Marketable Investment Securities in Escrow Accounts as
reflected in 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 investment earnings, less
amounts expended to date in connection with the development, construction and
continued growth of the DISH Network-SM-. These proceeds are held in separate
escrow accounts (the "Dish Escrow Account" and the "ESBC Escrow Account") as
required by the respective indentures, and invested in certain permitted debt
and other marketable investment securities until disbursed for the express
purposes identified in the respective indentures.
Other Restricted Cash includes balances totaling $11.4 million and $5.7
million at December 31, 1995 and 1996 respectively, which were restricted to
satisfy certain covenants in the Dish Notes Indenture regarding launch insurance
for EchoStar I and EchoStar II. In addition, as of each of December 31, 1995 and
1996, $15.0 million was held in escrow relating to a non-performing manufacturer
of DBS receivers (see Note 3). As of December 31, 1996, $10.0 million was on
deposit in a separate escrow account established pursuant to an additional DBS
receiver manufacturing agreement, to provide for EchoStar's future payment
obligations.
F-11
ECHOSTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
The major components of Restricted Cash and Marketable Investment Securities are
as follows (in thousands):
DECEMBER 31, 1995 DECEMBER 31, 1996
----------------------------- ----------------------------
UNREALIZED UNREALIZED
AMORTIZED HOLDING MARKET AMORTIZED HOLDING MARKET
COST GAIN VALUE COST GAIN VALUE
----------------------------- ----------------------------
Commercial paper $66,214 $ -- $66,214 $77,569 $ -- $77,569
Government bonds 32,904 420 33,324 368 -- 368
Certificates of
deposit -- -- -- 1,100 -- 1,100
Accrued interest 153 -- 153 254 -- 254
----------------------------- ----------------------------
$99,271 $420 $99,691 $79,291 $ -- $79,291
----------------------------- ----------------------------
----------------------------- ----------------------------
INVENTORIES
Inventories are stated at the lower of cost or market value. Cost is
determined using the first-in, first-out method. Proprietary products are
manufactured by outside suppliers to the Company'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. Inventories consist of the following (in thousands):
DECEMBER 31,
---------------------
1995 1996
---------------------
EchoStar Receiver Systems $ -- $ 32,799
Consigned DBS receiver components -- 23,525
DBS receiver components 9,615 15,736
Finished goods - C-band 11,161 600
Finished goods - International 9,297 3,491
Competitor DBS Receivers 9,404 --
Spare parts 2,089 2,279
Reserve for excess and obsolete inventory (2,797) (5,663)
---------------------
$38,769 $72,767
---------------------
---------------------
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Cost includes interest
capitalized of $5.7 million, $25.8 million and $25.7 million during the years
ended December 31, 1994, 1995 and 1996, respectively. Depreciation is recorded
on a straight-line basis for financial reporting purposes. Repair and
maintenance costs are charged to expense when incurred. Renewals and betterments
are capitalized.
FCC AUTHORIZATIONS
FCC authorizations are recorded at cost and amortized using the
straight-line method over a period of 40 years. Such amortization commences
at the time the related satellite becomes operational; capitalized costs are
written off at the time efforts to provide services are abandoned. FCC
authorizations include interest capitalized of $1.3 million and $6.1 million
during the years ended December 31, 1995 and 1996, respectively. 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 accompanying balance
sheets.
F-12
ECHOSTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
REVENUE RECOGNITION
Revenue from sales of DTH products is recognized upon shipment to
customers. Revenue from the provision of DISH Network-SM- service and C-band
programming service to subscribers is recognized as revenue in the period such
programming is provided.
SUBSCRIBER PROMOTION SUBSIDIES, SUBSCRIBER ACQUISITION COSTS, AND DISH
NETWORK-SM- PROMOTIONS - SUBSCRIPTION TELEVISION SERVICES AND PRODUCTS
Total transaction proceeds to EchoStar from DISH Network-SM- programming
and equipment sold as a package under EchoStar promotions are initially
deferred and recognized as revenue over the related service period (normally
one year), commencing upon authorization of each new subscriber. The excess
of EchoStar's aggregate cost of the equipment, programming and other expenses
for the initial prepaid subscription period for DISH Network-SM- service over
proceeds received ("subscriber promotion subsidies") is expensed upon
shipment of the equipment. Remaining costs, less programming costs and the
amount expensed upon shipment as per above, are capitalized and reflected in
the accompanying consolidated balance sheets as subscriber acquisition costs.
Such costs are amortized over the related prepaid subscription term of the
customer. Programming costs are expensed as service is provided. Excluding
expected incremental revenues from premium and Pay-Per-View programming, the
accounting followed results in revenue recognition over the initial period of
service equal to the sum of programming costs and amortization of subscriber
acquisition costs.
DISH Network-SM- programming and equipment not sold as a package under
echostar promotions are separately presented in the accompanying consolidated
statements of operations.
DEFERRED DEBT ISSUANCE COSTS AND DEBT DISCOUNT
Costs of completing the Dish Notes Offering and ESBC Notes Offering were
deferred (Note 5) and are being amortized to interest expense over their
respective terms. The original issue discounts related to the Dish Notes and the
ESBC Notes (Note 6) are being accreted to interest expense so as to reflect a
constant rate of interest on the accreted balance of the Dish Notes and the ESBC
Notes.
DEFERRED PROGRAMMING REVENUE
Deferred programming revenue consists of prepayments received from
subscribers to DISH Network-SM- programming. Such amounts are recognized as
revenue in the period the programming is provided to the subscriber. Similarly,
EchoStar defers prepayments received from subscribers to C-band programming sold
by EchoStar as an authorized distributor.
LONG-TERM DEFERRED SIGNAL CARRIAGE REVENUE
Long-term deferred signal carriage revenue consists of advance payments
from certain programming providers for carriage of their programming content on
the DISH Network-SM-. Such amounts are deferred and recognized as revenue on a
straight-line basis over the related contract terms (up to ten years).
F-13
ECHOSTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities consist of the following (in
thousands):
DECEMBER 31,
---------------------
1995 1996
---------------------
Accrued expenses $ 3,850 $20,269
Accrued satellite contract costs 15,000 --
Accrued programming 4,979 9,463
Reserve for warranty costs 1,013 763
Other 1,472 --
---------------------
$26,314 $30,495
---------------------
---------------------
The Company's C-Band proprietary products are under warranty against
defects in material and workmanship for a period of one year from the date of
original retail purchase. The reserve for warranty costs is based upon
historical units sold and expected repair costs. The Company does not have a
warranty reserve for its DBS products because the warranty is provided by the
contract manufacturer.
ADVERTISING COSTS
Advertising costs are expensed as incurred and totaled $2.3 million,
$1.9 million and $16.5 million for the years ended December 31, 1994, 1995 and
1996, respectively.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs, which are expensed as incurred, totaled
$5.9 million, $5.0 million and $6.0 million for the years ended December 31,
1994, 1995 and 1996, respectively.
NET LOSS ATTRIBUTABLE TO COMMON SHARES
Net loss attributable to common shares is calculated based on the
weighted-average number of shares of common stock issued and outstanding for
the respective periods. Common stock equivalents (warrants and employee stock
options) are excluded as they are antidilutive. Net loss attributable to
common shares is also adjusted for cumulative dividends on the 8% Series A
Cumulative Preferred Stock.
RECLASSIFICATIONS
Certain amounts from the prior years consolidated financial statements
have been reclassified to conform with the 1996 presentation.
3. OTHER CURRENT ASSETS
Other current assets consist of the following (in thousands):
DECEMBER 31,
---------------------
1995 1996
---------------------
Deposits held by non-performing manufacturer $10,000 $10,000
Other 3,037 8,356
---------------------
$13,037 $18,356
---------------------
---------------------
EchoStar has agreements with two manufacturers to supply DBS receivers for
EchoStar. To date, only one of the manufacturers has produced receivers
acceptable to EchoStar. EchoStar previously deposited $10.0 million with the
non-performing manufacturer and has an additional $15.0 million on deposit in an
escrow account as security for
F-14
ECHOSTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
3. OTHER CURRENT ASSETS - CONTINUED
EchoStar's payment obligations under that contract. EchoStar has given the
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 considered amounts due under the contract in
EchoStar's future purchase commitments. The performing manufacturer presently
manufactures 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. Management believes, but
can give no assurance, that EchoStar will be able to recover most, if not all,
amounts deposited with the non-performing manufacturer or held in escrow.
4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following (in thousands):
LIFE DECEMBER 31,
----------------------------------
(IN YEARS) 1995 1996
---------------------
EchoStar I 12 $ -- $201,607
EchoStar II 12 -- 228,694
Furniture, fixtures and equipment 2-12 35,127 72,945
Buildings and improvements 7-40 21,006 26,035
Tooling and other 2 2,039 3,253
Land -- 1,613 2,295
Vehicles 7 1,310 1,323
Construction in progress -- 303,174 89,733
---------------------
Total property and equipment 364,269 625,885
Accumulated depreciation (10,269) (35,264)
---------------------
Property and equipment, net $354,000 $590,621
---------------------
---------------------
Construction in progress consists of the following (in thousands):
DECEMBER 31,
---------------------
1995 1996
---------------------
Progress amounts for satellite construction,
launch, launch insurance, capitalized
interest, and launch and in-orbit
tracking, telemetry and control services:
EchoStar I $193,629 $ --
EchoStar II 88,634 --
EchoStar III 20,801 29,123
EchoStar IV -- 56,320
Other 110 4,290
---------------------
$303,174 $89,733
---------------------
---------------------
Construction in progress for EchoStar IV, which is currently scheduled for
launch prior to the end of 1998, includes capitalized costs related to the
construction, insurance and launch of that satellite. Construction in progress
for EchoStar III includes costs related to that launch, which is scheduled prior
to the end of 1997.
F-15
ECHOSTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
5. OTHER NONCURRENT ASSETS
Other noncurrent assets consist of the following (in thousands):
DECEMBER 31,
----------------------
1995 1996
------- -------
Long-term notes receivable from DBSC
and accrued interest $16,000 $49,382
Deferred debt issuance costs 10,622 21,284
SSET convertible subordinated debentures
and accrued interest 9,610 3,649
Investment in DBSC 4,111 4,044
DBSI convertible subordinated debentures 1,000 4,640
Other, net 897 827
------- -------
$42,240 $83,826
------- -------
------- -------
In 1994, the Company purchased $8.75 million of SSET's 6.5% convertible
subordinated debentures. During 1996, EchoStar received $6.4 million of payments
from SSET ($5.2 million principal and $1.2 million interest) related to these
convertible debentures. As of December 31, 1996, the debentures, if converted,
would represent approximately 5% of SSET's common stock, based on the number of
shares of SSET common stock outstanding at December 31, 1996. 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 and is engaged in the
manufacture and sale of satellite telecommunications equipment. In March 1994,
SSET 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 law suit brought by the Company
against DBSC regarding enforceability of the notes and accounts receivable. Such
receivables were exchanged for shares of DBSC common stock and the Company
purchased additional DBSC shares for $2,960,000 such that, together with the
shares of DBSC acquired from SSET, the Company owned 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 a total of 22 DBS frequencies.
In December 1995, the Company advanced DBSC $16.0 million in the form of a
note receivable to enable DBSC to make required payments under its satellite
construction contract (EchoStar III). Additionally, during 1996, the Company
made monthly advances to DBSC, in the form of additional notes receivable, to
enable DBSC to meet the commitments under its satellite construction contract.
Such advances made during 1996 aggregated $30.0 million. The $16.0 million note
receivable from DBSC bears interest at 11.5% and the additional $30.0 million of
notes receivable from DBSC bears interest at 11.25%. These notes receivable
mature monthly, beginning December 29, 2003. Under the terms of the promissory
notes, equal installments of principal and interest are due annually commencing
December 1997. As of December 31, 1996, these notes receivable totaled
$49.4 million, including accrued interest of $3.4 million. These notes are
secured by all of DBSC's assets, as defined in the security agreement.
Management estimates that the fair value of these notes approximates carrying
value in the accompanying financial statements based on current risk adjusted
interest rates. On January 8, 1997, EchoStar consummated the merger of DBSC with
a wholly-owned subsidiary of EchoStar ("New DBSC"). EchoStar expects to issue
approximately 658,000 shares of its Class A Common Stock to acquire the
remaining 60% of DBSC which it did not previously own. This transaction was
accounted for as a purchase and the excess of the purchase price over the fair
value of DBSC's tangible assets was allocated to DBSC's FCC authorizations.
DBSC's principal assets include an FCC conditional construction permit and
specific orbital slot assignments for certain DBS frequencies. During 1997,
upon consummation of the DBSC merger, the aforementioned notes receivable were
eliminated, on a consolidated basis, in the related purchase accounting.
In 1995, the Company purchased $1.0 million of DBS Industries, Inc.'s
("DBSI") convertible subordinated debentures, which mature July 1, 1998. In
January and December 1996, the Company purchased an additional $3.0 million
(maturing January 12, 1999), and $640,000 (maturing December 12, 1999),
respectively, of DBSI's convertible subordinated debentures. If EchoStar were to
convert these debentures, it would own approximately 14% of
F-16
ECHOSTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
5. OTHER NONCURRENT ASSETS - CONTINUED
DBSI's common stock, based on the number of shares of DBSI common stock
outstanding at December 31, 1996. Each of the debentures bears interest at the
prime rate plus 2%, adjusted and payable quarterly (aggregate rate of 10.25% at
December 31, 1996). DBSI, which is a reporting company under the Securities
Exchange Act of 1934, 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 believes the fair value of the DBSI
debentures approximates carrying value in the accompanying financial statements
based on current interest rates and the conversion features contained in the
debentures.
6. LONG TERM DEBT
DISH NOTES
On June 7, 1994, Dish, Ltd. issued the Dish Notes which mature on June 1,
2004. The Dish Notes issuance resulted in net proceeds to Dish, Ltd. of
$323.3 million (including amounts attributable to the issuance of the Warrants
(see Note 9) and after payment of underwriting discount and other issuance costs
aggregating approximately $12.6 million).
The Dish Notes bear interest at a rate of 12 7/8%, computed on a semi-
annual bond equivalent basis. Interest on the Dish Notes will not be payable in
cash prior to June 1, 1999, with the Dish Notes accreting to a principal value
at stated maturity of $624.0 million by that date. Commencing December 1, 1999,
interest on the Dish Notes will be payable in cash on December 1 and June 1 of
each year.
The Dish 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 Dish 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 Dish Notes are
further guaranteed by each material direct subsidiary of Dish, Ltd. (see
Note 12). Although the Dish Notes are titled "Senior," Dish, Ltd. has not
issued, and does not have any current arrangements to issue, any significant
indebtedness to which the Dish Notes would be senior; however, the ESBC notes
sold in March 1996 by ESBC, are effectively subordinated to the Dish Notes and
all other liabilities of Dish, Ltd. and its subsidiaries. Furthermore, at
December 31, 1995 and 1996, the Dish Notes were effectively subordinated to
approximately $5.4 million and $5.1 million of mortgage indebtedness,
respectively, with respect to certain assets of Dish, Ltd.'s subsidiaries, not
including the EchoStar DBS System, and rank PARI PASSU with the security
interest of approximately $30.0 million of contractor financing.
Except under certain circumstances requiring prepayment premiums, and in
other limited circumstances, the Dish Notes are not redeemable at Dish, Ltd.'s
option prior to June 1, 1999. Thereafter, the Dish 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% of
principal value at stated maturity on or after June 1, 2002 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 Dish Notes at a redemption price equal to 100% of
principal value at stated maturity thereof, together with accrued and unpaid
interest thereon to the redemption date. The remaining principal of the Dish
Notes matures on June 1, 2004.
In the event of a change of control and upon the occurrence of certain
other events, as described in the Dish Notes Indenture, Dish, Ltd. will be
required to make an offer to each holder of Dish Notes to repurchase all or any
part of such holder's Dish Notes at a purchase price equal to 101% of the
accreted 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 Dish Notes 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
F-17
ECHOSTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
6. LONG TERM DEBT - CONTINUED
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 Dish Notes Indenture; and (2) after giving effect to such
dividend, Dish, Ltd.'s ratio of total indebtedness to cash flow (calculated in
accordance with the Dish Notes Indenture) would not exceed 4.0 to 1.0. 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 Dish
Notes Indenture) from the date of issuance of the Dish 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).
ESBC NOTES
On March 25, 1996, ESBC completed the ESBC Notes Offering consisting of
$580.0 million aggregate principal amount at stated maturity of the ESBC Notes.
The ESBC Notes Offering resulted in net proceeds to ESBC of approximately
$336.9 million (after payment of underwriting discount and other issuance costs
aggregating approximately $13.1 million). The ESBC Notes bear interest at a rate
of 13 1/8%, computed on a semi-annual bond equivalent basis. Interest on the
ESBC Notes will not be payable in cash prior to March 15, 2000, with the ESBC
Notes accreting to a principal amount at stated maturity of $580.0 million by
that date. Commencing September 15, 2000, interest on the ESBC Notes will be
payable in cash on September 15 and March 15 of each year. The ESBC Notes mature
on March 15, 2004.
The ESBC Notes rank PARI PASSU in right of payment with all senior
indebtedness of ESBC. The ESBC Notes are guaranteed on a subordinated basis by
ESBC's parent, EchoStar, and are secured by liens on certain assets of ESBC,
EchoStar and certain of EchoStar's subsidiaries, including all of the
outstanding capital stock of Dish, Ltd., which currently owns substantially all
of EchoStar's operating subsidiaries. Although the ESBC Notes are titled
"Senior," (i) ESBC has not issued, and does not have any current arrangements to
issue, any significant indebtedness to which the ESBC Notes would be senior; and
(ii) the ESBC notes are effectively subordinated to all liabilities of ECC
(except liabilities to general creditors) and its other subsidiaries (except
liabilities of ESBC), including liabilities to general creditors. As of
December 31, 1996, the liabilities of EchoStar and its subsidiaries, exclusive
of the ESBC Notes, aggregated approximately $694.0 million. In addition, net
cash flows generated by the assets and operations of ESBC's subsidiaries will be
available to satisfy the obligations of the ESBC Notes only at any time after
payment of all amounts due and payable at such time under the Dish Notes.
Except under certain circumstances requiring prepayment premiums, and in
other limited circumstances, the ESBC Notes are not redeemable at ESBC's option
prior to March 15, 2000. Thereafter, the ESBC Notes will be subject to
redemption, at the option of ESBC, in whole or in part, at redemption prices
ranging from 106.5625% during the year commencing March 15, 2000 to 100% on or
after March 15, 2003 of principal amount at stated maturity, together with
accrued and unpaid interest thereon to the redemption date. The entire principal
balance of the ESBC Notes will mature on March 15, 2004.
The ESBC Notes Indenture contains restrictive covenants that, among other
things, impose limitations on ESBC with respect to its 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 ESBC's subsidiaries; (vi) merge,
consolidate or sell assets; (vii) incur subordinated or junior debt; and (viii)
enter into transactions with affiliates. In addition, ESBC may pay dividends on
its equity securities only if (1) no default is continuing under the ESBC Notes
Indenture; and (2) after giving effect to such dividend, ESBC's ratio of total
indebtedness to cash flow (calculated in accordance with the ESBC Notes
Indenture) would not exceed 5.0 to 1.0 Moreover, the aggregate amount of such
dividends generally may not exceed the sum of 50% of ESBC's consolidated net
income (calculated in accordance with the ESBC Notes Indenture) from the date of
issuance of the ESBC Notes, plus 100% of the aggregate net cash proceeds
received by ESBC and its subsidiaries from the issue or sale of certain equity
interests of EchoStar (including common stock).
F-18
ECHOSTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
6. LONG TERM DEBT - CONTINUED
In the event of a change of control, as described in the ESBC Notes
Indenture, ESBC will be required to make an offer to each holder of ESBC Notes
to repurchase all of such holder's ESBC Notes at a purchase price equal to 101%
of the accreted value thereof on the date of purchase, if prior to March 15,
2000, or 101% of the aggregate principal amount at stated maturity thereof,
together with accrued and unpaid interest thereon to the date of purchase, if on
or after March 15, 2000.
OTHER LONG-TERM DEBT
In addition to the Dish Notes and ESBC Notes, other long-term debt consists
of the following (in thousands, except monthly payment data):
DECEMBER 31,
------------------
1995 1996
------------------
8.25% note payable for deferred satellite contract
payments for EchoStar I due in equal monthly
installments of $722,027, including interest,
through February 2001 $32,833 $ 30,463
8.25% note payable for deferred satellite contract
payments for EchoStar II due in equal monthly
installments of $561,577, including interest,
through November 2001 -- 27,161
8.0% mortgage note payable due in equal monthly
installments of $41,635, including interest,
through May 2008; secured by land and office
building with a net book value of approximately
$4.1 million 3,909 3,715
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 with a net book value of approximately
$886,000 910 892
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 with a net book value of approximately
$802,000 574 531
------------------
Total long-term debt, excluding the Dish Notes and
ESBC Notes 38,226 62,762
Less current portion (4,782) (11,334)
------------------
Long-term debt, excluding current portion $33,444 $ 51,428
------------------
------------------
Future maturities of amounts outstanding under the Company's long-term debt
facilities as of December 31, 1996 are summarized as follows (in thousands):
DEFERRED
SATELLITE MORTGAGE
DISH ESBC CONTRACT NOTES
NOTES NOTES PAYMENTS PAYABLE TOTAL
-------------------------------------------------------
YEAR ENDING
DECEMBER 31,
1997 $ -- $ -- $11,061 $ 273 $ 11,334
1998 -- -- 12,009 1,141 13,150
1999 -- -- 13,038 289 13,327
2000 -- -- 14,156 309 14,465
2001 -- -- 7,360 331 7,691
Thereafter 624,000 580,000 -- 2,795 1,206,795
Unamortized discount (186,873) (193,835) -- -- (380,708)
-------------------------------------------------------
Total $ 437,127 $ 386,165 $57,624 $5,138 $ 886,054
-------------------------------------------------------
-------------------------------------------------------
The following table summarizes the book and fair values of the Company's
debt facilities at December 31, 1996 (dollars in thousands). Fair values for the
Company's Dish Notes and ESBC Notes are based on quoted market prices. The fair
value of the Company's Deferred Satellite Contract Payments and mortgage notes
payable are estimated
F-19
ECHOSTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
6. LONG TERM DEBT - CONTINUED
using discounted cash flow analyses. The interest rates assumed in such
discounted cash flow analyses reflect interest rates currently being offered for
loans with similar terms to borrowers of similar credit quality.
BOOK VALUE FAIR VALUE
-----------------------
Dish Notes $437,127 $ 526,282
ESBC Notes 386,165 435,986
Deferred satellite contract payments 57,624 56,471
Mortgage notes payable 5,138 5,138
-----------------------
$886,054 $1,023,877
-----------------------
-----------------------
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 which are deferred until after the respective satellites are
in orbit (the "Deferred Payments"). Interest rates on the Deferred Payments
range between 7.75% and 8.25% (to be determined 90 days prior to the launch of
the each satellite) and payments are made over a period of five years after the
delivery and launch of each such satellite. EchoStar utilized $36.0 million and
$28.0 million of contractor financing for EchoStar I and EchoStar II,
respectively. The deferred payments with respect to EchoStar I and EchoStar II
are secured by substantially all assets of Dish, Ltd. and its subsidiaries
(subject to certain restrictions) and a corporate guarantee of ECC. Contractor
financing of $15.0 million also will be used for each of EchoStar III and
EchoStar IV. EchoStar will issue a corporate guarantee with respect to the
contractor financing for EchoStar III and EchoStar IV.
BANK CREDIT FACILITY
From May 1994 to May 1996, certain of EchoStar's subsidiaries maintained a
revolving credit facility (the "Credit Facility") with a bank for the purposes
of funding working capital advances and meeting letter of credit requirements
associated with certain inventory purchases and satellite construction payments.
The Credit Facility expired in May 1996. EchoStar currently does not intend to
arrange a replacement credit facility.
7. INCOME TAXES
The components of the (provision for) benefit from income taxes are as
follows (in thousands):
YEAR ENDED DECEMBER 31,
------------------------------------
1994 1995 1996
------------------------------------
Current (provision) benefit:
Federal $(5,951) $1,350 $4,586
State (853) (67) (49)
Foreign (925) (301) (209)
------------------------------------
(7,729) 982 4,328
------------------------------------
Deferred benefit:
Federal 6,342 4,383 47,902
State 988 380 2,463
------------------------------------
7,330 4,763 50,365
------------------------------------
Total benefit (provision) $ (399) $5,745 $54,693
------------------------------------
------------------------------------
As of December 31, 1996, the Company had net operating loss carryforwards
("NOLs") for Federal income tax purposes of approximately $77.6 million. The
NOLs expire beginning in year 2011. The use of the NOLs is subject to statutory
and regulatory limitations regarding changes in ownership. SFAS No. 109 requires
that the tax benefit of NOLs for financial reporting purposes be recorded as an
asset and that deferred tax assets and liabilities are recorded for the
estimated future tax effects of temporary differences between the tax basis of
assets and liabilities and amounts reported in the consolidated balance sheets.
To the extent that management assesses the realization of deferred tax assets to
be less than "more likely than not," a valuation reserve is established.
F-20
ECHOSTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
7. INCOME TAXES - CONTINUED
The temporary differences which give rise to deferred tax assets and
liabilities as of December 31, 1995 and 1996 are as follows (in thousands):
DECEMBER 31,
------------------
1995 1996
------------------
Current deferred tax assets:
Accrued royalties $ -- $ 3,029
Inventory reserves and cost methods 834 1,811
Accrued expenses and other 257 1,582
Allowance for doubtful accounts 456 674
Reserve for warranty costs 385 284
------------------
Total current deferred tax assets 1,932 7,380
Current deferred tax liabilities:
Unrealized holding gain on marketable
investment securities (153) (6)
Subscriber acquisition costs -- (19,937)
------------------
Total current deferred tax liabilities (153) (19,943)
------------------
Net current deferred tax assets
(liabilities) 1,779 (12,563)
Noncurrent deferred tax assets:
Net operating loss carry forwards -- 77,577
Amortization of original issue discount on
Dish and ESBC Notes 15,439 34,914
Other 7 3,458
------------------
Total noncurrent deferred tax assets 15,446 115,949
Noncurrent deferred tax liabilities:
Capitalized costs deducted for tax (2,351) (17,683)
Depreciation (986) (18,927)
------------------
Total noncurrent deferred tax liabilities (3,337) (36,610)
------------------
Noncurrent net deferred tax assets 12,109 79,339
------------------
Net deferred tax assets $13,888 $ 66,776
------------------
------------------
No valuation reserve 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.
The actual tax provisions for 1994, 1995 and 1996 are reconciled to the
amounts computed by applying the statutory federal tax rate to income before
taxes as follows (dollars in thousands).
1994 1995 1996
----------------- ----------------- -----------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
----------------- ----------------- -----------------
Statutory rate $(166) (34.0)% $6,031 35.0% $54,488 35.0%
State income taxes, net
of federal benefit (88) (18.0) 203 1.2 2,864 1.8
Tax exempt interest income 60 12.3 10 0.1 -- --
Research and development
credits 156 31.9 31 0.2 -- --
Non-deductible interest expense (258) (52.7) (293) (1.7) (2,099) (1.3)
Other (103) (21.1) (237) (1.5) (560) (0.4)
----------------- ----------------- -----------------
Total (provision for) benefit
from income taxes $(399) (81.6)% $5,745 33.3% $54,693 35.1%
----------------- ----------------- -----------------
----------------- ----------------- -----------------
F-21
ECHOSTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
8. EMPLOYEE BENEFIT PLAN
The Company sponsors 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 totaled $170,000, $177,000 and $226,000 during 1994, 1995 and 1996,
respectively. Additionally, the Company contributed 55,000 shares of its Class A
Common Stock in each of 1995 and 1996 (fair value of approximately $1.1 million
and $935,000, respectively) to the 401(k) Plan as discretionary contributions.
9. STOCKHOLDERS' EQUITY
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. ECC's principal stockholder owns all outstanding Class B Common
Stock and all other stockholders own Class A Common Stock.
8% SERIES A CUMULATIVE PREFERRED STOCK
On May 6, 1994, the Company exchanged 1,616,681 shares of its 8% Series A
Cumulative 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 8% Series A Cumulative Preferred
Stock were subsequently transferred to another stockholder and officer of the
Company.
Each share of the 8% Series A Cumulative 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) issuance 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 8% Series A Cumulative Preferred Stock would be
entitled to receive an amount equal to approximately $11.38 per share as of
December 31, 1996.
The aggregate liquidation preference for all outstanding shares of 8%
Series A Cumulative Preferred Stock is limited to the principal amount
represented by the note, plus accrued and unpaid dividends thereon. Each share
of 8% Series A Cumulative Preferred Stock is entitled to receive dividends equal
to eight percent per annum of the initial liquidation preference for such share.
Each share of 8% Series A Cumulative 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 8% Series A Cumulative 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. 8% Series A
Cumulative Preferred Stock through the date of the Exchange ($1.4 million), and
all accrued dividends payable to the remaining holder of Dish, Ltd. 8% Series A
Cumulative 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. 8% Series A Cumulative Preferred Stock.
The Dish Notes Indenture places significant restrictions on the payment of those
dividends. Through December 31, 1996, additional accrued dividends payable to
Mr. Ergen by ECC on the ECC 8% Series A Cumulative Preferred Stock totaled $1.7
million.
F-22
ECHOSTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
9. STOCKHOLDERS' EQUITY - CONTINUED
Cumulative but unpaid dividends totaled approximately $2.1 million and
$3.3 million at December 31, 1995 and 1996, respectively, including amounts
which remain the obligation of Dish, Ltd.
WARRANTS
In conjunction with the Dish Notes Offering, described in Note 6, the
Company issued 3,744,000 Warrants for the purchase of Dish, Ltd. Class A Common
Stock. Effective with the Merger (see Note 1), the Warrants became exercisable
for 2,808,000 shares of ECC's Class A Common Stock. The Warrants were valued at
$26.1 million.
Each Warrant entitles the registered holder thereof, at such holder's
option, to purchase one share of ECC 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
receivable by the Company upon exercise of the Warrants. As of December 31,
1996, Warrants to purchase approximately 2,000 shares of the Company's Class A
Common Stock (as adjusted for the Exchange Ratio) remain outstanding.
10. STOCK COMPENSATION PLANS
The Company has two stock-based compensation plans, which are described
below. The Company has elected to follow Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees," ("APB 25") and related
interpretations in accounting for its stock-based compensation plans. Under APB
25, because the exercise price of the Company's employees stock options is equal
to the market price of the underlying stock on the date of the grant, no
compensation expense is recognized. In October 1995, the Financial Accounting
Standards Board issued SFAS No. 123, "Accounting and Disclosure of Stock-Based
Compensation," ("SFAS No. 123") which established an alternative method of
expense recognition for stock-based compensation awards to employees based on
fair values. The Company elected to not adopt SFAS No. 123 for expense
recognition purposes.
Pro forma information regarding net income and earnings per share is
required by SFAS No. 123 and has been determined as if the Company had accounted
for its stock-based compensation plans using the fair value method prescribed by
that statement. The fair value for these options was estimated at the date of
grant using a Black-Scholes option pricing model with the following weighted-
average assumptions for 1995 and 1996, respectively: risk-free interest rate of
6.12% and 6.80% for 1995 and 1996, respectively; dividend yields of 0.0% during
each period; volatility factors of the expected market price of the Company's
common stock of 62%, and a weighted-average expected life of the options of six
years.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. All options
are initially assumed to vest. Compensation previously recognized is reversed to
the extent applicable to forfeitures of unvested options. The Company's pro
forma net loss attributable to common shares and pro forma loss per common and
common equivalent share were as follows:
DECEMBER 31,
----------------------
1995 1996
----------------------
Net loss attributable to common shares $(13,079) $(103,120)
----------------------
----------------------
Loss per share common and common
equivalent share $ (0.37) $ (2.54)
----------------------
----------------------
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its stock-based compensation awards.
F-23
ECHOSTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
10. STOCK COMPENSATION PLANS - CONTINUED
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 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, 1996 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.
A summary of the Company's incentive stock option activity for the years
ended December 31, 1995 and 1996 is as follows:
1995 1996
--------------------------------------------------------
WEIGHTED-AVERAGE WEIGHTED-AVERAGE
OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE
--------------------------------------------------------
Options outstanding at
beginning of year 744,872 $ 9.33 1,117,133 $12.23
Granted 419,772 17.13 138,790 27.02
Exercised (4,284) 9.33 (103,766) 10.24
Forfeited (43,227) 10.55 (126,884) 13.27
--------------------------------------------------------
Options outstanding at
end of year 1,117,133 $12.23 1,025,273 14.27
--------------------------------------------------------
--------------------------------------------------------
Exercisable at end of year 142,474 $ 9.33 258,368 $11.31
--------------------------------------------------------
--------------------------------------------------------
Weighted-average fair
value of options granted $ 9.86 $16.96
Exercise prices for options outstanding as December 31, 1996 are as
follows:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------------------------------------------
NUMBER WEIGHTED NUMBER
OUTSTANDING AVERAGE EXERCISABLE
AS OF REMAINING WEIGHTED AS OF WEIGHTED
RANGE OF DECEMBER 31, CONTRACTUAL AVERAGE DECEMBER 31, AVERAGE
EXERCISE PRICES 1996 LIFE EXERCISE PRICE 1996 EXERCISE PRICE
- -----------------------------------------------------------------------------------------------
$ 9.333 - $11.870 607,462 5.50 $ 9.48 203,757 $ 9.41
17.000 - 20.250 279,021 6.71 18.48 54,611 18.51
26.690 - 29.360 138,790 7.58 27.02 -- --
- -----------------------------------------------------------------------------------------------
$ 9.333 - $29.360 1,025,273 6.11 $14.27 258,368 $11.31
- -----------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
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 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. During 1996, this option was
fully exercised.
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. In December 1996, the vested portion of this option was
exercised and the unvested portion of the option was canceled.
11. OTHER COMMITMENTS AND CONTINGENCIES
SATELLITE CONTRACTS
EchoStar has contracted with 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
F-24
ECHOSTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
11. OTHER COMMITMENTS AND CONTINGENCIES - CONTINUED
and EchoStar IV. The construction contract for EchoStar III includes a PER DIEM
penalty of $3,333, to a maximum of $100,000, 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 includes
a PER DIEM penalty of $50,000, to a maximum of $5.0 million in the aggregate, 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.
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 price 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.
EchoStar has contracted with Lockheed-Khrunichev-Energia-International,
Inc. ("LKE") for the launch of EchoStar IV in the first quarter of 1998 from the
Baikonur Cosmodrome in the Republic of Kazakhstan, a territory of the former
Soviet Union, utilizing a Proton launch vehicle (the "LKE Contract"). Either
party may request a delay in the 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. Additional payments to LKE are required in 1997.
In addition to the commitments described above, in 1997 EchoStar expects to
expend: (i) approximately $16.7 million for contractor financing on EchoStar I,
EchoStar II, and EchoStar III; (ii) approximately $118.7 million in connection
with the launch and insurance of EchoStar III and EchoStar IV; and (iii)
approximately $50.0 million for construction of EchoStar III and EchoStar IV.
Funds for these expenditures are expected to come from the ESBC Notes Escrow
Account and available cash and marketable investment securities. Beyond 1997,
EchoStar will expend approximately $88.6 million to repay contractor financing
debt related to EchoStar I, EchoStar II, EchoStar III, and EchoStar IV.
Additionally, EchoStar has committed to expend approximately an additional
$69.7 million to construct and launch EchoStar IV in 1998. 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 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 acceptable to EchoStar.
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's 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 satellite 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, 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 acceptable to the Company.
F-25
ECHOSTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
11. OTHER COMMITMENTS AND CONTINGENCIES - CONTINUED
LEASES
Future minimum lease payments under noncancelable operating leases as of
December 31, 1996, are as follows (in thousands):
Year ending December 31,
1997 $ 869
1998 492
1999 180
2000 21
2001 2
Thereafter --
------
Total minimum lease payments $1,564
------
------
Rental expense for operating leases aggregated $1.4 million, $1.2 million,
and $950,000 during the years ended December 31, 1994, 1995 and 1996,
respectively.
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
offered by the Company. As of December 31, 1996, the remaining commitments total
approximately $82.9 million and the total of all outstanding purchase order
commitments with domestic and foreign suppliers was $85.9 million. All of the
purchases related to these commitments are expected to be made during 1997. The
Company expects to finance these purchases from available cash and cash flows
generated from sales of DISH NetworkSM programming and related DBS inventory.
OTHER RISKS AND CONTINGENCIES
The Company is subject to various 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 the Company.
12. 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 certain de minimis domestic and foreign subsidiaries.
The ESBC Notes are initially guaranteed by ECC 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. From January 7, 1997,
the date upon which the DBSC Merger was consummated, the ESBC Notes are
guaranteed by New DBSC, which guarantee will rank PARI PASSU with all senior
unsecured indebtedness of New DBSC.
F-26
ECHOSTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
12. SUMMARY FINANCIAL INFORMATION FOR SUBSIDIARY GUARANTORS - CONTINUED
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 $166,000 as of December 31, 1995 and 1996,
respectively. Summarized consolidated financial information for Dish, Ltd. and
the subsidiary guarantors is as follows (in thousands):
YEAR ENDED DECEMBER 31,
-------------------------------
1994 1995 1996
-------- -------- ---------
STATEMENTS OF OPERATIONS DATA:
Revenue $187,044 $163,228 $ 209,731
Expenses 174,164 171,646 318,437
-------- -------- ---------
Operating income (loss) 12,880 (8,418) (108,706)
Other income (expense) (12,707) (9,911) (32,349)
-------- -------- ---------
Net income (loss) before income taxes 173 (18,329) (141,055)
(Provision for) benefit from income
taxes (433) 6,182 51,890
-------- -------- ---------
Net income (loss) $ (260) $(12,147) $ (89,165)
-------- -------- ---------
-------- -------- ---------
DECEMBER 31,
-------------------
1995 1996
-------- --------
BALANCE SHEET DATA:
Current assets $ 81,959 $198,981
Property and equipment, net 333,160 499,989
Other noncurrent assets 143,866 131,995
-------- --------
Total assets $558,985 $830,965
-------- --------
-------- --------
Current liabilities $ 50,710 $197,081
Long-term liabilities 415,662 630,421
Stockholder's equity 92,613 3,463
-------- --------
Total liabilities and stockholder's equity $558,985 $830,965
-------- --------
-------- --------
Upon consummation of the merger with DirectSat, DirectSat became, by virtue
of the merger, a guarantor of the Dish Notes on a full, unconditional and joint
and several basis, in addition to the guarantees of the previous subsidiaries.
F-27
ECHOSTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO 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, 1994, 1995 and 1996
and for the years then ended, is as follows (in thousands):
OTHER
UNITED STATES EUROPE INTERNATIONAL TOTAL
------------- ------- ------------- ----------
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
----------
----------
1996
- ----
Total revenue $ 173,919 $26,984 $10,508 $ 211,411
--------- ------- ------- ----------
--------- ------- ------- ----------
Export sales $ 1,536
---------
---------
Operating income (loss) $(107,175) $(1,274) $ (896) $ (109,345)
--------- ------- -------
--------- ------- -------
Other income (expense), net $ (46,334)
----------
Net income before income taxes $ (155,679)
----------
----------
Identifiable assets $ 836,596 $ 5,795 $ 1,871 $ 844,262
--------- ------- -------
--------- ------- -------
Corporate assets $ 297,118
----------
Total assets $1,141,380
----------
----------
F-28
ECHOSTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
14. VALUATION AND QUALIFYING ACCOUNTS
The Company's valuation and qualifying accounts as of December 31, 1994,
1995 and 1996 are as follows (in thousands):
BALANCE AT CHARGED TO
BEGINNING COSTS AND BALANCE AT
OF YEAR EXPENSES DEDUCTIONS END OF YEAR
---------------------------------------------------
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
Year ended December 31, 1996:
Assets:
Allowance for doubtful accounts $1,106 $2,340 $(1,952) $1,494
Loan loss reserve 78 660 (94) 644
Reserve for inventory 2,797 4,304 (1,438) 5,663
Liabilities:
Reserve for warranty costs 1,013 (250) -- 763
Other reserves 92 (92) -- --
15. QUARTERLY FINANCIAL DATA (UNAUDITED)
The Company's quarterly results of operations are summarized as follows (in
thousands):
THREE MONTHS ENDED
-----------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-----------------------------------------------
Year Ended December 31, 1995:
Total revenue $40,413 $ 39,252 $ 43,606 $ 40,619
Operating income (loss) (698) 768 341 (8,438)
Net loss (2,240) (1,787) (360) (7,099)
Loss per common and common
equivalent share (0.08) (0.06) (0.02) (0.20)
Year Ended December 31, 1996:
Total revenue $41,467 $ 73,524 $ 42,402 $ 54,018
Operating loss (8,629) (14,057) (26,898) (59,761)
Net loss (7,221) (22,554) (26,518) (44,693)
Loss per common and common
equivalent share (0.19) (0.57) (0.66) (1.10)
In the fourth quarter of 1995 and each quarter in 1996, the Company
incurred operating and net losses principally as a result of expenses incurred
related to development of the EchoStar DBS System.
F-29
ECHOSTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
16. PARENT COMPANY ONLY FINANCIAL INFORMATION
The following financial information reflects the parent company only
condensed statements of operations data, condensed balance sheet data, and
condensed cash flows data 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.
YEARS ENDED DECEMBER 31,
----------------------------------
1994 1995 1996
----------------------------------
STATEMENTS OF OPERATIONS DATA: (In thousands, except per share data)
Equity in earnings (losses) of
subsidiaries $ 90 $(12,361) $(100,853)
Other income -- 1,321 1,117
----------------------------------
Net income (loss) before
income taxes 90 (11,040) (99,736)
Provision for income taxes -- (446) (1,250)
----------------------------------
Net income (loss) $ 90 $(11,486) $(100,986)
----------------------------------
----------------------------------
Loss attributable to common shares $ (849) $(12,690) $(102,190)
----------------------------------
----------------------------------
Weighted average common shares
outstanding 32,442 35,562 40,548
----------------------------------
----------------------------------
Loss per common and common
equivalent share $(0.03) $ (0.36) $ (2.52)
----------------------------------
----------------------------------
DECEMBER 31,
-----------------------
1995 1996
-----------------------
BALANCE SHEET DATA: (In thousands)
Current assets:
Cash and cash equivalents $ 7,802 $ 814
Marketable investment securities 15,460 --
Advances to affiliates, net 19,545 --
Other current assets 191 1,349
-----------------------
Total current assets 42,998 2,163
Investments in subsidiaries:
Restricted (Note 12) 92,613 --
Unrestricted 280 --
-----------------------
Total investments in subsidiaries 92,893 --
Other non-current assets 21,111 70,054
-----------------------
Total assets $157,002 $ 72,217
-----------------------
-----------------------
Current liabilities $ 316 $ 1,304
Advances from affiliates, net -- 2,910
Investments in subsidiaries:
Restricted (Note 12) -- 6,731
Unrestricted -- 75
-----------------------
Total liabilities and investments in subsidiaries 316 11,020
Stockholders' equity:
Preferred Stock, 20,000,000 shares
authorized, 1,616,681 shares of 8%
Series A Cumulative Preferred Stock
issued and outstanding, including accrued
dividends of $2,143,000 and
$3,347,000, respectively 17,195 18,399
Class A Common Stock, $.01 par value,
200,000,000 shares authorized,
10,535,003 and 11,115,582 shares issued
and outstanding, respectively 105 111
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 Warrants 714 16
Additional paid-in capital 151,674 158,113
Unrealized holding gain (loss) on
available-for-sale securities, net 239 (11)
Accumulated deficit (13,539) (115,729)
-----------------------
Total stockholders' equity 156,686 61,197
-----------------------
Total liabilities and stockholders'
equity $157,002 $ 72,217
-----------------------
-----------------------
F-30
ECHOSTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
16. PARENT COMPANY ONLY FINANCIAL INFORMATION - CONTINUED
YEAR ENDED DECEMBER 31,
----------------------------
1994 1995 1996
CASH FLOWS DATA: ---- ---- ----
Cash flows from operating activities:
Net income (loss) $ 90 $(11,486) $(100,986)
Adjustments:
Equity in (earnings) losses of
subsidiaries (90) 12,361 100,853
Provision for deferred taxes -- -- 56
Changes in:
Other current assets -- (191) 1,158
Current liabilities -- 316 988
------------------------------
Net cash flows provided by operating
activities -- 1,000 2,069
Cash flows from investing activities:
Advances (to) from affiliates -- (19,545) 22,167
(Purchases) sales of marketable
investment securities, net -- (15,475) 15,460
Increase in noncurrent assets -- (21,111) (48,943)
------------------------------
Net cash flows used by investing activities -- (56,131) (11,316)
Cash flows from financing activities:
Stock options exercised -- -- 2,259
Net proceeds from IPO -- 62,933
------------------------------
Net cash flows provided by financing
activities -- 62,933 2,259
------------------------------
Net increase in cash and cash equivalents -- 7,802 (6,988)
Cash and cash equivalents, beginning of
year -- 7,802
------------------------------
Cash and cash equivalents, end of year $ -- $ 7,802 $ 814
------------------------------
------------------------------
17. SUBSEQUENT EVENTS
On February 24, 1997, EchoStar announced the formation of a DBS alliance
with News. Pursuant to a binding letter agreement, ASkyB will contribute to
EchoStar, or to an entity in which EchoStar would have an equity interest, or
make available for EchoStar's use, cash, satellites and other DBS assets.
These assets are expected to have a total value of approximately $1.7
billion, including an FCC license purchased during 1996 for approximately
$682.5 million. In return, ASkyB will acquire an approximate 50% equity
interest in EchoStar. As a result of its contributions to ASkyB, MCI will
have an approximate 19.9% interest in ASkyB. Four DBS satellites are currently
under construction for use by ASkyB. ASkyB also is constructing a digital
broadcast center in Gilbert, Arizona, which, upon completion, will provide
EchoStar with fully redundant digital broadcast center operations.
Prior to the closing of the ASkyB Transaction and pursuant to the terms of
the binding letter agreement, News has agreed to provide EchoStar with interim
financing, as needed, in an aggregate amount of up to $200.0 million. This
interim financing will be in the form of either purchases by News of EchoStar
Class A Common Stock or non-interest bearing advances to EchoStar, dependent
upon when necessary regulatory approvals are obtained. Any interim financing
amounts received by EchoStar will be used for purposes of funding its
near-term working capital, capital expenditure and debt service requirements.
To the extent that News advances funds to EchoStar or purchases shares as
described above, the amount paid by News shall be credited against News'
total cash consideration and the number of shares purchased shall be credited
against the number of shares of EchoStar's Class A Common Stock to be
received by News at the closing.
While definitive agreements are expected to be executed in the near
future, in the absence of definitive agreements, the letter agreement will
continue as a binding commitment between the parties. Consummation of the
ASkyB Transaction is subject only to certain regulatory and other approvals
and consents. While EchoStar and News intend to consummate the ASkyB
Transaction, there can be no assurance that necessary regulatory or other
approvals or consents will be obtained or that the transaction will be
consummated.
F-31
EXHIBIT 21
PAGE 1 OF 1
ECHOSTAR COMMUNICATIONS CORPORATIONS AND SUBSIDIARIES
LIST OF SUBSIDIARIES
STATE OR COUNTRY OF % OF NAME DOING
SUBSIDIARY INCORPORATION OWNERSHIP BUSINESS UNDER
---------- ------------- --------- --------------
Direct Broadcasting Satellite Corporation Colorado 100% DBSC
Dish Entertainment Corporation Colorado 100% Dish Entertainment
Dish Factory Direct Corporation Colorado 100% Dish Factory Direct
Dish Network Credit Corporation Colorado 100% DNCC
EchoStar Satellite Broadcasting Corporation Colorado 100% ESBC
EchoStar DBS Communications Corporation Colorado 100% EchoStar DBS
EchoStar DBS Corporation Colorado 100% DBS Corporation
EchoStar KuX Corporation Colorado 100% KuX
EchoStar Space Corporation Colorado 100% EchoStar Space
Dish, Ltd. Nevada 100%(1) Dish, Ltd.
DirectSat Corporation Colorado 100%(2) DirectSat
Echo Acceptance Corporation Colorado 100%(2) EAC
Echonet Business Network, Inc. Colorado 100%(2) Echonet
Echosphere Corporation Colorado 100%(2) Echosphere
EchoStar Capacity Corporation Colorado 100%(2) EchoStar Capacity
EchoStar International Corporation Colorado 100%(2) EchoStar International
EchoStar Licensee Corporation Colorado 100%(2) EchoStar Licensee
EchoStar Real Estate Corporation Colorado 100%(2) EREC
EchoStar Satellite Corporation Colorado 100%(2) ESC
E-Sat, Inc. Colorado 80%(2) E-Sat
Houston Tracker Systems, Inc. Texas 100%(2) HTS
HT Ventures, Inc. Colorado 100%(2) HTV
Satellite Source, Inc. Colorado 100%(2) Satellite Source
EchoStar Indonesia, Inc. Colorado 100%(4) EchoStar Indonesia
EchoStar International (Mauritius) Ltd. Colorado 100%(4) EchoStar International
EchoStar U.K., Inc. Colorado 100%(4) EchoStar U.K.
FlexTracker Sdn. Bhd. Limited Liability-
Malaysia 100%(5) FlexTracker
EchoStar Manufacturing and Distribution
Private Limited India 51%(6) (Mauritius) EMDPL
- ----------------------------------------------------------------------------------------------------
(1) This is a subsidiary of EchoStar Satellite Broadcasting Corporation.
(2) This is a subsidiary of Dish, Ltd.
(3) This is a subsidiary of Echosphere Corporation and Echonet Business
Network, Inc.
(4) This is a subsidiary of EchoStar International Corporation.
(5) This is a subsidiary of Houston Tracker Systems, Inc.
(6) This is a subsidiary of EchoStar International (Mauritius) and Satrec
Mauritius Limited, a Mauritius corporation 40% owned by EchoStar
International Corporation.
5
YEAR
DEC-31-1996
DEC-31-1996
39,231
18,807
15,010
(1,494)
72,767
235,636
625,885
(35,264)
1,141,380
198,311
874,720
18,399
0
409
42,389
1,141,380
208,377
211,411
153,379
153,379
167,377
2,340
61,487
(155,679)
54,693
(100,986)
0
0
0
(108,986)
(2.52)
(2.52)
INCLUDES SALES OF PROGRAMMING.
INCLUDES THE COST OF PROVIDING PROGRAMMING.
NET OF AMOUNTS CAPITALIZED.
