As filed with the Securities and Exchange Comission on September 15, 1997
Registration No. 333-31929
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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ECHOSTAR DBS CORPORATION
(Exact name of registrant as specified in its charter)
COLORADO 84-1328967
(State of Registrant's Incorporation) (I.R.S. Employer Identification No.)
and affiliate guarantors
ECHOSTAR COMMUNICATIONS CORPORATION
ECHOSTAR SATELLITE BROADCASTING CORPORATION
DISH, LTD.
(Exact name of registrants as specified in their respective charters)
NEVADA 88-0336997
COLORADO 84-1337871
NEVADA 88-0312499
(State of Registrant's Incorporation) (I.R.S. Employer Identification No.)
5064
(Registrant's Standard Industrial Classification Code Number)
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DAVID K. MOSKOWITZ, ESQ.
90 INVERNESS CIRCLE EAST SENIOR VICE PRESIDENT, GENERAL
ENGLEWOOD, COLORADO 80112 COUNSEL AND SECRETARY
(303) 799-8222 ECHOSTAR COMMUNICATIONS CORPORATION
(Address, Including Zip Code, and 90 INVERNESS CIRCLE EAST
Telephone Number, including Area Code, ENGLEWOOD, COLORADO 80112
of Registrant's Principal Executive Office) (303) 799-8222
(Name, Address, Including Zip
Code, and Telephone Number of
Agent for Service)
COPIES TO:
WILLIAM APPLETON, ESQ. WILLIAM F. SCHWITTER, ESQ.
BAKER & HOSTETLER LLP PAUL, HASTINGS, JANOFSKY & WALKER LLP
3200 NATIONAL CITY CENTER 399 PARK AVENUE.
1900 E. 9TH STREET NEW YORK, NEW YORK 10022-4697
CLEVELAND, OHIO 44114-3485 (212) 318-6000
(216) 621-0200
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon
as practicable after the effective date of this registration statement.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
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CALCULATION OF REGISTRATION FEE
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PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF SECURITIES TO BE AMOUNT TO BE OFFERING PRICE PER AGGREGATE OFFERING AMOUNT OF
REGISTERED REGISTERED UNIT PRICE REGISTRATION FEE
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12 1/2% Senior Secured Notes due 2002 . . . . . . $375,000,000 100% $375,000,000 $113,637
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Guarantees of 12 1/2% Senior Secured Notes
due 2002 . . . . . . . . . . . . . . . . . . . $375,000,000 (1) $375,000,000 (1)
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Total . . . . . . . . . . . . . . . . . . . . . . $375,000,000 100% $375,000,000 $113,637
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(1) No additional consideration will be paid by the recipients of the 12 1/2%
Senior Secured Notes due 2002 for the Guarantees. Pursuant to Rule 457(n)
under the Securities Act of 1933, no separate fee is payable for the
Guarantees.
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION,
ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
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ECHOSTAR DBS CORPORATION
CROSS-REFERENCE SHEET
PURSUANT TO ITEM 501(b) OF REGULATION S-K
ITEM
NUMBER ITEM LOCATION IN PROSPECTUS
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A. INFORMATION ABOUT THE TRANSACTION
(1) Forepart of the Registration Statement and
Outside Front Cover of Page of Prospectus. Facing Page; Cross-Reference Sheet; Outside
Front Cover Page of Prospectus
(2) Inside Front and Outside Back Cover Pages of
Prospectus. . . . . . . . . . . . . . . . . Inside Front Cover Page of Prospectus and Outside
Back Cover Page of Prospectus
(3) Risk Factors and Ratio of Earnings to Fixed
Charges and Other Information. . . . . . . Prospectus Summary; Summary Financial Data; Selected
Financial Data; Risk Factors
(4) Terms of the Transaction . . . . . . . . . . . Prospectus Summary; The Exchange Offer; Description of
the Exchange Notes; Certain Federal Income Tax
Consequences; Plan of Distribution
(5) Pro Forma Financial Information. . . . . . . . Not Applicable
(6) Material Contracts with Company Being Acquired Not Applicable
(7) Additional Information Required for
Reoffering by Persons and Parties Deemed
to Be Underwriters. . . . . . . . . . . . . Not Applicable
(8) Interest of Named Experts and Counsel. . . . . Not Applicable
(9) Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities . . . . . . . . . . . . . . . . Not Applicable
B. INFORMATION ABOUT THE REGISTRANT
(10) Information with Respect to S-3 Registrants. . Not Applicable
(11) Incorporation of Certain Information by
Reference . . . . . . . . . . . . . . . . . Not Applicable
(12) Information with Respect to S-2 or S-3
Registrants . . . . . . . . . . . . . . . . Not Applicable
(13) Incorporation of Certain Information by
Reference . . . . . . . . . . . . . . . . . Not Applicable
(14) Information with Respect to Registrants Other
Than S-3 or S-2 Registrants . . . . . . . . Available Information; Prospectus Summary; Selected
Financial Data; Management's Discussion and Analysis
of Financial Condition and Results of Operations;
Business; Index to Consolidated Financial Statements
C. INFORMATION ABOUT THE COMPANY BEING ACQUIRED
(15) Information with Respect to S-3 Companies. . . Not Applicable
(16) Information with Respect to S-2 or S-3
Companies . . . . . . . . . . . . . . . . . Not Applicable
(17) Information with Respect to Companies Other
Than S-2 or S-3 Companies . . . . . . . . . Not Applicable
D. VOTING AND MANAGEMENT INFORMATION
(18) Information if Proxies, Consents or
Authorizations are to be Solicited. . . . . Not Applicable
(19) Information if Proxies, Consents or
Authorizations are not to be Solicited
in an Exchange Offer. . . . . . . . . . . . The Exchange Offer; Certain Relationships and Related
Transactions; Security Ownership of Certain Beneficial
Owners and Management
Subject to completion, dated September 15, 1997
PROSPECTUS
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
ECHOSTAR DBS CORPORATION
OFFER TO EXCHANGE $1,000 PRINCIPAL AMOUNT OF ITS
12 1/2% SENIOR SECURED NOTES DUE 2002
WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT
FOR EACH $1,000 IN PRINCIPAL AMOUNT OF ITS
OUTSTANDING 12 1/2% SENIOR SECURED NOTES DUE 2002
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., EASTERN TIME,
ON , 1997, UNLESS EXTENDED
EchoStar DBS Corporation, a Colorado corporation (the "Issuer"), hereby
offers to exchange (the "Exchange Offer") up to $375,000,000 in aggregate
principal amount of its new 12 1/2% Senior Secured Notes due 2002 (the "Exchange
Notes") for up to $375,000,000 in aggregate principal amount of its outstanding
12 1/2% Senior Secured Notes due 2002 (the "Old Notes" and, together with the
Exchange Notes, the "Notes") that were issued and sold in a transaction exempt
from registration under the Securities Act of 1933, as amended (the "Securities
Act").
The terms of the Exchange Notes are substantially identical (including principal
amount, interest rate, maturity, security and ranking) to the terms of the Old
Notes for which they may be exchanged pursuant to the Exchange Offer, except
that the Exchange Notes: (i) are freely transferable by holders thereof (except
as provided below); and (ii) are not entitled to certain registration rights and
certain liquidated damages which are applicable to the Old Notes under the
Registration Rights Agreement (as defined). The Exchange Notes will be issued
under the indenture governing the Old Notes (the "Indenture"). The Notes rank
PARI PASSU in right of payment with all senior indebtedness of the Issuer. The
Notes are guaranteed on a subordinated basis by EchoStar Communications
Corporation ("EchoStar"), the Issuer's direct parent, (the "EchoStar Guarantee")
and, contingent upon the occurrence of certain events, will be guaranteed by
EchoStar Satellite Broadcasting Corporation ("ESBC"), a direct, wholly-owned
subsidiary of the Issuer, and Dish, Ltd. ("Dish"), a direct, wholly-owned
subsidiary of ESBC, and certain other subsidiaries of the Issuer and EchoStar
(the "Guarantors" and, collectively with the EchoStar Guarantee, the
"Guarantees"). The Notes are secured by liens on the capital stock of the
Issuer, the EchoStar IV satellite and certain other assets of the Issuer. See
"Description of Exchange Notes - Security." Although the Notes are titled
"Senior": (i) the Issuer has not issued, and does not have any plans to issue,
any indebtedness to which the Notes would be senior; and (ii) the Notes are
effectively subordinated to all liabilities of the Issuer's subsidiaries,
including liabilities to general creditors (except to the extent that any
subsidiary of the Issuer may guarantee the Notes), and the EchoStar Guarantee is
subordinated to all liabilities of EchoStar (except liabilities to general
creditors). As of June 30, 1997, including the effect of the offering of the
Old Notes (the "Old Notes Offering"), the consolidated liabilities of EchoStar
and its subsidiaries aggregated approximately $1.6 billion. Approximately $1.2
billion of the consolidated liabilities of EchoStar and its subsidiaries
(including liabilities of the Issuer) are effectively senior in right of payment
to the Notes. EchoStar and its subsidiaries do not have any liabilities which
rank either junior to or PARI PASSU with the Notes. In addition the ability of
Dish to make distributions to the Issuer is severely limited by the terms of the
1994 Indenture (as defined), and the cash flow generated by the assets and
operations of the Issuer's subsidiaries will therefore only be available to
satisfy the Issuer's obligations on the Notes to the extent that such
subsidiaries are able to make distributions, directly or indirectly, to the
Issuer. In this regard, as of June 30, 1997, the guarantee of Dish is
effectively subordinated to approximately $900.0 million of indebtedness of Dish
and its subsidiaries. Upon full accretion of the 1994 Notes, the guarantee of
Dish will be effectively subordinated to at least an additional approximately
$156.8 million of indebtedness of Dish and its subsidiaries solely as a result
of the accretion of the 1994 Notes. Additionally, the 1994 Indenture places
severe limitations on the incurrence of additional indebtedness (including the
guarantee of indebtedness) by Dish and its subsidiaries until such time as their
consolidated indebtedness to cash flow ratio would not exceed 4.0 to 1 after
taking the issuance of the indebtedness into account. As of June 30, 1997,
Dish and its subsidiaries do not meet this ratio of indebtedness to cash flow.
Accordingly, as
Subject ot completion, dated September 15, 1997
PROSPECTUS
(CONTINUED ON NEXT PAGE)
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HOLDERS OF OLD NOTES SHOULD CAREFULLY CONSIDER THE MATTERS SET FORTH IN
"RISK FACTORS" COMMENCING ON PAGE 19 OF THIS PROSPECTUS PRIOR TO MAKING A
DECISION WITH RESPECT TO THE EXCHANGE OFFER.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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The date of this Prospectus is , 1997.
(COVER PAGE CONTINUED)
of June 30, 1997, the guarantee of Dish is not in effect and Dish and its
subsidiaries are not able to make distributions to the Issuer. While the 1996
Indenture (as defined) permits ESBC to pay dividends and make other
distributions to the Issuer without restrictions, as of June 30, 1997, the
guarantee of ESBC is effectively subordinated to approximately $1.2 billion of
indebtedness of ESBC and its subsidiaries. Upon full accretion of the 1994 and
1996 Notes, the guarantee of ESBC will be effectively subordinated to at least
an additional approximately $325.5 million of indebtedness of ESBC and its
subsidiaries solely as a result of the accretion of the 1994 and 1996 Notes.
Further, the 1996 Indenture places severe limitations on the incurrence of
additional indebtedness (including the guarantee of indebtedness) by ESBC and
its subsidiaries until such time as their consolidated indebtedness to cash flow
ratio would not exceed 5.0 to 1 after taking the issuance of the indebtedness
into account. As of June 30, 1997, ESBC and its subsidiaries do not meet this
ratio of indebtedness to cash flow. Accordingly, as of June 30, 1997, the
guarantee of ESBC is not in effect. Therefore, there can be no assurance that
the guarantees of Dish and ESBC will ever provide additional collateral to the
holders of Notes. See "Description of Certain Indebtedness."
Concurrently with the closing of the Old Notes Offering, approximately $109.0
million and $112.0 million of the net proceeds of the Old Notes Offering were
placed into an Interest Escrow Account and a Satellite Escrow Account,
respectively. Funds in the Interest Escrow Account, together with reasonably
expected proceeds from the investment thereof will be sufficient to pay the
first five semi-annual interest payments on the Notes. Funds in the Satellite
Escrow Account, together with reasonably expected proceeds from the investment
thereof, will be sufficient to fully fund, through launch, the construction,
launch and insurance of EchoStar IV. Funds may be disbursed from the escrow
accounts only upon satisfaction of applicable provisions of the Escrow and
Disbursement Agreement. The escrow accounts serve as collateral for the Notes.
For a complete description of the terms of the Exchange Notes, see "Description
of Exchange Notes." There will be no cash proceeds to the Issuer from the
Exchange Offer.
Interest on the Exchange Notes will be payable semi-annually on January 1 and
July 1 of each year, commencing January 1, 1998. Holders of the Old Notes whose
Old Notes are accepted for exchange will be deemed to have waived the right to
have interest accrue, or to receive any payment in respect of interest on the
Old Notes, accrued from June 25, 1997 to the date of issuance of the Exchange
Notes.
Except as set forth below, the Notes are not redeemable at the Issuer's
option prior to July 1, 2000. Thereafter, the Notes are subject to redemption,
at the option of the Issuer, at the redemption prices set forth herein. In
addition, at any time prior to July 1, 2000, the Issuer may redeem up to
one-third of the Notes at a redemption price equal to 112.50% of the principal
amount thereof (other than Disqualified Stock) on the repurchase date, with the
net proceeds of one public or private sale of certain Equity Interests (other
than Disqualified Stock) of the Issuer, EchoStar or any of their subsidiaries
(other than proceeds from a sale to EchoStar, the Issuer or any of their
subsidiaries). In the event of a Change of Control, the Issuer is required to
make an offer to repurchase all or any part of the Notes at a purchase price
equal to 101% of the aggregate principal amount thereof, together with accrued
and unpaid interest thereon, to the date of repurchase.
The Old Notes were originally issued and sold on June 25, 1997 in a
transaction not registered under the Securities Act, in reliance upon the
exemption provided in Section 4(2) of the Securities Act and Rule 144A
promulgated under the Securities Act (the "Old Notes Offering"). Accordingly,
the Old Notes may not be reoffered, resold or otherwise pledged, hypothecated or
transferred in the United States unless so registered or unless an applicable
exemption from the registration requirements of the Securities Act is available.
Based upon its view of interpretations provided to third parties by the Staff
(the "Staff") of the Securities and Exchange Commission (the "Commission"), the
Issuer believes that the Exchange Notes issued pursuant to the Exchange Offer in
exchange for the Old Notes may be offered for resale, resold and otherwise
transferred by holders thereof (other than any holder which is: (i) an
"affiliate" of the Issuer within the meaning of Rule 405 under the Securities
Act (an "Affiliate"); (ii) a broker-dealer who acquired Old Notes directly from
the Issuer; (iii) a broker-dealer who acquired Old Notes as a result of market
making or other trading activities), without compliance with the registration
and prospectus delivery provisions of the Securities Act, provided that such
Exchange Notes are acquired in the ordinary course of such holders' business and
such holders are not engaged in, and do not intend to engage in, and have no
arrangement or understanding with any person to participate in, a distribution
of such Exchange Notes. In order to participate in the Exchange Offer, each
entity must certify to the Company in the Letter of Transmittal that it is not
an Affiliate of the Issuer, that it is not engaged in, and does not intend to
engage in, a distribution of the Exchange Notes, and that the Exchange Notes are
being acquired in the ordinary course of business. Each broker-dealer that
receives Exchange Notes for its own account pursuant to the Exchange Offer must
acknowledge that it will deliver a prospectus in connection with any resale of
Exchange Notes. The Letter of Transmittal that is filed as an exhibit to the
Registration Statement of which this Prospectus is
(CONTINUED ON NEXT PAGE)
2
(COVER PAGE CONTINUED)
a part (the "Letter of Transmittal") states that by so acknowledging and by
delivering a prospectus, a broker-dealer will not be deemed to admit that it is
an "underwriter" within the meaning of the Securities Act. Broker-dealers who
acquired Old Notes as a result of market making or other trading activities may
use this Prospectus, as supplemented or amended, in connection with resales of
the Exchange Notes. The Issuer has agreed that, for a period of 180 days after
the Registration Statement of which this Prospectus is a part is declared
effective by the Commission, it will make this Prospectus available to any
broker-dealer for use in connection with any such resale. Any holder who
tenders in the Exchange Offer for the purpose of participating in a distribution
of the Exchange Notes and any other holder that cannot rely upon interpretations
must comply with the registration and prospectus requirements of the Securities
Act in connection with a secondary resale transaction.
Old Notes initially purchased by qualified institutional buyers were
initially represented by a global Note in registered form, deposited with, or on
behalf of, The Depository Trust Company (the "Depositary"), and registered in
the name of Cede & Co., as nominee of the Depositary. The Exchange Notes
exchanged for Old Notes represented by the global Note will be represented by
one or more global Exchange Notes in registered form, registered in the name of
the nominee of the Depositary. See "Description of Exchange Notes - Book-entry,
Delivery and Form." Exchange Notes issued to non-qualified institutional buyers
in exchange for Old Notes held by such investors will be issued only in
certificated, fully registered, definitive form. Except as described herein,
Exchange Notes in definitive certificated form will not be issued in exchange
for the global Note or interests therein.
The Old Notes and the Exchange Notes constitute new issues of securities with
no established public trading market. If a trading market does not develop or is
not maintained, holders of the Exchange Notes may experience difficulty in
reselling the Exchange Notes or may be unable to sell them at all. If a market
for the Exchange Notes develops, any such market may be discontinued at any time
and the Exchange Notes could trade at prices that may be lower than the initial
market values thereof, depending on many factors, including prevailing interest
rates, the markets for similar services and the financial performance of the
Issuer. Although there is currently no market for the Exchange Notes, the
Initial Purchasers have advised the Issuer that they will make a market in the
Exchange Notes. However, they are not obligated to do so, and any such market
making with respect to the Exchange Notes may be discontinued at any time
without notice. In addition, such market making activity will be subject to the
limits imposed by the Securities Act and the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), and may be limited during the Exchange Offer and
the pendency of any applicable shelf registration statement. Accordingly, there
can be no assurance as to the development or liquidity of any market for the
Exchange Notes. The Issuer does not intend to apply for listing of any of the
Exchange Notes on any securities exchange or for quotation through the Nasdaq
National Market or any other securities quotation service.
Any Old Notes not tendered and accepted in the Exchange Offer will remain
outstanding. To the extent that Old Notes are tendered and accepted in the
Exchange Offer, a holder's ability to sell untendered and tendered, but
unaccepted, Old Notes are likely to be adversely affected. Following
consummation of the Exchange Offer, the holders of any remaining Old Notes will
continue to be subject to the existing restrictions on transfer thereof and the
Issuer will have no further obligation to such holders to provide for the
registration under the Securities Act of the Old Notes except under certain very
limited circumstances. See "Description of Exchange Notes - Old Notes'
Registration Rights; Liquidated Damages." No assurance can be given as to the
liquidity of the trading market for either the Old Notes or the Exchange Notes.
The Exchange Offer is not conditioned upon any minimum aggregate principal
amount of Old Notes being tendered or accepted for exchange. The Exchange Offer
will expire at 5:00 p.m., Eastern time, on , 1997, unless extended (the
"Expiration Date"). The date of acceptance for exchange (the "Exchange Date")
will be the first business day following the Expiration Date, upon surrender of
the Old Note. Old Notes tendered pursuant to the Exchange Offer may be
withdrawn at any time prior to the Expiration Date; otherwise such tenders are
irrevocable.
3
TABLE OF CONTENTS
PAGE
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Available Information. . . . . . . . . . . . . . . . . . . . . . . . . . 5
Prospectus Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Use of Proceeds. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
The Exchange Offer . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
Capitalization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
Selected Financial Data. . . . . . . . . . . . . . . . . . . . . . . . . 43
Management's Discussion of Financial Condition and Results of Operations 45
Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83
Certain Relationships and Related Transactions . . . . . . . . . . . . . 88
Security Ownership of Certain Beneficial Owners and Management . . . . . 89
Description of Certain Indebtedness. . . . . . . . . . . . . . . . . . . 91
Description of Exchange Notes. . . . . . . . . . . . . . . . . . . . . . 93
Certain United States Federal Income Tax Considerations. . . . . . . . . 129
Plan of Distribution . . . . . . . . . . . . . . . . . . . . . . . . . . 130
Notice to Investors. . . . . . . . . . . . . . . . . . . . . . . . . . . 131
Independent Accountants. . . . . . . . . . . . . . . . . . . . . . . . . 133
Legal Matters. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 133
Index to Consolidated Financial Statements . . . . . . . . . . . . . . . F-1
DISH NETWORK-SM- IS A SERVICE MARK OF ECHOSTAR COMMUNICATIONS CORPORATION
4
AVAILABLE INFORMATION
The Issuer and the Guarantors have filed with the Securities and Exchange
Commission (the "Commission") a Registration Statement on Form S-4 (together
with all amendments, exhibits, schedules and supplements thereto, the
"Registration Statement") under the Securities Act with respect to the
Exchange Notes being offered hereby. This Prospectus, which forms a part of
the Registration Statement, does not contain all of the information set forth
in the Registration Statement, certain items of which are omitted as
permitted by the rules and regulations of the Commission. For further
information with respect to the Issuer, the Guarantors and the Exchange
Notes, reference is hereby made to the Registration Statement. Statements
contained in this Prospectus as to the contents of any contract or other
document are not necessarily complete and, where such contract or other
document is an exhibit to the Registration Statement, each such statement is
qualified in all respects by the provisions in such exhibit, to which
reference is hereby made.
The Issuer, ESBC and Dish, Ltd. are not currently subject to the
informational requirements of the Exchange Act. However, ESBC is required by the
indenture (the "1996 Indenture") under which ESBC issued its 13 1/8% Senior
Secured Discount Notes due 2004 (the "1996 Notes"), whether or not it is then
subject to Section 13 or 15(d) of the Exchange Act, to file with the Commission
and furnish to holders of the 1996 Notes and the trustee under the 1996
Indenture copies of the annual reports, quarterly reports and other periodic
reports which ESBC and Direct Broadcasting Satellite Corporation ("New DBSC")
would have been required to file with the Commission pursuant to Section 13 or
15(d) of the Exchange Act if they were subject to such sections. ESBC and New
DBSC also agreed to provide all of the foregoing information for ESBC and New
DBSC taken as a single entity. Likewise, Dish, Ltd. is required by the
indenture (the "1994 Indenture") under which Dish, Ltd. issued its 12 7/8%
Senior Secured Discount Notes due 2004 (the "1994 Notes"), whether or not it is
then subject to Section 13 or 15(d) of the Exchange Act, to file with the
Commission and furnish to holders of the 1994 Notes and the trustee under the
1994 Indenture copies of the annual reports, quarterly reports and other
periodic reports which Dish, Ltd. would have been required to file with the
Commission pursuant to Section 13 or 15(d) of the Exchange Act if Dish, Ltd.
were subject to such sections. EchoStar Communications Corporation is subject
to the informational requirements of the Exchange Act. Upon the effectiveness
of the Registration Statement or, if earlier, the Shelf Registration Statement
(as defined herein), pursuant to the Indenture, the Issuer will file all reports
and other information required by the Exchange Act. The Registration Statement,
as well as periodic reports, proxy statements and other information filed by the
Issuer with the Commission, may be inspected at the public reference facilities
maintained by the Commission at Room 1024, 450 Fifth Street, N.W., Washington,
D.C. 20549, or at its regional offices located at Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661 and Seven World Trade
Center, Suite 1300, New York, New York 10048. Copies of such material can be
obtained from the Issuer upon request. Any such request should be addressed to
the Issuer's principal offices at 90 Inverness Circle East, Englewood, Colorado
80112-5300 (telephone (303) 799-8222).
The Issuer's, Dish, Ltd.'s and ESBC's obligation to file periodic reports
with the Commission pursuant to the Exchange Act may be suspended if the Notes
are held of record by fewer than 300 holders at the beginning of any fiscal year
of the Issuer, other than the fiscal year in which the Registration Statement or
the Shelf Registration Statement becomes effective. However, the Issuer has
agreed, pursuant to the indenture dated as of June 25, 1997 (the "Indenture")
governing the Notes, that, whether or not it is then subject to Section 13 or
15(d) of the Exchange Act, it will file with the Commission and furnish to the
holders of the Notes and the Trustee under the Indenture (and, if filing such
documents with the Commission is prohibited, to prospective holders of the Notes
upon request) copies of the annual reports, quarterly reports and other periodic
reports which the Issuer would have been required to file with the Commission
pursuant to Section 13 or 15(d) of the Exchange Act if the Issuer were subject
to such Sections. In addition, the Issuer will furnish, upon request of any
holder of a Note, such information as is specified in paragraph (d)(4) of Rule
144A, to the holder or to a prospective purchaser of such Note who the holder
reasonably believes is a qualified institutional buyer within the meaning of
Rule 144A, in order to permit compliance by such holder with Rule 144A in
connection with the resale of such Note by such holder unless, at the time of
the request, the Issuer is subject to the reporting requirements of Section 13
or 15(d) of the Exchange Act.
5
UNTIL , 1997 (90 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
NOTICE TO INVESTORS
THIS PROSPECTUS (THE "PROSPECTUS") DOES NOT CONSTITUTE AN OFFER TO SELL, OR A
SOLICITATION OF AN OFFER TO BUY, ANY NOTES BY ANY PERSON IN ANY JURISDICTION IN
WHICH IT IS UNLAWFUL FOR SUCH PERSON TO MAKE SUCH AN OFFERING OR SOLICITATION.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER
ANY CIRCUMSTANCES IMPLY THAT THE INFORMATION HEREIN IS CORRECT AS OF ANY DATE
SUBSEQUENT TO THE DATE HEREOF.
- ------------------------------
6
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION, INCLUDING THE CONSOLIDATED FINANCIAL STATEMENTS AND THE NOTES
THERETO, APPEARING ELSEWHERE IN THIS PROSPECTUS. ECHOSTAR DBS CORPORATION, A
COLORADO CORPORATION, WAS INCORPORATED DURING 1996 BY ITS PARENT, ECHOSTAR
COMMUNICATIONS CORPORATION, A NEVADA CORPORATION, THE CLASS A COMMON STOCK OF
WHICH IS QUOTED ON THE NASDAQ NATIONAL MARKET UNDER THE SYMBOL "DISH." AS USED
IN THIS PROSPECTUS, UNLESS THE CONTEXT OTHERWISE REQUIRES, "ECHOSTAR" OR THE
"COMPANY" REFERS TO ECHOSTAR COMMUNICATIONS CORPORATION AND ITS SUBSIDIARIES AND
"ISSUER" REFERS TO ECHOSTAR DBS CORPORATION.
THE COMPANY
EchoStar is a leading provider of direct broadcast satellite ("DBS")
programming services in the United States. The Company commenced its DBS service
(the "DISH Network-SM-") in March 1996, after the successful launch of its first
satellite ("EchoStar I") in December 1995. The Company launched its second
satellite ("EchoStar II") in September 1996. Since December 31, 1996, EchoStar
has increased its DISH Network-SM- subscriber base approximately 83% from
350,000 to approximately 640,000 subscribers at July 31, 1997. During 1997,
EchoStar believes that it has captured approximately 30% of all new DBS
satellite subscribers in the U.S. Average monthly programming revenue during
1997 has been approximately $38 per subscriber.
The introduction of DBS receivers is widely regarded as the most successful
introduction of a consumer electronics product in U.S. history, surpassing the
rollout of color televisions, VCRs and compact disc players. As of June 1, 1997,
approximately 5 million U.S. households subscribed to DBS and other digital
direct-to-home ("DTH") satellite services. Industry sources project that the DTH
market could grow to as many as 19 million subscribers by the year 2002.
EchoStar believes that there is significant unsatisfied demand for
high-quality, reasonably-priced television programming. Of the approximately 96
million television households in the U.S., it is estimated that more than 60
million subscribers pay an average of $34 per month for multichannel programming
services. EchoStar's primary target market for the DISH Network-SM- includes
cable subscribers in urban and suburban areas who are dissatisfied with the
quality or price of their cable programming, or who want niche programming
services not available from most cable operators. Other target markets for the
DISH Network-SM- include the approximately 7 million households not passed by
cable television systems and the approximately 21 million households currently
passed by cable television systems with relatively limited channel capacity.
EchoStar has rights to more U.S. licensed DBS frequencies than any of its
competitors, and currently controls 90 frequencies, including 21 frequencies at
an orbital slot capable of providing nationwide DBS service. The Company
currently provides approximately 120 channels of digital television programming
and over 30 channels of CD quality audio programming to the entire continental
U.S. DISH Network-SM- subscribers can choose from a variety of programming
packages that EchoStar believes have a better price-to-value relationship than
packages currently offered by most pay television providers.
DISH Network-SM- programming is available to any subscriber who purchases or
leases an 18-inch satellite dish, an EchoStar digital satellite receiver, a
user-friendly remote control and related components (collectively, an "EchoStar
Receiver System"). EchoStar Receiver Systems are fully compatible with MPEG-2,
the world digital standard for computers and consumer electronics products, and
provide image and sound quality superior to current analog cable or wireless
cable service. EchoStar Receiver Systems are designed and engineered by the
Company's wholly-owned subsidiary, Houston Tracker Systems, Inc. ("HTS").
Satellite receivers designed by HTS have won numerous awards from dealers,
retailers and industry trade publications.
The Company's primary objective is to become a leading provider of
subscription television services in the U.S. To achieve this objective, the
Company will seek to:
EXPAND PROGRAMMING OFFERINGS. The Company currently expects to launch its
third and fourth satellites ("EchoStar III" and "EchoStar IV") in
October 1997 and in the first quarter of 1998, respectively. EchoStar III,
which is expected to serve the eastern half of the U.S. from 61.5DEG. West
Longitude ("WL"), and EchoStar IV, which is expected to serve the western
half of the U.S. from 148DEG. WL, should enable EchoStar to retransmit local
broadcast signals in 20 of the largest U.S. television markets (assuming
receipt of all required retransmission consents and copyright licenses) and
to provide subscribers with additional sports, foreign language, cultural,
business, educational and other niche programming. EchoStar III and EchoStar
IV will also provide EchoStar the capacity to offer subscribers high
definition television ("HDTV") and popular Internet and other computer data
at high transmission speeds. By expanding its
7
programming services, EchoStar believes 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. In addition, the Company has been
conditionally granted fixed satellite service ("FSS") orbital locations at
121DEG. WL and 83DEG. WL in the Ku-band and at 121DEG. WL and 83DEG. WL
in the Ka-band, and has applications for two extended Ku-band satellites
pending at the FCC. Certain regulatory challenges remain pending against
these FSS licenses and applications.
CONTINUE TO EXPAND DISTRIBUTION CHANNELS. The Company continues to
strengthen its sales and distribution channels, which include consumer
retail outlets, consumer electronics retailers and direct sales
representatives. For example, the Company recently announced an agreement
with JVC Company of America ("JVC"), under which JVC will purchase EchoStar
Receiver Systems for distribution through existing JVC channels using the
JVC and DISH Network-SM- brand names. All consumers who purchase JVC
branded satellite receiver systems will also subscribe to DISH Network-SM-
programming.
PROVIDE ATTRACTIVELY PRICED PROGRAMMING AND SYSTEMS. EchoStar's entry
level America's Top 40 programming package is priced at $19.99 per month,
as compared to, on average, over $30 per month for comparable cable
service. Consumers can add six premium movie channels for an additional $10
per month, the same amount cable subscribers typically pay for one movie
channel. On June 1, 1997, the Company announced a new marketing program,
offering subscribers a standard EchoStar Receiver System for $199 (as
compared to an average retail price in March 1996 of $499), without
requiring an extended subscription commitment or significant up front
programming payments.
EMPHASIZE ONE-STOP SHOPPING. The Company believes that providing
outstanding service, convenience and value are essential to developing
long-term customer relationships. The Company offers consumers a "one-stop
shopping" service which includes programming, installation, maintenance,
reliable customer service and satellite reception equipment. To enhance
responsiveness to its customers, the Company has established a single
telephone number (1-800-333-DISH), which customers can call 24 hours a day,
seven days a week to order EchoStar Receiver Systems, activate programming
services, schedule installation and obtain technical support. The Company
believes it is the only DBS provider to offer a comprehensive single-point
customer service function.
The principal offices of EchoStar and the Issuer are located at 90 Inverness
Circle East, Englewood, Colorado 80112-5300, and their telephone number is
(303) 799-8222.
8
RECENT DEVELOPMENTS
NEW MARKETING PROMOTION
Beginning June 1, 1997, EchoStar implemented a new marketing program in
which independent retailers are able to offer standard EchoStar Receiver
Systems to consumers for a suggested retail price of $199 (the "1997
Promotion"). Previously, consumers could purchase EchoStar Receiver Systems
for approximately $199, but were also required to purchase a prepaid one-year
subscription to the DISH Network's-SM- America's Top 50 CD programming
package for $300 (the "1996 Promotion"). The 1997 Promotion allows consumers
to subscribe to the DISH Network's-SM- various programming offerings on a
month-to-month basis, without requiring an extended subscription commitment
or significant up front programming payments. While there can be no
assurance, EchoStar believes that by significantly reducing the "up front"
cost to the consumer and eliminating extended subscription commitments, the
1997 Promotion may increase consumer demand for DISH Network-SM- services.
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations."
JVC ALLIANCE
On April 14, 1997, EchoStar and JVC announced their plan to enter into a
strategic alliance (the "JVC Alliance") pursuant to which JVC will distribute
EchoStar Receiver Systems through JVC's national retail network. The JVC
brand name will appear on three models of EchoStar Receiver Systems.
TELEFONICA AGREEMENT
On June 2, 1997, Distribuidora de Television Digital S.A. ("Telefonica"),
a DBS joint venture in Spain, selected EchoStar to supply digital set top
boxes for its satellite television service scheduled to launch in September
1997. Total revenues from Telefonica's initial order of 100,000 digital
set-top boxes are expected to be approximately $40 million, of which
approximately one-half is expected to be recognized during 1997.
NEWS CORPORATION LITIGATION
On February 24, 1997, EchoStar and The News Corporation Limited ("News")
announced an agreement (the "News Agreement") pursuant to which, among other
things, News agreed to acquire approximately 50% of the outstanding capital
stock of EchoStar. News also agreed to make available for use by EchoStar the
DBS permit for 28 frequencies at 110DEG. WL purchased by MCI Communications
Corporation ("MCI") for over $682 million following a 1996 Federal
Communications Commission ("FCC") auction. During late April 1997,
substantial disagreements arose between the parties regarding their
obligations under the News Agreement.
During May 1997, EchoStar initiated litigation alleging, among other
things, breach of contract, failure to act in good faith, and other causes of
action. News has denied all of EchoStar's material allegations and has
asserted numerous counterclaims against EchoStar and its Chairman and Chief
Executive Officer, Charles W. Ergen. While EchoStar is confident of its
position and believes it will ultimately prevail, the litigation process
could continue for many years and there can be no assurance concerning the
outcome of the litigation.
DOMINION AGREEMENT
The FCC has granted Dominion Video Satellite, Inc. ("Dominion") a
conditional construction permit and related rights to eight frequencies at
61.5DEG. WL, the same orbital location where EchoStar III is expected to be
located. EchoStar has exercised its right under its agreement with Dominion
(the "Dominion Agreement"), subject to obtaining any necessary FCC approvals,
to use and program, for the expected life of the satellite, six of the eight
transponders on EchoStar III originally made available to Dominion.
Consequently, assuming necessary FCC approvals are obtained, EchoStar would
have the right to use a total of up to 17 transponders on EchoStar III.
9
THE EXCHANGE OFFER
The Exchange Offer...................... The Issuer is offering to exchange
(the "Exchange Offer") up to
$375,000,000 aggregate principal
amount of its new 12 1/2% Senior
Secured Notes due 2002 (the "Exchange
Notes") for up to $375,000,000
aggregate principal amount of its
outstanding 12 1/2% Senior Secured
Notes due 2002 that were issued and
sold in a transaction exempt from
registration under the Securities Act
(the "Old Notes" and, together with
the Exchange Notes, the "Notes").
The form and terms of the Exchange
Notes are substantially identical
(including principal amount, interest
rate, maturity, security and ranking)
to the form and terms of the Old
Notes for which they may be exchanged
pursuant to the Exchange Offer,
except that the Exchange Notes are
freely transferable by holders
thereof except as provided herein
(see "The Exchange Offer - Terms of
the Exchange" and "- Terms and
Conditions of the Letter of
Transmittal") and are not entitled to
certain registration rights and
certain liquidated damages which are
applicable to the Old Notes under a
registration rights agreement dated
as of June 25, 1997 (the
"Registration Rights Agreement")
among the Issuer, and the Guarantors
and Donaldson, Lufkin & Jenrette
Securities Corporation and Lehman
Brothers Inc., as initial purchasers
(collectively, the "Initial
Purchasers"). See Description of
Exchange Notes - Old Notes'
Registration Rights; Liquidated
Damages.
Exchange Notes issued pursuant to the
Exchange Offer in exchange for the
Old Notes may be offered for resale,
resold and otherwise transferred by
holders thereof (other than any
holder which is: (i) an Affiliate of
the Issuer; (ii) a broker dealer who
acquired Old Notes directly from the
Issuer; or (iii) a broker-dealer who
acquired Old Notes as a result of
market-making or other trading
activities), without compliance with
the registration and prospectus
delivery provisions of the Securities
Act, provided that such Exchange
Notes are acquired in the ordinary
course of such holders' business and
such holders are not engaged in, do
not intend to engage in, and have no
arrangement or understanding with any
person to participate in, a
distribution of such Exchange Notes.
Minimum Condition....................... The Exchange Offer is not conditioned
upon any minimum aggregate principal
amount of Old Notes being tendered or
accepted for exchange.
Expiration Date......................... The Exchange Offer will expire at
5:00 p.m., Eastern time, on
, 1997, unless extended (the
"Expiration Date").
Exchange Date........................... The first date of acceptance for
exchange of the Old Notes will be the
first business day following the
Expiration Date.
Conditions to the Exchange Offer........ The obligation of the Issuer to
consummate the Exchange Offer is
subject to certain conditions. See
"The Exchange Offer - Conditions to
the Exchange Offer." The Issuer
reserves the right to terminate or
amend the Exchange Offer at any time
prior to the Expiration Date upon the
occurrence of any of those conditions.
Withdrawal Rights....................... Tenders of Old Notes pursuant to the
Exchange Offer may be withdrawn at
any time prior to the Expiration
Date. Any Old Notes not accepted for
any reason will be returned without
expense to the tendering holders
thereof as promptly as practicable
after the expiration or termination
of the Exchange Offer.
10
Procedures for Tendering Old Notes...... See "The Exchange Offer - How to
Tender."
Federal Income Tax Consequences......... The exchange of Old Notes for
Exchange Notes by tendering holders
will not be a taxable exchange for
federal income tax purposes, and such
holders should not recognize any
taxable gain or loss or any interest
income as a result of such exchange.
See "Certain United States Federal
Income Tax Considerations."
Use of Proceeds......................... There will be no cash proceeds to the
Issuer from the exchange pursuant to
the Exchange Offer.
Effect on Holders of Old Notes.......... As a result of the making of this
Exchange Offer, and upon acceptance
for exchange of all validly tendered
Old Notes pursuant to the terms of
this Exchange Offer, the Issuer will
have fulfilled obligations contained
in the terms of the Old Notes and the
Registration Rights Agreement, and,
accordingly, the holders of the Old
Notes will have no further
registration or other rights under
the Registration Rights Agreement,
except under certain limited
circumstances. See "Description of
Exchange Notes - Old Notes'
Registration Rights; Liquidated
Damages." Holders of the Old Notes
who do not tender their Old Notes in
the Exchange Offer will continue to
hold such Old Notes and will be
entitled to all the rights and
limitations applicable thereto under
the Indenture. All untendered, and
tendered but unaccepted, Old Notes
will continue to be subject to the
restrictions on transfer provided for
in the Old Notes and the Indenture.
To the extent that Old Notes are
tendered and accepted in the Exchange
Offer, the trading market, if any,
for the Old Notes not so tendered is
likely to be adversely affected. See
"Risk Factors - Consequences of
Failure to Exchange Old Notes."
TERMS OF THE EXCHANGE NOTES
The Exchange Offer applies to $375,000,000 aggregate principal amount of
Old Notes. The form and terms of the Exchange Notes are substantially
identical to the form and terms of the Old Notes, except that the Exchange
Notes have been registered under the Securities Act, and therefore, will not
bear legends restricting the transfer thereof. The Exchange Notes will
evidence the same debt as the Old Notes and will be entitled to the benefits
of the Indenture. See "Description of Exchange Notes."
Securities Offered...................... $375.0 million aggregate principal
amount of 12 1/2% Senior Secured Notes
due 2002 (the "Exchange Notes").
Maturity Date........................... July 1, 2002.
Interest Payment Dates.................. Interest will accrue at the rate of
12 1/2% per annum and will be payable
semi-annually in cash on January 1 and
July 1 of each year, commencing
January 1, 1998.
11
Ranking................................. The Notes will rank senior in right
of payment to all subordinated
indebtedness of the Issuer and PARI
PASSU in right of payment with all
senior indebtedness of the Issuer.
Although the Notes are titled
"Senior": (i) the Issuer has not
issued, and does not have any plans
to issue, any indebtedness to which
the Notes would be senior; and (ii)
the Notes will be effectively
subordinated to all liabilities of
the Issuer's subsidiaries,
including liabilities to general
creditors (except to the extent
that any subsidiary of the Issuer
may guarantee the Notes), and the
EchoStar Guarantee (see below) of
the Notes will be subordinated to
all liabilities of EchoStar (except
liabilities to general creditors).
As of June 30, 1997, including the
effect of the Old Notes Offering,
the consolidated liabilities of
EchoStar and its subsidiaries
aggregated approximately $1.6
billion. Approximately $1.2
billion of the consolidated
liabilities of EchoStar and its
subsidiaries (including liabilities
of the Issuer) are effectively
senior in right of payment to the
Notes. EchoStar and its
subsidiaries do not have any
liabilities which rank either
junior to or PARI PASSU with the
Notes. In addition the ability of
Dish to make distributions to the
Issuer is severely limited by the
terms of the 1994 Indenture, and
the cash flow generated by the
assets and operations of the
Issuer's subsidiaries will
therefore only be available to
satisfy the Issuer's obligations on
the Notes to the extent that such
subsidiaries are able to make
distributions, directly or
indirectly, to the Issuer. In this
regard, as of June 30, 1997, the
guarantee of Dish is effectively
subordinated to approximately
$900.0 million of indebtedness of
Dish and its subsidiaries. Upon
full accretion of the 1994 Notes,
the guarantee of Dish will be
effectively subordinated to at
least an additional approximately
$156.8 million of indebtedness of
Dish and its subsidiaries solely as
a result of the accretion of the
1994 Notes. Additionally, the 1994
Indenture places severe limitations
on the incurrence of additional
indebtedness (including the
guarantee of indebtedness) by Dish
and its subsidiaries until such
time as their consolidated
indebtedness to cash flow ratio
would not exceed 4.0 to 1 after
taking the issuance of the
indebtedness into account. As of
June 30, 1997, Dish and its
subsidiaries do not meet this ratio
of indebtedness to cash flow.
Accordingly, as of June 30, 1997,
the guarantee of Dish is not in
effect and Dish and its
subsidiaries are not able to make
distributions to the Issuer. While
the 1996 Indenture permits ESBC to
pay dividends and make other
distributions to the Issuer without
restrictions, as of June 30, 1997,
the guarantee of ESBC is
effectively subordinated to
approximately $1.2 billion of
indebtedness of ESBC and its
subsidiaries. Upon full accretion
of the 1994 and 1996 Notes, the
guarantee of ESBC will be
effectively subordinated to at
least an additional approximately
$325.5 million of indebtedness of
ESBC and its subsidiaries solely as
a result of the accretion of the
1994 and 1996 Notes. Further, the
1996 Indenture places severe
limitations on the incurrence of
additional indebtedness (including
the guarantee of indebtedness) by
ESBC and its subsidiaries until
such time as their consolidated
indebtedness to cash flow ratio
would not exceed 5.0 to 1 after
taking the issuance of the
indebtedness into account. As of
June 30, 1997, ESBC and its
subsidiaries do not meet this ratio
of indebtedness to cash flow.
Accordingly, as of June 30, 1997,
the guarantee of ESBC is not in
effect. Therefore, there can be no
assurance that the guarantees of
Dish and ESBC will ever provide
additional collateral to the
holders of Notes. See "Description
of Exchange Notes" and
"Capitalization."
12
Optional Redemption..................... Except as set forth below, the
Notes will not be redeemable at the
Issuer's option prior to July 1,
2000. Thereafter, the Notes will be
subject to redemption, at the
option of the Issuer, in whole or
in part, at the redemption prices
set forth herein. In addition, at
any time prior to July 1, 2000, the
Issuer may redeem Notes at a
redemption price equal to 112.50%
of the principal amount thereof,
together with accrued and unpaid
interest thereon to the redemption
date, with the net proceeds of one
public or private sale of certain
Equity Interests (as defined
herein) of EchoStar, the Issuer or
any of their subsidiaries (other
than proceeds from a sale to
EchoStar, the Issuer or any of
their subsidiaries), provided that:
(i) at least two-thirds of the
Notes remain outstanding
immediately after the occurrence of
such redemption; and (ii) such
redemption occurs within 120 days
of the date of the closing of any
such sale.
Change of Control....................... Upon the occurrence of a Change of
Control (as defined herein), the
Issuer will be required to make an
offer to each holder of the Notes
to repurchase all or any part of
such holder's Notes at a purchase
price equal to 101% of the
principal amount thereof, together
with accrued and unpaid interest
thereon to the date of repurchase.
There can be no assurance that the
Issuer will have sufficient funds
at the time of a Change of Control
to repurchase Notes tendered. If
the Issuer does not have sufficient
funds to redeem all Notes tendered
for purchase upon the occurrence of
a Change of Control, the Issuer
would be required to raise
additional capital. No assurance
can be given that additional
capital would be available on terms
acceptable to the Issuer, or at
all. If the Issuer were unable to
purchase all Notes tendered in
connection with a Change of
Control, such occurrence would
constitute an Event of Default
under the Indenture.
Offer to Purchase....................... Upon the occurrence of certain
events described under "Description
of Exchange Notes--Offer to
Purchase upon the Occurrence of
Certain Events," the Issuer will be
required to offer to repurchase a
specified amount of Notes at a
purchase price equal to 101% of the
principal amount thereof, together
with accrued and unpaid interest
thereon to the date of repurchase.
There can be no assurance that the
Issuer will have sufficient funds
at the time of an Offer to Purchase
upon the Occurrence of Certain
Events to repurchase Notes
tendered. If the Issuer does not
have sufficient funds to redeem all
Notes tendered for Purchase upon
the Occurrence of Certain Events,
the Issuer would be required to
raise additional capital. No
assurance can be given that
additional capital would be
available on terms acceptable to
the Issuer, or at all. If the
Issuer were unable to purchase all
Notes tendered in connection with
an Offer to Purchase upon the
Occurrence of Certain Events, such
occurrence would constitute an
Event of Default under the
Indenture.
Significant Transactions................ EchoStar and its subsidiaries will
be permitted to engage in certain
Significant Transactions (as
defined), notwithstanding the fact
that such transactions would
otherwise be prohibited under the
Indenture, PROVIDED that: (i) such
transactions are for fair market
value in the opinion of an
investment banking firm of national
standing and the Board of
Directors; and (ii) prior to
consummation of
13
such transactions, the Issuer makes
an offer to each holder of Notes to
repurchase all or any part of such
holder's Notes at a purchase price
equal to 101% of the principal
amount thereof, together with
accrued and unpaid interest thereon
to the date of repurchase. See
"Description of Exchange
Notes--Significant Transactions."
Interest Escrow Account................. The Issuer has placed approximately
$109.0 million of the net proceeds
realized from the sale of the Old
Notes into an Interest Escrow
Account held by the Escrow Agent
for the benefit of the holders of
the Notes. Such funds, together
with the reasonably expected
proceeds from the investment
thereof, will secure, and will be
sufficient to pay, the first five
semi-annual interest payments on
the Notes. See "Description of
Exchange Notes--Disbursement of
Funds--Escrow Accounts."
Satellite Escrow Account................ The Issuer has placed $112.0
million of the net proceeds
realized from the sale of the Old
Notes into a Satellite Escrow
Account held by the Escrow Agent
for the benefit of the holders of
the Notes. Such funds, together
with the reasonably expected
proceeds from the investment
thereof, will be retained in escrow
until disbursed, under certain
conditions, for payment of
construction, launch and insurance
costs for EchoStar IV. See
"Description of Exchange
Notes--Disbursement of
Funds--Escrow Accounts."
Security................................ The Exchange Notes are initially
secured by: (i) a pledge by
EchoStar of the capital stock of
the Issuer; (ii) a first priority
security interest in both the
Interest and Satellite Escrow
Accounts; (iii) a first priority
security interest, when launched,
in EchoStar IV; (iv) a first
priority security interest in the
proceeds of any sale upon
foreclosure of the Issuer's permit
from the FCC for the 148DEG. WL
orbital slot frequency assignments;
and (v) a collateral assignment of
all contracts relating to the
construction, launch, insurance and
TT&C (as defined) of EchoStar IV
(in the case of such collateral
assignments, the Issuer has agreed
to use its best efforts to obtain
any required consents (none of
which required consents had been
obtained as of the date of the
Prospectus)). See "Description of
Exchange Notes--Security."
Guarantees.............................. The Notes are guaranteed by
EchoStar on a subordinated basis.
On and after the ESBC Guarantee
Date (as defined), the Notes will
be guaranteed by ESBC, a
wholly-owned subsidiary of the
Issuer, which guarantee will rank
PARI PASSU with all senior
unsecured indebtedness of ESBC. On
and after the Dish Guarantee Date
(as defined), the Notes will be
guaranteed by Dish, a wholly-owned
subsidiary of ESBC, which guarantee
will rank PARI PASSU with all
senior unsecured indebtedness of
Dish. See "Description of Exchange
Notes--Affiliate Guarantees."
Maintenance of Insurance................ The Indenture requires the Issuer
to obtain Launch Insurance (as
defined) for EchoStar IV, in an
amount equal to or greater than the
cost of construction and
14
launch of and insurance on
EchoStar IV. The Indenture also
requires the Issuer to maintain
In-orbit Insurance (as defined) for
EchoStar IV in an amount equal to or
greater than the cost of construction,
launch and insurance of EchoStar IV.
Certain Other Covenants................. The Indenture restricts, among
other things, the payment of
dividends, the repurchase of stock
and subordinated indebtedness of
the Issuer, the making of certain
other Restricted Payments (as
defined), the incurrence of
indebtedness and the issuance of
preferred stock, certain asset
sales, the creation of certain
liens, certain mergers and
consolidations, and transactions
with Affiliates (as defined).
The Indenture permits the Issuer to
launch, move or otherwise assign
(collectively, "Transfer") in a
transaction which is not an Asset
Sale under the terms of the
Indenture, EchoStar IV into an
orbital slot other than 148DEG. WL
provided the Issuer delivers to the
Trustee an Opinion of Counsel to
the effect, among other things,
that the holders of the Notes will
maintain their security interest in
EchoStar IV. See "Description of
Exchange Notes--Asset Sales;
Transfer of EchoStar IV."
Registration Rights; Liquidated Damages.. Pursuant to a registration rights
agreement among the Issuer, the
Guarantors and the Initial
Purchasers (the "Registration
Rights Agreement"), the Issuer and
the Guarantors agreed: (i) to file
a registration statement (the
"Exchange Offer Registration
Statement") on or prior to July 25,
1997 relating to an exchange offer
for the Old Notes and Guarantees
(the "Exchange Offer"); and (ii) to
use their best efforts to cause the
Exchange Offer Registration
Statement to be declared effective
by the Commission on or prior to
November 22, 1997. In certain
circumstances, the Issuer and the
Guarantors will be required to
provide a shelf registration
statement (the "Shelf Registration
Statement") to cover resales of the
Notes and Guarantees by the holders
thereof. If the Issuer and the
Guarantors do not comply with their
obligations under the Registration
Rights Agreement, they will be
required to pay Liquidated Damages
to holders of the Notes under
certain circumstances. See
"Description of Exchange
Notes--Registration Rights;
Liquidated Damages."
Transfer Restrictions................... The Old Notes and Guarantees have
not been registered under the
Securities Act and are subject to
certain restrictions on transfer.
The Exchange Notes, and Old Notes
registered pursuant to an effective
registration statement, will
generally be freely transferable.
See "Notice to Investors." The
Issuer does not intend to apply for
listing of the Notes on any
securities exchange or for
quotation through the Nasdaq
National Market or any other
securities quotation service.
15
SUMMARY FINANCIAL DATA
Prior to consummation of the Old Notes Offering, EchoStar contributed all
of the outstanding capital stock of ESBC to the Issuer (the "Contribution").
Similarly, in January 1996, EchoStar contributed all of the outstanding
capital stock of Dish to ESBC (the "Dish Contribution"). The Contribution and
the Dish Contribution have been accounted for as reorganizations of entities
under common control, in which Dish was treated as the predecessor to ESBC
and ESBC was treated as the predecessor to the Issuer. The following summary
financial data and the selected financial data presented elsewhere in this
Prospectus for the five years ended December 31, 1996 are derived from the
Consolidated Financial Statements of the Issuer and the Issuer's predecessor
entities, audited by Arthur Andersen LLP, independent public accountants. The
following summary financial data with respect to the six months ended June 30,
1996 and 1997 are unaudited; however, in the opinion of management, such data
reflect all adjustments (consisting only of normal recurring adjustments)
necessary to fairly present the data for such interim periods. Operating
results for interim periods are not necessarily indicative of the results
that may be expected for a full year. The data set forth in this table should
be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations," the Issuer's Consolidated
Financial Statements and the Notes thereto, and other financial information
included elsewhere in this Prospectus.
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
------------------------------------------------------ ---------------------
1992(1) 1993(1) 1994 1995 1996 1996 1997
(IN THOUSANDS, EXCEPT RATIOS, SUBSCRIBERS AND SATELLITE RECEIVERS SOLD)
(UNAUDITED)
STATEMENT OF OPERATIONS DATA:
Revenue....................................... $165,088 $220,941 $190,983 $163,890 $ 209,731 $110,380 $ 171,437
Operating income (loss)....................... 11,286 18,204 13,216 (8,006) (108,865) (26,579) (86,831)
Net income (loss)............................. 7,529 12,272 90 (12,361) (101,676) (28,921) (126,425)
OTHER DATA:
EBITDA (2).................................... $ 12,329 $ 19,881 $ 15,459 $ (4,892) $ (65,496) $(16,823) $ (243)
Ratio of earnings to fixed charges (3)........ 15.0x 18.4x 1.0x -- -- -- --
Deficiency of earnings to fixed charges (3)... -- -- -- $(18,552) $(156,529) $(12,833) $(126,469)
DBS subscribers (end of period)............... -- -- -- -- 350,000 70,000 590,000
Satellite receivers sold (in units):
Domestic.................................... 116,000 132,000 114,000 131,000 518,000 155,000 348,000
International............................... 85,000 203,000 289,000 331,000 239,000 126,000 91,000
------------------------------------------------------ ---------------------
Total.................................... 201,000 335,000 403,000 462,000 757,000 281,000 439,000
------------------------------------------------------ ---------------------
------------------------------------------------------ ---------------------
AS OF MARCH 31, 1997
----------------------------- JUNE 30,
ACTUAL AS ADJUSTED(4) 1997
---------- --------------- --------------
(UNAUDITED)
BALANCE SHEET DATA:
Cash, cash equivalents and marketable investment securities (5)...... $ 33,517 $ 175,017 $ 186,883(10)
Total assets......................................................... 1,084,639 1,459,639 1,433,783
Old Notes............................................................ -- 375,000 375,000
Total long-term obligations (less current portion)................... 910,604 1,285,604 1,323,762
Total stockholder's equity........................................... (68,626) (68,626) (133,100)
16
SUMMARY SATELLITE DATA
ECHOSTAR I ECHOSTAR II ECHOSTAR III ECHOSTAR IV
Expected launch date..................... Launched Launched October 1997 1st Quarter 1998
Orbital slot............................. 119DEG. WL 119DEG. WL 61.5DEG. WL 148DEG. WL (6)
Transponders............................. 16 @ 24 MHz 16 @ 24 MHz 16/32 @ 24 MHz (7) 16/32 @ 24 MHz (7)
Approximate channel capacity (8)......... 100 channels 100 channels 100/200 channels 100/200 channels
Output power............................. 130 Watts 130 Watts 240/120 Watts 240/120 Watts
Expected end of commercial life (9)...... 2011 2011 2012 2013
Coverage area Continental U.S. and certain Eastern and Western and Central U.S.
regions of Canada and Mexico Central U.S. Alaska and Hawaii
- ----------------------
(1) Certain of the Issuer'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 net income for 1992 and 1993 presented above is
net of pro forma income taxes of $3,304 and $7,846, respectively,
determined as if the Issuer had been subject to corporate Federal and
state income taxes for those years. See Note 7 of Notes to the
Issuer's Consolidated Financial Statements.
(2) EBITDA represents earnings before interest (net), taxes, depreciation
and amortization (including amortization of subscriber acquisition
costs of $16.0 million for the year ended December 31, 1996 and $61.3
million for the six months ended June 30, 1997). EBITDA is commonly
used in the communications industry to analyze companies on the basis
of operating performance, leverage and liquidity. EBITDA is not
intended to represent cash flows for the period, nor has it been
presented as an alternative to operating income as an indicator of
operating performance and should not be considered in isolation or as
a substitute for measures of performance determined in accordance with
generally accepted accounting principles. See the Issuer's
Consolidated Financial Statements contained elsewhere in this
Prospectus.
(3) For purposes of computing the ratio of earnings to fixed charges and
the deficiency of earnings to fixed charges, earnings consist of
earnings from continuing operations before income taxes, plus fixed
charges. Fixed charges consist of interest incurred on all
indebtedness and the computed interest components of rental expense
under noncancelable operating leases. For the years ended December 31,
1995 and 1996 and the six months ended June 30, 1996 and 1997,
earnings were insufficient to cover fixed charges.
(4) Gives effect to the Old Notes Offering and the application of the net
proceeds thereof.
(5) Excludes amounts held in escrow and other restricted cash of approximately
$51.5 million as of March 31, 1997. The March 31, 1997, as adjusted, data
also excludes $112.0 million placed in the Satellite Escrow Account and
approximately $109.0 million placed in the Interest Escrow Account.
(6) EchoStar presently intends to launch EchoStar IV into the 148DEG. WL
orbital slot during the first quarter of 1998. The Company may, however,
subject in each case to applicable FCC approvals and other conditions in
the Indenture, determine to launch or move EchoStar IV into the 61.5DEG.
WL or the 119DEG. WL orbital slot. See "Description of Exchange
Notes--Significant Transactions" and "--Certain Covenants--Asset Sales;
Transfer of EchoStar IV."
(7) The transponders on each of these satellites can be independently switched
to provide a range from 16 transponders operating at 240 Watts each to 32
transponders operating at 120 Watts each.
(8) EchoStar's DBS permits cover: (i) 11 of the 16 transponders (approximately
65 of 100 channels) on EchoStar I; (ii) 10 of the 16 transponders
(approximately 60 of 100 channels) on EchoStar II; (iii) 11 of the 16
transponders (approximately 65 of 100 channels) on EchoStar III; and
(iv) 24 of the 32 transponders (approximately 150 of 200 channels) on
EchoStar IV.
(9) The expected end of commercial life of each satellite has been estimated by
EchoStar based on each satellite's actual or expected launch date and the
terms of the construction and launch contracts. The minimum design life is
12 years. The licenses are issued for ten year periods, and would, unless
renewed by the FCC, expire prior to the end of the minimum design life.
(10) Excludes amounts held in escrow and other restricted cash of approximately
$8.4 million as of June 30, 1997. The June 30, 1997 data also excludes
$112.1 million held in the Satellite Escrow Account and approximately
$109.1 million held in the Interest Escrow Account.
17
THE ECHOSTAR ORGANIZATION
The following chart illustrates where significant EchoStar assets and rights
are, or are expected to be, held following the Contribution:
ECHOSTAR
COMMUNICATIONS
CORPORATION
NASDAQ: DISH
DIRECT BROADCASTING ECHOSTAR DBS ECHOSTAR DISH NETWORK
SATELLITE CORPORATION SPACE CORPORATION CREDIT CORPORATION
CORPORATION
- ECHOSTAR III SATELLITE ISSUER OF THE - LAUNCH CONTRACTS FOR - CONSUMMER FINANCING OF
NOTES ECHOSTAR III AND ECHOSTAR RECEIVER
- 11 FREQUENCIES 61.5DEG. WL ECHOSTAR IV SYSTEMS
- 11 FREQUENCIES 175DEG. WL
- ECHOSTAR IV SATELLITE
- 24 FREQUENCIES 148DEG. WL
ECHOSTAR SATELLITE
BROADCASTING
CORPORATION
ISSUER OF THE
1996 NOTES
DISH, LTD.
ISSUER OF THE
1994 NOTES
HOUSTON TRACKER ECHOSPHERE ECHOSTAR ECHOSTAR DIRECTSAT
SYSTEMS, INC. CORPORATION SATELLITE INTERNATIONAL CORPORATION
CORPORATION CORPORATION
- - U.S. DISTRIBUTION OF - U.S. DISTRIBUTION OF - ECHOSTAR I SATELLITE - INTERNATIONAL DISTRIBUTION - ECHOSTAR II SATELLITE
DTH PRODUCTS AND DTH PRODUCTS AND - 11 FREQUENCIES OF DTH PRODUCTS - 10 FREQUENCIES 119DEG. WL
ECHOSTAR RECEIVER ECHOSTAR RECEIVER 119DEG. WL - 11 FREQUENCIES 175DEG. WL
SYSTEMS TO ECHOSHPERE SYSTEMS TO - 10 FREQUENCIES EXPECTED - 1 FREQUENCIES 110DEG. WL
AND OTHER DISTRIBUTORS SATELLITE RETAILERS AT 175DEG. WL
- 1 FREQUENCY EXPECTED AT
- - DBS RESEARCH AND 166DEG. WL
DEVELOPMENT - DBS PROGRAMMING CONTRACTS
- DIGITAL BROADCAST
CENTER
- UPLINK EARTH STATIONS
The Notes are initially secured by:
(i) A pledge of the capital stock of the Issuer.
(ii) A first priority security interest in the proceeds of any sale upon
foreclosure of the Issuer's permit from the FCC for the 148DEG. WL
orbital slot frequency assignments.
(iii) A first priority security interest, when launched, in EchoStar IV.
(iv) A collateral assignment of certain construction, launch and insurance
contracts relating to EchoStar IV (in the case of such collateral
assignments, the Issuer has agreed to use its best efforts to obtain
any required consents (none of which required consents had been
obtained as of the date of the Prospectus)).
(v) A first priority security interest in each of the Satellite Escrow
Account and the Interest Escrow Account.
18
RISK FACTORS
HOLDERS OF THE OLD NOTES SHOULD CONSIDER CAREFULLY ALL OF THE INFORMATION
CONTAINED IN THIS PROSPECTUS, WHICH MAY BE GENERALLY APPLICABLE TO THE OLD NOTES
AS WELL AS TO THE EXCHANGE NOTES, BEFORE DECIDING WHETHER TO TENDER THEIR OLD
NOTES FOR THE EXCHANGE NOTES OFFERED HEREBY AND, IN PARTICULAR, THE FOLLOWING
FACTORS:
COMPETITION FROM DBS AND OTHER SATELLITE SYSTEM OPERATORS. The
subscription television industry is highly competitive. EchoStar faces
competition from companies offering video, audio, data, programming and
entertainment services. Many of these competitors have substantially greater
financial and marketing resources than EchoStar. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources."
EchoStar competes with companies offering programming through various
satellite broadcasting systems. One competitor, DirecTv, Inc. ("DirecTv"), has
launched three DBS satellites and has 27 frequencies that are capable of
transmitting to the entire continental U.S. ("full-CONUS"). DirecTv and U.S.
Satellite Broadcasting Corporation ("USSB"), which owns five transponders on one
of DirecTv's satellites, currently offer over 150 channels of combined DBS video
programming. As of July 31, 1997, DirecTv had approximately 2.7 million
subscribers, approximately one-half of which also subscribed to USSB
programming. EchoStar is currently at a competitive disadvantage to DirecTv and
USSB with regard to market entry, programming and, possibly, volume discounts
for programming offerings. In addition, in the event desirable pay-per-view or
other popular programming is secured by competitors of EchoStar on an exclusive
basis, it will be unavailable to EchoStar's DISH Network-SM-. DirecTv currently
has exclusive distribution rights for out-of-market National Football League
telecasts. There may be additional sports and other programming offered by other
pay television providers that will not be available on the DISH Network-SM-. See
"Business--Competition -- Other DBS and Home Satellite Operators."
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. Further, affiliates of the National Rural
Telecommunications Cooperative have acquired territories in rural areas of the
U.S. as distributors of DirecTv programming, thereby increasing the distribution
capacity of DirecTv.
On June 11, 1997, TCI Satellite Entertainment, Inc. ("TSAT")
announced that a binding letter of intent had been signed for the
restructuring of PrimeStar Partners, L.P. ("PrimeStar"), which currently
offers medium power Ku-band programming service to customers using dishes
approximately three feet in diameter. In connection with such restructuring,
PrimeStar, which is currently owned by affiliates of the five largest cable
companies in the U.S., has entered into an agreement to combine its assets
with American Sky Broadcasting, L.L.C. ("ASkyB"), a satellite venture formed
by News and MCI, into a single DBS provider. According to press releases,
each PrimeStar partner will contribute its PrimeStar customers and
partnership interests into the newly formed entity. ASkyB has announced that
it will contribute two satellites under construction and 28 full-CONUS
frequencies at the 110DEG. WL orbital location. This proposed transaction
requires certain federal regulatory approvals. In addition, Tempo Satellite,
Inc. ("Tempo"), a subsidiary of TSAT, has a license for a satellite using 11
full-CONUS frequencies at the 119DEG. WL orbital location, and recently
launched a satellite to that location. As of July 31, 1997, according to
published reports, PrimeStar had approximately 1.9 million subscribers.
The proposed restructuring of PrimeStar, if consummated, would create a
significantly strengthened competitor with substantial financial and other
resources, including a significantly greater number of full-CONUS channels than
any other DBS provider. Affiliates of several of the companies that would own
interests in a restructured PrimeStar entity provide programming to cable
television operators, other terrestrial systems and DBS system operators,
including EchoStar. These content providers, including News, Time Warner Inc.
(including its Turner Broadcasting Systems subsidiary) ("Time Warner"), TCI
Communications, Inc. ("TCI"), Cox Communications Inc. ("Cox"), Comcast
Corporation ("Comcast") and US WEST, Inc. ("US WEST") would likely provide a
significant amount of programming to the new PrimeStar entity and may decide to
provide this programming to PrimeStar on better terms and at a lower cost than
to other cable or DBS operators. Additionally, those content providers could
raise programming prices to all cable, DBS and other providers (including
PrimeStar), thereby increasing the Company's cost of programming to rates that
are effectively higher than those borne by PrimeStar's owners. Although the
current programming access provisions under the Cable Television Consumer
Protection and Competition Act of
19
1992, as amended (the "Cable Act"), and the FCC's rules generally require cable
company affiliated content providers to make programming available to
competitors on non-discriminatory terms, there are exceptions to these
requirements and there can be no assurance that such requirements will remain in
effect. Any amendment to, or interpretation of, the Cable Act or the FCC's
rules which would revise or eliminate these provisions could adversely affect
EchoStar's ability to acquire programming on a cost-effective basis.
The FCC has indicated that it may apply to the International
Telecommunication Union ("ITU") for allocation of additional DBS orbital
locations capable of providing service to the U.S. 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 U.S. In general,
non-U.S. licensed satellites are not presently allowed to provide domestic DBS
or DTH service in the U.S. However, in November 1996, the U.S. and Mexico signed
a Protocol allowing cross-border DBS and DTH service from Mexican-licensed
satellites to the U.S. and vice versa, and Mexico has indicated that it will
auction one or more of its DBS orbital locations later this summer. In addition,
the U.S. has indicated its willingness to enter into similar agreements with
other countries in North, Central, and South America. If the U.S. government
moves forward with these initiatives, or if other countries authorize DBS
providers to use their orbital slots to serve the U.S., 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 permit other potential competitors to have access to the U.S. In
addition, two additional satellite companies, Continental Satellite Corporation
("Continental") (a subsidiary of Loral Space & Communications Ltd. ("Loral"))
and Dominion, each has conditional permits for a comparatively small number of
DBS assignments which can be used to provide service to portions of the U.S.
There are a number of additional methods by which programming can be
delivered via satellite, including low power C-band satellite services, medium
and high power Ka-band, Ku-band and extended Ku-band satellite services. These
satellite frequency bands can be used to provide additional competition to
EchoStar. See "Business--Competition--Other Potential Providers of DBS or
Similar Services."
COMPETITION FROM CABLE TELEVISION AND OTHER TERRESTRIAL SYSTEMS. The
DISH Network-SM- also encounters substantial competition in the overall
market for pay television households from cable television and other
terrestrial systems. Cable television operators have a large, established
customer base, and many cable operators have significant investments in, and
access to, programming. Cable television service is currently available to
approximately 90% of the approximately 96 million U.S. television households,
and approximately 65% of total television households currently subscribe to
cable. Cable television operators currently have an advantage relative to
EchoStar with regard to the provision of local programming as well as the
provision of service to multiple television sets within the same household.
In addition, EchoStar's programming will not be available to households
lacking a clear line of sight to EchoStar's current orbital location, or to
households in apartment complexes or other multiple dwelling units that do
not facilitate or allow the installation of EchoStar Receiver Systems. As a
result of these and other factors, there can be no assurance that EchoStar
will be able to establish a substantial subscriber base or compete
effectively against cable television operators. See
"Business--Competition--Cable Television."
There are also a number of other terrestrial systems for delivering
multiple channels of television programming. These include "wireless cable" or
"MMDS" systems, and private cable systems such as satellite master antennae
television ("SMATV") as well as new and advanced technologies such as Local
Multi-Point Distribution Services ("LMDS"), which are still in the development
stage. Certain wireless cable companies may become more competitive as a result
of recently announced affiliations with telephone companies. In addition,
digital video compression over existing telephone lines, and fiber optic
networks and open video systems are being implemented and supported by entities
such as regional telephone companies which are likely to have greater resources
than EchoStar. When fully deployed, these new technologies could have a material
adverse effect on the demand for DBS services. Regulatory changes may also make
it easier for local exchange carriers ("LECs") and others, including utility
companies, to provide competitive video services, and to provide video services
directly to subscribers in the LECs' telephone service areas, with certain
exceptions. The Telecommunications Act of 1996 (the "1996 Act") repealed a
statutory telephone/cable cross-ownership restriction, and recognizes several
multiple-entry options for telephone companies to provide competitive video
programming. There can be no assurance that EchoStar will be able to compete
successfully with existing competitors or new entrants in the market for pay
television services. See "Business--Competition--Wireless Cable" and
"--Telephone Companies."
EXPECTED OPERATING LOSSES. Due to the substantial expenditures
required to complete development, construction and deployment of the EchoStar
DBS System and introduction of its DISH Network-SM- service to consumers, the
Issuer has sustained significant losses in recent periods. The Issuer's
operating losses were $8.0 million, $108.9 million and $86.8 million for the
years ended December 31, 1995 and 1996 and the six months ended June 30,
1997, respectively. The Issuer
20
had net losses of $12.4 million, $101.7 million and $126.4 million during those
same periods. Improvements in the Issuer's results of operations are largely
dependent upon its ability to increase its customer base while maintaining its
price structure, controlling subscriber turnover (i.e., the rate at which
subscribers terminate service), and effectively managing the Issuer's costs. No
assurance can be given that the Issuer will be effective with regard to the
above. In addition, the Issuer incurs significant acquisition costs to acquire
DISH Network-SM- subscribers. The high cost of obtaining new subscribers
magnifies the negative effects of subscriber turnover. See "--Risk of Inability
to Manage Rapidly Expanding Operations; Subscriber Turnover." EchoStar
anticipates that it will continue to experience operating losses through at
least 1999. There can be no assurance that such operating losses will not
continue beyond 1999 or that EchoStar's operations will generate sufficient cash
flows to pay its obligations, including its obligations on the 1994 Notes (as
defined), the 1996 Notes and the Notes. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and Capital
Resources."
SUBSTANTIAL LEVERAGE. The Issuer's direct and indirect subsidiaries,
including ESBC and Dish, are highly leveraged, and the Issuer, as a result of
the issuance of the Notes, also is highly leveraged. This leverage makes
EchoStar very vulnerable to changes in general economic conditions.
Substantially all of the assets of ESBC and Dish and its subsidiaries are
pledged as collateral for the 1996 Notes and the 1994 Notes, and a substantial
portion of EchoStar's remaining assets are pledged as collateral for the Notes.
Thus it is, and will continue to be, difficult for EchoStar and its subsidiaries
to obtain additional debt if required or desired in order to implement
EchoStar's business strategy. ESBC, Dish and certain of Dish's subsidiaries are
also parties to other agreements (in addition to the 1996 and 1994 Notes
Indentures (as defined)) that severely restrict their ability to obtain
additional debt financing for working capital, capital expenditures and general
corporate purposes. As security for the performance of its obligations under
such agreements, certain subsidiaries of Dish have pledged substantial assets as
collateral.
As of June 30, 1997, EchoStar had outstanding long-term debt (including
both the current and long-term portion) of approximately $1.3 billion (including
the 1996 Notes, 1994 Notes, the Notes, deferred satellite contract payments on
EchoStar I and EchoStar II and mortgage debt). In addition, because interest on
the 1994 Notes currently is not payable in cash but accretes through June 1,
1999, liability with respect to the 1994 Notes will increase by approximately
$156.8 million through that date to $624.0 million. Similarly, because interest
on the 1996 Notes currently is not payable in cash but accretes through
March 15, 2000, liability with respect to the 1996 Notes will increase by
approximately $168.7 million through that date to $580.0 million.
The ability of ESBC, Dish and the Issuer to meet their respective debt
obligations will depend on the success of EchoStar's business strategy, which is
subject to uncertainties and contingencies beyond EchoStar's control.
NEED FOR ADDITIONAL CAPITAL. EchoStar may require additional funds to
acquire DISH Network-SM- subscribers. In addition, EchoStar has applications
pending with the FCC for a two satellite Ku-band system, a two satellite FSS
Ka-band system, a two satellite extended Ku-band system and a six satellite low
earth orbit ("LEO") satellite system. EchoStar will need to raise additional
funds for the foregoing purposes. Further, there are a number of factors, some
of which are beyond EchoStar's control or ability to predict, that could require
EchoStar to raise additional capital. These factors include slower than expected
subscriber acquisition, a defect in or the loss of any satellite or an increase
in the cost of acquiring subscribers due to additional competition, among other
things. There can be no assurance that EchoStar will be able to raise additional
capital at the time necessary or on terms satisfactory to EchoStar. The
inability to raise sufficient capital would have a material adverse effect on
the Company. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Liquidity and Capital Resources."
RESTRICTIVE COVENANTS; ABILITY TO TRANSFER ECHOSTAR IV. The Indenture
contains restrictive covenants that, among other things, limit the ability of
the Issuer and its subsidiaries to: (i) incur additional indebtedness;
(ii) issue preferred stock; (iii) sell assets; (iv) create, incur or assume
liens; (v) create dividend and other payment restrictions with respect to the
Issuer's subsidiaries; (vi) merge, consolidate or sell assets; (vii) incur
subordinated or junior debt; (viii) enter into transactions with affiliates; and
(ix) pay dividends. Both the 1996 and 1994 Notes Indentures contain restrictive
covenants that, among other things, limit the ability of ESBC and Dish and their
subsidiaries to: (i) incur additional indebtedness; (ii) issue preferred stock;
(iii) sell assets; (iv) create, incur or assume liens; (v) create dividend and
other payment restrictions with respect to ESBC's and Dish's subsidiaries;
(vi) merge, consolidate or sell assets; (vii) enter into transactions with
affiliates; and (viii) pay dividends. These restrictions may inhibit EchoStar's
ability to manage its business and to react to changing market conditions. See
"Description of Exchange Notes."
21
The Indenture permits the Issuer to launch, move or otherwise assign,
in a transaction which is not an Asset Sale under the terms of the Indenture,
EchoStar IV into an orbital slot other than 148DEG. WL provided the Issuer
delivers to the Trustee an Opinion of Counsel to the effect, among other
things, that the holders of the Notes will maintain their security interest
in EchoStar IV. See "Description of Exchange Notes--Asset Sales; Transfer of
EchoStar IV."
HOLDING COMPANY STRUCTURE; STRUCTURAL SUBORDINATION. Since all of the
Issuer's, ESBC's and Dish's operations are conducted through subsidiaries, the
cash flow of the Issuer, ESBC and Dish and their ability to service debt,
including the 1994 Notes, the 1996 Notes and the Notes, are dependent upon the
earnings of such subsidiaries and the payment of funds by such subsidiaries to
Dish, by the payment of funds by Dish to ESBC, and by the payment of funds by
ESBC to the Issuer in the form of loans, dividends or other payments. ESBC, Dish
and its subsidiaries have no current obligations, contingent or otherwise, to
pay any amounts due pursuant to the Notes or to make any funds available
therefor, whether by dividends, loans or other payments, other than the possible
guarantee of the Notes by each of Dish and ESBC, which will become effective
when and if permitted by the applicable indenture to which such entities are
subject. The cash flow generated by subsidiaries of Dish will only be available
if and to the extent that Dish is able to make such cash available to ESBC in
the form of dividends, loans or other payments. In general, Dish may pay
dividends on its equity securities only if: (i) no default exists under the 1994
Notes Indenture; and (ii) after giving effect to such dividends, Dish's ratio of
total indebtedness to cash flow 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's consolidated net income (less 100% of consolidated net losses) from
April 1, 1994, plus 100% of the aggregate net proceeds to Dish from the sale and
issuance of certain equity interests of Dish. The 1996 Notes Indenture permits
ESBC to pay dividends and make other distributions to the Issuer without
restrictions. If available cash flows of ESBC's subsidiaries are not sufficient
to service the Notes, the Issuer would be required to obtain cash from other
sources, such as sales of assets or equity or debt securities by EchoStar, or
capital contributions or loans made by EchoStar from proceeds thereof, or cash
otherwise available to EchoStar or its other direct subsidiaries. There can be
no assurance that those alternative sources would be available, or, if
available, that the funds therefrom would be sufficient to service the Notes.
Although the Notes are titled "Senior": (i) the Issuer has not issued,
and does not have any plans to issue, any indebtedness to which the Notes would
be senior; and (ii) the Notes are effectively subordinated to all liabilities of
the Issuer's subsidiaries, including liabilities to general creditors (except to
the extent that any subsidiary of the Issuer may guarantee the Notes), and the
EchoStar guarantee of the Notes will be subordinated to all liabilities of
EchoStar (except liabilities to general creditors). As of June 30, 1997,
including the effect of the Old Notes Offering, the consolidated liabilities of
EchoStar and its subsidiaries aggregated approximately $1.6 billion.
Approximately $1.2 billion of the consolidated liabilities of EchoStar and its
subsidiaries (including liabilities of the Issuer) are effectively senior in
right of payment to the Notes. EchoStar and its subsidiaries do not have any
liabilities which rank either junior to or PARI PASSU with the Notes. In
addition the ability of Dish to make distributions to the Issuer is severely
limited by the terms of the 1994 Indenture (as defined), and the cash flow
generated by the assets and operations of the Issuer's subsidiaries will
therefore only be available to satisfy the Issuer's obligations on the Notes to
the extent that such subsidiaries are able to make distributions, directly or
indirectly, to the Issuer. In this regard, as of June 30, 1997, the guarantee of
Dish is effectively subordinated to approximately $900.0 million of indebtedness
of Dish and its subsidiaries. Upon full accretion of the 1994 Notes, the
guarantee of Dish will be effectively subordinated to at least an additional
approximately $156.8 million of indebtedness of Dish and its subsidiaries solely
as a result of the accretion of the 1994 Notes. Additionally, the 1994
Indenture places severe limitations on the incurrence of additional indebtedness
(including the guarantee of indebtedness) by Dish and its subsidiaries until
such time as their consolidated indebtedness to cash flow ratio would not exceed
4.0 to 1 after taking the issuance of the indebtedness into account. As of June
30, 1997, Dish and its subsidiaries do not meet this ratio of indebtedness to
cash flow. Accordingly, as of June 30, 1997, the guarantee of Dish is not in
effect and Dish and its subsidiaries are not able to make distributions to the
Issuer. While the 1996 Indenture permits ESBC to pay dividends and make other
distributions to the Issuer without restrictions, as of June 30, 1997, the
guarantee of ESBC is effectively subordinated to approximately $1.2 billion of
indebtedness of ESBC and its subsidiaries. Upon full accretion of the 1994 and
1996 Notes, the guarantee of ESBC will be effectively subordinated to at least
an additional approximately $325.5 million of indebtedness of ESBC and its
subsidiaries solely as a result of the accretion of the 1994 and 1996 Notes.
Further, the 1996 Indenture places severe limitations on the incurrence of
additional indebtedness (including the guarantee of indebtedness) by ESBC and
its subsidiaries until such time as their consolidated indebtedness to cash flow
ratio would not exceed 5.0 to 1 after taking the issuance of the indebtedness
into account. As of June 30, 1997, ESBC and its subsidiaries do not meet this
ratio of indebtedness to cash flow. Accordingly, as of June 30, 1997, the
guarantee of ESBC is not in effect. Therefore, there can be no assurance that
the guarantees of Dish and ESBC will ever provide additional collateral to the
holders of Notes. See "Description of Certain Indebtedness."
22
UNCERTAINTY OF SPRINGING GUARANTEES. Initially, the Issuer's payment
obligations under the Notes are only guaranteed (on a subordinated basis) by
EchoStar. On and after the ESBC Guarantee Date, the Issuer's payment obligations
under the Notes and the Indenture will be guaranteed by ESBC (the "ESBC
Guarantee"), which guarantee will rank PARI PASSU with all senior unsecured
indebtedness of ESBC. The ESBC Guarantee will not be issued until the earlier
of: (i) the first date upon which ESBC is permitted, pursuant to the terms of
the 1996 Notes Indenture, to guarantee the Issuer's total payment obligations
under all then-outstanding Notes; and (ii) the first date upon which the 1996
Notes are no longer outstanding or have been defeased. On and after the Dish
Guarantee Date, the Issuer's payment obligations under the Notes and the
Indenture will be guaranteed by Dish (the "Dish Guarantee"), which obligation
will rank PARI PASSU with all senior unsecured indebtedness of Dish. The Dish
Guarantee will not be issued until the earlier of: (i) the first date upon which
Dish is permitted, pursuant to the terms of both the 1994 Notes Indenture and
the 1996 Notes Indenture, to guarantee the Issuer's total payment obligations
under all of the then-outstanding Notes; and (ii) the first date upon which both
the 1994 Notes and the 1996 Notes are no longer outstanding or have been
defeased. Neither ESBC nor Dish may incur or guarantee debt, subject to certain
limited exceptions, unless, after giving effect to such debt or guarantee, its
respective Indebtedness to Cash Flow Ratio would be less than certain specified
ratios set forth in the 1994 and 1996 Notes Indentures, as applicable. For the
six months ended June 30, 1997, each of Dish and ESBC had negative cash flow.
Therefore, there can be no assurance that the Dish Guarantee or ESBC Guarantee
will be effected at any time. See "Description of Exchange Notes--Affiliate
Guarantees."
RISK OF INABILITY TO REALIZE UPON SECURITY INTERESTS. The Notes are
intended to be secured by, among other things, liens on the capital stock of the
Issuer, certain assets of the Issuer, collateral assignments of certain
contracts and insurance proceeds and amounts segregated in certain escrow
accounts. See "Description of Exchange Notes--Security" and "--Disbursement of
Funds--Escrow Account." Current FCC policy permits lenders to hold security
interests in the proceeds from the sale of FCC licenses, but not direct security
interests in the licenses themselves. The security interests will be perfected
in accordance with practices frequently utilized in the satellite industry, and
financing statements will be filed in jurisdictions considered appropriate. The
ability of the Trustee under the Indenture to foreclose on such collateral upon
the occurrence of an Event of Default (as defined herein), however, will be
subject to perfection and priority issues and to practical problems associated
with realization upon the security interest in addition to compliance with the
requirements of the Communications Act of 1934, as amended (the "Communications
Act") including without limitation the requirement of prior approval for
transfer or assignment of Title III licenses. In particular, unlike most other
forms of collateral, there is no clearly established system for granting or
perfecting security interests in satellites. No assurance can be given that the
holders of the Notes will obtain the benefit of a valid or perfected security
interest in the satellites. In addition, although the Issuer holds title to
EchoStar IV and the outstanding capital stock of the Issuer is being pledged to
secure the Notes, the Issuer may, subject to compliance with the terms of the
Indenture, incur additional Indebtedness and other liabilities (including trade
liabilities). As a result, title to EchoStar IV is held by an entity that may
have creditors other than the holders of the Notes who may assert rights in
EchoStar IV in the event of an inability to obtain or perfect such security
interest.
If an Event of Default occurs with respect to the Notes, there can be no
assurance that the liquidation of the collateral securing the Notes would
produce proceeds in an amount sufficient to pay the principal, premium, if any,
and accrued interest on the Notes.
In this regard, since the carrying value of the orbital slot for 24
frequencies at 148 DEG. WL (the "148 Frequencies") and EchoStar IV is currently
less than the principal amount of the Notes, the proceeds generated from the
sale of those assets would not be sufficient to repay the Notes unless these
assets were sold for significantly in excess of their carrying value. There can
be no assurance that either of these assets could be sold for an amount
significantly in excess of its carrying value. With respect to the 148
Frequencies, there would be a limited external market through which such
frequencies could be sold since, among other things, it is not possible to
provide full-CONUS coverage from the 148 DEG. WL orbital location. Since
EchoStar possesses the right to use a total of 90 frequencies (including the 148
Frequencies), the 148 Frequencies may be more valuable to EchoStar than to
others, including other DBS operators, since EchoStar's current business plan
contemplates a complementary use of these frequencies. Therefore, other
companies, including other DBS providers which have rights to use less orbital
spectrum than EchoStar, may attribute less value to the 148 Frequencies.
Accordingly, it is possible that the proceeds from any foreclosure sale of this
FCC license actually would be less than the carrying value of the asset on
EchoStar's balance sheet. While there are currently no other liens against
EchoStar IV, since there is a relatively limited market through which EchoStar
IV could be sold in the event of a liquidation sale, it is possible that
proceeds from any liquidation sale of EchoStar IV would be less than the
carrying value of that asset on EchoStar's balance sheet. Further, if an Event
of Default occurs with respect to the Notes, it is likely that an event of
default also would result with respect to the indentures associated with both
the 1994 and 1996 Notes. Accordingly, while the capital stock of both ESBC and
Dish could, subject to the occurrence of certain events, be used as springing
collateral by the Trustee to secure the 1997 Notes, it is unlikely that the
capital stock of ESBC and Dish would provide
23
additional significant collateral value to the holders of Notes in the near
term.
In any foreclosure sale of the assets of the Issuer, the purchaser of
such assets (including the Trustee if it purchased and chose not, or was
unable, to resell such assets) would need to be authorized by the FCC in
advance to operate the EchoStar DBS System. Since potential bidders who wish
to operate the EchoStar DBS System must be authorized in advance by the FCC
(which, among other things, may restrict foreign ownership), the number of
potential bidders in a foreclosure sale could be smaller than in foreclosures
of other types of facilities, and such requirements may delay the sale of,
and may adversely affect the sales price for, the EchoStar DBS System. The
ability to take possession and dispose of the collateral securing the Notes
upon acceleration is likely to be significantly impaired or delayed by
applicable bankruptcy law if a bankruptcy action were to be commenced by or
against the Issuer.
RISK THAT THE ISSUER WILL BE UNABLE TO PURCHASE NOTES TENDERED UPON A
CHANGE OF CONTROL OR UPON THE OCCURRENCE OF CERTAIN EVENTS. There can be no
assurance that the Issuer will have sufficient funds to repurchase Notes upon a
Change of Control or to repurchase Notes tendered Upon the Occurrence of Certain
Events. If the Issuer does not have sufficient funds to redeem all Notes
tendered for purchase upon the occurrence of a Change of Control or Upon the
Occurrence of Certain Events, the Issuer would be required to raise additional
capital. No assurance can be given that additional capital would be available
on terms acceptable to the Issuer, or at all. If the Issuer were unable to
purchase all Notes tendered in connection with a Change of Control or Upon the
Occurrence of Certain Events, either occurrence would constitute an Event of
Default under the Indenture.
POSSIBLE NASDAQ DELISTING OF ECHOSTAR COMMON STOCK. EchoStar's Class A
Common Stock is listed on the Nasdaq National Market. Currently, in order for an
issuer to continue to have one of its securities designated as a Nasdaq National
Market security, the issuer of the security must meet certain maintenance
criteria. Among other things, the issuer of a Nasdaq National Market security
must have net tangible assets of at least: (i) $1 million; or (ii) $2 million,
if the issuer has sustained losses from continuing operations and/or net losses
in two of its three most recent fiscal years; or (iii) $4 million, if the issuer
sustained losses from continuing operations and/or net losses in three of its
four most recent fiscal years. If an issuer's security is not eligible to be
listed on the Nasdaq National Market, it may be eligible to be listed on the
Nasdaq SmallCap Market. In order for an issuer to have one of its securities
designated as a Nasdaq SmallCap Market security, the issuer of the security must
meet certain maintenance criteria, including, among other things, capital and
surplus of at least $1 million.
EchoStar's net tangible assets are not sufficient to meet the Nasdaq
National Market maintenance criteria, and EchoStar's capital and surplus are not
sufficient to meet the Nasdaq SmallCap Market maintenance criteria. However,
during September 1997, EchoStar received written confirmation that its Class A
Common Stock will continue to be listed on the Nasdaq National Market
notwithstanding EchoStar's technical non-compliance. There can be no assurance
that EchoStar's Class A Common Stock will continue to be listed on the Nasdaq
National Market. If EchoStar were delisted from Nasdaq, trading in EchoStar's
Class A Common Stock would thereafter likely be conducted in the
over-the-counter market. If this were to occur, an investor might find it more
difficult to dispose of, or to obtain accurate quotations as to the price of,
EchoStar's Class A Common Stock. If EchoStar's Class A Common Stock were no
longer listed on Nasdaq, the Notes could be negatively affected.
LACK OF BRAND-NAME RECOGNITION. The absence of brand-name recognition
for the EchoStar DBS System impairs the Company's ability to market its
receivers through consumer electronics stores as effectively as it would
like. Some of the Company's competitors (such as DirecTv) have arrangements
with major consumer electronic product manufacturers (such as Sony and RCA)
which allow those companies to manufacture and sell DBS receivers that bear
their own trademark, and allow consumers to receive the programming of the
Company's DBS competitors. This type of arrangement between the Company's DBS
competitors and major consumer products companies gives the Company's
competitors a distinct, significant consumer marketing edge.
At this time, EchoStar Receiver Systems are manufactured by one
manufacturer, SCI Systems, Inc. ("SCI"). Unlike DirecTv, the Company does not
currently have manufacturing agreements or arrangements with any large consumer
products manufacturers. As a result, EchoStar's receivers (and consequently its
programming services) are less well known to consumers than those of some of its
principal competitors, and EchoStar, due in part to the lack of product
recognition and demand, has not had as much success in having EchoStar Receiver
Systems carried for sale in consumer electronic stores or outlets as EchoStar
would like, or as may be necessary for EchoStar's financial success.
24
POTENTIAL FOR DELAY AND COST OVERRUNS. Significant expenditures are
required to complete construction and deployment of the EchoStar DBS System.
Funds, in addition to existing cash balances, will be required in the event of
delays, cost overruns, increased costs associated with certain potential change
orders under the Satellite Contracts (as defined) or the Launch Contracts (as
defined), a change in launch provider, material increases in estimated levels of
operating cash requirements, if increased subsidization of EchoStar Receiver
Systems become necessary to meet competition, or to meet other unanticipated
expenses. There can be no assurance that such financing will be available or
that, if available, it will be available on terms favorable to EchoStar. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
A significant delay in the delivery or launch of any EchoStar satellite
would adversely affect EchoStar's operations and may result in the cancellation
of any of the permits of EchoStar Satellite Corporation ("ESC"), DirectSat
Corporation ("DirectSat"), the Issuer and DBSC by the FCC. See "--Risk of
Satellite Defect, Loss or Reduced Performance." In addition, any material delay
in the delivery of EchoStar Receiver Systems or related components would
negatively affect EchoStar's financial condition and results of operations. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
EFFECT OF LOSS OF KEY PERSONNEL. EchoStar believes that its future
success will depend to a significant extent upon the performance of certain
individuals, particularly Charles W. Ergen, Chairman, Chief Executive Officer
and President of EchoStar, and James DeFranco, Executive Vice President. The
loss of either of these individuals could have an adverse effect on
EchoStar's business. EchoStar does not maintain "key man" insurance with
respect to any such individuals. While all executives of the Company have
executed agreements limiting their ability to work for or consult with
competitors if they leave the Company, the Company does not have any
employment agreements with either of the above named individuals, nor any
other executive officer of the Company.
DEPENDENCE ON THIRD PARTY PROGRAMMERS. EchoStar is dependent on third
parties to provide it with programming services. EchoStar's programming
agreements have remaining terms ranging from one to ten years and contain
various renewal and cancellation provisions. There can be no assurance that any
of these agreements will be renewed or will not be cancelled prior to expiration
of their original term. In the event that any such agreements are not renewed or
are cancelled, there is no assurance that EchoStar would be able to obtain or
develop substitute programming, or that such substitute programming would be
comparable in quality or cost to EchoStar's existing programming. EchoStar's
competitors currently offer substantially the same programming as EchoStar. The
ability of EchoStar to compete successfully will depend on EchoStar's ability to
continue to obtain desirable programming and attractively package it to its
customers at competitive prices. See "Business--Programming."
Pursuant to the Cable Act and the FCC's rules, programming developed by
vertically integrated cable-affiliated programmers generally must be offered to
all multi-channel video programming distributors on non-discriminatory terms and
conditions. The Cable Act and the FCC's rules also prohibit certain exclusive
programming contracts. EchoStar anticipates purchasing a substantial percentage
of its programming from cable-affiliated programmers. Certain of the
restrictions on cable-affiliated programmers will expire in 2002 unless extended
by the FCC. As a result, any expiration of, amendment to, or interpretation of,
the Cable Act and the FCC's rules that permits the cable industry or programmers
to discriminate in the sale of programming against competing businesses, such as
that of EchoStar, could adversely affect EchoStar's ability to acquire
programming or acquire programming on a cost-effective basis. In addition, laws,
regulations and the need to obtain certain retransmission consents and copyright
licenses may limit the ability of the Company to implement a local programming
strategy in multiple markets.
RISKS OF INFRINGEMENT OF PATENTS AND PROPRIETARY RIGHTS. The ability of
EchoStar to obtain patents and other intellectual property rights is material to
its business. Many of EchoStar's competitors have obtained, and may be expected
to obtain in the future, patents that cover or affect products or services
directly or indirectly related to those offered by EchoStar. There can be no
assurance that EchoStar is aware of all patents that may potentially be
infringed by its products. In addition, patent applications in the U.S. are
confidential until a patent is issued and, accordingly, EchoStar cannot evaluate
the extent to which its products may infringe claims contained in pending patent
applications. In general, if it were determined that one or more of EchoStar's
products infringe on patents held by others, EchoStar would be required to cease
developing or marketing those products, to obtain licenses to develop and market
those products from the holders of the patents or to redesign those products in
such a way as to avoid infringing the patent claims. The extent to which
EchoStar may be required in the future to obtain licenses with respect to
patents held by others and the availability and cost of any such licenses is
currently unknown. A number
25
of third parties have contacted EchoStar claiming patent and other intellectual
rights with respect to components within the EchoStar DBS System. There can be
no assurance that EchoStar would be able to obtain such licenses on commercially
reasonable terms or, if it were unable to obtain such licenses, that it would be
able to redesign its products to avoid infringement. See "Business--Legal
Proceedings."
DEPENDENCE ON SATELLITES AND SINGLE DIGITAL BROADCAST CENTER. Prior to
the expiration of the anticipated useful lives of EchoStar satellites, EchoStar
will need to obtain replacement satellites. There can be no assurance that
replacements will be available when required or, if available, that they will be
available at prices, and on other terms, acceptable to EchoStar. Various FCC
approvals would be required with respect to replacement satellites, including
but not limited to renewal of EchoStar's ten year DBS licenses. There is no
assurance that the FCC will grant the required approvals.
EchoStar also relies upon a single digital broadcast center located in
Cheyenne, Wyoming for key operations such as reception of programming signals,
encryption and compression. If a natural or other disaster damaged the digital
broadcast center, there can be no assurance that EchoStar would be able to
continue to provide programming services to its customers.
IMPEDIMENTS TO RETRANSMIT LOCAL BROADCAST SIGNALS. EchoStar intends to
offer programming telecast by local affiliates of national television networks
to major population centers within the continental U.S. via DBS satellite. In
order to retransmit this programming to any DISH Network-SM- subscriber in a
particular local market, EchoStar must obtain the retransmission consent of the
local affiliate. There can be no assurance that the Company will obtain
retransmission consents of any local affiliate. The inability to transmit such
programming into the local markets from which the programming is generated could
have an adverse effect on the Company.
The Satellite Home Viewer Act ("SHVA") establishes a "compulsory"
copyright license that allows a DBS operator, for a statutorily-established fee,
to retransmit local affiliate programming to subscribers for private home
viewing so long as that retransmission is limited to those persons in "unserved
households." An "unserved household" is one that cannot receive a sufficient
over-the-air network signal through the use of a conventional outdoor rooftop
antenna and has not, within the 90 days prior to subscribing to the DBS service,
subscribed to a cable service that provides that network signal. While
management believes the SHVA could be read to allow the Company to retransmit
this programming to certain local markets via DBS satellite, management also
believes that the "compulsory" copyright license under the SHVA may not be
sufficient to permit the Company to implement its strategy to retransmit such
programming in the most efficient manner. EchoStar intends to prepare and lobby
for the enactment of national legislation amending the SHVA that would clarify
or extend the application of the "compulsory" copyright license to satellite
operators transmitting local affiliate programming into local markets. There can
be no assurance that EchoStar will be successful in having local affiliate
copyright legislation enacted, or that, in the absence of such legislation, it
would be successful in any litigation with copyright owners regarding this
issue.
DEPENDENCE ON SINGLE RECEIVER MANUFACTURER. EchoStar Receiver Systems are
currently manufactured exclusively by SCI, a high-volume contract electronics
manufacturer. SCI is currently EchoStar's only source of receivers. EchoStar is
currently 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
requirements, EchoStar's ability to add additional subscribers would be
materially impaired and its results of operations would be adversely affected.
RISK THAT INITIAL EQUIPMENT COSTS WILL LIMIT CONSUMER DEMAND FOR DISH
NETWORK-SM- PROGRAMMING. Currently, the suggested retail price of a standard
EchoStar Receiver System is $199. The initial equipment cost required to receive
DISH Network-SM- programming may reduce the demand for EchoStar Receiver
Systems, since EchoStar Receiver Systems generally 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.
POLITICAL RISKS PERTAINING TO LAUNCH PROVIDERS AND RESTRICTIONS ON EXPORT
OF TECHNOLOGY. 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
(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
26
non-EchoStar western satellites throughout 1997.
The first commercial Proton launch in 1997 was successfully launched on
May 24, carrying the Telestar 5 payload. ILS has a current commercial backlog of
18 satellites to be launched by the end of 1999 on Proton. However, two of the
launches of the Proton four stage launch vehicle have failed in the last twelve
months. In February 1996, a Proton Block DM failed during launch when its main
engine did not start properly. Additionally, in November 1996, the main engine
of a Proton Block D-2 failed to properly start a planned second burn during the
launch of the Mars 96 spacecraft.
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 U.S. 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 bloc countries, could affect the cost, timing and overall advisability of
utilizing LKE as a launch provider for EchoStar's satellites. See
"Business--Satellite Launches."
NEWS CORPORATION LITIGATION. On February 24, 1997, EchoStar and News
announced the News Agreement pursuant to which, among other things, News agreed
to acquire approximately 50% of the outstanding capital stock of EchoStar. News
also agreed to make available for use by EchoStar the DBS permit for 28
frequencies at 110DEG. WL purchased by MCI for over $682 million following a
1996 FCC auction. During late April 1997, substantial disagreements arose
between the parties regarding their obligations under the News Agreement.
On May 8, 1997, EchoStar filed a Complaint in the U.S. District Court for
the District of Colorado (the "Court"), Civil Action No. 97-960, requesting that
the Court confirm EchoStar's position and declare that News is obligated
pursuant to the News Agreement to lend $200 million to EchoStar without interest
and upon such other terms as the Court orders.
On May 9, 1997, EchoStar filed a First Amended Complaint significantly
expanding the scope of the litigation, to include breach of contract, failure to
act in good faith, and other causes of action. EchoStar seeks specific
performance of the News Agreement and damages, including lost profits based on,
among other things, a jointly prepared ten-year business plan showing expected
profits for EchoStar in excess of $10 billion based on consummation of the
transactions contemplated by the News Agreement.
On June 9, 1997, News filed an answer and counterclaims seeking
unspecified damages. News' answer denies all of the material allegations in
the First Amended Complaint and asserts twenty defenses, including bad faith,
misconduct and failure to disclose material information on the part of
EchoStar and its Chairman and Chief Executive Officer, Charles W. Ergen. The
counterclaims, in which News is joined by its subsidiary ASkyB assert that
EchoStar and Ergen breached their agreements with News and failed to act and
negotiate with News in good faith. EchoStar has responded to News' answer and
denied the allegations in their counterclaims. EchoStar also has asserted
various affirmative defenses. EchoStar intends to diligently defend against
the counterclaims. The parties are now in discovery. The case has been set
for a five week trial commencing June 1, 1998, but that date could be
postponed. The litigation process could continue for many years and there
can be no assurance concerning the outcome of the litigation. An adverse
decision could have a material adverse effect on EchoStar's financial
position and results of operations.
ABSENCE OF PUBLIC MARKET FOR THE EXCHANGE NOTES; RESTRICTIONS ON
TRANSFERS. The Exchange Notes are being offered to the holders of the Old
Notes. The Old Notes were offered and sold in June 1997 to a small number of
institutional and accredited investors and are eligible for trading in
Private Offerings, Resale and Trading through Automatic Linkages (PORTAL)
Market.
The Exchange Notes will constitute a new issue of securities, for
which there is no established trading market. If a trading market does not
develop or is not maintained, holders of the Exchange Notes may experience
difficulty in reselling the Exchange Notes or may be unable to sell them at
all. If a market for the Exchange Notes develops, any such market may be
discontinued at any time and the Exchange Notes could trade at prices that
may be lower than the initial market values thereof, depending on many
factors, including prevailing interest rates, the markets for similar
services and the financial performance of the Issuer. The Initial Purchasers
have made a market in the Old Notes. Although there is currently no market
for the Exchange Notes, the Initial Purchasers have advised the Issuer that
they will make a market in the Exchange Notes. However, they are not
obligated to do so, and any such market making with respect to the Old Notes
and the Exchange Notes may be discontinued at any time without notice. In
addition, such market making activity will be subject to the limits imposed
by the Securities Act and the Exchange Act, and may be limited during
27
the Exchange Offer and the pendency of any applicable shelf registration
statement. See "Description of Exchange Notes--Old Notes' Registration Right;
Liquidated Damages." Accordingly, there can be no assurance as to the
development or liquidity of any market for the Old Notes and the Exchange Notes.
The Issuer does not intend to apply for listing of any of the Exchange Notes on
any securities exchange or for quotation through the Nasdaq National Market or
any other securities quotation service.
CONSEQUENCES OF FAILURE TO EXCHANGE OLD NOTES. Holders of Old Notes who do
not exchange their Old Notes for Exchange Notes pursuant to the Exchange Offer
will continue to be subject to the restrictions on transfer of such Old Notes,
as set forth in the legend thereon, as a consequence of the issuance of the Old
Notes pursuant to exemptions from, or in transactions not subject to, the
registration requirements of the Securities Act and applicable state securities
laws. In general, the Old Notes may not be offered, sold, pledged or otherwise
transferred, unless registered under the Securities Act and applicable state
securities laws, or pursuant to an exemption therefrom. Except under certain
limited circumstances, the Issuer does not intend to register the Old Notes
under the Securities Act. In addition, any holder of Old Notes who tenders in
the Exchange Offer for the purpose of participating in a distribution of the
Exchange Notes may be deemed to have received restricted securities and, if so,
will be required to comply with the registration and prospectus delivery
requirements of the Securities Act in connection with any resale transaction.
To the extent Old Notes are tendered and accepted in the Exchange Offer, the
trading market, if any, for the Old Notes not so tendered could be adversely
affected. See "The Exchange Offer" and "Description of Exchange Notes - Old
Notes' Registration Rights; Liquidated Damages."
RISKS OF ADVERSE EFFECTS OF GOVERNMENT REGULATION. EchoStar is subject to
the regulatory authority of the U.S. Government and the national communications
authorities of the countries in which it operates. The business prospects of
EchoStar could be adversely affected by the adoption of new laws, policies or
regulations, or changes in the interpretation or application of existing laws,
policies and regulations, that modify the present regulatory environment, as
well as its failure to comply with existing laws, policies and regulations.
EchoStar must comply with all applicable Communications Act requirements and FCC
regulations and policies, including, among other things, proceeding with
diligence to construct satellites and commence operations within prescribed
milestones and in accordance with required filings of periodic progress
reports.
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. There can be no assurances that the FCC would
not find that EchoStar is subject to the requirements of Title II. If the FCC
made such a finding, EchoStar would be required to comply with the applicable
portions of Title II.
EchoStar believes that, because it is engaged in a subscription programming
service, it is not subject to many of the regulatory obligations imposed upon
broadcast licensees. However, there can be no assurances that the FCC will not
find in the future that EchoStar should be treated as a broadcast licensee with
respect to its current and future operations. If the FCC were to determine that
EchoStar is, in fact, a broadcast licensee, EchoStar could be required to comply
with all regulatory obligations imposed upon broadcast licensees.
The Cable Act requires the FCC to conduct a rulemaking to impose public
interest requirements for DBS licensees. The FCC's rules must, at a minimum,
mandate reasonable and non-discriminatory access to qualified candidates for
office and require DBS licensees to reserve between four and seven percent of
the DBS licensees' channel capacity exclusively for noncommercial programming of
an educational or informational nature. Within this set-aside requirement, DBS
providers must make capacity available to "national educational programming
suppliers" at below-cost rates. The FCC is presently conducting this proceeding.
The Company cannot predict at this time the extent or nature of the public
interest programming requirements that will be imposed by the FCC, or when the
FCC will issue these rules. There can be no assurance that these public interest
requirements will not have an adverse effect on the quantity and mix of
programming that EchoStar is able to offer its subscribers. See
"Business--Government Regulation."
Pursuant to the 1996 Act, the FCC has established regulations that prohibit
(with certain exceptions) governmental and non-governmental restrictions, such
as private covenants and homeowners' association rules, that impair a viewer's
ability to receive video programming through devices designed for DBS Service,
MMDS, or over-the-air reception of television broadcast service. These rules
apply to property within the exclusive control of the antenna user where the
user has an ownership interest in the property. In an ongoing proceeding, the
FCC is examining whether the rules should apply to the placement of antennas on
common areas or rental properties where the antenna user does not own or control
the property. While the Company cannot predict the outcome of this proceeding, a
decision not to extend these rules to such properties or other adverse decision
potentially could limit the growth of DBS subscribers. See "Business--Government
Regulation."
28
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 or regulation of a similar nature is promulgated,
EchoStar's future plans to provide local programming may be adversely affected,
and such must carry requirements could cause the displacement of possibly more
attractive programming.
INABILITY TO PROVIDE CONSUMER FINANCING. Historically, EchoStar has
maintained agreements with third-party finance companies to make consumer credit
available to its 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. The third-party finance company that provides the program
currently utilized by EchoStar has notified EchoStar that it does not intend to
renew the agreement, which expires during 1997. During March 1997, EchoStar's
wholly-owned subsidiary, Dish Network 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. Additional capital will be required
for EchoStar to implement the program on a larger scale. There can be no
assurance that additional capital will be available to fund the lease program on
terms acceptable to EchoStar, or at all. In the event that EchoStar is unable to
fund DNCC or to finalize consumer credit agreements with other third-party
finance companies, EchoStar's ability to attract new subscribers may be
adversely affected.
OPPOSITION TO, AND RISK OF LOSS OF, CERTAIN ECHOSTAR AUTHORIZATIONS. Many
aspects of EchoStar's operations require the retention or renewal of existing
FCC authorizations, or the procurement of additional authorizations. The FCC has
granted EchoStar conditional authority to use C-band frequencies for telemetry,
tracking and control ("TT&C") functions for EchoStar I, stating that the
required coordination process with Canada and Mexico had been completed. In
January 1996, however, the FCC received a communication from an official of the
Ministry of Communications and Transportation of Mexico stating that EchoStar
I's TT&C operations could cause unacceptable interference to Mexican satellites.
There can be no assurance that such objections will not subsequently require
EchoStar to relinquish the use of such C-band frequencies for TT&C purposes.
This could result in the inability to control EchoStar I and a total loss of the
satellite. Further, the FCC has granted EchoStar conditional authority to use
"extended" C-band frequencies for TT&C functions 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
beyond that date. Such failure to extend the authorization could result in the
inability to control EchoStar II and a total loss of the satellite. Also, there
can be no assurance that the rights of EchoStar under the Dominion Agreement
will be given effect in the absence of FCC approval, which has not yet been
received and may not be forthcoming. In addition, certain of EchoStar's pending
and future requests to the FCC for extensions, waivers and approvals have been,
and are expected to continue to be, opposed by third parties. Among other
things, the precise location of ESC's and DirectSat's licensed EchoStar I and
EchoStar II satellites may be outside the parameters set forth in their
licenses. EchoStar has requested temporary authority to operate, for 180 days,
EchoStar I and EchoStar II closer together (at 119.05DEG. WL and 118.95DEG. WL
instead of at their authorized locations at 119.2DEG. WL and 118.8DEG. WL),
which would improve signal quality and facilitate better customer service. The
FCC has raised concerns about this request, and the request has been opposed by
Tempo. See "Business--Government Regulation--FCC Permits and Licenses." Failure
of the FCC to grant or renew EchoStar's request would require EchoStar to take
steps to ensure that EchoStar I and EchoStar II are positioned consistent with
present FCC authorizations, or to reposition the satellites, and could have an
adverse effect on the operation of these satellites. If EchoStar I and EchoStar
II were found to have been operated outside their authorized parameters, the FCC
could impose monetary forfeitures or other penalties on EchoStar. There can be
no assurance that EchoStar's requests will be granted or, if granted, that they
will be granted on a timely basis or on terms favorable to EchoStar. EchoStar
will also require further FCC authorizations to launch and operate EchoStar III
and EchoStar IV. The loss of any of EchoStar's FCC authorizations, the failure
to obtain requested extensions or waivers or the imposition of conditions would
adversely affect EchoStar's plan of operations, and its current business plan
could not be fully implemented. See "Business--Other Components of DBS Service"
and "--Government Regulation--FCC Permits and Licenses."
By order released January 11, 1996, the FCC's International Bureau extended
the DBS permit of DirectSat for 11 channels at the 175DEG. WL orbital slot to
1999, subject to the condition that the FCC may reconsider the extension and
modify or cancel it, in whole or in part, if DirectSat fails to make progress
toward construction and operation of its DBS system substantially in compliance
with its promised timetable, or with any more expedited timetable ordered by the
FCC. In the same order, the FCC's staff denied reconsideration of its earlier
decision to assign channels and orbital locations to DirectSat at 119DEG. WL
and 175DEG. WL for its DBS system. PrimeStar has applied for full FCC review of
this order and other parties may seek reconsideration and/or judicial review of
the eventual FCC order. There can be no assurance that the full FCC will affirm
the International Bureau's decision or render a decision favorable to EchoStar.
Failure of the full FCC to affirm the decision would have a substantial
29
adverse effect upon EchoStar's operations and may result in a loss of
authorizations. In addition, in the event that EchoStar loses the DirectSat
frequencies at 119DEG. WL, EchoStar would be required under certain
circumstances to offer to repurchase all or a portion of the 1994 Notes, the
1996 Notes and the Notes. In the event that a substantial number of holders of
the 1994 Notes, the 1996 Notes or the Notes accepted that offer, EchoStar's plan
of operations, including its liquidity, would be adversely affected and it might
not be possible to implement EchoStar's current business plan without obtaining
additional financing. See "Business--Legal Proceedings."
DBSC's authorization to construct and operate two DBS satellites at
61.5DEG. WL and 175DEG. WL initially expired on August 15, 1995. Prior to that
date, DBSC applied for an extension of time, based upon a variety of factors.
DBSC indicated that it had signed an amendment to the DBSC Satellite Contract,
by which DBSC ordered a 32 transponder satellite in lieu of the previously
contracted for 16 transponder satellite. DBSC filed an application for FCC
approval of this minor modification in design. In December 1995, the FCC staff
approved DBSC's request for an extension of time, giving it until 1998 to
complete construction and launch of its satellites subject to continued
compliance with the FCC's due diligence requirements. PrimeStar has sought full
FCC review of this order, and other parties may seek reconsideration and/or
judicial review of the eventual FCC order. There can be no assurance that the
full FCC will affirm the International Bureau's decision or render a decision
favorable to EchoStar. Failure of the full FCC to affirm the decision would have
a substantial adverse effect upon EchoStar's operations, and may result in loss
of the authorization. The FCC has not yet ruled on PrimeStar's petition, and no
assurances can be given that the FCC will sustain the staff's determination. The
FCC's staff has declined to rule on DBSC's request for minor modification of its
authorization pending the submission to the FCC of interference data based on
the proposed new satellite design. While DBSC has submitted relevant data, there
can be no assurance that the FCC will grant the modification application.
Failure of the FCC to grant the modification application would have an adverse
effect on EchoStar's operations, and may preclude its ability to launch EchoStar
III and to deliver service at this orbital location in accordance with its
business plan and prescribed milestones.
In the event EchoStar at any time fails to comply with applicable
Communications Act requirements and FCC regulations, including the FCC's
required schedule for construction and launch of any of EchoStar's satellites,
the FCC has the authority to revoke, condition, or decline to extend or renew
the authorizations for that and any subsequent satellites and, in connection
with that action, could exercise its authority to rescind these authorizations.
The FCC has in fact indicated it may revoke DBS permits if there are delays in
the satellite construction schedule submitted by the permittee to the FCC or if
the permittee fails to meet other due diligence construction and operation
obligations. The schedule submitted to the FCC by DBSC calls for the completion
of construction at 61.5DEG. WL of EchoStar III by July 31, 1997. DBSC and
DirectSat also must have operational satellites at 175DEG. WL by 1998 and 1999,
respectively, and DirectSat must have an operational satellite at 110DEG. WL by
1999. Both DBSC and DirectSat must comply with other intermediate milestones.
Any delay in this schedule may cause total or partial revocation of DBSC's or
DirectSat's permits. 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 its DBS systems may result in cancellation of its permits.
EchoStar has not filed all required progress reports with the FCC. There is a
risk that the FCC may find that EchoStar has not complied fully with the FCC's
due diligence requirements, including without limitation the filing of
semi-annual progress reports and satisfaction of construction and payment
obligations consistent with the FCC's rules and the semi-annual progress reports
filed by EchoStar.
Further, the FCC has not yet completed its review to determine whether
EchoStar's contract for the construction of the western satellite of its system
meets the FCC's requirements and has deferred a decision on whether to extend
ESC's permit for western assignments. Therefore, the FCC has not yet assigned to
EchoStar frequencies for that satellite. While it is possible that DBSC,
DirectSat and ESC may construct a satellite for joint use by all three at
175DEG. WL (provided that ESC is found to have a firm contract and receives
frequency assignments at 175DEG. WL), EchoStar will still be required to
construct and launch two or more satellites in addition to EchoStar I, EchoStar
II, EchoStar III and EchoStar IV in order to preserve all of its DBS permits
(plus additional satellites for the single frequencies at each of the 110DEG.
WL and 166DEG. WL orbital slots in order to avoid loss of those frequencies).
Finally, with respect to the 24 orbital assignments at the 148DEG. WL orbital
slot, EchoStar must complete contracting for a satellite by December 20, 1997,
must complete construction by December 20, 2000, and must launch and operate a
satellite by December 20, 2002. Absent infusion of additional significant
capital, EchoStar will not be able to retain all of its assigned frequencies and
orbital slots. There can be no assurance that EchoStar will be able to comply
with the FCC's due diligence requirements or that the FCC will determine that
EchoStar has complied with such due diligence requirements.
In addition, ESC recently received from the FCC's International Bureau a
conditional license for two FSS satellites in the Ka-band. That license was
based on an orbital plan agreed upon by applicants in EchoStar's processing
round. Certain of these
30
applicants have now requested changes to that orbital plan. One company (Norris)
has filed a request to stay the plan, and petitions for reconsideration are also
pending against certain of the licenses covered by the plan. There can be no
assurance that review of the recently granted Ka-band licenses and orbital plan
by the International Bureau and the full FCC will not eliminate the basis for
EchoStar's conditional license and result in loss of that license.
In November 1996, ESC also received a conditional license for two Ku-band
FSS satellites, subject, among other things, to submitting additional proof of
its financial qualifications. While ESC has submitted such proof, GE Americom
and PrimeStar have challenged it and have requested cancellation of ESC's
license. GE Americom and PrimeStar have also requested reconsideration of ESC's
license and reassignment of one EchoStar satellite to a different orbital slot,
on the ground that the satellite will interfere with the GE Americom satellite
used by PrimeStar for its medium-power Ku-band service. Finally, GE Americom and
PrimeStar have opposed ESC's request to add C-band capabilities to one satellite
of its Ku-band system, and EchoStar Ku-X Corporation's pending application for
an extended Ku-band system has also been opposed. There is no assurance as to
how the FCC will rule with respect to any of these challenges. Rulings in favor
of these challengers would adversely affect EchoStar's ability to use these FSS
satellites.
EchoStar also must comply with certain construction and launch milestones
imposed or expected to be imposed with respect to its conditionally authorized
operations in the Ku and Ka-bands. Failure to comply with such requirements may
result in termination of the authorizations.
RISK OF INABILITY TO MANAGE RAPIDLY EXPANDING OPERATIONS. EchoStar must
expand its operations rapidly to achieve its business objectives. Several of
EchoStar's key activities, including satellite in-orbit control, satellite
receiver manufacturing, billing and subscriber management are out-sourced to
third party vendors. To manage its growth effectively, EchoStar must continue to
develop its internal and external sales force, installation capability, customer
service operations, and information systems, and maintain its relationships with
third party vendors. EchoStar will also need to continue to expand, train and
manage its employee base, and its management personnel will be required to
assume even greater levels of responsibility. If EchoStar is unable to manage
its growth effectively, EchoStar's business and results of operations could be
materially adversely affected.
SUBSCRIBER TURNOVER. Since commencing operation of the DISH Network-SM- in
March 1996, the Issuer's monthly subscriber turnover (which represents the
number of subscriber disconnects during the period divided by the
weighted-average number of subscribers during the period) has averaged less than
1.0%. To date, a majority of the Issuer's subscribers have purchased annual
subscriptions. The Issuer expects that subscriber turnover may increase as
annual subscribers renew and convert to month-to-month subscriptions, as the
number of overall DISH Network-SM- subscribers increases, and as a result of
certain other factors. In the event that the Issuer is unable to control
subscriber turnover, its financial condition and results of operations would be
adversely affected.
LIMITED MARKETING EXPERIENCE. EchoStar began marketing the EchoStar DBS
System in March 1996. The Company markets EchoStar Receiver Systems throughout
the U.S. through its own sales and marketing organization using national and
regional broadcast and print advertising, independent distributors and retailers
and consumer electronics stores and outlets. The Company's success will
ultimately depend in large part upon its ability to successfully demonstrate to
consumers the ease of use, reliability and cost-effectiveness of the EchoStar
DBS System, and upon its ability to have EchoStar Receiver Systems distributed
in consumer mass marketing channels, such as consumer electronics stores and
outlets.
EchoStar is presently selling EchoStar Receiver Systems through a limited
number of consumer electronics stores. Some of EchoStar's competitors, including
DirecTv, began selling their products through consumer electronics stores before
EchoStar and, as a result, are carried by a greater number of retailers and have
a competitive advantage in the consumer electronics distribution channel.
Further, some of EchoStar's competitors have maintained this competitive
advantage through extensive monetary support of consumer electronics advertising
campaigns. This is particularly true in the case of those consumer electronics
outlet chains that have chosen, for the time being, to sell only one or a
limited number of DBS receiver products. Consequently, there can be no assurance
that EchoStar will be able to effectively market its EchoStar Receiver Systems.
RISK OF SATELLITE DEFECT, LOSS OR REDUCED PERFORMANCE. Satellites are
subject to significant risks, including satellite defects, launch failure,
destruction and damage that may result in incorrect orbital placement or prevent
proper commercial operation. Approximately 15% of all commercial geosynchronous
satellite launches have resulted in a total or constructive total loss. The
failure rate varies by launch vehicle and manufacturer. While the FCC granted
EchoStar authority in 1995 to construct a satellite to serve as a ground spare
for EchoStar I and EchoStar II, EchoStar has not constructed ground spares for
its DBS system, and therefore may not have satellites immediately available to
use as replacements in the event of a serious in-orbit
31
problem which could cause a substantial delay in the restoration of EchoStar's
DBS service.
In the event of a failure or loss of any of EchoStar I, EchoStar II, or
EchoStar III, and subject to FCC consent, EchoStar may relocate EchoStar IV and
utilize the satellite as a replacement for the failed or lost satellite. Such a
relocation would require prior FCC approval and, among other things, a showing
to the FCC that EchoStar IV would not cause additional interference compared to
EchoStar I, EchoStar II, or EchoStar III. Should EchoStar choose to utilize
EchoStar IV in this manner, there can be no assurances that such use would not
adversely affect EchoStar's ability to meet the construction, launch and
operation deadlines associated with its permits. Failure to meet such deadlines
could result in the loss of such permits and would have an adverse effect on
EchoStar's planned operations.
In the event of a launch failure of EchoStar III, under the 1996 Notes
Indenture EchoStar would be required to use the proceeds from any launch
insurance to purchase satellites or, at ESBC's option, to make an offer to
repurchase the maximum amount of 1996 Notes that can be purchased with those
proceeds. Similarly, in the event of a launch failure of EchoStar IV, under the
Indenture the Issuer would be required to use the proceeds from any launch
insurance to purchase satellites or, at the Issuer's option, to make an offer to
repurchase the maximum amount of Notes that can be purchased with those
proceeds.
A number of satellites constructed by Lockheed Martin Corporation
("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 or EchoStar IV, or from other factors beyond
EchoStar's control. If the launch of any of EchoStar's satellites, including
EchoStar III or EchoStar IV, is delayed, the Company's strategy to provide
additional programming to DISH Network-SM- subscribers using transponders on
these satellites would be adversely affected.
RISK OF SIGNAL THEFT. The delivery of subscription programming requires
the use of encryption technology. Signal theft or "piracy" in the C-band DTH,
cable television and European DBS industries has been widely reported. There can
be no assurance that the encryption technology used by the EchoStar DBS System
will remain totally effective. If EchoStar's encryption technology is
compromised in a manner which is not promptly corrected, EchoStar's revenue and
its ability to contract for video and audio services provided by programmers
would be adversely affected. Recent published reports indicate that the DirecTv
and USSB encryption systems have been compromised. There can be no assurance
that continued theft of DirecTv programming will not adversely affect EchoStar's
operations. A Canadian court recently ruled that pirating of DirecTv programming
is not illegal in Canada. This ruling may encourage the attempted piracy of
EchoStar programming in Canada, resulting in lost revenue for EchoStar and
increased piracy of DirecTv programming. Piracy of DirecTv programming could
result in increased sales of DirecTv receivers at the expense of loss of
potential DISH Network-SM- subscribers.
RISKS OF FAILURE OF COMPLEX TECHNOLOGY. The EchoStar DBS System is highly
complex. New applications and adaptations of existing and new technology
(including compression, conditional access, on screen guides and other matters),
and significant software development, are integral to the EchoStar DBS System.
As a result of the introduction of such new applications and adaptions from time
to time, the EchoStar DBS System may, at times, not function as expected.
Technology in the satellite television industry is in a rapid and
continuing state of change as new technologies develop. Although the digital
compression technology utilized in connection with the EchoStar DBS System is
the world standard, the integration and implementation of that technology is
also undergoing rapid change. There can be no assurance that EchoStar and its
suppliers will be able to keep pace with technological developments. In
addition, delays in the delivery of components or other unforeseen problems in
the EchoStar DBS System may occur that could adversely affect performance, cost
or timely deployment and operation of the EchoStar DBS System and could have an
adverse effect on EchoStar. Further, in the event that a competitive satellite
receiver technology becomes commonly accepted as the standard for satellite
receivers in the U.S., EchoStar would be at a significant technological
disadvantage. See "Business--Programming."
CONTROL OF ECHOSTAR BY PRINCIPAL STOCKHOLDER. Although Charles W. Ergen,
the Chairman, Chief Executive Officer and President of EchoStar, currently owns
72% of the total equity securities of EchoStar (assuming exercise of employee
stock options), he currently possesses approximately 96% of the total voting
power. Thus, Mr. Ergen has the ability to elect a majority of the directors of
EchoStar and to control all other matters requiring the approval of EchoStar's
stockholders. See "Security Ownership of Certain Beneficial Owners and
Management." For Mr. Ergen's total voting power in EchoStar to be reduced to
32
below 51%, his percentage ownership of the equity securities of EchoStar would
have to be reduced to below 10%.
LIMITATIONS ON WARRANTIES AND INSURANCE. Pursuant to satellite
construction contracts between Lockheed Martin and EchoStar and certain of its
subsidiaries (collectively, the "Satellite Contracts"), and EchoStar's launch
services contracts (the "Launch Contracts"), EchoStar and certain of its
subsidiaries are the beneficiaries of limited warranties on their satellites and
launch vehicles. However, the limited warranties do not cover a substantial
portion of the risk inherent in satellite launches or satellite operations.
EchoStar is required under the 1994 Notes Indenture to obtain in-orbit
insurance for EchoStar I and EchoStar II. EchoStar is required under the 1996
Notes Indenture to obtain launch and in-orbit insurance for EchoStar III and is
required under the Indenture to obtain launch and in-orbit insurance for
EchoStar IV. The launch insurance policy for EchoStar II covered the period from
launch through completion of testing and commencement of commercial operations.
This 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. 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. The
launch insurance policies contain (or are expected to contain), and the
insurance policies with respect to in-orbit operation contain (or are expected
to contain), standard commercial satellite insurance provisions, including a
material change condition, that, if successfully invoked, will give insurance
carriers the ability to increase the cost of the insurance (potentially to a
commercially impracticable level), require exclusions from coverage that would
leave the risk uninsured or rescind their coverage commitment entirely. The
in-orbit insurance policies for EchoStar I and EchoStar II also are subject to
annual renewal provisions. There can be no assurance that such renewals will be
at rates or on terms favorable to the Company. If renewal is not possible, there
can be no assurance that EchoStar will be able to obtain replacement insurance
policies on terms favorable to EchoStar. 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 or coverage
exclusions for similar anomalies could be required. Further, although EchoStar
has obtained binders for the in-orbit insurance required for EchoStar II (for
the period after the 365 day in-orbit period covered by the launch insurance)
and the launch insurances required for EchoStar III and EchoStar IV (including
in-orbit insurance for 365 days after launch), there can be no assurance that
EchoStar will be able to obtain or maintain insurance for EchoStar III and
EchoStar IV. See "Business--Insurance."
If the launch of any EchoStar satellite is a full or partial failure or if,
following launch, any EchoStar satellite does not perform to specifications,
there may be circumstances in which insurance will not fully reimburse EchoStar
for any loss. In addition, insurance will not reimburse EchoStar for business
interruption, loss of business and similar losses that might arise from delay in
the launch of any EchoStar satellite. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Liquidity and Capital
Resources."
LIMITED LIFE OF SATELLITES. Each EchoStar satellite has a limited useful
life. A number of factors affect the useful lives of the satellites, including
the quality of their construction, the durability of their component parts, the
longevity of their orbits and the launch vehicle used. The minimum design life
of each of EchoStar I, EchoStar II, EchoStar III and EchoStar IV is 12 years.
There can be no assurance, however, as to the useful lives of the satellites.
EchoStar's operating results would be adversely affected in the event the useful
life of any of these satellites were significantly shorter than 12 years. The
Satellite Contracts contain no warranties in the event of a failure of EchoStar
I, EchoStar II, EchoStar III or EchoStar IV following launch. Additionally, a
move of any of these satellites, either temporarily or permanently, to another
orbital location, would result in a decrease in the orbital life of the
satellite of up to six months per movement.
RISK OF SATELLITE DAMAGE OR LOSS FROM ACTS OF WAR, ELECTROSTATIC STORM AND
SPACE DEBRIS. The loss, damage or destruction of any EchoStar satellites as a
result of military actions or acts of war, anti-satellite devices, electrostatic
storm or collision with space debris would have a material adverse effect on
EchoStar. EchoStar's insurance policies include customary exclusions including:
(i) military or similar actions; (ii) laser, directed energy or nuclear
anti-satellite devices; and (iii) insurrection and similar acts or governmental
action.
STATE TAXES. In addition to being subject to FCC regulation, operators of
satellite broadcast systems in the U.S. may be affected by imposition of state
and/or local sales taxes on satellite-delivered programming. According to the
Satellite Broadcasting and Communications Association, several states, including
Maryland, Missouri, North Dakota, New York and Washington, have either adopted
or proposed such taxes. Other states are in various stages of considering
proposals that would tax providers of satellite-delivered programming and other
communications providers. The adoption of state imposed sales taxes could have
adverse consequences to the Issuer's business.
33
USE OF PROCEEDS
There will be no cash proceeds to the Issuer from the Exchange Offer. The
gross proceeds to the Issuer from the Old Notes Offering were approximately
$375.0 million, with net proceeds to the Issuer of approximately $362.5 million.
The net proceeds from the Old Notes offering will be used to fund: (i) the
Satellite Escrow Account; (ii) the Interest Escrow Account; and (iii) subscriber
acquisition and marketing expenses, general corporate purposes, and to the
extent otherwise available, the construction, launch and insurance of
EchoStar III. Although the estimates set forth under "Uses" below represent
EchoStar's best estimate of the intended use of the proceeds from the Old Notes
Offering, the specific amounts allocated to each use (other than amounts
segregated in the Satellite and Interest Escrow Accounts) may change depending
on such factors as unanticipated costs or requirements necessary for development
and operation of the EchoStar DBS System.
(IN MILLIONS)
SOURCES:
Net proceeds from the Old Notes Offering (1). . . . . . . . . $362.5
------
------
USES:
Deposit to the Satellite Escrow Account (2) . . . . . . . . . $112.0
Deposit to the Interest Escrow Account (3). . . . . . . . . . 109.0
Construction, launch and insurance of EchoStar III,
subscriber acquisition and marketing expenses and general
corporate purposes . . . . . . . . . . . . . . . . . . . . . 141.5
------
Total uses . . . . . . . . . . . . . . . . . . . . . . . . $362.5
------
------
- ----------------------
(1) Net proceeds from the Old Notes Offering are net of approximately $12.5
million of estimated transaction expenses, including discounts and
commissions.
(2) Represents the amount placed in escrow to fund, together with the proceeds
from the investment thereof, the construction, launch and insurance of
EchoStar IV.
(3) Represents the amount placed in escrow to fund, together with the proceeds
from the investment thereof, the first five semi-annual interest payments
on the Notes.
34
THE EXCHANGE OFFER
PURPOSE OF THE EXCHANGE OFFER
The sole purpose of the Exchange Offer is to fulfill the obligations of the
Issuer and the Guarantors with respect to the registration of the Old Notes.
The Old Notes were originally issued and sold on June 25, 1997 (the "Issue
Date"). Such sales were not registered under the Securities Act in reliance
upon the exemption provided in section 4(2) of the Securities Act and Rule 144A
promulgated under the Securities Act. In connection with the sale of the Old
Notes, the Issuer agreed to file with the Commission a registration statement
relating to the Exchange Offer (the "Registration Statement"), pursuant to which
the Exchange Notes, consisting of another series of senior subordinated notes of
the Issuer covered by such Registration Statement and containing substantially
identical terms to the Old Notes, except as set forth in this Prospectus, would
be offered in exchange for Old Notes tendered at the option of the holders
thereof. If: (i) the Issuer is not required to file the Registration Statement
or permitted to consummate the Exchange Offer because the Exchange Offer is not
permitted by applicable law or Commission policy; or (ii) any holder of Transfer
Restricted Notes notifies the Issuer within the specific time period that: (A)
it is prohibited by law or Commission policy from participating in the Exchange
Offer; (B) that it may not resell the Exchange Notes acquired by it in the
Exchange Offer to the public without delivering a prospectus and the prospectus
contained in the Registration Statement is not appropriate or available for such
resales; or (C) that it is a broker-dealer and owns Old Notes acquired directly
from the Issuer or an affiliate of the Issuer, the Issuer and the Guarantors
will file with the Commission a registration statement (the "Shelf Registration
Statement") to cover resales of the Old Notes by the holders thereof who satisfy
certain conditions relating to the provision of information in connection with
the Shelf Registration Statement. For purposes of the foregoing, "Transfer
Restricted Notes" means each Old Note until: (i) the date on which such Old Note
has been exchanged by a person other than a broker-dealer for an Exchange Note
in the Exchange Offer; (ii) following the exchange by a broker-dealer in the
Exchange Offer of a Note for an Exchange Note, the date on which such Exchange
Note is sold to a purchaser who receives from such broker-dealer on or prior to
the date of such sale a copy of the prospectus contained in the Registration
Statement; (iii) the date on which such Old Note has been effectively registered
under the Securities Act and disposed of in accordance with the Shelf
Registration Statement; or (iv) the date on which such Old Note is distributed
to the public pursuant to Rule 144 under the Act. If: (a) the Issuer and the
Guarantors fail to file any of the Registration Statements required by the
Registration Rights Agreement on or before the date specified for such filing;
(b) any of such Registration Statements is not declared effective by the
Commission on or prior to the date specified for such effectiveness (the
"Effectiveness Target Date"); (c) the Issuer and the Guarantors fail to
consummate the Exchange Offer within 30 business days of the Effectiveness
Target Date with respect to the Registration Statement; or (d) the Shelf
Registration Statement or the Registration Statement is declared effective but
thereafter ceases to be effective or usable in connection with resales of
Transfer Restricted Notes during the periods specified in the Registration
Rights Agreement (each such event referred to in clauses (a) through (d) above a
"Registration Default") then the Issuer and the Guarantors jointly and severally
agree to pay liquidated damages to each holder of Old Notes, with respect to the
first 90-day period immediately following the occurrence of such Registration
Default in an amount equal to $.05 per week per $1,000 principal amount of Old
Notes held by such holder ("Liquidated Damages"). The amount of the Liquidated
Damages will increase by an additional $.05 per week per $1,000 principal amount
of Old Notes with respect to each subsequent 90-day period until all
Registration Defaults have been cured, up to a maximum amount of Liquidated
Damages of $.40 per week per $1,000 principal amount of Old Notes constituting
Transfer Restricted Notes. All accrued Liquidated Damages will be paid by the
Issuer on each damages payment date to the Global Note Holder (as defined) by
wire transfer to the accounts specified by them or by mailing checks to their
registered addressed if no such accounts have been specified. Following the
cure of all Registration Defaults the accrual of Liquidated Damages will cease.
See "Description of Exchange Notes - Old Notes' Registration rights; Liquidated
Damages."
Holders of Old Notes will be required to make certain representations to
the Issuer (as described in the Registration Rights Agreement) in order to
participate in the Exchange Offer and will be required to deliver information to
be used in connection with the Shelf Registration Statement and to provide
comments on the Shelf Registration Statement within the time periods set forth
in the Registration Rights Agreement in order to have their Old Notes included
in the Shelf Registration Statement and benefit form the provisions regarding
Liquidated Damages set forth above.
TERMS OF THE EXCHANGE
The Issuer hereby offers to exchange, upon the terms and subject to the
conditions set forth herein and in the Letter of Transmittal accompanying this
Prospectus (the "Letter of Transmittal"), $1,000 in principal amount of Exchange
Notes for each $1,000 in principal amount of Old Notes. The terms of the
Exchange Notes are substantially identical to the terms of the Old Notes for
which they may be exchanged pursuant to this Exchange Offer, except that the
Exchange Notes will generally be
35
freely transferable by holders thereof, and the holders of the Exchange Notes
(as well as remaining holders of any Old Notes) are not entitled to certain
registration rights and certain liquidated damages provisions which are
applicable to the Old Notes under the Registration Rights Agreement. The
Exchange Notes will evidence the same debt as the Old Notes and will be entitled
to the benefits of the Indenture. See "Description of Exchange Notes."
The Exchange Offer is not conditioned upon any minimum aggregate principal
amount of Old Notes being tendered or accepted for exchange.
Based on its view of interpretations set forth in no-action letters issued
by the Staff to third parties, the Issuer believes that Exchange Notes issued
pursuant to the Exchange Offer in exchange for the Old Notes may be offered for
resale, resold and otherwise transferred by holders thereof (other than any
holder which is (i) an Affiliate of the Issuer, (ii) a broker-dealer who
acquired Old Notes directly from the Issuer or (iii) a broker-dealer who
acquired Old Notes as a result of market making or other trading activities)
without compliance with the registration and prospectus delivery provisions of
the Securities Act, provided that such Exchange Notes are acquired in the
ordinary course of such holders' business, and such holders are not engaged in,
and do not intend to engage in, and have no arrangement or understanding with
any person to participate in, a distribution of such Exchange Notes. Any
broker-dealer that resells Exchange Notes that were received by it for its own
account pursuant to the Exchange Offer and any broker or dealer that
participates in a distribution of such Exchange Notes may be deemed to be an
"underwriter" within the meaning of the Securities Act and any profit on any
such resale of Exchange Notes and any commissions or concessions received by any
such persons may be deemed to be underwriting compensation under the Securities
Act. Broker-dealers who acquire Old Notes as a result of market making or other
trading activities may use this Prospectus, as supplemented or amended, in
connection with resales of the Exchange Notes. The Issuer has agreed that, for
a period of 180 days after the Registration Statement is declared effective,
they will make this prospectus available to any broker-dealer for use in
connection with any such resale. Any holder who tenders in the Exchange Offer
for the purpose of participating in a distribution of the Exchange Notes or any
other holder that cannot rely upon such interpretations must comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with a secondary resale transaction.
Tendering holders of Old Notes will not be required to pay brokerage
commissions or fees or, subject to the instructions in the Letter of
Transmittal, transfer taxes with respect to the exchange of the Old Notes
pursuant to the Exchange Offer.
The Exchange Notes will bear interest from June 25, 1997. Holders of Old
Notes whose Old Notes are accepted for exchange will be deemed to have waived
the right to have interest accrue, or to receive any payment in respect of
interest, on the Old Notes from June 25, 1997 to the date of the issuance of the
Exchange Notes. Interest on the Exchange Notes is payable semiannually in
arrears on January 1 and July 1 of each year, commencing January 1, 1998;
accruing from June 25, 1997 at a rate of 12 1/2% per annum.
EXPIRATION DATE; EXTENSIONS; TERMINATION; AMENDMENTS
The Exchange Offer expires on the Expiration Date. The term "Expiration
Date" means 5:00 p.m., Eastern time, on _______ , 1997 unless the Issuer in its
sole discretion extends the period during which the Exchange Offer is open, in
which event the term "Expiration Date" means the latest time and date on which
the Exchange Offer is open, in which event the term "Expiration Date" means the
latest time and date on which the Exchange Offer, as so extended by the Issuer,
expires. The Issuer reserves the right to extend the Exchange Offer at any time
and from time to time prior to the Expiration Date by giving written notice to
First Trust National Association (the "Exchange Agent") and by timely public
announcement communicated by no later than 5:00 p.m. on the next business day
following the Expiration Date, unless otherwise required by applicable law or
regulation, by making a release to the Dow Jones News Service. During any
extension of the Exchange Offer, all Old Notes previously tendered pursuant to
the Exchange Offer will remain subject to the Exchange Offer.
The initial Exchange Date will be the first business day following the
Expiration Date. The Issuer expressly reserves the right to (i) terminate the
Exchange Offer and not accept for exchange any Old Notes for any reason,
including if any of the events set forth below under "Conditions to the Exchange
Offer" shall have occurred and shall not have been waived by the Issuer and (ii)
amend the terms of the Exchange Offer in any manner, whether before or after any
tender of the Old Notes. If any such termination or amendment occurs, the
Issuer will notify the Exchange Agent in writing and will either issue a press
release or give written notice to the holder of the Old Notes as promptly as
practicable. Unless the Issuer terminates the Exchange Offer prior to 5:00
p.m., Eastern time, on the Expiration Date, the Issuer will exchange the
Exchange Notes for Old Notes on the Exchange Date.
36
This Prospectus and the related Letter of Transmittal and other relevant
materials will be mailed by the Issuer to record holders of Old Notes and will
be furnished to brokers, banks and similar persons whose names, or the names of
whose nominees, appear on the lists of holders for subsequent transmittal to
beneficial owners of Old Notes.
HOW TO TENDER
The tender to the Issuer of Old Notes by a holder thereof pursuant to one
of the procedures set forth below will constitute an agreement between such
holder and the Issuer in accordance with the terms and subject to the conditions
set forth herein and in the Letter of Transmittal.
GENERAL PROCEDURES
A holder of an Old Note may tender the same by (i) properly completing and
signing the Letter of Transmittal or a facsimile thereof (all references in this
Prospectus to the Letter of Transmittal shall be deemed to include a facsimile
thereof) and delivering the same, together with the certificate or certificates
representing the Old Notes being tendered and any required signature guarantees
(or a timely confirmation of a book-entry transfer (a "Book-Entry Confirmation")
pursuant to the procedure described below), to the Exchange Agent at its address
set forth on the back cover of this Prospectus on or prior to the Expiration
Date or (ii) complying with the guaranteed delivery procedures described below.
If tendered Old Notes are registered in the name of the signer of the
Letter of Transmittal and the Exchange Notes to be issued in exchange therefor
are to be issued (and any untendered Old Notes are to be reissued) in the name
of the registered holder, the signature of such signer need not be guaranteed.
In any other case, the tendered Old Notes must be endorsed or accompanied by
written instruments of transfer in form satisfactory to the Issuer and duly
executed by the registered holder and the signature on the endorsement or
instrument of transfer must be guaranteed by a bank, broker, dealer, credit
union, savings association, clearing agency or other institution (each an
"Eligible Institution") that is a member of a recognized signature guarantee
medallion program within the meaning of Rule 17Ad-15 under the Exchange Act. If
the Exchange Notes and/or Old Notes not exchanged are to be delivered to an
address other than that of the registered holder appearing on the note register
for the Old Notes, the signature on the Letter of Transmittal must be guaranteed
by an Eligible Institution.
Any beneficial owner whose Old Notes are registered in the name of a
broker, dealer, commercial bank, trust company or other nominee and who wishes
to tender Old Notes should contact such holder promptly and instruct such holder
to tender Old Notes on such beneficial owner's behalf. If such beneficial owner
wishes to tender such Old Notes himself, such beneficial owner must, prior to
completing and executing the Letter of Transmittal and delivering such Old
Notes, either make appropriate arrangements to register ownership of the Old
Notes in such beneficial owners name or follow the procedures described in the
immediately preceding paragraph. The transfer of record ownership may take
considerable time.
BOOK-ENTRY TRANSFER
The Exchange Agent will make a request to establish an account with respect
to the Old Notes at The Depository Trust Company (the "Book-Entry Transfer
Facility") for purposes of the Exchange Offer within two business days after
receipt of this Prospectus, and any financial institution that is a participant
in the Book-Entry Transfer Facility's systems may make book-entry delivery of
Old Notes by causing the Book-Entry Transfer Facility to transfer such Old Notes
into the Exchange Agent's account at the Book-Entry Transfer Facility in
accordance with the Book-Entry Transfer Facility's procedures for transfer.
However, although delivery of Old Notes may be effected through book-entry
transfer at the Book-Entry Transfer Facility, the Letter of Transmittal, with
any required signature guarantees and any other required documents, must, in any
case, be transmitted to and received by the Exchange Agent at the address
specified on the back cover of this prospectus on or prior to the Expiration
Date or the guaranteed delivery procedures described below must be complied
with.
THE METHOD OF DELIVERY OF OLD NOTES AND ALL OTHER DOCUMENTS IS AT THE
ELECTION AND RISK OF THE HOLDER. IF SENT BY MAIL, IT IS RECOMMENDED THAT
REGISTERED MAIL, RETURN RECEIPT REQUESTED, BE USED, PROPER INSURANCE BE
OBTAINED, AND THE MAILING BE MADE SUFFICIENTLY IN ADVANCE OF THE EXPIRATION DATE
TO PERMIT DELIVERY TO THE EXCHANGE AGENT ON OR BEFORE THE EXPIRATION DATE.
Unless an exemption applies under the applicable law and regulations
concerning "backup withholding" of federal income tax, the Exchange Agent will
be required to withhold, and will withhold 31% of the gross proceeds otherwise
payable to a holder pursuant to the Exchange Offer if the holder does not
provide his, her, or its taxpayer identification number (social security number
or employer identification number, as applicable) and certify that such number
is correct. Each tendering holder should complete and sign the main signature
form and the Substitute Form W-9 included as part of the Letter of Transmittal,
so as to provide the information and certification necessary to avoid backup
withholding, unless an applicable
37
exemption exists and is proven in a manner satisfactory to the Issuer and the
Exchange Agent.
GUARANTEED DELIVERY PROCEDURES
If a holder desires to accept the Exchange Offer and time will not permit a
Letter of Transmittal or Old Notes to reach the Exchange Agent before the
Expiration Date, a tender may be effected if the Exchange Agent has received at
its office listed on the Letter of Transmittal on or prior to the Expiration
Date a letter, telegram or facsimile transmission from an Eligible Institution
setting forth the name and address of the tendering holder, the principal amount
of the Old Notes being tendered, the names in which the Old Notes are registered
and, if possible, the certificate numbers of the Old Notes to be tendered, and
stating that the tender is being made thereby and guaranteeing that within three
New York Stock Exchange trading days after the date of execution of such letter,
telegram or facsimile transmission by the Eligible Institution, the Old Notes,
in proper form for transfer, will be delivered by such Eligible Institution
together with a properly completed and duly executed Letter of Transmittal (and
any other required documents). Unless Old Notes being tendered by the
above-described method (or a timely Book-Entry Confirmation) are deposited with
the Exchange Agent within the time period set forth above (accompanied or
preceded by a properly completed Letter of Transmittal and any other required
documents), the Issuer may, at its option, reject the tender. Copies of a
Notice of Guaranteed Delivery which may be used by Eligible Institutions for the
purposes described in this paragraph are available form the Exchange Agent.
A tender will be deemed to have been received as of the date when the
tendering holder's properly completed and duly signed Letter of Transmittal
accompanied by the Old Notes (or a timely Book-Entry Confirmation) is received
by the Exchange Agent. Issuances of Exchange Notes in exchange for Old Notes
tendered pursuant to a Notice of Guaranteed Delivery or letter, telegram or
facsimile transmission to similar effect (as provided above) by an Eligible
Institution will be made only against deposit of the Letter of Transmittal (and
any other required documents) and the tendered Old Notes (or a timely Book-Entry
Confirmation).
All questions as to the validity, form, eligibility (including time of
receipt) and acceptance for exchange of any tender of Old Notes will be
determined by the Issuer, whose determination will be final and binding. The
Issuer reserves the absolute right to reject any or all tenders not in proper
form or the acceptances for exchange of which may, in the opinion of counsel to
the Issuer, be unlawful. The Issuer also reserves the absolute right to waive
any of the conditions of the Exchange Offer or any defect or irregularities in
tenders of any particular holder whether or not similar defects or
irregularities are waived in the case of other holder. Neither the Issuer, the
Exchange Agent nor any other person will be under any duty to give notification
of any defects or irregularities in tenders or shall incur any liability for
failure to give any such notification. The Issuer's interpretation of the terms
and conditions of the Exchange Offer (including the Letter of Transmittal and
the instructions thereto) will be final and binding.
TERMS AND CONDITIONS OF THE LETTER OF TRANSMITTAL
The Letter of Transmittal contains, among other things, the following terms
and conditions, which are part of the Exchange Offer:
The party tendering Old Notes for exchange (the "Transferor") exchanges,
assigns and transfers the Old Notes to the Issuer and irrevocable constitutes
and appoints the Exchange Agent as the Transferor's agent and attorney-in-fact
to cause the Old Notes to be assigned, transferred and exchanged. The
Transferor represents and warrants that it has full power and authority to
tender, exchange, assign and transfer the Old Notes and to acquire Exchange
Notes issuable upon the exchange of such tendered Old Notes, and that, when the
same are accepted for exchange, the Issuer will acquire good and unencumbered
title to the tendered Old Notes, free and clear of all liens, restrictions,
charges and encumbrances and not subject to any adverse claim. The Transferor
also warrants that it will, upon request, execute and deliver any additional
documents deemed by the Issuer to be necessary or desirable to complete the
exchange, assignment and transfer of tendered Old Notes. The Transferor further
agrees that acceptance of any tendered Old Notes by the Issuer and the issuance
of Exchange Notes in exchange therefor shall constitute performance in full by
the Issuer of its obligations under the Registration Rights Agreement and that
the Issuer shall have no further obligations or liabilities thereunder (except
in certain limited circumstances). All authority conferred by the Transferor
will survive the death or incapacity of the Transferor and every obligation of
the Transferor shall be binding upon the heirs, legal representatives,
successors, assigns, executors and administrators of such Transferor.
By tendering Old Notes and executing the Letter of Transmittal, the
Transferor certifies that (a) it is not an Affiliate of the Issuer, that it is
not a broker-dealer that owns Old Notes acquired directly from the Issuer or an
Affiliate of the Issuer, that it is acquiring the Exchange Notes offered hereby
in the ordinary course of such Transferor's business and that such
38
transferor has no arrangement with any person to participate in the distribution
of such Exchange Notes. In order to participate in the Exchange Offer, each
entity must certify to the Company in the Letter of Transmittal that it is not
an Affiliate of the Issuer, that it is not engaged in, and does not intend to
engage in, a distribution of the Exchange Notes, and that the Exchange Notes are
being acquired in the ordinary course of business.
WITHDRAWAL RIGHTS
Old Notes tendered pursuant to the Exchange Offer may be withdrawn at any
time prior to the Expiration date.
For a withdrawal to be effective, a written or facsimile transmission
notice of withdrawal must be timely received by the Exchange Agent at its
address set forth on the back cover of this prospectus prior to the Expiration
Date. Any such notice of withdrawal must specify the person named in the Letter
of Transmittal as having tendered Old Notes to be withdrawn, the certificate
numbers of Old Notes to be withdrawn, the principal amount of Old Notes to be
withdrawn, a statement that such holder is withdrawing his election to have such
Old Notes exchanged, and the name of the registered holder of such Old Notes,
and must be signed by the holder in the same manner as the original signature of
the Letter of Transmittal (including any required signature guarantees) or be
accompanied by evidence satisfactory to the Issuer that the person withdrawing
the tender has succeeded to the beneficial ownership of the Old Notes being
withdrawn. The Exchange Agent will return the properly withdrawn Old Notes
promptly following receipt of notice of withdrawal. All questions as to the
validity of notices of withdrawals, including time of receipt, will be
determined by the Issuer, and such determination will be final and binding on
all parties.
ACCEPTANCE OF OLD NOTES FOR EXCHANGE; DELIVERY OF EXCHANGE NOTES
Upon the terms and subject to the conditions of the Exchange Offer, the
acceptance for exchange of Old Notes validly tendered and not withdrawn and the
issuance of the Exchange Notes will be made on the Exchange Date.
The Exchange Agent will act as agent for the tendering holders of Old Notes
for the purposes of receiving Exchange Notes from the Issuer and causing the Old
Notes to be assigned, transferred and exchanged. Upon the terms and subject to
conditions of the Exchange Offer, delivery of Exchange Notes to be issued in
exchange for accepted Old Notes will be made by the Exchange Agent promptly
after acceptance of the tendered Old Notes. Old Notes not accepted for exchange
by the Issuer will be returned without expense to the tendering holders (or in
the case of Old Notes tendered by book-entry transfer into the Exchange Agent's
account at the Book-Entry Transfer Facility pursuant to the procedures described
above, such non-exchanged Old Notes will be credited to an account maintained
with such Book-Entry Transfer Facility) promptly following the Expiration Date
or, if the Issuer terminates the Exchange Offer prior to the Expiration Date,
promptly after the Exchange Offer is so terminated.
CONDITIONS TO THE EXCHANGE OFFER
Notwithstanding any other provision of the Exchange Offer, or any extension
of the Exchange Offer, the Issuer will not be required to issue Exchange Notes
in respect of any properly tendered Old Notes not previously accepted and may
terminate the Exchange Offer (by oral or written notice to the Exchange Agent
and by timely public announcement communicated no later than 5:00 p.m. on the
next business day following the Expiration Date, unless otherwise required by
applicable law or regulation, by making a release to the Dow Jones News Service)
or, at its option, modify or otherwise amend the Exchange Offer, if: (a) there
shall be threatened, instituted or pending any action or proceeding before, or
any injunction, order or decree shall have been issued by, any court or
governmental agency or other governmental regulatory or administrative agency or
commission, (i) seeking to restrain or prohibit the making or consummation of
the Exchange Offer or any other transaction contemplated by the Exchange Offer,
(ii) assessing or seeking any damages as a result thereof or (iii) resulting in
a material delay in the ability of the Issuer to accept for exchange some or all
of the Old Notes pursuant to the Exchange Offer; (b) any statute, rule,
regulation, order or injunction shall be sought, proposed, introduced, enacted,
promulgated or deemed applicable to the Exchange Offer or any of the
transactions contemplated by the Exchange Offer by any government or
governmental authority, domestic or foreign, or any action shall have been
taken, proposed or threatened, by any government, governmental authority, agency
or court, domestic or foreign, that in the sole judgment of the Issuer, might
directly or indirectly result in any of the consequences referred to in clauses
(a)(i) or (ii) above or, in the sole judgment of the Issuer, might result in the
holders of Exchange Notes having obligations with respect to resales and
transfers of Exchange Notes which are greater than those described in the
interpretations of the Staff referred to on the cover page of this Prospectus,
or would otherwise make it inadvisable to proceed with the Exchange Offer; or
(c) a material adverse change shall have occurred in the business, condition
(financial or otherwise), operations, or prospects of the Issuer.
39
The foregoing conditions are for the sole benefit of the Issuer and may be
asserted by it with respect to all or any portion of the Exchange Offer
regardless of the circumstances (including any action or inaction by the Issuer)
giving rise to such condition or may be waived by the Issuer in whole or in part
at any time or from time to time in its sole discretion. The failure by the
Issuer at any time to exercise any of the foregoing rights will not be deemed a
waiver of any such right, and each right will be deemed an ongoing right which
may be asserted at any time or from time to time. In addition, the Issuer has
reserved the right, notwithstanding the satisfaction of each of the foregoing
conditions, to terminate or amend the Exchange Offer.
Any determination by the Issuer concerning the fulfillment or
nonfulfillment of any conditions will be final and binding upon all parties.
In addition, the Issuer will not accept for exchange any Old Notes
tendered, and no Exchange Notes will be issued in exchange for any such Old
Notes, if at such time any stop order shall be threatened or in effect with
respect to the Registration Statement of which this Prospectus constitutes a
part or qualification of the Indenture under the Trust Indenture Act of 1939, as
amended (the "Trust Indenture Act").
EXCHANGE AGENT
First Trust National Association has been appointed as the Exchange Agent
for the Exchange Offer. Letters of Transmittal must be addressed to the
Exchange Agent at:
First Trust National Association
180 East Fifth Street
St. Paul, Minnesota 55101
Telephone: (612) 244-1197
Facsimile: (612) 244-1537
Attention: Phyllis Meath, Specialized Finance Group
Delivery to an address other than as set forth herein, or transmission of
instructions via a facsimile or telex number other than the ones set forth
herein, will not constitute a valid delivery.
SOLICITATION OF TENDERS; EXPENSES
The Issuer has not retained any dealer-manager or similar agent in
connection with the Exchange Offer and will not make any payments to brokers,
dealers or others for soliciting acceptances of the Exchange Offer. The Issuer
will, however, pay the Exchange Agent reasonable and customary fees for its
services and will reimburse it for reasonable out-of-pocket expenses in
connection therewith. The Issuer will also pay brokerage houses and other
custodians, nominees and fiduciaries the reasonable out-of-pocket expenses
incurred by them in forwarding tenders for their customers. The expenses to be
incurred in connection with the Exchange Offer, including the fees and expenses
of the Exchange Agent and printing, accounting, investment banking and legal
fees, will be paid by the Issuer and are estimated to be approximately $250,000.
No person has been authorized to give any information or to make any
representations in connection with the Exchange Offer other than those contained
in this Prospectus. If given or made, such information or representations
should not be relied upon as having been authorized by the Issuer. Neither the
delivery of this Prospectus nor any exchange made hereunder shall, under any
circumstances, create any implication that there has been no change in the
affairs of the Issuer since the respective dates as of which information is
given herein. The Exchange Offer is not being made to (nor will tenders be
accepted from or on behalf of) holders of Old Notes in any jurisdiction in which
the making of the Exchange Offer or the acceptance thereof would not be in
compliance with the laws of such jurisdiction. However, the Issuer may, at its
discretion, take such action as it may deem necessary to make the Exchange Offer
in any such jurisdiction and extend the Exchange Offer to holders of Old Notes
in such jurisdiction. In any jurisdiction the securities laws or blue sky laws
of which require the Exchange Offer to be made by a licensed broker or dealer,
the Exchange Offer is being made on behalf of the Issuer by one or more
registered brokers or dealers which are licensed under the laws of such
jurisdiction.
DISSENTER AND APPRAISAL RIGHTS
HOLDERS OF OLD NOTES WILL NOT HAVE DISSENTERS' RIGHTS OR APPRAISAL RIGHTS
IN CONNECTION WITH THE EXCHANGE OFFER.
40
FEDERAL INCOME TAX CONSEQUENCES
The exchange of Old Notes for Exchange Notes by tendering holders will not
be a taxable exchange for federal income tax purposes, and such holders should
not recognize any taxable gain or loss or any interest income as a result of
such exchange. See "Certain United States Federal Income Tax Considerations."
OTHER
Participation in the Exchange Offer is voluntary and holders of Old Notes
should carefully consider whether to accept the terms and conditions thereof.
Holders of the Old Notes are urged to consult their financial and tax advisors
in making their own decisions on what action to take with respect to the
Exchange Offer.
As a result of the making of, and upon acceptance for exchange of all
validly tendered Old Notes pursuant to the terms of this Exchange Offer, the
Issuer will have fulfilled obligations contained in the terms of the Old Notes
and the Registration Rights Agreement. Holders of the Old Notes who do not
tender their Old Notes in the Exchange Offer will continue to hold such Old
Notes and will be entitled to all the rights, and limitations applicable thereto
under the Indenture, except for any such rights under the Registration Rights
Agreement which by their terms terminate or cease to have further effect as a
result of the making of this Exchange Offer. See "Description of Exchange
Notes." All untendered Old Notes will continue to be subject to the restriction
on transfer set forth in the Indenture. To the extent that Old Notes are
tendered and accepted in the Exchange Offer, the trading market, if any, for any
remaining Old Notes could be adversely affected. See" Risk Factors -
Consequences of Failure to Exchange Old Notes."
The Issuer may in the future seek to acquire untendered Old Notes in open
market or privately negotiated transactions, through subsequent exchange offers
or otherwise. The Issuer has no present plan to acquire any Old Notes which are
not tendered in the Exchange Offer.
41
CAPITALIZATION
The following table sets forth: (i) the consolidated capitalization of
EchoStar, on a historical basis as of March 31, 1997; (ii) the consolidated
capitalization of EchoStar, as of March 31, 1997, as adjusted to give effect to
the Old Notes Offering; and (iii) the consolidated capitalization of EchoStar as
of June 30, 1997. The historical information in this table is derived from the
Consolidated Financial Statements of EchoStar, and should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements and the Notes thereto
included elsewhere in this Prospectus. The June 30, 1997 historical information
in this table is derived from the Condensed Consolidated Financial Statements of
EchoStar, and should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the Supplemental
Condensed Consolidated Financial Statements and the Notes thereto included
elsewhere in this Prospectus.
AS OF
MARCH 31, 1997
-------------------- JUNE 30,
ACTUAL AS ADJUSTED 1997
---------- ------------- --------
(IN THOUSANDS)
(UNAUDITED)
Cash, cash equivalents, and marketable investment securities (1).................. $ 33,980 $ 175,480 $ 186,883
---------- ---------- -----------
---------- ---------- -----------
Long-term obligations (net of current portion):
Mortgages and notes payable....................................................... $ 48,298 $ 48,298 $ 45,379
1994 Notes........................................................................ 451,907 451,907 467,210
1996 Notes........................................................................ 398,399 398,399 411,256
Old Notes......................................................................... -- 375,000 375,000
---------- ---------- -----------
Total long-term debt............................................................ 898,604 1,273,604 1,298,845
Stockholders' Equity:
Preferred Stock, $.01 par value, 20,000,000 shares authorized, 1,616,681
shares of 8% Series A Cumulative Preferred Stock issued and outstanding,
including accrued dividends of $3,648,000 and $3,949,000, respectively.......... 18,700 18,700 19,001
Class A Common Stock, $.01 par value, 200,000,000 shares authorized,
11,776,406 and 11,821,513 shares issued and outstanding, respectively........... 118 118 118
Class B Common Stock, $.01 par value, 100,000,000 shares authorized,
29,804,401 shares issued and outstanding........................................ 298 298 298
42
Class C Common Stock, $.01 par value, 100,000,000 shares authorized, none
outstanding..................................................................... -- -- --
Common Stock Warrants............................................................ 16 16 11
Additional paid-in capital....................................................... 170,252 170,252 170,701
Unrealized holding losses on available-for-sale securities, net of deferred taxes (12) (12) (11)
Accumulated deficit.............................................................. (178,896) (178,896) (242,986)
---------- ---------- -----------
Total stockholders' equity (deficit)............................................. 10,476 10,476 (52,868)
---------- ---------- -----------
Total capitalization............................................................. $909,080 $1,284,080 $1,245,977
---------- ---------- -----------
---------- ---------- -----------
- ----------------------
(1) Excludes amounts in escrow and other restricted cash of approximately $51.5
million and $8.4 million as of March 31, and June 30, 1997, respectively.
The March 31, 1997, as adjusted, data and the June 30, 1997 data also
excludes $112.0 million and $112.1 million, respectively, placed in the
Satellite Escrow Account and approximately $109.0 million and $109.1
million, respectively, placed in the Interest Escrow Account.
43
SELECTED FINANCIAL DATA
Prior to consummation of the Old Notes Offering, EchoStar contributed all of
the outstanding capital stock of ESBC to the Issuer. As a result, ESBC became a
direct wholly-owned subsidiary of the Issuer. Similarly, in January 1996
EchoStar contributed all of the outstanding capital stock of Dish to ESBC. The
Contribution and the Dish Contribution have been accounted for as
reorganizations of entities under common control, in which Dish was treated as
the predecessor to ESBC and ESBC was treated as the predecessor to the Issuer.
The following selected financial data as of, and for the five years ended
December 31, 1996, are derived from the financial statements of the Issuer and
the Issuer's predecessor entities, audited by Arthur Andersen LLP, independent
public accountants. The following selected financial data at June 30, 1997 and
with respect to the six months ended June 30, 1996 and 1997 are unaudited;
however, in the opinion of management, such data reflect all adjustments
(consisting only of normal recurring adjustments) necessary to fairly present
the data for such interim periods. Operating results for interim periods are not
necessarily indicative of the results that may be expected for a full year. The
data set forth in this table should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations," the
Issuer's Consolidated Financial Statements and the Notes thereto and the other
financial information included elsewhere in this Prospectus.
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
------------------------------------------------------ -------------------
1992(1) 1993(1) 1994 1995 1996 1996 1997
(IN THOUSANDS, EXCEPT RATIOS, SUBSCRIBERS AND SATELLITE RECEIVERS SOLD)
(UNAUDITED)
STATEMENT OF OPERATIONS DATA:
Revenue:
DTH products and technical services.............. $157,473 $206,311 $172,753 $146,910 $ 136,377 $ 97,199 $ 33,660
DISH Network-SM- subscription television services -- -- -- -- 37,898 6,046 57,588
DISH Network-SM- promotions -- subscription
television services and products (2)............ -- -- -- -- 22,746 -- 75,825
C-band programming............................... 6,436 10,770 14,540 15,232 11,921 6,643 4,079
Loan origination and participation income........ 1,179 3,860 3,690 1,748 789 492 285
-------- -------- -------- -------- --------- -------- ---------
Total revenue....................................... 165,088 220,941 190,983 163,890 209,731 110,380 171,437
Expenses:
DTH products and technical services............... 120,826 161,447 133,635 116,758 123,505 90,278 27,333
Subscriber promotion subsidies (2)................ -- -- -- -- 35,239 -- 31,090
DISH Network-SM- programming...................... -- -- -- -- 19,079 1,769 45,259
C-band programming................................ 6,225 9,378 11,670 13,520 10,510 6,058 3,308
Selling, general and administrative............... 25,708 30,235 30,219 38,504 86,894 29,098 64,690
Amortization of subscriber acquisition costs (2).. -- -- -- -- 15,991 92 61,290
Depreciation and amortization..................... 1,043 1,677 2,243 3,114 27,378 9,664 25,298
-------- -------- -------- -------- --------- -------- ---------
Total expenses.................................... 153,802 202,737 177,767 171,896 318,596 136,959 258,268
-------- -------- -------- -------- --------- -------- ---------
Operating income (loss)............................. 11,286 18,204 13,216 (8,006) (108,865) (26,579) (86,831)
-------- -------- -------- -------- --------- -------- ---------
-------- -------- -------- -------- --------- -------- ---------
Net income (loss)................................... $ 7,529 $ 12,272 $ 90 $(12,361) $(101,676) $(28,921) $(126,425)
-------- -------- -------- -------- --------- -------- ---------
-------- -------- -------- -------- --------- -------- ---------
OTHER DATA:
EBITDA (3)........................................ $ 12,329 $ 19,881 $ 15,459 $ (4,892) $ (65,496) $(16,823) $ (243)
44
Ratio of earnings to fixed charges (4)............ 15.0x 18.4x 1.0x -- -- --
Deficiency of earnings to fixed charges (4)....... -- -- -- $(18,552) $(156,529) $(12,833) $(126,469)
DBS subscribers (end of period)................... 350,000 70,000 590,000
Satellite receivers sold (in units):
Domestic...................................... 116,000 132,000 114,000 131,000 518,000 155,000 348,000
International................................. 85,000 203,000 289,000 331,000 239,000 126,000 91,000
-------- -------- -------- -------- --------- -------- ---------
Total............................................. 201,000 335,000 403,000 462,000 757,000 281,000 439,000
-------- -------- -------- -------- --------- -------- ---------
-------- -------- -------- -------- --------- -------- ---------
AS OF
AS OF DECEMBER 31, MARCH 31, 1997 JUNE 30,
----------------------------------------------------- ---------------------- ---------
1992 1993 1994 1995 1996 ACTUAL AS ADJUSTED(5) 1997
---- ---- ---- ---- ---- ------ ------------- ----
(UNAUDITED)
BALANCE SHEET DATA:
Cash, cash equivalents and marketable
investment securities (6)............ $22,031 $27,232 $233,975 $ 14,159 $ 57,245 $ 33,517 $ 175,017 $ 186,883
Total assets.......................... 88,529 106,476 472,492 559,295 1,085,543 1,084,639 1,459,639 1,433,783
Long-term obligations (less current
portion):
Old Notes (7)...................... -- -- -- -- -- -- 375,000 375,000
1994 Notes......................... -- -- 334,206 382,218 437,127 451,907 451,907 467,210
1996 Notes......................... -- -- -- -- 386,165 398,399 398,399 411,256
Notes payable to stockholder....... 2,274 14,725 -- -- -- -- -- --
Other long-term obligations........ 4,876 4,702 5,393 33,444 70,465 70,425 70,425 70,296
- ----------------------
(1) Certain of the Issuer's subsidiaries operated under Subchapter S of the
Code and comparable provisions of applicable state income tax laws until
December 31, 1993. The net income for 1992 and 1993 presented above is net
of pro forma taxes of $3,304 and $7,846, respectively, determined as if the
Issuer had been subject to corporate Federal and state income taxes for
these years. See Note 7 of Notes to the Issuer's Consolidated Financial
Statements.
(2) For accounting and financial reporting purposes, the excess of EchoStar's
aggregate costs over related transaction proceeds associated with the 1996
Promotion are 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 excess of transaction costs over related proceeds
associated with the 1997 Promotion (which commenced June 1, 1997) will be
recognized as subscriber promotion subsidies in the Company's statements of
operations. EBITDA in future periods will be negatively affected to the
extent that a larger portion of future subscriber additions result from the
1997 Promotion rather than from the 1996 Promotion. This adverse EBITDA
impact will result from the immediate recognition of all transaction costs
at activation under the 1997 Promotion.
(3) EBITDA represents earnings before interest (net), taxes, depreciation and
amortization (including amortization of subscriber acquisition costs of
$16.0 million for the year ended December 31, 1996 and $61.3 million for
the six months ended June 30, 1997). EBITDA is commonly used in the
telecommunications industry to analyze companies on the basis of operating
performance, leverage and liquidity. EBITDA is not intended to represent
cash flows for the period, nor has it been presented as an alternative to
operating income as an indicator of operating performance and should not be
considered in isolation or as a substitute for measures of performance
determined in accordance with generally accepted accounting principles. See
the Issuer's Consolidated Financial Statements and Supplemental Condensed
Consolidated Financial Statements contained elsewhere in this Prospectus.
(4) For purposes of computing the ratio of earnings to fixed charges and the
deficit of earnings to fixed charges, earnings consist of earnings from
continuing operations before income taxes, plus fixed charges. Fixed
charges consist of interest incurred on all indebtedness and the computed
interest component of rental expense under non-cancelable operating leases.
For the years ended December 31, 1995 and 1996 and the six months ended
June 30, 1996 and 1997, earnings were insufficient to cover the fixed
charges.
(5) Gives effect to the Old Notes Offering and the application of the net
proceeds thereof.
(6) Excludes amounts in escrow and other restricted cash of approximately $51.5
million and $8.4 million as of March 31 and June 30, 1997,
45
respectively. The March 31, 1997, as adjusted data and the June 30, 1997
data also excludes $112.0 million and $112.1 million, respectively placed
in the Satellite Escrow Account and approximately $109.0 million and $109.1
million, respectively, placed in the Interest Escrow Account.
(7) The Notes are guaranteed on a subordinated basis by EchoStar. As described
above, the predecessor consolidated financial statements of EchoStar and
the Issuer through 1994 are the same. Summary consolidated financial data
for EchoStar and its subsidiaries for 1995, 1996 and the six months ended
June 30, 1996 and 1997 are presented below:
YEARS ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
------------------------- ----------------------------
1995 1996 1996 1997
(IN THOUSANDS)
(UNAUDITED)
STATEMENT OF OPERATIONS DATA:
Revenue............................. $ 163,890 $ 211,411 $ 114,991 $ 172,845
Operating income (loss)............. (8,027) (109,345) (22,686) (87,617)
Net income (loss)................... (11,486) (100,986) (29,775) (126,655)
OTHER DATA:
EBITDA.............................. (4,913) (65,931) (12,930) (842)
AS OF
DECEMBER 31, MARCH 31, 1997 JUNE 30,
----------------------- ----------------------- -------
1995 1996 ACTUAL AS ADJUSTED 1997
(UNAUDITED)
BALANCE SHEET DATA:
Cash, cash equivalents and marketable investment
securities.............................................. $ 37,424 $ 58,038 $ 33,980 $ 175,480 $ 187,804
Total assets............................................. 623,091 1,141,380 1,155,990 1,530,990 1,534,480
Old Notes................................................ -- -- -- 375,000 375,000
Total long-term obligations (excluding current portion).. 415,662 881,872 898,604 1,273,604 1,311,902
Total stockholders' equity (deficit)..................... 156,686 61,197 10,476 10,476 (52,868)
46
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION AND ANALYSIS RELATES TO THE CONSOLIDATED RESULTS OF
OPERATIONS OF THE ISSUER AND ITS PREDECESSORS, ESBC AND DISH, and THE
CONSOLIDATED FINANCIAL CONDITION OF ECHOSTAR. THIS DISCUSSION SHOULD BE READ IN
CONJUNCTION WITH THE CONSOLIDATED FINANCIAL STATEMENTS AND THE NOTES THERETO OF
THE ISSUER AND ECHOSTAR INCLUDED ELSEWHERE IN THIS PROSPECTUS. PRIOR TO
CONSUMMATION OF THE OFFERING OF THE OLD NOTES, ECHOSTAR EFFECTED THE
CONTRIBUTION.
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.
The accompanying results of operations discussion reflects the historical
results of the Issuer and its predecessor entities. As substantially all of
EchoStar's operations are performed by the Issuer and its subsidiaries, the
results of operations of EchoStar do not differ materially from those of the
Issuer. For the year ended December 31, 1996 and the three and six months ended
June 30, 1997, total consolidated revenues of EchoStar were $211.4 million,
$100.8 million and $172.8 million, respectively, as compared to $209.7 million,
$100.0 million and $171.4 million, respectively, for the Issuer. EchoStar's loss
from operations totaled $109.3 million for the year ended December 31, 1996,
compared to $108.9 million for the Issuer. For the three months ended June 30,
1997, EchoStar's and the Issuer's losses from operations were $43.0 million and
$43.5 million, respectively. For the six months ended June 30, 1997, EchoStar's
and the Issuer's losses from operations were $87.6 million and $86.8 million,
respectively. EchoStar's and the Issuer's net losses for the year ended
December 31, 1996 and the three months ended June 30, 1997 were $101.0 million
and $101.7 million and $63.8 million and $64.5 million, respectively.
EchoStar's and the Issuer's net losses for the six months ended June 30, 1997
were $127.3 million and $126.4 million, respectively. The differences described
above result from assets and operations of EchoStar's subsidiaries that are not
subsidiaries of the Issuer. Such operations principally consist of the assets
and operations of DNCC, Direct Broadcasting Satellite Corporation ("DBSC") and
EchoStar Space Corporation. DBSC holds EchoStar III and certain FCC
authorizations, and EchoStar Space Corporation holds the launch contracts for
EchoStar III and EchoStar IV. The accompanying discussion under "--Liquidity and
Capital Resources" is presented for EchoStar.
47
ECHOSTAR MARKETING PROMOTIONS. Since August 1996, EchoStar has introduced
several marketing promotions, the most significant of which is the 1996
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's-SM- America's Top 50 CD programming package for approximately
$300. Total transaction proceeds to EchoStar are less than its aggregate
costs (equipment, programming and other) for the initial prepaid subscription
period for DISH Network-SM- service.
NEW MARKETING PROMOTION. Beginning June 1, 1997, EchoStar implemented a
new marketing program in which independent retailers ARE PERMITTED to offer
standard EchoStar Receiver Systems to consumers for a suggested retail price
of $199 (THE "1997 PROMOTION"). Previously, consumers could purchase
EchoStar Receiver Systems for approximately $199, but were also required to
purchase a prepaid one-year subscription to the DISH Network's-SM- America's
Top 50 CD programming package for $300. The 1997 Promotion allows consumers
to subscribe to the DISH Network's-SM- various programming offerings on a
month-to-month basis without an extended subscription commitment. While
there can be no assurance, EchoStar believes that by reducing the "up front"
cost to the consumer significantly and eliminating extended subscription
commitments, the 1997 Promotion may significantly increase consumer demand
for DISH Network-SM- services.
48
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1997 COMPARED TO THE THREE MONTHS ENDED JUNE 30,
1996.
REVENUE. Total revenue for the three months ended June 30, 1997 was $100.0
million, an increase of $30.6 million, or 44%, as compared to total revenue for
the three months ended June 30, 1996 of $69.4 million. The increase in total
revenue in 1997 was primarily attributable to DISH Network subscriber growth.
As of June 30, 1997, the Company had approximately 590,000 DISH Network
subscribers compared to approximately 70,000 at June 30, 1996. The Company
expects this trend to continue as it adds additional DISH Network subscribers.
49
The increase in total revenue for the three months ended June 30, 1997
was partially offset by a decrease in international and domestic sales of
C-band satellite receivers and equipment. As was anticipated, domestic and
international demand for C-band DTH products continued to decline during the
second quarter of 1997; this decline is expected to continue for the
foreseeable future. Consistent with the increases in total revenue during
the three months ended June 30,1997, the Company experienced a corresponding
increase in trade accounts receivable at June 30, 1997. The Company expects
this trend to continue as the number of DISH Network subscribers increases,
and as the Company develops additional channels of distribution for DISH
Network equipment.
Revenue from domestic sales of DTH products and technical services
decreased $46.8 million, or 92%, to $4.1 million during the three months
ended June 30, 1997. Domestically, the Company sold approximately 174,000
satellite receivers during the three months ended June 30, 1997, as compared
to approximately 110,000 receivers sold during the comparable period in 1996.
Of the total number of satellite receivers sold during the three months
ended June 30, 1997, approximately 173,000 were EchoStar Receiver Systems.
Although there was a significant increase in the number of satellite
receivers sold in the second quarter of 1997 as compared to same quarter in
1996, overall revenue from domestic sales of DTH products decreased as a
result of decreased prices charged for DBS receivers combined with the
revenue recognition policy applied to DBS satellite receivers sold under the
Company's promotions.
Revenue from international sales of analog DTH products for the
three months ended June 30, 1997 was $6.1 million, a decrease of $3.5
million, or 36%, as compared to the same period in 1996. This decrease was
principally attributable to a decrease in the number of analog satellite
receivers sold, combined with decreased prices on products sold.
Internationally, the Company sold approximately 38,000 analog satellite
receivers in the three months ended June 30, 1997, a decrease of 25%,
compared to approximately 51,000 units sold during the comparable period of
1996. Overall, international demand for the Company's analog DTH products
continued to decline in the second quarter of 1997 as a result of consumer
anticipation of new international digital services. 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.
50
To expand its presence in international markets, the Company has
entered into distribution and consulting agreements with international
digital service providers. In January 1997, the Company entered into an
agreement (the "ExpressVu Agreement") with ExpressVu, Inc. ("ExpressVu") a
majority owned subsidiary of BEC, Inc. ("Bell Canada"). The first phase of
this agreement includes an initial order for 62,000 satellite receivers, and
primary uplink integration payments, which combined are expected to exceed
$40.0 million. Pursuant to the ExpressVu Agreement, the Company is assisting
ExpressVu with the construction 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
Canadian DTH service. Among other things, the Company has agreed not to
provide DTH service in Canada and ExpressVu has agreed not to provide DTH
service, including DBS service, in the U.S. The Company recognized revenues
of approximately $11.9 million related to the ExpressVu Agreement during the
three months ended June 30, 1997 (included within the "DTH products and
technical services" caption in the Company's statements of operations).
Additionally, in June 1997, Distribuidora de Television Digital S.A.
("Telefonica"), a DBS joint venture in Spain, selected the Company to supply
digital set-top boxes for its satellite television service scheduled to
launch in September 1997. Revenues from Telefonica's initial order of
100,000 digital set-top boxes are expected to approximate $40.0 million. The
Company expects to begin delivery of set-top boxes to Telefonica in September
1997 and to fulfill approximately one-half of the contract during the
remainder of 1997. The Company expects to fulfill the remainder of the
contract during early 1998. While the Company continues to actively pursue
other similar distribution opportunities, no assurance can be given that any
such additional negotiations will be successful. Further, the Company's
future revenue from the sale of DBS equipment and receivers in international
markets depends largely on the success of the DBS operator in that country,
which, in turn, depends on other factors, such as the level of consumer
acceptance of DBS products and the intensity of competition for international
subscription television subscribers. No assurance can be given regarding the
level of expected future revenues which could be generated from the Company's
alliances with these, and potentially other, foreign DBS operators.
C-band programming revenue totaled $1.9 million for the three
months ended June 30, 1997, a decrease of $1.3 million, or 40%, compared to
the three months ended June 30, 1996. 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.
DTH AND DISH NETWORK EXPENSES. DTH and DISH Network expenses for
the three months ended June 30, 1997 aggregated $63.8 million, an increase of
$1.7 million, or 3% compared to the same period in 1996. DTH products and
technical services expenses decreased $39.4 million, or 69%, to $18.1 million
for the three months ended June 30, 1997. These expenses include the costs
of C-band systems and the costs of EchoStar Receiver Systems and related
components sold prior to commencement of the Company's promotions.
Subscriber promotion subsidies aggregated $18.3 million for the three months
ended June 30, 1997 and represent expenses associated with the Company's
various promotions. DISH Network programming expenses totaled $25.8 million
for the three months ended June 30, 1997 as compared to $1.7 million for the
comparable period in 1996. The Company expects that DISH Network programming
expenses will continue to increase in future periods in proportion to
increases in the number of DISH Network subscribers. Such expenses, relative
to related revenues, will vary based on the services subscribed to by DISH
Network customers, the number and types of pay-per-view events purchased by
subscribers, and the extent to which the Company is able to realize volume
discounts from programming providers.
C-band programming expenses totaled $1.5 million for the three
months ended June 30, 1997, a decrease of $1.3 million, or 46%, as compared
to the same period in 1996. This decrease is consistent with the decrease in
C-band programming revenue. As previously described, demand for C-band DTH
products 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 $33.8 million for the three months
ended June 30, 1997, an increase of $15.4 million as compared to the same period
in 1996. SG&A expenses as a percentage of total revenue increased to 34% for
the three months ended June 30, 1997 as compared to 27% for the same period in
1996. The increase in SG&A expenses was principally attributable to increased
personnel expenses to support the growth of DISH Network service and increased
expenses associated with the operation of EchoStar's digital broadcast center
and DBS satellites (collectively the "EchoStar DBS System").
51
EARNINGS BEFORE INTEREST, TAXES, DEPRECIATION AND AMORTIZATION.
Earnings before interest, taxes, depreciation and amortization (including
amortization of subscriber acquisition costs) ("EBITDA") was $2.4 million for
the three months ended June 30, 1997, an improvement of $13.5 million,
compared to negative EBITDA of $11.2 million during the same period of 1996.
This improvement in EBITDA resulted from the factors affecting revenue and
expenses discussed above.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization
expenses for the three months ended June 30, 1997 (including amortization of
subscriber acquisition costs of $92,000 and $33.2 million for the three
months ended June 30, 1996 and June 30, 1997, respectively), aggregated $45.9
million, an increase of $39.5 million, as compared to the same period 1996.
The increase in depreciation and amortization expenses principally resulted
from amortization of subscriber acquisition costs and depreciation expense
associated with the Company's second DBS satellite, EchoStar II (placed in
service during the fourth quarter of 1996).
OTHER INCOME AND EXPENSE. Other expense, net totaled $20.9 million
for the three months ended June 30, 1997, an increase of $6.4 million, as
compared to the same period 1996. The increase in other income and expense
in the second quarter of 1997 resulted primarily from a decrease interest
income of approximately $4.4 million as a result of a decrease in invested
balances. Additionally, interest expense increased $2.0 million as compared
to the same period of 1996 as a result of the continued accretion of the 1994
Notes and 1996 Notes. The Company capitalized interest of approximately $8.6
million during the three months ended June 30, 1997, compared to
approximately $5.5 million during the three months ended June 30, 1996.
INCOME TAX BENEFIT. The decrease in the income tax benefit of $11.0
million (from $11.0 million for the three months ended June 30, 1996 to an
income tax provision of $25,000 for the three months ended June 30, 1997)
principally resulted from the Company's decision to fully reserve the second
quarter addition to its net deferred tax asset. The Company's net deferred
tax assets (approximately $67.4 million at June 30, 1997) relate to temporary
differences for amortization of original issue discount on the 1994 Notes and
1996 Notes, net operating loss carryforwards, and various accrued expenses
which are not deductible until paid. If future operating results differ
materially and adversely from the Company's current expectations, its
judgment regarding the magnitude of its reserve may change.
SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 1996.
REVENUE. Total revenue for the six months ended June 30, 1997 was $171.4
million, an increase of $61.0 million, or 55%, as compared to total revenue for
the six months ended June 30, 1996 of $110.4 million. The increase in total
revenue in 1997 was primarily attributable to the introduction of the Company's
DISH Network service during March 1996, combined with significant DISH Network
subscriber growth since the launch of service.
The increase in total revenue for the six months ended June 30, 1997 was
partially offset by a decrease in international and domestic sales of C-band
satellite receivers and equipment. The domestic and international demand for
C-band DTH products continued to decline during the first half of 1997.
Revenue from domestic sales of DTH products and technical services
decreased $66.2 million, or 88%, to $8.8 million for the six months ended June
30, 1997. Domestically, the Company sold approximately 348,000 satellite
receivers during the six months ended June 30, 1997, as compared to
approximately 155,000 receivers sold during the comparable period of 1996. Of
the total number of satellite receivers sold during the six months ended June
30, 1997, approximately 345,000 were EchoStar Receiver Systems. Although there
was a significant increase in the number of satellite receivers sold during the
six months ended June 30, 1997 as compared to same period in 1996, overall
revenue from domestic sales of DTH products decreased as a result of decreased
prices charged for DBS satellite receivers combined with the revenue recognition
policy applied to DBS satellite receivers sold under the Company's promotions.
52
Revenue from international sales of analog DTH products for the six months
ended June 30, 1997 totaled $13.0 million, a decrease of $9.3 million, or 42%,
as compared to the same period in 1996. This decrease was directly attributable
to a decrease in the number of analog satellite receivers sold, combined with
decreased prices on products sold. Internationally, the Company sold
approximately 91,000 analog satellite receivers during the six months ended June
30, 1997, a decrease of 28%, compared to approximately 126,000 units sold in the
comparable period in 1996. As previously described, the Company also recognized
revenues totaling $11.9 million during the six months ended June 30, 1997
related to the ExpressVu Agreement.
C-band programming revenue totaled $4.1 million for the six months
ended June 30, 1997, a decrease of $2.6 million, or 39%, compared to the six
months ended June 30, 1996. This decrease was primarily attributable to the
industry-wide decline in demand for domestic C-band programming services.
DTH AND DISH NETWORK EXPENSES. DTH and DISH Network expenses for the six
months ended June 30, 1997 aggregated $107.0 million, an increase of $8.9
million, or 9% compared to the same period in 1996. DTH products and technical
services expense decreased $62.9 million, or 70%, to $27.3 million during the
six months ended June 30, 1997. These expenses include the costs of C-band
systems and the costs of EchoStar Receiver Systems and related components sold
prior to commencement of the Company's promotions. Subscriber promotion
subsidies aggregated $31.1 million for the six months ended June 30, 1997. DISH
Network programming expenses totaled $45.3 million for the six months ended June
30, 1997 as compared to $1.8 million for the comparable period in 1996. This
increase is directly attributable to the increase in DISH Network subscribers at
June 30, 1997 compared to June 30, 1996.
C-band programming expenses totaled $3.3 million for the six months ended
June 30, 1997, a decrease of $2.8 million, or 45%, as compared to the same
period in 1996. This decrease is consistent with the decrease in C-band
programming revenue.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. SG&A expenses totaled
$64.7 million for the six months ended June 30, 1997, an increase of $35.6
million as compared to the same period in 1996. SG&A expenses as a percentage
of total revenue increased to 38% for the six months ended June 30, 1997 as
compared to 26% for the same period in 1996. The increase in SG&A expenses was
principally attributable to increased personnel expenses to support the growth
of DISH Network service and increased expenses associated with the operation of
the EchoStar DBS System. In future periods, the Company 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 was negative $243,000 for the six months ended June 30, 1997, an
improvement of $16.6 million, compared to negative EBITDA of $16.8 million
for the same period in 1996. This improvement in negative EBITDA resulted
from the factors affecting revenue and expenses discussed above.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expenses
for the six months ended June 30, 1997 (including amortization of subscriber
acquisition costs of $92,000 and $61.3 million for the six months ended June
30, 1996 and June 30, 1997, respectively) aggregated $86.6 million, an
increase of $76.8 million, as compared to the same period 1996. The increase
in depreciation and amortization expenses primarily was attributable to
amortization of subscriber acquisition costs and depreciation expense
associated with EchoStar II.
OTHER INCOME AND EXPENSE. Other expense, net totaled $39.6 million
for the six months ended June 30, 1997, an increase of $21.1 million, as
compared to the same period 1996. The increase in other expense in the first
half of 1997 resulted primarily from an increase in interest expense
associated with the March 1996 issuance of the 1996 Notes and 1997 Notes
combined with the continued accretion of the 1994 Notes. Additionally,
interest income decreased $4.8 million as a result of a decrease in invested
balances. The Company capitalized $16.6 million and $14.4 million of
interest in the six months ended June 30, 1997 and 1996, respectively.
INCOME TAX BENEFIT. The decrease in the income tax benefit of $16.1
million (from $16.1 million for the six months ended June 30, 1996 to an income
tax provision of $44,000 for the six months ended June 30, 1997) principally
resulted from the Company's decision to fully reserve the 1997 additions to its
net deferred tax asset.
53
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
REVENUE. Total revenue for 1996 was $209.7 million, an increase of $45.8
million, or 28%, 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, the Issuer expects to derive its revenue principally from DISH
Network-SM-subscription television services. As of December 31, 1996, the
Issuer 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. Consistent with the increases in total
revenue during 1996, EchoStar experienced a corresponding increase in trade
accounts receivable at December 31, 1996.
Revenue from domestic sales of DTH products and technical services
increased $5.2 million, or 6%, to $98.9 million during 1996. Domestically,
the Issuer 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
1996 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 the 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.
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 $789,000, a decrease
of $959,000, or 55%, as compared to 1995. The decrease in loan origination
and participation income during 1996 was primarily due to the commencement of
operations of DNCC in 1996. DNCC is a subsidiary of EchoStar, not of the
Issuer. The introduction of the DISH Network-SM- has increased the number of
consumer loans and leases funded, but since DNCC is the responsible entity,
this increase is not reflected in ESBC's statements of operations.
DTH AND DISH NETWORK-SM- EXPENSES. DTH and DISH Network-SM- expenses in
1996 aggregated $188.3 million, an increase of $58.1 million, or 45%, as
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
$6.7 million, or 6%, to $123.5 million during 1996. These expenses include
the costs of EchoStar Receiver Systems and related components sold prior to
commencement of the 1996 Promotion. Subscriber promotion subsidies aggregated
$35.2 million during 1996 and represent expenses associated with the 1996
Promotion. DISH Network-SM-programming expenses totaled $19.1 million for
the year ended December 31, 1996.
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.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. SG&A expenses totaled $86.9
million in 1996, an increase of $48.4 million or 126%, as compared to 1995.
Such expenses as a percentage of total revenue increased to 41% in 1996 as
compared to 23% 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-;
54
(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.
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) for 1996 was a negative $65.5 million, an
increase of $60.6 million, as compared to negative $4.9 million in 1995. This
increase in negative EBITDA resulted from the factors affecting revenue and
expenses described 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 $47.7 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 1996 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 1996 Notes. Interest capitalized relating
to development of the EchoStar DBS System during 1996 was $19.8 million
(compared to $25.0 million during 1995).
INCOME TAX BENEFIT. The increase in the income tax benefit of $48.7
million (from $6.2 million in 1995 to $54.9 million in 1996) principally
resulted from the increase in EchoStar's loss before income taxes. EchoStar's
net deferred tax assets (approximately $67.0 million at December 31, 1996)
relate to temporary differences for amortization of original issue discount
on the 1994 and 1996 Notes, net operating loss carryforwards, and various
accrued expenses which are not deductible until paid. No valuation allowance
was provided because EchoStar believed it was more likely than not that these
deferred tax assets would ultimately be realized.
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 $25.4 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. 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. 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.
55
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 Household Retail Services, Inc. ("HRSI") on its loan portfolio,
contributing to a decrease in loan origination and participation income from
1994. Loan origination and participation income for 1995 was $1.7 million, a
decrease of $1.9 million, or 53%, compared to 1994.
EchoStar aggressively marketed its 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.
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.
DTH EXPENSES. Costs of DTH products sold were $130.3 million for 1995, a
decrease of $15.0 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.
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 23% 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.
EARNINGS BEFORE INTEREST, TAXES, DEPRECIATION AND AMORTIZATION. 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 $10.5 million, a
decrease of $2.2 million, or 17%, as compared to 1994. The difference in
other income and expense for 1995 compared to 1994 resulted primarily from
the amortization of original issue discount and deferred debt issuance costs
of $23.5 million in 1995, and $20.7 million in 1994, net of capitalized
interest, on the 1994 Notes, which were issued on June 7, 1994. Other expense
was reduced by investment income on monies deposited in an 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 $25.0
million as compared to $5.7 million for 1994.
56
BENEFIT FROM/PROVISION FOR INCOME TAXES. An income tax benefit of $6.2
million was recognized during 1995 as compared to the income tax provision
for 1994 of $399,000. This change was principally the result of changes in
components of income and expenses discussed above during 1995 and 1994,
respectively. EchoStar's deferred tax assets (approximately $13.9 million at
December 31, 1995) relate principally to temporary differences for
amortization of original issue discount on the 1994 Notes and various accrued
expenses which are not deductible until paid. No valuation allowance was
provided because EchoStar believed it was more likely than not that these
assets would be realized.
LIQUIDITY AND CAPITAL RESOURCES
EchoStar's working capital and capital expenditure requirements were
substantial during the three-year period ended December 31, 1996. Those
expenditures principally resulted from the construction of EchoStar's DBS
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, and $81.5 million and $67.1 million
during the six-month periods ended June 30, 1996 and 1997, 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 148DEG. WL orbital slot. Those
frequencies were acquired at the FCC's January 1996 auction of certain DBS
frequencies.
During 1994, 1995 and 1996 and the six months ended June 30, 1997, EchoStar's
capital expenditure and working capital requirements principally were funded
from proceeds of the 1994 Notes offering, the 1995 initial public offering of
EchoStar's Class A Common Stock (the "IPO"), and the 1996 Notes offering. In
June 1994, EchoStar issued 624,000 units consisting of $624.0 million principal
amount at stated maturity of the 1994 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, EchoStar completed
the IPO of 4.0 million shares of its Class A Common Stock, resulting in net
proceeds to EchoStar of approximately $62.9 million. In March 1996, ESBC
consummated the 1996 Notes offering. In connection therewith, ESBC issued $580.0
million principal amount at stated maturity of 1996 Notes, resulting in
aggregate net proceeds to the Company of approximately $337.0 million. As of
June 30, 1997, substantially all of the Warrants issued in connection with the
1994 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. Net cash flows
used in operations totaled $9.2 million for the six months ended June 30, 1997,
compared to $20.1 million used by operations for the six months ended June 30,
1996. EchoStar anticipates that its capital expenditure and working capital
requirements, including subscriber acquisition costs, will increase
substantially throughout 1997 as it aggressively builds its DISH Network-SM-
subscriber base. 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; or (iii) the investment in subscriber acquisition costs
increases from planned levels. EchoStar had anticipated meeting its 1997 capital
requirements with $200.0 million of interim financing which was to be provided
by News pursuant to the News Agreement (the "News Funding"). EchoStar no longer
expects to receive the News Funding in the near term. Accordingly, EchoStar
consummated the Old Notes Offering to fund its short- and medium-term capital
requirements.
EFFECTS OF CAMPAIGNS TO ACQUIRE SUBSCRIBERS
The 1997 Promotion will significantly increase EchoStar's working capital
requirements. Transaction proceeds associated with the 1997 Promotion, which
commenced in June, vary dependent on the type of EchoStar Receiver System and
the number of additional outlet receivers purchased, but are expected to
approximate $225 to $275 per new subscriber. Transaction costs, consisting of
costs of goods sold, activation fees paid to dealers and distributors, and other
promotional costs, are expected to range from $425 to $500 per new subscriber.
Thus, each subscriber initially added pursuant to the 1997 Promotion will result
in a net use of cash of approximately $200 to $275. Comparatively, EchoStar's
prior promotion (which requires an annual prepaid DISH Network subscription)
(the "1996 Promotion"), which will continue to be available to consumers,
results in approximately breakeven net cash flows at the time of subscriber
activation. EchoStar expects that transaction costs associated with both the
1996 and 1997 Promotions will decrease during the remainder of 1997 as
additional cost reductions for EchoStar Receiver Systems are realized, thereby
57
reducing the initial net cash outflow per new subscriber.
The excess of transaction costs over related proceeds from the 1996 Promotion
and net transaction costs resulting from the 1997 Promotion are recognized as
subscriber promotion subsidies in the Company's statements of operations.
EBITDA in future periods will be negatively affected to the extent that a larger
portion of future subscriber additions result from the 1997 Promotion rather
than from the 1996 Promotion. Since the 1997 Promotion was not commenced until
June 1997, the majority of EchoStar's second quarter subscriber additions
resulted from consumers who purchased an EchoStar Receiver System pursuant to
the 1996 Promotion rather than the 1997 Promotion. EchoStar expects that a
significant percentage of its future subscriber additions will result from the
1997 Promotion. The adverse EBITDA impact of the 1997 Promotion (relative to
the 1996 Promotion) results from the immediate recognition of all transaction
costs at the time of subscriber activation. Comparatively, a portion of 1996
Promotion transaction costs are deferred and amortized over the initial prepaid
subscription period.
Beginning August 1, 1997, EchoStar began offering an internally-financed
lease program to consumers. The lease provides for an 18 month lease term at
competitive rates to qualified consumers. At the end of the lease term, the
consumer has the option of purchasing the equipment. Each subscriber activated
under the lease program is expected to result in a net use of cash to EchoStar
of approximately $400 to $600 (depending on the number of outlets).
Accordingly, the lease program will result in a greater investment per customer
than either the 1997 Promotion or the 1996 Promotion. While there can be no
assurance, EchoStar believes that its investment per lease customer will
significantly improve at the end of the lease term when the subscriber either
continues on a month-to-month basis, purchases the equipment from EchoStar or
returns the equipment to the retailer. Depending upon the number of subscribers
added pursuant to the lease program, EchoStar may require additional capital to
finance the acquisition of additional lease subscribers. No assurance can be
given that additional capital will be available on terms acceptable to EchoStar,
or at all.
EchoStar believes the lease program will be attractive to consumers who
would otherwise subscribe to a DBS service but for the initial "up front"
costs associated with DBS service. The lease program allows the consumer
(for less than $100) to receive an upgraded EchoStar Receiver System,
including a professional installation. Upon activation of service, the
consumer is charged a low monthly equipment rental fee in addition to charges
associated with programming services purchased.
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 EchoStar
Receiver Systems, including installation costs and certain DISH Network
programming packages, on competitive terms. Consumer financing provided by
third parties is generally non-recourse to EchoStar. EchoStar currently
maintains one such agreement which expires in the near future. 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 and expects to consummate at least one such agreement prior to the
expiration of its existing consumer financing agreement. 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 subscriber base may be negatively impacted.
1997 CAPITAL REQUIREMENTS
In addition to the working capital requirements discussed above, during the
remainder of 1997 EchoStar expects to expend: (i) approximately $128.1 million
in connection with the construction launch, insurance and deployment of
EchoStar III ($83.6 million) and EchoStar IV ($44.5 million). Additionally,
EchoStar will expend approximately $1.3 million per month to meet debt service
requirements relative to deferred satellite construction payments for EchoStar I
and EchoStar II. EchoStar's debt service requirements on the deferred satellite
construction payments will increase to approximately $1.6 million per month upon
the successful launch of EchoStar III (currently expected to be launched in
October 1997). Capital expenditures related to EchoStar III and EchoStar IV 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.
58
EchoStar's 1997 working capital, capital expenditure and debt service
requirements are expected to be funded from existing unrestricted cash and
investment balances, the Satellite Escrow, and cash generated from operations.
The Company expects subscriber growth to accelerate during the last six months
of 1997. Based upon its subscriber growth expectations, EchoStar anticipates
that it will require additional financing during the first quarter of 1998 to
fund additional subscriber growth. If EchoStar's actual subscriber growth rate
exceeds its current expectations, it will require additional financing sooner
than originally expected. In the event that EchoStar's subscriber growth occurs
slower than currently expected, its needs for additional financing will be
delayed. 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.
FUTURE CAPITAL REQUIREMENTS
During 1998 EchoStar will expend approximately $64.5 million to construct,
launch and support EchoStar IV, which is scheduled to be launched during the
first quarter of 1998. These expenditures will be funded from the Satellite
Escrow. EchoStar's debt service requirements relative to the deferred satellite
construction payments will increase to approximately $1.9 million per month upon
the successful launch of EchoStar IV (currently scheduled for launch in the
first quarter of 1998). Additionally, beginning in January 1998, EchoStar will
be required to make semi-annual interest payments of $23.4 million on the 1997
Notes. The first five such semi-annual interest payments will be funded from
the Interest Escrow. As described above, based upon its subscriber growth
expectations, EchoStar anticipates that it will require additional financing
during the first quarter of 1998 to fund additional subscriber growth. As
previously described (see "Risk Factors--Possible Nasdaq Delisting of EchoStar
Common Stock"), in the event that EchoStar's Class A Common Stock is delisted by
the NASD from the Nasdaq National Market, it may be more difficult to raise
additional equity financing. There can be no assurance that additional debt,
equity or other financing will be available on terms acceptable to EchoStar, or
at all.
As of June 30, 1997, EchoStar had approximately $1.3 billion of outstanding
long-term debt
59
(including the 1994 Notes, the 1996 Notes, the Old Notes, Deferred Payments
on EchoStar I and EchoStar II, and mortgage notes payable). Interest on the
1994 Notes and the 1996 Notes accretes, but currently is not payable in cash.
Semi-annual cash interest payments of approximately $40.2 million on the 1994
Notes commence December 1, 1999. The 1994 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 semi-annual cash interest
payments to $30.1 million and $20.1 million, effective December 1, 2002 and
December 1, 2003, respectively. Semi-annual cash interest payments of $38.1
million on the 1996 Notes commence on September 15, 2000. Semi-annual cash
interest payments of $23.4 million on the Old Notes commence January 1, 1998.
The first five such semi-annual interest payments will be funded from the
Interest Escrow Account. Gross Deferred Payments totaled $64.0 million for
EchoStar I and EchoStar II. As of June 30, 1997, approximately $52.2 million
of such Deferred Payments was outstanding. The Deferred Payments bear
interest at 8.25% and are payable in equal monthly installments over five
years following launch of the respective satellites. Deferred Payments of
$15.0 million will be used for each of EchoStar III and EchoStar IV. The
terms of such Deferred Payments for EchoStar III and EchoStar IV will be
similar to the terms associated with EchoStar I and EchoStar II.
AVAILABILITY OF OPERATING CASH FLOW TO ECHOSTAR
Since all of the Issuer's, ESBC's and Dish's operations are conducted through
subsidiaries, the cash flow of the Issuer, ESBC and Dish and their ability to
service debt, including the 1994 Notes, the 1996 Notes and the Notes, are
dependent upon the earnings of such subsidiaries and the payment of funds by
such subsidiaries to Dish, by the payment of funds by Dish to ESBC and by the
payment of funds by ESBC to the Issuer in the form of loans, dividends or other
payments. ESBC, Dish and its subsidiaries have no current obligations,
contingent or otherwise, to pay any amounts due pursuant to the Notes or to make
any funds available therefor, whether by dividends, loans or other payments,
other than the possible guarantee of the Notes by each of Dish and ESBC, which
will become effective when and if permitted by the applicable indenture to which
such entities are subject. The cash flow generated by subsidiaries of Dish will
only be available if and to the extent that Dish is able to make such cash
available to ESBC in the form of dividends, loans or other payments. The
indentures related to the 1994 Notes and the 1996 Notes impose various
restrictions on the transfer of funds among EchoStar and its subsidiaries. The
1994 Notes Indenture contains restrictive covenants that, among other things,
impose limitations on Dish and its subsidiaries with respect to their ability
to: (i) incur additional indebtedness; (ii) issue preferred stock; (iii) sell
assets; (iv) create, incur or assume liens; (v) create dividend and other
payment restrictions with respect to Dish's subsidiaries; (vi) merge,
consolidate or sell assets; and (vii) enter into transactions with affiliates.
In addition, Dish, may pay dividends on its equity securities only if (1) no
default exists under the 1994 Notes Indenture; and (2) after giving effect to
such dividends, Dish's ratio of total indebtedness to cash flow (calculated in
accordance with the 1994 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's consolidated net income (less 100% of consolidated net losses) from
April 1, 1994, plus 100% of the aggregate net proceeds to Dish from the sale and
issuance of certain equity interests of Dish (including common stock).
The 1996 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) sell assets;
(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. The 1996 Notes Indenture permits ESBC to pay
dividends and make other distributions to the Issuer without restrictions.
For a description of the restrictive covenants contained in the Notes, see
"Description of Exchange Notes."
If cash generated from operation of the DISH Network-SM- is not sufficient to
meet the debt service requirements of the Notes, the 1994 Notes and the 1996
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 the Notes,
the 1994 Notes and the 1996 Notes. See "Description of Certain
Indebtedness--1994 Notes" and "--1996 Notes" for other restrictions associated
with the 1994 Notes and the 1996 Notes.
EFFECTS OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In March 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 128, "Earnings Per Share" (SFAS
No. 128), which supersedes Accounting Principles Board Opinion No. 15, "Earnings
Per Share" ("APB No. 15"). SFAS No. 128 simplifies the requirements for
60
reporting earnings per share ("EPS") by requiring companies only to report
"basic" and "diluted" EPS. SFAS No. 128 is effective for both interim and
annual periods ending after December 15, 1997 but requires retroactive
restatement upon adoption. EchoStar will adopt SFAS No. 128 in the fourth
quarter of 1997. EchoStar does not believe such adoption will have a material
effect on either its previously reported or future EPS.
In March 1997, the FASB issued Statement of Financial Accounting Standards
No. 129, "Disclosure of Information about Capital Structure" (SFAS No. 129),
which continues the existing requirements of APB No. 15 but expands the number
of companies subject to portions of its requirements. Specifically, SFAS No.
129 requires that entities previously exempt from the requirements of APB No. 15
disclose the pertinent rights and privileges of all securities other than
ordinary common stock. SFAS No. 129 is effective for periods ending after
December 15, 1997. EchoStar was not exempt from APB No. 15; accordingly, the
adoption of SFAS No. 129 will not have any effect on EchoStar.
In June 1997, the FASB issued Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income" ("SFAS No. 130") which establishes
standards for reporting and display of comprehensive income and its components
(revenues, expenses, gains and losses) in a full set of general-purpose
financial statements. SFAS No. 130 requires that all items that are required to
be recognized under accounting standards as components of comprehensive income
be reported in a financial statement that is displayed with the same prominence
as other financial statements. SFAS No. 130 does not require a specific format
for that financial statement but requires that the enterprise display an amount
representing total comprehensive income for the period in that financial
statement. SFAS No. 130 is effective for fiscal years beginning after December
15, 1997. The adoption of SFAS No. 130 will require additional disclosure in
EchoStar's financial statements.
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131, "Disclosures About Segments of an Enterprise and Related
Information" ("SFAS No. 131") which establishes standards for the way that
public business enterprises report information about operating segments in
annual financial statements and requires that those enterprises report
selected information about operating segments in interim financial reports
issued to shareholders. It also establishes standards for related
disclosures about products and services, geographic areas, and major
customers. SFAS No. 131 supersedes Statement of Financial Accounting
Standards No. 14, "Financial Reporting for Segments of a Business
Enterprise," but retains the requirement to report information about major
customers. SFAS No. 131 requires that a public business enterprise report
financial and descriptive information about its reportable operating
statements. Operating segments are components of an enterprise about which
separate financial information is available that is evaluated regularly by
the chief operating decision maker in deciding how to allocate resources and
in assessing performance. Generally, financial information is required to be
reported on the basis that it is used internally for evaluating segment
performance and deciding how to allocate resources to segments. SFAS No. 131
is effective for financial statements for periods beginning after December
15, 1997. The adoption of SFAS No. 131 will require additional disclosure in
EchoStar's financial statements.
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.
61
BUSINESS
GENERAL
EchoStar is a leading provider of DBS programming services in the United
States. The Company commenced its DISH Network-SM- in March 1996, after the
successful launch of EchoStar I in December 1995. The Company launched EchoStar
II in September 1996. Since December 31, 1996, EchoStar has increased its DISH
Network-SM- subscriber base approximately 83% from 350,000 to approximately
640,000 subscribers at July 31, 1997. During 1997, EchoStar believes that it has
captured approximately 30% of all new DBS satellite subscribers in the U.S.
Average monthly revenue during 1997 has been approximately $38 per subscriber.
The introduction of DBS receivers is widely regarded as the most
successful introduction of a consumer electronics product in U.S. history,
surpassing the rollout of color televisions, VCRs and compact disc players.
As of July 31, 1997, approximately 5.3 million U.S. households subscribed to
DBS and other digital DTH satellite service. Industry sources project that
the market could grow to as many as 19 million subscribers by the year 2002.
EchoStar believes that there is significant unsatisfied demand for
high-quality, reasonably-priced television programming. Of the approximately 96
million television households in the U.S., it is estimated that more than 60
million subscribers pay an average of $34 per month for multichannel programming
services. EchoStar's primary target market for the DISH Network-SM- includes
cable subscribers in urban and suburban areas who are dissatisfied with the
quality or price of their cable programming, or who want niche programming
services not available from most cable operators. Other target markets for the
DISH Network-SM- include the approximately 7 million households not passed by
cable television systems and the approximately 21 million households currently
passed by cable television systems with relatively limited channel capacity.
EchoStar has rights to more U.S. licensed DBS frequencies than any of
its competitors, and currently controls 90 frequencies, including 21
frequencies at an orbital slot capable of providing nationwide DBS service.
The Company currently provides approximately 120 channels of digital
television programming and over 30 channels of CD quality audio programming
to the entire continental U.S. DISH Network-SM- subscribers can choose from a
variety of programming packages that EchoStar believes have a better
price-to-value relationship than packages currently offered by most pay
television providers.
DISH Network-SM- programming is available to any subscriber who
purchases or leases an EchoStar Receiver System. EchoStar Receiver Systems
are fully compatible with MPEG-2, the world digital standard for computers
and consumer electronics products, and provide image and sound quality
superior to current analog cable or wireless cable service. EchoStar Receiver
Systems are designed and engineered by the Company's wholly-owned subsidiary,
HTS. Satellite receivers designed by HTS have won numerous awards from
dealers, retailers and industry trade publications.
The Company's primary objective is to become the leading provider of
subscription television services in the U.S. To achieve this objective, the
Company will seek to:
EXPAND PROGRAMMING OFFERINGS. The Company expects to launch
EchoStar III and EchoStar IV in October 1997 and in the first quarter of
1998, respectively. EchoStar III, which is expected to serve the eastern half
of the U.S. from 61.5DEG. WL and EchoStar IV, which is expected to serve the
western half of the U.S. from 148DEG. WL, should enable EchoStar to
retransmit local broadcast signals in 20 of the largest U.S. television
markets (assuming receipt of all required retransmission consents and
copyright licenses) and to provide subscribers with additional sports,
foreign language, cultural, business, educational and other niche
programming. EchoStar III and EchoStar IV will also enable EchoStar to offer
subscribers HDTV and popular Internet and other computer data at high
transmission speeds. By expanding its programming services EchoStar believes
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. In addition, the Company has
been conditionally granted FSS orbital locations at 121DEG. WL and 83DEG. WL
in the Ku-band and at 121DEG. WL and 83DEG. WL in the Ka-band, and has
applications for two extended Ku-band satellites pending at the FCC. Certain
regulatory challenges remain pending against these FSS licenses and
applications.
CONTINUE TO EXPAND DISTRIBUTION CHANNELS. The Company continues
to strengthen its sales and distribution channels, which include consumer
retail outlets, consumer electronics retailers and direct sales
representatives. For example, the Company recently announced an agreement
with JVC, under which JVC will purchase EchoStar Receiver Systems for
distribution through existing JVC channels using the JVC and DISH Network-SM-
brand names. All consumers who purchase JVC branded satellite
62
receiver systems will subscribe to DISH Network-SM- programming.
PROVIDE ATTRACTIVELY PRICED PROGRAMMING AND SYSTEMS. EchoStar's entry
level America's Top 40 programming package is priced at $19.99 per month, as
compared to, on average, over $30 per month for comparable cable service.
Consumers can add six premium movie channels for an additional $10 per month,
the same amount cable subscribers typically pay for one movie channel. On
June 1, 1997, the Company announced a new marketing program, offering
subscribers a standard EchoStar Receiver System for $199 (as compared to an
average retail price in March 1996 of $499), without requiring an extended
subscription commitment or significant up front programming payments.
EMPHASIZE ONE-STOP SHOPPING. The Company believes that providing
outstanding service, convenience and value are essential to developing
long-term customer relationships. The Company offers consumers a "one-stop
shopping" service which includes programming, installation, maintenance,
reliable customer service and satellite reception equipment. To enhance the
Company's responsiveness to its customers, the Company has established a
single telephone number (1-800-333-DISH), which customers can call 24 hours a
day, seven days a week, to order EchoStar Receiver Systems, activate
programming services, schedule installation and obtain technical support. The
Company believes it is the only DBS provider to offer a comprehensive
single-point customer service function.
DBS INDUSTRY OVERVIEW
DBS, as used in this Prospectus, describes a high power satellite
broadcast service in the Ku frequency band that, by international agreement,
contemplates unique wide orbital spacing among satellites, permitting higher
powered transmissions that can be received on an 18-inch satellite dish.
Other DTH services include FSS, which describes low power (C-band) and medium
power (Ku-band) satellite services. Small dish size generally increases
consumer acceptance and provides a substantial competitive advantage over
other DTH services.
Although the concept of DBS was introduced in 1982, it did not become
commercially viable until the last several years because available satellite
technology did not allow for the power required to transmit to small dishes and
digital compression technology had not been adequately developed. Today, DBS
provides the most cost efficient national point to multi-point transport of
video, audio and data services.
DBS satellites operate in geosynchronous orbit above the equator, from
orbital positions or "slots." Orbital slots are designated by their longitude
and comprise both a physical location and an assignment of broadcast spectrum in
the applicable frequency band, divided into 32 frequency channels, each with a
useable bandwidth of 24 MHz. With digital compression technology, each frequency
channel can be converted on average into six or more digital channels of
programming. The ITU has allotted to the U.S. eight DBS orbital slots, each with
32 frequency channels, for use by U.S. licensed DBS providers. The FCC has
indicated its belief that only the 101DEG. WL, 110DEG. WL and 119DEG. WL
slots provide full-CONUS coverage and, therefore, these three slots are
considered the most strategic. With respect to a fourth orbital position,
61.5DEG. WL, coverage of a vast majority of the continental U.S. is
commercially possible.
The FCC has issued or, EchoStar believes, may issue licenses or
construction permits for DBS orbital locations as follows:
FREQUENCY ASSIGNMENTS FOR U.S. DBS ORBITAL SLOTS
--------------------------------------------------------------------------------------------------
TOTAL
FREQUENCIES 61.5DEG. 101DEG. 110DEG. 119DEG. 148DEG. 157DEG. 166DEG. 175DEG.
--------------------------------------------------------------------------------------------------
ECHOSTAR (1)......... 90 11 1 21 24 1 32
DirecTv.............. 54 27 27
MCI/News Corp. (2)... 28 28
Continental (3)...... 22 11 11
Tempo (2)............ 22 11 11
Dominion............. 16 8 8
USSB................. 16 5 3 8
Unassigned........... 8 2 5 1
--- -- -- -- -- -- -- -- --
Totals............... 256 32 32 32 32 32 32 32 32
--- -- -- -- -- -- -- -- --
--- -- -- -- -- -- -- -- --
63
- ----------------------
(1) Includes 10 frequencies at 175DEG. WL and one frequency at 166DEG.
WL that EchoStar may be assigned if the FCC finds that EchoStar has
a firm satellite construction contract. There can be no assurance in
this regard. EchoStar has not yet developed a business plan for the
175DEG. WL orbital slot, which has limited utility for service to
the continental U.S.
(2) Does not take into account the recently announced proposed
combination of the MCI/News Corp and the Tempo licenses under
TCI Satellite Entertainment, Inc. See "Risk Factors--Competition."
(3) On May 14, 1997, the FCC granted its consent to the transfer of
Continental's permit (the "Permit") for 11 frequencies at each of
61.5DEG. WL and 166DEG. WL to R/L DBS Company L.L.C. (a subsidiary
of Loral) ("R/L") subject to certain conditions.
The operator of a digital satellite television service typically enters into
agreements with programmers, who deliver their programming content to the
digital satellite service operator via commercial satellite, fiber optics or
microwave transmissions. The digital satellite service operator generally
monitors such signals for quality, and may add promotional messages, public
service programming or other system-specific content. The signals are then
digitized, compressed, encrypted and combined with other programming sharing a
given transponder and other necessary data streams (such as conditional access
information). Each transponder's signal is then uplinked, or transmitted, to the
transponder owned or leased by the service operator on the service's satellite,
which receives and transmits the signal to consumers.
In order to receive the programming, a subscriber requires: (i) a dish, a low
noise block converter and related equipment; (ii) an integrated receiver/decoder
("IRD," sometimes referred to herein as the "satellite receiver" or "set-top
box"), which receives the data stream from each broadcasting transponder,
separates it into separate digital programming signals, decrypts and
decompresses those signals that the subscriber is authorized to receive and
converts such digital signals into analog radio frequency signals; and (iii) a
television set, to view and listen to the programming contained in such analog
signals. A subscriber's IRD is generally connected to the digital satellite
service operator's authorization center by telephone to report the purchase of
premium and pay-per-view channels.
The Cable Act and the FCC's rules, subject to certain exceptions, require
programmers affiliated with cable companies to offer programming to all
multi-channel video programming distributors on non-discriminatory terms and
conditions. The Cable Act and the FCC rules also prohibit certain exclusive
programming contracts. EchoStar anticipates purchasing a substantial percentage
of its programming from cable-affiliated programmers. Certain of the
restrictions on cable-affiliated programmers will expire in 2002 unless extended
by the FCC. As a result, any expiration of, amendment to, or interpretation of,
the Cable Act or the FCC's rules that permits the cable industry or programmers
to discriminate in the sale of programming against competing businesses, such as
that of EchoStar, could adversely affect EchoStar's ability to acquire
programming or to acquire programming on a cost-effective basis. Additionally,
although not required by law, in EchoStar's experience substantially all
unaffiliated programmers have made their programming available on fair and
reasonable terms. Pay-per-view programming has also generally been made
available to DBS providers on substantially the same terms and conditions as are
available to cable operators. See "Risk Factors--Risks of Adverse Effects of
Government Regulation."
MARKET FOR DIGITAL SATELLITE SERVICES
DBS SERVICES. Digital satellite television has been one of the fastest
selling consumer electronics products in U.S. history. As of July 31, 1997,
approximately 5.3 million U.S. households subscribed to DBS and other digital
DTH satellite services. This installed base represents a greater than 100%
increase from the approximately 2.2 million DBS subscribers as of the end of
1995 and more than ten times the approximately 500,000 DBS subscribers as of the
end of 1994. The Company believes that the market for digital satellite products
and services is growing and that there is significant unsatisfied demand for
high quality, reasonably priced television programming. Of the approximately 96
million television households in the U.S., it is estimated that more than 60
million subscribers pay an average of $34 per month for multichannel programming
services. The Company believes, therefore, that the potential market in the U.S.
for video, audio and data programming services consists of: (i) existing cable
subscribers who desire a greater variety of programming, improved video and
audio quality, better customer service and fewer transmission interruptions;
(ii) the approximately 7 million households not passed by cable and the
approximately 21 million households currently underserved by cable; (iii) the
approximately 8 million households headed by persons of foreign nationality
living in the U.S. who demand international, cultural and niche programming
typically not provided by cable television; (iv) the U.S. households which are
seeking an alternative provider of high-speed Internet and other
64
data services; (v) the mobile, commercial and institutional markets; (vi)
businesses; and (vii) the approximately 2.2 million C-band subscribers who
may desire to migrate to digital services. The large base of potential
subscribers enhances the Company's opportunity to significantly increase its
DISH Network-SM- subscriber base.
HOUSEHOLDS PASSED BY CABLE. EchoStar has specifically targeted the
approximately 85 million households that are passed by cable television.
Management believes that over 60% of the Company's DISH Network-SM- subscriber
base consists of households that are passed by cable. Although programming
offerings of cable systems in major metropolitan areas are significant, most
cable systems have a typical analog capacity of 30 to 80 channels. In order to
expand their service offering to one comparable to that offered by the DISH
Network-SM-, the Company believes that cable systems would have to upgrade their
analog networks to fiber-based digital service. Fiber upgrade implementation is
in progress in a few cable systems in select metropolitan markets, with a
resultant increase of channel capacity anticipated to be available in five to
ten years. Due to the substantial capital investment required for widescale
deployment of fiber-based services, several cable companies have delayed
originally-announced deployment schedules. The Company believes that the cost of
such upgrades, when undertaken, will ultimately be passed on to the consumer,
which may further enhance the attractiveness of the service offerings of the
DISH Network-SM- to the consumer. The Company believes that consumers will
continue to demand the improved audio and video quality, and expanded
programming offerings, that are currently available with DBS technology, but not
available from over-the-air VHF and UHF broadcasters or from cable. The Company
believes that the quality and variety of its DISH Network-SM- service offerings
relative to even the most advanced cable television systems makes it an
attractive alternative to traditional cable.
HOUSEHOLDS UNSERVED OR UNDERSERVED BY CABLE. The Company is also targeting
the approximately 7 million households which are not passed by cable and the
approximately 21 million households that are in areas served by cable systems
with fewer than 40 channels. Even the largest cable systems with sufficient
channel capacity (generally 54 or more channels) and good quality cable plant
will require costly upgrades to add bandwidth or incur significant maintenance
costs in order to offer digital programming services. The Company believes
however, that based on current compression technology, the number of channels
that a cable system would have to remove from its existing service offerings in
order to use them for digital services may, in the case of cable systems with
limited channel capacity, result in the value of their analog programming
offering being degraded and their subscribers alienated. Accordingly, pending
the availability of advanced digital compression technology now under
development, such smaller cable systems will be required to incur substantial
costs to upgrade their plant and distribution systems to expand their channel
capacity before they can introduce digital services. Due to the limited number
of subscribers across which any plant upgrades would be spread, the smaller
cable systems may find that the cost of such upgrades cannot be justified
economically. The Company believes areas served by cable systems which have not
been fully upgraded currently provide a prime market for digital satellite
services.
INTERNATIONAL, CULTURAL AND NICHE MARKETS. The Company believes that there
are approximately 8 million households headed by persons of foreign nationality
living in the U.S, encompassing approximately 23 million foreign-born persons
living in the U.S. who demand international, cultural and other niche
programming typically not provided by cable television, and who represent a
prime market for its DISH Network-SM- service offerings. Generally, it is not
cost effective for traditional broadcast television or cable companies to
provide targeted programming to these households due to the relatively low
number of such niche customers in any particular local market. These customers,
along with other customers interested in receiving international and other
cultural programming, are an important target market for the Company. The
Company's incremental cost to provide multicultural and niche programming is
relatively insignificant given the ability of digital DBS service to utilize a
national delivery system for all programming offerings. The Company believes
that, by directly marketing international programming to these potential
customers, it will also sell more of its most popular programming.
HIGH-SPEED INTERNET AND OTHER DATA SERVICES. The Company currently intends
to make space available on EchoStar III to begin test-marketing its high-speed
Internet and other related data services. The Company believes that there is
significant unsatisfied demand for alternative providers of such services and
believes that if it can provide a comparable product at a reasonable price, many
of its current DISH Network-SM- subscribers would also subscribe to the
Company's Internet and data services, thus leading to an increase in the average
recurring revenue per subscriber. Further, the Company believes that by offering
Internet and other high-speed data services, it may be able to attract
additional subscribers to the DISH Network-SM- who would otherwise not have
subscribed.
MOBILE, COMMERCIAL AND INSTITUTIONAL MARKETS. Other target markets for DBS
services include mobile, commercial and institutional markets. Historically,
many owners of recreational vehicles own C-band satellite dishes. Management
believes that the lower equipment prices and the smaller dish size will attract
many more recreational vehicle owners to DBS service. The
65
Company also believes that digital satellite services are well suited for
hotels, motels, bars, multiple-dwelling units ("MDUs"), schools and other
organizations within the commercial markets. In addition to the wide variety
of entertainment, sports, news and other general programming desired by such
commercial organizations, the Company expects that some commercial
organizations will in the future provide a market for educational, foreign
language, and other niche video and audio programming.
BUSINESS COMMUNICATION NETWORKS. The Company has had success in providing
its programming services to business and commercial subscribers, such as
multi-level marketing organizations and legal, medical and real estate
professionals. A number of large corporations are using the Company's DBS
business communication services, and over 1,000 EchoStar Receiver Systems are in
use for these services. The Company is in advanced discussions with numerous
business and trade organizations regarding its business communications services
and intends to continue the aggressive marketing of its services to business
users.
C-BAND SUBSCRIBERS. The Company believes that the lower equipment prices
combined with the higher-quality digital video and audio output provided by DBS
and the smaller dish size will attract many more current C-band subscribers to
DBS. The Company believes that its historical presence in the C-band satellite
industry has enhanced its ability to persuade current C-band subscribers to
migrate to DISH Network-SM- service.
ECHOSTAR'S EXPERIENCE IN THE DBS MARKET
The Company commenced commercial operations of the DISH Network-SM- in
March 1996 and since that time has experienced rapid subscriber growth. As of
July 31, 1997, the Company had approximately 640,000 subscribers to its DISH
Network-SM- programming services. During 1997, the Company believes that it has
captured approximately 30% of all new DBS subscribers in the U.S. The Company
also has had a significant amount of success in marketing its services to its
primary target market--existing cable television subscribers. Management
believes that more than 60% of current DISH Network-SM- subscribers have come
from homes that are passed by cable. The DISH Network-SM- has been marketed to
consumers as an alternative to traditional cable services and the Company has
had much success in differentiating itself from cable providers based on its
superior quality video and audio programming relative to cable, combined with a
better price-to-value relationship of its programming offerings. For example,
the Company's America's Top 50 CD programming package is priced at $26.99 per
month. Comparatively, on a national average, a similar package of cable
programming costs the consumer approximately $42 per month. Additionally,
according to industry estimates, more than 75% of subscribers are satisfied with
the DBS picture quality. Further, approximately 94% of those same consumers said
they would recommend satellite television to their friends. This high-level of
consumer satisfaction has been evident in the Company's low level of subscriber
turnover, which has averaged less than 1% per month. EchoStar's first year of
operations in the DBS industry also resulted in higher average revenue per
subscriber than initial expectations. This is due largely in part to the
popularity of the Company's multichannel premium service offerings, which have
proven to be very popular among subscribers.
DBS AND RELATED SERVICES
PROGRAMMING. EchoStar now provides approximately 120 channels of digital
television programming and over 30 channels of CD-quality audio programming to
the entire continental United States. EchoStar's America's Top 40 package is
priced at $19.99 per month and America's Top 50 CD is priced at $26.99 per
month. Multichannel premium services are also available for separate purchase,
at prices currently ranging from $10 to $25 per month, depending upon the number
of services purchased. 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.
66
EchoStar's primary programming packages include:
AMERICA'S TOP 40 AMERICA'S TOP 50 CD PREMIUM SERVICES (1)
---------------- ------------------- --------------------
A&E Home & Garden Television All of America's Top 40 PLUS: Multichannel Cinemax (3)
Cartoon Network Home Shopping Network Animal Planet FLIX
CNBC The Learning Channel BET Multichannel HBO (6)
CNN Lifetime CNN-fn The Movie Channel (2)
Court TV MTV CNN International Multichannel Showtime (3)
Comedy Central NET--Political NewsTalk Game Show Network Sundance Channel
C-SPAN Network KTLA-Los Angeles
C-SPAN 2 Nickelodeon MTV2
Country Music Nick at Nite Classic TV Turner Classic Movies
Television QVC WGN-Chicago
The Discovery The Sci-Fi Channel WPIX-New York
Channel The Travel Channel WSBK--Boston
Disney (2) TBS One Regional Sports Network
E! TBN
ESPN TNN
ESPN 2 TNT
ESPNews TV Land
EWTN USA
The Family Channel VH-1
Food Network The Weather Channel
Headline News
The History
Channel
- ----------------------
(1) Premium Services are available on an a-la-carte basis. Numbers in
parentheses represent the number of channels available through each
Premium Service.
EchoStar intends to offer programming telecast by local affiliates of
national television networks to certain population centers within the
continental U.S. via DBS satellite. In order to retransmit this programming to
any DISH Network-SM- subscriber in a particular local market, EchoStar must
obtain the retransmission consent of the local affiliate, and is subject to the
restrictions of the SHVA as described below. There can be no assurance that the
Company will obtain retransmission consents of any local affiliate. The
inability to transmit such programming into the local markets from which the
programming is generated could have an adverse effect on the Company.
The SHVA establishes a "compulsory" copyright license that allows a DBS
operator, for a statutorily-established fee, to retransmit local network
programming to subscribers for private home viewing so long as that
retransmission is limited to those persons in "unserved households." An
"unserved household" is one that cannot receive a sufficient over-the-air
network signal through the use of a conventional outdoor rooftop antenna and has
not, within the 90 days prior to subscribing to the DBS service, subscribed to a
cable service that provides that network signal. While management believes the
SHVA could be read to allow the Company to retransmit this programming to
certain local markets via DBS satellite, management also believes that the
"compulsory" copyright license under the SHVA may not be sufficient to permit
the Company to implement its strategy to retransmit such programming in the most
efficient and comprehensive manner. EchoStar intends to prepare, lobby for, and
see enacted national legislation amending the SHVA that would clarify or extend
the application of the "compulsory" copyright license to satellite operators
transmitting local affiliate programming into local markets. There can be no
assurance that EchoStar will be successful in having such copyright legislation
enacted, or that, in the absence of such legislation, it would be successful in
any litigation with copyright owners regarding this issue.
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DBS SALES AND MARKETING
EchoStar primarily utilizes its existing nationwide network of over 4,000
independent distribution and retail stores and outlets to market and
distribute DISH Network-SM- systems and programming services to its target
markets. EchoStar intends to enhance consumer awareness of its product
relative to other providers of DTH services by forming alliances with
nationally recognized distributors of other consumer electronics products. As
discussed previously, in May 1997 EchoStar entered into a strategic alliance
with JVC, pursuant to which JVC will distribute DISH Network-SM- satellite
receiver systems under a private label through its JVC national retail
network. EchoStar also has expanded its marketing efforts into direct sales.
To enhance the Company's responsiveness to its customers, the Company has
established a single telephone number (1-800-333-DISH) which customers can
call 24 hours a day, seven days a week to order EchoStar Receiver Systems,
activate programming services, schedule installation and obtain technical
support. The Company believes it is the only DBS provider to offer a
comprehensive single-point customer service function. EchoStar also is
expanding into other less-traditional means of distribution such as alliances
with electric and other utilities, multi-level marketing firms and other
non-consumer electronic retail businesses. 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 U.S., EchoStar believes it will be able to optimize the
marketing of its DBS products and services to distinguish itself from other
DBS suppliers.
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's marketing programs and pricing strategies, such as the 1996
Promotion and the 1997 Promotion, have significantly increased the
affordability of EchoStar Receiver Systems for consumers. The primary
purposes of the 1996 Promotion and the 1997 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. These promotions are
consistent with, and emphasize, 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 1996 and 1997
Promotions have resulted in, and will continue to result in, EchoStar
incurring significant costs to acquire subscribers. EchoStar believes such
costs will be fully recouped from future programming revenues expected to be
generated from customers obtained as a result of these promotions. DISH
Network-SM- reception equipment cannot be utilized with competitors' systems.
Consequently, subscribers cannot seamlessly migrate to alternative DBS
providers. Further, based on high DBS industry consumer satisfaction ratings,
initial feedback from consumers and dealers, and low DISH Network-SM-
subscriber turnover rates (to date less than 1.0% per month), 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 1996 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.
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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 dish, an EchoStar digital
satellite receiver (which processes and descrambles signals for television
viewing), a user-friendly 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
standard 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 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 video and audio 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 video and audio 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 is currently EchoStar's only
source of MPEG-2 DBS receivers. 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 its 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. The third-party finance company that
provides the program currently utilized by EchoStar has notified EchoStar that
it does not intend to renew the agreement, which expires during 1997. During
March 1997, 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. 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.
69
DIGITAL BROADCAST CENTER. The first step in the delivery of satellite
programming to the customer is the uplink of that programming to the satellite.
Uplink is the process by which signals are received from either the programming
originator or distributor and transmitted to a satellite. EchoStar's Digital
Broadcast Center is located in Cheyenne, Wyoming. The Digital Broadcast Center
contains fiber optic lines and downlink antennas to receive programming and
other data at the center, as well as a number of large uplink antennas and other
equipment necessary to modulate and demodulate the programming and data signals.
The compression and encryption of the programming signals is also performed at
EchoStar's Digital Broadcast Center.
CONDITIONAL ACCESS SYSTEM. EchoStar has contracted 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 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. In January 1996, however, the FCC 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 the Company believes
it is unlikely, there can be no assurance that such objections will not
subsequently require EchoStar to relinquish use of such C-band frequencies for
TT&C purposes. This could result in the inability to control EchoStar I, and 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 beyond that date. Such failure to extend the authorization could
result in the inability to control EchoStar II and a total loss of the
satellite.
DBS AND OTHER PERMITS
EchoStar's subsidiaries have been assigned 21 DBS frequencies at 119 DEG. WL,
a U.S. licensed orbital slot that provides 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.
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
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the western continental U.S., Hawaii and Alaska. These frequencies also could
provide a satellite programming link between the U.S. and the Pacific Rim, if
FCC and ITU coordination can be arranged and authorizations in the receiving
countries obtained.
The FCC has granted Dominion a conditional construction permit and related
rights to eight frequencies at 61.5 DEG. WL, the same orbital location where
EchoStar III will be located. Dominion and certain EchoStar subsidiaries are
parties to the Dominion Agreement pursuant to which Dominion, subject to
appropriate FCC approvals, has the right to use eight transponders on EchoStar
III to exploit the Dominion frequencies. Additionally, the Dominion Agreement
provides that until EchoStar III is operational, Dominion can use an entire
transponder on an EchoStar satellite located at 119 DEG. WL by paying EchoStar
$1 million per month. From December 1996 through April 1997, in consideration of
the use of such transponder for a period of five months, Dominion issued five $1
million promissory notes to EchoStar, each due May 10, 1997. When Dominion did
not repay these notes, EchoStar exercised its right under the Dominion
Agreement, subject to obtaining any necessary FCC approvals, to use and program,
for the expected life of the satellite, six of the eight transponders on
EchoStar III that Dominion has the right to use and that would operate on
frequency channels assigned to Dominion. Dominion has pending FCC applications
to modify its permit to rely on the Dominion Agreement to satisfy its due
diligence and to extend its permit. These applications have not yet been
approved. The Dominion Agreement may also require further FCC approval. Assuming
the necessary FCC approvals are obtained and any further required approvals
(including any required transfer of control approvals) are obtained, EchoStar
would have the right to use a total of up to 17 transponders on EchoStar III.
However, Echostar's ability to use a total of up to 17 transponders depends on
obtaining all necessary FCC approvals, and there can be no assurance that these
approvals will be obtained.
ESC's, DirectSat's, DBSC's and Echostar DBS Corporation's permits are
subject to continuing due diligence requirements imposed by the FCC. See
"--Government Regulation--FCC Permits and Licenses" and "Government
Regulation--DBS Rules." 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 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 2002.
EchoStar's DBS system also requires feeder link earth stations, for which
EchoStar holds authorizations from the FCC. To EchoStar's knowledge, its earth
station authorizations are not subject to any pending regulatory challenges.
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 has also been granted a license for a two-satellite FSS Ka-band system
and has an application pending for a two-satellite extended Ku-band satellite
system. EchoStar also requested a modification of its proposed Ku-band system to
add C-band capabilities to one satellite. GE Americom and PrimeStar have filed
petitions for reconsideration or cancellation and petitions to deny against
EchoStar's Ku-band conditional license, 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. Moreover,
EchoStar's Ka-band license was based on an orbital plan agreed upon by
applicants in EchoStar's processing round. That plan is subject to several
modification requests and a request for a stay. 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 relatively small dishes. 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 any 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 authority to construct,
launch and operate a six-satellite, Little LEO system, and its application has
been opposed. While primary applications for the Little LEO system are unrelated
to DBS, it is possible that the system could serve as a path for wireless
communication with EchoStar DBS customers, particularly for periodic polling of
units for pay-per-view purchases and 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
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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 Deferred Payments. The Deferred Payments bear interest at
rates ranging from 7.75% to 8.25% and are due in equal monthly installments over
five years following the launch of the respective satellite. 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.
Lockheed Martin owns each satellite (and the components thereof) it
constructs for EchoStar until the launch of the satellite. Lockheed Martin also
is required to pay penalties to EchoStar if it fails to deliver EchoStar III or
EchoStar IV on time.
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. Although EchoStar has been informed by Lockheed Martin that it
has made changes in its satellites to rectify the defects responsible for past
failures, 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.
If the launch of EchoStar III or EchoStar IV is delayed, the Company's strategy
to provide additional programming to DISH Network-SM- subscribers using
transponders on these satellites would be adversely affected.
SATELLITE LAUNCHES
EchoStar has entered into a contract for launch services with Lockheed
Services for the launch of EchoStar III from Cape Canaveral Air Station, Florida
in October 1997, subject to delay or acceleration in certain circumstances. 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. Lockheed Martin has the right to terminate the Lockheed
Contract if EchoStar postpones the launch by more than 12 months.
EchoStar has contracted with LKE for the launch of EchoStar IV during the
first quarter of 1998 from the Baikonur Cosmodrome in the Republic of
Kazakhstan. 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 through 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 launch in 1997 was successfully launched on
May 24, carrying the Telestar 5 payload. ILS has a current commercial backlog of
18 satellites to be launched by the end of 1999 on Proton. However, two of the
launches of the Proton four stage launch vehicle have failed in the last twelve
months. In February 1996, a Proton Block DM failed during launch when its main
engine did not start properly. Based on representations made by ILS, the Company
believes that corrective
72
actions have been taken that should prevent a recurrence of that failure. In
November 1996, the main engine of a Proton Block D-Z failed to properly start
a planned second burn during the launch of the Mars 96 spacecraft. According
to ILS, an analysis of the November launch failure indicates that the
improper start was most likely due to faulty guidance and control system
commands from the Mars 96 spacecraft. The Proton Block DM, which will carry
EchoStar IV, carries its own fully integrated and system level guidance and
control system, unlike the Proton Block D-2 used in the November launch.
Based on representations made by ILS, the Company believes that the
differences between the Proton Block D-2 and the Proton Block DM make a
recurrence of the causes of the Mars 96 launch failure unlikely during the
launch of EchoStar IV.
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 U.S. 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 bloc 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 U.S. 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.
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 approximately
$220 million and, together with the cash segregated and reserved on its balance
sheet, satisfied its insurance obligations under the 1994 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 1994 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 through June 25, 1997 and expects to
procure the required in-orbit insurance for EchoStar II, to commence
contemporaneous with the expiration of the launch insurance policy on
September 9, 1997. EchoStar has obtained commitments for in-orbit insurance for
EchoStar I starting June 25, 1997 and for EchoStar II starting September 9,
1997. In-orbit insurance for EchoStar I and EchoStar II includes standard
commercial satellite insurance provisions, including a material change
condition, that, if successfully invoked, will give insurance carriers the
ability to increase the cost of the insurance (potentially to a commercially
impracticable level), require exclusions from coverage that would leave the risk
uninsured or rescind their coverage commitment entirely. The in-orbit insurance
policies for EchoStar I and EchoStar II also are 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 on
terms favorable to the Company. If renewal is not possible, there can be no
assurance that EchoStar will be able to obtain replacement insurance policies on
terms favorable to EchoStar. 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 or coverage exclusions for
similar anomalies could be required. Further, although EchoStar has obtained
binders for the in-orbit insurance required for EchoStar II (for the period
after the 365 day in-orbit period covered by the launch insurance) and the
launch insurances required for EchoStar III and EchoStar IV (including in-orbit
insurance for 365 days after launch), there can be no assurance that EchoStar
will be able to obtain or maintain insurance for EchoStar III and EchoStar IV.
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;
73
(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.
If the launch of any EchoStar satellite is a full or partial failure or if,
following launch, any EchoStar satellite does not perform to specifications,
there may be circumstances in which insurance will not fully reimburse EchoStar
for any loss. In addition, insurance will not reimburse EchoStar for business
interruption, loss of business and similar losses that might arise from delay in
the launch of any EchoStar satellite.
The 1996 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%). The Indenture requires the Company to obtain in-orbit insurance for
EchoStar IV in an amount equal to the cost to construct, launch and insure
EchoStar IV (in the case of in-orbit insurance with a deductible no greater than
20%). EchoStar has bound approximately $220 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-TM and HTS Tracker-TM-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 U.S., 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 adopt 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, 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.
EchoStar Receiver Systems are designed and engineered by HTS, the Company's
wholly-owned subsidiary. HTS has entered into an agreement to sell satellite
receivers to ExpressVu, Inc. ("ExpressVu") a majority-owned affiliate of BEC,
Inc. (Bell Canada). The first phase of this agreement includes an initial order
for 62,000 satellite receivers, and primary uplink integration payments, which
combined exceed $40 million. Pursuant to this agreement, EchoStar is assisting
ExpressVu with the construction 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 U.S. EchoStar recognized revenues of approximately $11.9
million related to the ExpressVu Agreement during the three and six months ended
June 30, 1997.
On June 2, 1997, the Company announced that Telefonica has selected EchoStar
to supply digital set top boxes for its upcoming satellite television service in
Spain scheduled to launch in September 1997. In addition, EchoStar will license
its proprietary electronic programming guide for use in connection with the
digital receivers for Telefonica. Revenues from Telefonica's initial order of
100,000 digital set-top boxes are expected to approximate $40 million. EchoStar
expects to fulfill approximately one-half of the contract during the remainder
of 1997 and the remainder of the contract during early 1998.
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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 U.S. 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.
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 U.S., 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.
Advances in communications technology, as well as changes in the marketplace
and the regulatory and legislative environment, are constantly occurring. The
Company cannot predict the effect that ongoing or future developments might have
on the video programming distribution industry generally or the Company
specifically.
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 approximately 65% 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. Cable television operators currently
have an advantage relative to EchoStar with regard to the provision of local
programming as well as the provision of service to multiple television sets
within the same household. 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 U.S. 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, many consumers may find cable
service to be more attractive than 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.
The compulsory copyright license granted to satellite providers by the Satellite
Home Viewer Act is narrower in scope than the compulsory license granted to
cable operators, thus creating another competitive advantage for cable
operators.
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In addition, TCI has announced that it currently intends to provide digital
programming to TCI and other cable subscribers from Tempo's DBS satellite
launched in March 1997. Tempo'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 Tempo'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 AND HOME SATELLITE OPERATORS. In addition to EchoStar, several
other companies have DBS authorizations and are positioned to compete with
EchoStar for home satellite subscribers.
DirecTv has channel assignments at a full-CONUS orbital slot. 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 over 150 channels of combined DBS video programming. EchoStar
currently offers approximately 120 channels of digital video programming.
DirecTv currently has exclusive distribution rights for out-of-market National
Football League telecasts. 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 2.7 million
subscribers, approximately one-half of whom subscribe to USSB programming.
DirecTv recently filed an application with the FCC to construct, launch and
operate six additional DBS satellites. DirecTv requested three orbital slots for
these satellites--96.5 DEG. WL, 101 DEG. WL, and 105.5 DEG. WL. These satellites
would operate on frequencies that are not currently allocated domestically for
this use, and DirecTv has also requested an FCC rulemaking to secure such
allocations.
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 of the U.S. 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.
As a result of the successful launch and operation of a new satellite in early
1997, PrimeStar increased its medium-power programming services to approximately
150 channels. This new satellite will potentially enable PrimeStar to reduce its
dishes to approximately 29 inches for most subscribers within the continental
U.S. In addition, PrimeStar is expected to have access to significant DBS
capacity via TSAT's DBS satellite, which is capable of providing full-CONUS
service. PrimeStar has announced plans to use TSAT's DBS satellite to provide a
mix of sports, multichannel movie services, pay-per-view services, and popular
cable networks to traditional broadcast television, basic cable and other analog
programming customers. As of July 31, 1997, PrimeStar had approximately 1.9
million subscribers.
On June 11, 1997, TSAT announced that a binding letter of intent had been
signed for the restructuring of PrimeStar. PrimeStar, which is currently owned
by a group of multiple-system cable operators including TCI, has entered into an
agreement to combine its assets with ASkyB, a satellite venture formed by News
and MCI, into a single DBS provider. According to press releases, each PrimeStar
partner will contribute its PrimeStar customers and partnership interests into
the newly formed entity. ASkyB has announced that it will contribute two
satellites under construction and 28 full-CONUS frequencies at the 110 DEG. WL
orbital location. This proposed transaction requires certain federal regulatory
approvals. In addition, Tempo Satellite, Inc., a subsidiary of TSAT, has a
license for a satellite using 11 full-CONUS frequencies at the 119 DEG. WL
orbital location, and recently launched a satellite to that location.
The proposed restructuring of PrimeStar, if consummated, would create a
significant additional competitor with substantial financial and other
resources, including a significantly greater number of channels capable of
serving the entire continental U.S., than any other DBS provider. Several of the
companies that would own interests in a restructured PrimeStar entity provide
programming to cable television operators, other terrestrial systems and DBS
system operators, including EchoStar. These
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content providers, including News, Turner, Time Warner, TCI, Cox, Comcast and
US WEST would likely provide a significant amount of programming to the new
PrimeStar entity and may decide to provide this programming to PrimeStar on
better terms and at a lower cost than to other cable or DBS operators.
Additionally, those content providers could raise programming prices to all
cable, DBS and other providers (including PrimeStar), thereby increasing the
Company's cost of programming to rates that are effectively higher than those
borne by PrimeStar's owners. Although the current programming access
provisions under the Cable Act and the FCC's rules require cable-affiliated
content providers to make programming available to multi-channel video
programming distributors on non-discriminatory terms, there are exceptions to
these requirements and there can be no assurance that such requirements will
remain in effect. Any amendment to, or interpretation of, the Cable Act or
the FCC's rules which would revise or eliminate these provisions could
adversely affect EchoStar's ability to acquire programming on a
cost-effective basis.
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 services. 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. In addition to MCI,
DirectSat, USSB and Tempo/PrimeStar, two other companies have been granted
conditional permits by the FCC for DBS but are not yet operational.
Continental currently has an assignment of 11 frequencies at the 61.5 DEG.
WL orbital slot covering the eastern and central U.S. and 11 frequencies at
the 166 DEG. WL orbital slot covering the western U.S. On November 21, 1995,
the FCC granted Continental an extension of its permit until August 15, 1999.
On May 14, 1997 the FCC granted its consent to the assignment of
Continental's permit to R/L. The FCC has granted Dominion a conditional
construction permit and related rights to eight frequencies at 61.5 DEG. WL,
the same orbital location where EchoStar III will be located. Dominion and
certain EchoStar subsidiaries are parties to the Dominion Agreement pursuant
to which Dominion, subject to appropriate FCC approvals, has the right to use
eight transponders on EchoStar III to exploit the Dominion frequencies.
Additionally, the Dominion Agreement provides that until EchoStar III is
operational, Dominion can use an entire transponder on an EchoStar satellite
located at 119 DEG. WL by paying EchoStar $1 million per month. From
December 1996 through April 1997, in consideration of the use of such
transponder for a period of five months, Dominion issued five $1 million
promissory notes to EchoStar, each due May 10, 1997. When Dominion did not
repay the notes, EchoStar exercised its right under the Dominion Agreement,
subject to obtaining any necessary FCC approvals, to use and program, for the
expected life of the satellite, six of the eight transponders on EchoStar III
that Dominion has the right to use and that would operate on frequency
channels assigned to Dominion. Dominion has pending FCC applications to
modify its permit to rely on the Dominion Agreement to satisfy its due
diligence and to extend its permit. These applications have not yet been
approved. The Dominion Agreement may also require further FCC approval.
Assuming the necessary FCC approvals are obtained and any further required
approvals (including any required transfer of control approvals) are obtained
EchoStar would have the right to use a total of up to 17 transponders on
EchoStar III. However, EchoStar's ability to use a total of up to 17
transponders depends on obtaining all necessary FCC approvals, and there can
be no assurance that those approvals will be obtained. Dominion also has an
assignment of 8 frequencies at the 166 DEG. WL orbital slot covering the
western and central U.S.
During March 1996, AlphaStar Television Network, which is owned by Tee-Comm
Electronics, Inc., a Canadian company, began offering DTH programming in the
U.S. 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. On May 27, 1997,
AlphaStar filed for bankruptcy protection under Chapter 11.
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Foreign satellite systems also are potential providers of DBS within the
U.S. In May 1996, in its DISCO II proceeding, the FCC proposed permitting
non-U.S. satellite systems, including DBS systems, to serve the U.S. on terms
of competitive and regulatory parity with U.S.-licensed satellite systems.
The FCC would provide access to the U.S. market by licensing earth stations
to operate with non-U.S. satellite systems for any service that is within the
scope of "effective competitive opportunities" for U.S. satellites abroad. In
the February 1997 World Trade Organization Agreement, the U.S. offer
contained an exemption from market opening commitments for, among other
things, DBS and DTH services. The FCC is expected to revisit the DISCO II
proposed standards in light of the World Trade Organization Agreement, and
requested comment on that issue in April 1997.
The FCC has indicated that it may apply to the ITU for allocation of
additional DBS orbital locations capable of providing service to the U.S.
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 U.S. In general, non-U.S. licensed satellites are not allowed
to provide domestic DBS or DTH service in the U.S. However, in November 1996,
the U.S. 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 summer. In addition, the U.S. has indicated its
willingness to enter into similar agreements with other countries in North,
Central, and South America. If the U.S. government moves forward with these
initiatives, or if other countries authorize DBS providers to use their
orbital slots to serve the U.S., 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 U.S.
In addition, 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. Finally, other potential competitors
may provide television programming at any time by leasing transponders from
an existing satellite operator.
WIRELESS CABLE. Multichannel, multipoint distribution ("wireless cable")
systems typically offer 20 to 40 channels of programming, which may include
local programming (a potential advantage over most digital satellite
systems). Developments in high compression digital statistical multiplexing
technology are expected to increase significantly the number of channels and
video and audio quality of wireless cable systems. 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 video and audio 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 million subscribers at the end of 1996.
TELEPHONE COMPANIES. Certain telecommunications carriers, including
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
1996 Act, which was enacted in February 1996, permits telephone companies to
provide a variety of competitive video services, including owning cable
systems, with certain regulatory safeguards. It is also possible for
telephone companies to 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 telephone companies from competing in the
provision of video programming and information services. Several large
telephone companies have announced plans to acquire or merge with existing
cable 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 virtually 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 U.S. 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 has allocated
additional digital spectrum to licensed broadcasters. During a transition
period ending in 2006, each existing television station will be able to
transmit
78
programming on a digital channel that may permit multiple programming
services per channel.
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 MDUs,
without crossing public rights of way. Private cable generally operates under
an agreement with a private landowner to service a specific MDU, commercial
establishment or hotel. These agreements are often exclusive arrangements
with lengthy (E.G., ten-year) terms, and private cable systems generally are
not subject to substantial federal, state or local regulations. 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. 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.
UTILITIES. The 1996 Act also authorizes registered utility holding
companies and their subsidiaries to provide video programming services,
notwithstanding the Public Utility Holding Company Act. Utilities must
establish separate subsidiaries and must apply to the FCC for operating
authority. Several such utilities have been granted broad authority by the
FCC to engage in activities which could include the provision of video
programming.
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
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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.
GOVERNMENT REGULATION
THE FOLLOWING SUMMARY OF REGULATORY DEVELOPMENTS AND LEGISLATION DOES NOT
PURPORT TO DESCRIBE ALL PRESENT AND PROPOSED GOVERNMENT REGULATION AND
LEGISLATION AFFECTING THE VIDEO PROGRAMMING DISTRIBUTION INDUSTRY. OTHER
EXISTING GOVERNMENT REGULATIONS ARE CURRENTLY THE SUBJECT OF JUDICIAL
PROCEEDINGS, LEGISLATIVE HEARINGS OR ADMINISTRATIVE PROPOSALS THAT COULD
CHANGE, IN VARYING DEGREES, THE MANNER IN WHICH THIS INDUSTRY OPERATES.
NEITHER THE OUTCOME OF THESE PROCEEDINGS NOR THEIR IMPACT UPON THE INDUSTRY
OR THE COMPANY CAN BE PREDICTED AT THIS TIME. THIS SECTION SETS FORTH A BRIEF
DESCRIPTION OF REGULATORY ISSUES PERTAINING TO OPERATIONS OF THE COMPANY.
Authorizations and permits issued by the FCC and foreign regulatory
agencies performing similar functions are required for the construction,
launch and 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 operator of a privately owned U.S.
satellite system, EchoStar is subject to the regulatory authority of the FCC
and the Radio Regulations promulgated by the ITU. As a distributor of
television programming, EchoStar is also affected by numerous laws and
regulations, including the Communications Act. EchoStar believes that it
remains free to set prices and serve customers according to its business
judgment, without rate regulation or the statutory obligation under Title II
of the Communications Act to avoid undue discrimination among customers. Even
if, under a future interpretation of the 1996 Act, EchoStar were to be
classified as a telecommunications carrier subject to Title II, EchoStar
believes that such reclassification would not likely increase substantially
the regulatory burdens imposed on EchoStar or have an adverse impact on
EchoStar's DBS operations, although there can be no assurance in this regard.
EchoStar believes that, because it is engaged in a subscription programming
service, it is not subject to many of the regulatory obligations imposed upon
broadcast licensees. However, there can be no assurances that the FCC will
not find in the future that EchoStar should be treated as a broadcast
licensee with respect to its current and future operations. If the FCC were
to determine that Echostar is, in fact, a broadcast licensee, EchoStar could
be required to comply with all regulatory obligations imposed upon broadcast
licensees. EchoStar also requires import and general destination export
licenses issued by the U.S. 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, U.S. export regulations
apply to the delivery of the satellite and to providing related technical
information to the launch provider.
While EchoStar believes that it 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 in a timely fashion and
without the imposition of conditions or restrictions that would be
unacceptable.
FCC PERMITS AND LICENSES. As the operator of a DBS system, EchoStar is
subject to FCC jurisdiction and review primarily for: (i) assignment of
frequencies and orbital slots; (ii) compliance with the terms and conditions
of such assignments and authorizations, including required timetables for
construction and operation of satellites; (iii) authorization of individual
satellites (I.E., meeting minimum financial, legal and technical standards)
and earth stations; (iv) avoiding interference with other radio frequency
emitters; (v) compliance with rules the FCC has established specifically for
holders of U.S. DBS satellite and earth station authorizations, including
construction milestones and due diligence requirements; and (vi) compliance
with applicable provisions of the Communications Act. The FCC has granted ESC
a license to cover 11 specified frequencies for EchoStar I at 119DEG. 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 119DEG. WL orbital location. The FCC also has
issued DirectSat a conditional permit for one frequency at 110DEG. WL and 11
frequencies at 175DEG. WL. DBSC holds a conditional construction permit and
specific orbital slot assignments for 11 DBS frequencies at each of 61.5DEG.
WL and 175DEG. WL.
During January 1996, the FCC held an auction for 24 frequencies at the
148DEG. WL orbital slot. EchoStar acquired a DBS construction permit for the
use of the 24 frequencies at the 148DEG. 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.
EchoStar's FCC permits are conditioned on satisfaction of ongoing due
diligence, construction, reporting and related
80
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
it has 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 several companies with interests adverse to
EchoStar's, including Dominion, PrimeStar, Advanced, Tempo, DirecTv and
others.
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 119DEG. WL orbital location. It deferred
decision on ESC's request for an extension of time with respect to ESC's permit
for 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 119.2DEG. WL and 118.8DEG. WL. The
precise location of ESC's and DirectSat's licensed EchoStar I and EchoStar II
satellites may be outside the parameters set forth in their licenses. Therefore,
ESC and DirectSat have filed a joint request for an STA to enable them to
operate, for 180 days, EchoStar I at 119.05DEG. WL and EchoStar II at
118.95DEG. WL, which also would improve signal quality and facilitate better
customer service. That application was not timely opposed. The FCC has not yet
ruled on ESC's and DirectSat's request. The 180 day STA, if granted, would
commence contemporaneous with an FCC ruling in ESC's and DirectSat's favor. On
February 26, 1997, the FCC staff notified EchoStar of its concern that the
requested STA might cause interference to the Tempo satellite at 118.8DEG. WL.
The FCC required EchoStar to submit a technical analysis in support of the
request. EchoStar has submitted such analysis, and Tempo has submitted its own
technical analysis supporting a contrary position. There can be no assurance
that the FCC will grant or, if granted, renew EchoStar's request. Failure of the
FCC to grant EchoStar's request would require EchoStar to take steps to ensure
that EchoStar I and EchoStar II are positioned consistent with present FCC
authorizations, or to reposition the satellites, and could have an adverse
effect on the operation of these satellites. If EchoStar I and EchoStar II were
found to have been operated outside their authorized parameters, the FCC could
impose monetary forfeitures or other penalties on EchoStar. If the FCC denied
the STA, this event would not have a material impact on the Company.
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. In January
1996, the FCC 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 the use of such C-band frequencies for TT&C purposes,
such relinquishment could result in the inability to control EchoStar I and
the total loss of the satellite.
Among other regulatory requirements, all of 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. The ITU has requested certain
technical information in order to process the requested modification of the
BSS plan for EchoStar I, and EchoStar has cooperated, and continues to
cooperate, with the FCC in the preparation of its responses to any ITU
request. The Company cannot predict when the ITU will act upon this request
for modification or if it will be granted.
By an 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 118.8DEG. WL and for approval of certain modifications
made to the design of that satellite. In a separate order issued on the same
date in File No. 53-SAT-ML-95, the International Bureau granted DirectSat
conditional authority to use extended 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 FCC's refusal to extend
such authorization could result
81
in the inability to control EchoStar II and a total loss of the satellite
unless the satellite could be moved to another orbital slot with FCC approval.
By an 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. PrimeStar has
filed an application for review requesting that the FCC reverse the
International Bureau's decision to extend DBSC's construction permit. 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. ESC has a pending application for assignment of
western frequencies and an orbital position, which has been opposed. In 1992,
the FCC held that ESC had not completed contracting for its western
assignments, which is a prerequisite to the grant of specific assignments.
The FCC asked ESC to submit amended contract documentation. While EchoStar
has submitted such documentation, the FCC has not yet ruled on whether ESC
has completed contracting for that satellite. There are no assurances that
the FCC will rule favorably on this issue to enable ESC to receive western
assignments. The FCC has also deferred action on whether to extend ESC's
permit for the western assignments pending a ruling on completion of
contracting. 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 timely
progress in the construction of its DBS systems may result in cancellation of
its permits. EchoStar has not filed all required progress reports with the
FCC, and there is a risk that the filed reports may be found by the FCC not
to comply fully with its due diligence requirements.
In the event of a failure or loss of any of EchoStar I, EchoStar II, or
EchoStar III, and subject to FCC consent, EchoStar may relocate EchoStar IV
and utilize the satellite as a replacement for the failed or lost satellite.
Such a relocation would require prior FCC approval and, among other things, a
showing to the FCC that EchoStar IV would not cause additional interference
compared to EchoStar I, EchoStar II, or EchoStar III. Should EchoStar choose
to utilize EchoStar IV in this manner, there can be no assurances that such
use would not adversely affect EchoStar's ability to meet the construction,
launch and operation deadlines associated with its permits. Failure to meet
such deadlines could result in the loss of such permits and would have an
adverse effect on EchoStar's planned operations.
The 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. In the event the FCC declines to renew the operator's license, the
operator would be required to cease operations and the frequencies would
revert to the FCC. EchoStar also requires FCC authority to operate earth
stations, including the earth stations necessary to uplink programming to its
satellites.
In addition, on November 21, 1996, EchoStar was granted conditional
authorization for two-Ku-band FSS satellites to be located at 83 WL and 121
WL, subject, among other things, to submitting additional proof of its
financial qualifications (the "ESC License"). While ESC has submitted such
proof, PrimeStar and GE Americom have challenged it, and on March 10, 1997
and March 12, 1997, respectively, have separately filed petitions to cancel
the ESC Licence on the ground that the supplemental financial information,
filed by ESC in response to a condition set forth in the ESC License, is not
adequate. If the FCC granted these petitions, ESC would lose the ESC
License. On December 23, 1996, PrimeStar and GE Americom separately filed
petitions for reconsideration of the ESC License and the reassignment of one
EchoStar satellite to a different orbital slot on the ground that the
satellite in dispute will interfere with the GE Americom satellite used by
PrimeStar for its medium-power Ku-band service. If the FCC granted these
petitions, the satellite in dispute may be reassigned to another orbital
location or it may become subject to significant limitation on its power.
Finally, PrimeStar and GE Americom have opposed ESC's request for
authorization to add C-band capabilities to one satellite of its Ku-band
system (the "C-band Capabilities") by separately filing petitions to deny
ESC's application to add the C-band Capabilities (on March 10, 1997, and on
March 12, 1997, respectively) on similar grounds set forth in their petitions
outlined above. If the FCC granted these petitions, ESC will not get the
requested authorization to add the C-band Capabilities. There can be no
assurances as to how the FCC will rule with respect to any of these
challenges. While EchoStar has not finalized a business plan which
incorporates use of this spectrum and is not relying on this spectrum
for the generation of future revenues, if the FCC were to rule against
EchoStar, a potential future business opportunity would be lost.
82
EchoStar has also been granted a license for a two-satellite FSS Ka-band
system. That license was based on an orbital plan agreed upon by applicants
in EchoStar's processing round. Certain of these applicants have now
requested changes to that orbital plan. One company (Norris) has requested a
stay of the plan, and petitions for reconsideration are pending against
certain of the licenses covered by the plan. There can be no assurance that
review of the recently granted Ka-band licenses and orbital plan by the
International Bureau and the full FCC will not eliminate the basis for
EchoStar's conditional license and result in loss of that license.
EchoStar also has an application pending with the FCC for two extended
Ku-band FSS satellites to be located at 85DEG. WL and 91DEG. WL. EchoStar
also has requested FCC authorization to modify its proposed Ku-band system to
add C-band capabilities to one satellite. 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. Any such initial applications that are granted would have a
ten-year license term and the same renewal obligations as pertain to DBS
licenses.
DBS RULES. Once the FCC grants a conditional construction permit, the
permittee must proceed with due diligence in constructing the system. The FCC
has adopted specific milestones that must be met in order to retain the
permit, unless the FCC determines that an extension or waiver is appropriate,
and permittees must file semi-annual reports on the status of their due
diligence efforts. The due diligence milestones require holders of
conditional permits to complete contracting for construction of their systems
within one year of grant of the permit (with no unresolved contingencies that
could preclude substantial construction of the satellites), and to place all
satellite stations comprising the system in operation within six years of
grant of the permit. In addition, holders of permits received after January
19, 1996 must complete construction of the first satellite in their system
within four years of grant of the permit. The FCC also may impose other
conditions on the grant of the permit. The holders of new DBS authorizations
issued on or after January 19, 1996 must also provide DBS service to Alaska
and Hawaii where the service is technically feasible from the acquired
orbital locations, which includes 148DEG. WL. Those holding DBS permits as
of January 1996 must either provide DBS service to Hawaii or Alaska from at
least one of their orbital locations or relinquish their western assignments.
Subject to applicable regulations governing non-DBS operations, a licensee
may make unrestricted use of its assigned frequencies for non-DBS purposes
during the first five years of the ten-year license term. 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 to provide DBS service.
Failure to comply with applicable Communications Act requirements and FCC
rules, regulations, policies, and orders may result in the FCC's revoking,
conditioning, or declining to review or extend an authorization.
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 within the exclusive use or control of the
viewer and in which the viewer has no 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 fully
scramble or block channels providing indecent or sexually explicit adult
programming. If a multi-channel video programming distributor cannot fully
scramble or block such programming, it must restrict transmission to those
hours of the day when children are unlikely to view the programming (as
determined by the FCC). On March 24, 1997, the U.S. Supreme Court let stand a
lower court ruling that allows enforcement of this provision pending a
constitutional challenge. In response to this ruling, the FCC declared that
its rules implementing the scrambling provision would become effective on May
18, 1997.
THE CABLE ACT. In addition to regulating pricing practices and competition
within the franchise cable television industry, the Cable Act was intended to
establish and support existing and new multi-channel video services, such as
wireless cable and DBS, to provide subscription television services. EchoStar
has benefited from the programming access provisions of the Cable Act and
83
implementing rules in that it has been able to gain access to previously
unavailable programming services and, in some circumstances, has obtained
certain programming services at reduced cost. Any amendment to, or
interpretation of, the Cable Act or the FCC's rules that would permit cable
companies or entities affiliated with cable companies to discriminate against
competitors such as EchoStar in making programming available (or to
discriminate in the terms and conditions of such programming) could adversely
affect EchoStar's ability to acquire programming on a cost-effective basis.
Certain of the restrictions on cable-affiliated programmers will expire in
2002 unless the FCC extends such restrictions.
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
by qualified candidates for office and the obligation to set aside four to
seven percent of the licensee's channel capacity for non-commercial
programming of an educational or informational nature. Within this set-aside
requirement, DBS providers must make capacity available to "national
educational programming suppliers" at below-cost rates. The FCC is conducting
a rulemaking to implement this statutory provision.
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 will be adversely affected, and
such must-carry requirements could cause the displacement of possibly more
attractive programming.
SATELLITE HOME VIEWER ACT. The SHVA establishes a "compulsory" copyright
license that allows a DBS operator, for a statutorily-established fee, to
retransmit local 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 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 in a letter 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.
EchoStar intends to offer local programming, including local network
programming, to certain population centers within the continental U.S. In
order to retransmit local programming into a market, EchoStar must obtain the
retransmission consent of the local stations, in addition to any requisite
copyright licenses. EchoStar's ability to transmit local 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 letter (described above)
may support the interpretation that the SHVA provides a "compulsory"
copyright license permitting the Company to transmit local network
programming via satellite into certain 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 that would clarify or extend the application of
the "compulsory" copyright license to satellite operators transmitting local
programming into local markets. There can be no assurance that EchoStar will
be successful in having such copyright legislation enacted, or that, in the
absence of such legislation, it would be successful in any litigation with
copyright owners regarding this issue.
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. Export licenses will be required to be
obtained from 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 U.S. 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.
84
PATENTS AND TRADEMARKS
EchoStar uses a number of trademarks for its products and services,
including "EchoStar-Registered Trademark-," "DISH Network-TM-," "DISH
Network-SM-," "America's Top 40," "America's Top 50 CD," 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 is investigating allegations of infringement and, if
appropriate, intends to vigorously defend against any suit filed by the
parties. There can be no assurance that the Company will be able to
successfully defend any suit, if brought, or that the Company will be able to
obtain a license for any patent that might be required. See "Business--Legal
Proceedings."
EMPLOYEES
EchoStar had approximately 1,400 employees at July 31, 1997, of which
approximately 1,325 worked in EchoStar's domestic operations and
approximately 75 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.
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
DESCRIPTION/USE LOCATION SQUARE FOOTAGE OWNED OR 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
85
LEGAL PROCEEDINGS
On July 29, 1996, EAC, DNCC, ESC and Echosphere Corporation (collectively,
"EchoStar Credit"), filed a civil action against Associates which is
currently pending in the U.S. 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. Associates 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 April 25, 1997, ESC and Sagem, S.A., ("Sagem"), a French corporation,
signed a settlement and release agreement under which Sagem agreed to return
a $10.0 million down payment made to Sagem and agreed to release the $15.0
million placed in escrow with a bank in connection with a manufacturing
agreement entered into in April 1995. ESC and Sagem have released all claims
against each other.
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
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 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 $10.0 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 February 24, 1997, EchoStar and News announced the News Agreement
pursuant to which, among other things, News agreed to acquire approximately
50% of the outstanding capital stock of EchoStar. News also agreed to make
available for use by EchoStar the DBS permit for 28 frequencies at 110DEG.
WL purchased by MCI for over $682 million following a 1996 FCC auction.
During late April 1997, substantial disagreements arose between the parties
regarding their obligations under the News Agreement.
On May 8, 1997, EchoStar filed a Complaint in the Court, Civil Action No.
97-960, requesting that the Court confirm EchoStar's position and declare
that News is obligated pursuant to the News Agreement to lend $200 million to
EchoStar without interest and upon such other terms as the Court orders.
On May 9, 1997, EchoStar filed a First Amended Complaint significantly
expanding the scope of the litigation, to include breach of contract, failure
to act in good faith, and other causes of action. EchoStar seeks specific
performance of the News
86
Agreement and damages, including lost profits based on, among other things, a
jointly prepared ten-year business plan showing expected profits for EchoStar
in excess of $10 billion based on consummation of the transactions
contemplated by the News Agreement.
On June 9, 1997, News filed an answer and counterclaims seeking
unspecified damages. News' answer denies all of the material allegations in
the First Amended Complaint and asserts numerous defenses, including bad
faith, misconduct and failure to disclose material information on the part of
EchoStar and its Chairman and Chief Executive Officer, Charles W. Ergen. The
counterclaims, in which News is joined by its subsidiary American Sky
Broadcasting, L.L.C., assert that EchoStar and Ergen breached their
agreements with News and failed to act and negotiate with News in good faith.
EchoStar has responded to News' answer and denied the allegations in their
counterclaims. EchoStar also has asserted various affirmative defenses.
EchoStar intends to diligently defend against the counterclaims. The parties
are now in discovery. The case has been set for a five week trial commencing
June 1, 1998, but that date could be postponed.
While EchoStar is confident of its position and believes it will
ultimately prevail, the litigation process could continue for many years and
there can be no assurance concerning the outcome of the litigation.
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.
87
MANAGEMENT
DIRECTORS AND OFFICERS
The following table sets forth information concerning certain officers and
directors of EchoStar:
NAME AGE POSITION
Charles W. Ergen... 44 Chairman, Chief Executive Officer,
President and Director
Alan M. Angelich... 53 Director
Raymond L. Friedlob 52 Director
James DeFranco..... 44 Executive Vice President and Director
R. Scott Zimmer.... 41 Vice Chairman and Vice President
David K. Moskowitz. 39 Senior Vice President, General
Counsel and Secretary
Michael T. Dugan... 48 Senior Vice President, Consumer
Products
Division
Steven B. Schaver.. 43 Chief Financial and Chief Operating
Officer
John R. Hager...... 35 Treasurer and Controller
CHARLES W. ERGEN. Mr. Ergen has been Chairman of the Board of
Directors, Chief Executive Officer and President 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, 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 SSET,
a company principally engaged in the manufacture and sale of satellite
telecommunications equipment.
ALAN M. ANGELICH. Mr. Angelich has been a director of EchoStar and a
member of its Audit and Executive Compensation Committees since October 1995.
Mr. Angelich is presently a principal with Janco Partners, Inc., an
investment banking firm specializing in the telecommunications industry. From
May 1982 to October 1993, Mr. Angelich served in various executive capacities
with Jones Intercable, Inc., including Vice Chairman of its Board of
Directors from December 1988 to October 1993. From August 1990 to October
1993, Mr. Angelich was also the Chief Executive Officer of Jones Capital
Markets, Inc.
RAYMOND L. FRIEDLOB. Mr. Friedlob has been a director of EchoStar and a
member of its Audit and Executive Compensation Committees since October 1995.
Mr. Friedlob is presently a member of the law firm of Friedlob, Sanderson,
Raskin, Paulson & Tourtillot, LLC. Prior to 1995, Mr. Friedlob was a partner
of Raskin & Friedlob, where he had practiced since 1970. Mr. Friedlob
specializes in federal securities law, corporate law, leveraged acquisitions,
mergers and taxation.
JAMES DEFRANCO. Mr. DeFranco, currently the Executive Vice President of
EchoStar, has been a Vice President and a Director of EchoStar since its
formation and, during the past five years, has held various positions with
EchoStar's subsidiaries, including President of HTS, EAC and HT Ventures,
Inc. ("HTV"), Executive Vice President of ESC, Senior Vice President of
Echosphere and EBN, and Director of 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 has 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 and certain of the
business affairs of EchoStar and its subsidiaries. From June 1986 to March
1990, Mr. Moskowitz was corporate counsel for M.D.C. Holdings, Inc., a
publicly-held home builder and mortgage finance company.
MICHAEL T. DUGAN. Mr. Dugan is the Senior Vice President of the
Consumer Products Division of EchoStar. In that capacity, Mr. Dugan is
responsible for all engineering and manufacturing operations at EchoStar. Mr.
Dugan has been with EchoStar since 1990.
88
STEVEN B. SCHAVER. Mr. Schaver was named the Chief Financial Officer of
EchoStar in February 1996. In November 1996, Mr. Schaver also was named Chief
Operating Officer. 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.
JOHN R. HAGER. Mr. Hager has been Treasurer and Controller of EchoStar
since February 1997. From August 1993 to February 1997, Mr. Hager was
Controller of American Telecasting, Inc., a national operator of multiple
wireless cable systems. Previously, Mr. Hager was with the Denver office of
Ernst & Young from May 1984 until August 1993, most recently as Audit Senior
Manager.
The Board of Directors of EchoStar currently has an Audit Committee and
an Executive Compensation Committee, both of which were established in
October 1995. The present members of the Audit and Executive Compensation
Committees are Messrs. Angelich and Friedlob. The principal functions of the
Audit Committee are: (i) to recommend to the Board of Directors the selection
of independent public accountants; (ii) review management's plan for engaging
EchoStar's independent public accountants during the year to perform
non-audit services and consider what effect these services will have on the
independence of the accountants; (iii) review the annual financial statements
and other financial reports which require approval by the Board of Directors;
(iv) review the adequacy of EchoStar's system of internal accounting
controls; and (v) review the scope of the independent public accountants'
audit plans and the results of the audit. The principal function of the
Executive Compensation Committee is to award grants under and administer
EchoStar's Stock Incentive Plan.
The Board of Directors of the Issuer consists of Messrs. Ergen, DeFranco
and Moskowitz. The Board of Directors of the Issuer has no committees. The
officers of the Issuer are Charles W. Ergen, Chairman and President; James
DeFranco, Director; and David K. Moskowitz, Senior Vice President, General
Counsel and Secretary.
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EXECUTIVE COMPENSATION
Executive Officers are compensated by certain subsidiaries of EchoStar.
The following table sets forth the cash and non-cash compensation for the
fiscal years ended December 31, 1996, 1995 and 1994 for the Named Executive
Officers.
SUMMARY COMPENSATION TABLE
LONG TERM
COMPENSATION
AWARDS/
OTHER ANNUAL SECURITIES
COMPENSATION UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS (1) OPTIONS COMPENSATION (2)
Charles W. Ergen. . . . . . . . . . . . . . . . . 1996 $190,000 $ -- $ -- 17,030 $140,680
Chairman and Chief Executive Officer 1995 190,000 -- -- 14,705 15,158
1994 177,578 -- -- 53,568 888
Carl E. Vogel (3). . . . . . . . . . . . . . . . 1996 166,923 -- -- -- 12,798
President 1995 150,000 -- -- 21,641 11,346
1994 107,300 -- -- 375,776 500
R. Scott Zimmer . . . . . . . . . . . . . . . . . 1996 160,000 -- 36,265 -- 22,461
Vice Chairman and Vice President 1995 160,000 -- 88,229 14,705 32,390
1994 148,006 -- 74,396 42,855 18,990
James DeFranco. . . . . . . . . . . . . . . . . . 1996 160,000 -- -- -- 48,990
Executive Vice President and Director 1995 156,923 -- -- 11,764 15,158
1994 154,461 -- -- 42,855 1,000
Steven B. Schaver . . . . . . . . . . . . . . . . 1996 142,498 11,787 14,340 -- 12,516
Chief Operating Officer and Chief Financial Officer 1995 116,755 21,012 4,777 23,240 10,597
1994 85,602 -- -- 10,713 --
David K. Moskowitz. . . . . . . . . . . . . . . . 1996 142,692 10,000 -- 7,495 12,994
Senior Vice President and General Counsel 1995 130,000 10,000 -- 28,048 13,270
1994 125,384 -- -- 53,568 1,000
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(1) With respect to Mr. Zimmer and Mr. Schaver, "Other Annual Compensation"
includes housing and car allowances related to their overseas assignments.
While each Named Executive Officer enjoys certain other perquisites, such
perquisites do not exceed the lesser of $50,000 or 10% of each Officer's
salary and bonus.
(2) "All Other Compensation" includes amounts contributed to the EchoStar's
401(k) plan and health insurance premiums paid on behalf of the Named
Executive Officers. With respect to Mr. Ergen, Mr. DeFranco and Mr. Zimmer,
"All Other Compensation" also includes payments made in connection with a
tax indemnification agreement between the Corporation and such individuals.
With respect to Mr. Zimmer, "All Other Compensation" also includes home
leave and education allowances related to his overseas assignment.
(3) Mr. Vogel tendered his resignation in March 1997.
90
The following table provides information concerning grants of options to
purchase shares of Class A Common Stock of EchoStar made in 1996 to the named
executive officers.
OPTION GRANTS IN LAST FISCAL YEAR
NUMBER OF PERCENT OF
SECURITIES TOTAL OPTIONS
UNDERLYING GRANTED TO EXERCISE
OPTIONS EMPLOYEE IN PRICE PER GRANT DATE
NAME GRANTED 1996 SHARE EXPIRATION DATE PRESENT VALUE
Charles W. Ergen................ 17,030(1) 12.3% $29.36 August 1, 2006 $280,804 (2)
David K. Moskowitz.............. 7,495(1) 5.4% 26.69 August 1, 2006 127,601 (2)
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(1) In August 1996, the Corporation granted options to the Named Executive
Officers, among other key employees, to purchase shares of Class A Common
Stock. The options vest 20% on August 1, 1997, and 20% thereafter on
August 1, 1998, 1999, 2000 and 2001. See "--Stock Incentive Plan." The
options expire five years from the date on which each portion of the option
first becomes exercisable, subject to early termination in certain
circumstances.
(2) Option values reflect Black-Scholes model output for options. The
assumptions used in the model were expected volatility of 62%, risk free
rate of return of 6.8%, dividend yield of 0%, and time to exercise of six
years.
The following table provides information as of December 31, 1996,
concerning unexercised options to purchase Class A Common Stock:
FISCAL YEAR END OPTION VALUES
NUMBER OF NUMBER OF SECURITIES
SHARES UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
ACQUIRED VALUE OPTIONS AT IN-THE-MONEY OPTIONS AT
ON EXERCISE REALIZED DECEMBER 31, 1996 DECEMBER 31, 1996 (1)
---------------------------- -----------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
Charles W. Ergen.......... -- $ -- 24,367 60,936 $268,108 $465,963
R. Scott Zimmer........... 17,000 300,589 3,082 37,478 16,499 384,532
Carl E. Vogel............. 322,208 8,566,272 25,753 49,456 286,619 468,031
James DeFranco............ -- -- 19,494 35,125 228,898 372,767
Steven B. Schaver......... -- -- 8,931 25,022 76,524 170,486
David K. Moskowitz........ -- -- 27,034 62,077 289,817 480,824
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(1) The dollar value of each exercisable and unexercisable option was
calculated by multiplying the number of shares of Class A Common Stock
underlying the option by the difference between the exercise price of the
option and the closing price (as quoted in the Nasdaq National Market) of a
share of Class A Common Stock on December 31, 1996.
EXECUTIVE COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION.
Prior to October 1995, the Company did not have an Executive Compensation
Committee, and its Board of Directors determined all matters concerning
executive compensation.
DIRECTOR COMPENSATION. Directors of the Company who are not also
Executive Officers of the Company receive $500 for each meeting of the Board
of Directors attended and are reimbursed for reasonable travel expenses
related to attendance at Board meetings. Directors of the Company are elected
annually by the stockholders of the Company. Directors of the Company are not
compensated for their services as Directors. Directors who are not also
employees of the Company are granted shares of options under the 1995
Nonemployee Director Stock Option Plan (the "Director Plan") to acquire 1,000
shares of Class A Common Stock of the Company upon election to the Board.
Each of Messrs. Angelich and Friedlob was granted options to acquire 1,000
shares of Class A Common Stock of the Company on December 22, 1995 pursuant
to the Director Plan. These options were
91
100% vested upon issuance and have an exercise price of $20.25 per share and
a term of five years. Additionally, in February 1997, each of Messrs.
Angelich and Friedlob was granted options to acquire 5,000 shares of Class A
Common Stock of the Company. These options were 100% vested upon issuance and
have an exercise price of $17.00 and a term of five years.
STOCK INCENTIVE PLAN. The Company adopted the Incentive Plan to provide
incentives to attract and retain Executive Officers and other key employees.
The Company's Executive Compensation Committee administers the Incentive
Plan. Key employees are eligible to receive awards under the Incentive Plan,
in the Committee's discretion.
Awards available under the Incentive Plan include: (i) common stock
purchase options; (ii) stock appreciation rights; (iii) restricted stock and
restricted stock units; (iv) performance awards; (v) dividend equivalents;
and (vi) other stock-based awards. The Company has reserved up to 10.0
million shares of Class A Common Stock for granting awards under the
Incentive Plan. Under the terms of the Incentive Plan, the Executive
Compensation Committee retains discretion, subject to plan limits, to modify
the terms of outstanding awards and to reprice awards.
Pursuant to the Incentive Plan, the Company has granted options to its
Executive Officers and other key employees for the purchase of a total of
1,303,147 shares of Class A Common Stock. These options generally vest at the
rate of 20% per year, commencing one year from the date of grant and 20%
thereafter on each anniversary of the date of grant. The exercise prices of
these options range between $9.33 and $29.36 per share of Class A Common
Stock.
LAUNCH BONUS PLAN. Effective September 9, 1996, the Corporation granted a
performance award of ten shares of Class A Common Stock to all full-time
employees with more than 90 days of service. The total number of shares
granted relative to the performance award approximated 7,390 shares.
401(k) PLAN. In 1983, the Corporation adopted a defined-contribution
tax-qualified 401(k) plan. The Corporation's employees become eligible for
participation in the 401(k) plan upon completing six months of service with
the Corporation and reaching age 21. 401(k) plan participants may contribute
an amount equal to not less than 1% and not more than 15% of their
compensation in each contribution period. The Corporation may make a 50%
matching contribution up to a maximum of $1,000 per participant per calendar
year. The Corporation may also make an annual discretionary profit sharing or
employer stock contribution to the 401(k) plan with the approval of the Board
of Directors.
401(k) plan participants are immediately vested in their voluntary
contributions, plus actual earnings thereon. The balance of the vesting in
401(k) plan participants' accounts is based on years of service. A
participant becomes 10% vested after one year of service, 20% vested after
two years of service, 30% vested after three years of service, 40% vested
after four years of service, 60% vested after five years of service, 80%
vested after six years of service, and 100% vested after seven years of
service.
In March 1997, the Corporation contributed an additional 55,000 shares of
Class A Common Stock to the 401(k) plan as a discretionary employer stock
contribution. A total of 60,000 shares of Class A Common Stock (including
5,000 shares of Class A Common Stock which were contributed for plan year
1995 but not allocated) were allocated to individual participant 401(k)
accounts in proportion to their 1996 eligible compensation. These shares are
subject to the seven-year vesting schedule previously described. Shares of
Class A Common Stock allocated to the 401(k) accounts of the Named Executive
Officers pursuant to the 1996 discretionary employer stock contribution were
as follows: (i) Charles W. Ergen, 677 shares; (ii) Carl E. Vogel, 677 shares;
(iii) R. Scott Zimmer, 677 shares; (iv) James DeFranco, 677 shares; (v)
Steven B. Schaver, 676 shares; (vi) David K. Moskowitz, 677 shares; and (vii)
all Officers and Directors as a group, 4,736 shares.
92
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Certain subsidiaries of EchoStar have agreed to indemnify Charles W.
Ergen, Chairman and Chief Executive Officer of EchoStar, James DeFranco,
Executive Vice President of EchoStar, R. Scott Zimmer, Vice Chairman and Vice
President of EchoStar, and Cantey M. Ergen, a former Director of HTS and the
spouse of Charles W. Ergen, for any adjustments to such individuals' federal,
state or local income taxes resulting from adjustments to EchoStar's
subsidiaries' taxable income or loss, tax credits or tax credit recapture for
years during which such individuals were shareholders of such subsidiaries
and such subsidiaries elected to be taxed as Subchapter S corporations. This
indemnity agreement also covers interest, penalties and additions to tax, as
well as fees and expenses, including attorneys' and accountants' fees, if
any.
As of December 31, 1996 and June 30, 1997, accrued dividends on the Dish
Series A Preferred Shares and the Preferred Shares of EchoStar payable to
Messrs. Ergen and DeFranco aggregated $3.18 million and $3.75 million, and
$167,000 and $198,000, respectively.
Since March 1995, Mr. Ergen has served on the Board of Directors of SSET.
In 1994, EchoStar purchased $8.75 million of SSET's seven-year, 6.5%
subordinated convertible debentures. In December 1994, DirectSat Corporation,
a subsidiary of SSET, was merged with a wholly-owned subsidiary of EchoStar.
As a result of this merger, SSET acquired 800,780 shares of Class A Common
Stock of EchoStar. On September 6, 1996, SSET repurchased $3.5 million of the
outstanding convertible debentures and paid all outstanding accrued interest
through that date. As of December 31, 1996, the SSET debentures, if
converted, would have represented approximately 5% of SSET's outstanding
common stock. The total amount owed by SSET to EchoStar as of December 31,
1996 and June 30, 1997 related to the convertible debentures was
approximately $3.6 million and $4.1 million, respectively.
93
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, to the best knowledge of the EchoStar,
the beneficial ownership of the EchoStar's equity securities as of July 31,
1997 by: (i) each person known by the Corporation to be the beneficial owner
of more than five percent of any class of the Corporation's capital stock;
(ii) each Director of the Corporation; (iii) each person acting as an
executive officer of the Company; and (iv) all Directors and Executive
Officers as a group. Unless otherwise indicated, each person listed in the
following table (alone or with family members) has sole voting and
dispositive power over the shares listed opposite such person's name.
NUMBER OF PERCENTAGE OF
NAME (1) SHARES CLASS
8% SERIES A CUMULATIVE PREFERRED STOCK:
Charles W. Ergen (2)..................................................... 1,535,847 95.0%
James DeFranco........................................................... 80,834 5.0%
All Directors and Executive Officers as a Group (nine persons)........... 1,616,681 100.0%
CLASS A COMMON STOCK:
Charles W. Ergen (3), (4), (5)........................................... 31,387,620 72.0%
James DeFranco (6), (4).................................................. 1,525,320 3.5%
FMR Corp. (7)............................................................ 1,186,459 2.7%
R. Scott Zimmer (8), (4)................................................. 819,836 1.9%
T. Rowe Price Associates, Inc. (9)....................................... 755,000 1.7%
SSE Telecom, Inc. (10)................................................... 709,780 1.6%
Chancellor LGT Asset Management, Inc. (11)............................... 609,200 1.4%
David K. Moskowitz (12), (4)............................................. 49,521 *
Steven B. Schaver (13), (4).............................................. 12,781 *
All Directors and Executive Officers as a Group (nine persons)(4),(14)... 33,831,528 77.7%
CLASS B COMMON STOCK:
Charles W. Ergen......................................................... 29,804,401 100.0%
All Directors and Executive Officers as a Group (nine persons)........... 29,804,401 100.0%
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* Less than 1%.
(1) Except as otherwise noted, the address of each such person is 90
Inverness Circle East, Englewood, Colorado 80112-5300.
(2) Includes 1,125,000 Preferred Shares held in trust for the benefit of
Mr. Ergen's minor children and other members of his family.
Mr. Ergen's spouse is the trustee for that trust.
(3) Includes: (i) the right to acquire 41,428 shares of Class A Common
Stock within 60 days upon the exercise of employee stock options;
(ii) 29,804,401 shares of Class A Common Stock issuable upon
conversion of Mr. Ergen's shares of Class B
94
Common Stock; (iii) 410,847 shares of Class A Common Stock issuable
upon conversion of Mr. Ergen's Preferred Shares; and (iv) 1,125,000
shares of Class A Common Stock issuable upon conversion of Preferred
Shares held in trust for the benefit of Mr. Ergen's minor children
and other members of his family.
(4) Beneficial ownership percentage was calculated assuming exercise or
conversion of all shares of Class B Common Stock, Preferred Stock,
Warrants and employee stock options exercisable within 60 days
(collectively, the "Derivative Securities") into shares of Class A
Common Stock by all holders of such Derivative Securities. Assuming
exercise or conversion of Derivative Securities by such person, and
only by such person, the beneficial ownership of shares of Class A
Common Stock would be as follows: Mr. Ergen, 72.7%; Mr. DeFranco,
12.8%, Mr. Zimmer, 6.9%; Mr. Moskowitz and Mr. Schaver, less than one
percent, and all Officers and Directors as a group, 77.9%.
(5) The percentage of total voting power held by Mr. Ergen is 95.8% after
giving effect to the exercise of the Warrants and employee stock
options.
95
(6) Includes: (i) the right to acquire 30,417 shares of Class A Common
Stock within 60 days upon the exercise of employee stock options;
(ii) 80,834 shares of Class A Common Stock issuable upon conversion of
Mr. DeFranco's Preferred Shares; (iii) 751 shares of Class A Common
Stock held as custodian for his minor children; and (iv) 375,000
shares of Class A Common Stock controlled by Mr. DeFranco as general
partner of a partnership.
(7) Based on information available to the Corporation, FMR Corp. owned
10.0% of the shares of Class A Common Stock. The address of FMR Corp.
is 82 Devonshire Street, Boston, Massachusetts 02109.
(8) Includes: (i) the right to acquire 14,593 shares of Class A Common
Stock within 60 days upon the exercise of employee stock options;
(ii) 700 shares of Class A Common Stock owned jointly with members of
his family; and (iii) 100,000 shares of Class A Common Stock held in
trust for the benefit of Mr. Zimmer's children and other members of
his family. Mr. Zimmer's spouse is the trustee for that trust.
(9) Based on information available to the Corporation, T. Rowe Price
Associates, Inc. owned 6.4% of the shares of Class A Common Stock. The
address of T. Rowe Price Associates, Inc. is 100 E. Pratt Street,
Baltimore, Maryland 21202.
(10) Based on information available to the Corporation, SSET owns 6.0% of
the shares of Class A Common Stock. The address of SSET is 8230
Leesburg Pike, Suite 710, Vienna, Virginia 22182.
(11) Based on information available to the Corporation, Chancellor LGT
Asset Management, Inc. owned 5.2% of the shares of Class A Common
Stock. The address of Chancellor LGT Asset Management, Inc. is 1166
Avenue of the Americas, New York, New York 10036.
(12) Includes (i) the right to acquire 41,893 shares of Class A Common
Stock within 60 days upon the exercise of employee stock options;
(ii) 166 shares of Class A Common Stock held as custodian for his
minor children; (iii) 1,023 shares of Class A Common Stock held as
trustee for Mr. Ergen's children; and (iv) 3,000 shares of Class A
Common Stock owned jointly with Mr. Moskowitz's spouse.
(13) Includes the right to acquire 12,761 shares of Class A Common Stock
within 60 days upon the exercise of employee stock options.
(14) Includes: (i) the right to acquire 177,274 shares of Class A Common
Stock within 60 days upon the exercise of employee stock options;
(ii) 375,000 shares of Class A Common Stock held in a partnership;
(iii) 1,616,681 shares of Class A Common Stock issuable upon
conversion of Preferred Shares; (iv) 29,804,401 shares of Class A
Common Stock issuable upon conversion of shares of Class B Common
Stock; (v) 102,041 shares of Class A Common Stock held in the name of,
or in trust for, minor children and other family members; and
(vi) 3,700 shares of Class A Common Stock owned by or jointly with
family members.
96
DESCRIPTION OF CERTAIN INDEBTEDNESS
Set forth below is a summary of certain indebtedness to which Dish and
ESBC are subject. This summary does not purport to be complete and is
qualified in its entirety by reference to the applicable agreements, copies
of which may be obtained from the Company.
1994 NOTES
On June 7, 1994, Dish issued 624,000 units, consisting of the 1994
Notes, and 3,744,000 Class A Common Stock Purchase Warrants (the "Warrants").
Issuance of the 1994 Notes resulted in net proceeds to Dish of approximately
$323.3 million (including amounts attributable to issuance of the Warrants
and after payment of underwriting discount and other issuance costs
aggregating approximately $12.6 million). The 1994 Notes bear interest at a
rate of 12 7/8%, computed on a semi-annual bond equivalent basis. Interest on
the 1994 Notes will not be payable in cash prior to June 1, 1999, with the
1994 Notes accreting to a principal amount at stated maturity of $624.0
million by that date. Commencing December 1, 1999, interest on the 1994 Notes
will be payable in cash on December 1 and June 1 of each year. The 1994
Notes mature on June 1, 2004.
The 1994 Notes rank senior in right of payment to all subordinated
indebtedness of Dish and PARI PASSU in right of payment with all other senior
indebtedness of Dish, subject to the terms of an Intercreditor Agreement
between Dish, certain of its principal subsidiaries, and certain creditors
thereof. The 1994 Notes are secured by liens on certain assets of Dish and
its subsidiaries, including EchoStar I and EchoStar II and all other
components of the EchoStar DBS System owned by Dish and its subsidiaries. The
1994 Notes are further guaranteed by each material direct subsidiary of Dish.
Although the 1994 Notes are titled "Senior": (i) Dish has not issued, and
does not have any current arrangements to issue, any significant indebtedness
to which the 1994 Notes would be senior and (ii) the 1994 Notes are
subordinated to certain obligations of Dish's subsidiaries with respect to
deferred payments on EchoStar I and EchoStar II. The 1996 Notes and Notes are
effectively subordinated to the 1994 Notes and all other liabilities of Dish
and its subsidiaries.
Except under certain circumstances requiring prepayment premiums, and
in other limited circumstances, the 1994 Notes are not redeemable at Dish's
option prior to June 1, 1999. Thereafter, the 1994 Notes will be subject to
redemption, at the option of Dish, in whole or in part, at redemption prices
ranging from 104.828% during the year commencing June 1, 1999 to 100% of
principal amount 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 will be required to redeem 25% of the original
aggregate principal amount of 1994 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 1994 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 1994 Notes Indenture, Dish will be required
to make an offer to each holder of 1994 Notes to repurchase all or any part
of such holder's 1994 Notes at a purchase price equal to 101% of the accreted
value thereof on the date of purchase, if prior to June 1, 1999, 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
June 1, 1999.
The 1994 Notes Indenture contains restrictive covenants that, among
other things, impose limitations on Dish and its subsidiaries with respect to
their ability to: (i) incur additional indebtedness (including the guarantee
of indebtedness); (ii) issue preferred stock; (iii) sell assets; (iv) create,
incur or assume liens; (v) create dividend and other payment restrictions
with respect to Dish's subsidiaries; (vi) merge, consolidate or sell assets;
and (vii) enter into transactions with affiliates. As a result of these
restrictive covenants, Dish currently is not able to guarantee the Notes. In
addition, Dish, may pay dividends on its equity securities only if (1) no
default exists under the 1994 Notes Indenture; and (2) after giving effect to
such dividends, Dish's ratio of total indebtedness to cash flow (calculated
in accordance with the 1994 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's consolidated net income (less 100% of consolidated net
losses) (calculated in accordance with the 1994 Notes Indenture) from April
1, 1994, plus 100% of the aggregate net proceeds received by Dish from the
sale and issuance of certain equity interests of Dish (including common
stock). As of the date of this Prospectus, Dish does not meet the above
specified ratios and is therefore unable to pay dividends or make other
distributions to the Issuer..
The Warrants became separately transferable and exercisable on December 1,
1994. Each Warrant entitles the registered holder thereof to purchase from Dish
one share of Class A Common Stock at a purchase price of $0.01 per share, which
price has been paid in advance. No additional amounts are required to be paid
upon exercise of the Warrants. The Warrants expire on June 1, 2004.
Substantially all of the Warrants have been exercised.
97
1996 NOTES
On March 25, 1996, ESBC completed the 1996 Notes Offering consisting of
$580.0 million aggregate principal amount at stated maturity of the 1996
Notes. The 1996 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 1996 Notes
bear interest at a rate of 13 1/8%, computed on a semi-annual bond equivalent
basis. Interest on the 1996 Notes will not be payable in cash prior to March
15, 2000, with the 1996 Notes accreting to a principal amount at stated
maturity of $580.0 million by that date. Commencing September 15, 2000,
interest on the 1996 Notes will be payable in cash on September 15 and March
15 of each year. The 1996 Notes mature on March 15, 2004.
The 1996 Notes rank PARI PASSU in right of payment with all senior
indebtedness of ESBC. The 1996 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, which currently owns substantially all of
EchoStar's operating subsidiaries. Although the 1996 Notes are titled
"Senior": (i) ESBC has not issued, and does not have any plans to issue, any
indebtedness to which the 1996 Notes would be senior; and (ii) the 1996 Notes
are effectively subordinated to all liabilities of EchoStar (except
liabilities to general creditors) and its other subsidiaries (except
liabilities of ESBC), including liabilities to general creditors.
Except under certain circumstances requiring prepayment premiums, and in
other limited circumstances, the 1996 Notes are not redeemable at ESBC's
option prior to March 15, 2000. Thereafter, the 1996 Notes are subject to
redemption, at the option of ESBC, in whole or in part, at 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 1996 Notes will mature on March 15, 2004.
In the event of a change of control, as described in the 1996 Notes
Indenture, ESBC will be required to make an offer to each holder of 1996
Notes to repurchase all of such holder's 1996 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.
The 1996 Notes Indenture contains restrictive covenants that, among
other things, impose limitations on ESBC with respect to its ability to: (i)
incur additional indebtedness (including the guarantee of indebtedness); (ii)
issue preferred stock; (iii) sell assets; (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; and (vii) enter into
transactions with affiliates. As a result of these restrictive covenants,
ESBC currently is not able to guarantee the Notes. The 1996 Notes Indenture
permits ESBC to pay dividends and make other distributions to the Issuer
without restrictions.
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DESCRIPTION OF EXCHANGE NOTES
The following summary of certain provisions of: (i) the Indenture; and
(ii) the Registration Rights Agreement (the "Registration Rights Agreement"),
by and among the Issuer, the Guarantor and the Initial Purchasers, does not
purport to be complete and is qualified in its entirety by reference to the
Indenture and the Registration Rights Agreement. All material elements of
the Indenture and the Registration Rights Agreement are set forth below. The
definitions of certain terms used in the following summary are set forth
below under "--Certain Definitions." In the following summary, "EchoStar"
refers solely to EchoStar Communications Corporation and does not include any
direct or indirect subsidiaries of EchoStar. Unless the context otherwise
requires, all references herein to the "Notes" shall include the Old Notes
and the Exchange Notes.
GENERAL
The Exchange Notes will be issued, and the Old Notes were issued, pursuant
to the Indenture among the Issuer, the Guarantor and First Trust National
Association, as trustee (the "Trustee"). The terms of the Exchange Notes are
the same in all respects (including principal amount, interest rate,
maturity, security and ranking) as the terms of the Old Notes for which they
may be exchanged pursuant to the Exchange Offer, except that the Exchange
Notes (i) are freely transferable by holders thereof (except as provided
below) and (ii) are not entitled to certain registration right and certain
liquidated damages provisions which are applicable to the Old Notes under the
Registration Rights Agreement. The Exchange Notes will be issued under the
Indenture governing the Notes. The Exchange Notes are subject to all such
terms and holders of the Notes are referred to the Trust Indenture Act of
1939, as amended (the "Trust Indenture Act"). The Exchange Notes are subject
to all such terms, and holders of the Exchange Notes are referred to the
Indenture and the Trust Indenture Act for a statement thereof.
The Notes rank PARI PASSU in right of payment with all senior indebtedness
of the Issuer. Although the Notes are titled "Senior": (i) the Issuer has not
issued, and does not have any plans to issue, any indebtedness to which the
Notes would be senior and (ii) the Notes are effectively subordinated to all
liabilities of the Issuer's subsidiaries, including liabilities to general
creditors (except to the extent that any subsidiary of the Issuer may
guarantee the Notes), and the EchoStar guarantee of the Notes is subordinated
to all liabilities of EchoStar (except liabilities to general creditors). As
of March 31, 1997, the consolidated liabilities of EchoStar and its
Subsidiaries aggregated approximately $1.1 billion. On a pro forma basis,
after giving effect to issuance of the Old Notes and application of the net
proceeds therefrom, the Issuer's aggregate consolidated Indebtedness as of
March 31, 1997, for purposes of the Indenture, would have been approximately
$1.3 billion. In addition, the ability of Dish to make distributions to the
Issuer is severely limited by the terms of an indenture to which it is
subject, and the cash flow generated by the assets and operations of the
Issuer's subsidiaries will therefore only be available to satisfy the
Issuer's obligations on the Notes to the extent that such subsidiaries are
able to make distributions, directly or indirectly, to the Issuer. The Notes
will be secured by liens on the capital stock of the Issuer and certain other
assets of the Issuer and EchoStar. See "--Security," "--Affiliate
Guarantees," "Risk Factors--Springing Guarantees" and "Risk Factors--Risk of
Inability to Realize Upon Security Interests."
PRINCIPAL, MATURITY AND INTEREST
The Notes were issued in an aggregate principal amount of $375.0 million
which was sufficient to generate net proceeds to the Issuer of approximately
$362.5 million. The Notes mature on July 1, 2002. Interest on the Notes
accrues at the rate of 12 1/2% per annum and is payable semi-annually in cash
on each January 1 and July 1, commencing January 1, 1998, to holders of
record on the immediately preceding December 15 and June 15, respectively.
Interest will accrue from the most recent date to which interest has been
paid or, if no interest has been paid, from the date of issuance. Interest
will be computed on the basis of a 360-day year of twelve 30-day months.
The Notes will be payable both as to principal and interest at the office
or agency of the Issuer maintained for such purpose or, at the option of the
Issuer, payment of interest may be made by check mailed to the holders of the
Notes at their respective addresses set forth in the register of holders of
Notes. Until otherwise designated by the Issuer, the Issuer's office or
agency will be the office of the Trustee maintained for such purpose. The
Exchange Notes will be issued in registered form, without coupons, in
denominations of $1,000 and integral multiples thereof.
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OPTIONAL REDEMPTION
Except as provided in the next paragraph, the Issuer shall not have the
option to redeem the Notes prior to July 1, 2000. Thereafter, the Issuer
shall have the option to redeem the Notes, in whole or in part, upon not less
than 30 nor more than 60 days notice, at the redemption prices (expressed as
percentages of principal amount) set forth below, together with accrued and
unpaid interest thereon to the applicable redemption date, if redeemed during
the 12-month period beginning on July 1 of the years indicated below:
Year Percentage
---- ----------
2000............. 106.250%
2001............. 103.125%
2002............. 100.000%
Notwithstanding the foregoing, at any time prior to July 1, 2000, the
Issuer may redeem Notes at a redemption price equal to 112.50% of the
principal amount thereof on the repurchase date with the net proceeds of one
public or private sale of Equity Interests (other than Disqualified Stock) of
EchoStar, the Issuer or any of their Subsidiaries (other than proceeds from a
sale to EchoStar, the Issuer or any of their Subsidiaries); PROVIDED that (a)
at least two-thirds in aggregate principal amount of the Notes originally
issued remain outstanding immediately after the occurrence of such redemption
and (b) such redemption occurs within 120 days of the date of the closing of
any such sale.
SELECTION AND NOTICE
If less than all of the Notes are to be redeemed at any time, the
selection of Notes for redemption will be made by the Trustee in compliance
with the requirements of the principal national securities exchange, if any,
on which the Notes are listed, or if the Notes are not so listed on a PRO
RATA basis, by lot or in accordance with any other method the Trustee
considers fair and appropriate, PROVIDED that no Notes with a principal
amount of $1,000 or less shall be redeemed in part. In the event of partial
redemption by lot, the particular Notes to be redeemed shall be selected,
unless otherwise provided herein, not less than 30 nor more than 60 days
prior to the redemption date by the Trustee from the outstanding Notes not
previously called for redemption.
The Trustee shall promptly notify the Issuer in writing of the Notes
selected for redemption and, in the case of any Note selected for partial
redemption, the principal amount thereof to be redeemed. Notes and portions
of them selected shall be in amounts of $1,000 or whole multiples of $1,000;
except that if all of the Notes of a Holder are to be redeemed, the entire
outstanding amount of Notes held by such Holder, even if not a multiple of
$1,000, shall be redeemed.
OFFER TO PURCHASE UPON CHANGE OF CONTROL
Upon the occurrence of a Change of Control, the Issuer shall make an
offer (a "Change of Control Offer") to each Holder of Notes to repurchase all
or any part (equal to $1,000 or an integral multiple thereof) of such
Holder's Notes at a purchase price equal to 101% of the aggregate principal
amount thereof, together with accrued and unpaid interest thereon to the date
of repurchase (the "Change of Control Payment"), PROVIDED that if the date of
purchase is on or after an interest record date and on or before the related
interest payment date, any accrued interest shall be paid to the Person in
whose name a Note is registered at the close of business on such record date,
and no additional interest shall be paid or payable to Holders who tender
Notes pursuant to the Change of Control Offer. Within 15 days following any
Change of Control, the Issuer shall mail a notice to the Trustee and each
Holder stating:
(a) that the Change of Control Offer is being made pursuant to the covenant
entitled "Change of Control" and that all Notes tendered will be
accepted for payment;
(b) the purchase price and the purchase date, which shall be no earlier
than 30 days nor later than 40 days after the date such notice is
mailed (the "Change of Control Payment Date");
(c) that any Note not tendered will continue to accrue interest in
accordance with the terms of the Indenture;
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(d) that, unless the Issuer defaults in the payment of the Change of
Control Payment, all Notes accepted for payment pursuant to the Change
of Control Offer shall cease to accrue interest after the Change of
Control Payment Date;
(e) that Holders electing to have any Notes purchased pursuant to a Change
of Control Offer will be required to surrender the Notes, with the form
entitled "Option of Holder to Elect Purchase" on the reverse of the
Notes completed, to the Paying Agent at the address specified in the
notice prior to the close of business on the third Business Day
preceding the Change of Control Payment Date;
(f) that Holders will be entitled to withdraw their election if the Paying
Agent receives, not later than the close of business on the second
Business Day preceding the Change of Control Payment Date, a telegram,
telex, facsimile transmission or letter setting forth the name of the
Holder, the principal amount of Notes delivered for purchase, and a
statement that such Holder is withdrawing his election to have such
Notes purchased;
(g) that Holders whose Notes are being purchased only in part will be
issued new Notes equal in principal amount to the unpurchased portion
of the Notes surrendered, which unpurchased portion must be equal to
$1,000 in principal amount or an integral multiple thereof; and
(h) any other information material to such Holder's decision to tender the
Notes.
The Issuer shall comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent such laws and regulations are applicable in connection with the
repurchase of the Notes in connection with a Change of Control. Due to the
highly leveraged structure of the Issuer and the terms of other indebtedness
to which EchoStar and the Issuer's Subsidiaries are subject, the Issuer may
not be able to repurchase all of the Notes tendered for purchase upon the
occurrence of a Change of Control. If the Issuer fails to repurchase all of
the Notes tendered for purchase upon the occurrence of a Change of Control,
such failure will constitute an Event of Default. See "--Events of Default
and Remedies."
Except as described above with respect to a Change of Control, the
Indenture does not contain provisions that permit the holders of the Notes to
require that the Issuer repurchase or redeem the Notes in the event of a
takeover, recapitalization or similar transaction.
OFFER TO PURCHASE UPON THE OCCURRENCE OF CERTAIN EVENTS
In the event that:
(a) EchoStar and its Subsidiaries do not have the right to use orbital slot
authorizations granted by the FCC covering a minimum of 21 transponders
at a single Full-CONUS Orbital Slot; or
(b) EchoStar and its Subsidiaries at any time fail to timely obtain or
maintain any material license or permit that is necessary to operate
EchoStar I or EchoStar II in the manner and in accordance with the plan
of operations described in the Prospectus (unless (i) EchoStar or any of
its Subsidiaries is contesting the loss of such license or permit in
good faith at the FCC and has not exhausted its remedies at the FCC and
(ii) EchoStar (together with any Subsidiary) continue to have the right
to use such license or permit if previously obtained);
the Issuer will be required to make an offer (an "Offer to Purchase") (i) in
the case of clause (a), to repurchase one-half of all outstanding Notes and
(ii) in the case of clause (b), to repurchase all or any part (equal to
$1,000 or an integral multiple thereof) of each Holder's Notes, in each case
at a purchase price (the "Offer Payment") equal to 101% of the aggregate
principal amount thereof, together with accrued and unpaid interest thereon
to the date of purchase.
Within 15 days following any event described above, the Issuer shall mail
a notice to each Holder stating, among other things:
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(i) that the Offer to Purchase is being made pursuant to the covenant
entitled "Offer to Purchase upon the Occurrence of Certain Events"";
(ii) the purchase price and the purchase date, which shall be no earlier
than 30 days nor later than 40 days after the date such notice is
mailed (the "Offer Payment Date");
(iii) that any Notes not tendered will continue to accrue interest in
accordance with the terms of the Indenture;
(iv) that, unless the Issuer defaults in the payment of the Offer Payment,
all Notes accepted for payment pursuant to the Offer to Purchase shall
cease to accrue interest after the Offer Payment Date;
(v) that Holders will be entitled to withdraw their election if the Paying
Agent receives, not later than the close of business on the second
Business Day preceding the Offer Payment Date, a telegram, telex,
facsimile transmission or letter setting forth the name of the Holder,
the principal amount of Notes delivered for purchase, and a statement
that such Holder is withdrawing his election to have such Notes
purchased;
(vi) that Holders whose Notes are being purchased only in part will be
issued new Notes equal in principal amount to the unpurchased portion
of the Notes surrendered, which unpurchased portion must be equal to
$1,000 in principal amount or an integral multiple thereof; and
(vii) any other information material to such Holder's decision to tender
the Notes.
The Issuer will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent such laws and regulations are applicable in connection with the
repurchase of the Notes in connection with an Offer to Purchase. Due to the
highly leveraged structure of the Issuer and the terms of other indebtedness
to which EchoStar and the Issuer's Subsidiaries are subject, the Issuer may
not be able to repurchase all of the Notes required to be purchased by it in
connection with an Offer to Purchase. If the Issuer fails to repurchase all
of the Notes required to be purchased by it in connection with an Offer to
Purchase, such failure will constitute an Event of Default. See "--Events of
Default and Remedies."
SIGNIFICANT TRANSACTIONS
EchoStar or any of its Subsidiaries may enter into a transaction or series
of transactions (a "Significant Transaction") with another entity (a
"Strategic Partner"), notwithstanding the fact that such Significant
Transaction would otherwise be prohibited under the terms of the Indenture,
in which EchoStar or any such Subsidiary (i) sells, leases, conveys or
otherwise disposes of any of its assets (including by way of a
sale-and-leaseback transaction) to such Strategic Partner or (ii) makes an
Investment in or receives an Investment from such Strategic Partner; PROVIDED
that :
(i) EchoStar or such Subsidiary receives fair market value for any
property or assets (including capital stock) transferred in such
Significant Transaction in the opinion of a majority of the Board of
Directors of EchoStar as evidenced by an Officers' Certificate
delivered to the Trustee and an investment banking firm of national
standing selected by the Issuer; and
(ii) prior to the consummation of such Significant Transaction, the Issuer
makes an offer (a "Special Offer to Purchase") to each Holder of Notes
to repurchase, within 15 days following the consummation of such
Significant Transaction, all or any part (equal to $1,000 or an
integral multiple thereof) of such Holder's Notes at a purchase price
equal to 101% of the aggregate principal amount thereof, together with
accrued and unpaid interest thereon to the date of purchase (in either
case, the "Special Offer Payment").
At least 30 days prior to the consummation of such Significant Transaction,
the Issuer shall mail a notice to each Holder stating:
(a) that the Special Offer to Purchase is being made pursuant to the
covenant entitled "Significant Transactions";
102
(b) the purchase price and the purchase date, which shall be no earlier than
30 days nor later than 60 days after the date such notice is mailed (the
"Special Offer Payment Date");
(c) that any Notes tendered will only be repurchased in the event that such
Significant Transaction is consummated;
(d) that any Notes not tendered or not repurchased will continue to accrue
interest in accordance with the terms of the Indenture;
(e) that, if such Significant Transaction is consummated, unless the Issuer
defaults in the payment of the Special Offer Payment, all Notes accepted
for payment pursuant to the Special Offer to Purchase shall cease to
accrue interest after the Special Offer Payment Date;
(f) that Holders electing to have any Notes purchased pursuant to an Offer
to Purchase will be required to surrender the Notes, with the form
entitled "Option of Holder to Elect Purchase" on the reverse of the
Notes completed, to the Paying Agent at the address specified in the
notice prior to the close of business on the third Business Day
preceding the Special Offer Payment Date;
(g) that Holders will be entitled to withdraw their election if the Paying
Agent receives, not later than the close of business on the second
Business Day preceding the Special Offer Payment Date, a telegram,
telex, facsimile transmission or letter setting forth the name of the
Holder, the principal amount of Notes delivered for purchase, and a
statement that such Holder is withdrawing his election to have such
Notes purchased;
(h) that Holders whose Notes are being purchased only in part will be
issued new Notes equal in principal amount to the unpurchased portion of
the Notes surrendered, which unpurchased portion must be equal to $1,000
in principal amount or an integral multiple thereof; and
(i) a description of such Significant Transaction, as well as any other
information material to such Holder's decision to tender Notes.
The Issuer will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent such laws and regulations are applicable in connection with the
repurchase of Notes pursuant to a Special Offer to Purchase. Due to the
highly leveraged structure of the Issuer and the terms of other indebtedness
to which EchoStar and the Issuer's Subsidiaries are subject, the Issuer may
not be able to repurchase all of the Notes tendered for purchase in
connection with a Special Offer to Purchase. If a Significant Transaction is
consummated and the Issuer fails to repurchase all of the Notes tendered for
purchase, such failure will constitute an Event of Default. See "--Events
of Default and Remedies."
DISBURSEMENT OF FUNDS ESCROW ACCOUNTS
The Issuer placed $109.0 million of the net proceeds realized from the
sale of the Notes in the Interest Escrow Account held by the Escrow Agent for
the benefit of the Holders of the Notes. The disbursement of such funds is
governed by the Interest Escrow Agreement. Such funds, together with the
proceeds from the investment thereof, will secure, and will be sufficient
(and shall be applied) to pay, the first five semi-annual interest payments
on the Notes. Funds will be released from the Interest Escrow Account, pro
rata, to reflect any reduction in the outstanding principal amount of Notes
prior to the fifth semi-annual interest payment date.
The Issuer placed $112.0 million of the net proceeds realized from the
sale of the Notes into a Satellite Escrow Account to be held by the Escrow
Agent for the benefit of the Holders of the Notes. The disbursement of such
funds is governed by the Satellite Escrow Agreement. The Escrow Agent will
not be permitted to disburse any proceeds from the Satellite Escrow Account
unless the Issuer delivers an Officers' Certificate, prior to such
disbursement, to the Trustee and the Escrow Agent certifying that such funds
will be applied toward required payments under the Satellite Contract or
Launch Contract relating to EchoStar IV or toward a payment on Launch
Insurance or In-Orbit Insurance for EchoStar IV. Funds from the Satellite
Escrow Account will be released therefrom, on a dollar-for-dollar basis, to
the extent that the Additional Payment Obligations of the Issuer, EchoStar or
any of the
103
Issuer's Subsidiaries are contractually deferred to a date after the launch
date of EchoStar IV as evidenced by an Officers' Certificate delivered to the
Trustee and Escrow Agent.
Pending disbursement, funds maintained in the Interest Escrow Account and
the Satellite Escrow Account will be invested in Marketable Securities. The
Notes are secured by, among other things, a first priority security interest
in the Interest Escrow Account and the Satellite Escrow Account.
CERTAIN COVENANTS
RESTRICTED PAYMENTS. The Issuer shall not, and shall not permit any of
its Restricted Subsidiaries, to, directly or indirectly:
(a) declare or pay any dividend or make any distribution on account of any
Equity Interests of the Issuer or any of its Subsidiaries, other than
dividends or distributions payable in Equity Interests (other than
Disqualified Stock) of the Issuer or dividends or distributions
payable to any Wholly Owned Subsidiary of the Issuer (other than
Unrestricted Subsidiaries of the Issuer);
(b) purchase, redeem or otherwise acquire or retire for value any
outstanding Equity Interests of EchoStar, any of its Subsidiaries or
any other Affiliate of EchoStar, other than any such Equity Interests
owned by the Issuer or any of its Wholly Owned Subsidiaries (other
than Unrestricted Subsidiaries of the Issuer);
(c) voluntarily purchase, redeem, defease or otherwise acquire or retire
for value any Indebtedness that is expressly subordinated in right of
payment to the Notes, except in accordance with the scheduled
mandatory redemption or repayment provisions set forth in the original
documentation governing such Indebtedness; or
(d) make any Restricted Investment (all such prohibited payments and other
actions set forth in clauses (a) through (d) above being collectively
referred to as "Restricted Payments"), unless, at the time of such
Restricted Payment:
(1) no Default or Event of Default shall have occurred and be continuing
or would occur as a consequence thereof;
(2) after giving effect to such Restricted Payment and the incurrence of
any Indebtedness the net proceeds of which are used to finance such
Restricted Payment, the Indebtedness to Cash Flow Ratio of the Issuer
would not have exceeded 6.0 to 1; and
(3) such Restricted Payment, together with the aggregate of all other
Restricted Payments made by the Issuer after the date of the
Indenture, is less than the sum of: (A) the difference of cumulative
(x) Consolidated Cash Flow determined at the time of such Restricted
Payment (or, in case such Consolidated Cash Flow shall be a deficit,
minus 100% of such deficit) minus (y) 150% of Consolidated Interest
Expense of the Issuer, each as determined for the period (taken as
one accounting period) from July 1, 1997 to the end of the Issuer's
most recently ended fiscal quarter for which internal financial
statements are available at the time of such Restricted Payment;
plus (B) an amount equal to 100% of the aggregate net cash proceeds
received by the Issuer and its Subsidiaries from the issue or sale
of Equity Interests (other than Disqualified Stock) of the Issuer
or EchoStar (other than Equity Interests sold to a Subsidiary of
the Issuer or EchoStar, and PROVIDED that any sale of Equity
Interests of EchoStar shall only be included in such calculation to
the extent that the proceeds thereof are contributed to the capital
of the Issuer other than as Disqualified Stock or Indebtedness),
since the date of the Indenture.
The foregoing provisions will not prohibit:
(1) the payment of any dividend within 60 days after the date of declaration
thereof, if at such date of declaration such payment would have complied
with the provisions of the Indenture;
104
(2) the redemption, repurchase, retirement or other acquisition of any
Equity Interests of the Issuer in exchange for, or out of the net
proceeds of, the substantially concurrent sale (other than to a
Subsidiary of the Issuer) of other Equity Interests of the Issuer
(other than Disqualified Stock);
(3) the payment of dividends on, or the redemption of, the Dish Preferred
Stock;
(4) Investments in an aggregate amount not to exceed $20 million; PROVIDED
that such Investments are in businesses of the type described under
"--Activities of EchoStar";
(5) Investments to fund the financing activity of DNCC in the ordinary
course of its business in an amount not to exceed, as of the date of
determination, the sum of (A) $25.0 million plus (B) 30% of the
aggregate cost to DNCC for each Satellite Receiver purchased by DNCC
and leased by DNCC to a retail consumer in excess of 100,000 units;
(6) the purchase of employee stock options, or capital stock issued pursuant
to the exercise of employee stock options, in an aggregate amount not to
exceed $2 million in any calendar year and in an aggregate amount not to
exceed $10 million since the date of the Indenture;
(7) a Permitted Refinancing (as defined below in "--Incurrence of
Indebtedness, Issuance of Disqualified Stock and Issuance of Preferred
Equity Interests of Subsidiaries");
(8) Investments in an amount equal to the net proceeds received by the
Issuer or any of its Restricted Subsidiaries from the issue and sale of
Equity Interests of EchoStar (other than Equity Interests sold to a
Subsidiary of EchoStar and other than Disqualified Stock), since the
date of the Indenture; PROVIDED that the entity making such Investment
(if other than the Issuer) receives a capital contribution from
EchoStar in an amount greater than or equal to the amount of such
Investment;
(9) the purchase of odd-lots of Equity Interests of EchoStar, in an amount
not to exceed $1 million in the aggregate;
(10) Investments in ExpressVu Inc. or an Affiliate thereof, in an amount
not to exceed the amount necessary to exercise the purchase options
granted, through the date of the Indenture, to EchoStar or its
Subsidiaries with respect to ExpressVu, Inc.;
(11) Investments in ABCN, Inc. or an Affiliate thereof, in an amount not to
exceed the amount necessary to exercise the purchase options granted,
through the date of the Indenture, to EchoStar or its Subsidiaries with
respect to ABCN, Inc.; or
(12) the payment of any dividend, or making of any distribution or
Investment, the proceeds of which are, within five Business Days of
receipt thereof, used to pay for the construction, launch, operation or
insurance of EchoStar III, PROVIDED that at the time of any such
payment, distribution or Investment, EchoStar III shall be owned by
EchoStar or any Wholly Owned Subsidiary of EchoStar.
Restricted Payments made pursuant to clauses (1) and (8) shall be included
as Restricted Payments in any computation made pursuant to clause (iii) above.
Not later than the date of making any Restricted Payment, the Issuer shall
deliver to the Trustee an Officers' Certificate stating that such Restricted
Payment is permitted and setting forth the basis upon which the calculations
required by the covenant "Restricted Payments" were computed, which
calculations shall be based upon the Issuer's latest available financial
statements.
INCURRENCE OF INDEBTEDNESS, ISSUANCE OF DISQUALIFIED STOCK AND ISSUANCE OF
PREFERRED EQUITY INTERESTS OF SUBSIDIARIES. The Indenture provides that the
Issuer shall not, and the Issuer shall not permit any of its Restricted
Subsidiaries to, directly or indirectly, create, incur, issue, assume,
guaranty or otherwise become directly or indirectly liable with respect to
(collectively, "incur") any Indebtedness (including Acquired Debt) and the
Issuer shall not, and the Issuer shall not permit any of its Restricted
Subsidiaries to, issue any Disqualified Stock or any Preferred Equity
Interest; PROVIDED, HOWEVER, that notwithstanding the foregoing the Issuer
and each of its Restricted
105
Subsidiaries may incur Indebtedness or issue Disqualified Stock if, after
giving effect to the incurrence of such Indebtedness or the issuance of such
Disqualified Stock and the application of the net proceeds thereof, the
Indebtedness to Cash Flow Ratio of the Issuer would not have exceeded 6.0 to
1.
The foregoing limitation will not apply to:
(i) the incurrence of the Deferred Payments and letters of credit with
respect thereto;
(ii) the incurrence of Bank Debt;
(iii) the incurrence of Indebtedness in an aggregate amount not to exceed
$15 million upon a finding by the Issuer (evidenced by a resolution
of the Board of Directors of EchoStar set forth in an Officers'
Certificate delivered to the Trustee) that such Indebtedness is
necessary to finance costs in connection with the development,
construction, launch or insurance of EchoStar III or IV (or any
permitted replacements thereof), PROVIDED that such Indebtedness is
subordinated by its terms in right and priority of payment to the
Notes;
(iv) Indebtedness between and among the Issuer and each of its Restricted
Subsidiaries;
(v) Acquired Debt of a person incurred prior to the date upon which such
person was acquired by the Issuer or any of its Subsidiaries
(excluding Indebtedness incurred by such entity other than in the
ordinary course of its business in connection with, or in
contemplation of, such entity being so acquired) in an aggregate
principal amount not to exceed $15 million, PROVIDED that such
Indebtedness and the holders thereof do not at any time have direct
or indirect recourse to any property or assets of the Issuer or any
of its Subsidiaries other than the property and assets of such
acquired entity and its Subsidiaries;
(vi) Existing Indebtedness;
(vii) additional Indebtedness in an aggregate amount not to exceed $15
million at any one time outstanding;
(viii) the incurrence of Purchase Money Indebtedness by the Issuer and any
Restricted Subsidiary in an aggregate amount not to exceed $30
million at any one time outstanding; or
(ix) the incurrence by the Issuer or any of its Restricted Subsidiaries of
Indebtedness issued in exchange for, or the proceeds of which are
used to extend, refinance, renew, replace, substitute or refund
Indebtedness referred to in clauses (1), (3), (5), (6), (7) and (8)
above ("Refinancing Indebtedness"); PROVIDED, HOWEVER, that (A) the
principal amount of such Refinancing Indebtedness shall not exceed
the principal amount and accrued interest of the Indebtedness so
extended, refinanced, renewed, replaced, substituted or refunded;
(B) the Refinancing Indebtedness shall have a final maturity later
than, and a Weighted Average Life to Maturity equal to or greater
than; the final maturity and Weighted Average Life to Maturity of
the Indebtedness being extended, refinanced, renewed, replaced or
refunded; and (C) the Refinancing Indebtedness shall be subordinated
in right of payment to the Notes, if at all, on terms at least as
favorable to the Holders of Notes as those contained in the
documentation governing the Indebtedness being extended, refinanced,
renewed, replaced or refunded (a "Permitted Refinancing").
ASSET SALES; TRANSFER OF ECHOSTAR IV. If the Issuer or any of its
Restricted Subsidiaries, in a single transaction or a series of related
transactions:
(a) sells, leases, conveys or otherwise disposes of any assets (including
by way of a sale-and-leaseback transaction), other than (i) sales of
inventory in the ordinary course of business, (ii) sales to the Issuer
or a Wholly Owned Restricted Subsidiary of the Issuer by any
Restricted Subsidiary of the Issuer, (iii) sales of accounts
receivable by EAC or DNCC for cash in an amount at least equal to the
fair market value of such accounts receivable or (iv) sales of rights
to satellite launches (PROVIDED that the sale, lease, conveyance or
other disposition of all or substantially all of the assets of the
Issuer shall be governed by the provisions of the Indenture described
below under the caption "Merger, Consolidation, or Sale of Assets");
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(b) issue or sell equity securities of any Restricted Subsidiary of the
Issuer, in the case of either (a) or (b) above, which assets or
securities (i) have a fair market value (as determined in good faith
by the Board of Directors of EchoStar evidenced by a resolution of the
Board of Directors of EchoStar and set forth in an Officers'
Certificate delivered to the Trustee; PROVIDED, HOWEVER, that if the
fair market value of such assets exceeds $20 million, the fair market
value shall be determined by an investment banking firm of national
standing selected by the Issuer) in excess of $10 million or (ii) are
sold or otherwise disposed of for net proceeds in excess of $10
million (each of the foregoing, an "Asset Sale") then:
(A) The Issuer or such Restricted Subsidiary, as the case may be, must
receive consideration at the time of such Asset Sale at least equal
to the fair market value (as determined in good faith by the Board
of Directors of EchoStar evidenced by a resolution of the Board of
Directors of EchoStar and set forth in an Officers' Certificate
delivered to the Trustee; PROVIDED, HOWEVER, that if the fair
market value of such assets exceeds $20 million, the fair market
value shall be determined by an investment banking firm of national
standing selected by the Issuer) of the assets sold or otherwise
disposed of; and
(B) at least 80% of the consideration therefor received by the Issuer or
such Restricted Subsidiary, as the case may be, is in the form of
cash or Cash Equivalents; provided, however, that the Issuer may
consider up to $15 million of non-cash assets at any one time to be
cash for purposes of this clause (B), PROVIDED that the provisions
of the next paragraph are complied with as such non-cash assets are
converted to cash.
The Indenture provides that the Net Proceeds from such Asset Sale shall be
placed in the Satellite Escrow Account, and shall be disbursed only: (i) to
make Receiver Subsidies, to buy or lease satellite frequencies at orbital
slots or to purchase tangible assets to be used in the business of EchoStar
as described "--Activities of EchoStar," or if any satellite is sold after
launch, only to purchase a replacement satellite or (ii) as set forth in the
next sentence. Any Net Proceeds from any Asset Sale that are not applied or
invested as provided in the preceding sentence within 180 days after such
Asset Sale, and not applied to an offer to repurchase 1994 Notes required by
the 1994 Notes Indenture or 1996 Notes required by the 1996 Notes Indenture,
shall constitute "Excess Proceeds" and shall be applied to an offer to
purchase Notes as set forth under "--Excess Proceeds Offer."
Notwithstanding the foregoing or any other provision of the Indenture to
the contrary, (i) any of DBSC, EchoStar Satellite Corporation or DirectSat
Corporation may transfer its right and interest in any permits and licenses
relating to the use of channels at the 166DEG. WL or 175DEG. WL orbital
slot, or any portions thereof, without receiving any consideration and (ii)
the Issuer may lease EchoStar IV to any Wholly Owned Subsidiary of EchoStar
(other than an Unrestricted Subsidiary of the Issuer) without receiving any
consideration provided (A) either (1) such Subsidiary has the right to
operate at a full-CONUS orbital slot and EchoStar IV is used in such orbital
slot or (2)(x) there has been a full or partial launch or in-orbit failure of
EchoStar III, (y) such Subsidiary has the right to operate at the 61.5DEG.
WL orbital slot and (z) EchoStar IV is used in such orbital slot and (B)
prior to or contemporaneously with executing such lease, the Issuer delivers
to the Trustee an Opinion of Counsel (which Opinion of Counsel may be subject
to customary qualifications and exceptions), substantially to the effect that
(i) such lease is not prohibited by applicable laws, rules or regulations (or
any required consents, approvals or filings have been obtained or made, as
the case may be), (ii) such lease will not result in a default or breach
under any indenture or under any material contract, agreement or
understanding to which the Issuer is a party or by which it or its properties
is bound, and (iii) immediately following such lease, the Trustee for the
benefit of the Holders of the Notes will maintain its security interest in
EchoStar IV and all other collateral which, immediately prior to such lease,
secured the Issuer's or any Guarantor's obligations under the Notes or
Guarantee, as the case may be. The Issuer will not launch, move or otherwise
assign (collectively, "Transfer") EchoStar IV into an orbital slot other than
148DEG. WL unless prior to or contemporaneously with such Transfer the
Issuer delivers to the Trustee an Opinion of Counsel (which Opinion of
Counsel may be subject to customary qualifications and exceptions)
substantially to the effect that (i) such Transfer is not prohibited by
applicable laws, rules or regulations (or any required consents, approvals or
filings have been obtained or made, as the case may be), (ii) such Transfer
will not result in a default or breach under any indenture or under any
material contract, agreement or understanding to which the Issuer is a party
or by which it or its properties is bound, and (iii) immediately following
such Transfer, the Trustee for the benefit of the Holders of the Notes will
maintain its security interest in EchoStar IV and all other collateral which,
immediately prior to such Transfer, secured the Issuer's or any Guarantor's
Obligations under the Notes or Guarantee, as the case may be; provided
however, that in the event the Transfer constitutes an "Asset Sale", then the
Issuer (i) shall not be
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obligated to comply with the requirements of this paragraph but (ii) shall
otherwise be required to comply with the covenant entitled "Asset Sales;
Transfer of EchoStar IV" (subject to the immediately preceding paragraph) and
all other applicable provisions of the Indenture.
LIENS. The Indenture provides that none of the Issuer or any Restricted
Subsidiary of the Issuer may directly or indirectly create, incur, assume or
suffer to exist any Lien on any asset now owned or hereafter acquired, or on
any income or profits therefrom or assign or convey any right to receive
income therefrom, except Permitted Liens.
MAINTENANCE OF INSURANCE. The Indenture provides that:
(a) Prior to the launch of EchoStar IV (and any permitted replacement
thereof, including any satellite purchased with the proceeds of an
Asset Sale), the Issuer shall obtain or cause to be obtained Launch
Insurance with respect to each such satellite; and
(b) at all times subsequent to the expiration of Launch Insurance on
EchoStar IV (and any permitted replacement thereof, including any
satellite purchased with the proceeds of an Asset Sale), the Issuer
shall maintain In-orbit Insurance with respect to each such satellite.
The Indenture provides that EchoStar IV (or any replacement thereof) may
not be launched unless Launch Insurance covering such satellite has been
obtained.
In the event that the Trustee, EchoStar, the Issuer or any of their
Subsidiaries (or a named loss payee) receives proceeds from any Launch
Insurance or In-orbit Insurance covering EchoStar IV (or any replacement
thereof), or in the event that EchoStar, the Issuer or any of their
Subsidiaries receives proceeds from any insurance maintained by Lockheed
Martin or any launch provider covering EchoStar IV (or any replacement
thereof), all such proceeds (including any cash or Cash Equivalents deemed to
be proceeds of Launch Insurance or In-orbit Insurance pursuant to the
respective definition thereof) shall be placed in the Satellite Escrow
Account and shall be disbursed only: (i) to purchase a replacement
satellite, PROVIDED that if such replacement satellite is of lesser value
compared to the insured satellite, any insurance proceeds remaining after
purchase of such replacement satellite must be applied to the construction,
launch and insurance of a satellite of equal or greater value as compared to
the insured satellite (or in accordance with (ii) below); or (ii) to the
extent that such proceeds are not applied or contractually committed to be
applied as described in (i) above within 180 days of the receipt of such
proceeds as "Excess Proceeds" to be applied to an offer to purchase Notes as
set forth under "--Excess Proceeds Offer."
The Issuer shall grant or cause to be granted to the Trustee on behalf of
the Holders of the Notes (i) a first priority security interest in each
satellite constructed, launched or insured with any portion of the proceeds
of Launch or In-orbit Insurance covering EchoStar IV (or any replacement
thereof); and (ii) a collateral assignment of all contracts relating to the
construction, launch, insurance and TT&C of each such satellite. As soon as
practicable, the Issuer shall execute or cause to be executed a security
agreement relating to such Liens. The Issuer shall take or cause to be taken
all actions necessary to record, register and file any documents or
instruments necessary to make effective such Lien and shall provide an
Opinion of Counsel prepared in accordance with the Indenture with respect to
such Lien.
CONSTRUCTION OF ECHOSTAR IV. The Indenture provides that EchoStar and the
Issuer shall cause the construction and launch of EchoStar IV (and any
permitted replacements thereof) to be prosecuted with diligence and
continuity in a good and workmanlike manner in accordance with the Satellite
Contracts and the Launch Contracts.
ACTIVITIES OF ECHOSTAR. The Indenture provides that neither EchoStar nor
any of its Subsidiaries may engage in any business other than developing,
owning, engaging in and dealing with all or any part of the business of
domestic and international satellite communications, and reasonably related
extensions thereof, including but not limited to the purchase, ownership,
operation, leasing and selling of, and generally dealing in or with, one or
more communications satellites and the transponders thereon, the acquisition,
transmission, broadcast, production and other provision of programming
therewith and the manufacturing, distribution and financing of equipment
(including consumer electronic equipment) relating thereto.
ADDITIONAL SUBSIDIARY GUARANTEES. The Indenture provides that if the
Issuer or any Guarantor transfers or causes to be transferred, in one or a
series of related transactions, property or assets (including, without
limitation,
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businesses, divisions, real property, assets or equipment) having a fair
market value (as determined in good faith by the Board of Directors of
EchoStar evidenced by a resolution of the Board of Directors of EchoStar and
set forth in an Officers' Certificate delivered to the Trustee; PROVIDED,
HOWEVER that if the fair market value exceeds $10 million, the fair market
value shall be determined by an investment banking firm of national standing
selected by the Issuer) exceeding $500,000 to any Restricted Subsidiary of
the Issuer that is neither a Subsidiary of ESBC nor a Guarantor, EchoStar, to
the extent not otherwise precluded by obligations set forth in the 1996 Notes
Indenture or the 1994 Notes Indenture, shall, or shall cause the owner of
such Subsidiary to: (a) enter into a pledge agreement in order to pledge all
of the issued and outstanding Capital Stock of such Subsidiary as security to
the Trustee for the benefit of the Holders of the Notes; and (b) cause such
Subsidiary to: (i) execute and deliver to the Trustee a Supplemental
Indenture in form and substance reasonably satisfactory to the Trustee
pursuant to which such Subsidiary shall unconditionally Guarantee all of the
Issuer's obligations under the Notes and execute a notation in form and
substance reasonably satisfactory to the Trustee; and (ii) deliver to the
Trustee an Opinion of Counsel reasonably satisfactory to the Trustee that
such pledge agreement and such Supplemental Indenture have been duly
authorized, executed and delivered by and are valid and binding obligations
of such Subsidiary or such owner, as the case may be; PROVIDED, HOWEVER, that
the foregoing provisions shall not apply to transfers of property or assets
(other than cash) by the Issuer or any Guarantor in exchange for cash or Cash
Equivalents in an amount equal to the fair market value (as determined in
good faith by the Board of Directors of EchoStar evidenced by a resolution of
the Board of Directors of EchoStar and set forth in an Officers' Certificate
delivered to the Trustee; PROVIDED, HOWEVER, that if the fair market value
exceeds $10 million, the fair market value shall be determined by an
investment banking firm of national standing selected by the Issuer) of such
property or assets.
DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING SUBSIDIARIES. The
Indenture provides that the Issuer shall not, and the Issuer shall not permit
any of its Restricted Subsidiaries to, directly or indirectly, create or
otherwise cause or suffer to exist or become effective any encumbrance or
restriction on the ability of any Restricted Subsidiary to:
(a) pay dividends or make any other distributions to the Issuer or any of
its Restricted Subsidiaries on its Capital Stock or with respect to
any other interest or participation in, or measured by, its profits,
or pay any Indebtedness owed to the Issuer or any of its Subsidiaries;
(b) make loans or advances to the Issuer or any of its Subsidiaries; or
(c) transfer any of its properties or assets to the Issuer or any of its
Subsidiaries, except for such encumbrances or restrictions existing
under or by reasons of:
(i) Existing Indebtedness and existing agreements as in effect on the
date of the Indenture;
(ii) any Credit Agreement containing any encumbrances or restrictions
that are no more restrictive with respect to the provisions set
forth in clauses (a), (b) and (c) above than the 1994 Credit
Agreement as in effect on the date of its expiration;
(iii)applicable law or regulation;
(iv) any instrument governing Acquired Debt as in effect at the time
of acquisition (except to the extent such Indebtedness was
incurred in connection with, or in contemplation of, such
acquisition), which encumbrance or restriction is not applicable
to any Person, or the properties or assets of any Person, other
than the Person, or the property or assets of the Person, so
acquired, PROVIDED that the Consolidated Cash Flow of such
Person shall not be taken into account in determining whether
such acquisition was permitted by the terms of the Indenture;
(v) by reason of customary non-assignment provisions in leases
entered into in the ordinary course of business and consistent
with past practices; or
(vi) Refinancing Indebtedness, as defined in "--Incurrence of
Indebtedness, Issuance of Disqualified Stock and Issuance of
Preferred Equity Interests of Subsidiaries"), PROVIDED that the
restrictions contained in the agreements governing such
Refinancing Indebtedness are no more restrictive than those
contained in the agreements governing the Indebtedness being
refinanced.
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ACCOUNTS RECEIVABLE SUBSIDIARY. The Indenture provides that the Issuer:
(a) may, and may permit any of its Subsidiaries to, notwithstanding the
provisions of the covenant entitled "Restricted Payments," of the
Indenture, make Investments in an Accounts Receivable Subsidiary: (i)
the proceeds of which are applied within five Business Days of the
making thereof solely to finance: (A) the purchase of accounts
receivable of the Issuer and its Subsidiaries or (B) payments required
in connection with the termination of all then existing arrangements
relating to the sale of accounts receivable or participation interests
therein by an Accounts Receivable Subsidiary (PROVIDED that the
Accounts Receivable Subsidiary shall receive cash, Cash Equivalents
and accounts receivable having an aggregate fair market value not less
than the amount of such payments in exchange therefor) and (ii) in the
form of Accounts Receivable Subsidiary Notes to the extent permitted
by clause (b) below;
(b) shall not, and shall not permit any of its Subsidiaries to, sell
accounts receivable to an Accounts Receivable Subsidiary except for
consideration in an amount not less than that which would be obtained
in an arm's length transaction and solely in the form of cash or Cash
Equivalents; PROVIDED that an Accounts Receivable Subsidiary may pay
the purchase price for any such accounts receivable in the form of
Accounts Receivable Subsidiary Notes so long as, after giving effect
to the issuance of any such Accounts Receivable Subsidiary Notes, the
aggregate principal amount of all Accounts Receivable Subsidiary Notes
outstanding shall not exceed 20% of the aggregate purchase price paid
for all outstanding accounts receivable purchased by an Accounts
Receivable Subsidiary since the date of the Indenture (and not
written-off or required to be written off in accordance with the
normal business practice of an Accounts Receivable Subsidiary);
(c) shall not permit an Accounts Receivable Subsidiary to sell any
accounts receivable purchased from the Issuer and its Subsidiaries or
participation interests therein to any other Person except on an arm's
length basis and solely for consideration in the form of cash or Cash
Equivalents or certificates representing undivided interests of a
Receivables Trust; provided an Accounts Receivable Subsidiary may not
sell such certificates to any other Person except on an arm's length
basis and solely for consideration in the form of cash or Cash
Equivalents;
(d) shall not, and shall not permit any of its Subsidiaries to, enter into
any Guarantee, subject any of their respective properties or assets
(other than the accounts receivable sold by them to an Accounts
Receivable Subsidiary) to the satisfaction of any liability or
obligation or otherwise incur any liability or obligation (contingent
or otherwise), in each case, on behalf of an Accounts Receivable
Subsidiary or in connection with any sale of accounts receivable or
participation interests therein by or to an Accounts Receivable
Subsidiary, other than obligations relating to breaches of
representations, warranties, covenants and other agreements of the
Issuer or any of its Subsidiaries with respect to the accounts
receivable sold by the Issuer or any of its Subsidiaries to an
Accounts Receivable Subsidiary or with respect to the servicing
thereof; PROVIDED that neither the Issuer nor any of its Subsidiaries
shall at any time guarantee or be otherwise liable for the
collectibility of accounts receivable sold by them;
(e) shall not permit an Accounts Receivable Subsidiary to engage in any
business or transaction other than the purchase and sale of accounts
receivable or participation interests therein of the Issuer and its
Subsidiaries and activities incidental thereto;
(f) shall not permit an Accounts Receivable Subsidiary to incur any
Indebtedness other than the Accounts Receivable Subsidiary Notes,
Indebtedness owed to the Issuer and Non-Recourse Indebtedness;
PROVIDED that the aggregate principal amount of all such Indebtedness
of an Accounts Receivable Subsidiary shall not exceed the book value
of its total assets as determined in accordance with GAAP;
(g) shall cause any Accounts Receivable Subsidiary to remit to the Issuer
or a Subsidiary of the Issuer on a monthly basis as a distribution all
available cash and Cash Equivalents not held in a collection account
pledged to acquirors of accounts receivable or participation interests
therein, to the extent not applied to (i) pay interest or principal on
the Accounts Receivable Subsidiary Notes or any Indebtedness of such
Accounts Receivable Subsidiary owed to the Issuer, (ii) pay or
maintain reserves for reasonable operating expenses of such Accounts
Receivable Subsidiary or to satisfy reasonable minimum operating
capital
110
requirements or (iii) to finance the purchase of additional
accounts receivable of the Issuer and its Subsidiaries; and
(h) shall not, and shall not permit any of its Subsidiaries to, sell
accounts receivable to, or enter into any other transaction with or
for the benefit of, an Accounts Receivable Subsidiary (i) if such
Accounts Receivable Subsidiary pursuant to or within the meaning of
any Bankruptcy Law (A) commences a voluntary case, (B) consents to the
entry of an order for relief against it in an involuntary case, (C)
consents to the appointment of a Custodian of it or for all or
substantially all of its property, (D) makes general assignment for
the benefit of its creditors, or (E) generally is not paying its debts
as they become due; or (ii) if a court of competent jurisdiction
enters an order or decree under any Bankruptcy Law that (A) is for
relief against such Accounts Receivable Subsidiary in an involuntary
case, (B) appoints a Custodian of such Accounts Receivable Subsidiary
or for all or substantially all of the property of such Accounts
Receivable Subsidiary, or (C) orders the liquidation of such Accounts
Receivable Subsidiary, and, with respect to clause (ii) hereof, the
order or decree remains unstayed and in effect for 60 consecutive days.
MERGER, CONSOLIDATION, OR SALE OF ASSETS. The Indenture provides that
the Issuer may not consolidate or merge with or into (whether or not the
Issuer is the surviving entity), or sell, assign, transfer, lease, convey or
otherwise dispose of all or substantially all of its properties or assets in
one or more related transactions to, another Person unless:
(a) the Issuer is the surviving Person or the Person formed by or
surviving any such consolidation or merger (if other than the Issuer)
or to which such sale, assignment, transfer, lease, conveyance or
other disposition shall have been made is a corporation organized or
existing under the laws of the United States, any state thereof or the
District of Columbia;
(b) the Person formed by or surviving any such consolidation or merger (if
other than the Issuer) or the Person to which such sale, assignment,
transfer, lease, conveyance or other disposition shall have been made
assumes all the obligations of the Issuer, pursuant to a supplemental
indenture in a form reasonably satisfactory to the Trustee, under the
Notes and the Indenture;
(c) immediately after such transaction no Default or Event of Default
exists; and
(d) the Issuer or the Person formed by or surviving any such consolidation
or merger (if other than the Issuer), or to which such sale,
assignment, transfer, lease, conveyance or other disposition shall
have been made (i) shall have Consolidated Net Worth immediately after
the transaction (but prior to any purchase accounting adjustments or
accrual of deferred tax liabilities resulting from the transaction)
not less than the Consolidated Net Worth of the Issuer immediately
preceding the transaction and (ii) would, at the time of such
transaction after giving pro forma effect thereto as if such
transaction had occurred at the beginning of the applicable
four-quarter period, be permitted to incur at least $1.00 of
additional Indebtedness pursuant to the Indebtedness to Cash Flow
Ratio test set forth in the covenant entitled "Incurrence of
Indebtedness, Issuance of Disqualified Stock and Issuance of Preferred
Equity Interests of Subsidiaries."
Notwithstanding the foregoing, the Issuer may merge with another Person if:
(a) the Issuer is the surviving Person;
(b) the consideration issued or paid by the Issuer in such merger consists
solely of Equity Interests (other than Disqualified Stock) of the
Issuer; and
(c) immediately after giving effect to such merger, the Issuer's
Indebtedness to Cash Flow Ratio does not exceed the Issuer's
Indebtedness to Cash Flow Ratio immediately prior to such merger.
TRANSACTIONS WITH AFFILIATES. The Indenture provides that EchoStar shall
not, and shall not permit any of its Subsidiaries to, sell, lease, transfer
or otherwise dispose of any of its properties or assets to, or purchase any
property or assets from, or enter into any contract, agreement,
understanding, loan, advance or guarantee with, or for the benefit of, any
Affiliate (including any Unrestricted Subsidiary) (each of the foregoing, an
"Affiliate Transaction"), unless:
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(a) such Affiliate Transaction is on terms that are no less favorable to
the Issuer or its Subsidiaries than those that would have been
obtained in a comparable transaction by the Issuer or such
Subsidiaries with an unrelated Person;
(b) if such Affiliate Transaction involves aggregate payments in excess of
$500,000, the Issuer delivers to the Trustee a resolution of the Board
of Directors of the Issuer set forth in an Officers' Certificate
certifying that such Affiliate Transaction complies with clause (a)
above and such Affiliate Transaction is approved by a majority of
disinterested members of the Board of Directors of EchoStar; and
(c) if such Affiliate Transaction involves aggregate payments in excess of
$15 million, the Issuer delivers to the Trustee an opinion as to the
fairness to the Issuer or such Subsidiaries from a financial point of
view of such Affiliate Transaction issued by an investment banking
firm of national standing;
PROVIDED, HOWEVER, that (i) the payment of compensation to directors and
management of EchoStar in amounts approved by the Compensation Committee of
the Board of Directors of EchoStar (which shall consist of a majority of
outside directors); (ii) transactions between or among the Issuer and its
Wholly Owned Subsidiaries (other than Unrestricted Subsidiaries of the
Issuer); (iii) the transfer of rights and interests in any permits or
licenses relating to the use of channels at the 166DEG. West Longitude or
175DEG. WL orbital slot; (iv) transactions permitted by the provisions of
the Indenture described above under clauses (1), (3), (5), (6), (7), (9) and
(12) of the second paragraph of the covenant "Restricted Payments"; and (v)
any transactions between or among EchoStar and any Subsidiary of EchoStar
which is not also a Subsidiary of the Issuer, shall, in each case, not be
deemed Affiliate Transactions.
REPORTS. Whether or not required by the rules and regulations of the
SEC, so long as any of the Notes remain outstanding, the Issuer shall cause
copies of all quarterly and annual financial reports and of the information,
documents, and other reports (or copies of such portions of any of the
foregoing as the SEC may by rules and regulations prescribe) which the Issuer
is required to file with the SEC pursuant to Section 13 or 15(d) of the
Exchange Act (including all information that would be required to be
contained in Forms 10-Q and 10-K) to be filed with the SEC and the Trustee
and mailed to the Holders at their addresses appearing in the register of
Notes maintained by the Registrar, in each case, within 15 days of filing
with the SEC. If the Issuer is not subject to the requirements of such
Section 13 or 15(d) of the Exchange Act, the Issuer shall nevertheless
continue to cause the annual and quarterly financial statements, including
any notes thereto (and, with respect to annual reports, an auditors' report
by an accounting firm of established national reputation) and a "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
comparable to that which would have been required to appear in annual or
quarterly reports filed under Section 13 or 15(d) of the Exchange Act
(including all information that would be required to be contained in Forms
10-Q and 10-K), to be so filed with the SEC for public availability and the
Trustee and mailed to the Holders within 120 days after the end of the
Issuer's fiscal years and within 60 days after the end of each of the first
three quarters of each such fiscal year. The Issuer and the Guarantors shall
also comply with the provisions of TIA Section 314(a).
PAYMENTS FOR CONSENTS. Neither EchoStar, the Issuer nor any of their
Subsidiaries may, directly or indirectly, pay or cause to be paid any
consideration, whether by way of interest, fee or otherwise, to any Holder of
a Note for or as an inducement to any consent, waiver or amendment of any of
the terms or provisions of the Indenture or the Notes unless such
consideration is offered to be paid or agreed to be paid to all Holders of
the Notes that consent, waive or agree to amend in the time frame set forth
in the solicitation documents relating to such consent, waiver or agreement.
EXCESS PROCEEDS OFFER. When the cumulative amount of Excess Proceeds
that have not been applied in accordance with the covenants entitled
"Significant Transactions," "Asset Sales; Transfer of EchoStar IV" and
"Maintenance of Insurance" or this paragraph exceeds $5.0 million, the Issuer
shall be obligated to make an offer to all Holders of the Notes (an "Excess
Proceeds Offer") to purchase the maximum principal amount of Notes that may
be purchased out of such Excess Proceeds at an offer price in cash in an
amount equal to 101% of the principal amount thereof, together with accrued
and unpaid interest to the date fixed for the closing of such offer in
accordance with the procedures set forth in the Indenture. If the aggregate
principal amount of Notes surrendered by Holders thereof exceeds the amount
of such Excess Proceeds, the Trustee shall select the Notes to be purchased
on a PRO RATA basis.
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SECURITY AND COLLATERAL
The Notes initially are secured by: (i) a pledge by EchoStar of the
capital stock of the Issuer; (ii) a first priority security interest in both
the Interest and Satellite Escrow Accounts; (iii) a first priority security
interest, when launched, in EchoStar IV (iv) a first priority security
interest in the proceeds of any sale upon foreclosure of the Issuer's permit
from the FCC for the 148DEG. WL orbital slot frequency assignments; and (v) a
collateral assignment of all contracts relating to the construction, launch,
insurance and TT&C (as defined) of EchoStar IV. The Issuer has agreed to use its
best efforts to obtain any required consents necessary to effect a collateral
assignment of the contracts relating to the construction, launch, insurance and
TT&C of EchoStar IV by August 24, 1997 (none of such consents have been obtained
as of the date of the Prospectus).
The Issuer and certain of its Affiliates will enter into one or more pledge
agreements (the "Pledge Agreements") and one or more security agreements (the
"Security Agreements") providing for the grant by the Issuer and such Affiliates
to the Trustee, as collateral agent for the holders of the Notes, of security
interests in the Collateral. All such security interests will secure the
payment and performance when due of all of the Obligations of the Issuer under
the Notes and the Indenture.
In the event that the proceeds of Launch Insurance or In-Orbit Insurance
are applied to the purchase of one or more replacement satellites in
accordance with the covenant entitled "Maintenance of Insurance," the Notes
will be secured by: (i) a first priority security interest in each such
replacement satellite; and (ii) a collateral assignment of all contracts
relating to the construction, launch, insurance or TT&C of each such
replacement satellite.
Upon the occurrence and during the continuance of an Event of Default:
(i) all rights of EchoStar and its Subsidiaries to exercise voting or other
consensual rights with respect to any stock pledged to secure the Notes shall
cease, and all such rights shall become vested in the Trustee, which, to the
extent permitted by law, shall have the sole right to exercise such voting and
other consensual rights; (ii) all rights of EchoStar and its Subsidiaries to
receive cash dividends, interest and other payments made upon or with respect to
such pledged stock shall cease and such cash dividends, interest and other
payments shall be paid to the Trustee; and (iii) the Trustee may sell the
Collateral or any part thereof in accordance with the terms of the Pledge
Agreements and the Security Agreements. All funds distributed under the Pledge
Agreements, the Security Agreements or the Escrow and Disbursement Agreement and
received by the Trustee for the benefit of the holders of the Notes shall be
distributed by the Trustee in accordance with the provisions of the Indenture.
Under the terms of the Pledge Agreements and the Security Agreements, the
Trustee will determine the circumstances and manner in which the Collateral
shall be disposed of, including, but not limited to, the determination of
whether to release all or any portion of the Collateral from the Liens created
by the Pledge Agreements or the Security Agreements and whether to foreclose on
the Collateral following an Event of Default. Moreover, upon the full and final
payment and performance of all Obligations of the Issuer under the Notes and the
Indenture, or upon defeasance of the Notes, the Pledge Agreements and the
Security Agreements shall terminate and the Collateral shall be released. In
addition, in the event that any Collateral is sold and the Net Proceeds thereof
are applied in accordance with the terms of the covenant entitled "Asset Sales,"
the Trustee shall release the Liens in favor of the Trustee in the assets sold;
PROVIDED, that the Trustee shall have received from the Issuer an Officers'
Certificate and an Opinion of Counsel that such Net Proceeds have been or will
be so applied.
In the event that the Issuer or any of its Subsidiaries sells, transfers or
disposes of any property consisting partially or wholly of the Collateral other
than in accordance with the provisions of the covenant entitled "Asset Sales;
Transfer of EchoStar IV," the Trustee shall have a first priority security
interest in the pro rata portion of the net proceeds of such sale, transfer or
disposition attributable to such Collateral as determined by an investment
banking firm of national standing selected by the Issuer.
EXECUTION OF COLLATERAL DOCUMENTS
(a) Simultaneously with the execution of the Indenture, the Issuer
executed (i) the Escrow Accounts Security Agreement, (ii) the EchoStar IV
Security Agreement, (iii) the Orbital Slot Security Agreement, (iv) the
Collateral Assignment, (v) the Interest Escrow Agreement and (vi) the
Satellite Escrow Agreement.
(b) Simultaneously with the execution of the Indenture, EchoStar
executed the Stock Pledge Agreement.
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(c) Simultaneously with the execution of the Indenture, EchoStar Space
Corporation executed the Collateral Assignment.
(d) In connection with the Collateral Assignment, EchoStar, EchoStar
Space Corporation and the Issuer shall use their best efforts to obtain any
required consents necessary to effect a collateral assignment of (i) the
Launch Contract, the Satellite Contract and Launch Insurance relating to
EchoStar IV within 60 days after the date hereof, (ii) all TT&C contracts
relating to EchoStar IV at the time such TT&C contracts are entered into and
(iii) In-Orbit Insurance relating to EchoStar IV at the time such In-Orbit
Insurance is obtained.
SALE OF AND LIENS ON ECHOSTAR IV
(a) The Issuer shall not and shall not permit any of its Subsidiaries to
sell, transfer or dispose of EchoStar IV (or any replacement thereof) after it
is launched, unless, upon such sale, transfer or disposition, the Issuer grants
or causes to be granted to the Trustee on behalf of the Holders of the Notes
(i) a first priority security interest in an operational satellite in
geosynchronous orbit of equal or greater value than EchoStar IV (or such
replacement); and (ii) a collateral assignment of all contracts relating to the
construction, launch, insurance and TT&C of such satellite. Prior to such sale,
transfer or disposition, the Issuer shall execute or cause to be executed a
security agreement relating to such Liens. The Issuer shall take or cause to be
taken all actions necessary to record, register and file any documents or
instruments necessary to make effective such Lien, including the filing of any
required applications with the FCC for approval of any collateral assignment
hereunder, and shall provide an Opinion of Counsel prepared in accordance with
Section 10.03(a) of the Indenture with respect to such Lien.
(b) EchoStar and its Subsidiaries may not incur or suffer to exist Liens
on EchoStar IV (or any replacement thereof), except (i) prior to launch, Liens
in favor of satellite contractor; (ii) after launch, Liens not to exceed $20
million securing the Deferred Payments, ranking PARI PASSU with the Liens on
EchoStar IV (or such replacement) in favor of the Holders of the Notes; and
(iii) additional Liens securing the Deferred Payments, subordinated to the Liens
on EchoStar IV (or such replacement) in favor of the Holders of the Notes.
AFFILIATE GUARANTEES
Initially, the Issuer's payment obligations under the Notes will be
guaranteed on a subordinated basis by EchoStar.
On and after the ESBC Guarantee Date, the Issuer's payment obligations
under the Notes and the Indenture will be guaranteed by ESBC (the "ESBC
Guarantee"), which Guarantee will rank PARI PASSU with all senior unsecured
Indebtedness of ESBC. On and after the Dish Guarantee Date, the Issuer's
payment obligations under the Notes and the Indenture will be guaranteed by
Dish (the "Dish Guarantee"), which Guarantee will rank PARI PASSU with all
senior unsecured Indebtedness of Dish.
There can be no assurance that any of the conditions to the issuance of
the ESBC Guarantee or Dish Guarantee will be satisfied at any time. See "Risk
Factors--Springing Guarantees."
The obligations of each Guarantor under its Guarantee will be limited, if
necessary, to such amount as will not constitute a fraudulent conveyance
under applicable law.
The Indenture provides that, subject to the next paragraph, EchoStar may
consolidate or merge with or into (whether or not such Guarantor is the
surviving entity), or sell, assign, transfer, lease, convey or otherwise
dispose of all or substantially all of its properties or assets in one or
more related transactions to, another person unless:
(a) such Guarantor is the surviving person or the person formed by or
surviving any such consolidation or merger (if other than such
Guarantor) or to which such sale, assignment, transfer, lease,
conveyance or other disposition shall have been made is a corporation
organized or existing under the laws of the U.S., any state thereof or
the District of Columbia;
(b) the person formed by or surviving any such consolidation or member (if
other than such Guarantor) or the person to which such sale,
assignment, transfer, lease, conveyance or other disposition will have
been made
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assumes all the obligations of such Guarantor, pursuant to a
supplemental indenture in form reasonably satisfactory to the Trustee,
under the Notes and the Indenture;
(c) immediately after such transaction, no Default or Event of Default
exists; and
(d) such Guarantor or the person formed by or surviving any such
consolidation or merger, or to which such sale, assignment, transfer,
lease, conveyance or other disposition will have been made: (i) will
have Consolidated Net Worth immediately after the transaction (but
prior to any purchase accounting adjustments or accrual of deferred
tax liabilities resulting from the transaction) not less than the
Consolidated Net Worth of such Guarantor immediately preceding the
transaction; and (ii) will have an Indebtedness to Cash Flow Ratio
immediately after the transaction that does not exceed such
Guarantor's Indebtedness to Cash Flow Ratio immediately preceding the
transaction.
Except as set forth in the provisions entitled "--Certain Covenants" and
"--Merger, Consolidation, or Sale of Assets," nothing contained in the
Indenture shall prevent any consolidation or merger of a Guarantor with or
into the Issuer or shall prevent any sale or conveyance of the property of a
Guarantor as an entirety or substantially as an entirety to the Issuer.
The Indenture provides that in the event of a sale or other disposition
of all of the assets of any Guarantor which is a Subsidiary of the Issuer, by
way of merger, consolidation or otherwise, or a sale or other disposition of
all of the capital stock of any such Guarantor, then such Guarantor (in the
event of a sale or other disposition, by way of such a merger, consolidation
or otherwise, of all of the capital stock of such Guarantor) or the person
acquiring the property (in the event of a sale or other disposition of all of
the assets of such Guarantor) will be released and relieved of any
obligations under its Guarantee, PROVIDED that the Net Proceeds of such sale
or other disposition are applied in accordance with the provisions described
under "--Certain Covenants--Asset Sales."
EVENTS OF DEFAULT AND REMEDIES
The Indenture provides that each of the following constitutes an Event of
Default (unless the provisions described under "--Significant Transactions"
arc applicable and the Issuer complies with such provisions):
(a) default for 30 days in the payment when due of interest on the Notes;
(b) default in payment when due of principal on the Notes at maturity,
upon repurchase, redemption or otherwise;
(c) failure by EchoStar, the Issuer or any of their subsidiaries to comply
with the provisions described under "--Offer to Purchase upon Change of
Control," "--Offer to Purchase upon the Occurrence of Certain Events,"
"--Significant Transactions," "--Certain Covenants--Maintenance of
Insurance," "--Certain Covenants--Transactions with Affiliates," "--
Disbursement of Funds--Escrow Account" or "--Certain Covenants--Asset
Sales" or the failure by the Issuer to comply with the third paragraph
under "--Security";
(d) default under the provisions described under "--Certain Covenants--
Restricted Payments" or "--Certain Covenants--Incurrence of Indebtedness,
and Issuance of Disqualified Stock and Issuance of Preferred Equity of
Subsidiaries" or under any of the Collateral Documents, which default
remains uncured for 15 days, or the breach of any representation or
warranty, or the making of any untrue statement, in any certificate
delivered by the Issuer pursuant to the Indenture or the Collateral
Documents;
(e) failure by the Issuer for 60 days after notice from the Trustee or the
holders of at least 25% in principal amount of the Notes then outstanding
to comply with any of its other agreements in the Indenture or the Notes;
(f) a continuing default after expiration of any applicable grace period
by the Issuer or any of its Affiliates under any of the Satellite Contracts
or the Launch Contracts, which default would permit a party other than the
Issuer or its Affiliates to terminate its obligations under such contract;
(g) default under any mortgage, indenture or instrument under which there
may be issued or by which there may be secured or evidenced any Indebtedness
for money borrowed by EchoStar or any of its Subsidiaries (or the
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payment of which is guaranteed by EchoStar or any of its Subsidiaries),
other than any Credit Agreement, which default is caused by a failure to pay
when due principal or interest on such Indebtedness within the grace period
provided in such Indebtedness (a "Payment Default"), and the principal
amount of any such Indebtedness, together with the principal amount of any
other such Indebtedness under which there has been a Payment Default,
aggregates $5 million or more;
(h) default under any mortgage, indenture or instrument under which there
may be issued or by which there may be secured or evidenced any Indebtedness
for money borrowed by EchoStar or any of its Subsidiaries (or the payment of
which is guaranteed by EchoStar or any of its Subsidiaries), other than any
Credit Agreement, which default results in the acceleration of such
Indebtedness prior to its express maturity and the principal amount of any
such Indebtedness, together with the principal amount of any other such
Indebtedness under which there has been a Payment Default or the maturity of
which has been so accelerated, aggregates $5 million or more;
(i) failure by EchoStar, the Issuer (at any time at which the Notes are
secured by a pledge of all of the issued and outstanding Capital Stock of
the Issuer) or any of their Subsidiaries to pay final judgments (other than
any judgment as to which a reputable insurance company has accepted full
liability) aggregating in excess of $2.0 million, which judgments are not
stayed within 60 days after their entry;
(j) certain events of bankruptcy or insolvency with respect to EchoStar or
certain of its Subsidiaries (including the filing of a voluntary case, the
consent to an order of relief in an involuntary case, the consent to the
appointment of a custodian, a general assignment for the benefit of
creditors or an order of a court for relief in an involuntary case,
appointing a custodian or ordering liquidation, which order remains
unstayed for 60 days); and
(k) any Guarantee of the Notes shall be held in a judicial proceeding to
be unenforceable or invalid or shall cease for any reason to be in full
force and effect, or any Guarantor, or any person acting on behalf of any
Guarantor, shall deny or disaffirm its obligations under its Guarantee of
any Notes.
If any Event of Default occurs and is continuing, the Trustee or the holders
of at least 25% in principal amount of the then outstanding Notes may declare
all the Notes to be due and payable immediately (plus, in the case of an Event
of Default that is the result of an action by EchoStar or any of its
Subsidiaries intended to avoid restrictions on or premiums related to
redemptions of the Notes contained in the Indenture or the Notes, an amount of
premium that would have been applicable pursuant to the Notes or as set forth in
the Indenture). Notwithstanding the foregoing, in the case of an Event of
Default arising from the events of bankruptcy or insolvency with respect to
EchoStar or any of its Subsidiaries described in (j) above, all outstanding
Notes will become due and payable without further action or notice. Holders of
the Notes may not enforce the Indenture or the Notes except as provided in the
Indenture. Subject to certain limitations, holders of a majority in principal
amount of the then outstanding Notes may direct the Trustee in its exercise of
any trust or power. The Trustee may withhold from holders of the Notes notice of
any continuing Default or Event of Default (except a Default or Event of Default
relating to the payment of principal or interest) if it determines that
withholding notice is in such holders' interest.
The holders of a majority in aggregate principal amount of the Notes then
outstanding, by notice to the Trustee, may on behalf of the holders of all of
the Notes waive any existing Default or Event of Default and its consequences
under the Indenture, except a continuing Default or Event of Default in the
payment of interest or premium on, or principal of the Notes.
The Issuer is required to deliver to the Trustee annually a statement
regarding compliance with the Indenture, and the Issuer is required upon
becoming aware of any Default or Event of Default to deliver to the Trustee a
statement specifying such Default or Event of Default.
All powers of the Trustee hereunder will be subject to applicable
provisions of the Communications Act, including without limitation, the
requirements of prior approval for transfer of control or assignment of Title
III licenses.
WAIVER OF PAST DEFAULTS. Holders of not less than a majority in
aggregate principal amount of Notes then outstanding, by notice to the
Trustee, may on behalf of the Holders of all of the Notes waive an existing
Default or Event of Default and its consequences under the Indenture, except
a continuing Default or Event of Default in the
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payment of the principal of, premium, if any, or interest on, the Notes. Upon
any such waiver, such Default shall cease to exist, and any Event of Default
arising therefrom shall be deemed to have been cured for every purpose of the
Indenture; but no such waiver shall extend to any subsequent or other Default or
impair any right consequent thereon.
CONTROL BY MAJORITY. Holders of a majority in principal amount of the then
outstanding Notes may direct the time, method and place of conducting any
proceeding for exercising any remedy available to the Trustee or exercising any
trust or power conferred on it. However, the Trustee may refuse to follow any
direction that conflicts with the law or the Indenture that the Trustee
determines may be unduly prejudicial to the rights of other Holders of Notes or
that may involve the Trustee in personal liability.
LIMITATION ON SUITS. A Holder of a Note may pursue a remedy with respect
to the Indenture or the Notes only if:
(a) the Holder of a Note gives to the Trustee written notice of a
continuing Event of Default;
(b) the Holders of at least 25% in principal amount of the then
outstanding Notes make a written request to the Trustee to pursue the remedy;
(c) such Holder of a Note or Holders of Notes offer and, if requested,
provide to the Trustee indemnity satisfactory to the Trustee against any
loss, liability or expense;
(d) the Trustee does not comply with the request within 60 days after
receipt of the request and the offer and, if requested, the provision of
indemnity; and
(e) during such 60-day period the Holders of a majority in principal
amount of the then outstanding Notes do not give the Trustee a direction
inconsistent with the request.
A Holder of a Note may not use the Indenture to prejudice the rights of
another Holder of a Note or to obtain a preference or priority over another
Holder of a Note.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES, INCORPORATORS AND
STOCKHOLDERS.
No director, officer, employee, incorporator or stockholder of EchoStar,
the Issuer or any of their Affiliates, as such, shall have any liability for
any obligations of EchoStar, the Issuer and any of their Affiliates under the
Notes or the Indenture or for any claim based on, in respect of, or by reason
of, such obligations or their creation. Each Holder of the Notes by
accepting a Note waives and releases all such liability. The waiver and
release are part of the consideration for issuance of the Notes. Such waiver
may not be effective to waive liabilities under the federal securities laws
and it is the view of the Commission that such waiver is against public
policy.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
The Issuer may, at its option and at any time, elect to have all
obligations discharged with respect to the outstanding Notes ("Legal
Defeasance"). Such Legal Defeasance means that the Issuer will be deemed to
have paid and discharged the entire indebtedness represented by the outstanding
Notes, except for: (a) the rights of holders of outstanding Notes to receive
payments in respect of the principal of, premium, if any, and interest on the
Notes when such payments are due, or on the redemption date, as the case may
be; (b) the Issuer's obligations with respect to the Notes concerning issuing
temporary Notes, registration of Notes, mutilated, destroyed, lost or stolen
Notes and the maintenance of an office or agency for payment and money for
security payments held in trust; (c) the rights, powers, trust, duties and
immunities of the Trustee, and the Issuer's obligations in connection
therewith; and (d) the Legal Defeasance provisions of the Indenture. In
addition, the Issuer may, at its option and at any time, elect to have all
obligations released with respect to certain covenants that are described in
the Indenture ("Covenant Defeasance") and thereafter any omission to comply
with such obligations shall not constitute a Default or Event of Default with
respect to the Notes. In the event Covenant Defeasance occurs, certain events
(not including non-payment, bankruptcy, receivership, rehabilitation and
insolvency events) described under "--Events of Default and Remedies" will no
longer constitute an Event of Default with respect to the Notes.
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In order to exercise either Legal Defeasance or Covenant Defeasance: (i)
the Issuer must irrevocably deposit with the Trustee, in trust, for the benefit
of the holders of the Notes, cash in U.S. dollars, non-callable U.S. government
obligations, or a combination thereof, in such amounts as will be sufficient,
in the opinion of a nationally recognized firm of independent public
accountants selected by the Trustee, to pay the principal of, premium, if any,
and interest on the outstanding Notes on the stated maturity or on the
applicable optional redemption date, as the case may be; (ii) in the case of
Legal Defeasance, the Issuer shall have delivered to the Trustee an Opinion of
Counsel in the U.S. reasonably acceptable to the Trustee confirming that (A)
the Issuer has received from, or there has been published by the Internal
Revenue Service, a ruling or (B) since the date of the Indenture, there has
been a change in the applicable Federal income tax law, in each case to the
effect that, and based thereon such opinion of counsel shall confirm that, the
holders of such Notes will not recognize income, gain or loss for Federal
income tax purposes as a result of such Legal Defeasance, and will be subject
to Federal income tax in the same amount, in the same manner and at the same
times as would have been the case if such Legal Defeasance had not occurred;
(iii) in the case of Covenant Defeasance, the Issuer shall have delivered to
the Trustee an Opinion of Counsel reasonably acceptable to such Trustee
confirming that the holders of such Notes will not recognize income, gain or
loss for Federal income tax purposes as a result of such Covenant Defeasance
and will be subject to Federal income tax on the same amounts, in the same
manner and at the same times as would have been the case if such Covenant
Defeasance had not occurred; (iv) no Default or Event of Default shall have
occurred and be continuing on the date of such deposit or insofar as Events of
Default from bankruptcy or insolvency events are concerned, at any time in the
period ending on the 91st day after the date of deposit; (v) such Legal
Defeasance or Covenant Defeasance shall not result in a breach or violation of,
or constitute a default under the Indenture or any other material agreement or
instrument to which the Issuer or any of its Subsidiaries is a party or by
which EchoStar or any of its Subsidiaries is bound; (vi) the Issuer shall have
delivered to the Trustee an Officers' Certificate stating that the deposit was
not made by the Issuer with the intent of preferring the holders of such Notes
over any other creditors of the Issuer or with the intent of defeating,
hindering, delaying or defrauding any other creditors of the Issuer or others;
and (vii) the Issuer shall have delivered to the Trustee an Officers'
Certificate stating that all conditions precedent provided for or relating to
the Legal Defeasance or the Covenant Defeasance have been complied with.
AMENDMENT, SUPPLEMENT AND WAIVER
Except as provided in the next paragraph, the Indenture, the Notes and the
Collateral Documents may be amended or supplemented with the consent of the
holders of at least a majority in principal amount of the Notes then
outstanding (including consents obtained in connection with a tender offer or
exchange offer for Notes), and any existing default or compliance with any
provision of the Indenture or the Notes may be waived with the consent of the
holders of a majority in principal amount of the then outstanding Notes
(including consents obtained in connection with a tender offer or exchange
offer for Notes).
Without the consent of each holder affected, however, an amendment or
waiver may not (with respect to any Senior Secured Note held by a
non-consenting holder):
(a) reduce the aggregate principal amount of Notes whose holders must
consent to an amendment, supplement or waiver;
(b) reduce the principal of or change the fixed maturity of any Senior
Secured Note or alter the provisions with respect to the redemption of
the Notes;
(c) reduce the rate of or change the time for payment of interest on any
Notes;
(d) waive a Default or Event of Default in the payment of principal of or
premium, if any, or interest on the Notes (except a rescission of
acceleration of the Notes by the holders of at least a majority in
aggregate principal amount of the Notes and a waiver of the payment
default that resulted from such acceleration);
(e) make any Senior Secured Note payable in money other than that stated
in the Notes;
(f) make any change in the provisions of the Indenture relating to waivers
of past Defaults or the rights of holders of Notes to receive payments
of principal of or interest on the Notes;
(g) waive a redemption payment with respect to any Senior Secured Note; or
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(h) make any change in the foregoing amendment and waiver provisions.
In addition, without the consent of at least 66 2 3% of the Notes then
outstanding, an amendment or a waiver may not make any change to the
covenants in the Indenture entitled "Offer to Purchase upon Change of
Control," "Offer to Purchase upon the Occurrence of Certain Events," "Asset
Sales" and "Excess Proceeds Offer" (including, in each case, the related
definitions).
Notwithstanding the foregoing, without the consent of any holder of
Notes, the Issuer and the Trustee may amend or supplement the Indenture, the
Notes, the Pledge Agreement, the Security Agreement, the Satellite Escrow
Agreement or the Interest Escrow Agreement to cure any ambiguity, defect or
inconsistency, to provide for uncertificated Notes in addition to or in place
of certificated Notes, to provide for the assumption of the Issuer's
obligations to holders of the Notes in the case of a merger or consolidation,
to make any change that would provide any additional rights or benefits to
the holders of the Notes or that does not adversely affect the legal rights
under the Indenture of any such holder, or to comply with requirements of the
Commission in order to effect or maintain the qualification of the Indenture
under the Trust Indenture Act.
CONCERNING THE TRUSTEE
The Indenture contains certain limitations on the rights of the Trustee,
should the Trustee become a creditor of the Issuer, to obtain payment of
claims in certain cases, or to realize on certain property received in
respect of any such claim as security or otherwise. The Trustee will be
permitted to engage in other transactions with the Issuer; however, if the
Trustee acquires any conflicting interest, it must eliminate such conflict
within 90 days, apply to the Commission for permission to continue as Trustee
or resign.
The holders of a majority in principal amount of the then outstanding
Notes will have the right to direct the time, method and place of conducting
any proceeding for exercising any remedy available to the Trustee, subject to
certain exceptions. The Indenture provides that in case an Event of Default
shall occur (which shall not be cured), the Trustee will be required, in the
exercise of its power, to use the degree of care of a prudent man in the
conduct of his own affairs. The Trustee will not be relieved from liabilities
for its own negligent action, its own negligent failure to act or its own
willful misconduct, except that: (i) this sentence shall not limit the
preceding sentence of this paragraph; (ii) the Trustee shall not be liable
for any error of judgment made in good faith, unless it is proved that the
Trustee was negligent in ascertaining the pertinent facts; and (iii) the
Trustee shall not be liable with respect to any action it takes or omits to
take in good faith in accordance with a direction received by it pursuant to
the first sentence of this paragraph. Subject to such provisions, the Trustee
will be under no obligation to exercise any of its rights or powers under the
Indenture at the request of any holder of Notes, unless such holder shall
have offered to the Trustee security and indemnity satisfactory to it against
any loss, liability or expense.
NOTES BOOK-ENTRY, DELIVERY AND FORM
Old Notes initially purchased by qualified institutional buyers were
initially issued in the form of [three] global book-entry notes without
interest coupons (collectively the "Global Old Notes"). The Global Old Note
was deposited on the date of the closing of the sale of the Old Notes (the
"Closing Date") with the Trustee, as custodian for The Depository Trust
Company (the "DTC"), in New York, New York and registered in the name of
DTC., or its nominee, in each case for credit to the accounts of Direct and
Indirect Participants (as defined below). of the Depositary (such nominee
being referred to herein the "Global Note Holder"). Except as set forth in
the next paragraph, the Exchange Notes exchanged for Old Notes represented by
the Global Old Note will be represented by one or more global Exchange Notes
in registered form (collectively, the "Global Exchange Note" and, together
with the Global Old Note, the "Global Notes"), deposited with the DTC and
registered in the name of the Global Noteholder.
Exchange Notes that are issued as described below under " - Exchange of
Global Notes for Certificated Notes"). Such Certificated Notes may, unless
the Global Note has previously been exchanged for Certificated notes, be
exchanged for an interest in the global Note representing the principal
amount of Exchange Notes being transferred. In addition, transfer of
beneficial interests in any Global Notes will be subject to the applicable
rules and procedures of DTC and its Direct or Indirect Participants, which
may change from time to time.
DEPOSITARY PROCEDURES. DTC has advised the Company that DTC is a
limited-purpose trust company created to
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hold securities for its participating organizations (collectively, the
"Direct Participants") and to facilitate the clearance and settlement of
transactions in those securities between Direct Participants through
electronic book-entry changes in accounts of Participants. The Direct
Participants include securities brokers and dealers (including the Initial
Purchasers), banks, trust companies, clearing corporations and certain other
organizations. Access to DTC's system is also available to other entities
that clear through or maintain a direct or indirect custodial relationship
with a Direct Participant (collectively, the "Indirect Participants"). DTC
may hold securities beneficially owned by other persons only through the
Direct Participants or Indirect Participants and such other persons'
ownership interest and transfer of ownership interest will be recorded only
on the records of the Direct Participant and/or Indirect Participant, and not
on the records maintained by DTC.
DTC has also advised the Company that, pursuant to DTC procedures, (i)
upon deposit of the Global Notes, DTC will credit the accounts of Direct
Participants designated by the Initial Purchaser with portions of the
principal amount of Global Notes allocated by the Initial Purchasers to such
Direct Participants, and (ii) DTC will maintain records of the ownership
interests of Direct Participants in the Global Notes and the transfer of
ownership interests by and between direct Participants. DTC will not maintain
records of the ownership interests of, or the transfer of ownership interests
by and between, Indirect Participants or other owners of beneficial interests
in the Global Notes. Direct Participants and the Indirect Participants must
maintain their own records of the ownership interests of, and the transfer of
ownership interests by and between, Indirect Participants and other owners of
beneficial interests in the Global Notes.
Investors in the Global Notes may hold their interests therein directly
through DTC if they are Direct Participants in DTC or indirectly through
organizations which are Direct Participants in DTC. All ownership interests
in any Global Notes may be subject to the procedures and requirements of DTC.
The laws of some states require that certain persons take physical
delivery in definitive, certificated form, of securities that they own. This
may limit or curtail the ability to transfer beneficial interests in a Global
Note to such persons. Because DTC can act only on behalf of Direct
Participants, which in turn act on behalf of Indirect Participants and
others, the ability of a person having a beneficial interest in a Global Note
to pledge such interest to persons or entities that are not Direct
Participants in DTC, or to otherwise take actions in respect of such
interests, may be affected by the lack of physical certificates evidencing
such interests. For certain other restrictions on the transferability of the
Notes see "--Exchange of Book-Entry Notes for Certificated Notes."
Except as described below, owners of beneficial interests in the Global
Notes will not have Notes registered in their names, will not receive
physical delivery of Notes in certificated form and will not be considered
the registered owners or holders thereof under the Indenture for any purpose.
Under the terms of the Indenture, the Issuer, the Guarantors and the
Trustee will treat the persons in whose names the Notes are registered
(including Notes represented by Global Notes) as the owners thereof for the
purpose of receiving payments and for any and all other purposes whatsoever.
Payments in respect of the principal, premium, Liquidated Damages, if any,
and interest on Global Notes registered in the name of DTC or its nominee
will be payable by the Trustee to DTC or its nominee as the registered holder
under the Indenture. Consequently, neither the Company, the Trustee nor any
agent of the Company or the Trustee has or will have any responsibility or
liability for (i) any aspect of DTC's records or any Direct Participant's or
Indirect Participant's records relating to or payments made on account of
beneficial ownership interests in the Global Notes or for maintaining,
supervising or reviewing any of DTC's records or any Direct Participant's or
Indirect Participant's records relating to the beneficial ownership interests
in any Global Note or (ii) any other matter relating to the actions and
practices of DTC or any of its Direct Participants or Indirect Participants.
DTC has advised the Company that its current payment practice (for
payments of principal, interest and the like) with respect to securities such
as the Notes is to credit the accounts of the relevant Direct Participants
with such payment on the payment date in amounts proportionate to such Direct
Participant's respective holdings in principal amount of its ownership
interests in the Global Notes as shown on DTC's records. Payments by Direct
Participants and Indirect Participants to the beneficial owners of the Notes
will be governed by standing instructions and customary practices between
them and will not be the responsibility of DTC, the Trustee, the Company or
the Guarantors. Neither the Company, the Guarantors nor the Trustee will be
liable for any delay by DTC or its Direct Participants or Indirect
Participants in identifying the beneficial owners of the Notes, and the
Company and the Trustee may conclusively rely on and will be protected in
relying on instructions from DTC or its nominee as the registered owner of
the Notes for all purposes.
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The Global Notes will trade in DTC's Same-Day Funds Settlement System
and, therefore, transfers between Direct Participants in DTC will be effected
in accordance with DTC's procedures, and will be settled in immediately
available funds. Transfers between Indirect Participants who hold an interest
through a Direct Participant will be effected in accordance with the
procedures of such Direct Participant but generally will settle in
immediately available funds.
DTC has advised the Company that it will take any action permitted to be
taken by a holder of Notes only at the direction of one or more Direct
Participants to whose account interests in the Global Notes are credited and
only in respect of such portion of the aggregate principal amount of the
Notes as to which such Direct Participant or Direct Participants has or have
given direction. However, if there is an Event of Default under the Notes,
DTC reserves the right to exchange Global Notes (without the direction of one
or more of its Direct Participants) for legended Notes in certificated form,
and to distribute such certificated forms of Notes to its Direct
Participants. See "--Notes Book-Entry, Delivery and Form."
EXCHANGE OF GLOBAL NOTES FOR CERTIFICATED NOTES. An entire Global Note
may be exchanged for definitive Exchange Notes in registered, certificated
form without interest coupons ("Certificated Notes") if (i) DTC (x) notifies
the Company that it is unwilling or unable to continue as depositary for the
Global Notes and the Company thereupon fails to appoint a successor
depositary within 90 days or (y) has ceased to be a clearing agency
registered under the Exchange Act, (ii) the Company, at its option, notifies
the Trustee in writing that it elects to cause the issuance of Certificated
Notes or (iii) there shall have occurred and be continuing to occur a Default
or an Event of Default with respect to the Notes. In any such case, the
Company will notify the Trustee in writing that, upon surrender by the Direct
and Indirect Participants of their interest in such Global Note, Certificated
Notes will be issued to each person that such Direct and Indirect
Participants and DTC identify as being the beneficial owner of the related
Notes.
Beneficial interests in Global Notes held by any Direct or Indirect
Participant may be exchanged for Certificated Notes upon request to DTC, on
behalf of such Direct or Indirect Participant, to the Trustee in accordance
with customary DTC procedures. Certificated Notes delivered in exchange for
any beneficial interest in any Global Note will be registered in the names,
and issued in any approved denominations, requested by DTC on behalf of such
Direct or Indirect Participants (in accordance with DTC's customary
procedures).
In all cases described herein, such Certificated Notes will bear the
restrictive legend referred to in "Notice to Investors," unless the Company
determines otherwise in compliance with applicable law.
Neither the Company, the Guarantors nor the Trustee will be liable for any
delay by the holder of the Global Notes or DTC in identifying the beneficial
owners of Notes, and the Company and the Trustee may conclusively rely on,
and will be protected in relying on, instructions from the holder of the
Global Note or DTC for all purposes.
TRANSFER AND EXCHANGE OF CERTIFICATED NOTES. Certificated Notes may only
be transferred if the transferor first delivers to the Trustee a written
certificate (and in certain circumstances, an opinion of counsel) confirming
that, in connection with such transfer, it has complied with the restrictions
on transfer described under "--Notice to Investors." Beneficial interests in
Certificated Notes may not be transferred to a person that takes delivery
thereof in the form of an interest in a Global Note unless the transferor
first delivers to the Trustee a written certificate certifying that such
transfer has been effected pursuant to Rule 144A. As a result of the
foregoing, Accredited Institutional Investors that are not QIBs or non-U.S.
persons may not hold an interest in any Global Notes.
NEXT DAY SETTLEMENT AND PAYMENT. The Indenture requires that payments in
respect of the Exchange Notes represented by the Global Notes (including
principal, premium, if any, interest and Liquidated Damages, if any) be made
by wire transfer of immediately available next day funds to the accounts
specified by the holder of interests in such Global Notes. With respect to
Certificated Notes, the Company will make all payments of principal, premium,
if any, interest and Liquidated Damages, if any, by wire transfer of
immediately available next day funds to the accounts specified by the holders
thereof or, if no such account is specified, by mailing a check to each such
holder's registered address. The Issuer expects that secondary trading the
Certificated Notes will also be settled in immediately available funds.
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ADDITIONAL INFORMATION
Anyone who receives this prospectus may obtain a copy of the Indenture
without charge by writing to the Issuer, 90 Inverness Circle East, Englewood,
Colorado 80112, attention David K. Moskowitz, facsimile (303) 799-0354.
OLD NOTES' REGISTRATION RIGHTS; LIQUIDATED DAMAGES
The Issuer, the Guarantors and the Initial Purchasers entered into the
Registration Rights Agreement on June 20, 1997. Pursuant to the Registration
Rights Agreement, the Issuer and the Guarantors agreed to file with the
Commission the Exchange Offer Registration Statement on the appropriate form
under the Securities Act with respect to the Exchange Notes to be exchanged
for the Old Notes. Upon the effectiveness of the Exchange Offer Registration
Statement, the Issuer and the Guarantors will offer, pursuant to the Exchange
Offer, to the holders of Transfer Restricted Notes who are able to make
certain representations the opportunity to exchange their Transfer Restricted
Notes for Exchange Notes. If: (i) the Issuer is not permitted to file the
Exchange Offer Registration Statement or permitted to consummate the Exchange
Offer because the Exchange Offer is not permitted by applicable law or
Commission policy or (ii) any holder of Transfer Restricted Notes notifies
the Issuer within the specified time period that: (A) it is prohibited by law
or Commission policy from participating in the Exchange Offer; (B) that it
may not resell the Exchange Notes acquired by it in the Exchange Offer to the
public without delivering a prospectus and the prospectus contained in the
Exchange Offer Registration Statement is not appropriate or available for
such resales; or (C) that it is a broker-dealer and owns Old Notes acquired
directly from the Issuer or an affiliate of the Issuer, the Issuer and the
Guarantors will file with the Commission a Shelf Registration Statement to
cover resales of the Old Notes by the holders thereof who satisfy certain
conditions relating to the provisions of information in connection with the
Shelf Registration Statement. The Issuer and the Guarantors will use their
best efforts to cause the applicable registration statement to be declared
effective as promptly as possible by the Commission. For purposes of the
foregoing, "Transfer Restricted Notes" means each Senior Secured Note until:
(i) the date on which such Senior Secured Note has been exchanged by a person
other than a broker-dealer for an Exchange Note in the Exchange Offer; (ii)
following the exchange by a broker-dealer in the Exchange Offer of an Old
Note for an Exchange Note, the date on which such Exchange Note is sold to a
purchaser who receives from such broker-dealer on or prior to the date of
such sale a copy of the prospectus contained in the Exchange Offer
Registration Statement; (iii) the date on which such Old Note has been
effectively registered under the Securities Act and disposed of in accordance
with the Shelf Registration Statement; or (iv) the date on which such Old
Note is distributed to the public pursuant to Rule 144 under the Securities
Act.
The Registration Rights Agreement provides that: (i) the Issuer and the
Guarantors will file an Exchange Offer Registration Statement with the
Commission on or prior to July 25, 1997; (ii) the Issuer and the Guarantors
will use their best efforts to have the Exchange Offer Registration Statement
declared effective by the Commission on or prior to November 22, 1997; (iii)
unless the Exchange Offer would not be permitted by applicable law or
Commission policy, the Issuer and the Guarantors will commence the Exchange
Offer and use their best efforts to issue, on or prior to 30 business days
after the date on which the Exchange Offer Registration Statement was
declared effective by the Commission, Exchange Notes in exchange for all Old
Notes tendered prior thereto in the Exchange Offer; and (iv) if obligated to
file the Shelf Registration Statement, the Issuer and the Guarantors will use
their best efforts to file the Shelf Registration Statement with the
Commission on or prior to 30 days after such filing obligation arises (and in
any event by November 22, 1997) and to use their best efforts to cause the
Shelf Registration Statement to be declared effective by the Commission on or
prior to 150 days after such obligation arises. If: (a) the Issuer and the
Guarantors fail to file any of the Registration Statements required by the
Registration Rights Agreement on or before the date specified for such
filing; (b) any of such Registration Statements is not declared effective by
the Commission on or prior to the date specified for such effectiveness (the
"Effectiveness Target Date"); (c) the Issuer and the Guarantors fail to
consummate the Exchange Offer within 30 business days of the Effectiveness
Target Date with respect to the Exchange Offer Registration Statement; or (d)
the Shelf Registration Statement or the Exchange Offer Registration Statement
is declared effective but thereafter ceases to be effective or usable in
connection with resales of Transfer Restricted Notes during the periods
specified in the Registration Rights Agreement (each such event referred to
in clauses (a) through (d) above a "Registration Default"), then the Issuer
and the Guarantors jointly and severally agree to pay liquidated damages to
each holder of Old Notes, with respect to the first 90-day period immediately
following the occurrence of such Registration Default in an amount equal to
$.05 per week per $1,000 principal
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amount of Notes held by such holder ("Liquidated Damages"). The amount of the
Liquidated Damages will increase by an additional $.05 per week per $1,000
principal amount of Notes with respect to each subsequent 90-day period until
all Registration Defaults have been cured, up to a maximum amount of
Liquidated Damages of $.40 per week per $1,000 principal amount of Old Notes
constituting Transfer Restricted Notes. All accrued Liquidated Damages will
be paid by the Issuer on each Damages Payment Date to the Global Note Holder
by wire transfer to the accounts specified by it or by mailing checks to its
registered addresses if no such accounts have been specified. Following the
cure of all Registration Defaults, the accrual of Liquidated Damages will
cease.
Holders of Old Notes will be required to make certain representations to
the Issuer (as described in the Registration Rights Agreement) in order to
participate in the Exchange Offer and will be required to deliver information
to be used in connection with the Shelf Registration Statement and to provide
comments on the Shelf Registration Statement within the time periods set
forth in the Registration Rights Agreement in order to have their Old Notes
included in the Shelf Registration Statement and benefit from the provisions
regarding Liquidated Damages set forth above.
CERTAIN DEFINITIONS
Set forth below are certain defined terms used in the Indenture.
Reference is made to the Indenture for a full disclosure of all such terms,
as well as any other capitalized terms used herein for which no definition is
provided.
"ACCOUNTS RECEIVABLE SUBSIDIARY" means one Unrestricted
Subsidiary of the Issuer specifically designated as an Accounts Receivable
Subsidiary for the purpose of financing the accounts receivable of the
Issuer, and PROVIDED that any such designation shall not be deemed to
prohibit the Issuer from financing accounts receivable through any other
entity, including without limitation, any other Unrestricted Subsidiary.
"ACCOUNTS RECEIVABLE SUBSIDIARY NOTES" means the notes to be issued by
the Accounts Receivable Subsidiary for the purchase of accounts receivable.
"ACQUIRED DEBT" means, with respect to any specified person, Indebtedness
of any other person existing at the time such other person merges with or
into or becomes a Subsidiary of such specified person, or Indebtedness
incurred by such person in connection with the acquisition of assets,
including Indebtedness incurred in connection with, or in contemplation of,
such other person merging with or into or becoming a Subsidiary of such
specified person or the acquisition of such assets, as the case may be.
"ADDITIONAL PAYMENT OBLIGATIONS" means the portion of the payment
obligations, under any vendor financing arrangements, of any of the Issuer,
EchoStar or any of the Issuer's Subsidiaries with respect to the
construction, launch or insurance of EchoStar IV in excess of $15.0 million.
"AFFILIATE" of any specified person means any other person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified person. For purposes of this definition,
"control" (including, with correlative meanings, the terms "controlling,"
"controlled by" and "under common control with"), as used with respect to any
person, shall mean the possession, directly or indirectly, of the power to
direct or cause the direction of the management or policies of such person,
whether through the ownership of voting securities, by agreement or
otherwise; PROVIDED, HOWEVER, that beneficial ownership of 10% or more of the
voting securities of a person shall be deemed to be control; PROVIDED FURTHER
that no individual, other than a director of EchoStar or an officer of
EchoStar with a policy making function, shall be deemed an Affiliate of
EchoStar or any of its Subsidiaries, solely by reason of such individual's
employment, position or responsibilities by or with respect to EchoStar or
any of its Subsidiaries.
"AGENT" means any Registrar, Paying Agent or co-registrar.
"BANK DEBT" means Indebtedness incurred pursuant to the Credit Agreement
in an aggregate amount not to exceed 90% of the accounts receivable of the
borrowers under the Credit Agreement eligible for inclusion in the borrowing
base under the Credit Agreement, plus 75% of the inventory of the Credit
Agreement borrowers under the Credit Agreement eligible for inclusion in the
borrowing base under the Credit Agreement, plus 100% of the cash collateral
and marketable securities of the Borrowers under the Credit Agreement
eligible for inclusion in the borrowing base under the Credit Agreement.
"BANKRUPTCY LAW" means title 11, U.S. Code or any similar federal or
state law for the relief of debtors.
"BUSINESS DAY" means any day other than a Legal Holiday.
123
"CAPITAL LEASE" means, at the time any determination thereof is made, any
lease of property, real or personal, in respect of which the present value of
the minimum rental commitment would be capitalized on a balance sheet of the
lessee in accordance with GAAP.
"CAPITAL LEASE OBLIGATION" means, at the time any determination thereof
is to be made, the amount of the liability in respect of a capital lease that
would at such time be so required to be capitalized on the balance sheet in
accordance with GAAP.
"CAPITAL STOCK" means any and all shares, interests, participations,
rights or other equivalents (however designated) of corporate stock or
partnership or membership interests, whether common or preferred.
"CASH EQUIVALENTS" means: (a) U.S. dollars; (b) securities issued or
directly and fully guaranteed or insured by the U.S. government or any agency
or instrumentality thereof having maturities of not more than six months from
the date of acquisition; (c) certificates of deposit and eurodollar time
deposits with maturities of six months or less from the date of acquisition,
bankers' acceptances with maturities not exceeding six months and overnight
bank deposits, in each case with any domestic commercial bank having capital
and surplus in excess of $500 million; (d) repurchase obligations with a term
of not more than seven days for underlying securities of the types described
in clauses (b) and (c) entered into with any financial institution meeting
the qualifications specified in clause (c) above; and (e) commercial paper
rated P-1, A-l or the equivalent thereof by Moody's Investors Service, Inc.
or Standard & Poor's Corporation, respectively, and in each case maturing
within six months after the date of acquisition.
"CHANGE OF CONTROL" means: (a) any transaction or series of transactions
(including, without limitation, a tender offer, merger or consolidation) the
result of which is that the Principals and their Related Parties or an entity
controlled by the Principals and their Related Parties cease to (i) be the
"beneficial owners" (as defined in Rule 13(d)(3) under the Exchange Act) of
at least 30% of the total Equity Interests in EchoStar and (ii) have the
voting power to elect at least a majority of the Board of Directors of
EchoStar; (b) the first day on which a majority of the members of the Board
of Directors of EchoStar are not Continuing Directors; (c) any transaction or
series of transactions (including, without limitation, a tender offer, merger
or consolidation) the result of which is that the Principals and their
Related Parties or any entity controlled by the Principals and their Related
Parties cease to be the "beneficial owners" (as defined in Rule 13(d)(3)
under the Exchange Act) of at least 30% of the total Equity Interests in the
Issuer and have the voting power to elect at least a majority of the Board of
Directors of the Issuer, or (d) the first day on which a majority of the
members of the Board of Directors of the Issuer are not Continuing Directors.
"COLLATERAL" means all assets pledged, mortgaged or collaterally assigned
as Security pursuant to the Collateral Documents.
"COLLATERAL ASSIGNMENT" means the Security Agreement dated the date
hereof, substantially in the form of Exhibit I hereto.
"COLLATERAL DOCUMENTS" means (i) the Interest Escrow Agreement, (ii) the
Satellite Escrow Agreement, (iii) the Stock Pledge Agreement, (iv) the Escrow
Accounts Security Agreement, (v) the EchoStar IV Security Agreement, (vi) the
Collateral Assignment and (vii) the Orbital Slot Security Agreement.
"COMMUNICATIONS ACT" means the Communications Act of 1934, as amended.
"CONSOLIDATED CASH FLOW" means, with respect to any person for any
period, the Consolidated Net Income of such person for such period, plus, to
the extent deducted in computing Consolidated Net Income: (a) provision for
taxes based on income or profits; (b) Consolidated Interest Expense; (c)
depreciation and amortization (including amortization of goodwill and other
intangibles) of such person for such period; and (d) any extraordinary loss
and any net loss realized in connection with any Asset Sale, in each case, on
a consolidated basis determined in accordance with GAAP, PROVIDED that
Consolidated Cash Flow shall not include interest income derived from the net
proceeds of the Old Notes Offering.
"CONSOLIDATED INTEREST EXPENSE" means, with respect to any person for any
period, consolidated interest expense of such person for such period, whether
paid or accrued (including amortization of original issue discount
124
and deferred financing costs, non-cash interest payments and the interest
component of Capital Lease Obligations), on a consolidated basis determined
in accordance with GAAP.
"CONSOLIDATED NET INCOME" means, with respect to any person for any
period, the aggregate of the Net Income of such person and its Subsidiaries
for such period, on a consolidated basis, determined in accordance with GAAP;
PROVIDED, HOWEVER, that: (a) the Net Income of any person that is not a
Subsidiary or that is accounted for by the equity method of accounting shall
be included only to the extent of the amount of dividends or distributions
paid in cash to such person, in the case of a gain, or to the extent of any
contributions or other payments by the referent person, in the case of a
loss; (b) the Net Income of any person that is a Subsidiary that is not a
Wholly Owned Subsidiary shall be included only to the extent of the amount of
dividends or distributions paid in cash to the referent person; (c) the Net
Income of any person acquired in a pooling of interests transaction for any
period prior to the date of such acquisition shall be excluded; (d) the Net
Income of any Subsidiary of such person shall be excluded to the extent that
the declaration or payment of dividends or similar distributions is not at
the time permitted by operation of the terms of its charter or bylaws or any
other agreement, instrument, judgment, decree, order, statute, rule or
government regulation to which it is subject; and (e) the cumulative effect
of a change in accounting principles shall be excluded.
"CONSOLIDATED NET WORTH" means, with respect to any person, the sum of:
(a) the stockholders' equity of such person; plus (b) the amount reported on
such person's most recent balance sheet with respect to any series of
preferred stock (other than Disqualified Stock) that by its terms is not
entitled to the payment of dividends unless such dividends may be declared
and paid only out of net earnings in respect of the year of such declaration
and payment, but only to the extent of any cash received by such person upon
issuance of such preferred stock, less: (i) all write-ups (other than
write-ups resulting from foreign currency translations and write-ups of
tangible assets of a going concern business made within 12 months after the
acquisition of such business) subsequent to the date of the Indenture in the
book value of any asset owned by such person or a consolidated Subsidiary of
such person; and (ii) all unamortized debt discount and expense and
unamortized deferred charges, all of the foregoing determined in accordance
with GAAP.
"CONTINUING DIRECTOR" means, as of any date of determination, any member
of the Board of Directors of EchoStar or the Issuer, as the case may be, who:
(a) was a member of such Board of Directors on the date of the Indenture; or
(b) was nominated for election or elected to such Board of Directors with the
affirmative vote of a majority of the Continuing Directors who were members
of such Board at the time of such nomination or election.
"CORPORATE TRUST OFFICE OF THE TRUSTEE" shall be at the address of the
Trustee specified in the Section entitled "Notices" of the Indenture or such
other address as to which the Trustee may give notice to the Issuer.
"CREDIT AGREEMENT" means any one or more credit agreements (which may
include or consist of revolving credits) between EchoStar, the Issuer or any
of the Issuer's Restricted Subsidiaries and one or more banks or other
financial institutions providing financing for the business of EchoStar, the
Issuer and the Issuer's Restricted Subsidiaries, PROVIDED that the lenders
party to the Credit Agreement may not be Affiliates of EchoStar.
"CUSTODIAN" means any receiver, trustee, assignee, liquidator or similar
official under any Bankruptcy Law.
"DBS" means direct broadcast satellite.
"DEFAULT" means any event that is or with the passage of time or the
giving of notice or both would be an Event of Default.
"DEFERRED PAYMENTS" means Indebtedness to satellite contractors incurred
in connection with the construction and launch of EchoStar I, EchoStar II,
EchoStar III and EchoStar IV in an amount not to exceed $135.0 million.
"DISH" means Dish, Ltd., a Nevada corporation.
"DISH GUARANTEE" means the Guarantee dated the date hereof, by Dish, of
the Obligations of the Issuer under the Notes and the Indenture, in
substantially the same form as Exhibit D hereto.
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"DISH GUARANTEE DATE" means the earlier of: (i) the first date upon
which Dish is permitted, pursuant to the terms of both the 1996 Notes
Indenture and the 1994 Notes Indenture, to Guarantee the Issuer's total
payment obligations under all of the then-outstanding Notes; and (ii) the
first date upon which both the 1996 Notes and the 1994 Notes are no longer
outstanding or have been defeased.
"DISH PREFERRED STOCK" means Dish's 8% Series A Cumulative Preferred
Stock having an aggregate liquidation preference not in excess of $15.1
million.
"DISQUALIFIED STOCK" means any Capital Stock which, by its terms (or by
the terms of any security into which it is convertible or for which it is
exchangeable), or upon the happening of any event, matures or is mandatorily
redeemable, pursuant to a sinking fund obligation or otherwise, or redeemable
at the option of the holder thereof, in whole or in part, on or prior to date
on which the Notes mature.
"DNCC" means Dish Network Credit Corporation, a Colorado corporation.
"ECHOSTAR" means EchoStar Communications Corporation, a Nevada
corporation.
"ECHOSTAR DBS" means EchoStar DBS Corporation, a Colorado corporation.
"ECHOSTAR DBS SYSTEM" means the digital direct broadcast satellite system
of the Issuer.
"ECHOSTAR I" means the Issuer's high-powered direct broadcast satellite
designated as EchoStar I in the Prospectus.
"ECHOSTAR II" means the Issuer's high-powered direct broadcast satellite
designated as EchoStar II in the Prospectus.
"ECHOSTAR III" means the high-powered direct broadcast satellite being
constructed by DBSC as of the date of the Indenture, and any replacement
satellite thereof to the extent permitted by the terms of the Indenture.
"ECHOSTAR IV" means the high-powered direct broadcast satellite being
constructed which is designated as EchoStar IV in the Prospectus, and any
replacement satellite thereof to the extent permitted by the terms of the
Indenture.
"ECHOSTAR IV SECURITY AGREEMENT" means the Security Agreement dated the
date hereof, substantially in the form of Exhibit J hereto.
"ECHOSTAR GUARANTEE" means the Guarantee by EchoStar of the Obligations
of the Issuer under the Notes and the Indenture, in substantially the same
form as Exhibit B hereto.
"ECHOSTAR RECEIVER SYSTEM" means a satellite dish, digital satellite
receiver, remote control and related components, used in connection with the
DBS service provided by EchoStar and its Subsidiaries.
"ELIGIBLE INSTITUTION" means a commercial banking institution that has
combined capital and surplus of not less than $500 million or its equivalent
in foreign currency, whose debt is rated Investment Grade at the time as of
which any investment or rollover therein is made.
"EQUITY INTERESTS" means Capital Stock and all warrants, options or other
rights to acquire Capital Stock (but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock).
"ESBC" means EchoStar Satellite Broadcasting Corporation.
"ESBC GUARANTEE" means the Guarantee dated the date hereof, by ESBC, of
the Obligations of the Issuer under the Notes and the Indenture, in
substantially the same form as Exhibit C hereto.
"ESBC GUARANTEE DATE" means the earlier of: (i) the first date upon
which ESBC is permitted, pursuant to the terms of the 1996 Notes Indenture,
to Guarantee the Issuer's total payment obligations under all of the
126
then-outstanding Notes; and (ii) the first date upon which the 1996 Notes are
no longer outstanding or have been defeased.
"ESC" means EchoStar Satellite Corporation.
"ESCROW AGENT" means First Trust National Association, as Escrow Agent
under the Interest Escrow Agreement and the Satellite Escrow Agreement, or
any successor thereto appointed pursuant to such agreements.
"ESCROW ACCOUNTS SECURITY AGREEMENT" means the Security Agreement dated
the date hereof, substantially in the form of Exhibit H hereto.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended.
"EXCHANGE NOTES" means 121/2% Notes Due 2002 issued by the Issuer, and
containing terms identical to those of the Notes (except that such Exchange
Notes shall have been issued in an exchange offer registered under the
Securities Act), that are issued and exchanged for the Notes pursuant to the
Registration Rights Agreement and the Indenture.
"EXISTING INDEBTEDNESS" means the Notes and any other Indebtedness of the
Issuer and its Subsidiaries in existence on the date of the Indenture until
such amounts are repaid.
"FCC" means Federal Communications Commission.
"FULL-CONUS ORBITAL SLOT" means the 101, 110 or 119 degrees West
Longitude orbital slot.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the
American Institute of Certified Public Accountants and statements and
pronouncements of the Financial Accounting Standards Board or in such other
statements by such other entity as may be approved by a significant segment
of the accounting profession of the U.S., which are applicable as of the date
of determination; PROVIDED, HOWEVER; that these definitions and all ratios
and calculations contained in the covenants "Restricted Payments,"
"Incurrence of Indebtedness, Issuance of Disqualified Stock and Issuance of
Preferred Equity Interests of Subsidiaries," "Asset Sales," and "Dividend and
Other Payment Restrictions Affecting Subsidiaries" shall be determined in
accordance with GAAP as in effect and applied by EchoStar and its
Subsidiaries on the date of the Indenture, consistently applied; PROVIDED,
FURTHER, that in the event of any change in GAAP or in any change by EchoStar
or any of its Subsidiaries in GAAP applied that would result in any change in
any such ratio or calculation, the Issuer shall deliver to the Trustee, each
time any such ratio or calculation is required to be determined or made, an
Officers' Certificate setting forth the computations showing the effect of
such change or application on such ratio or calculation.
"GLOBAL NOTE" means a Note evidencing all or part of the Notes issued to
the Depositary for such Notes.
"GOVERNMENT SECURITIES" means direct obligations of, or obligations
guaranteed by, the United States of America for the payment of which
guarantee or obligations the full faith and credit of the United States of
America is pledged.
"GUARANTEE" means a guarantee (other than by endorsement of negotiable
instruments for collection in the ordinary course of business), direct or
indirect, in any manner (including, without limitation, letters of credit and
reimbursement agreements in respect thereof), of all or any part of any
Indebtedness.
"GUARANTOR" means EchoStar and any other entity that executes a Guarantee
of the obligations of the Issuer under the Notes, and their respective
successors and assigns.
"HEDGING OBLIGATIONS" means, with respect to any person, the obligations
of such person under: (a) interest rate swap agreements, interest rate cap
agreements and interest rate collar agreements; and (b) other agreements or
arrangements designed to protect such person against fluctuations in interest
rates.
"HOLDER" means a Person in whose name a Note is registered.
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"INDEBTEDNESS" means, with respect to any person, any indebtedness of
such person, whether or not contingent, in respect of borrowed money or
evidenced by bonds, notes, debentures or similar instruments or letters of
credit (or reimbursement agreements in respect thereof) or representing the
balance deferred and unpaid of the purchase price of any property (including
pursuant to capital leases) or representing any Hedging Obligations, except
any such balance that constitutes an accrued expense or trade payable, if and
to the extent any of the foregoing (other than Hedging Obligations) would
appear as a liability upon a balance sheet of such person prepared in
accordance with GAAP, and also includes, to the extent not otherwise
included, the Guarantee of items that would be included within this
definition.
"INDEBTEDNESS TO CASH FLOW RATIO" means, with respect to any person, the
ratio of: (a) the Indebtedness of such person and its Subsidiaries as of the
end of the most recently ended fiscal quarter, plus the amount of any
Indebtedness incurred subsequent to the end of such fiscal quarter; to (b)
such person's Consolidated Cash Flow for the most recently ended four full
fiscal quarters for which internal financial statements are available
immediately preceding the date on which such event for which such calculation
is being made shall occur (the "Measurement Period"), PROVIDED, HOWEVER;
that: (i) in making such computation, Indebtedness shall include the total
amount of funds outstanding and available under any revolving credit
facilities; and (ii) in the event that the Issuer or any of its Subsidiaries
consummates a material acquisition or an Asset Sale or other disposition of
assets subsequent to the commencement of the Measurement Period but prior to
the event for which the calculation of the Indebtedness to Cash Flow Ratio is
made, then the Indebtedness to Cash Flow Ratio shall be calculated giving pro
forma effect to such material acquisition or Asset Sale or other disposition
of assets, as if the same had occurred at the beginning of the applicable
period.
"INDENTURE" means the Indenture, as amended or supplemented from time to
time.
"IN-ORBIT INSURANCE" means, with respect to a satellite, In-Orbit
insurance providing coverage beginning 180 days after the launch (or
contemporaneously with the expiration of any applicable Launch Insurance) of
such satellite in an amount which is, together with cash and Cash Equivalents
(not including cash and Cash Equivalents in the Satellite Escrow Account)
segregated and reserved on the balance sheet of the Issuer, for the duration
of the useful life of the satellite or until applied in accordance with the
covenant entitled "Maintenance of Insurance," in an amount equal to or
greater than the cost of construction, launch and insurance of such
satellite, which insurance shall provide pro rata benefits to the insured
upon a loss of more than 20% of the capacity of such satellite and shall
compensate the insured for a total loss upon a loss of more than 50% of the
capacity of such satellite. For purposes of the Indenture, the proceeds of
any In-Orbit Insurance shall be deemed to include the amount of cash and Cash
Equivalents segregated and reserved by the Issuer for purposes of the
preceding sentence.
"INTEREST ESCROW ACCOUNT" means an escrow account for the deposit of the
proceeds from the sale of the Notes under the Interest Escrow Agreement.
"INTEREST ESCROW AGREEMENT" means the Interest Escrow Agreement, dated as
of the date hereof, by and among the Escrow Agent, the Trustee and the
Issuer, governing the disbursement and loan of funds from the Interest Escrow
Account, in the form of Exhibit E.
"INVESTMENT GRADE" means with respect to a security, that such security
is rated, by at least two nationally recognized statistical rating
organizations, in one of each such organization's four highest generic rating
categories.
"INVESTMENTS" means, with respect to any person, all investments by such
person in other persons (including Affiliates) in the forms of loans
(including Guarantees), advances or capital contributions (excluding
commission, travel and similar advances to officers and employees made in the
ordinary course of business), purchases or other acquisitions for
consideration of Indebtedness, Equity Interests or other securities and all
other items that are or would be classified as investments on a balance sheet
prepared in accordance with GAAP.
"LAUNCH CONTRACT" means any contract for the launching of EchoStar IV
into geostationary transfer orbit.
"LAUNCH INSURANCE" means, with respect to a satellite, launch insurance
(including, at the option of the Issuer, reflight coverage for any launch by
Lockheed Martin or LKE, PROVIDED that such coverage permits assignment of
the right to any subsequent launch, without consent of the launch provider)
covering the period of the launch of such
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satellite to 180 days after such launch (or for such period as otherwise
specified in the applicable policy) in an amount which, together with cash
and Cash Equivalents segregated and reserved on the consolidated balance
sheet of the Issuer until the successful launch of such satellite or until
applied in accordance with the covenant entitled "Maintenance of Insurance,"
is equal to or greater than the cost of construction, launch and insurance of
such satellite, which insurance shall provide pro rata benefits to the
insured upon a loss of more than 20% of the capacity of such satellite and
shall compensate the insured for a total loss upon a loss of more than 50% of
the capacity of such satellite; PROVIDED, HOWEVER, that the amount of cash
and Cash Equivalents that may be used by the Issuer for purposes of this
definition may include cash and Cash Equivalents contained in the Satellite
Escrow Account only for purposes of Launch Insurance with respect to EchoStar
IV, but only to the extent that the Issuer certifies, in an Officers'
Certificate delivered to the Trustee, that such cash and Cash Equivalents are
reasonably not expected to be necessary for the completion of the
development, construction, launch and operation of the relevant satellite.
For purposes of the Indenture, the proceeds of any Launch Insurance shall be
deemed to include the amount of cash and Cash Equivalents segregated and
reserved by the Issuer for purposes of the preceding sentence.
"LEGAL HOLIDAY" means a Saturday, a Sunday or a day on which banking
institutions in the City of New York or at a place of payment are authorized
by law, regulation or executive order to remain closed. If a payment date is
a Legal Holiday at a place of payment, payment may be made at that place on
the next succeeding day that is not a Legal Holiday, and no interest shall
accrue for the intervening period.
"LIEN" means, with respect to any asset, any mortgage, lien, pledge,
charge, security interest or encumbrance of any kind in respect of such
asset, whether or not filed, recorded or otherwise perfected under applicable
law (including any conditional sale or other title retention agreement, any
lease in the nature thereof, any option or other agreement to sell or give a
security interest in and any filing of or agreement to give any financing
statement under the Uniform Commercial Code (or equivalent status) of any
jurisdiction).
"LKE" means Lockheed-Khruenichev-Energia, Inc., a Delaware corporation.
"LOCKHEED MARTIN" means Lockheed Martin Corporation, a Maryland
corporation, and its successors.
"LOCKHEED MARTIN SATELLITE CONTRACT" means the Satellite Contract, dated
as of July 18, 1996, between Lockheed Martin and the Issuer, as amended from
time to time.
"MARKETABLE SECURITIES" means: (a) Government Securities; (b) any
certificate of deposit maturing not more than 365 days after the date of
acquisition issued by, or time deposit of, an Eligible Institution; (c)
commercial paper maturing not more than 365 days after the date of
acquisition issued by a corporation (other than an Affiliate of the Issuer)
with an Investment Grade rating, at the time as of which any investment
therein is made, issued or offered by an Eligible Institution; (d) any
bankers acceptances or money market deposit accounts issued or offered by an
Eligible Institution; and (e) any fund investing exclusively in investments
of the types described in clauses (a) through (d) above.
"MINIMUM APPRAISED VALUE" means: (a) an appraised value determined and
set forth in writing by a nationally recognized appraisal firm experienced in
the industry described under the covenant entitled "Activities of EchoStar"
in an amount not less than the aggregate principal amount of Notes then
outstanding plus all accrued and unpaid interest thereon (less any funds
remaining in the Interest Escrow Account as of the date of determination); or
(b) a satellite of equal or greater value as compared to EchoStar IV.
"NET INCOME" means, with respect to any person, the net income (loss) of
such person, determined in accordance with GAAP, excluding, however, any gain
(but not loss), together with any related provision for taxes on such gain
(but not loss), realized in connection with any Asset Sale (including,
without limitation, dispositions pursuant to sale and leaseback
transactions), and excluding any extraordinary gain (but not loss), together
with any related provision for taxes on such extraordinary gain (but not
loss).
"NET PROCEEDS" means the aggregate cash proceeds received by the Issuer
or any of its Restricted Subsidiaries, as the case may be, in respect of any
Asset Sale, net of the direct costs relating to such Asset Sale (including,
without limitation, legal, accounting and investment banking fees, and sales
commissions) and any relocation expenses incurred, as a result thereof, taxes
paid or payable as a result thereof (after taking into account any available
tax credits or deductions and any tax sharing arrangements), amounts required
to be applied to the
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repayment of Indebtedness secured by a Lien on the asset or assets that are
the subject of such Asset Sale and any reserve for adjustment in respect of
the sale price of such asset or assets. Net Proceeds shall exclude any
non-cash proceeds received from any Asset Sale, but shall include such
proceeds when and as converted by the Issuer or any Restricted Subsidiary to
cash.
"1994 NOTES INDENTURE" means the Indenture relating to the 1994 Notes.
"1994 NOTES" means the 12 7/8% Senior Discount Notes due 2004 of Dish.
"1994 CREDIT AGREEMENT" has the meaning set forth in the 1996 Notes
Indenture.
"1996 NOTES INDENTURE" means the Indenture relating to the 1996 Notes.
"1996 NOTES" means the 13 1/8% Senior Discount Notes due 2004 of ESBC.
"NON-RECOURSE INDEBTEDNESS" of any person means Indebtedness of such
person that: (i) is not guaranteed by any other person (except a Wholly
Owned Subsidiary of the referent person); (ii) is not recourse to and does
not obligate any other person (except a Wholly Owned Subsidiary of the
referent person) in any way; (iii) does not subject any property or assets of
any other person (except a Wholly Owned Subsidiary of the referent person),
directly or indirectly, contingently or otherwise, to the satisfaction
thereof; and (iv) is not required by GAAP to be reflected on the financial
statements of any other person (other than a Subsidiary of the referent
person) prepared in accordance with GAAP.
"NOTES" means the 12 1/2% Notes due 2002 issued under the Indenture on the
date of the Indenture. For purpose of the Indenture, the term "Notes" shall
include any Exchange Notes and all Notes and Exchange Notes shall vote
together as a single class.
"OBLIGATIONS" means any principal, interest, penalties, fees,
indemnifications, reimbursements, damages and other liabilities payable under
the documentation governing any Indebtedness.
"OFFICER" means, with respect to any Person, the Chairman of the Board,
the Chief Executive Officer, the President, the Chief Operating Officer, the
Chief Financial Officer, the Treasurer, any Assistant Treasurer, Controller,
Secretary or any Vice-President of such Person.
"OFFICERS' CERTIFICATE" means a certificate signed on behalf of the
Issuer by two Officers of the Issuer, one of whom must be the principal
executive officer, principal financial officer, treasurer or principal
accounting officer of the Issuer.
"OPINION OF COUNSEL" means an opinion from legal counsel, who may be an
employee of or counsel to the Issuer (or any Guarantor, if applicable), any
Subsidiary of the Issuer (or any Guarantor, if applicable) or the Trustee.
"ORBITAL SLOT SECURITY AGREEMENT" means the Security Agreement dated the
date hereof, substantially in the form of Exhibit K hereto.
"PERMITTED INVESTMENTS" means: (a) Investments in the Issuer or in a
Wholly Owned Subsidiary of the Issuer, other than Unrestricted Subsidiaries
of the Issuer, (b) Investments in Cash Equivalents and Marketable Securities;
(c) conversion of debentures of SSET and DBS Industries, Inc. ("DBSI"), in
accordance with their terms, into Equity Interests of SSET and DBSI; and (d)
Investments by the Issuer or any Subsidiary of the Issuer in a person if, as
a result of such Investment: (i) such person becomes a Wholly Owned
Restricted Subsidiary of the Issuer, or (ii) such person is merged,
consolidated or amalgamated with or into, or transfers or conveys
substantially all of its assets to, or is liquidated into, the Issuer or a
Wholly Owned Subsidiary of the Issuer that is not an Unrestricted Subsidiary
of the Issuer.
"PERMITTED LIENS" means: (a) Liens securing the Notes; (b) Liens
securing the Deferred Payments; (c) Liens on EchoStar IV to the extent
permitted under Article X of the Indenture and the Collateral Documents; (d)
Liens securing the Bank Debt on current assets of the Issuer's Restricted
Subsidiaries; (e) Liens securing the 1996 Notes and the 1994 Notes; (f) Liens
securing Purchase Money Indebtedness, PROVIDED that such Indebtedness was
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permitted to be incurred by the terms of the Indenture and such Liens do not
extend to any assets of the Issuer or its Restricted Subsidiaries other than
the assets so acquired; (g) Liens securing Indebtedness the proceeds of which
are used to develop, construct, launch or insure any satellites other than
EchoStar I, EchoStar II, EchoStar III or EchoStar IV (or any permitted
replacements thereof), PROVIDED that such Indebtedness was permitted to be
incurred by the terms of the Indenture and such Liens do not extend to any
assets of the Issuer or its Restricted Subsidiaries other than such
satellites being developed, constructed, launched or insured and to the
related licenses, permits and construction, launch, insurance and TT&C
contracts; (h) Liens on orbital slots, licenses and other assets and rights
of the Issuer, PROVIDED that such orbital slots, licenses and other assets
and rights relate solely to the satellites referred to in clause (g) of this
definition; (i) Liens on property of a person existing at the time such
person is merged into or consolidated with the Issuer or any Restricted
Subsidiary of the Issuer, PROVIDED, that such Liens were not incurred in
connection with, or in contemplation of, such merger or consolidation, other
than in the ordinary course of business; (j) Liens on property of an
Unrestricted Subsidiary at the time that it is designated as a Restricted
Subsidiary pursuant to the definition of "Unrestricted Subsidiary," PROVIDED
that such liens were not incurred in connection with, or contemplation of,
such designation; (k) Liens on property existing at the time of acquisition
thereof by the Issuer or any Restricted Subsidiary of the Issuer; PROVIDED
that such Liens were not incurred in connection with, or in contemplation of,
such acquisition and do not extend to any assets of the Issuer or any of its
Restricted Subsidiaries other than the property so acquired; (l) Liens to
secure the performance of statutory obligations, surety or appeal bonds or
performance bonds, or landlords', carriers', warehousemen's, mechanics',
suppliers', materialmen's or other like Liens, in any case incurred in the
ordinary course of business and with respect to amounts not yet delinquent or
being contested in good faith by appropriate process of law, if a reserve or
other appropriate provision, if any, as is required by GAAP shall have been
made therefore; (m) Liens existing on the date of the Indenture; (n) Liens
for taxes, assessments or governmental charges or claims that are not yet
delinquent or that are being contested in good faith by appropriate
proceedings promptly instituted and diligently concluded; PROVIDED that any
reserve or other appropriate provision as shall be required in conformity
with GAAP shall have been made therefor; (o) Liens incurred in the ordinary
course of business of the Issuer or any Restricted Subsidiary of the Issuer
(including, without limitation, Liens securing Purchase Money Indebtedness)
with respect to obligations that do not exceed $2 million in principal amount
in the aggregate at any one time outstanding; and (p) extensions, renewals or
refundings of any Liens referred to in clauses (a) through (o) above,
PROVIDED that any such extension, renewal or refunding does not extend to any
assets or secure any Indebtedness not securing or secured by the Liens being
extended, renewed or refinanced.
"PERSON" means any individual, corporation, partnership, joint venture,
association, joint-stock Issuer, trust or unincorporated organization
(including any subdivision or ongoing business of any such entity or
substantially all of the assets of any such entity, subdivision or business).
"PREFERRED EQUITY INTEREST", in any person, means an Equity Interest of
any class or classes (however designated) which is preferred as to the
payment of dividends or distributions, or as to the distribution of assets
upon any voluntary or involuntary liquidation or dissolution of such person,
over Equity Interests of any other class in such person.
"PRINCIPALS" means Charles W. Ergen, James DeFranco, R. Scott Zimmer,
Steven B. Schaver and David K. Moskowitz.
"PURCHASE MONEY INDEBTEDNESS" means indebtedness of the Issuer or any of
its Restricted Subsidiaries incurred (within 180 days of such purchase) to
finance the purchase of any assets of the Issuer or any of its Restricted
Subsidiaries: (a) to the extent the amount of Indebtedness thereunder does
not exceed 80% of the purchase cost of such assets; (b) to the extent the
purchase cost of such assets is or should be included in "additions to
property, plant and equipment" in accordance with GAAP; (c) to the extent
that such Indebtedness is not recourse to the Issuer or any of its Restricted
Subsidiaries or any of their respective assets, other than the assets so
purchased; and (d) if the purchase of such assets is not part of an
acquisition of any Person.
"RECEIVER SUBSIDY" means a subsidy, rebate or other similar payment by
EchoStar or any of its Subsidiaries, in the ordinary course of business, to
subscribers, vendors or distributors, relating to an EchoStar Receiver
System, not to exceed the cost of such EchoStar Receiver System, together
with the cost of installation of such EchoStar Receiver System.
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"RECEIVABLES TRUST" means a trust organized solely for the purpose of
securitizing the accounts receivable held by the Accounts Receivable
Subsidiary that (a) shall not engage in any business other than (i) the
purchase of accounts receivable or participation interests therein from the
Accounts Receivable Subsidiary and the servicing thereof, (ii) the issuance
of and distribution of payments with respect to the securities permitted to
be issued under clause (b) below and (iii) other activities incidental to the
foregoing, (b) shall not at any time incur Indebtedness or issue any
securities, except (i) certificates representing undivided interests in the
Trust issued to the Accounts Receivable Subsidiary and (ii) debt securities
issued in an arm's length transaction for consideration solely in the form of
cash and Cash Equivalents, all of which (net of any issuance fees and
expenses) shall promptly be paid to the Accounts Receivable Subsidiary, and
(c) shall distribute to the Accounts Receivable Subsidiary as a distribution
on the Accounts Receivable Subsidiary's beneficial interest in the
Receivables Trust no less frequently than once every six months all available
cash and Cash Equivalents held by it, to the extent not required for
reasonable operating expenses or reserves therefor or to service any
securities issued pursuant to clause (b) above that are not held by the
Accounts Receivable Subsidiary.
"RELATED PARTY" means, with respect to any Principal, (a) the spouse and
each immediate family member of such Principal and (b) each trust,
corporation, partnership or other entity of which such Principal beneficially
holds an 80% or more controlling interest.
"REGISTRATION RIGHTS AGREEMENT" means the Registration Rights Agreement
among the Issuer, the Guarantors, Donaldson, Lufkin & Jenrette Securities
Corporation and Lehman Brothers Inc..
"RESPONSIBLE OFFICER," when used with respect to the Trustee, means any
officer within the Corporate Trust Administration of the Trustee (or any
successor group of the Trustee) or any other officer of the Trustee
customarily performing functions similar to those performed by any of the
above designated officers and also means, with respect to a particular
corporate trust matter, any other officer to whom such matter is referred
because of his knowledge of and familiarity with the particular subject.
"RESTRICTED INVESTMENT" means an Investment other than Permitted
Investments.
"RESTRICTED SUBSIDIARY" means, any corporation, association or other
business entity of which more than 50% of the total voting power of shares of
Capital Stock entitled (without regard to the occurrence of any contingency)
to vote in the election of directors, managers or trustees thereof is at the
time owned or controlled, directly or indirectly, by the Issuer or one or
more Subsidiaries of the Issuer or a combination thereof, other than
Unrestricted Subsidiaries.
"SATELLITE CONTRACT" means any contract relating to the construction of
EchoStar IV, including, without limitation, the Lockheed Martin Satellite
Contract.
"SATELLITE ESCROW ACCOUNT" means an escrow account for the deposit of the
proceeds from the sale of the Notes under the Satellite Escrow Agreement.
"SATELLITE ESCROW AGREEMENT" means the Satellite Escrow Agreement, dated
as of the date hereof, by and among the Escrow Agent, the Trustee and the
Issuer, governing the disbursement and loan of funds from the Satellite
Escrow Account, in the form of Exhibit F.
"SATELLITE RECEIVER" means any satellite receiver capable of receiving
programming from the EchoStar DISH Network.
"SEC" means the Securities and Exchange Commission.
"SECURITIES ACT" means the Securities Act of 1933, as amended.
"SENIOR ECHOSTAR INDEBTEDNESS" means all Indebtedness for borrowed money
of EchoStar, whether outstanding on the date of the Indenture or incurred
after the date of the Indenture, which is not by its terms subordinate and
junior to other Indebtedness of EchoStar.
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"SIGNIFICANT SUBSIDIARY" means any Subsidiary that would be a
"significant subsidiary" as defined in Article 1 of the Indenture, Rule 1-02
of Regulation S-X promulgated pursuant to the Securities Act, as such
Regulation is in effect on the date of the Indenture.
"SPRINGING GUARANTEES" means the Guarantees by the Springing Guarantors
of the Obligations of the Issuer under the Notes and the Indenture.
"SPRINGING GUARANTORS" means Dish and ESBC.
"SSET" means Satellite Systems Engineering Technologies, Inc. and its
Affiliates.
"STOCK PLEDGE AGREEMENT" means the Pledge Agreement dated the date
hereof, substantially in the form of Exhibit G hereto.
"SUBSIDIARY" means, with respect to any person, any corporation,
association or other business entity of which more than 50% of the total
voting power of shares of Capital Stock entitled (without regard to the
occurrence of any contingency) to vote in the election of directors, managers
or trustees thereof is at the time owned or controlled, directly or
indirectly, by such person or one or more of the other Subsidiaries of such
person or a combination thereof.
"SUPPLEMENTAL INDENTURE" means any supplemental indenture relating to the
Indenture.
"TIA" means the Trust Indenture Act of 1939 as in effect on the date on
which the Indenture is qualified under the TIA.
"TRUSTEE" means the party named as such above until a successor replaces
it in accordance with the applicable provisions of the Indenture and
thereafter means the successor serving hereunder.
"TT&C" means telemetry, tracking and control.
"UNRESTRICTED SUBSIDIARY" means; (A) EchoStar Real Estate Corporation,
EchoStar International (Mauritius) Ltd., EchoStar Manufacturing and
Distribution Pvt. Ltd. and Satrec Mauritius Ltd.; and (B) any Subsidiary of
the Issuer designated as an Unrestricted Subsidiary in a resolution of the
Board of Directors of the Issuer: (a) no portion of the Indebtedness or any
other obligation (contingent or otherwise) of which, at the time of such
designation: (i) is guaranteed by the Issuer or any other Subsidiary of the
Issuer (other than another Unrestricted Subsidiary); (ii) is recourse to or
obligates the Issuer or any other Subsidiary of the Issuer (other than
another Unrestricted Subsidiary) in any way; or (iii) subjects any property
or asset of the Issuer or any other Subsidiary of the Issuer (other than
another Unrestricted Subsidiary), directly or indirectly, contingently or
otherwise, to satisfaction thereof; (b) with which neither the Issuer nor any
other Subsidiary of the Issuer (other than another Unrestricted Subsidiary)
has any contract, agreement, arrangement, understanding or is subject to an
obligation of any kind, written or oral, other than on terms no less
favorable to the Issuer or such other Subsidiary than those that might be
obtained at the time from persons who are not Affiliates of the Issuer; (c)
with which neither the Issuer nor any other Subsidiary of the Issuer (other
than another Unrestricted Subsidiary) has any obligation: (i) to subscribe
for additional shares of Capital Stock or other equity interests therein; or
(ii) to maintain or preserve such Subsidiary's financial condition or to
cause such Subsidiary to achieve certain levels of operating results and (d)
which does not provide direct broadcast services in any capacity other than
as a selling, billing and collection agent for one or more of the Issuer and
its Restricted Subsidiaries; PROVIDED, HOWEVER, that none of the Issuer,
Dish, EchoStar Satellite Corporation, DirectSat Corporation, Echo Acceptance
Corporation, Houston Tracker Systems, Inc., EchoStar International
Corporation and Echosphere Corporation may be designated as Unrestricted
Subsidiaries. At the time that the Issuer designates a Subsidiary as an
Unrestricted Subsidiary, the Issuer will be deemed to have made a Restricted
Investment in an amount equal to the fair market value (as determined in good
faith by the Board of Directors of the Issuer evidenced by a resolution of
the Board of Directors of the Issuer and set forth in an Officers'
Certificate delivered to the Trustee; PROVIDED, HOWEVER, that if the fair
market value of such Subsidiary exceeds $10 million, the fair market value
shall be determined by an investment banking firm of national standing
selected by the Issuer) of such Subsidiary; PROVIDED that the Issuer may
designate DNCC as an Unrestricted Subsidiary at any time and such designation
shall not be deemed a Restricted Investment if, but only if, the provisions
of clauses (B) (a), (b), (c) and (d) shall have been complied with prior to
such designation. An Unrestricted Subsidiary may be designated as a
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Restricted Subsidiary of the Issuer if, at the time of such designation after
giving pro forma effect thereto as if such designation had occurred at the
beginning of the applicable four-quarter period, the Issuer would be
permitted to incur at least $1.00 of additional Indebtedness pursuant to the
Cash Flow Ratio test set forth in the covenant entitled "--Incurrence of
Indebtedness, Issuance of Disqualified Stock and Issuance of Preferred Equity
Interest of Subsidiaries."
"WEIGHTED AVERAGE LIFE TO MATURITY" means, when applied to any
Indebtedness at any date, the number of years obtained by dividing (a) the
then outstanding principal amount of such Indebtedness into (b) the total of
the product obtained by multiplying (i) the amount of each then remaining
installment, sinking fund, serial maturity or other required payments of
principal, including payment at final maturity, in respect thereof, by (ii)
the number of years (calculated to the nearest one-twelfth) that will elapse
between such date and the making of such payment.
"WHOLLY OWNED RESTRICTED SUBSIDIARY" means a Wholly Owned Subsidiary of
the Issuer that is a Restricted Subsidiary of the Issuer.
"WHOLLY OWNED SUBSIDIARY" means, with respect to any person, any Subsidiary
all of the outstanding voting stock (other than directors' qualifying shares)
of which is owned by such person, directly or indirectly.
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CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following summary describes the principal U.S. federal income tax
consequences of the ownership and disposition of Notes. This summary is based
on the Internal Revenue Code of 1986, as amended to the date hereof (the
"Code"), administrative pronouncements, judicial decisions and existing and
proposed Treasury Regulations, changes to any of which subsequent to the date
hereof may affect the tax consequences described below. This summary
addresses only initial holders of Notes who acquire such Notes at the
offering price, as defined below, and discusses only Notes held as capital
assets within the meaning of Section 1221 of the Code. It does not discuss
all of the tax consequences that may be relevant to a holder in light of such
holder's particular circumstances or to holders subject to special rules,
such as certain financial institutions, insurance companies, dealers in
securities or persons holding the Notes as part of a straddle or a hedging
arrangement.
HOLDERS OF NOTES SHOULD CONSULT THEIR TAX ADVISORS WITH REGARD TO THE
APPLICATION OF THE UNITED STATES FEDERAL INCOME TAX LAWS TO THEIR PARTICULAR
SITUATIONS, AS WELL AS WITH REGARD TO ANY TAX CONSEQUENCES ARISING UNDER THE
LAWS OF ANY STATE, LOCAL OR FOREIGN JURISDICTION.
INTEREST
Holders of Notes will be required to include stated interest on the Notes in
gross income for Federal income tax purposes in accordance with their regular
method of accounting for tax purposes. The Notes were not issued with
original issue discount.
SALE, EXCHANGE OR RETIREMENT OF THE NOTES
In general, a holder of a Note will recognize gain or loss on the sale,
exchange, retirement or other taxable disposition of such Note measured by
the difference, if any, between (i) the amount of cash and the fair market
value of property received and (ii) the holder's tax basis in the Note.
Gain or loss realized on the sale, exchange or retirement of a Note will
be capital gain or loss and will be long-term capital gain or loss if the
holding period of the Note exceeds one year as of the date of the sale,
exchange or retirement. Under current law, the excess of net long-term
capital gains over net short-term capital losses is taxed at a lower rate
than ordinary income for certain non-corporate taxpayers. The distinction
between capital gain or loss and ordinary income or loss is also relevant for
purposes of, among other things, limitation on the deductibility of capital
losses.
EXCHANGE OFFER
The exchange of Old Notes for the Exchange Notes will not be treated as a
taxable exchange for federal income tax purposes because, other than the fact
that the Exchange Notes will be registered under the Securities Act, the
terms of the Exchange Notes will be identical to the terms of the Old Notes.
BACKUP WITHHOLDING AND INFORMATION REPORTING
Certain noncorporate holders may be subject to backup withholding at a
rate of 31% on payments of principal and interest and premium on, and the
proceeds of disposition of, a Note. Backup withholding will apply only if the
holder: (i) fails to furnish its Taxpayer Identification Number ("TIN")
which, for an individual, would be his or her Social Security number; (ii)
furnishes an incorrect TIN; (iii) is notified by the IRS that it has failed
properly to report payments of interest and dividends; or (iv) under certain
circumstances, fails to certify, under penalty of perjury, that it has
furnished a correct TIN and has not been notified by the IRS that it is
subject to backup withholding for failure to report interest and dividend
payments. Holders of the Notes should consult their tax advisors regarding
their qualification for exemption from backup withholding and the procedure
for obtaining such an exemption, if applicable.
The amount of any backup withholding from a payment to a holder of a
Note will be allowed as a credit against the holder's U.S. federal income tax
liability and may entitle the holder to a refund, PROVIDED that the required
information is furnished to the Internal Revenue Service.
135
OTHER TAX CONSEQUENCES
In addition to the federal income tax considerations described above,
prospective purchasers of Notes should consider potential state, local,
income, franchise, personal property and other taxation in any state or
locality and the tax effect of ownership, sale, exchange, or retirement of
Notes in any state or locality. Prospective purchasers of Notes are advised
to consult their own tax advisors with respect to any state or local income,
franchise, personal property or other tax consequences arising out of their
ownership of the Notes.
THE FOREGOING DISCUSSION IS FOR GENERAL INFORMATION AND IS NOT TAX
ADVICE. ACCORDINGLY, EACH HOLDER OF NOTES SHOULD CONSULT HIS OWN TAX ADVISOR
AS TO THE PARTICULAR TAX CONSEQUENCES TO HIM OF THE NOTES, INCLUDING THE
APPLICABILITY AND EFFECT OF ANY STATE, LOCAL, OR FOREIGN INCOME TAX LAWS AND
ANY RECENT OR PROSPECTIVE CHANGES IN APPLICABLE TAX LAWS.
PLAN OF DISTRIBUTION
Based on interpretation by the Staff set forth in no-action letters
issued to third parties, the Issuer believes that Exchange Notes issued
pursuant to the Exchange Offer in exchange for the Old Notes may be offered
for resale, resold and otherwise transferred by holders thereof (other than
any holder which is (i) an affiliate of the Issuer, (ii) a broker-dealer who
acquired Old Notes directly from the Issuer or (iii) a broker-dealer who
acquired Old Notes as a result of market-making or other trading activities)
without compliance with the registration and prospectus delivery provisions
of the Securities Act PROVIDED that such Exchange Notes are acquired in the
ordinary course of such holders' business, and such holders are not engaged
in, and do not intend to engage in, and have no arrangement or understanding
with any person to participate in, a distribution of such Exchange Notes;
PROVIDED that broker-dealers ("Participating Broker-Dealers") receiving
Exchange Notes in the Exchange Offer will be subject to a prospectus delivery
requirement with respect to resales of such Exchange Notes. To date, the
Staff has taken the position that Participating Broker-Dealers may fulfill
their prospectus delivery requirements with respect to transactions involving
an exchange of securities such as the exchange pursuant to the Exchange Offer
(other than a resale of an unsold allotment from the sale of the Old Notes to
the Initial Purchasers) with the prospectus contained in the Registration
Statement. Pursuant to the Registration Rights Agreement, the Issuer has
agreed to permit Participating Broker-Dealers and other persons, if any,
subject to similar prospectus delivery requirements to use this Prospectus in
connection with the resale of such Exchange Notes. The Issuer has agreed
that, for a period of 180 days after the Exchange Date, it will make this
Prospectus, and any amendment or supplement to this Prospectus, available to
any broker-dealer that requests such documents in the Letter of Transmittal.
Each holder of the Old Notes who wishes to exchange its Old Notes for
Exchange Notes in the Exchange Offer will be required to make certain
representations to the Issuer as set forth in "The Exchange Offer - Terms and
Conditions of the Letter of Transmittal." In addition, each holder who is a
broker-dealer and who receives Exchange Notes for its own account in exchange
for Old Notes that were acquired by it as a result of market-making
activities or other trading activities will be required to acknowledge that
it will deliver a Prospectus in connection with any resale by it of such
Exchange Notes.
The Issuer will not receive any proceeds from any sale of Exchange Notes
by broker-dealers. Exchange Notes received by broker-dealers for their own
account pursuant to the Exchange Offer may be sold from time to time in one
or more transactions in the over-the-counter market, in negotiated
transactions, through the writing of options on the Exchange Notes or a
combination of such methods of resale, at market prices prevailing at the
time of resale, at prices related to such prevailing market prices or at
negotiated prices. Any such resale may be made directly to purchasers or to
or through brokers or dealers who may receive compensation in the form of
commissions or concessions from any such broker-dealer and/or the purchasers
of any such Exchange Notes. Any broker-dealer that resells Exchange Notes
that were received by it for its own account pursuant to the Exchange Offer
and any broker or dealer that participates in a distribution of such Exchange
Notes may be deemed to be an "underwriter" within the meaning of the
Securities Act and any profit on any such resale of Exchange Notes and any
commissions or concessions received by any such persons may be deemed to be
underwriting compensation under the Securities Act. The Letter of
Transmittal states that by acknowledging that it will deliver and by
delivering a prospectus, a broker-dealer will not be deemed to admit that it
is an "underwriter" within the meaning of the Securities Act.
136
The Issuer has agreed to pay all expenses incidental to the Exchange
Offer other than commissions and concessions of any brokers or dealers and
will indemnify holders of the Notes (including any broker-dealers) against
certain liabilities, including liabilities under the Securities Act, as set
forth in the Registration Rights Agreement.
NOTICE TO INVESTORS
Because the following instructions will apply to any Old Notes held by
holders who do not participate in the Exchange Offer, holders of the Old
Notes are advised to consult legal counsel prior to making any offer, resale,
pledge or transfer of any of the Old Notes.
The Old Notes have not been registered under the Securities Act and may
not be offered or sold within the United States or to U.S. Persons (as such
terms as defined under the Securities Act) except pursuant to an exemption
from, or in a transaction not subject to the registration requirements of the
Securities Act. Accordingly, the Old Notes were offered only to "qualified
institutional buyers" (as defined in Rule 144A under the Securities Act) in
reliance on the exemption from the registration requirements of the
Securities Act provided by Rule 144A, and to a limited number of
institutional "accredited investors" within the meaning of Rule 501(a)(1),
(2), (3) and (7) under the Securities Act.
Each purchaser of Old Notes purchased in a sale made in reliance on Rule
144A has been deemed to have represented and agreed as follows (terms used in
this paragraph that are defined in Rule 144A are used herein as defined
therein):
(1) The purchaser is either (A) a qualified institutional buyer and is
aware that the sale to it is being made in reliance on Rule 144A, and
such qualified institutional buyer has acquired such Old Notes for its
own account or for the account of another qualified institutional
buyer or, (B) an "accredited investor" within the meaning of Rule
501(a)(1), (2), (3) or (7) under the Securities Act (an "accredited
investor") or, (C) if the Old Notes are to be purchased for one or
more accounts ("investor accounts") for which it is acting as
fiduciary or agent, each such account is an accredited investor on a
like basis.
(2) The purchaser understands that the Old Notes were offered in a
transaction not involving any public offering in the United States
within the meaning of the Securities Act, that the Old Notes have not
been registered under the Securities Act and that: (A) the Old Notes
may be offered, resold, pledged or otherwise transferred only: (i) to
a person who the seller reasonable believes is a qualified
institutional buyer in the transaction meeting the requirements of
Rule 144A, in a transaction meeting the requirements of Rule 144 under
the Securities Act, outside the United States to a foreign person in a
transaction meeting the requirement of Rule 904 under the Securities
Act or in accordance with another exemption form the registration
requirements of the Securities Act (and based upon an Opinion to
Counsel if the Issuer so requests); (ii) to the Issuer; or (iii)
pursuant to an effective registration statement, and, in each case, in
accordance with any applicable securities laws of any State of the
United States or any other applicable jurisdiction; and (B) the
purchaser will, and each subsequent holder is required to, notify any
subsequent purchaser from it of the resale restrictions set forth in
(A) above.
(3) The purchaser understands that the certificates evidencing the Old
Notes bear, and if not exchanged pursuant to the Exchange Offer will
continue to bear, a legend substantially to the following effect
unless otherwise agreed by the Issuer and the holder thereof:
"THIS NOTE (OR ITS PREDECESSOR) HAS NOT BEEN REGISTERED
UNDER THE U.S. SECURITIES ACT OF 1933, AS AMENDED (THE
"SECURITIES ACT") AND, ACCORDINGLY, MAY NOT BE OFFERED,
SOLD, PLEDGED OR OTHERWISE TRANSFERRED WITHIN THE
UNITED STATES OR TO, OR FOR THE ACCOUNT OR BENEFIT OF,
U.S. PERSONS, EXCEPT AS SET FORTH IN THE FOLLOWING
SENTENCE. BY ITS ACQUISITION HEREOF OR OF A BENEFICIAL
INTEREST HEREIN, THE HOLDER (1) REPRESENTS THAT IT IS A
"QUALIFIED INSTITUTIONAL BUYER" (AS DEFINED IN RULE
144A UNDER THE SECURITIES ACT)(A "QIB"), (2) AGREES
THAT IT WILL NOT, WITHIN THE TIME PERIOD REFERRED TO
UNDER RULE 144(k) (TAKING INTO ACCOUNT THE PROVISIONS
OF RULE 144(d) UNDER THE SECURITIES ACT, IF APPLICABLE)
UNDER THE SECURITIES ACT AS IN EFFECT ON THE DATE OF
137
THE TRANSFER OF THIS NOTE, RESELL OR OTHERWISE TRANSFER
THIS NOTE EXCEPT (A) TO THE ISSUER OR ANY SUBSIDIARY
THEREOF, (B) TO A PERSON WHOM THE HOLDER REASONABLY
BELIEVES IS A QIB PURCHASING FOR ITS OWN ACCOUNT OR FOR
THE ACCOUNT OF A QIB IN COMPLIANCE WITH RULE 144A UNDER
THE SECURITIES ACT, (C) PURSUANT TO THE EXEMPTION FROM
REGISTRATION PROVIDED BY RULE 144 UNDER THE SECURITIES
ACT (IF AVAILABLE), (D) IN ACCORDANCE WITH ANOTHER
EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE
SECURITIES ACT (AND BASED UPON AN OPINION OF COUNSEL
ACCEPTABLE TO THE ISSUER) OR (E) PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES
ACT AND, IN EACH CASE, IN ACCORDANCE WITH APPLICABLE
STATE SECURITIES LAWS, AND (3) AGREES THAT IT WILL
DELIVER TO EACH PERSON TO WHOM THIS NOTE OR AN INTEREST
HEREIN IS TRANSFERRED A NOTICE SUBSTANTIALLY TO THE
EFFECT OF THIS LEGEND. THE INDENTURE CONTAINS A
PROVISION REQUIRING THE TRUSTEE TO REFUSE TO REGISTER
ANY TRANSFER OF THIS NOTE IN VIOLATION OF THE FOREGOING
RESTRICTIONS."
(4) The purchaser acknowledged that none of the Issuer, the Initial
Purchasers, or any person representing the Issuer or the Initial
Purchasers made any representations to it with respect to the Issuer
or the offering or sale of the Old Notes, other than the information
contained in the Prospectus, dated June 20, 1997, relating to the Old
Notes (the "Prospectus"), which was delivered to it and upon which it
relied in making its investment decision with respect to the Old
Notes. The purchaser had access to such financial and other
information concerning the Issuer and the Old Notes as it deemed
necessary in connection with its decision to purchase the Old Notes,
including an opportunity to ask questions of and request information
from the Issuer and the Initial Purchasers.
(5) The purchaser acknowledged that the Issuer and the Initial Purchasers,
and others relied upon the truth and accuracy of the foregoing
acknowledgements, representations and agreements and agrees that, if
any of the foregoing acknowledgements, representations or agreements
deemed to have been made by it are no longer accurate, it shall
promptly notify the Initial Purchasers. If such purchaser acquired
Old Notes as a fiduciary or agent for one or more investor accounts,
such purchaser represented that it has sole investment discretion with
respect to each such account and that it has full power to make the
foregoing acknowledgements, representations and agreements on behalf
of each such account.
Each purchaser of Old Notes that is an institutional accredited investor
executed and delivered a purchaser's letter for the benefit of the Initial
Purchasers and the Issuer, substantially in the form included as Appendix A
to the Prospectus, whereby such institutional accredited investor (a) agreed
to the restrictions on transfer set forth in clause (2) above, (b) confirmed
that it: (i) acquired Old Notes having a minimum purchase price of at least
$100,000 for its own account and for each separate account for which it is
acting; (ii) acquired such Old Notes for its own account or for certain
qualified institutional accounts, as specified therein; and (iii) did not
acquire the Notes with a view to distribution thereof in a transaction that
would violate the Securities Act or the securities laws of any State of the
United States or any other applicable jurisdiction; and (c) acknowledged that
the registrar and transfer agent for the Old Notes will not be required to
accept for registration of transfer any Old Notes acquired by them, except
upon presentation of evidence satisfactory to the Issuer that the restriction
on transfer set forth in clause (2) above have been complied with, and that
any such Old Notes will be in the form of definitive physical certificates
bearing the legend set forth in clause (3) above.
The Old Notes may not be sold or transferred to, and each purchaser, by
its purchase of the Old Notes has been deemed to have represented and
covenanted that it did not acquire the Old Notes for or on behalf of, and
will not transfer the Old Notes to, any pension or welfare plan (as defined
in Section 3 of the Employee Retirement Income Security Act of 1974; "ERISA")
except that such a purchase for or on behalf of a pension or welfare plan
shall be permitted:
(1) to the extent such purchase is made by or on behalf of a
bank collective investment fund maintained by the purchaser in
which no plan (together with any other plans maintained by the
same employer or employee organization) has an interest in excess
of 10% of the total assets in such collective
138
investment fund and the conditions of Section III of Prohibited
Transaction Class Exemption 91-38 issued by the Department of
Labor are satisfied;
(2) to the extent such purchase is made by or on behalf of an
insurance company pooled separate account maintained by the
purchaser in which, at any time while the Old Notes are
outstanding, no plan (together with any other plans maintained by
the same employer or employee organization) has an interest in
excess of 10% of the total of all assets in such pooled separate
account and the conditions of Section III of Prohibited
Transaction Class Exemption 90-1 issued by the Department of
Labor are satisfied;
(3) to the extent such purchase is made on behalf of a plan
by: (i) an investment advisor registered under the Investment
Advisers Act of 1940 that had as of the last day of its most
recent fiscal year total assets under its management and control
in excess of $50 million and had stockholders' or partners'
equity in excess of $0.75 million, as shown in its most recent
balance sheet prepared in accordance with generally accepted
accounting principles; or (ii) a bank as defined in Section
202(a)(2) of the Investment Advisers Act of 1940 with equity
capital in excess of $1 million as of the last day of its most
recent fiscal year; or (iii) an insurance company which is
qualified under the laws of more than one state to manage,
acquire or dispose of any assets of a plan, which insurance
company has as of the last day of its most recent fiscal year,
net worth in excess of $1 million and which is subject to
supervision and examination by a state authority having
supervision over insurance companies and, in any case, such
investment advisor, bank or insurance company is otherwise a
qualified professional asset manager, as such term is used in
Prohibited Transaction Class Exemption 84-14 issued by the
Department of Labor, and the assets of such plan when combined
with the assets of other plans established or maintained by the
same employer (or affiliate thereof) or employee organization and
managed by such investment advisor, bank or insurance company, do
not represent more than 20% of the total client assets managed by
such investment advisor, bank or insurance company, and the
conditions of Section I of such exemption are otherwise
satisfied; or
(4) to the extent such plan is a governmental plan (as
defined in Section 3 of ERISA) which is not subject to the
provision of Title I of ERISA of Section 401 of the Internal
Revenue Code.
INDEPENDENT ACCOUNTANTS
The audited financial statements of the Issuer included in this
Prospectus have been audited by Arthur Andersen LLP, independent public
accountants, as indicated in their reports with respect thereto, and are
included herein in reliance upon the authority of such firm as experts in
giving such reports.
LEGAL MATTERS
The validity of the Notes has been passed upon for the Issuer by Baker &
Hostetler LLP.
139
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
ECHOSTAR DBS CORPORATION 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 Stockholder's Equity for the years ended December 31, 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
ECHOSTAR COMMUNICATIONS CORPORATION
Consolidated Financial Statements:
Report of Independent Public Accountants. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-39
Consolidated Balance Sheets at December 31, 1995 and 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . F-40
Consolidated Statements of Operations for the years ended December 31, 1994, 1995 and 1996. . . . . . . . . . . F-41
Consolidated Statements of Stockholders' Equity for the years ended December 31, 1994, 1995 and 1996. . . . . . F-42
Consolidated Statements of Cash Flows for the years ended December 31, 1994, 1995 and 1996. . . . . . . . . . . F-43
Notes to Consolidated Financial Statements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-44
SUPPLEMENTAL QUARTERLY FINANCIAL INFORMATION
ECHOSTAR DBS CORPORATION
Condensed Consolidated Financial Statements:
Balance Sheets at December 31, 1996 and June 30, 1997 (Unaudited) . . . . . . . . . . . . . . . . . . . . . . . F-77
Statements of Operations for the three and six months ended June 30, 1996 and 1997 (Unaudited). . . . . . . . . F-78
Statement of Stockholder's Equity for the six months ended June 30, 1997 (Unaudited). . . . . . . . . . . . . . F-79
Statements of Cash Flows for the six months ended June 30, 1996 and 1997 (Unaudited). . . . . . . . . . . . . . F-80
Notes to Condensed Consolidated Financial Statements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-81
ECHOSTAR COMMUNICATIONS CORPORATION
Condensed Consolidated Financial Statements:
Balance Sheets at December 31, 1996 and June 30, 1997 (Unaudited) . . . . . . . . . . . . . . . . . . . . . . . F-86
Statements of Operations for the three and six months ended June 30, 1996 and 1997 (Unaudited). . . . . . . . . F-87
Statement of Stockholders' Equity for the six months ended June 30, 1997 (Unaudited). . . . . . . . . . . . . . F-88
Statements of Cash Flows for the six months ended June 30, 1996 and 1997 (Unaudited). . . . . . . . . . . . . . F-89
Notes to Condensed Consolidated Financial Statements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-90
F-1
REPORT OF INDEPENDENT ACCOUNTANTS
To EchoStar DBS Corporation:
We have audited the accompanying consolidated balance sheets of EchoStar
DBS Corporation (a Colorado corporation) and subsidiaries, as described in Note
1, as of December 31, 1995 and 1996, and the related consolidated statements of
operations, stockholder's 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 DBS
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 DBS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
DECEMBER 31,
-------------------------
1995 1996
-------------------------
ASSETS
Current Assets:
Cash and cash equivalents. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 13,949 $ 38,438
Marketable investment securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 210 18,807
Trade accounts receivable, net of allowance for uncollectible accounts of $1,106 and
$1,494, respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,115 13,483
Inventories. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38,769 72,767
Income tax refund receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,870 4,830
Deferred tax assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,834 -
Subscriber acquisition costs, net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 68,129
Other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,791 15,031
-------------------------
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80,538 231,485
Restricted Cash and Marketable Investment Securities:
1994 Notes escrow. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73,291 -
1996 Notes escrow. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 47,491
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26,400 31,450
-------------------------
Total restricted cash and marketable investment securities . . . . . . . . . . . . . . . . . . 99,691 78,941
Property and equipment, net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 333,199 528,577
FCC authorizations, net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,309 72,500
Advances to affiliates, net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,320 68,607
Deferred tax assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,109 79,663
Other noncurrent assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21,129 25,770
-------------------------
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $559,295 $1,085,543
-------------------------
-------------------------
LIABILITIES AND STOCKHOLDER'S EQUITY
Current Liabilities:
Trade accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 19,063 $ 41,228
Deferred programming and product revenue - DISH Network subscriber promotions. . . . . . . . - 97,959
Deferred programming revenue - DISH Network. . . . . . . . . . . . . . . . . . . . . . . . . - 4,407
Deferred programming revenue - C-band. . . . . . . . . . . . . . . . . . . . . . . . . . . . 584 734
Accrued expenses and other current liabilities . . . . . . . . . . . . . . . . . . . . . . . 26,314 30,125
Deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 12,674
Current portion of long-term debt. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,782 11,334
-------------------------
Total current liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50,743 198,461
Long-term obligations, net of current portion:
Long-term deferred signal carriage revenue . . . . . . . . . . . . . . . . . . . . . . . . . - 5,949
1994 Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 382,218 437,127
1996 Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 386,165
Mortgage and other notes payable, excluding current portion. . . . . . . . . . . . . . . . . 33,444 51,428
Note payable to ECC. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 12,000
Other long-term liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 1,088
-------------------------
Total long-term obligations, net of current portion. . . . . . . . . . . . . . . . . . . . . . 415,662 893,757
-------------------------
Total liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 466,405 1,092,218
Commitments and Contingencies (Note 11)
Stockholder's Equity (Deficit) (Notes 2 and 9):
Preferred Stock, 20,000,000 and no shares authorized, 1,616,681 and no shares of 8%
Series A Cumulative Preferred Stock issued and outstanding, including accrued
dividends of $1,555 and $-0-, respectively . . . . . . . . . . . . . . . . . . . . . . . . 16,607 -
Class A Common Stock, $.01 par value, 200,000,000, -0- and -0- shares authorized,
6,470,599 and -0- shares issued and outstanding, respectively. . . . . . . . . . . . . . . 65 -
Class B Common Stock, $.01 par value, 100,000,000, -0- and -0- shares authorized,
29,804,401 and -0- shares issued and outstanding, respectively . . . . . . . . . . . . . . 298 -
Common Stock, $.01 par value, -0- and 1,000 shares authorized, issued and outstanding,
respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - -
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89,495 108,839
Unrealized holding gains (losses) on available-for-sale securities, net of deferred taxes. . 251 (12)
Accumulated deficit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (13,826) (115,502)
-------------------------
Total stockholder's equity (deficit) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92,890 (6,675)
-------------------------
Total liabilities and stockholder's equity . . . . . . . . . . . . . . . . . . . . . . . . $559,295 $1,085,543
-------------------------
-------------------------
See accompanying Notes to Consolidated Financial Statements.
F-3
ECHOSTAR DBS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands)
YEARS ENDED DECEMBER 31,
----------------------------------------
1994 1995 1996
----------------------------------------
REVENUE:
DTH products and technical services. . . . . . . . . . . . . . . . . . . . . $172,753 $146,910 $ 136,377
DISH Network promotions - subscription television services and
products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - - 22,746
DISH Network subscription television services. . . . . . . . . . . . . . . . - - 37,898
C-band programming . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,540 15,232 11,921
Loan origination and participation income. . . . . . . . . . . . . . . . . . 3,690 1,748 789
----------------------------------------
Total revenue. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 190,983 163,890 209,731
EXPENSES:
DTH products and technical services. . . . . . . . . . . . . . . . . . . . . 133,635 116,758 123,505
DISH Network programming . . . . . . . . . . . . . . . . . . . . . . . . . . - - 19,079
C-band programming . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,670 13,520 10,510
Selling, general and administrative. . . . . . . . . . . . . . . . . . . . . 30,219 38,504 86,894
Subscriber promotion subsidies . . . . . . . . . . . . . . . . . . . . . . . - - 35,239
Amortization of subscriber acquisition costs . . . . . . . . . . . . . . . . - - 15,991
Depreciation and amortization. . . . . . . . . . . . . . . . . . . . . . . . 2,243 3,114 27,378
----------------------------------------
Total expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 177,767 171,896 318,596
----------------------------------------
Operating income (loss). . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,216 (8,006) (108,865)
Other Income (Expense):
Interest income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,420 12,545 15,111
Interest expense, net of amounts capitalized . . . . . . . . . . . . . . . . (21,408) (23,985) (62,430)
Minority interest in loss of consolidated joint venture and other. . . . . . 261 894 (345)
----------------------------------------
Total other income (expense), net. . . . . . . . . . . . . . . . . . . . . . . (12,727) (10,546) (47,664)
----------------------------------------
Income (loss) before income taxes. . . . . . . . . . . . . . . . . . . . . . . 489 (18,552) (156,529)
Income tax (provision) benefit, net. . . . . . . . . . . . . . . . . . . . . . (399) 6,191 54,853
----------------------------------------
Net income (loss). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 90 $(12,361) $(101,676)
----------------------------------------
----------------------------------------
See accompanying Notes to Consolidated Financial Statements.
F-4
ECHOSTAR DBS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY (DEFICIT)
(In thousands)
ACCUMULATED
DEFICIT AND
SHARES OF UNREALIZED
COMMON COMMON ADDITIONAL HOLDING
STOCK PREFERRED COMMON STOCK PAID-IN 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. . . . . . . . . . . . . . . . - 616 - - - (616) -
Exercise of Common Stock Warrants. . . . . 2,731 - 26 (25,419) 25,393 - -
Common Stock Warrants exchanged for ECC
Warrants . . . . . . . . . . . . . . . . - - - (714) 714 - -
Launch bonuses funded by issuance of ECC's
Class A Common Stock . . . . . . . . . . - - - - 1,192 - 1,192
Unrealized holding gains on available-
for-sale securities, net . . . . . . . . - - - - - 251 251
Net loss . . . . . . . . . . . . . . . . . - - - - - (12,361) (12,361)
-------------------------------------------------------------------------------------
Balance, December 31, 1995. . . . . . . . . 36,275 16,607 362 - 89,496 (13,575) 92,890
Issuance of Common Stock (Note 1). . . . . 1 - - - 2 - 2
Reorganization of entities under common
control (Note 1) . . . . . . . . . . . . (36,275) (16,607) (362) - 16,969 - -
Income tax benefit of deduction for income
tax purposes on exercise of Class A
Common Stock options . . . . . . . . . . - - - - 2,372 - 2,372
Unrealized holding losses on available-for-
sale securities, net . . . . . . . . . . - - - - - (263) (263)
Net loss . . . . . . . . . . . . . . . . . - - - - - (101,676) (101,676)
-------------------------------------------------------------------------------------
Balance, December 31, 1996. . . . . . . . . 1 $ - $ - $ - $ 108,839 $(115,514) $ (6,675)
-------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements.
F-5
ECHOSTAR DBS 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 $ (12,361) $(101,676)
Adjustments to reconcile net income (loss) to net cash flows from operating activities:
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,243 3,114 27,378
Amortization of subscriber acquisition costs. . . . . . . . . . . . . . . . . . . . . . - - 15,991
Deferred income tax benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (7,330) (4,825) (50,515)
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 -
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 convertible subordinated debentures from SSET . . . . . . (279) (860) (484)
Other, net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (37) 276 1,020
Changes in current assets and current liabilities, net (see Note 2) . . . . . . . . . . 8,354 (33,164) 14,940
------------------------------------
Net cash flows provided by (used in) operating activities. . . . . . . . . . . . . . . . 24,205 (21,888) (22,836)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of marketable investment securities. . . . . . . . . . . . . . . . . . . . . . (15,100) (3,004) (138,328)
Sales of marketable investment securities. . . . . . . . . . . . . . . . . . . . . . . . 4,439 33,816 119,730
Purchases of restricted marketable investment securities . . . . . . . . . . . . . . . . (11,400) (15,000) (21,100)
Funds released from restricted cash and marketable investment securities - other. . . . - - 16,050
Advances (to) from affiliates, net . . . . . . . . . . . . . . . . . . . . . . . . . . . - - (63,958)
Purchases of property and equipment. . . . . . . . . . . . . . . . . . . . . . . . . . . (3,507) (4,048) (45,822)
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 DBSC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (4,210) 4,210 -
Expenditures for satellite systems under construction. . . . . . . . . . . . . . . . . . (115,752) (109,507) (137,939)
Expenditures for FCC authorizations. . . . . . . . . . . . . . . . . . . . . . . . . . . (159) (458) (55,420)
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,305 - -
------------------------------------
Net cash flows provided by (used in) investing activities. . . . . . . . . . . . . . . . (338,565) 18,569 (294,962)
CASH FLOWS FROM FINANCING ACTIVITIES:
Minority investor investment in and loan to consolidated joint venture . . . . . . . . . 1,000 - -
Net proceeds from issuance of 1994 Notes and Common Stock Warrants . . . . . . . . . . . 323,325 - -
Net proceeds from issuance of Class A Common Stock . . . . . . . . . . . . . . . . . . . 3,833 - -
Proceeds from issuance of Common Stock . . . . . . . . . . . . . . . . . . . . . . . . . - - 2
Proceeds from note payable to ECC. . . . . . . . . . . . . . . . . . . . . . . . . . . . - - 12,000
Net proceeds from issuance of 1996 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) - -
Dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3,000) - -
------------------------------------
Net cash flows provided by (used in) financing activities. . . . . . . . . . . . . . . . 325,011 (238) 342,287
------------------------------------
Net increase (decrease) in cash and cash equivalents . . . . . . . . . . . . . . . . . . 10,651 (3,557) 24,489
Cash and cash equivalents, beginning of year . . . . . . . . . . . . . . . . . . . . . . 6,855 17,506 13,949
------------------------------------
Cash and cash equivalents, end of year . . . . . . . . . . . . . . . . . . . . . . . . . $ 17,506 $ 13,949 $ 38,438
------------------------------------
------------------------------------
See accompanying Notes to Consolidated Financial Statements.
F-6
ECHOSTAR DBS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THE ACCOMPANYING CONSOLIDATED FINANCIAL STATEMENTS FORM PART OF THE
PROSPECTUS TO EXCHANGE (THE "EXCHANGE OFFER") THE 12 1/2% SENIOR SECURED NOTES
DUE 2002 THAT WERE ISSUED IN A TRANSACTION EXEMPT FROM REGISTRATION UNDER THE
SECURITIES ACT OF 1933, AS AMENDED (THE "OLD NOTES") FOR PUBLICLY REGISTERED NEW
12 1/2% SENIOR SECURED NOTES DUE 2002 WITH SUBSTANTIALLY IDENTICAL TERMS (THE
"EXCHANGE NOTES" AND TOGETHER WITH THE OLD NOTES, THE "NOTES"). THE OLD NOTES
WERE ISSUED BY ECHOSTAR DBS CORPORATION ("DBS CORP"), A WHOLLY-OWNED SUBSIDIARY
OF ECHOSTAR COMMUNICATIONS CORPORATION ("ECC") ON JUNE 25, 1997. IN CONNECTION
WITH THE ISSUANCE OF THE OLD NOTES, ECC CONTRIBUTED ALL OF THE OUTSTANDING
CAPITAL STOCK OF ITS WHOLLY-OWNED SUBSIDIARY, ECHOSTAR SATELLITE BROADCASTING
CORPORATION ("ESBC") TO DBS CORP. THE ACCOMPANYING FINANCIAL STATEMENTS
RETROACTIVELY REFLECT THE RESULTING STRUCTURE AND HISTORICAL RESULTS OF DBS CORP
AND ITS PREDECESSORS AS A REORGANIZATION OF ENTITIES UNDER COMMON CONTROL. (SEE
ORGANIZATIONAL HISTORY AND LEGAL STRUCTURE BELOW).
ECC IS A PUBLICLY TRADED COMPANY ON THE NASDAQ NATIONAL MARKET. AS USED
HEREIN, "ECHOSTAR" REFERS TO ECC AND ITS SUBSIDIARIES. THE "COMPANY" REFERS TO
DBS CORP AND ITS SUBSIDIARIES, AS REORGANIZED.
DBS CORP WAS FORMED UNDER COLORADO LAW IN JANUARY 1996 FOR THE INITIAL
PURPOSE OF PARTICIPATING IN A FEDERAL COMMUNICATIONS COMMISSION ("FCC") AUCTION.
ON JANUARY 26, 1996, DBS CORP SUBMITTED THE WINNING BID OF $52.3 MILLION FOR 24
DIRECT BROADCAST SATELLITE ("DBS") FREQUENCIES AT 148DEG. WL. FUNDS NECESSARY
TO COMPLETE THE PURCHASE OF THE DBS FREQUENCIES AND COMMENCE CONSTRUCTION OF THE
COMPANY'S FOURTH DBS SATELLITE, ECHOSTAR IV, HAVE BEEN ADVANCED TO DBS CORP BY
ECC AND ESBC.
1. ORGANIZATION AND BUSINESS ACTIVITIES
PRINCIPAL BUSINESS
The Company currently is one of only three DBS companies in the United
States with the capacity to provide comprehensive nationwide DBS programming
service. The Company's DBS service (the "DISH Network") commenced operations in
March 1996 after the successful launch of its first satellite ("EchoStar I").
The Company launched its second satellite ("EchoStar II") on September 10, 1996.
EchoStar II significantly increased the channel capacity and programming
offerings of the DISH Network when it became fully operational in November 1996.
The Company currently provides approximately 120 channels of digital video
programming and over 30 channels of CD quality audio programming to the entire
continental United States. In addition to its DISH Network business, the Company
is engaged in the design, manufacture, distribution and installation of
satellite direct-to-home ("DTH") products and domestic distribution of DTH
programming.
The Company's business objective is to become one of the leading providers
of subscription television and other satellite-delivered services in the United
States. The Company had approximately 350,000 subscribers to DISH Network
programming as of December 31, 1996.
RECENT DEVELOPMENTS
On February 24, 1997, EchoStar and The News Corporation Limited ("News")
announced an agreement (the "News Agreement") pursuant to which, among other
things, News agreed to acquire approximately 50% of the outstanding capital
stock of EchoStar. News also agreed to make available for use by EchoStar the
DBS license for 28 frequencies at 110DEG. West Longitude ("WL") purchased by
MCI Communications Corporation for over $682 million at a 1996 FCC auction.
During late April 1997, substantial disagreements arose between the parties
regarding their obligations under the News Agreement.
On May 8, 1997 EchoStar filed a Complaint in the United States District
Court for the District of Colorado (the "Court"), Civil Action No. 97-960,
requesting that the Court confirm EchoStar's position and declare that News is
obligated pursuant to the News Agreement to lend $200 million to EchoStar
without interest and upon such other terms as the Court orders.
On May 9, 1997, EchoStar filed a First Amended Complaint significantly
expanding the scope of the litigation to include breach of contract, failure to
act in good faith, and other causes of action. EchoStar seeks specific
performance of the News
F-7
ECHOSTAR DBS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND BUSINESS ACTIVITIES (CONTINUED)
Agreement and damages, including lost profits based on, among other things, a
jointly prepared ten-year business plan showing expected profits for EchoStar in
excess of $10 billion based on consummation of the transactions contemplated by
the News Agreement.
On June 9, 1997, News filed an answer and counterclaims seeking unspecified
damages. News' answer denies all of the material allegations in the First
Amended Complaint and asserts numerous defenses, including bad faith, misconduct
and failure to disclose material information on the part of EchoStar and its
Chairman and Chief Executive Officer, Charles W. Ergen. The counterclaims, in
which News is joined by its subsidiary American Sky Broadcasting, L.L.C., assert
that EchoStar and Ergen breached their agreements with News and failed to act
and negotiate with News in good faith. EchoStar has responded to News' answer
and denied the allegations in their counterclaims. EchoStar also has asserted
various affirmative defenses. EchoStar intends to diligently defend against the
counterclaims. The parties are now in discovery. A trial date has not been set.
While EchoStar is confident of its position and believes it will ultimately
prevail, the litigation could continue for many years and there can be no
assurance concerning the outcome of the litigation.
ORGANIZATIONAL HISTORY 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 included EchoStar Satellite Corporation ("ESC"),
which holds licenses for certain DBS frequencies and is the operator of the
DISH Network, 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.
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 stockholders received an
approximate 3% equity interest in Dish, Ltd. in exchange for all of DirectSat's
outstanding stock. DirectSat's principal assets are a conditional satellite
construction permit and frequency assignments for ten DBS frequencies.
In June 1994, Dish, Ltd. completed an offering of 127/8% Senior Secured
Discount Notes due 2004 (the "1994 Notes," see Note 6) and Common Stock Warrants
(the "Warrants") (collectively, the "1994 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 1994 Notes
(the "1994 Notes Indenture").
In April 1995, ECC was formed to conduct an initial public offering ("IPO")
of its Class A Common Stock and to become the parent of Dish, Ltd. as described
below. The assets of ECC are not subject to the 1994 Notes Indenture. Separate
parent company only financial information for ECC is supplementally provided in
Note 16. As described in Note 6, the 1994 Notes Indenture places significant
restrictions on the payment of dividends or other transfers by Dish, Ltd.
In June 1995, ECC completed its IPO, 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.
F-8
ECHOSTAR DBS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND BUSINESS ACTIVITIES (CONTINUED)
ESBC was formed as a wholly-owned subsidiary of ECC in January 1996. In
March 1996, ESBC completed an offering (the "1996 Notes Offering") of 131/8%
Senior Secured Discount Notes due 2004, which resulted in net proceeds to the
Company of approximately $337.0 million. In connection with the 1996 Notes
Offering, ECC 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 1996 Notes (the "1996 Notes Indenture").
The following summarizes the reorganized structure, following issuance of
the Old Notes for EchoStar and its significant subsidiaries as described above:
LEGAL ENTITY REFERRED TO HEREIN AS OWNERSHIP
- ------------ --------------------- ---------
EchoStar Communications Corporation ECC Publicly owned
EchoStar DBS Corporation DBS Corp Wholly-owned by ECC
EchoStar Satellite Broadcasting Corporation ESBC Wholly-owned by DBS Corp
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.
Substantially all of EchoStar's operating activities are conducted by
subsidiaries of Dish, Ltd.
SIGNIFICANT RISKS AND UNCERTAINTIES
The commencement of the Company's DBS business has dramatically changed its
operating results and financial position as compared to its historical results.
As a result, annual interest expense on the Company's long-term debt, and
depreciation of satellites and related assets each exceeds historical levels of
income before income taxes. Consequently, the Company currently reports
significant net losses and expects such net losses to continue through at least
1999. The proceeds generated from the issuance of the Old Notes is expected to
be sufficient to fund the Company's operations for at least 12 months. The
Company may require additional capital to 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 the Company. A
further increase in subscriber acquisition costs, or significant delays or
launch failures would significantly and adversely affect the Company's operating
results and financial condition.
The Company is currently dependent on one manufacturing source for its
receivers. This manufacturer presently manufactures receivers in sufficient
quantities to meet currently expected demand. If the Company's sole manufacturer
is unable for any reason to produce receivers in a quantity sufficient to meet
demand, the Company's liquidity and results of operations would be adversely
affected.
In accordance with the News Agreement, as described above, EchoStar had
expected to meet its short- and medium-term capital needs through financial
commitments from News. As a result of the failure by News to honor its
obligations under the News Agreement, EchoStar was required to raise additional
capital to execute its contemplated business plan. In connection therewith, in
June 1997 DBS Corp consummated the Old Notes offering. The Old Notes offering
resulted in net proceeds to DBS Corp of approximately $362.5 million, including
approximately $109.0 million restricted for certain interest payments on the
Notes. EchoStar intends to seek recovery from News for any costs of financing,
including those costs associated with the Notes offering, in excess of the costs
of the financing committed to by News under the News Agreement.
F-9
ECHOSTAR DBS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The financial statements for 1996 and prior periods present the
consolidation of Dish, Ltd. and its subsidiaries through the date of closing the
1996 Notes Offering (see Note 1), the consolidation of ESBC and its
subsidiaries, including Dish, Ltd., thereafter, and the combination of DBS Corp
from its inception in January 1996. The structural changes described in Note 1
have been accounted for as reorganizations of entities under common control and
the historical cost basis of consolidated assets and liabilities was not
affected by the transactions. All significant intercompany accounts and
transactions have been eliminated.
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 the
years ended December 31, 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.
F-10
ECHOSTAR DBS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
STATEMENTS OF CASH FLOWS DATA
The following summarizes the changes in the Company's current assets and
current liabilities:
YEARS ENDED DECEMBER 31,
------------------------------------
1994 1995 1996
------------------------------------
Trade accounts receivable. . . . . . . . . . . . $ 372 $ (1,536) $ (4,368)
Inventories. . . . . . . . . . . . . . . . . . . 3,049 (19,654) (36,864)
Income tax refund receivable . . . . . . . . . . - (3,870) (960)
Subscriber acquisition costs . . . . . . . . . . - - (84,120)
Other current assets . . . . . . . . . . . . . . (183) (10,218) (2,240)
Trade accounts payable . . . . . . . . . . . . . 2,648 4,111 22,165
Deferred revenue - DISH Network subscriber
promotions . . . . . . . . . . . . . . . . . . - - 97,959
Deferred programming revenue . . . . . . . . . . 564 (1,009) 4,557
Accrued expenses and other current liabilities . 1,670 (988) 18,811
Other, net . . . . . . . . . . . . . . . . . . . 234 - -
------------------------------------
Net increase (decrease) in current assets
and current liabilities. . . . . . . . . . . $8,354 $(33,164) $14,940
------------------------------------
------------------------------------
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 939 617 -
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 -
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 stockholder's equity,
net of related deferred income taxes of $153,000 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.
F-11
ECHOSTAR DBS CONRPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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
HOLDING HOLDING
AMORTIZED GAIN MARKET AMORTIZED GAIN MARKET
COST (LOSS) VALUE COST (LOSS) VALUE
--------------------------------- -------------------------------------
Commercial paper . . . . . $ - $ - $ - $16,065 $ - $16,065
Government bonds . . . . . 38 - 38 2,540 - 2,540
Mutual funds . . . . . . . 188 (16) 172 219 (17) 202
--------------------------------- ------------------------------------
$226 $(16) $210 $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 1994 Notes Offering, and a portion of
the proceeds from the 1996 Notes Offering, plus interest earned, less amounts
expended to date in connection with the development, construction and continued
growth of the DISH Network. These proceeds are held in separate escrow accounts
(the "1994 Notes Escrow" and the "1996 Notes Escrow") 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,
$5.7 million at December 31, 1995 and 1996, respectively, which were restricted
to satisfy certain covenants in the 1994 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. The $15.0 million and $10.0 million
deposits were both released from these escrow accounts during May 1997. The
major components of Restricted Cash and Marketable Investment Securities are as
follows (in thousands):
DECEMBER 31, 1995 DECEMBER 31, 1996
--------------------------------- -------------------------------------
UNREALIZED UNREALIZED
HOLDING HOLDING
AMORTIZED GAIN MARKET AMORTIZED GAIN MARKET
COST (LOSS) VALUE COST (LOSS) VALUE
--------------------------------- -------------------------------------
Commercial paper . . . . . . $66,214 $ - $66,214 $77,569 $ - $77,569
Government bonds . . . . . . 32,904 420 33,324 368 - 368
Certificates of deposit . . - - - 750 - 750
Accrued interest . . . . . . 153 - 153 254 - 254
--------------------------------- ------------------------------------
$99,271 $420 $99,691 $78,941 $ - $78,941
--------------------------------- ------------------------------------
--------------------------------- ------------------------------------
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. The Company
also distributes non-proprietary products purchased from other manufacturers.
Manufactured inventories include materials, labor and manufacturing overhead.
Cost of other inventories includes parts, contract manufacturers' delivered
price, assembly and testing labor, and related overhead, including handling and
storage costs.
F-12
ECHOSTAR DBS CONRPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 and other. . . . . . . . . . . . . 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, $25.0 million and $19.8 million during the years
ended December 31, 1994, 1995 and 1996, respectively. The costs of satellites
under construction are capitalized during the construction phase, assuming the
eventual successful launch and in-orbit operation of the satellite. If a
satellite were to fail during launch or while in-orbit, the resultant loss would
be charged to expense in the period such loss was realized. The amount of any
such loss would be reduced to the extent of insurance proceeds received as a
result of the launch or in-orbit failure. 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 $1.1 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 at the time of the merger and are included in FCC authorizations
(see Note 5).
ADVANCES TO AFFILIATES
Advances to affiliates are recorded at cost and represent the net amount of
funds advanced to, or received from, unconsolidated affiliates of DBS Corp. Such
advances principally have consisted of advances to Direct Broadcasting Satellite
Corporation ("DBSC") and EchoStar Space Corporation to fund satellite
construction and launch expenditures.
REVENUE RECOGNITION
Revenue from sales of DTH products is recognized upon shipment to
customers. Revenue from the provision of DISH Network 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
PROMOTIONS - SUBSCRIPTION TELEVISION SERVICES AND PRODUCTS
Total transaction proceeds from DISH Network 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 the aggregate cost of the
equipment, programming and other expenses for
F-13
ECHOSTAR DBS CONRPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
the initial prepaid subscription period for DISH Network service over proceeds
received 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 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 programming and equipment which were 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 1994 Notes Offering and the 1996 Notes Offering
were deferred (Note 5) and are being amortized to interest expense over their
respective terms. The original issue discounts related to the 1994 Notes and the
1996 Notes (Note 6) are being accreted to interest expense so as to reflect a
constant rate of interest on the accreted balance of the 1994 Notes and the 1996
Notes.
DEFERRED PROGRAMMING REVENUE
Deferred programming revenue consists of prepayments received from
multiple-month subscriptions to DISH Network programming. Such amounts are
recognized as revenue in the period the programming is provided to the
subscriber. Similarly, the Company defers prepayments received from subscribers
to C-band programming sold by the Company 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. Such amounts are deferred and recognized as revenue on a
straight-line basis over the related contract terms (up to ten years).
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 $ 19,899
Accrued satellite contract costs . . . . . . . 15,000 -
Accrued programming. . . . . . . . . . . . . . 4,979 9,463
Reserve for warranty costs . . . . . . . . . . 1,013 763
Other. . . . . . . . . . . . . . . . . . . . . 1,472 -
--------------------
$26,314 $30,125
--------------------
--------------------
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.
F-14
ECHOSTAR DBS CONRPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
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
------------------------
Deposit held by non-performing manufacturer. . $10,000 $10,000
Other. . . . . . . . . . . . . . . . . . . . . 2,791 5,031
------------------------
$12,791 $15,031
------------------------
------------------------
The Company previously maintained agreements with two manufacturers for DBS
receivers. Only one of the manufacturers produced receivers acceptable to the
Company. Previously, the Company deposited $10.0 million with the non-performing
manufacturer and as of December 31, 1996, had an additional $15.0 million on
deposit in an escrow account as security for its payment obligations under that
contract. During 1996, the Company provided the non-performing manufacturer
notice of its intent to terminate the contract and filed suit against that
manufacturer. On April 25, 1997, the Company and the non-performing manufacturer
executed a settlement and release agreement under which the non-performing
manufacturer agreed to return the $10.0 million deposit and agreed to release
the $15.0 million held in escrow. The Company received these amounts in
May 1997.
F-15
ECHOSTAR DBS CONRPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following (in thousands):
DECEMBER 31,
LIFE -----------------------------
(IN YEARS) 1995 1996
-------------- -----------------------------
EchoStar I . . . . . . . . . . . . . . . . 12 $ - $201,607
EchoStar II. . . . . . . . . . . . . . . . 12 - 228,694
Furniture, fixtures and equipment. . . . . 2 - 12 35,127 72,932
Buildings and improvements . . . . . . . . 7 - 40 21,006 21,649
Tooling and other. . . . . . . . . . . . . 2 2,039 3,253
Land . . . . . . . . . . . . . . . . . . . - 1,613 1,613
Vehicles . . . . . . . . . . . . . . . . . 7 1,310 1,323
Construction in progress . . . . . . . . . - 282,373 32,725
------------------------------
Total property and equipment . . . . . . . 343,468 563,796
Accumulated depreciation . . . . . . . . . (10,269) (35,219)
------------------------------
Property and equipment, net. . . . . . . . $333,199 $528,577
------------------------------
------------------------------
Construction in progress consists of the following (in thousands):
DECEMBER 31,
-----------------------
1995 1996
-----------------------
Progress amounts for satellite construction,
launch, launch insurance, and capitalized
interest:
EchoStar I. . . . . . . . . . . . . . . . . . $193,629 $ -
EchoStar II . . . . . . . . . . . . . . . . . 88,634 -
EchoStar IV . . . . . . . . . . . . . . . . . - 28,487
Other . . . . . . . . . . . . . . . . . . . . . 110 4,238
-----------------------
$282,373 $32,725
-----------------------
-----------------------
5. OTHER NONCURRENT ASSETS
Other noncurrent assets consist of the following (in thousands):
DECEMBER 31,
-----------------------
1995 1996
-----------------------
Deferred debt issuance costs . . . . . . . . . . $10,622 $21,284
SSET convertible subordinated debentures and
accrued interest. . . . . . . . . . . . . . . . 9,610 3,649
Other, net . . . . . . . . . . . . . . . . . . . 897 837
-----------------------
$21,129 $25,770
-----------------------
-----------------------
In 1994, the Company purchased $8.75 million of SSET's 6.5% convertible
subordinated debentures. During 1996, the Company 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, the Company purchased an approximate 6% ownership interest in the stock of
Direct Broadcasting Satellite Corporation ("DBSC") and certain of DBSC's notes
and accounts receivable from SSET for $1.25 million.
F-16
ECHOSTAR DBS CONRPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. LONG-TERM DEBT
1994 NOTES
On June 7, 1994, Dish, Ltd. issued the 1994 Notes which mature on June 1,
2004. The 1994 Notes issuance resulted in net proceeds to Dish, Ltd. of $323.3
million (including amounts attributable to the issuance of the Warrants and
after payment of underwriting discount and other issuance costs aggregating
approximately $12.6 million).
The 1994 Notes bear interest at a rate of 12 7/8%, computed on a
semi-annual bond equivalent basis. Interest on the 1994 Notes will not be
payable in cash prior to June 1, 1999, with the 1994 Notes accreting to a
principal value at stated maturity of $624.0 million by that date. Commencing
December 1, 1999, interest on the 1994 Notes will be payable in cash on
December 1 and June 1 of each year.
The 1994 Notes rank senior in right of payment to all subordinated
indebtedness of Dish, Ltd. and PARI PASSU in right of payment with all other
senior indebtedness of Dish, Ltd., subject to the terms of an Intercreditor
Agreement between Dish, Ltd., certain of its principal subsidiaries, and certain
creditors thereof. The 1994 Notes are secured by liens on certain assets of
Dish, Ltd., including EchoStar I and EchoStar II and all other components of the
EchoStar DBS System owned by Dish, Ltd. and its subsidiaries. The 1994 Notes are
further guaranteed by each material direct subsidiary of Dish, Ltd. (see Note
12). Although the 1994 Notes are titled "Senior," Dish, Ltd. has not issued, and
does not have any current arrangements to issue, any significant indebtedness to
which the 1994 Notes would be senior; however, the 1996 Notes are effectively
subordinated to the 1994 Notes and all other liabilities of Dish, Ltd. and its
subsidiaries. Furthermore, at December 31, 1995 and 1996, the 1994 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 1994 Notes are not redeemable at Dish, Ltd.'s
option prior to June 1, 1999. Thereafter, the 1994 Notes will be subject to
redemption, at the option of Dish, Ltd., in whole or in part, at redemption
prices ranging from 104.828% during the year commencing June 1, 1999 to 100% 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 1994 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 1994
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 1994 Notes Indenture, Dish, Ltd. will be
required to make an offer to each holder of 1994 Notes to repurchase all or any
part of such holder's 1994 Notes at a purchase price equal to 101% of the
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 1994 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 1994 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 1994 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 1994 Notes Indenture) from the date of issuance of the 1994
Notes, plus 100% of the aggregate net proceeds to Dish, Ltd. from the issuance
and sale of certain equity interests of Dish, Ltd. (including common stock).
F-17
ECHOSTAR DBS CONRPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. LONG-TERM DEBT (CONTINUED)
1996 NOTES
On March 25, 1996, ESBC completed the 1996 Notes Offering consisting of
$580.0 million aggregate principal amount at stated maturity of the 1996 Notes.
The 1996 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 1996 Notes bear interest at a rate
of 13 1/8%, computed on a semi-annual bond equivalent basis. Interest on the
1996 Notes will not be payable in cash prior to March 15, 2000, with the 1996
Notes accreting to a principal amount at stated maturity of $580.0 million by
that date. Commencing September 15, 2000, interest on the 1996 Notes will be
payable in cash on September 15 and March 15 of each year. The 1996 Notes mature
on March 15, 2004.
The 1996 Notes rank PARI PASSU in right of payment with all senior
indebtedness of ESBC. The 1996 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 1996 Notes are titled
"Senior," (i) ESBC has not issued, and does not have any current arrangements to
issue, any significant indebtedness to which the 1996 Notes would be senior; and
(ii) the 1996 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 1996 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 1996 Notes only at any time after
payment of all amounts due and payable at such time under the 1994 Notes.
Except under certain circumstances requiring prepayment premiums, and in
other limited circumstances, the 1996 Notes are not redeemable at ESBC's option
prior to March 15, 2000. Thereafter, the 1996 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 1996 Notes will mature on March 15, 2004.
The 1996 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 1996 Notes
Indenture; and (2) after giving effect to such dividend, ESBC's ratio of total
indebtedness to cash flow (calculated in accordance with the 1996 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 1996 Notes Indenture) from January 1,
1996, 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). The 1996 Notes Indenture permits ESBC to pay dividends
and make other distributions to DBS Corp without restrictions.
In the event of a change of control, as described in the 1996 Notes
Indenture, ESBC will be required to make an offer to each holder of 1996 Notes
to repurchase all of such holder's 1996 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.
F-18
ECHOSTAR DBS CONRPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. LONG-TERM DEBT (CONTINUED)
OTHER LONG-TERM DEBT
In addition to the 1994 Notes and 1996 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 1994 Notes and 1996 Notes. . . . . . . . . 38,226 62,762
Less current portion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (4,782) (11,334)
--------------------------
Long-term debt, excluding current portion. . . . . . . . . . . . . . . . . . . $33,444 $ 51,428
--------------------------
--------------------------
In addition to the above other long-term debt, DBS Corp has a $12.0 million
demand note payable to ECC. This note payable bears interest at the prime rate
(8.25% at December 31, 1996).
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
CONTRACT NOTES
1994 NOTES 1996 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
---------- ---------- ---------- ---------- -----------
---------- ---------- ---------- ---------- -----------
F-19
ECHOSTAR DBS CONRPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. LONG-TERM DEBT (CONTINUED)
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 1994 Notes and 1996 Notes are based on quoted market prices. The fair
value of the Company's deferred satellite contract payments and mortgage notes
payable are estimated using discounted cash flow analyses. The interest rates
assumed in such discounted cash flow analyses reflect interest rates currently
being offered for loans with similar terms to borrowers of similar credit
quality.
BOOK VALUE FAIR VALUE
---------- ----------
1994 Notes . . . . . . . . . . . . . . . . . $437,127 $ 526,282
1996 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
each such satellite) and payments are made over a period of five years after the
delivery and launch of each such satellite. DBS Corp 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.
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
obtain 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) $1,711 $ 4,596
State. . . . . . . . . . . . . . . . . . . (853) (44) (49)
Foreign. . . . . . . . . . . . . . . . . . (925) (301) (209)
------- ------ --------
. . . . . . . . . . . . . . . . . . . . . (7,729) 1,366 4,338
Deferred benefit:
Federal. . . . . . . . . . . . . . . . . . 6,342 4,440 48,043
State. . . . . . . . . . . . . . . . . . . 988 385 2,472
------- ------ --------
7,330 4,825 50,515
------- ------ --------
Total (provision) benefit . . . . . . . . $ (399) $6,191 $54,853
------- ------ --------
------- ------ --------
F-20
ECHOSTAR DBS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. INCOME TAXES (CONTINUED)
As of December 31, 1996, the Company had net operating loss carryforwards
("NOLs") for Federal income tax purposes of approximately $77.9 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. 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.
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. . . . . . . . . . . . . . . . . . . . . . . . . . . . - 1,414
Allowance for doubtful accounts . . . . . . . . . . . . . . . . . . . . 456 674
Reserve for warranty costs. . . . . . . . . . . . . . . . . . . . . . . 385 284
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 312 57
---------------------------
Total current deferred tax assets . . . . . . . . . . . . . . . . . . . . 1,987 7,269
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) . . . . . . . . . . . . . 1,834 (12,674)
Noncurrent deferred tax assets:
Net operating loss carryforwards. . . . . . . . . . . . . . . . . . . . - 77,910
Amortization of original issue discount on 1994 and 1996 Notes. . . . . 15,439 4,912
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 3,451
---------------------------
Total noncurrent deferred tax assets. . . . . . . . . . . . . . . . . . . 15,446 116,273
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 79,663
---------------------------
Net deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . $13,943 $ 66,989
---------------------------
---------------------------
F-21
ECHOSTAR DBS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. INCOME TAXES (CONTINUED)
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)% $6,493 35.0% $54,785 35.0%
State income taxes, net of federal benefit. . . . . (88) (18.0) 222 1.2 2,839 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) (1.4)
Other . . . . . . . . . . . . . . . . . . . . . . . (103) (21.1) (272) (1.4) (672) (0.4)
---------------------- ---------------------- ------------------------
Total (provision for) benefit from income taxes . . $(399) (81.6)% $6,191 33.4% $54,853 35.0%
---------------------- ---------------------- ------------------------
---------------------- ---------------------- ------------------------
8. EMPLOYEE BENEFIT PLAN
EchoStar 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 EchoStar, subject to a maximum annual contribution by EchoStar of
$1,000 per employee. EchoStar may also make an annual discretionary contribution
to the plan with approval by EchoStar's Board of Directors, subject to the
maximum deductible limit provided by the Internal Revenue Code of 1986, as
amended. EchoStar's total cash contributions to the 401(k) Plan totaled
$170,000, $177,000 and $226,000 during 1994, 1995 and 1996, respectively.
Additionally, EchoStar contributed 55,000 shares of its Class A Common Stock in
each of the years ended December 31, 1995 and 1996 (fair value of approximately
$1.1 million and $935,000, respectively) to the 401(k) Plan as discretionary
contributions.
9. STOCKHOLDER'S EQUITY
Effective March 10, 1994, the stockholders approved measures necessary to
increase the authorized capital stock of Dish, Ltd. to include 200 million
shares of Class A Common Stock, 100 million shares of Class B Common Stock, and
20 million shares of Series A Convertible Preferred Stock and determined to
split all outstanding shares of common stock on the basis of approximately 4,296
to 1.
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 1994 Notes Indenture places significant restrictions on the payment of those
dividends. As of 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.
10. STOCK COMPENSATION PLANS
EchoStar has two stock-based compensation plans, which are described below.
EchoStar 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 EchoStar'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
F-22
ECHOSTAR DBS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. STOCK COMPENSATION PLANS (CONTINUED)
compensation awards to employees based on fair values. EchoStar 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 EchoStar 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
EchoStar's Class A 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 was $12.8 million and $102.6 million for the years ended December
31, 1995 and 1996, respectively.
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.
In April 1994, EchoStar adopted a stock incentive plan (the "Stock
Incentive Plan") to provide incentive to attract and retain officers, directors
and key employees. 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
EchoStar's Board of Directors, generally at the rate of 20% per year.
A summary of EchoStar's incentive stock option activity for the years ended
December 31, 1995 and 1996 is as follows:
1995 1996
-------------------------- -------------------------
WEIGHTED- WEIGHTED-
AVERAGE AVERAGE
EXERCISE EXERCISE
OPTION PRICE OPTION PRICE
-------------------------- -------------------------
Options outstanding at beginning of period. . . . . . . 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 period. . . . . . . . . . 1,117,133 $ 12.23 1,025,273 14.27
-------------------------- -------------------------
-------------------------- -------------------------
Exercisable at end of period. . . . . . . . . . . . . . 142,474 $ 9.33 258,368 $11.31
-------------------------- -------------------------
-------------------------- -------------------------
Weighted-average fair value of options granted. . . . . $ 9.86 $16.96
---------- ---------
---------- ---------
F-23
ECHOSTAR DBS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. STOCK COMPENSATION PLANS (CONTINUED)
Exercise prices for options outstanding as of December 31, 1996 are as
follows:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------- ------------------------------
NUMBER WEIGHTED- NUMBER
OUTSTANDING AS AVERAGE WEIGHTED- EXERCISABLE AS OF WEIGHTED-
OF DECEMBER 31, REMAINING AVERAGE DECEMBER 31, AVERAGE
RANGE OF EXERCISE PRICES 1996 CONTRACTUAL 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, EchoStar 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 EchoStar Class A Common
Stock 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, EchoStar granted an additional option to a key
employee to purchase 33,000 shares of EchoStar's 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
The Company 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. During the remainder of 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 1996 Notes Escrow
Account, the proceeds of the 1997 Offering, 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. The construction contracts with Martin for the construction of EchoStar
III and EchoStar IV contain substantial termination penalties. The 1997 Offering
is expected to provide financing sufficient to fund the Company's commitments
for at least the next 12 months. In order to continue to build, launch and
support EchoStar III and EchoStar IV beyond the second quarter of 1998, EchoStar
may require additional capital. There can be no assurance that additional
capital will be available, or, if available, that it will be available on terms
acceptable to EchoStar.
EchoStar 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, EchoStar will successfully develop the
FSS System or the Ka-band satellite system. EchoStar 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 EchoStar's FSS or Ka-band satellite
system applications are approved by the FCC, additional debt or equity financing
would be required. No assurances can be given that financing will be available,
or that it will be available on terms acceptable to the Company.
F-24
ECHOSTAR DBS 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 to its
specifications. As of December 31, 1996, the remaining commitments totaled
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, the proceeds of
the 1997 Offering, and cash flows generated from sales of DISH Network
programming and related DBS inventory.
OTHER RISKS AND CONTINGENCIES
EchoStar 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
EchoStar's financial position or results of operations.
F-25
ECHOSTAR DBS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. CONDENSED CONSOLIDATING FINANCIAL INFORMATION FOR SUBSIDIARY GUARANTORS
Presented below is condensed consolidating financial information for
EchoStar and its subsidiaries as of and for the years ended December 31, 1995
and 1996. See Note 6 for a more complete description of the subsidiary
guarantors of each of the 1996 Notes and the 1994 Notes. Because the formations
of EchoStar (incorporated in 1995), DBS Corp (incorporated in 1996) and ESBC
(incorporated in 1996) were all accounted for as reorganizations of entities
under common control, the consolidated financial statements of Dish, Ltd. as of
December 31, 1994 and for the year then ended also represent the financial
statements of EchoStar, DBS Corp and ESBC. Therefore, condensed consolidating
financial information for the subsidiary guarantors of the 1996 Notes and the
1994 Notes for the year ended December 31, 1994 is not presented.
Condensed consolidating financial information is presented for the
following entities:
Consolidated Dish, Ltd. (referred to as "Dish") Consolidated DBS Corp (referred to as "DBS Corp")
ESBC Parent Company Only (referred to as "ESBC - PC") ECC Parent Company Only (referred to as "ECC - PC")
Consolidating and eliminating adjustments (referred to as "C&E") Other direct wholly owned subs of ECC (referred to as "Other")
Consolidated ESBC (referred to as "ESBC") Consolidated ECC (referred to as "ECC")
DBS Corp Parent Company Only (referred to as "DBS Corp - PC")
CONDENSED CONSOLIDATING BALANCE SHEETS - AS OF DECEMBER 31, 1995 (IN MILLIONS)
ECC -
Dish PC Other C&E ECC
----------------------------------------------------------
ASSETS
Current Assets:
Cash and cash equivalents. . . . . . . . . . . . . $ 14 $ 8 $-- $ -- $ 22
Marketable investment securities . . . . . . . . . -- 15 -- -- 15
Trade accounts receivable, net . . . . . . . . . . 10 -- -- -- 10
Inventories. . . . . . . . . . . . . . . . . . . . 39 -- -- -- 39
Other current assets . . . . . . . . . . . . . . . 18 -- -- -- 18
----------------------------------------------------------
Total current assets . . . . . . . . . . . . . . . . 81 23 -- -- 104
Investments in subsidiaries. . . . . . . . . . . . . -- 93 -- (93) --
Restricted cash and marketable investment
securities . . . . . . . . . . . . . . . . . . . . 100 -- -- -- 100
Property and equipment, net. . . . . . . . . . . . . 333 -- 21 -- 354
Advances to affiliates, net. . . . . . . . . . . . . -- 21 -- (21) --
Other noncurrent assets. . . . . . . . . . . . . . . 45 20 -- -- 65
----------------------------------------------------------
Total assets . . . . . . . . . . . . . . . . . . $559 $157 $21 $(114) $623
----------------------------------------------------------
----------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Trade accounts payable . . . . . . . . . . . . . . $ 19 $ -- $-- $ -- $ 19
Deferred revenue . . . . . . . . . . . . . . . . . 1 -- -- -- 1
Accrued expenses and other current liabilities . . 26 -- -- -- 26
Current portion of long-term debt. . . . . . . . . 5 -- -- -- 5
----------------------------------------------------------
Total current liabilities. . . . . . . . . . . . . . 51 -- -- -- 51
Advances from affiliates, net. . . . . . . . . . . . 382 -- -- -- 382
1994 Notes . . . . . . . . . . . . . . . . . . . . . -- -- 21 (21) --
Mortgage and other notes payable, excluding
current portion. . . . . . . . . . . . . . . . . . . 33 -- -- -- 33
----------------------------------------------------------
Total long-term liabilities. . . . . . . . . . . . 415 -- 21 ( 21) 415
----------------------------------------------------------
Total liabilities. . . . . . . . . . . . . . . . 466 -- 21 ( 21) 466
Stockholders' equity (deficit) . . . . . . . . . . . 93 157 -- ( 93) 157
----------------------------------------------------------
Total liabilities and stockholders' equity (deficit) $559 $157 $21 $(114) $623
----------------------------------------------------------
----------------------------------------------------------
F-26
ECHOSTAR DBS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. CONDENSED CONSOLIDATING FINANCIAL INFORMATION FOR SUBSIDIARY GUARANTORS
(CONTINUED)
CONDENSED CONSOLIDATING BALANCE SHEETS - AS OF DECEMBER 31, 1996 (IN
MILLIONS)
ESBC - DBS Corp-
Dish PC C&E ESBC PC C&E
------------------------------------------------------------
ASSETS
Current Assets:
Cash and cash equivalents . . . . . . . . . . . $ 25 $ 14 $ -- $ 39 $ -- $ --
Marketable investment securities. . . . . . . . -- 19 -- 19 -- --
Trade accounts receivable, net. . . . . . . . . 14 -- -- 14 -- --
Inventories . . . . . . . . . . . . . . . . . . 73 -- -- 73 -- --
Subscriber acquisition costs, net . . . . . . . 68 -- -- 68 -- --
Other current assets. . . . . . . . . . . . . . 19 -- -- 19 -- --
------------------------------------------------------------
Total current assets . . . . . . . . . . . . . . 199 33 -- 232 -- --
Investment in subsidiary.. . . . . . . . . . . . -- 3 ( 3) -- -- --
Restricted cash and marketable investment
securities. . . . . . . . . . . . . . . . . . . 32 47 -- 79 -- --
Property and equipment, net. . . . . . . . . . . 500 -- -- 500 29 --
Advances to affiliates, net. . . . . . . . . . . -- 280 (135) 145 -- (76)
Deferred tax assets. . . . . . . . . . . . . . . 74 5 -- 79 -- --
Other noncurrent assets. . . . . . . . . . . . . 26 12 -- 38 60 --
------------------------------------------------------------
Total assets. . . . . . . . . . . . . . . . . . $831 $380 $(138) $1,073 $ 89 $(76)
------------------------------------------------------------
------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Trade accounts payable. . . . . . . . . . . . . $ 41 $ -- $ -- $ 41 $ -- $ --
Deferred revenue. . . . . . . . . . . . . . . . 103 -- -- 103 -- --
Accrued expenses and
other current liabilities . . . . . . . . . . 29 -- -- 29 2 --
Deferred tax liabilities. . . . . . . . . . . . 13 -- -- 13 -- --
Current portion of long-term debt . . . . . . . 11 -- -- 11 -- --
------------------------------------------------------------
Total current liabilities. . . . . . . . . . . . 197 -- -- 197 2 --
Long-term deferred signal carriage revenue . . . 6 -- -- 6 -- --
Advances from affiliates, net. . . . . . . . . . 135 -- (135) -- 76 (76)
Investment in subsidiaries . . . . . . . . . . . -- -- -- -- 6 ( 6)
1994 Notes . . . . . . . . . . . . . . . . . . . 437 -- -- 437 -- --
1996 Notes . . . . . . . . . . . . . . . . . . . -- 386 -- 386 -- --
Mortgage and other notes payable,
excluding current portion . . . . . . . . . . . 52 -- -- 52 12 --
Other long-term liabilities. . . . . . . . . . . 1 -- -- 1 -- --
------------------------------------------------------------
Total long-term liabilities . . . . . . . . . . 631 386 (135) 882 94 (82)
------------------------------------------------------------
Total liabilities . . . . . . . . . . . . . . 828 386 (135) 1,079 96 (82)
Stockholders' equity (deficit) . . . . . . . . . 3 ( 6) ( 3) ( 6) ( 7) 6
------------------------------------------------------------
Total liabilities and stockholders' equity
(deficit) . . . . . . . . . . . . . . . . . . $831 $380 $(138) $1,073 $ 89 $(76)
------------------------------------------------------------
------------------------------------------------------------
DBS ECC -
Corp PC Other C&E ECC
--------------------------------------------------
ASSETS
Current Assets:
Cash and cash equivalents . . . . . . . . . . . $ 39 $-- $-- $ -- $ 39
Marketable investment
securities. . . . . . . . . . . . . . . . . . 19 -- -- -- 19
Trade accounts receivable,
net . . . . . . . . . . . . . . . . . . . . . 14 -- -- -- 14
Inventories . . . . . . . . . . . . . . . . . . 73 -- -- -- 73
Subscriber acquisition
costs, net. . . . . . . . . . . . . . . . . . 68 -- -- -- 68
Other current assets. . . . . . . . . . . . . . 19 1 3 -- 23
--------------------------------------------------
Total current assets . . . . . . . . . . . . . . 232 1 3 -- 236
Investment in subsidiary.. . . . . . . . . . . . -- -- -- -- --
Restricted cash and
marketable investment
securities. . . . . . . . . . . . . . . . . . . 79 -- -- -- 79
Property and equipment, net. . . . . . . . . . . 529 -- 62 -- 591
Advances to affiliates, net. . . . . . . . . . . 69 -- -- (69) --
Deferred tax assets. . . . . . . . . . . . . . . 79 -- 1 ( 1) 79
Other noncurrent assets. . . . . . . . . . . . . 98 70 -- (12) 156
--------------------------------------------------
Total assets. . . . . . . . . . . . . . . . . . $1,086 $71 $66 $(82) $1,141
--------------------------------------------------
--------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Trade accounts payable. . . . . . . . . . . . . $ 41 $-- $ 1 $ (1) $ 41
Deferred revenue. . . . . . . . . . . . . . . . 103 -- -- -- 103
Accrued expenses and
other current liabilities . . . . . . . . . . 31 1 -- (2) 30
Deferred tax liabilities. . . . . . . . . . . . 13 -- -- -- 13
Current portion of long-
term debt . . . . . . . . . . . . . . . . . . 11 -- -- -- 11
--------------------------------------------------
Total current liabilities. . . . . . . . . . . . 199 1 1 (3) 198
Long-term deferred signal
carriage revenue. . . . . . . . . . . . . . . . 6 -- -- -- 6
Advances from affiliates, net. . . . . . . . . . -- 2 64 (66) --
Investment in subsidiaries . . . . . . . . . . . -- 7 -- ( 7) --
1994 Notes . . . . . . . . . . . . . . . . . . . 437 -- -- -- 437
1996 Notes . . . . . . . . . . . . . . . . . . . 386 -- -- -- 386
Mortgage and other notes
payable, excluding current
portion . . . . . . . . . . . . . . . . . . . . 64 -- -- (12) 52
Other long-term liabilities. . . . . . . . . . . 1 -- -- -- 1
--------------------------------------------------
Total long-term liabilities . . . . . . . . . . 894 9 64 (85) 882
--------------------------------------------------
Total liabilities . . . . . . . . . . . . . . 1,093 10 65 (88) 1,080
Stockholders' equity (deficit) . . . . . . . . . ( 7) 61 1 6 61
--------------------------------------------------
Total liabilities and
stockholders' equity
(deficit) . . . . . . . . . . . . . . . . . . $1,086 $71 $66 $(82) $1,141
--------------------------------------------------
--------------------------------------------------
F-27
ECHOSTAR DBS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. CONDENSED CONSOLIDATING FINANCIAL INFORMATION FOR SUBSIDIARY GUARANTORS
(CONTINUED)
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS - YEAR ENDED DECEMBER 31,
1995 (IN MILLIONS, EXCEPT PER SHARE DATA)
ECC -
Dish PC C&E ECC
-----------------------------------------
REVENUE:
DTH products and technical services . . . . . . . . . . . . . . . . $147 $ -- $-- $ 147
C-band programming. . . . . . . . . . . . . . . . . . . . . . . . . 15 -- -- 15
Loan origination and participation income . . . . . . . . . . . . . 2 -- -- 2
-----------------------------------------
Total revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . 164 -- -- 164
EXPENSES:
DTH products and technical services . . . . . . . . . . . . . . . . 117 -- -- 117
C-band programming. . . . . . . . . . . . . . . . . . . . . . . . . 13 -- -- 13
Selling, general and administrative . . . . . . . . . . . . . . . . 39 -- -- 39
Depreciation and amortization . . . . . . . . . . . . . . . . . . . 3 -- -- 3
-----------------------------------------
Total expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . 172 -- -- 172
-----------------------------------------
Operating income (loss) . . . . . . . . . . . . . . . . . . . . . . . ( 8) -- -- ( 8)
Other Income (Expense):
Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . 13 1 -- 14
Interest expense, net of amounts capitalized. . . . . . . . . . . . ( 24) -- -- ( 24)
Minority interest in loss of consolidated joint venture and other . 1 -- -- 1
Equity in losses of subsidiaries. . . . . . . . . . . . . . . . . . -- (12) 12 --
-----------------------------------------
Total other income (expense), net . . . . . . . . . . . . . . . . . . ( 10) (11) 12 ( 9)
-----------------------------------------
Income (loss) before income taxes . . . . . . . . . . . . . . . . . . ( 18) (11) 12 ( 17)
Income tax (provision) benefit, net . . . . . . . . . . . . . . . . . 6 -- -- 6
-----------------------------------------
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . $( 12) $(11) $12 $( 11)
-----------------------------------------
-----------------------------------------
Net loss attributable to common shares. . . . . . . . . . . . . . . . -- -- -- $( 13)
-----------------------------------------
-----------------------------------------
Weighted-average common shares outstanding. . . . . . . . . . . . . . -- -- -- 36
-----------------------------------------
-----------------------------------------
Loss per common and common equivalent share . . . . . . . . . . . . . -- -- -- $(0.36)
-----------------------------------------
-----------------------------------------
F-28
ECHOSTAR DBS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. CONDENSED CONSOLIDATING FINANCIAL INFORMATION FOR SUBSIDIARY GUARANTORS
(CONTINUED)
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS - YEAR ENDED DECEMBER 31,
1996 (IN MILLIONS, EXCEPT PER SHARE DATA)
ESBC - DBS Corp-
Dish PC C&E ESBC PC C&E
------------------------------------------------------------
REVENUE:
DTH products and technical services . . . . . . $ 136 $ -- $-- $ 136 $ -- $ --
DISH Network promotions -
subscription television services and
products. . . . . . . . . . . . . . . . . . . 23 -- -- 23 -- --
DISH Network subscription television
services. . . . . . . . . . . . . . . . . . . 38 -- -- 38 -- --
C-band programming. . . . . . . . . . . . . . . 12 -- -- 12 -- --
Loan origination and participation income . . . 1 -- -- 1 -- --
------------------------------------------------------------
Total revenue. . . . . . . . . . . . . . . . . . 210 -- -- 210 -- --
EXPENSES:
DTH products and technical services . . . . . . 124 -- -- 124 -- --
DISH Network programming. . . . . . . . . . . . 19 -- -- 19 -- --
C-band programming. . . . . . . . . . . . . . . 11 -- -- 11 -- --
Selling, general and administrative . . . . . . 87 -- -- 87 -- --
Subscriber promotion subsidies. . . . . . . . . 35 -- -- 35 -- --
Amortization of subscriber acquisition
costs . . . . . . . . . . . . . . . . . . . . 16 -- -- 16 -- --
Depreciation and amortization . . . . . . . . . 27 -- -- 27 -- --
------------------------------------------------------------
Total expenses . . . . . . . . . . . . . . . . . 319 -- -- 319 -- --
------------------------------------------------------------
Operating income (loss). . . . . . . . . . . . . (109) -- -- (109) -- --
Other Income (Expense):
Interest income . . . . . . . . . . . . . . . . 4 10 -- 14 -- --
Interest expense, net of amounts
capitalized . . . . . . . . . . . . . . . . . ( 37) ( 24) -- ( 61) ( 1) --
Equity in losses of subsidiaries. . . . . . . . -- ( 92) 92 -- (101) 101
------------------------------------------------------------
Total other income (expense), net. . . . . . . . ( 33) (106) 92 ( 47) (102) 101
------------------------------------------------------------
Income (loss) before income taxes. . . . . . . . (142) (106) 92 (156) (102) 101
Income tax (provision) benefit, net. . . . . . . 50 5 -- 55 -- --
------------------------------------------------------------
Net income (loss). . . . . . . . . . . . . . . . $( 92) $(101) $92 $(101) $(102) $101
------------------------------------------------------------
------------------------------------------------------------
Net loss attributable to common shares . . . . . -- -- -- -- -- --
------------------------------------------------------------
------------------------------------------------------------
Weighted-average common shares
outstanding . . . . . . . . . . . . . . . . . . -- -- -- -- -- --
------------------------------------------------------------
------------------------------------------------------------
Loss per common and common equivalent
share . . . . . . . . . . . . . . . . . . . . . -- -- -- -- -- --
------------------------------------------------------------
------------------------------------------------------------
DBS ECC -
Corp PC Other C&E ECC
-------------------------------------------------
REVENUE:
DTH products and technical services . . . . . . $ 136 $ -- $ -- $ -- $ 136
DISH Network promotions -
subscription television services and
products. . . . . . . . . . . . . . . . . . . 23 -- -- -- 23
DISH Network subscription television
services. . . . . . . . . . . . . . . . . . . 38 -- -- -- 38
C-band programming. . . . . . . . . . . . . . . 12 -- -- -- 12
Loan origination and participation
income. . . . . . . . . . . . . . . . . . . . 1 -- 2 -- 3
-------------------------------------------------
Total revenue. . . . . . . . . . . . . . . . . . 210 -- 2 -- 212
EXPENSES:
DTH products and technical services . . . . . . 124 -- -- -- 124
DISH Network programming. . . . . . . . . . . . 19 -- -- -- 19
C-band programming. . . . . . . . . . . . . . . 11 -- -- -- 11
Selling, general and administrative . . . . . . 87 -- 3 -- 90
Subscriber promotion subsidies. . . . . . . . . 35 -- -- ( 1) 34
Amortization of subscriber acquisition
costs . . . . . . . . . . . . . . . . . . . . 16 -- -- -- 16
Depreciation and amortization . . . . . . . . . 27 -- -- -- 27
-------------------------------------------------
Total expenses . . . . . . . . . . . . . . . . . 319 -- 3 ( 1) 321
-------------------------------------------------
Operating income (loss). . . . . . . . . . . . . (109) -- (1) 1 (109)
Other Income (Expense):
Interest income . . . . . . . . . . . . . . . . 14 1 -- -- 15
Interest expense, net of amounts
capitalized . . . . . . . . . . . . . . . . . ( 62) -- -- -- ( 62)
Equity in losses of subsidiaries. . . . . . . . -- (101) -- 101 --
-------------------------------------------------
Total other income (expense), net. . . . . . . . ( 48) (100) -- 101 ( 47)
-------------------------------------------------
Income (loss) before income taxes. . . . . . . . (157) (100) (1) 102 (156)
Income tax (provision) benefit, net. . . . . . . 55 ( 1) 1 -- 55
-------------------------------------------------
Net income (loss). . . . . . . . . . . . . . . . $(102) $(101) $ -- $102 $(101)
-------------------------------------------------
-------------------------------------------------
Net loss attributable to common shares . . . . . -- -- -- -- $(102)
-------------------------------------------------
-------------------------------------------------
Weighted-average common shares
outstanding . . . . . . . . . . . . . . . . . . -- -- -- -- 41
-------------------------------------------------
-------------------------------------------------
Loss per common and common equivalent
share . . . . . . . . . . . . . . . . . . . . . -- -- -- -- $(2.52)
-------------------------------------------------
-------------------------------------------------
F-29
ECHOSTAR DBS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. CONDENSED CONSOLIDATING FINANCIAL INFORMATION FOR SUBSIDIARY GUARANTORS
(CONTINUED)
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS - YEAR ENDED DECEMBER 31,
1995 (IN MILLIONS)
ECC -
Dish PC Other C&E ECC
-------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $( 12) $( 11) $ -- $ 12 $( 11)
Adjustments to reconcile net income (loss) to net cash flows
from operating activities:
Equity in (earnings) losses of subsidiaries . . . . . . . . . . . . . . . . . -- 12 -- (12) --
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . 3 -- -- -- 3
Deferred income tax benefit . . . . . . . . . . . . . . . . . . . . . . . . . ( 5) -- -- -- (5)
Amortization of debt discount and deferred financing costs. . . . . . . . . . 24 -- -- -- 24
Other, net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 -- -- -- 1
Changes in current assets and current liabilities, net. . . . . . . . . . . . ( 33) -- -- -- ( 33)
-------------------------------------------------
Net cash flows provided by (used in) operating activities. . . . . . . . . . . ( 22) 1 -- -- ( 21)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of marketable investment securities. . . . . . . . . . . . . . . . . (3) (22) -- -- (25)
Sales of marketable investment securities. . . . . . . . . . . . . . . . . . . 34 7 -- -- 41
Purchases of restricted marketable investment securities . . . . . . . . . . . ( 15) -- -- -- ( 15)
Advances (to) from affiliates, net . . . . . . . . . . . . . . . . . . . . . . -- ( 20) 20 -- --
Purchases of property and equipment. . . . . . . . . . . . . . . . . . . . . . ( 4) -- -- -- ( 4)
Offering proceeds and investment earnings placed in escrow . . . . . . . . . . ( 10) -- -- -- ( 10)
Funds released from escrow accounts. . . . . . . . . . . . . . . . . . . . . . 122 -- -- -- 122
Investment in convertible subordinated debentures from DBSI. . . . . . . . . . -- ( 1) -- -- ( 1)
Investment in DBSC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 ( 4) -- -- --
Long-term notes receivable from and investment in DBSC . . . . . . . . . . . . -- ( 16) -- -- ( 16)
Expenditures for satellite systems under construction. . . . . . . . . . . . . (110) -- (20) -- (130)
-------------------------------------------------
Net cash flows used in investing activities. . . . . . . . . . . . . . . . . . 18 ( 56) -- -- ( 38)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of Class A Common Stock . . . . . . . . . . . . . . -- 63 -- -- 63
-------------------------------------------------
Net cash flows provided by (used in) financing activities. . . . . . . . . . . -- 63 -- -- 63
-------------------------------------------------
Net increase (decrease) in cash and cash equivalents . . . . . . . . . . . . . ( 4) 8 -- -- 4
Cash and cash equivalents, beginning of year . . . . . . . . . . . . . . . . . 18 -- -- -- 18
-------------------------------------------------
Cash and cash equivalents, end of year . . . . . . . . . . . . . . . . . . . . $ 14 $ 8 $ -- $ -- $ 22
-------------------------------------------------
-------------------------------------------------
F-30
ECHOSTAR DBS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. CONDENSED CONSOLIDATING FINANCIAL INFORMATION FOR SUBSIDIARY GUARANTORS
(CONTINUED)
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS - YEAR ENDED DECEMBER 31,
1996 (IN MILLIONS)
DBS
ESBC Corp-
Dish - PC C&E ESBC PC C&E
----------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) .......................................... $ (92) $(101) $ 92 $(101) $(102) $101
Adjustments to reconcile net income (loss) to net cash flows
from operating activities:
Equity in (earnings) losses of subsidiaries ............. -- 92 (92) -- 101 (101)
Depreciation and amortization ........................... 27 -- -- 27 -- --
Amortization of subscriber acquisition costs ............ 16 -- -- 16 -- --
Deferred income tax benefit ............................ (45) (5) -- (50) -- --
Amortization of debt discount and deferred financing
costs .................................................. 34 24 3 61 -- --
Other, net .............................................. 10 -- -- 10 -- --
Changes in current assets and current liabilities, net .. 14 -- -- 14 1 --
----------------------------------------------------------
Net cash flows provided by (used in) operating activities (36) 10 3 (23) -- --
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of marketable investment securities .............. -- (138) -- (138) -- --
Sales of marketable investment securities .................. -- 120 -- 120 -- --
Purchases of restricted marketable investment securities ... (21) -- -- (21) -- --
Funds released from restricted cash and marketable
investment securities - other ........................... 16 -- -- 16 -- --
Advances (to) from affiliates, net ......................... 138 (268) (3) (133) 69 --
Purchases of property and equipment ........................ (46) -- -- (46) -- --
Offering proceeds and investment earnings placed in
escrow .................................................. (11) (183) -- (194) -- --
Funds released from escrow accounts ........................ 84 136 -- 220 -- --
Payments received on (investments in) convertible
subordinated debentures from SSET ....................... 6 -- -- 6 -- --
Investment in convertible subordinated debentures from
DBSI .................................................... -- -- -- -- -- --
Long-term notes receivable from and investment in DBSC -- -- -- -- -- --
Long-term note receivable from DBS Corp .................... -- -- -- -- -- --
Expenditures for satellite systems under construction ..... (112) -- -- (112) (26) --
Expenditures for FCC authorizations ........................ -- -- -- -- (55) --
Other -- -- -- -- -- --
----------------------------------------------------------
Net cash flows used in investing activities ................ 54 (333) (3) (282) (12) --
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of 1996 Notes ................... -- 337 -- 337 -- --
Proceeds from note payable to ECC .......................... -- -- -- -- 12 --
Repayments of mortgage indebtedness and notes payable ...... (8) -- -- (8) -- --
Stock options exercised .................................... -- -- -- -- -- --
----------------------------------------------------------
Net cash flows provided by (used in) financing activities .. (8) 337 -- 329 12 --
----------------------------------------------------------
Net increase (decrease) in cash and cash equivalents ....... 10 14 -- 24 -- --
Cash and cash equivalents, beginning of year ............... 14 -- -- 14 -- --
----------------------------------------------------------
Cash and cash equivalents, end of year ..................... $ 24 $ 14 $ -- $ 38 $ -- $ --
----------------------------------------------------------
----------------------------------------------------------
DBS ECC
Corp -PC Other C&E ECC
-----------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) .......................................... $(102) $(101) $ -- $102 $(101)
Adjustments to reconcile net income (loss) to net cash flows
from operating activities:
Equity in (earnings) losses of subsidiaries ............. -- 101 -- (101) --
Depreciation and amortization ........................... 27 -- -- -- 27
Amortization of subscriber acquisition costs ............ 16 -- -- -- 16
Deferred income tax benefit ............................. (50) -- -- -- (50)
Amortization of debt discount and deferred financing
costs .................................................. 61 -- -- -- 61
Other, net .............................................. 10 (2) -- -- 8
Changes in current assets and current liabilities, net .. 15 4 -- (8) 11
--------------------------------------------------
Net cash flows provided by (used in) operating activities .. (23) 2 -- (7) (28)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of marketable investment securities .............. (138) -- -- -- (138)
Sales of marketable investment securities .................. 120 15 -- -- 135
Purchases of restricted marketable investment securities ... (21) -- -- -- (21)
Funds released from restricted cash and marketable .........
investment securities - other ........................... 16 -- -- -- 16
Advances (to) from affiliates, net ......................... (64) 22 38 4 --
Purchases of property and equipment ........................ (46) -- (5) -- (51)
Offering proceeds and investment earnings placed in ........
escrow .................................................. (194) -- -- -- (194)
Funds released from escrow accounts ........................ 220 -- -- -- 220
Payments received on (investments in) convertible
subordinated debentures from SSET ....................... 6 -- -- -- 6
Investment in convertible subordinated debentures from
DBSI .................................................... -- (3) -- -- (3)
Long-term notes receivable from and investment in DBSC ..... -- (30) -- -- (30)
Long-term note receivable from DBS Corp .................... -- (12) -- 12 --
Expenditures for satellite systems under construction ...... (138) -- (33) -- (171)
Expenditures for FCC authorizations ........................ (55) -- -- -- (55)
Other ...................................................... -- (3) -- 3 --
-------------------------------------------------
Net cash flows used in investing activities ................ (294) (11) -- 19 (286)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of 1996 Notes ................... 337 -- -- -- 337
Proceeds from note payable to ECC .......................... 12 -- -- (12) --
Repayments of mortgage indebtedness and notes payable ...... (8) -- -- -- (8)
Stock options exercised .................................... -- 2 -- -- 2
-------------------------------------------------
Net cash flows provided by (used in) financing activities .. 341 2 -- (12) 331
-------------------------------------------------
Net increase (decrease) in cash and cash equivalents ....... 24 (7) -- -- 17
Cash and cash equivalents, beginning of year ............... 14 8 -- -- 22
-------------------------------------------------
Cash and cash equivalents, end of year ..................... $ 38 $ 1 $ -- $ -- $ 39
-------------------------------------------------
-------------------------------------------------
F-31
ECHOSTAR DBS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. OPERATIONS IN GEOGRAPHIC AREAS
The Company sells its products worldwide 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
------------- ------- ------------- ----------
AS OF AND FOR THE YEAR ENDED DECEMBER 31, 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
----------
----------
AS OF AND FOR THE YEAR ENDED DECEMBER 31, 1995:
Total revenue ............................ $ 110,629 $31,351 $21,910 $ 163,890
------------- ------- ------------- ----------
------------- ------- ------------- ----------
Export sales ............................. $ 6,317
-------------
-------------
Operating income (loss) .................. $ (7,895) $ 146 $ (257) $ (8,006)
------------- ------- -------------
------------- ------- -------------
Other income (expense), net .............. (9,260)
----------
Loss before income taxes ................ $ (17,266)
----------
----------
Identifiable assets ...................... $ 63,136 $10,088 $ 3,788 $ 77,012
------------- ------- -------------
------------- ------- -------------
Corporate assets ......................... 482,283
----------
Total assets ............................. $ 559,295
----------
----------
AS OF AND FOR THE YEAR ENDED DECEMBER 31, 1996:
Total revenue ............................ $ 172,239 $26,984 $ 10,508 $ 209,731
------------- ------- ------------- ----------
------------- ------- ------------- ----------
Export sales ............................. $ 1,536
-------------
-------------
Operating loss ........................... $ (106,695) $(1,274) $ (896) $ (108,865)
------------- ------- -------------
------------- ------- -------------
Other income (expense), net .............. (46,743)
----------
Loss before income taxes ................. $ (155,608)
----------
----------
Identifiable assets ...................... $ 836,596 $ 5,795 $ 1,871 $ 844,262
------------- ------- -------------
------------- ------- -------------
Corporate assets ......................... 228,829
----------
Total assets ............................. $1,073,091
----------
----------
F-32
ECHOSTAR DBS 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 OF COSTS AND BALANCE AT
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 .................... 78 157 (94) 141
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 (8,417)
Net loss ......................... (2,240) (1,813) (916) (7,392)
YEAR ENDED DECEMBER 31, 1996:
Total revenue .................... $41,026 $ 69,354 $ 55,507 $ 43,844
Operating loss ................... (8,908) (17,671) (21,599) (60,687)
Net loss ......................... (7,787) (21,134) (22,766) (49,989)
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-33
ECHOSTAR DBS 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 DBS Corp:
FOR THE PERIOD FROM
JANUARY 16, 1996
(INCEPTION) THROUGH
DECEMBER 31, 1996
-----------------------
(IN THOUSANDS)
STATEMENT OF OPERATIONS DATA:
Interest income ........................... $ 20
Equity in losses of ESBC. ................. (100,748)
Interest and other expense ................ (941)
-----------------------
Net loss before income taxes .............. (101,669)
Income tax provision ...................... (7)
-----------------------
Net loss ................................ $(101,676)
-----------------------
-----------------------
DECEMBER 31, 1996
-----------------------
(IN THOUSANDS)
BALANCE SHEET DATA:
Cash and cash equivalents ................. $ 10
Property and equipment .................... 28,588
Other noncurrent assets ................... 60,147
-----------------------
Total assets $ 88,745
-----------------------
-----------------------
Current liabilities ....................... $ 1,388
Note payable to ECC ....................... 12,000
Restricted investment in ESBC. ............ 5,748
Advances from affiliates, net ............. 76,284
-----------------------
Total liabilities and investment in
subsidiary ............................... 95,420
Stockholder's equity:
Common Stock, $.01 par value,
1,000 shares authorized, issued and
outstanding ........................... -
Additional paid-in capital ............. 108,839
Unrealized holding losses on available
for sale securities ................... (12)
Accumulated deficit .................... (115,502)
-----------------------
Total stockholder's equity ................ (6,675)
-----------------------
Total liabilities and stockholder's
equity ................................... $ 88,745
-----------------------
-----------------------
F-34
ECHOSTAR DBS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
16. PARENT COMPANY ONLY FINANCIAL INFORMATION (Continued)
FOR THE PERIOD FROM
JANUARY 16, 1996
(INCEPTION) THROUGH
DECEMBER 31, 1996
-----------------------
(IN THOUSANDS)
CASH FLOWS DATA:
Cash flows from operating activities:
Net income (loss) ............................ $(101,676)
Adjustments:
Equity in (earnings) losses of ESBC ......... 100,748
Provision for deferred taxes ................ 7
Changes in current liabilities .............. 1,400
-----------------------
Net cash flows provided by operating
activities .................................. 479
Cash flows from investing activities:
Advances (to) from affiliates, net ........... 68,710
Expenditures for satellite systems under
construction ................................ (25,864)
Expenditures for FCC authorizations .......... (55,316)
-----------------------
Net cash flows used by investing activities .. (12,470)
Cash flows from financing activities:
Net proceeds from note payable to ECC ........ 12,000
Proceeds from issuance of Common Stock ....... 1
-----------------------
Net cash flows provided by financing
activities .................................. 12,001
-----------------------
Net increase (decrease) in cash and cash
equivalents ................................. 10
Cash and cash equivalents, beginning of
year ........................................ -
-----------------------
Cash and cash equivalents, end of year ....... $ 10
-----------------------
-----------------------
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
-----------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS 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)
-----------------------------------------------
-----------------------------------------------
F-35
ECHOSTAR DBS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
16. PARENT COMPANY ONLY FINANCIAL INFORMATION (CONTINUED)
DECEMBER 31,
----------------------
1995 1996
----------------------
(IN THOUSANDS)
BALANCE SHEET DATA:
Current assets:
Cash and cash equivalents ......................................................................... $ 7,802 $ 814
Marketable investment securities .................................................................. 15,460 -
Advances to affiliates ............................................................................ 19,545 -
Other current assets .............................................................................. 191 1,349
----------------------
Total current assets ................................................................................ 42,998 2,163
Investments in subsidiaries:
Restricted ........................................................................................ 92,613 -
Unrestricted ...................................................................................... 280 -
----------------------
Total investments in subsidiaries ................................................................... 92,893 -
Other noncurrent assets ............................................................................. 21,111 70,054
----------------------
Total assets ........................................................................................ $157,002 $ 72,217
----------------------
----------------------
Current liabilities ................................................................................. $ 316 $ 1,304
Advances from affiliates ............................................................................ - 2,910
Investments in subsidiaries:
Restricted ........................................................................................ - 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-36
ECHOSTAR DBS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
16. Parent Company Only Financial Information (CONTINUED)
YEARS ENDED DECEMBER 31,
------------------------------------------
1994 1995 1996
------------------------------------------
(IN THOUSANDS)
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 (decrease) 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
------------------------------------------
------------------------------------------
NET LOSS ATTRIBUTABLE TO COMMON SHARES
Net loss attributable to common shares is calculated based on the
weighted-average number of shares of ECC 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.
ECC 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.
ECC 8% SERIES A CUMULATIVE PREFERRED STOCK
On May 6, 1994, EchoStar 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;
F-37
ECHOSTAR DBS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
16. PARENT COMPANY ONLY FINANCIAL INFORMATION (CONTINUED)
(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.
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 1994 Notes Offering, described in Note 6, EchoStar
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 EchoStar 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.
F-38
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-39
ECHOSTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
DECEMBER 31,
------------------------------
1995 1996
------------------------------
ASSETS
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:
1994 Notes escrow ............................................................................. 73,291 -
1996 Notes escrow ............................................................................. - 47,491
Other ......................................................................................... 26,400 31,800
------------------------------
Total restricted cash and marketable investment securities ...................................... 99,691 79,291
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 subscriber promotions ......................................... - 97,959
Deferred programming revenue - DISH Network ................................................... - 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 obligations ...................................................... 4,782 11,334
------------------------------
Total current liabilities ....................................................................... 50,743 198,311
Long-term obligations, net of current portion:
Long-term deferred signal carriage revenue .................................................... - 5,949
1994 Notes .................................................................................... 382,218 437,127
1996 Notes .................................................................................... - 386,165
Mortgage and other notes payable, excluding current portion ................................... 33,444 51,428
Other long-term obligations ................................................................... - 1,203
------------------------------
Total long-term obligations, net of current portion ........................................... 415,662 881,872
------------------------------
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 and $3,347,
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-40
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 promotions - subscription television services
and products . . . . . . . . . . . . . . . . . . . . . . . . . . . . - - 22,746
DISH Network 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 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)
-----------------------------------------
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-41
ECHOSTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands)
ACCUMULATED
DEFICIT AND
SHARES OF UNREALIZED
COMMON COMMON ADDITIONAL HOLDING
STOCK PREFERRED COMMON STOCK PAID-IN 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-42
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 (investments in) 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 investing 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 1994 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 1996 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 (used in) financing activities. . . . . . . . . . . . . . . 325,011 62,695 332,544
-------------------------------------
Net increase (decrease) 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-43
ECHOSTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND BUSINESS ACTIVITIES
PRINCIPAL BUSINESS
EchoStar Communications Corporation ("ECC"), and 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") 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 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. In addition to its DISH
Network 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 and domestic DTH products and services.
EchoStar's 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
programming as of December 31, 1996.
RECENT DEVELOPMENTS
On February 24, 1997, EchoStar and The News Corporation Limited ("News")
announced an agreement (the "News Agreement") pursuant to which, among other
things, News agreed to acquire approximately 50% of the outstanding capital
stock of EchoStar. News also agreed to make available for use by EchoStar the
DBS license for 28 frequencies at 110DEG. West Longitude ("WL") purchased by
MCI Communications Corporation for over $682 million following a 1996 Federal
Communications Commission ("FCC") auction. During late April 1997, substantial
disagreements arose between the parties regarding their obligations under the
News Agreement.
On May 8, 1997 EchoStar filed a Complaint in the United States District
Court for the District of Colorado (the "Court"), Civil Action No. 97-960,
requesting that the Court confirm EchoStar's position, and declare that News is
obligated pursuant to the News Agreement to lend $200 million to EchoStar
without interest and upon such other terms as the Court orders.
On May 9, 1997, EchoStar filed a First Amended Complaint significantly
expanding the scope of the litigation to include breach of contract, failure to
act in good faith, and other causes of action. EchoStar seeks specific
performance of the News Agreement and damages, including lost profits based on,
among other things, a jointly prepared ten-year business plan showing expected
profits over such ten-year period for EchoStar in excess of $10 billion based on
consummation of the transactions contemplated by the News Agreement.
On June 9, 1997, News filed an answer and counterclaims seeking unspecified
damages. News' answer denies all of the material allegations in the First
Amended Complaint and asserts numerous defenses, including bad faith, misconduct
and failure to disclose material information on the part of EchoStar and its
Chairman and Chief Executive Officer, Charles W. Ergen. The counterclaims, in
which News is joined by its subsidiary American Sky Broadcasting, L.L.C., assert
that EchoStar and Ergen breached their agreements with News and failed to act
and negotiate with News in good faith. EchoStar has responded to News' answer
and denied the allegations in their counterclaims. EchoStar also has asserted
various affirmative defenses. EchoStar intends to diligently defend against the
counterclaims. The parties are now in discovery. A trial date has not been set.
While EchoStar is confident of its position and believes it will ultimately
prevail, the litigation could continue for many years and there can be no
assurance concerning the outcome of the litigation.
F-44
ECHOSTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND BUSINESS ACTIVITIES (CONTINUED)
ORGANIZATIONAL HISTORY 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 "1994 Notes," see Note 6) and Common Stock Warrants
(the "Warrants") (collectively, the "1994 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 1994 Notes
(the "1994 Notes Indenture"). The assets of ECC are not subject to the 1994
Notes Indenture. Separate parent company only financial information for ECC is
supplementally provided in Note 16. As described in Note 6, the 1994 Notes
Indenture places significant restrictions on the payment of dividends or other
transfers by Dish, Ltd. to ECC.
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
owns 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 "1996 Notes
Offering") of 13 1/8% Senior Secured Discount Notes due 2004, which resulted in
net proceeds to the Company of approximately $337.0 million. In connection with
the 1996 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 1996 Notes
(the "1996 Notes Indenture"). EchoStar DBS Corporation ("DBS Corp") was formed
in January 1996 as a wholly-owned subsidiary of ECC for the initial purpose of
participating in a Federal Communications Commission auction. On January 26,
1996, DBS Corp submitted the winning bid of $52.3 million for 24 DBS frequencies
at 148 DEG. WL. Funds necessary to complete the purchase of the DBS frequencies
and commence construction of the Company's fourth DBS satellite, EchoStar IV,
have been loaned to DBS Corp by ECC and EBSC. As described further below, DBS
Corp issued a new series of 12 1/2% Senior Secured Notes due 2002 in a
transaction exempt from registration under the Securities Act of 1933, as
amended (the "Old Notes"). Prior to consummation of the offering of the Old
Notes offering, ECC contributed all of the outstanding capital stock of ESBC to
DBS Corp. In connection with the offering of the Old Notes, DBS Corp agreed to
file a Registration Statement with the Securities and Exchange Commission to
publicly register a new series of notes with substantially identical terms (the
"Exchange Notes" and together with the Old Notes, the "Notes"). Upon the
F-45
ECHOSTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND BUSINESS ACTIVITIES (CONTINUED)
effectiveness of the Registration Statement, DBS Corp will make an offer to
exchange the Exchange Notes for the Old Notes.
The following summarizes the Company's organizational structure for
EchoStar and its significant subsidiaries as described above as of December 31,
1996.
LEGAL ENTITY REFERRED TO HEREIN AS OWNERSHIP
------------ --------------------- ---------
EchoStar Communications Corporation ECC Publicly owned
EchoStar DBS Corporation DBS Corp Wholly-owned by ECC
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, td.
Houston Tracker Systems, Inc. HTS Wholly-owned by Dish, Ltd.
EchoStar International Corporation EIC Wholly-owned by Dish, Ltd.
Substantially all of EchoStar's operating activities are conducted by subsidiaries of Dish, Ltd.
SIGNIFICANT RISKS AND UNCERTAINTIES
The commencement of EchoStar's DBS business has dramatically changed
EchoStar's operating results and financial position as compared to its
historical results. EchoStar consummated the 1994 Notes Offering, the 1996 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). As a result, annual interest
expense on the 1994 and 1996 Notes, and depreciation of the investment in the
satellites and related assets each 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). EchoStar's plans also include the financing,
construction and launch of two fixed service satellites, additional DBS
satellites, and Ku-band and KuX-band satellites, assuming receipt of all
required FCC licenses and permits.
In accordance with its agreement with News, as described above, EchoStar
had expected to meet its short- and medium-term capital needs through financial
commitments from News. As a result of the failure by News to honor its
obligations under the News Agreement, EchoStar was required to raise additional
capital to execute its contemplated business plan. In connection therewith, in
June 1997 DBS Corp issued the Old Notes. The Old Notes offering resulted in net
proceeds to the Company of approximately $362.5 million, including approximately
$109.0 million restricted for certain interest payments on the Notes. EchoStar
intends to seek recovery from News for any costs of financing, including those
costs associated with the offering of the Notes, in excess of the costs of the
financing committed to by News under the News Agreement.
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.
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.
F-46
ECHOSTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 the
years ended December 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.
F-47
ECHOSTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 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
--------------------------------------------
--------------------------------------------
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.
F-48
ECHOSTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Marketable investment securities as of December 31, 1995 and 1996 are as
follows (in thousands):
DECEMBER 31, 1995 DECEMBER 31, 1996
---------------------------------------- ----------------------------------------
UNREALIZED UNREALIZED
HOLDING HOLDING
AMORTIZED GAIN MARKET AMORTIZED GAIN MARKET
COST (LOSS) VALUE COST (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 1994 Notes Offering, and a portion of
the proceeds from the 1996 Notes Offering, plus investment earnings, less
amounts expended to date in connection with the development, construction and
continued growth of the DISH Network. 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 1994 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). Also, 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. The $15.0 million and $10.0 million deposits were both released
from these escrow accounts during May 1997.
The major components of Restricted Cash and Marketable Investment
Securities are as follows (in thousands):
DECEMBER 31, 1995 DECEMBER 31, 1996
---------------------------------------- --------------------------------------
UNREALIZED UNREALIZED
HOLDING HOLDING
AMORTIZED GAIN MARKET AMORTIZED GAIN MARKET
COST (LOSS) VALUE COST (LOSS) 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.
F-49
ECHOSTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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. The costs of satellites
under construction are capitalized during the construction phase, assuming the
eventual successful launch and in-orbit operation of the satellite. If a
satellite were to fail during launch or while in-orbit, the resultant loss would
be charged to expense in the period such loss was realized. The amount of any
such loss would be reduced to the extent of insurance proceeds received as a
result of the launch or in-orbit failure. 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.
REVENUE RECOGNITION
Revenue from sales of DTH products is recognized upon shipment to
customers. Revenue from the provision of DISH Network 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
PROMOTIONS-SUBSCRIPTION TELEVISION SERVICES AND PRODUCTS
Total transaction proceeds to EchoStar from DISH Network 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 service over proceeds received
("subscriber promotion subsidies") is expensed upon shipment of the equipment.
Remaining costs, less programming costs and the amount expensed
F-50
ECHOSTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 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 1994 Notes Offering and 1996 Notes Offering were
deferred (Note 5) and are being amortized to interest expense over their
respective terms. The original issue discounts related to the 1994 Notes and the
1996 Notes (Note 6) are being accreted to interest expense so as to reflect a
constant rate of interest on the accreted balance of the 1994 Notes and the 1996
Notes.
DEFERRED PROGRAMMING REVENUE
Deferred programming revenue consists of prepayments received from
subscribers to DISH Network 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. Such amounts are deferred and recognized as revenue on a
straight-line basis over the related contract terms (up to ten years).
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.
F-51
ECHOSTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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
-------------------
Deposit held by non-performing manufacturer . . . . $10,000 $10,000
Other . . . . . . . . . . . . . . . . . . . . . . . 3,037 8,356
-------------------
$13,037 $18,356
-------------------
-------------------
EchoStar previously maintained agreements with two manufacturers for DBS
receivers. Only one of the manufacturers produced receivers acceptable to
EchoStar. EchoStar previously deposited $10.0 million with the non-performing
manufacturer and, as of December 31, 1996, had an additional $15.0 million on
deposit in an escrow account as security for EchoStar's payment obligations
under that contract. During 1996 EchoStar provided the non-performing
manufacturer notice of its intent to terminate the contract and filed suit
against that manufacturer. On April 25, 1997, the Company and the non-performing
manufacturer executed a settlement and release agreement under which the
non-performing manufacturer agreed to return the $10.0 million deposit and to
release the $15.0 million held in escrow. The Company received these amounts in
May 1997.
EchoStar is currently dependent on one manufacturing source for its
receivers. 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.
F-52
ECHOSTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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, and capitalized interest:
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 each of EchoStar III and EchoStar IV, includes capitalized costs related to the construction,
insurance and launch of such satellites. EchoStar III is currently scheduled to launch during the third quarter of 1997; EchoStar IV
is currently scheduled to launch during the first quarter of 1998.
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
F-53
ECHOSTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. OTHER NONCURRENT ASSETS (CONTINUED)
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,
the Company purchased an approximate 6% ownership interest in the stock of
Direct Broadcasting Satellite Corporation ("DBSC") and certain of DBSC's notes
and accounts receivable from SSET for $1.25 million.
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 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
1994 NOTES
On June 7, 1994, Dish, Ltd. issued the 1994 Notes which mature on June 1,
2004. The 1994 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 1994 Notes bear interest at a rate of 12 7/8%, computed on a semi-annual
bond equivalent basis. Interest on the 1994 Notes will not be payable in cash
prior to June 1, 1999, with the 1994 Notes accreting to a principal value at
stated maturity of $624.0 million by that date. Commencing December 1, 1999,
interest on the 1994 Notes will be payable in cash on December 1 and June 1 of
each year.
F-54
ECHOSTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. LONG-TERM DEBT (CONTINUED)
The 1994 Notes rank senior in right of payment to all subordinated
indebtedness of Dish, Ltd. and PARI PASSU in right of payment with all other
senior indebtedness of Dish, Ltd., subject to the terms of an Intercreditor
Agreement between Dish, Ltd., certain of its principal subsidiaries, and certain
creditors thereof. The 1994 Notes are secured by liens on certain assets of
Dish, Ltd., including EchoStar I and EchoStar II and all other components of the
EchoStar DBS System owned by Dish, Ltd. and its subsidiaries. The 1994 Notes are
further guaranteed by each material direct subsidiary of Dish, Ltd. (see Note
12). Although the 1994 Notes are titled "Senior," Dish, Ltd. has not issued, and
does not have any current arrangements to issue, any significant indebtedness to
which the 1994 Notes would be senior; however, the 1996 Notes are effectively
subordinated to the 1994 Notes and all other liabilities of Dish, Ltd. and its
subsidiaries. Furthermore, at December 31, 1995 and 1996, the 1994 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 1994 Notes are not redeemable at Dish, Ltd.'s
option prior to June 1, 1999. Thereafter, the 1994 Notes will be subject to
redemption, at the option of Dish, Ltd., in whole or in part, at redemption
prices ranging from 104.828% during the year commencing June 1, 1999 to 100% 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 1994 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 1994
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 1994 Notes Indenture, Dish, Ltd. will be
required to make an offer to each holder of 1994 Notes to repurchase all or any
part of such holder's 1994 Notes at a purchase price equal to 101% of the
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 1994 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 1994 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 1994 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 1994 Notes Indenture) from the date of issuance of the 1994 Notes, plus
100% of the aggregate net proceeds to Dish, Ltd. from the issuance and sale of
certain equity interests of Dish, Ltd. (including common stock).
1996 NOTES
On March 25, 1996, ESBC completed the 1996 Notes Offering consisting of
$580.0 million aggregate principal amount at stated maturity of the 1996 Notes.
The 1996 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 1996 Notes bear interest at a rate
of 13 1/8%, computed on a semi-annual bond equivalent basis. Interest on the
1996 Notes will not be payable in cash prior to March 15, 2000, with the 1996
Notes accreting to a principal amount at stated maturity of $580.0 million by
that date. Commencing September 15, 2000, interest on the 1996 Notes will be
payable in cash on September 15 and March 15 of each year. The 1996 Notes mature
on March 15, 2004.
The 1996 Notes rank PARI PASSU in right of payment with all senior
indebtedness of ESBC. The 1996 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
F-55
ECHOSTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. LONG-TERM DEBT (CONTINUED)
EchoStar's operating subsidiaries. Although the 1996 Notes are titled "Senior,":
(i) ESBC has not issued, and does not have any current arrangements to issue,
any significant indebtedness to which the 1996 Notes would be senior; and (ii)
the 1996 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 1996 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 1996 Notes only at any time after payment of all amounts
due and payable at such time under the 1994 Notes.
Except under certain circumstances requiring prepayment premiums, and in
other limited circumstances, the 1996 Notes are not redeemable at ESBC's option
prior to March 15, 2000. Thereafter, the 1996 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 1996 Notes will mature on March 15, 2004.
The 1996 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 1996 Notes
Indenture; and (2) after giving effect to such dividend, ESBC's ratio of total
indebtedness to cash flow (calculated in accordance with the 1996 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 1996 Notes Indenture) from January 1,
1996, 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). The 1996 Notes Indenture permits ESBC to pay dividends
and make other distributions to EchoStar without restrictions.
In the event of a change of control, as described in the 1996 Notes
Indenture, ESBC will be required to make an offer to each holder of 1996 Notes
to repurchase all of such holder's 1996 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.
F-56
ECHOSTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. LONG-TERM DEBT (CONTINUED)
OTHER LONG-TERM DEBT
In addition to the 1994 Notes and 1996 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
9.5% note payable due 90 days following the successful launch and checkout of
EchoStar III. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - -
-------------------------
Total long-term debt, excluding the 1994 Notes and 1996 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
CONTRACT MORTGAGE
1994 NOTES 1996 NOTES PAYMENTS NEW 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
--------------------------------------------------------------------------
--------------------------------------------------------------------------
F-57
ECHOSTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINAICIAL STATEMENTS (CONTINUED)
6. LONG-TERM DEBT (CONTINUED)
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 1994 Notes and 1996 Notes are based on quoted market prices. The fair
value of the Company's Deferred Satellite Contract Payments and mortgage notes
payable are estimated using discounted cash flow analyses. The interest rates
assumed in such discounted cash flow analyses reflect interest rates currently
being offered for loans with similar terms to borrowers of similar credit
quality.
BOOK VALUE FAIR VALUE
------------------------
1994 Notes . . . . . . . . . . . . . . . . . . . . $437,127 $ 526,282
1996 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
obtain a replacement credit facility.
F-58
ECHOSTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. INCOME TAXES
The components of the (provision for) benefit from income taxes are as
follows (in thousands):
YEARS 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.
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 carryforwards. . . . . . . . . . . . . . . . . . . . . . - 77,577
Amortization of original issue discount on 1994 and 1996 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
------------------------
------------------------
F-59
ECHOSTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. INCOME TAXES (CONTINUED)
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 %
--------------------------------------------------------------------
--------------------------------------------------------------------
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
F-60
ECHOSTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. STOCKHOLDERS' EQUITY (CONTINUED)
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 1994 Notes Indenture places significant restrictions on the payment of those
dividends. As of 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. 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 1994 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 Class A Common Stock of 62%, and a weighted-average expected life of
the options of six years.
F-61
ECHOSTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. STOCK COMPENSATION PLANS (CONTINUED)
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 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.
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- WEIGHTED-
AVERAGE 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
-------------- ----------------
-------------- ----------------
F-62
ECHOSTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. STOCK COMPENSATION PLANS (CONTINUED)
Exercise prices for options outstanding as of December 31, 1996 are as
follows:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------------------------- -------------------------------------
NUMBER WEIGHTED- NUMBER
OUTSTANDING AS OF AVERAGE WEIGHTED- EXERCISABLE AS OF WEIGHTED-
DECEMBER 31, REMAINING AVERAGE EXERCISE DECEMBER 31, AVERAGE EXERCISE
RANGE OF EXERCISE PRICES 1996 CONTRACTUAL LIFE PRICE 1996 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 EchoStar's 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 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.
F-63
ECHOSTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. OTHER COMMITMENTS AND CONTINGENCIES
In addition to the commitments described above, during the remainder of
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
1996 Notes Escrow Account, the proceeds of the 1997 Offering, 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. The construction contracts with Martin for the
construction of EchoStar III and EchoStar IV contain substantial termination
penalties. The 1997 Offering is expected to provide financing sufficient to fund
the Company's commitments for at least the next 12 months. In order to continue
to build, launch and support EchoStar III and EchoStar IV beyond the second
quarter of 1998, EchoStar may need additional capital. There can be no assurance
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.
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 to its
specifications. 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, the proceeds of
the 1997 Offering, and cash flows generated from sales of DISH Network
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.
F-64
ECHOSTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. CONDENSED CONSOLIDATING FINANCIAL INFORMATION FOR SUBSIDIARY GUARANTORS
Presented below is condensed consolidating financial information for
EchoStar and its subsidiaries as of and for the years ended December 31, 1995
and 1996. See Note 6 for a more complete description of the subsidiary
guarantors of each of the 1996 Notes and the 1994 Notes. Because the formations
of EchoStar (incorporated in 1995), DBS Corp (incorporated in 1996) and ESBC
(incorporated in 1996) were all accounted for as reorganizations of entities
under common control, the consolidated financial statements of Dish, Ltd. as of
December 31, 1994 and for the year then ended also represent the financial
statements of EchoStar, DBS Corp and ESBC. Therefore, condensed consolidating
financial information for the subsidiary guarantors of the 1996 Notes and the
1994 Notes for the year ended December 31, 1994 is not presented.
Condensed consolidating financial information is presented for the
following entities:
Consolidated Dish, Ltd. (referred to as "Dish") Consolidated DBS Corp (referred to as "DBS Corp")
ESBC Parent Company Only (referred to as "ESBC - PC") ECC Parent Company Only (referred to as "ECC - PC")
Consolidating and eliminating adjustments (referred to as "C&E") Other direct wholly owned subs of ECC (referred to as "Other")
Consolidated ESBC (referred to as "ESBC") Consolidated ECC (referred to as "ECC")
DBS Corp Parent Company Only (referred to as "DBS Corp - PC")
CONDENSED CONSOLIDATING BALANCE SHEETS - AS OF DECEMBER 31, 1995
(IN MILLIONS)
ECC -
Dish PC Other C&E ECC
------------------------------------------------------
ASSETS
Current Assets:
Cash and cash equivalents. . . . . . . . . . . . . . . . . . . $ 14 $ 8 $ -- $ -- $ 22
Marketable investment securities . . . . . . . . . . . . . . . -- 15 -- -- 15
Trade accounts receivable, net . . . . . . . . . . . . . . . . 10 -- -- -- 10
Inventories. . . . . . . . . . . . . . . . . . . . . . . . . . 39 -- -- -- 39
Other current assets . . . . . . . . . . . . . . . . . . . . . 18 -- -- -- 18
------------------------------------------------------
Total current assets . . . . . . . . . . . . . . . . . . . . . . 81 23 -- -- 104
Investments in subsidiaries. . . . . . . . . . . . . . . . . . . -- 93 -- (93) --
Restricted cash and marketable investment securities . . . . . . 100 -- -- -- 100
Property and equipment, net. . . . . . . . . . . . . . . . . . . 333 -- 21 -- 354
Advances to affiliates, net. . . . . . . . . . . . . . . . . . . -- 21 -- (21) --
Other noncurrent assets. . . . . . . . . . . . . . . . . . . . . 45 20 -- -- 65
------------------------------------------------------
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . $559 $157 $ 21 $(114) $623
------------------------------------------------------
------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Trade accounts payable . . . . . . . . . . . . . . . . . . . . $ 19 $ -- $ -- $ -- $ 19
Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . 1 -- -- -- 1
Accrued expenses and other current liabilities . . . . . . . . 26 -- -- -- 26
Current portion of long-term debt. . . . . . . . . . . . . . . 5 -- -- -- 5
------------------------------------------------------
Total current liabilities. . . . . . . . . . . . . . . . . . . . 51 -- -- -- 51
Advances from affiliates, net. . . . . . . . . . . . . . . . . . -- -- 21 ( 21) --
1994 Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . 382 -- -- -- 382
Mortgage and other notes payable, excluding current portion. . . 33 -- -- -- 33
------------------------------------------------------
Total long-term liabilities. . . . . . . . . . . . . . . . . . 415 -- 21 ( 21) 415
------------------------------------------------------
Total liabilities. . . . . . . . . . . . . . . . . . . . . . 466 -- 21 ( 21) 466
Stockholders' equity (deficit) . . . . . . . . . . . . . . . . . 93 157 -- ( 93) 157
------------------------------------------------------
Total liabilities and stockholders' equity (deficit) . . . . . . $559 $157 $ 21 $(114) $623
------------------------------------------------------
------------------------------------------------------
F-65
ECHOSTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. CONDENSED CONSOLIDATING FINANCIAL INFORMATION FOR SUBSIDIARY GUARANTORS
(CONTINUED)
CONDENSED CONSOLIDATING BALANCE SHEETS - AS OF DECEMBER 31, 1996 (IN MILLIONS)
ESBC - DBS Corp-
Dish PC C&E ESBC PC C&E
------------------------------------------------------------
ASSETS
Current Assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . $ 25 $ 14 $ -- $ 39 $ -- $ --
Marketable investment securities. . . . . . . . . . . . . -- 19 -- 19 -- --
Trade accounts receivable, net. . . . . . . . . . . . . . 14 -- -- 14 -- --
Inventories . . . . . . . . . . . . . . . . . . . . . . . 73 -- -- 73 -- --
Subscriber acquisition costs, net . . . . . . . . . . . . 68 -- -- 68 -- --
Other current assets. . . . . . . . . . . . . . . . . . . 19 -- -- 19 -- --
------------------------------------------------------------
Total current assets . . . . . . . . . . . . . . . . . . . 199 33 -- 232 -- --
Investment in subsidiary . . . . . . . . . . . . . . . . . -- 3 ( 3) -- -- --
Restricted cash and marketable investment securities . . 32 47 -- 79 -- --
Property and equipment, net. . . . . . . . . . . . . . . . 500 -- -- 500 29 --
Advances to affiliates, net. . . . . . . . . . . . . . . . -- 280 (135) 145 -- (76)
Deferred tax assets. . . . . . . . . . . . . . . . . . . . 74 5 -- 79 -- --
Other noncurrent assets. . . . . . . . . . . . . . . . . . 26 12 -- 38 60 --
------------------------------------------------------------
Total assets. . . . . . . . . . . . . . . . . . . . . . $831 $380 $(138) $1,073 $ 89 $(76)
------------------------------------------------------------
------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Trade accounts payable. . . . . . . . . . . . . . . . . . $ 41 $ -- $ -- $ 41 $ -- $ --
Deferred revenue. . . . . . . . . . . . . . . . . . . . . 103 -- -- 103 -- --
Accrued expenses and
other current liabilities . . . . . . . . . . . . . . . 29 -- -- 29 2 --
Deferred tax liabilities. . . . . . . . . . . . . . . . . 13 -- -- 13 -- --
Current portion of long-term debt . . . . . . . . . . . . 11 -- -- 11 -- --
------------------------------------------------------------
Total current liabilities. . . . . . . . . . . . . . . . . 197 -- -- 197 2 --
Long-term deferred signal carriage revenue. . . . . . . . 6 -- -- 6 -- --
Advances from affiliates, net. . . . . . . . . . . . . . . 135 -- (135) -- 76 (76)
Investment in subsidiaries . . . . . . . . . . . . . . . . -- -- -- -- 6 ( 6)
1994 Notes . . . . . . . . . . . . . . . . . . . . . . . . 437 -- -- 437 -- --
1996 Notes . . . . . . . . . . . . . . . . . . . . . . . . -- 386 -- 386 -- --
Mortgage and other notes payable, excluding current
portion . . . . . . . . . . . . . . . . . . . . . . . . . 52 -- -- 52 12 --
Other long-term liabilities. . . . . . . . . . . . . . . . 1 -- -- 1 -- --
------------------------------------------------------------
Total long-term liabilities . . . . . . . . . . . . . . . 631 386 (135) 882 94 (82)
------------------------------------------------------------
Total liabilities . . . . . . . . . . . . . . . . . . . 828 386 (135) 1,079 96 (82)
Stockholders' equity (deficit) . . . . . . . . . . . . . . 3 ( 6) ( 3) ( 6) ( 7) 6
------------------------------------------------------------
Total liabilities and
stockholders' equity
(deficit) . . . . . . . . . . . . . . . . . . . . . . $831 $380 $(138) $1,073 $ 89 $(76)
------------------------------------------------------------
------------------------------------------------------------
DBS ECC -
Corp PC Other C&E ECC
---------------------------------------------------
ASSETS
Current Assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . $ 39 $ -- $ -- $ -- $ 39
Marketable investment
securities. . . . . . . . . . . . . . . . . . . . . . . 19 -- -- -- 19
Trade accounts receivable,
net . . . . . . . . . . . . . . . . . . . . . . . . . . 14 -- -- -- 14
Inventories . . . . . . . . . . . . . . . . . . . . . . . 73 -- -- -- 73
Subscriber acquisition costs, net . . . . . . . . . . . . 68 -- -- -- 68
Other current assets. . . . . . . . . . . . . . . . . . . 19 1 3 -- 23
---------------------------------------------------
Total current assets . . . . . . . . . . . . . . . . . . . 232 1 3 -- 236
Investment in subsidiary.. . . . . . . . . . . . . . . . . -- -- -- -- --
Restricted cash and
marketable investment securities. . . . . . . . . . . . . 79 -- -- -- 79
Property and equipment, net. . . . . . . . . . . . . . . . 529 -- 62 -- 591
Advances to affiliates, net. . . . . . . . . . . . . . . . 69 -- -- (69) --
Deferred tax assets. . . . . . . . . . . . . . . . . . . . 79 -- 1 ( 1) 79
Other noncurrent assets. . . . . . . . . . . . . . . . . . 98 70 -- (12) 156
---------------------------------------------------
Total assets. . . . . . . . . . . . . . . . . . . . . . $1,086 $ 71 $ 66 $ (82) $1,141
---------------------------------------------------
---------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Trade accounts payable. . . . . . . . . . . . . . . . . . $ 41 $ -- $ 1 $ (1) $ 41
Deferred revenue. . . . . . . . . . . . . . . . . . . . . 103 -- -- -- 103
Accrued expenses and other
current liabilities . . . . . . . . . . . . . . . . . . 31 1 -- (2) 30
Deferred tax liabilities. . . . . . . . . . . . . . . . . 13 -- -- -- 13
Current portion of long-term debt . . . . . . . . . . . . 11 -- -- -- 11
---------------------------------------------------
Total current liabilities. . . . . . . . . . . . . . . . . 199 1 1 (3) 198
Long-term deferred signal
carriage revenue. . . . . . . . . . . . . . . . . . . . 6 -- -- -- 6
Advances from affiliates, net. . . . . . . . . . . . . . . -- 2 64 (66) --
Investment in subsidiaries . . . . . . . . . . . . . . . . -- 7 -- ( 7) --
1994 Notes . . . . . . . . . . . . . . . . . . . . . . . . 437 -- -- -- 437
1996 Notes . . . . . . . . . . . . . . . . . . . . . . . . 386 -- -- -- 386
Mortgage and other notes
payable, excluding current
portion . . . . . . . . . . . . . . . . . . . . . . . . 64 -- -- (12) 52
Other long-term liabilities. . . . . . . . . . . . . . . . 1 -- -- -- 1
---------------------------------------------------
Total long-term liabilities . . . . . . . . . . . . . . . 894 9 64 (85) 882
---------------------------------------------------
Total liabilities . . . . . . . . . . . . . . . . . . . 1,093 10 65 (88) 1,080
Stockholders' equity (deficit) . . . . . . . . . . . . . . ( 7) 61 1 6 61
---------------------------------------------------
Total liabilities and
stockholders' equity (deficit). . . . . . . . . . . . . $1,086 $ 71 $ 66 $ (82) $1,141
---------------------------------------------------
---------------------------------------------------
F-66
ECHOSTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. CONDENSED CONSOLIDATING FINANCIAL INFORMATION FOR SUBSIDIARY GUARANTORS
(CONTINUED)
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS - YEAR ENDED DECEMBER 31, 1995
(IN MILLIONS, EXCEPT PER SHARE DATA)
ECC -
Dish PC C&E ECC
---------------------------------------------
REVENUE:
DTH products and technical services. . . . . . . . . . . . . . . . . . . $ 147 $ -- $-- $ 147
C-band programming . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 -- -- 15
Loan origination and participation income. . . . . . . . . . . . . . . . 2 -- -- 2
---------------------------------------------
Total revenue. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 164 -- -- 164
EXPENSES:
DTH products and technical services. . . . . . . . . . . . . . . . . . . 117 -- -- 117
C-band programming . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 -- -- 13
Selling, general and administrative. . . . . . . . . . . . . . . . . . . 39 -- -- 39
Depreciation and amortization. . . . . . . . . . . . . . . . . . . . . . 3 -- -- 3
---------------------------------------------
Total expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 172 -- -- 172
---------------------------------------------
Operating income (loss). . . . . . . . . . . . . . . . . . . . . . . . . . ( 8) -- -- ( 8)
Other Income (Expense):
Interest income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 1 -- 14
Interest expense, net of amounts capitalized . . . . . . . . . . . . . . ( 24) -- -- ( 24)
Minority interest in loss of consolidated joint venture and other. . . . 1 -- -- 1
Equity in losses of subsidiaries . . . . . . . . . . . . . . . . . . . . -- (12) 12 --
---------------------------------------------
Total other income (expense), net. . . . . . . . . . . . . . . . . . . . . ( 10) (11) 12 ( 9)
---------------------------------------------
Income (loss) before income taxes. . . . . . . . . . . . . . . . . . . . . ( 18) (11) 12 ( 17)
Income tax (provision) benefit, net. . . . . . . . . . . . . . . . . . . . 6 -- -- 6
---------------------------------------------
Net income (loss). . . . . . . . . . . . . . . . . . . . . . . . . . . . . $( 12) $(11) $12 $( 11)
---------------------------------------------
---------------------------------------------
Net loss attributable to common shares . . . . . . . . . . . . . . . . . . -- -- -- $( 13)
---------------------------------------------
---------------------------------------------
Weighted-average common shares outstanding . . . . . . . . . . . . . . . . -- -- -- 36
---------------------------------------------
---------------------------------------------
Loss per common and common equivalent share. . . . . . . . . . . . . . . . -- -- -- $(0.36)
---------------------------------------------
---------------------------------------------
F-67
ECHOSTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. CONDENSED CONSOLIDATING FINANCIAL INFORMATION FOR SUBSIDIARY GUARANTORS
(CONTINUED)
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS - YEAR ENDED DECEMBER 31, 1996
(IN MILLIONS, EXCEPT PER SHARE DATA)
ESBC - DBS Corp-
Dish PC C&E ESBC PC C&E
------------------------------------------------------------
REVENUE:
DTH products and technical services. . . . . . . . . . . $ 136 $ -- $ -- $ 136 $ -- $ --
DISH Network promotions - subscription television
services and products. . . . . . . . . . . . . . . . . 23 -- -- 23 -- --
DISH Network subscription television services. . . . . . 38 -- -- 38 -- --
C-band programming . . . . . . . . . . . . . . . . . . . 12 -- -- 12 -- --
Loan origination and participation income. . . . . . . . 1 -- -- 1 -- --
------------------------------------------------------------
Total revenue. . . . . . . . . . . . . . . . . . . . . . . 210 -- -- 210 -- --
EXPENSES:
DTH products and technical services. . . . . . . . . . . 124 -- -- 124 -- --
DISH Network programming . . . . . . . . . . . . . . . . 19 -- -- 19 -- --
C-band programming . . . . . . . . . . . . . . . . . . . 11 -- -- 11 -- --
Selling, general and administrative. . . . . . . . . . . 87 -- -- 87 -- --
Subscriber promotion subsidies . . . . . . . . . . . . . 35 -- -- 35 -- --
Amortization of subscriber acquisition costs . . . . . . 16 -- -- 16 -- --
Depreciation and amortization. . . . . . . . . . . . . . 27 -- -- 27 -- --
------------------------------------------------------------
Total expenses . . . . . . . . . . . . . . . . . . . . . . 319 -- -- 319 -- --
------------------------------------------------------------
Operating income (loss). . . . . . . . . . . . . . . . . . (109) -- -- (109) -- --
Other Income (Expense):
Interest income. . . . . . . . . . . . . . . . . . . . . 4 10 -- 14 -- --
Interest expense, net of amounts capitalized . . . . . . ( 37) ( 24) -- ( 61) ( 1) --
Equity in losses of subsidiaries . . . . . . . . . . . . -- ( 92) 92 -- (101) 101
------------------------------------------------------------
Total other income (expense), net. . . . . . . . . . . . . ( 33) (106) 92 ( 47) (102) 101
------------------------------------------------------------
Income (loss) before income taxes. . . . . . . . . . . . . (142) (106) 92 (156) (102) 101
Income tax (provision) benefit, net. . . . . . . . . . . . 50 5 -- 55 -- --
------------------------------------------------------------
Net income (loss). . . . . . . . . . . . . . . . . . . . . $( 92) $(101) $92 $(101) $(102) $101
------------------------------------------------------------
------------------------------------------------------------
Net loss attributable to common shares . . . . . . . . . . -- -- -- -- -- --
------------------------------------------------------------
------------------------------------------------------------
Weighted-average common shares outstanding . . . . . . . . -- -- -- -- -- --
------------------------------------------------------------
------------------------------------------------------------
Loss per common and common equivalent share. . . . . . . . -- -- -- -- -- --
------------------------------------------------------------
------------------------------------------------------------
DBS ECC -
Corp PC Other C&E ECC
--------------------------------------------------
REVENUE:
DTH products and technical services. . . . . . . . . . . $ 136 $ -- $ -- $ -- $ 136
DISH Network promotions -
subscription television services and products. . . . . 23 -- -- -- 23
DISH Network subscription television services. . . . . . 38 -- -- -- 38
C-band programming . . . . . . . . . . . . . . . . . . . 12 -- -- -- 12
Loan origination and participation income. . . . . . . . 1 -- 2 -- 3
--------------------------------------------------
Total revenue. . . . . . . . . . . . . . . . . . . . . . . 210 -- 2 -- 212
EXPENSES:
DTH products and technical services. . . . . . . . . . . 124 -- -- -- 124
DISH Network programming . . . . . . . . . . . . . . . . 19 -- -- -- 19
C-band programming . . . . . . . . . . . . . . . . . . . 11 -- -- -- 11
Selling, general and administrative. . . . . . . . . . . 87 -- 3 -- 90
Subscriber promotion subsidies . . . . . . . . . . . . . 35 -- -- ( 1) 34
Amortization of subscriber acquisition costs . . . . . . 16 -- -- -- 16
Depreciation and amortization. . . . . . . . . . . . . . 27 -- -- -- 27
--------------------------------------------------
Total expenses . . . . . . . . . . . . . . . . . . . . . . 319 -- 3 ( 1) 321
--------------------------------------------------
Operating income (loss). . . . . . . . . . . . . . . . . . (109) -- (1) 1 ( 109)
Other Income (Expense):
Interest income. . . . . . . . . . . . . . . . . . . . . 14 1 -- -- 15
Interest expense, net of amounts capitalized . . . . . . ( 62) -- -- -- ( 62)
Equity in losses of subsidiaries . . . . . . . . . . . . -- (101) -- 101 --
--------------------------------------------------
Total other income (expense), net. . . . . . . . . . . . . ( 48) (100) -- 101 ( 47)
--------------------------------------------------
Income (loss) before income taxes. . . . . . . . . . . . . (157) (100) (1) 102 ( 156)
Income tax (provision) benefit, net. . . . . . . . . . . . 55 ( 1) 1 -- 55
--------------------------------------------------
Net income (loss). . . . . . . . . . . . . . . . . . . . . $(102) $(101) $ -- $102 $( 101)
--------------------------------------------------
--------------------------------------------------
Net loss attributable to common shares . . . . . . . . . . -- -- -- -- $( 102)
--------------------------------------------------
--------------------------------------------------
Weighted-average common shares outstanding . . . . . . . . -- -- -- -- 41
--------------------------------------------------
--------------------------------------------------
Loss per common and common equivalent share. . . . . . . . -- -- -- -- $(2.52)
--------------------------------------------------
--------------------------------------------------
F-68
ECHOSTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. CONDENSED CONSOLIDATING FINANCIAL INFORMATION FOR SUBSIDIARY GUARANTORS
(CONTINUED)
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS - YEAR ENDED DECEMBER 31, 1995
(IN MILLIONS)
ECC -
Dish PC Other C&E ECC
--------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $( 12) $(11) $ -- $ 12 $( 11)
Adjustments to reconcile net income (loss) to net cash flows
from operating activities:
Equity in (earnings) losses of subsidiaries . . . . . . . . . . . . . . . . -- 12 -- (12) --
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . 3 -- -- -- 3
Deferred income tax benefit . . . . . . . . . . . . . . . . . . . . . . . . ( 5) -- -- -- ( 5)
Amortization of debt discount and deferred financing costs. . . . . . . . . 24 -- -- -- 24
Other, net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 -- -- -- 1
Changes in current assets and current liabilities, net. . . . . . . . . . . ( 33) -- -- -- ( 33)
--------------------------------------------------
Net cash flows provided by (used in) operating activities . . . . . . . . . . ( 22) 1 -- -- ( 21)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of marketable investment securities . . . . . . . . . . . . . . . . ( 3) (22) -- -- ( 25)
Sales of marketable investment securities . . . . . . . . . . . . . . . . . . 34 7 -- -- 41
Purchases of restricted marketable investment securities. . . . . . . . . . . ( 15) -- -- -- ( 15)
Advances (to) from affiliates, net. . . . . . . . . . . . . . . . . . . . . . -- (20) 20 -- --
Purchases of property and equipment . . . . . . . . . . . . . . . . . . . . . ( 4) -- -- -- ( 4)
Offering proceeds and investment earnings placed in escrow. . . . . . . . . . ( 10) -- -- -- ( 10)
Funds released from escrow accounts . . . . . . . . . . . . . . . . . . . . . 122 -- -- -- 122
Investment in convertible subordinated debentures from DBSI . . . . . . . . . -- ( 1) -- -- ( 1)
Investment in DBSC. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 ( 4) -- -- --
Long-term notes receivable from and investment in DBSC. . . . . . . . . . . . -- (16) -- -- ( 16)
Expenditures for satellite systems under construction . . . . . . . . . . . . (110) -- (20) -- (130)
--------------------------------------------------
Net cash flows used in investing activities . . . . . . . . . . . . . . . . . 18 (56) -- -- ( 38)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of Class A Common Stock. . . . . . . . . . . . . . -- 63 -- -- 63
--------------------------------------------------
Net cash flows provided by (used in) financing activities . . . . . . . . . . -- 63 -- -- 63
--------------------------------------------------
Net increase (decrease) in cash and cash equivalents. . . . . . . . . . . . . ( 4) 8 -- -- 4
Cash and cash equivalents, beginning of year. . . . . . . . . . . . . . . . . 18 -- -- -- 18
--------------------------------------------------
Cash and cash equivalents, end of year. . . . . . . . . . . . . . . . . . . . $ 14 $ 8 $ -- $ -- $ 22
--------------------------------------------------
--------------------------------------------------
F-69
ECHOSTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. CONDENSED CONSOLIDATING FINANCIAL INFORMATION FOR SUBSIDIARY GUARANTORS
(CONTINUED)
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS - YEAR ENDED DECEMBER 31, 1996
(IN MILLIONS)
DBS
ESBC - Corp-
Dish PC C&E ESBC PC C&E
-----------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . $( 92) $(101) $ 92 $(101) $(102) $ 101
Adjustments to reconcile net income (loss) to net cash
flows from operating activities:
Equity in (earnings) losses of subsidiaries . . . . . . . . . . . . -- 92 (92) -- 101 (101)
Depreciation and amortization . . . . . . . . . . . . . . . . . . . 27 -- -- 27 -- --
Amortization of subscriber acquisition costs. . . . . . . . . . . . 16 -- -- 16 -- --
Deferred income tax benefit . . . . . . . . . . . . . . . . . . . . ( 45) ( 5) -- ( 50) -- --
Amortization of debt discount and deferred financing costs. . . . . 34 24 3 61 -- --
Other, net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 -- -- 10 -- --
Changes in current assets and current liabilities, net. . . . . . . 14 -- -- 14 1 --
-----------------------------------------------------------
Net cash flows provided by (used in) operating activities . . . . . ( 36) 10 3 ( 23) -- --
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of marketable investment securities . . . . . . . . . . . . -- (138) -- (138) -- --
Sales of marketable investment securities . . . . . . . . . . . . . . -- 120 -- 120 -- --
Purchases of restricted marketable investment securities. . . . . . . ( 21) -- -- ( 21) -- --
Funds released from restricted cash and marketable
investment securities - other . . . . . . . . . . . . . . . . . . . 16 -- -- 16 -- --
Advances (to) from affiliates, net. . . . . . . . . . . . . . . . . . 138 (268) (3) (133) 69 --
Purchases of property and equipment . . . . . . . . . . . . . . . . . ( 46) -- -- ( 46) -- --
Offering proceeds and investment earnings placed in escrow. . . . . . ( 11) (183) -- (194) -- --
Funds released from escrow accounts . . . . . . . . . . . . . . . . . 84 136 -- 220 -- --
Payments received on (investments in) convertible
subordinated debentures from SSET . . . . . . . . . . . . . . . . . 6 -- -- 6 -- --
Investment in convertible subordinated debentures from DBSI . . . . . -- -- -- -- -- --
Long-term notes receivable from and investment in DBSC. . . . . . . . -- -- -- -- -- --
Long-term note receivable from DBS Corp . . . . . . . . . . . . . . . -- -- -- -- -- --
Expenditures for satellite systems under construction . . . . . . . . (112) -- -- (112) ( 26) --
Expenditures for FCC authorizations . . . . . . . . . . . . . . . . . -- -- -- -- ( 55) --
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- -- -- -- -- --
-----------------------------------------------------------
Net cash flows used in investing activities . . . . . . . . . . . . . 54 (333) (3) (282) ( 12) --
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of 1996 Notes. . . . . . . . . . . . . . . -- 337 -- 337 -- --
Proceeds from note payable to ECC . . . . . . . . . . . . . . . . . . -- -- -- -- 12 --
Repayments of mortgage indebtedness and notes payable . . . . . . . . ( 8) -- -- ( 8) -- --
Stock options exercised . . . . . . . . . . . . . . . . . . . . . . . -- -- -- -- -- --
-----------------------------------------------------------
Net cash flows provided by (used in) financing activities . . . . . . ( 8) 337 -- 329 12 --
-----------------------------------------------------------
Net increase (decrease) in cash and cash equivalents. . . . . . . . . 10 14 -- 24 -- --
Cash and cash equivalents, beginning of year. . . . . . . . . . . . . 14 -- -- 14 -- --
-----------------------------------------------------------
Cash and cash equivalents, end of year. . . . . . . . . . . . . . . . $ 24 $ 14 $ -- $ 38 $ -- $ --
-----------------------------------------------------------
-----------------------------------------------------------
DBS ECC -
Corp PC Other C&E ECC
-------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . $(102) $(101) $ -- $ 102 $(101)
Adjustments to reconcile net income (loss) to net cash flows
from operating activities:
Equity in (earnings) losses of subsidiaries . . . . . . . . . . . . -- 101 -- (101) --
Depreciation and amortization . . . . . . . . . . . . . . . . . . . 27 -- -- -- 27
Amortization of subscriber acquisition costs. . . . . . . . . . . . 16 -- -- -- 16
Deferred income tax benefit . . . . . . . . . . . . . . . . . . . . ( 50) -- -- -- ( 50)
Amortization of debt discount and deferred financing costs. . . . . 61 -- -- -- 61
Other, net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 ( 2) -- -- 8
Changes in current assets and current liabilities, net. . . . . . . 15 4 -- ( 8) 11
-------------------------------------------------
Net cash flows provided by (used in) operating activities . . . . . . ( 23) 2 -- ( 7) ( 28)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of marketable investment securities . . . . . . . . . . . . (138) -- -- -- (138)
Sales of marketable investment securities . . . . . . . . . . . . . . 120 15 -- -- 135
Purchases of restricted marketable investment securities. . . . . . . ( 21) -- -- -- ( 21)
Funds released from restricted cash and marketable
investment securities - other . . . . . . . . . . . . . . . . . . . 16 -- -- -- 16
Advances (to) from affiliates, net. . . . . . . . . . . . . . . . . . ( 64) 22 38 4 --
Purchases of property and equipment . . . . . . . . . . . . . . . . . ( 46) -- ( 5) -- ( 51)
Offering proceeds and investment earnings placed in escrow. . . . . . (194) -- -- -- (194)
Funds released from escrow accounts . . . . . . . . . . . . . . . . . 220 -- -- -- 220
Payments received on (investments in) convertible
subordinated debentures from SSET . . . . . . . . . . . . . . . . . 6 -- -- -- 6
Investment in convertible subordinated debentures from DBSI . . . . . -- ( 3) -- -- ( 3)
Long-term notes receivable from and investment in DBSC. . . . . . . . -- ( 30) -- -- ( 30)
Long-term note receivable from DBS Corp . . . . . . . . . . . . . . . -- ( 12) -- 12 --
Expenditures for satellite systems under construction . . . . . . . . (138) -- ( 33) -- (171)
Expenditures for FCC authorizations . . . . . . . . . . . . . . . . . ( 55) -- -- -- ( 55)
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- ( 3) -- 3 --
-------------------------------------------------
Net cash flows used in investing activities . . . . . . . . . . . . . (294) ( 11) -- 19 (286)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of 1996 Notes. . . . . . . . . . . . . . . 337 -- -- -- 337
Proceeds from note payable to ECC . . . . . . . . . . . . . . . . . . 12 -- -- ( 12) --
Repayments of mortgage indebtedness and notes payable . . . . . . . . ( 8) -- -- -- ( 8)
Stock options exercised . . . . . . . . . . . . . . . . . . . . . . . -- 2 -- -- 2
-------------------------------------------------
Net cash flows provided by (used in) financing activities . . . . . . 341 2 -- ( 12) 331
-------------------------------------------------
Net increase (decrease) in cash and cash equivalents. . . . . . . . . 24 ( 7) -- -- 17
Cash and cash equivalents, beginning of year. . . . . . . . . . . . . 14 8 -- -- 22
-------------------------------------------------
Cash and cash equivalents, end of year. . . . . . . . . . . . . . . . $ 38 $ 1 $ -- $ -- $ 39
-------------------------------------------------
-------------------------------------------------
F-70
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 is as follows (in thousands):
OTHER
UNITED STATES EUROPE INTERNATIONAL TOTAL
------------- ------------- ------------- -------------
AS OF AND FOR THE YEAR ENDED DECEMBER 31, 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
-------------
-------------
AS OF AND FOR THE YEAR ENDED DECEMBER 31, 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)
-------------
Loss before income taxes . . . . . . . . . . . . . $ (17,231)
-------------
-------------
Identifiable assets. . . . . . . . . . . . . . . . $ 63,136 $ 10,088 $ 3,788 $ 77,012
------------- -------------- -------------
------------- -------------- -------------
Corporate assets . . . . . . . . . . . . . . . . . 546,079
-------------
Total assets . . . . . . . . . . . . . . . . . . . $ 623,091
-------------
-------------
AS OF AND FOR THE YEAR ENDED DECEMBER 1996:
Total revenue. . . . . . . . . . . . . . . . . . . $ 173,919 $ 26,984 $10,508 $ 211,411
------------- -------------- ------------- -------------
------------- -------------- ------------- -------------
Export sales . . . . . . . . . . . . . . . . . . . $ 1,536
-------------
-------------
Operating loss . . . . . . . . . . . . . . . . . . $ (107,175) $ (1,274) $ (896) $ (109,345)
------------- -------------- -------------
------------- -------------- -------------
Other income (expense), net. . . . . . . . . . . . (46,334)
-------------
Loss 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-71
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 OF COSTS AND BALANCE AT
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-72
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
-------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS 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)
-------------------------------------
-------------------------------------
F-73
ECHOSTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
16. PARENT COMPANY ONLY FINANCIAL INFORMATION (CONTINUED)
DECEMBER 31,
----------------------
1995 1996
----------------------
(IN THOUSANDS)
BALANCE SHEET DATA:
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. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92,613 -
Unrestricted. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 280 -
-----------------------
Total investments in subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92,893 -
Other noncurrent 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. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 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-74
ECHOSTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
16. PARENT COMPANY ONLY FINANCIAL INFORMATION (CONTINUED)
YEARS 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 (decrease) 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
--------------------------------
--------------------------------
F-75
SUPPLEMENTAL QUARTLERLY FINANCIAL INFORMATION
(UNAUDITED)
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1997
ECHOSTAR DBS CORPORATION
F-76
ECHOSTAR DBS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
DECEMBER 31, JUNE 30,
1996 1997
---------------------------
(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 38,438 $ 181,931
Marketable investment securities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,807 4,952
Trade accounts receivable, net of allowance for uncollectible accounts of $1,494 and $1,834,
respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,483 29,480
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72,767 63,043
Income tax refund receivable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,830 145
Subscriber acquisition costs, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68,129 68,356
Other current assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,031 7,479
---------------------------
Total current assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 231,485 355,386
Restricted Cash and Marketable Investment Securities:
1996 Notes escrow . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47,491 --
Satellite escrow. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- 112,086
Interest escrow . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- 109,084
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31,450 8,445
---------------------------
Total restricted cash and marketable investment securities. . . . . . . . . . . . . . . . . . . . . . . 78,941 229,615
Property and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 528,577 540,583
FCC authorizations, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72,500 76,471
Advances to affiliates, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68,607 113,170
Deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79,663 79,663
Other noncurrent assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25,770 38,895
---------------------------
Total assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,085,543 $ 1,433,783
---------------------------
---------------------------
LIABILITIES AND STOCKHOLDER'S EQUITY
Current Liabilities:
Trade accounts payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 41,228 $ 49,850
Deferred revenue - DISH Network subscriber promotions . . . . . . . . . . . . . . . . . . . . . . . . 97,959 115,785
Deferred revenue - DISH Network . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,407 5,209
Deferred revenue - C-band . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 734 588
Accrued expenses and other current liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . 30,125 47,548
Deferred tax liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,674 12,309
Current portion of long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,334 11,832
---------------------------
Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 198,461 243,121
Long-term obligations, net of current portion:
Long-term deferred signal carriage revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,949 7,366
1994 Notes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 437,127 467,210
1996 Notes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 386,165 411,256
1997 Notes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- 375,000
Mortgage and other notes payable, net of current portion. . . . . . . . . . . . . . . . . . . . . . . 51,428 45,379
Note payable to ECC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,000 12,000
Other long-term liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,088 5,551
---------------------------
Total long-term obligations, net of current portion . . . . . . . . . . . . . . . . . . . . . . . . . . 893,757 1,323,762
---------------------------
Total liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,092,218 1,566,883
Commitments and Contingencies (Note 6)
Stockholder's Equity (Deficit):
Common Stock, $.01 par value, 1,000 shares authorized, issued and outstanding . . . . . . . . . . . . -- --
Additional paid-in capital. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 108,839 108,839
Unrealized holding gains (losses) on available-for-sale securities, net of deferred taxes . . . . . . ( 12) ( 12)
Accumulated deficit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ( 115,502) ( 241,927)
---------------------------
Total stockholder's deficit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ( 6,675) ( 133,100)
---------------------------
Total liabilities and stockholder's equity (deficit). . . . . . . . . . . . . . . . . . . . . . . . $ 1,085,543 $ 1,433,783
---------------------------
---------------------------
See accompanying Notes to Condensed Consolidated Financial Statements.
F-77
ECHOSTAR DBS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- --------------------------
1996 1997 1996 1997
--------------------------- --------------------------
REVENUE:
DTH products and technical services . . . . . . . . . . . . . $ 60,458 $ 22,071 $ 97,199 $ 33,660
DISH Network promotions - subscription television
services and products. . . . . . . . . . . . . . . . . . . -- 43,672 -- 75,825
DISH Network subscription television services . . . . . . . . 5,582 32,189 6,046 57,588
C-band programming. . . . . . . . . . . . . . . . . . . . . . 3,194 1,916 6,643 4,079
Loan origination and participation income . . . . . . . . . . 120 127 492 285
--------------------------- --------------------------
Total revenue . . . . . . . . . . . . . . . . . . . . . . . . . 69,354 99,975 110,380 171,437
EXPENSES:
DTH products and technical services . . . . . . . . . . . . . 57,528 18,109 90,278 27,333
DISH Network programming. . . . . . . . . . . . . . . . . . . 1,664 25,834 1,769 45,259
C-band programming. . . . . . . . . . . . . . . . . . . . . . 2,880 1,545 6,058 3,308
Selling, general and administrative . . . . . . . . . . . . . 18,444 33,794 29,098 64,690
Subscriber promotion subsidies. . . . . . . . . . . . . . . . -- 18,313 -- 31,090
Amortization of subscriber acquisition costs. . . . . . . . . 92 33,228 92 61,290
Depreciation and amortization . . . . . . . . . . . . . . . . 6,334 12,655 9,664 25,298
--------------------------- --------------------------
Total expenses. . . . . . . . . . . . . . . . . . . . . . . . . 86,942 143,478 136,959 258,268
--------------------------- --------------------------
Operating loss. . . . . . . . . . . . . . . . . . . . . . . . . (17,588) (43,503) (26,579) ( 86,831)
Other Income (Expense):
Interest income . . . . . . . . . . . . . . . . . . . . . . . 5,873 1,445 7,851 3,094
Interest expense, net of amounts capitalized. . . . . . . . . (20,247) (22,278) (26,144) ( 42,368)
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . ( 136) ( 114) ( 137) ( 276)
--------------------------- --------------------------
Total other income (expense). . . . . . . . . . . . . . . . . . (14,510) (20,947) (18,430) ( 39,550)
--------------------------- --------------------------
Loss before income taxes. . . . . . . . . . . . . . . . . . . . (32,098) (64,450) (45,009) (126,381)
Income tax (provision) benefit, net . . . . . . . . . . . . . . 10,964 ( 25) 16,088 ( 44)
--------------------------- --------------------------
Net loss. . . . . . . . . . . . . . . . . . . . . . . . . . . . $(21,134) $(64,475) $(28,921) $(126,425)
--------------------------- --------------------------
--------------------------- --------------------------
See accompanying Notes to Condensed Consolidated Financial Statements.
F-78
ECHOSTAR DBS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY (DEFICIT)
(In thousands)
ACCUMULATED
DEFICIT AND
SHARES OF UNREALIZED
COMMON ADDITIONAL HOLDING
STOCK COMMON PAID-IN GAINS
OUTSTANDING STOCK CAPITAL (LOSSES) TOTAL
------------------------------------------------------------------
Balance, December 31, 1996 . . . . . . . 1 $ - $108,839 $(115,514) $ (6,675)
Net loss (unaudited) . . . . . . . . . - - - (126,425) (126,425)
------------------------------------------------------------------
Balance, June 30, 1997 (unaudited) . . . 1 $ - $108,839 $(241,939) $(133,100)
------------------------------------------------------------------
------------------------------------------------------------------
See accompanying Notes to Condensed Consolidated Financial Statements.
F-79
ECHOSTAR DBS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
SIX MONTHS ENDED JUNE 30,
----------------------------
1996 1997
-----------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $( 28,491) $(126,425)
Adjustments to reconcile net loss to net cash flows from operating activities:
Depreciation and amortization. . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,664 25,298
Amortization of subscriber acquisition costs . . . . . . . . . . . . . . . . . . . . 92 61,290
Deferred income tax benefit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . ( 11,099) ( 365)
Amortization of debt discount and deferred financing costs . . . . . . . . . . . . . 24,530 38,731
Change in reserve for excess and obsolete inventory. . . . . . . . . . . . . . . . . 634 1,987
Change in long-term deferred signal carriage revenue . . . . . . . . . . . . . . . . 4,163 1,417
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 503 4,463
Changes in current assets and current liabilities, net. . . . . . . . . . . . . . . . . ( 12,518) ( 18,013)
--------- ---------
Net cash flows used in operating activities . . . . . . . . . . . . . . . . . . . . . . . ( 12,522) ( 11,617)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of marketable investment securities . . . . . . . . . . . . . . . . . . . . . ( 44,782) ( 4,706)
Sales of marketable investment securities . . . . . . . . . . . . . . . . . . . . . . . -- 18,561
Purchases of restricted marketable investment securities. . . . . . . . . . . . . . . . ( 9,800) ( 1,995)
Advances to affiliates, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ( 30,547) ( 34,385)
Purchases of property and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . ( 5,485) ( 18,453)
Offering proceeds and investment earnings placed in escrow. . . . . . . . . . . . . . . (181,778) (221,654)
Funds released from escrow accounts and restricted cash - other . . . . . . . . . . . . 71,545 72,975
Expenditures for satellite systems under construction . . . . . . . . . . . . . . . . . ( 62,016) ( 11,225)
Investment in convertible subordinated debentures from SSET . . . . . . . . . . . . . . -- ( 500)
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ( 25) ( 457)
--------- ---------
Net cash flows used in investing activities . . . . . . . . . . . . . . . . . . . . . . . (262,888) (201,839)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of Common Stock. . . . . . . . . . . . . . . . . . . . . . . . . 1 --
Net proceeds from issuance of 1996 Notes. . . . . . . . . . . . . . . . . . . . . . . . 337,043 --
Net proceeds from issuance of 1997 Notes. . . . . . . . . . . . . . . . . . . . . . . . -- 362,500
Repayments of mortgage indebtedness and notes payable . . . . . . . . . . . . . . . . . ( 1,082) ( 5,551)
--------- ---------
Net cash flows provided by financing activities . . . . . . . . . . . . . . . . . . . . . 335,962 356,949
--------- ---------
Net increase in cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . 60,552 143,493
Cash and cash equivalents, beginning of period. . . . . . . . . . . . . . . . . . . . . . 13,949 38,438
--------- ---------
Cash and cash equivalents, end of period. . . . . . . . . . . . . . . . . . . . . . . . . $ 74,501 $ 181,931
--------- ---------
--------- ---------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest, net of amounts capitalized. . . . . . . . . . . . . . . . . . . $ 544 $ 2,352
Cash paid for income taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- --
Satellite launch payment for EchoStar II applied to EchoStar I launch . . . . . . . . . 15,000 --
Increase in note payable for deferred satellite construction payments for EchoStar I. . 3,167 --
See accompanying Notes to Condensed Consolidated Financial Statements.
F-80
ECHOSTAR DBS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND BUSINESS ACTIVITIES
PRINCIPAL BUSINESS
EchoStar DBS Corporation and subsidiaries ("DBS Corp" or the "Company"), is
a wholly-owned subsidiary of EchoStar Communications Corporation ("EchoStar"), a
publicly-traded company on the Nasdaq National Market. The Company is primarily
engaged in the operation of a direct broadcast satellite ("DBS") subscription
television service (the "DISH Network"), which commenced operations in March
1996. The DISH Network currently provides approximately 120 channels of digital
video programming and over 30 channels of CD quality audio programming to
consumers throughout the continental United States. In addition to the DISH
Network, the Company designs, manufactures, distributes and installs satellite
direct-to-home ("DTH") products, and distributes domestic DTH programming. The
Company's primary business objective is to become one of the leading providers
of subscription television and other satellite-delivered services in the United
States. The Company had approximately 590,000 subscribers to DISH Network
programming as of June 30, 1997.
RECENT DEVELOPMENTS
1997 NOTES OFFERING
On June 25, 1997, DBS Corp consummated an offering (the "1997 Notes
Offering") of 12 1/2% Senior Secured Notes due 2002 (the "1997 Notes"). The
1997 Notes Offering resulted in net proceeds to the Company of approximately
$362.5 million. Interest on the 1997 Notes is payable semi-annually on January
1 and July 1 of each year, commencing January 1, 1998. Approximately $109.0
million of the net proceeds of the 1997 Notes Offering were placed in an escrow
account to fund the first five semi-annual interest payments (through January 1,
2000). The 1997 Notes were issued in a private placement pursuant to Rule 144A
of the Securities Act of 1933, as amended. DBS Corp agreed to exchange the
privately issued notes for publicly registered notes and on July 23, 1997 filed
a registration statement on Form S-4 (the "Registration Statement") with the
Securities and Exchange Commission. Upon the effectiveness of the Registration
Statement, the Company will make an offer to exchange the 1997 Notes for
publicly registered notes with substantially identical terms (including
principal amount, interest rate, maturity, security and ranking). Prior to
consummation of the 1997 Notes Offering, EchoStar contributed (the
"Contribution") all of the outstanding capital stock of its wholly-owned
subsidiary EchoStar Satellite Broadcasting Corporation ("ESBC") to DBS Corp. As
a result of the Contribution, ESBC is a wholly-owned subsidiary of DBS Corp.
NEWS CORPORATION LITIGATION
On February 24, 1997, EchoStar and The News Corporation Limited ("News")
announced an agreement (the "News Agreement") pursuant to which, among other
things, News agreed to acquire approximately 50% of the outstanding capital
stock of EchoStar. News also agreed to make available for use by EchoStar the
DBS permit for 28 frequencies at 110DEG. West Longitude ("WL") purchased by MCI
Communications Corporation ("MCI") for over $682 million at a Federal
Communications Commission ("FCC") auction. During late April 1997, substantial
disagreements arose between the parties regarding their obligations under the
News Agreement.
During May 1997, EchoStar initiated litigation alleging, among other
things, breach of contract, failure to act in good faith, and other causes of
action. News has denied all of EchoStar's material allegations and has asserted
numerous counterclaims against EchoStar and its Chairman and Chief Executive
Officer, Charles W. Ergen. While EchoStar is confident of its position and
believes it will ultimately prevail, the litigation process could continue for
many years and there can be no assurance concerning the outcome of the
litigation.
F-81
ECHOSTAR DBS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
2. SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and Article
10 of Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring adjustments) considered necessary for a fair presentation
have been included. All significant intercompany accounts and transactions have
been eliminated in consolidation. Operating results for the three and six
months ended June 30, 1997 are not necessarily indicative of the results that
may be expected for the year ending December 31, 1997. For further information,
refer to the consolidated financial statements and footnotes thereto included in
the Company's Annual Report on Form 10-K for the year ended December 31, 1996.
Certain prior year amounts have been reclassified to conform with the current
year presentation.
Unless otherwise stated herein, or the context otherwise requires,
references herein to EchoStar shall include EchoStar, ESBC and all direct and
indirect wholly-owned subsidiaries thereof. The Company's management refers
readers of this Quarterly Report on Form 10-Q to EchoStar's Quarterly Report on
Form 10-Q for the six months ended June 30, 1997.
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.
CASH AND CASH EQUIVALENTS
The Company considers all liquid investments purchased with original
maturities of 90 days or less to be cash equivalents. Cash equivalents as of
December 31, 1996 and June 30, 1997 principally consisted of money market funds,
corporate notes and commercial paper; such balances are stated at cost which
equates to market value.
INCOME TAXES
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes," requires that the tax benefit of net operating losses ("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. The Company has fully
reserved the 1997 additions to its deferred tax assets.
3. RESTRICTED CASH AND MARKETABLE INVESTMENT SECURITIES
Restricted cash and marketable investment securities held in escrow
accounts, as reflected in the accompanying condensed consolidated balance
sheets, represent cash restricted by the indenture associated with the 1997
Notes and the remaining restricted cash proceeds from the 1996 Notes Offering,
plus investment earnings, less amounts expended to date. A portion of the
proceeds from the 1997 Notes Offering are held in two separate escrow accounts
(the "Interest Escrow" and the "Satellite Escrow") as required by the related
indenture. Restricted cash and marketable investment securities are invested in
certain permitted debt and other marketable investment securities until
disbursed for the express purposes identified in the respective indentures.
F-82
ECHOSTAR DBS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Other restricted cash includes balances totaling $5.7 million at
December 31, 1996 and June 30, 1997, respectively, which was restricted to
satisfy certain covenants in the 1994 Notes Indenture regarding launch insurance
for EchoStar II. In addition, as of December 31, 1996, $15.0 million was held
in escrow relating to a non-performing manufacturer of DBS receivers (see Note
6). Also, 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 the Company's future payment obligations. The $15.0
million and $10.0 million deposits were both released from these escrow accounts
in May 1997.
4. INVENTORIES
Inventories consist of the following (in thousands):
DECEMBER 31, JUNE 30,
1996 1997
----------------------
(UNAUDITED)
EchoStar Receiver Systems. . . . . . . . . . . . . $ 32,799 $ 46,499
DBS receiver components. . . . . . . . . . . . . . 15,736 15,201
Consigned DBS receiver components. . . . . . . . . 23,525 2,681
Finished goods - International . . . . . . . . . . 3,491 4,181
Finished goods - C-band. . . . . . . . . . . . . . 600 359
Spare parts and other. . . . . . . . . . . . . . . 2,279 1,771
Reserve for excess and obsolete inventory. . . . . ( 5,663) ( 7,649)
----------------------
$ 72,767 $ 63,043
----------------------
----------------------
5. 1997 NOTES
On June 25, 1997, DBS Corp completed the 1997 Notes Offering consisting of
$375.0 million aggregate principal amount of the 1997 Notes. The 1997 Notes
Offering resulted in net proceeds to DBS Corp of approximately $362.5 million
(after payment of underwriting discounts and other issuance costs aggregating
approximately $12.5 million). The 1997 Notes bear interest at a rate of 12
1/2%, computed semi-annually. Interest on the 1997 Notes will be payable in
cash semi-annually on January 1 and July 1 of each year, with the first interest
payment due January 1, 1998. Approximately $109.0 million of the net proceeds
of the 1997 Notes Offering were placed in the Interest Escrow account to fund
the first five semi-annual interest payments (through January 1, 2000).
Approximately $112.0 million of the net proceeds of the 1997 Notes Offering were
placed in the Satellite Escrow account to fund the construction launch and
insurance of EchoStar's fourth DBS satellite ("EchoStar IV"). The 1997 Notes
mature on July 1, 2002.
The 1997 Notes rank PARI PASSU in right of payment with all senior
indebtedness of DBS Corp. The 1997 Notes are guaranteed on a subordinated basis
by DBS Corp's parent, EchoStar, and, contingent upon the occurrence of certain
events, will be guaranteed by ESBC and Dish, Ltd. and certain other subsidiaries
of DBS Corp and EchoStar. The 1997 Notes are secured by liens on the capital
stock of DBS Corp, EchoStar IV, and certain other assets of DBS Corp and
EchoStar. Although the 1997 Notes are titled "Senior:" (i) DBS Corp has not
issued, and does not have any plans to issue, any significant indebtedness to
which the 1997 Notes would be senior; and (ii) the 1997 Notes are effectively
subordinated to all liabilities of ECC (except liabilities to general
creditors). In addition, the ability of Dish, Ltd. to make distributions to DBS
Corp is severely limited by the terms of an indenture to which it is subject,
and the cash flow generated by the assets and operations of DBS Corp's
subsidiaries will only be available to satisfy DBS Corp's obligations on the
1997 Notes to the extent that such subsidiaries are able to make distributions,
directly or indirectly, to DBS Corp.
Except under certain circumstances requiring prepayment premiums, and in
other limited circumstances, the 1997 Notes are not redeemable at DBS Corp's
option prior to July 1, 2000. Thereafter, the 1997 Notes will be subject to
redemption, at the option of DBS Corp, in whole or in part, at redemption prices
decreasing from 106.25% during the year commencing July 1, 2000 to 100% on or
after July 1, 2002, together with accrued and unpaid interest thereon to the
redemption date.
F-83
ECHOSTAR DBS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
The 1997 Notes Indenture contains restrictive covenants that, among other
things, impose limitations on the ability of DBS Corp 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 DBS Corp's subsidiaries; (vi) merge,
consolidate or sell assets; (vii) incur subordinated or junior debt; and (viii)
enter into transactions with affiliates. In addition, DBS Corp may pay
dividends on its equity securities only if: (1) no default is continuing under
the 1997 Notes Indenture; and (2) after giving effect to such dividend and the
incurrence of any indebtedness (the proceeds of which are used to finance the
dividend), DBS Corps's ratio of total indebtedness to cash flow (calculated in
accordance with the 1997 Notes Indenture) would not exceed 6.0 to 1.0.
Moreover, the aggregate amount of such dividends generally may not exceed the
sum of the difference of cumulative consolidated cash flow (calculated in
accordance with the 1997 Notes Indenture) minus 150% of consolidated interest
expense of DBS Corp (calculated in accordance with the 1997 Notes Indenture)
plus an amount equal to 100% of the aggregate net cash proceeds received by DBS
Corp and its subsidiaries from the issuance or sale of equity interests of DBS
Corp or EchoStar (other than equity interests sold to a subsidiary of DBS Corp
or EchoStar, since June 25, 1997).
In the event of a change of control, as defined in the 1997 Notes
Indenture, DBS Corp will be required to make an offer to repurchase all of the
1997 Notes at a purchase price equal to 101% of the aggregate principal amount
thereof, together with accrued and unpaid interest thereon, to the date of
repurchase.
6. COMMITMENTS AND CONTINGENCIES
PURCHASE COMMITMENTS
The Company has entered into agreements with various manufacturers to
purchase DBS satellite receivers and related components manufactured to its
specifications. As of June 30, 1997, remaining commitments total approximately
$141.7 million and the total of all outstanding purchase order commitments with
domestic and foreign suppliers was $148.1 million. All of the purchases related
to these commitments are expected to be made during 1997. The Company expects
to finance these purchases from unrestricted cash and additional cash flows
generated from sales of DISH Network programming and related DBS inventory. The
Company expects that its 1997 purchases of DBS satellite receivers and related
components will significantly exceed its existing contractual commitments. In
addition to the above, EchoStar will expend $192.6 million between June 30, 1997
and the first quarter of 1998 to complete the construction phase (including
applicable insurance) and launch of its third DBS satellite ("EchoStar III") and
EchoStar IV.
OTHER RISKS AND CONTINGENCIES
The Company is subject to various other legal proceedings and claims which
arise in the ordinary course of its business. In the opinion of management, the
amount of ultimate liability with respect to these actions will not materially
affect the financial position or results of operations of the Company.
F-84
SUPPLEMENTAL QUARTLERLY FINANCIAL INFORMATION
(UNAUDITED)
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1997
ECHOSTAR COMMUNICATIONS CORPORATION
F-85
ECHOSTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
DECEMBER 31, JUNE 30,
1996 1997
---------------------------
(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 39,231 $ 182,852
Marketable investment securities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,807 4,952
Trade accounts receivable, net of allowance for uncollectible accounts of $1,494 and $1,834,
respectively. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,516 29,475
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72,767 63,043
Income tax refund receivable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,830 145
Subscriber acquisition costs, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68,129 68,584
Other current assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,356 10,177
---------------------------
Total current assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 235,636 359,228
Restricted Cash and Marketable Investment Securities:
1996 Notes escrow . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47,491 --
Satellite Escrow. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- 112,086
Interest Escrow . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- 109,084
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31,800 8,445
---------------------------
Total restricted cash and marketable investment securities. . . . . . . . . . . . . . . . . . . . 79,291 229,615
Property and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 590,621 728,237
FCC authorizations, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72,667 94,386
Deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79,339 79,339
Other noncurrent assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83,826 43,675
---------------------------
Total assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,141,380 $ 1,534,480
---------------------------
---------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Trade accounts payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 40,819 $ 49,752
Deferred programming and product revenue - DISH Network subscriber promotions . . . . . . . . . 97,959 117,121
Deferred revenue - DISH Network . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,407 5,269
Deferred revenue - C-band . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 734 588
Accrued satellite costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- 32,950
Accrued expenses and other current liabilities. . . . . . . . . . . . . . . . . . . . . . . . . 30,495 45,236
Deferred tax liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,563 12,198
Current portion of long-term obligations. . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,334 12,332
---------------------------
Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 198,311 275,446
Long-term obligations, net of current portion:
Long-term deferred signal carriage revenue . . . . . . . . . . . . . . . . . . . . . . . . . . 5,949 7,366
1994 Notes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 437,127 467,210
1996 Notes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 386,165 411,256
1997 Notes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- 375,000
Mortgage and other notes payable, net of current portion. . . . . . . . . . . . . . . . . . . . 51,428 45,379
Other long-term obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,203 5,691
---------------------------
Total long-term obligations, net of current portion . . . . . . . . . . . . . . . . . . . . . . . 881,872 1,311,902
---------------------------
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,080,183 1,587,348
Commitments and Contingencies (Note 8)
Stockholders' Equity (Deficit):
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
$3,347 and $3,949, respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,399 19,001
Class A Common Stock, $.01 par value, 200,000,000 shares authorized, 11,115,582 and
11,821,513 shares issued and outstanding, respectively. . . . . . . . . . . . . . . . . . . . 111 118
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 11
Additional paid-in capital. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 158,113 170,701
Unrealized holding gains (losses) on available-for-sale securities, net of deferred taxes . . . ( 11) ( 11)
Accumulated deficit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ( 115,729) ( 242,986)
---------------------------
Total stockholders' equity (deficit). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,61,197 ( 52,868)
---------------------------
Total liabilities and stockholders' equity. . . . . . . . . . . . . . . . . . . . . . . . . . . $1,141,380 $ 1,534,480
---------------------------
---------------------------
See accompanying Notes to Condensed Consolidated Financial Statements
F-86
ECHOSTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- -------------------------
1996 1997 1996 1997
--------------------------- -------------------------
REVENUE:
DTH products and technical services . . . . . . . . . . . . . . . $ 60,458 $ 21,987 $ 97,199 $ 33,649
DISH Network promotions - subscription television
services and products . . . . . . . . . . . . . . . . . . . . . -- 43,943 -- 76,251
DISH Network subscription television services . . . . . . . . . . 5,582 32,189 6,046 57,588
C-band programming. . . . . . . . . . . . . . . . . . . . . . . . 3,194 1,916 6,643 4,079
Loan origination and participation income . . . . . . . . . . . . 4,290 787 5,103 1,278
--------------------------- -------------------------
Total revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . 73,524 100,822 114,991 172,845
EXPENSES:
DTH products and technical services . . . . . . . . . . . . . . . 57,528 18,231 90,278 27,718
DISH Network programming. . . . . . . . . . . . . . . . . . . . . 1,664 25,834 1,769 45,259
C-band programming. . . . . . . . . . . . . . . . . . . . . . . . 2,880 1,545 6,058 3,308
Selling, general and administrative . . . . . . . . . . . . . . . 19,083 34,362 29,816 66,389
Subscriber promotion subsidies. . . . . . . . . . . . . . . . . . -- 17,871 -- 31,013
Amortization of subscriber acquisition costs. . . . . . . . . . . 92 33,316 92 61,418
Depreciation and amortization . . . . . . . . . . . . . . . . . . 6,334 12,684 9,664 25,357
--------------------------- -------------------------
Total expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . 87,581 143,843 137,677 260,462
--------------------------- -------------------------
Operating loss. . . . . . . . . . . . . . . . . . . . . . . . . . . ( 14,057) ( 43,021) (22,686) ( 87,617)
Other Income (Expense):
Interest income . . . . . . . . . . . . . . . . . . . . . . . . . 6,706 1,571 9,3833,343
Interest expense, net of amounts capitalized. . . . . . . . . . . ( 27,141) (22,197) (33,184) ( 42,043)
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ( 117) ( 117) ( 134) ( 294)
--------------------------- -------------------------
Total other income (expense). . . . . . . . . . . . . . . . . . . . ( 20,552) (20,743) (23,935) ( 38,994)
--------------------------- -------------------------
Loss before income taxes. . . . . . . . . . . . . . . . . . . . . . ( 34,609) (63,764) (46,621) (126,611)
Income tax benefit (provision), net . . . . . . . . . . . . . . . . 12,055 ( 5) 16,84 ( 44)
--------------------------- -------------------------
Net loss. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ ( 22,554) $ (63,789) $ (29,775) $(126,655)
--------------------------- -------------------------
--------------------------- -------------------------
Loss attributable to common shares. . . . . . . . . . . . . . . . . $ ( 22,855) $ (64,090) $ (30,377) $(127,257)
--------------------------- -------------------------
--------------------------- -------------------------
Weighted-average common shares outstanding. . . . . . . . . . . . . 40,432 41,604 40,404 41,265
--------------------------- -------------------------
--------------------------- -------------------------
Loss per common and common equivalent share . . . . . . . . . . . . $ ( 0.57) $ ( 1.54) $ ( 0.75) $( 3.08)
--------------------------- -------------------------
--------------------------- -------------------------
See accompanying Notes to Condensed Consolidated Financial Statements
F-87
ECHOSTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
(In thousands)
ACCUMULATED
DEFICIT AND
SHARES OF UNREALIZED
COMMON COMMON ADDITIONAL HOLDING
STOCK PREFERRED COMMON STOCK PAID-IN GAINS
OUTSTANDING STOCK STOCK WARRANTS CAPITAL (LOSSES) TOTAL
------------------------------------------------------------------------------------
Balance, December 31, 1996. . . . . . . . . 40,920 $18,399 $409 $ 16 $158,113 $(115,740) $ 61,197
Issuance of Class A Common Stock for
acquisition of Direct Broadcasting
Satellite Corporation (unaudited) . . . 647 - 6 - 11,986 - 11,992
8% Series A Cumulative Preferred Stock
dividends (unaudited) . . . . . . . . . - 602 - - - (602) -
Exercise of Class A Common Stock options
(unaudited) . . . . . . . . . . . . . . 58 - 1 - 543 - 544
Exercise of Common Stock Warrants
unaudited). . . . . . . . . . . . . . . -- - -- (5) 5 - -
Employee incentives funded by issuance of
Class A Common Stock (unaudited). . . . 1 - -- - 54 - 54
Net loss (unaudited). . . . . . . . . . . - - - - - (126,655) (126,655)
------------------------------------------------------------------------------------
Balance, June 30, 1997 (unaudited). . . . . 41,626 $19,001 $416 $ 11 $170,701 $(242,997) $( 52,868)
------------------------------------------------------------------------------------
------------------------------------------------------------------------------------
See accompanying Notes to Condensed Consolidated Financial Statements
F-88
ECHOSTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
SIX MONTHS ENDED JUNE 30,
--------------------------
1996 1997
--------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $( 29,775) $( 126,655)
Adjustments to reconcile net loss to net cash flows from operating activities:
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,664 25,357
Amortization of subscriber acquisition costs. . . . . . . . . . . . . . . . . . . . . . . 92 61,418
Deferred income tax benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ( 11,534) ( 365)
Amortization of debt discount and deferred financing costs. . . . . . . . . . . . . . . . 24,530 38,731
Change in reserve for excess and obsolete inventory . . . . . . . . . . . . . . . . . . . 634 1,987
Change in long-term deferred signal carriage revenue. . . . . . . . . . . . . . . . . . . 4,163 1,417
Other, net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ( 666) 4,542
Changes in current assets and current liabilities, net. . . . . . . . . . . . . . . . . . . ( 17,163) ( 15,623)
--------------------------
Net cash flows used in operating activities . . . . . . . . . . . . . . . . . . . . . . . . . ( 20,055) ( 9,191)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of marketable investment securities . . . . . . . . . . . . . . . . . . . . . . . ( 44,782) ( 4,706)
Sales of marketable investment securities . . . . . . . . . . . . . . . . . . . . . . . . . 15,479 18,561
Purchases of restricted marketable investment securities. . . . . . . . . . . . . . . . . . ( 9,800) ( 1,645)
Purchases of property and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . ( 7,537) ( 19,129)
Offering proceeds and investment earnings placed in escrow. . . . . . . . . . . . . . . . . ( 181,778) ( 221,654)
Funds released from escrow accounts and restricted cash - other . . . . . . . . . . . . . . 71,545 72,975
Expenditures for satellite systems under construction . . . . . . . . . . . . . . . . . . . ( 73,932) ( 47,975)
Investment in convertible subordinated debentures from SSET . . . . . . . . . . . . . . . . -- ( 500)
Investment in convertible subordinated debentures from DBSI . . . . . . . . . . . . . . . . ( 3,000) --
Long-term notes receivable from DBSC. . . . . . . . . . . . . . . . . . . . . . . . . . . . ( 12,500) --
Expenditures for FCC authorizations . . . . . . . . . . . . . . . . . . . . . . . . . . . . ( 13,652) ( 129)
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- ( 478)
--------------------------
Net cash flows used in investing activities . . . . . . . . . . . . . . . . . . . . . . . . . (259,957) (204,680)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of 1996 Notes. . . . . . . . . . . . . . . . . . . . . . . . . . 337,043 --
Net proceeds from issuance of 1997 Notes. . . . . . . . . . . . . . . . . . . . . . . . . . -- 362,500
Repayments of mortgage indebtedness and notes payable . . . . . . . . . . . . . . . . . . . ( 1,082) ( 5,551)
Stock options exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 722 543
--------------------------
Net cash flows provided by financing activities . . . . . . . . . . . . . . . . . . . . . . . 336,683 357,492
--------------------------
Net increase in cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . 56,671 143,621
Cash and cash equivalents, beginning of period. . . . . . . . . . . . . . . . . . . . . . . . 21,754 39,231
--------------------------
Cash and cash equivalents, end of period. . . . . . . . . . . . . . . . . . . . . . . . . . . $ 78,425 $ 182,852
--------------------------
--------------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest, net of amounts capitalized. . . . . . . . . . . . . . . . . . . . . $ 7,953 $ 2,352
Cash paid for income taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- --
8% Series A Cumulative Preferred Stock dividends. . . . . . . . . . . . . . . . . . . . . . 602 602
Accrued satellite construction costs. . . . . . . . . . . . . . . . . . . . . . . . . . . . -- 32,950
Satellite launch payment for EchoStar II applied to EchoStar I launch . . . . . . . . . . . 15,000 --
Increase in note payable for deferred satellite construction payments for EchoStar I. . . . 3,167 --
Employee incentives funded by issuance of Class A Common Stock. . . . . . . . . . . . . . . 8 20
The purchase price of DBSC was allocated as follows in the related purchase accounting:
EchoStar III satellite under construction . . . . . . . . . . . . . . . . . . . . . . -- 51,321
FCC authorizations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- 12,500
Accounts payable and accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . -- 1,946
Notes payable to EchoStar and subsidiaries. . . . . . . . . . . . . . . . . . . . . . -- 46,000
Accrued interest due EchoStar and subsidiaries. . . . . . . . . . . . . . . . . . . . -- 3,382
Other notes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- 500
Equity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- 11,993
See accompanying Notes to Condensed Consolidated Financial Statements
F-89
ECHOSTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND BUSINESS ACTIVITIES
PRINCIPAL BUSINESS
EchoStar Communications Corporation ("ECC"), together with its subsidiaries
("EchoStar" or the "Company"), is primarily engaged in the operation of a direct
broadcast satellite ("DBS") subscription television service (the "DISH
Network"), which commenced operations in March 1996. The DISH Network currently
provides approximately 120 channels of digital video programming and over 30
channels of CD quality audio programming to consumers throughout the continental
United States. In addition to the DISH Network, EchoStar designs, manufactures,
distributes and installs satellite direct-to-home ("DTH") products, distributes
domestic DTH programming, and provides consumer financing of EchoStar's DISH
Network 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 590,000 subscribers to DISH Network programming as of June 30,
1997.
RECENT DEVELOPMENTS
1997 NOTES OFFERING
As more fully described in Note 7, on June 25, 1997, EchoStar DBS
Corporation ("DBS Corp"), a wholly-owned subsidiary of EchoStar, consummated an
offering (the "1997 Notes Offering") of 12 1/2% Senior Secured Notes due 2002
(the "1997 Notes"). The 1997 Notes Offering resulted in net proceeds to the
Company of approximately $362.5 million. Interest on the 1997 Notes is payable
semi-annually on January 1 and July 1 of each year, commencing January 1, 1998.
Approximately $109.0 million of the net proceeds of the 1997 Notes Offering were
placed in an escrow account to fund the first five semi-annual interest payments
(through January 1, 2000). The 1997 Notes were issued in a private placement
pursuant to Rule 144A of the Securities Act of 1933, as amended. The Company
agreed to exchange the privately issued notes for publicly registered notes and
on July 23, 1997 filed a registration statement on Form S-4 (the "Registration
Statement") with the Securities and Exchange Commission. Upon the effectiveness
of the Registration Statement, the Company will make an offer to exchange the
1997 Notes for publicly registered notes with substantially identical terms
(including principal amount, interest rate, maturity, security and ranking).
Prior to consummation of the 1997 Notes Offering, EchoStar contributed (the
"Contribution") all of the outstanding capital stock of its wholly-owned
subsidiary EchoStar Satellite Broadcasting Corporation ("ESBC") to DBS Corp. As
a result of the Contribution, ESBC is a wholly-owned subsidiary of DBS Corp.
NEWS CORPORATION LITIGATION
On February 24, 1997, EchoStar and The News Corporation Limited ("News")
announced an agreement (the "News Agreement") pursuant to which, among other
things, News agreed to acquire approximately 50% of the outstanding capital
stock of EchoStar. News also agreed to make available for use by EchoStar the
DBS permit for 28 frequencies at 110DEG. West Longitude ("WL") purchased by MCI
Communications Corporation ("MCI") for over $682 million at a Federal
Communications Commission ("FCC") auction. During late April 1997, substantial
disagreements arose between the parties regarding their obligations under the
News Agreement.
During May 1997, EchoStar initiated litigation alleging, among other
things, breach of contract, failure to act in good faith, and other causes of
action. News has denied all of EchoStar's material allegations and has asserted
numerous counterclaims against EchoStar and its Chairman and Chief Executive
Officer, Charles W. Ergen. While EchoStar is confident of its position and
believes it will ultimately prevail, the litigation process could continue for
many years and there can be no assurance concerning the outcome of the
litigation.
F-90
ECHOSTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
2. SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and Article
10 of Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring adjustments) considered necessary for a fair presentation
have been included. All significant intercompany accounts and transactions have
been eliminated in consolidation. Operating results for the three and six
months ended June 30, 1997 are not necessarily indicative of the results that
may be expected for the year ending December 31, 1997. For further information,
refer to the consolidated financial statements and footnotes thereto included in
the Company's Annual Report on Form 10-K for the year ended December 31, 1996.
Certain prior year amounts have been reclassified to conform with the current
year presentation.
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.
CASH AND CASH EQUIVALENTS
The Company considers all liquid investments purchased with original
maturities of 90 days or less to be cash equivalents. Cash equivalents as of
December 31, 1996 and June 30, 1997 principally consisted of money market funds,
corporate notes and commercial paper; such balances are stated at cost which
equates to market value.
INCOME TAXES
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes," requires that the tax benefit of net operating losses ("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. EchoStar has fully
reserved the 1997 additions to its deferred tax assets.
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 during
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.
3. RESTRICTED CASH AND MARKETABLE INVESTMENT SECURITIES
Restricted cash and marketable investment securities held in escrow
accounts, as reflected in the accompanying condensed consolidated balance
sheets, represent cash restricted by the indenture associated with the 1997
Notes and the remaining restricted cash proceeds from the 1996 Notes Offering,
plus investment earnings, less amounts expended to date. A portion of the
proceeds from the 1997 Notes Offering are held in two separate escrow accounts
(the "Interest Escrow" and the "Satellite Escrow") as required by the related
indenture. Restricted cash and marketable investment securities are 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 $5.7 million at
December 31, 1996 and June 30, 1997, respectively, which was restricted to
satisfy certain covenants in the 1994 Notes Indenture regarding launch insurance
for EchoStar II. In
F-91
ECHOSTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
addition, as of December 31, 1996, $15.0 million was held in escrow relating to
a non-performing manufacturer of DBS receivers (see Note 8). Also, 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. The $15.0 million and $10.0
million deposits were both released from these escrow accounts in May 1997.
4. INVENTORIES
Inventories consist of the following (in thousands):
DECEMBER 31, JUNE 30,
1996 1997
---------------------
(UNAUDITED)
EchoStar Receiver Systems . . . . . . . . . . . $ 32,799 $ 46,499
DBS receiver components . . . . . . . . . . . . 15,736 15,201
Consigned DBS receiver components . . . . . . . 23,525 2,681
Finished goods - International. . . . . . . . . 3,491 4,181
Finished goods - C-band . . . . . . . . . . . . 600 359
Spare parts and other . . . . . . . . . . . . . 2,279 1,771
Reserve for excess and obsolete inventory . . . ( 5,663) ( 7,649)
---------------------
$ 72,767 $ 63,043
---------------------
---------------------
5. PROPERTY AND EQUIPMENT
Property and equipment consist of the following (in thousands):
DECEMBER 31, JUNE 30,
LIFE 1996 1997
---------- ----------- ----------
(IN YEARS) (UNAUDITED)
EchoStar I . . . . . . . . . . . . . 12 $ 201,607 $ 201,607
EchoStar II. . . . . . . . . . . . . 12 228,694 228,694
Furniture, fixtures and equipment. . 2-12 72,945 82,083
Buildings and improvements . . . . . 7-40 26,035 27,488
Tooling and other. . . . . . . . . . 2 3,253 3,781
Land . . . . . . . . . . . . . . . . -- 2,295 2,317
Vehicles . . . . . . . . . . . . . . 7 1,323 1,334
Construction in progress . . . . . . -- 89,733 241,189
---------- ----------- ----------
Total property and equipment . . . . 625,885 788,493
Accumulated depreciation . . . . . . ( 35,264) ( 60,256)
---------- ----------- ----------
Property and equipment, net. . . . . $ 590,621 $ 728,237
---------- ----------- ----------
---------- ----------- ----------
F-92
ECHOSTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Construction in progress consists of the following (in thousands):
DECEMBER 31, JUNE 30,
1996 1997
-------------- -------------
(UNAUDITED)
Progress amounts for satellite construction, launch, launch insurance, and
capitalized interest:
EchoStar III. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $29,123 $151,570
EchoStar IV . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56,320 77,002
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,290 12,617
-------------- -------------
$89,733 $241,189
-------------- -------------
-------------- -------------
6. OTHER NONCURRENT ASSETS
Other noncurrent assets consist of the following (in thousands):
DECEMBER 31, JUNE 30,
1996 1997
-----------------------------
(UNAUDITED)
Notes receivable from DBSC, including accrued interest of $3,382
and $0, respectively. . . . . . . . . . . . . . . . . . . . . . . . . . . . $49,382 $ --
Deferred debt issuance costs . . . . . . . . . . . . . . . . . . . . . . . . . 21,284 33,619
SSET convertible subordinated debentures . . . . . . . . . . . . . . . . . . . 3,649 4,075
Investment in DBSC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,044 --
DBSI convertible subordinated debentures . . . . . . . . . . . . . . . . . . . 4,640 4,640
-----------------------------
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 827 1,341
$83,826 $43,675
-----------------------------
-----------------------------
In January 1997, EchoStar acquired the remaining 60% of Direct Broadcasting
Satellite Corporation ("DBSC"), a Delaware corporation, which it did not
previously own. DBSC's principal assets include an FCC conditional construction
permit and specific orbital slot assignments for certain DBS frequencies.
Through the date of the merger, EchoStar had advanced DBSC a total of $46.0
million to enable it to meet commitments under a satellite ("EchoStar III")
construction contract. 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. Upon consummation of the DBSC merger,
the notes receivable from DBSC and EchoStar's investment in DBSC were eliminated
in consolidation. Through June 30, 1997, EchoStar has issued approximately
647,000 shares of its Class A Common Stock (and expects to issue an additional
11,000 shares) to acquire the remaining 60% of DBSC which it did not previously
own.
7. 1997 NOTES
On June 25, 1997, DBS Corp completed the 1997 Notes Offering consisting of
$375.0 million aggregate principal amount of the 1997 Notes. The 1997 Notes
Offering resulted in net proceeds to DBS Corp of approximately $362.5 million
(after payment of underwriting discounts and other issuance costs aggregating
approximately $12.5 million). The 1997 Notes bear interest at a rate of 12
1/2%, computed semi-annually. Interest on the 1997 Notes will be payable in
cash semi-annually on January 1 and July 1 of each year, with the first interest
payment due January 1, 1998. Approximately $109.0 million of the net proceeds
of the 1997 Notes Offering were placed in the Interest Escrow account to fund
the first five semi-annual interest payments (through January 1, 2000).
Approximately $112.0 million of the net proceeds of the 1997 Notes Offering were
placed in the Satellite Escrow account to fund the construction launch and
insurance of EchoStar's fourth DBS satellite ("EchoStar IV"). The 1997 Notes
mature on July 1, 2002.
The 1997 Notes rank PARI PASSU in right of payment with all senior
indebtedness of DBS Corp. The 1997 Notes are guaranteed on a subordinated basis
by DBS Corp's parent, EchoStar, and, contingent upon the occurrence of certain
events, will be guaranteed by ESBC and Dish, Ltd. and certain other subsidiaries
of DBS Corp and EchoStar. The 1997 Notes are secured by liens on the capital
stock of DBS Corp, EchoStar IV, and certain other assets of DBS Corp and
EchoStar. Although the 1997 Notes are titled "Senior:" (i) DBS Corp has not
issued, and does not have any plans to issue, any significant indebtedness to
which the 1997 Notes would be senior; and (ii) the 1997 Notes are effectively
subordinated to all liabilities of ECC (except
F-93
ECHOSTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
liabilities to general creditors). In addition, the ability of Dish, Ltd. to
make distributions to DBS Corp is severely limited by the terms of an indenture
to which it is subject, and the cash flow generated by the assets and operations
of DBS Corp's subsidiaries will only be available to satisfy DBS Corp's
obligations on the 1997 Notes to the extent that such subsidiaries are able to
make distributions, directly or indirectly, to DBS Corp.
Except under certain circumstances requiring prepayment premiums, and in
other limited circumstances, the 1997 Notes are not redeemable at DBS Corp's
option prior to July 1, 2000. Thereafter, the 1997 Notes will be subject to
redemption, at the option of DBS Corp, in whole or in part, at redemption prices
decreasing from 106.25% during the year commencing July 1, 2000 to 100% on or
after July 1, 2002, together with accrued and unpaid interest thereon to the
redemption date.
The 1997 Notes Indenture contains restrictive covenants that, among other
things, impose limitations on the ability of DBS Corp 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 DBS Corp's subsidiaries; (vi) merge,
consolidate or sell assets; (vii) incur subordinated or junior debt; and (viii)
enter into transactions with affiliates. In addition, DBS Corp may pay
dividends on its equity securities only if: (1) no default is continuing under
the 1997 Notes Indenture; and (2) after giving effect to such dividend and the
incurrence of any indebtedness (the proceeds of which are used to finance the
dividend), DBS Corps's ratio of total indebtedness to cash flow (calculated in
accordance with the 1997 Notes Indenture) would not exceed 6.0 to 1.0.
Moreover, the aggregate amount of such dividends generally may not exceed the
sum of the difference of cumulative consolidated cash flow (calculated in
accordance with the 1997 Notes Indenture) minus 150% of consolidated interest
expense of DBS Corp (calculated in accordance with the 1997 Notes Indenture)
plus an amount equal to 100% of the aggregate net cash proceeds received by DBS
Corp and its subsidiaries from the issuance or sale of equity interests of DBS
Corp or EchoStar (other than equity interests sold to a subsidiary of DBS Corp
or EchoStar, since June 25, 1997).
In the event of a change of control, as defined in the 1997 Notes
Indenture, DBS Corp will be required to make an offer to repurchase all of the
1997 Notes at a purchase price equal to 101% of the aggregate principal amount
thereof, together with accrued and unpaid interest thereon, to the date of
repurchase.
8. COMMITMENTS AND CONTINGENCIES
PURCHASE COMMITMENTS
The Company has entered into agreements with various manufacturers to
purchase DBS satellite receivers and related components manufactured to its
specifications. As of June 30, 1997, remaining commitments total approximately
$141.7 million and the total of all outstanding purchase order commitments with
domestic and foreign suppliers was $148.1 million. All of the purchases related
to these commitments are expected to be made during 1997. The Company expects
to finance these purchases from unrestricted cash and additional cash flows
generated from sales of DISH Network programming and related DBS inventory.
EchoStar expects that its 1997 purchases of DBS satellite receivers and related
components will significantly exceed its existing contractual commitments. In
addition to the above, EchoStar will expend $192.6 million between June 30, 1997
and the first quarter of 1998 to complete the construction phase (including
applicable insurance) and launch of its third DBS satellite ("EchoStar III") and
EchoStar IV.
OTHER RISKS AND CONTINGENCIES
The Company is subject to various other legal proceedings and claims which
arise in the ordinary course of its business. In the opinion of management, the
amount of ultimate liability with respect to these actions will not materially
affect the financial position or results of operations of the Company.
F-94
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NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS OFFERING
OTHER THAN THOSE CONTAINED IN THIS AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY ECHOSTAR,
THE ISSUER OR THE INITIAL PURCHASERS. THIS DOES NOT CONSTITUTE AN OFFER TO SELL
OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES TO
WHICH IT RELATES, NOR DOES IT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF
AN OFFER TO BUY SUCH SECURITIES IN ANY JURISDICTION IN WHICH SUCH OFFER OR
SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER OR
SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL
TO MAKE SUCH AN OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS NOR ANY SALE
MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE
HAS BEEN NO CHANGE IN THE AFFAIRS OF ECHOSTAR OR THE ISSUER SINCE THE DATE
HEREOF OR THAT INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT
TO ITS DATE.
- -------------------------------------
TABLE OF CONTENTS
PAGE
Prospectus Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Use of Proceeds. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
The Exchange Offer . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
Capitalization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
Selected Financial Data. . . . . . . . . . . . . . . . . . . . . . . . . 43
Management's Discussion and Analysis of
Financial Condition and Results of
Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83
Certain Relationships and
Related Transactions . . . . . . . . . . . . . . . . . . . . . . . . . 88
Security Ownership of Certain Beneficial
Owners and Management. . . . . . . . . . . . . . . . . . . . . . . . . 89
Description of Certain Indebtedness. . . . . . . . . . . . . . . . . . . 91
Description of Exchange Notes. . . . . . . . . . . . . . . . . . . . . . 93
Certain U.S. Federal Income Tax
Considerations . . . . . . . . . . . . . . . . . . . . . . . . . . . . 129
Plan of Distribution . . . . . . . . . . . . . . . . . . . . . . . . . . 130
Notice to Investors. . . . . . . . . . . . . . . . . . . . . . . . . . . 131
Legal Matters. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 133
Independent Accountants. . . . . . . . . . . . . . . . . . . . . . . . . 133
Index to Financial Statements. . . . . . . . . . . . . . . . . . . . . . F-1
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PROSPECTUS
$375,000,000
ECHOSTAR DBS
CORPORATION
OFFER TO EXCHANGE $1,000 PRINCIPAL AMOUNT OF ITS
12 1/2% SENIOR SECURED NOTES DUE 2002 WHICH HAVE BEEN
REGISTERED UNDER THE SECURITIES ACT FOR EACH $1,000
PRINCIPAL AMOUNT OF ITS OUTSTANDING 12 1/2% SENIOR
SECURED NOTES DUE 2002.
THE EXCHANGE AGENT FOR THE EXCHANGE OFFER IS:
FIRST TRUST NATIONAL ASSOCIATION
BY FACSIMILE:
(612) 244-1537
CONFIRMATION BY TELEPHONE:
(612) 244-1197
BY MAIL/HAND DELIVERY/OVERNIGHT DELIVERY:
FIRST TRUST NATIONAL ASSOCIATION
180 EAST FIFTH STREET
ST. PAUL, MINNESOTA 55101
ATTN: PHYLLIS MEATH
SPECIALIZED FINANCE GROUP
, 1997
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PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Chapter 78.751(1) of the Nevada Revised Statutes allows EchoStar to
indemnify any person made or threatened to be made a party to any action
(except an action by or in the right of EchoStar, a "derivative action"), by
reason of the fact that he is or was a director, officer, employee or agent
of EchoStar, or is or was serving at the request of EchoStar as a director,
officer, employee or agent of another corporation, against expenses including
attorneys' fees, judgments, fines and amounts paid in settlement actually and
reasonable incurred by him in connection with the action, suit or proceeding
if he acted in a good faith manner which he reasonably believed to be in or
not opposed to the best interests of EchoStar, and, with respect to any
criminal proceeding, had no reasonable cause to believe that his conduct was
unlawful. Under Chapter 78.751(2), a similar standard of care applies to
derivative actions, except that indemnification is limited solely to expenses
(including attorneys' fees) incurred in connection with the defense or
settlement of the actin and court approval of the indemnification is required
where the person seeking indemnification has been found liable to EchoStar.
In addition, Chapter 78.751(5) allows EchoStar to advance payment of
indemnifiable expenses prior to final disposition of the proceeding in
question. Decisions as to the payment of indemnification are made by a
majority of the Board of Directors at a meeting at which a quorum of
disinterested directors is present, or by written opinion of special legal
counsel, or by the stockholders.
Provisions relating to liability and indemnification of officers and
directors of EchoStar for acts by such officers and directors are contained
in Article IX of the Amended and Restated Articles of Incorporation of
EchoStar, Exhibit 3.1(a) hereto and Article IX of EchoStar's Bylaws, Exhibit
3.2(a) hereto, which are incorporated herein by reference. These provisions
state, among other things, that, consistent with and to the extent allowable
under Nevada law, and upon the decision of a disinterested majority of
EchoStar's Board of Directors, or a written opinion of outside legal counsel,
or EchoStar's stockholders: (1) EchoStar shall indemnify any person who was
or is a party or is threatened to be made a party to any threatened, pending
or completed action, suit or proceeding, whether civil, criminal,
administrative or investigative and whether formal or informal (other than an
action by or in the right of EchoStar) by reason of the fact that he is or
was a director, officer, employee, fiduciary or agent of EchoStar, or is or
was serving at the request of EchoStar as a director, officer, employee,
fiduciary of agent of another corporation, partnership, joint venture, trust,
employee benefit plan or other enterprise, against expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement actually
and reasonably incurred by him in connection with such action, suit or
proceeding, if he conducted himself in good faith and in a manner he
reasonably believed to be in or not opposed to the best interest of EchoStar,
and, with respect to any criminal action or proceeding, had no reasonable
cause to believe his conduct was unlawful; and (2) EchoStar shall indemnify
any person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action or suit by or in the right of
EchoStar to procure a judgment in its favor by reason of the fact that he is
or was a director, officer, employee, fiduciary or agent of EchoStar, or is
or was serving at the request of EchoStar as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust, employee
benefit plan or other enterprise against expenses (including attorneys' fees)
actually and reasonably incurred by him in connection with the defense or
settlement of such action or suit if he acted in good faith and in a manner
he reasonably believed to be in or not opposed to the best interests of
EchoStar and except that no indemnification shall be made in respect of any
claim, issue or matter as to which such person shall have been adjudged to be
liable for negligence or misconduct in the performance of his duty to
EchoStar unless and only to the extent that the court in which such action or
suit was brought shall determine upon application that despite the
adjudication of liability but in view of all circumstances of the case, such
person is fairly and reasonably entitled to indemnity for such expenses which
such court shall deem proper.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
EXHIBIT NO. DESCRIPTION
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 Dish, Ltd. (formerly EchoStar
Communications Corporation, a Nevada corporation formed in December
1993) ("Dish") (incorporated by reference to Exhibit 2.2 to the
Registration Statement on Form S-1 of EchoStar, 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
of EchoStar, Registration No. 333-03584).
2.3* Merger Trigger Agreement entered into as of December 21, 1995 by
and among EchoStar, MergerCo and DBSC (incorporated by reference to
Exhibit 2.4 to the Registration Statement on Form S-4 of EchoStar,
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 of EchoStar, Registration No. 33-91276).
3.1(b)* Bylaws of EchoStar (incorporated by reference to Exhibit 3.1(b) to
the Registration Statement on Form S-1 of EchoStar, Registration
No. 33-91276).
3.2(a)* Articles of Incorporation of EchoStar Satellite Broadcasting
Corporation (formerly EchoStar Bridge Corporation, a Colorado
corporation) ("ESBC") (incorporated by reference to Exhibit 3.1(e)
to the Registration Statement on Form S-1 of ESBC, Registration No.
333-3980).
3.2(b)* Bylaws of ESBC (incorporated by reference to Exhibit 3.1(f) to the
Registration Statement on Form S-1 of ESBC, Registration No. 333-
3980).
3.3(a)* Amended and Restated Articles of Incorporation of Dish
(incorporated by reference to Exhibit 3.1(a) to the Registration
Statement on Form S-1 of Dish, Registration No. 33-76450).
3.3(b)* Bylaws of Dish (incorporated by reference to Exhibit 3.1(b) to the
Registration Statement on Form S-1 of Dish, Registration No. 33-
76450).
3.4(a)+ Articles of Incorporation of EchoStar DBS Corporation, a Colorado
corporation ("EDBS").
3.4(b)+ Bylaws of EDBS.
4.1* Indenture of Trust between Dish 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,
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, Registration No. 33-76450).
4.3* Security Agreement in favor of First Trust, as Trustee under the
Indenture filed as Exhibit 4.1 hereto (incorporated by reference to
Exhibit 4.3 to the Registration Statement on Form S-1 of Dish,
Registration No. 33-76450).
4.4* Escrow and Disbursement Agreement between Dish and First Trust
(incorporated by reference to Exhibit 4.4 to the Registration
Statement on Form S-1 of Dish, Registration No. 33-76450).
4.5* Pledge Agreement in favor of First Trust, as Trustee under the
Indenture filed as Exhibit 4.1 hereto (incorporated by reference to
Exhibit 4.5 to the Registration Statement on Form S-1 of Dish,
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, 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 filed as Exhibit 4.9 hereto (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 filed as Exhibit 4.9 hereto (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 filed as Exhibit 4.9 hereto (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 ESBC, EchoStar, Dish,
MergerCo 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).
4.15+ Registration Rights Agreement, dated as of June 25, 1997, by and
among EDBS, EchoStar, ESBC, Dish, Donaldson, Lufkin & Jenrette
Securities Corporation and Lehman Brothers Inc.
4.16 Indenture of Trust, dated as of June 25, 1997, between EDBS and
First Trust National Association ("First Trust"), as Trustee.
5.1+ Opinion of Baker & Hostetler LLP regarding legality of securities
being registered.
10.1(a)* Satellite Construction Contract, dated as of February 6, 1990,
between EchoStar Satellite Corporation ("ESC") and Martin Marietta
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, 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, 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, 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, Registration No. 33-76450).
10.1(e)* Fourth Amendment to the Satellite Construction Contract, dated as
of August 19, 1993, between ESC and Martin Marietta (incorporated
by reference to Exhibit 10.1(e)to the Registration Statement on
Form S-1 of Dish, Registration No. 33-76450).
10.1(f)* Form of Fifth Amendment to the Satellite Construction Contract,
between ESC and Martin Marietta (incorporated by reference to
Exhibit 10.1(f) to the Registration Statement on Form S-1 of Dish,
Registration No. 33-81234).
10.1(g)* Sixth Amendment to the Satellite Construction Contract, dated as
of June 7, 1994, between ESC and Martin Marietta (incorporated by
reference to Exhibit 10.1(g) to the Registration Statement on Form
S-1 of Dish, 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 Quarterly Report on Form 10-Q
of EchoStar for the quarter ended 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, Registration No. 33-
76450).
10.3* Master Purchase and License Agreement, dated as of June 18, 1986,
between Echosphere Corporation 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, Registration No. 33-76450).
10.4* Merchandising Financing Agreement, dated as of June 29, 1989,
between Echo Acceptance Corporation and Household Retail Services,
Inc. (incorporated by reference to Exhibit 10.6 to the Registration
Statement on Form S-1 of Dish, 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, 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, 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, Registration No. 33-81234).
10.8* Dish 1994 Stock Incentive Plan (incorporated by reference to
Exhibit 10.11 to the Registration Statement on Form S-1 of Dish,
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, Registration No. 33-
81234).
10.10* Manufacturing Agreement, dated as of March 22, 1995, between HTS
and SCI Technology, Inc. (incorporated by reference to Exhibit
10.12 to the Registration Statement on Form S-1 of Dish, 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).
10.12* Statement of Work, dated January 31, 1995 from ESC to Divicom Inc.
(incorporated by reference to Exhibit 10.14 to the Registration
Statement on Form S-1 of EchoStar, Registration No. 33-91276).
10.13* Launch Services Contract, dated as of June 2, 1995, by and between
EchoStar Space Corporation and Lockheed-Khrunichev-Energia
International, Inc. (incorporated by reference to Exhibit 10.15 to
the Registration Statement on Form S-1 of EchoStar, Registration
No. 33-91276).
10.14* EchoStar 1995 Stock Incentive Plan (incorporated by reference to
Exhibit 10.16 to the Registration Statement on Form S-1 of EchoStar,
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
(incorporated by reference to Exhibit 10.17(a) to the Quarterly
Report on Form 10-Q of EchoStar for the quarter ended 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
(incorporated by reference to Exhibit 10.15 to the Registration
Statement of Form S-4 of EchoStar, 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
(incorporated by reference to Exhibit 10.17(b) to the Quarterly
Report on Form 10-Q of EchoStar for the quarter ended June 30, 1996,
Commission File No. 0-26176).
10.16* Satellite Construction Contract, dated as of July 18, 1996, between
EDBS and Lockheed Martin Corporation (incorporated by reference to
Exhibit 10.18 to the Quarterly Report on Form 10-Q of EchoStar for
the quarter ended June 30, 1996, Commission File No. 0-26176).
10.17* Confidential Amendment to Satellite Construction Contract between
DBSC and Martin Marietta,
dated as of May 31, 1995 (incorporated by reference to Exhibit
10.14 to the Registration Statement of Form S-4 of EchoStar,
Registration No. 333-03584).
10.18* Right and License Agreement by and among HTS and Asia Broadcasting
and Communications Network, Ltd., dated December 19, 1996
(incorporated by reference to Exhibit 10.18 to the Annual Report on
Form 10-K of EchoStar for the year ended December 31, 1996, as
amended, Commission file No. 0-26176).
10.19* Agreement between HTS, ESC and ExpressVu Inc., dated January 8,
1997, as amended (incorporated by reference to Exhibit 10.18 to the
Annual Report on Form 10-K of EchoStar for the year ended December
31, 1996, as amended, Commission file No. 0-26176).
11 Computation of Earnings Per Share.
12 Computation of Ratios.
21* Subsidiaries of EchoStar Communications Corporation (incorporated by
reference to Exhibit 10.18 to the Annual Report on Form 10-K of
EchoStar for the year ended December 31, 1996, as amended,
Commission file No. 0-26176).
23.1 Consent of Arthur Andersen LLP.
23.2+ Consent of Baker & Hostetler LLP (included in Exhibit 5.1)
24.1* Powers of Attorney authorizing signature of Charles W. Ergen, R.
Scott Zimmer, James DeFranco, Alan M. Angelich and Raymond L.
Friedlob (incorporated by reference to Exhibit 24.1 to the Annual
Report on Form 10-K of EchoStar for the year ended December 31,
1996, as amended, Commission file No. 0-26176).
24.2+ Power of Attorney of EchoStar and all affiliated entities.
25.1+ Statement of Eligibility on Form T-1 under the Trust Indenture Act
of 1939 of First Trust National Association, as Trustee of the
Indenture, relating to the 12 1/2% Senior Secured Notes due 2002.
99.1 Form of Letter of Transmittal
99.2+ Form of Notice of Guaranteed Delivery.
99.3+ Form of Letter to Securities Dealers, Commercial banks, Trust
Companies and Other Nominees.
99.4+ Form of Letter to Clients.
99.5+ Guidelines for Certification of Taxpayer Identification Number on
Form W-9.
________________________________
* Incorporated by reference.
** Constitutes a management contract or compensatory plan or arrangement.
+ Previously filed.
ITEM 22. UNDERTAKINGS
(a) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors,
officers and controlling persons of the Registrant pursuant
to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore,
unenforceable. In the event that a claim for
indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a
director, officer or controlling person of the Registrant in
the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in
connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to
a court of appropriate jurisdiction the question of whether
such indemnification by it is against public policy as
expressed in the Act and will be governed by the final
adjudication of such issue.
(b) The undersigned Registrant hereby undertakes to respond to
requests for information that is incorporated by reference
into the Prospectus pursuant to items 4, 10(b), 11, or 13 of
this Form, within one business day of receipt of such
request, and to send the incorporating documents by first
class mail or other equally prompt means. This includes
information contained in the documents filed subsequent to
the effective date of the registration statement through the
date of responding to the request.
(c) The undersigned Registrant hereby undertakes to supply by
means of a post-effective amendment all information concerning
a transaction, and the company being acquired involved
therein, that was not the subject of and included in the
registration statement when it became effective
(d) The Company undertakes to update the Registration Statement
with post-effective amendments to reflect: (i) any prospectus
required by Section 10(a)(3) of the Securities Act; (ii)
facts or events arising after the effective date of the
Registration Statement which constitute a fundamental
change; (iii) any material information with respect to the
plan of distribution not disclosed previously in the
Registration Statement. The Company also undertakes to
remove from registration by means of a post-effective
amendment any of the securities being registered which
remain unsold at the termination of the offering.
SIGNATURES
Pursuant to the requirements of Securities Act of 1933, as amended, the
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized in the City of Englewood,
State of Colorado, as of September 15, 1997
ECHOSTAR DBS CORPORATION
By: /s/STEVEN B. SCHAVER
---------------------------------------------------
Steven B. Schaver
Chief Operating Officer and Chief Financial Officer
Date: September 15, 1997
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed below by the following persons in
the capacities and as of the dates indicated:
SIGNATURE TITLE DATE
- --------- ----- ----
* Chief Executive Officer and Director September 15, 1997
- -----------------------
Charles W. Ergen (PRINCIPAL EXECUTIVE OFFICER)
/s/ STEVEN B. SCHAVER Chief Operating Officer and September 15, 1997
- -----------------------
Steven B. Schaver Chief Financial Officer
(PRINCIPAL FINANCIAL OFFICER)
/s/ JOHN R. HAGER Treasurer and Controller September 15, 1997
- -----------------------
John R. Hager (PRINCIPAL ACCOUNTING OFFICER)
* Director September 15, 1997
- -----------------------
James DeFranco
* Director September 15, 1997
- -----------------------
David K. Moskowitz
* By: /s/ STEVEN B. SCHAVER
------------------------------
Steven B. Schaver
Attorney-in-Fact
SIGNATURES
Pursuant to the requirements of Securities Act of 1933, as amended, the
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized in the City of Englewood,
State of Colorado, as of September 15, 1997
ECHOSTAR COMMUNICATIONS CORPORATION
By: /s/ STEVEN B. SCHAVER
---------------------------------------------------
Steven B. Schaver
Chief Operating Officer and Chief Financial Officer
Date: September 15, 1997
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed below by the following persons in
the capacities and as of the dates indicated:
SIGNATURE TITLE DATE
- --------- ----- ----
