AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 10, 1997
REGISTRATION NO. 333.
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM S-3
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
--------------------------
ECHOSTAR COMMUNICATIONS CORPORATION
(Exact name of registrant as specified in its charter)
NEVADA 88-0336997
(State of Registrant's Incorporation) (I.R.S. Employer Identification No.)
5064
(Registrant's Standard Industrial Classification Code Number)
90 INVERNESS CIRCLE EAST DAVID K. MOSKOWITZ, ESQ.
ENGLEWOOD, COLORADO 80112 SENIOR VICE PRESIDENT, GENERAL COUNSEL AND
(303) 799-8222 SECRETARY
(Address, Including Zip Code, and ECHOSTAR COMMUNICATIONS CORPORATION
Telephone Number, including Area Code, 90 INVERNESS CIRCLE EAST
Of Registrant's Principal Executive Office) ENGLEWOOD, COLORADO 80112
(303) 799-8222
(Name, Address, Including Zip Code, and
Telephone Number of Agent for Service)
WITH COPIES TO:
RAYMOND L FRIEDLOB, ESQ. WILLIAM F. SCHWITTER, ESQ.
HERRICK K. LIDSTONE, JR., ESQ. PAUL, HASTINGS, JANOFSKY & WALKER
FRIEDLOB SANDERSON RASKIN PAULSON & TOURTILLOTT, LLP
LLC 399 PARK AVENUE
1400 GLENARM PLACE, #300 NEW YORK, NEW YORK 10022-4697
DENVER, COLORADO 80202 (212) 318-6000
(303) 571-1400
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this registration statement. If the only
securities being registered on this Form are being offered pursuant to dividend
or interest reinvestment plans, please check the following box. / /
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. /X/
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
CALCULATION OF REGISTRATION FEE
,
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE PER AGGREGATE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED UNIT PRICE REGISTRATION FEE
Common Stock.......................... 5,750,000 $24.00 $138,000,000 $41,819
Series C Preferred Stock*............. 2,300,000 $50.00 $115,000,000 $34,848
TOTAL................................. $76,667
* Estimated. This includes an indeterminate number of shares of common stock
issuable as dividends on, and upon conversion of the Series C Preferred
Stock pursuant to Rule 457(o). No filing fee is required pursuant to Rule
457(i). This also includes an indeterminate number of shares of Class A
Common Stock deliverable at the Registrant's option from time to time in the
future in exchange for funds to be held in a Deposit Account on behalf of
the purchasers of the Series C Preferred Stock. This also registers
interests in the Deposit Account to the extent such interests are required
to be registered.
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INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED OCTOBER , 1997
PROSPECTUS
, 1997
2,000,000 SHARES
[LOGO]
ECHOSTAR COMMUNICATIONS CORPORATION
% SERIES C CUMULATIVE CONVERTIBLE PREFERRED STOCK
EchoStar Communications Corporation, a Nevada corporation ("EchoStar" or the
"Company"), is offering (the "Preferred Offering") 2,000,000 shares of % Series
C Cumulative Convertible Preferred Stock (the "Preferred Stock"), having a
liquidation preference of $50 per share (the "Liquidation Preference").
Simultaneously with the closing of the Preferred Offering, the purchasers of
the Preferred Stock will deposit approximately $ million into an account (the
"Deposit Account"), and will be entitiled to a quarterly cash payment from the
Deposit Account in an amount equal to $ per share of Preferred Stock (the
"Quarterly Return Amount"), commencing , 1998 and continuing until
, 1999. After such date, dividends will begin to accrue on the Preferred
Stock. EchoStar may, prior to the date on which any Quarterly Return Amount
would otherwise be payable, deliver notice instructing the deposit agent (i) to
purchase from EchoStar, for transfer to each holder of Preferred Stock, in lieu
of the Quarterly Return Amount, that number of whole shares of Class A Common
Stock (the "Class A Common Stock") determined by dividing the Quarterly Return
Amount by 95% of the Market Value (as defined) of the Class A Common Stock as of
the date of such notice or (ii) defer delivery of the Quarterly Return Amount to
holders of Preferred Stock on such quarterly payment date until the next
quarterly payment date or any subsequent payment date. However, no later than
, 1999 (the "Deposit Expiration Date"), any amounts remaining in the
Deposit Account, as of such date, or which have previously been deferred, will
be (i) paid to the holders of the Preferred Stock or (ii) used to purchase from
EchoStar for transfer to each holder of Preferred Stock that number of whole
shares of Class A Common Stock determined by dividing the balance remainng in
the Deposit Account by 95% of the Market Value of the shares of Class A Common
Stock as of the Deposit Expiration Date. See "Prospectus Summary--The
Offering--Deposit Account." For a discussion of the Federal taxation treatment
of the Deposit Account, and payments therefrom, see "Certain Federal Income Tax
Consequences."
Dividends on the Preferred Stock will accrue from , 1999, and
holders of the Preferred Stock will be entitled to receive cumulative dividends
at an annual rate of % of the Liquidation Preference, payable quarterly in
arrears, commencing , 2000. Dividends may, at the option of EchoStar, be
paid in cash, by delivery of fully paid and nonassessable shares of Class A
Common Stock, or a combination thereof.
The Preferred Stock is convertible at any time, unless previously redeemed,
at the option of the holder thereof, into fully paid and nonassessable shares of
Class A Common Stock at the Conversion Price (as defined), subject to adjustment
under certain circumstances. On October 9, 1997, the closing price of the Class
A Common Stock (symbol "DISH") on the Nasdaq National Market was $23 1/8 per
share. Prior to this Preferred Offering, there has been no trading market for
the Preferred Stock.
The Preferred Stock is redeemable at any time on or after , 2000, in
whole or in part, at the option of EchoStar, in cash, by delivery of fully paid
and nonassessable shares of Class A Common Stock, or a combination thereof,
initially at a price of $ per share and thereafter at prices declining to
$ per share on or after , 2004, plus in each case all accumulated and
unpaid dividends to the redemption date. Upon any Change of Control (as
defined), holders of Preferred Stock will, in the event that the Market Value at
such time is less than the Conversion Price, have a one time option to convert
all of their outstanding shares into shares of Class A Common Stock at an
adjusted conversion price equal to the greater of (i) the Market Value as of the
Change of Control Date (as defined) and (ii) 66.67% of the Market Value as of
the date of this Prospectus. In lieu of issuing the shares of Class A Common
Stock issuable upon conversion in the event of a Change of Control, EchoStar
may, at its option, make a cash payment equal to the Market Value of such Class
A Common Stock otherwise issuable.
Simultaneously with the Preferred Offering, EchoStar is registering shares
of Class A Common Stock, initially issuable upon conversion of the Preferred
Stock, plus such indeterminate number of additional shares as may become
issuable upon conversion of the Preferred Stock as a result of adjustments of
the Conversion Price or upon redemption payments and dividend payments made on
the Preferred Stock by delivery of shares of Class A Common Stock in accordance
with the terms of the Preferred Stock. Application is being made to list the
shares of Preferred Stock on the Nasdaq National Market.
The Company is also concurrently offering, by means of a separate
prospectus, 5,000,000 shares of Class A Common Stock (the "Common Offering").
The Preferred Offering and the Common Offering are collectively referred to
herein as the "Offerings." The Preferred Offering is not conditioned on
consummation of the Common Offering and the Common Offering is not conditioned
on consummation of the Preferred Offering.
SEE "RISK FACTORS" BEGINNING ON PAGE 10 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE SECURITIES
OFFERED HEREBY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION (THE "COMMISSION") OR ANY STATE SECURITIES COMMISSION NOR
HAS THE 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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UNDERWRITING PROCEEDS
PRICE TO DISCOUNTS AND TO THE
THE PUBLIC COMMISSIONS (1) COMPANY (2)
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Per Share................................. $ $ $
Total (3)................................. $ $ $
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(1) ECHOSTAR HAS AGREED TO INDEMNIFY THE UNDERWRITERS (AS DEFINED) AGAINST
CERTAIN LIABILITIES, INCLUDING LIABILITIES UNDER THE SECURITIES ACT OF 1933,
AS AMENDED (THE "SECURITIES ACT").
(2) BEFORE DEDUCTING EXPENSES OF THE OFFERING PAYABLE BY ECHOSTAR, ESTIMATED TO
BE $ .
(3) ECHOSTAR HAS GRANTED THE UNDERWRITERS AN OPTION, EXERCISABLE WITHIN 30 DAYS
OF THE DATE HEREOF, TO PURCHASE UP TO 300,000 ADDITIONAL SHARES OF PREFERRED
STOCK AT THE PRICE TO THE PUBLIC SHOWN ABOVE. IF THE OPTION IS EXERCISED IN
FULL, THE TOTAL PRICE TO THE PUBLIC, UNDERWRITING DISCOUNTS AND COMMISSIONS
AND PROCEEDS TO THE COMPANY WILL BE $ , $ AND $ ,
RESPECTIVELY. SEE "UNDERWRITING."
The Preferred Stock is offered by the several underwriters (the
"Underwriters"), subject to prior sale, when, as and if issued to and accepted
by the Underwriters and subject to certain conditions, including the right of
the Underwriters to reject any order in whole or in part. It is expected that
delivery of the Preferred Stock will be made through the facilities of The
Depository Trust Company ("DTC") against payment therefor in immediately
available funds in New York, New York on or about October , 1997.
DONALDSON, LUFKIN & JENRETTE LEHMAN BROTHERS
SECURITIES CORPORATION
CERTAIN PERSONS PARTICPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE PREFERRED STOCK.
SPECIFICALLY, THE UNDERWRITERS MAY OVER-ALLOT IN CONNECTION WITH THIS OFFERING,
AND MAY BID FOR, AND PURCHASE, SHARES OF THE PREFERRED STOCK IN THE OPEN MARKET.
FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
i
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. AS USED IN THIS PROSPECTUS,
UNLESS THE CONTEXT OTHERWISE REQUIRES, "ECHOSTAR" OR THE "COMPANY" REFERS TO
ECHOSTAR COMMUNICATIONS CORPORATION, A NEVADA CORPORATION, THE CLASS A COMMON
STOCK OF WHICH IS QUOTED ON THE NASDAQ NATIONAL MARKET UNDER THE SYMBOL "DISH"
OR, IF THE CONTEXT REQUIRES, TO ECHOSTAR TOGETHER WITH ITS SUBSIDIARIES.
THE COMPANY
EchoStar is a leading provider of direct broadcast satellite ("DBS")
programming services in the United States. The Company commenced its DISH
Network-SM- DBS service (the "DISH Network") 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, and launched
its third satellite ("EchoStar III") in October 1997. Since December 31, 1996,
EchoStar has increased its DISH Network subscriber base from 350,000 to
approximately 820,000 subscribers as of September 30, 1997. During the third
quarter of 1997, EchoStar believes that it captured approximately 40% of all new
DBS satellite subscribers in the U.S. Average monthly programming revenue during
1997 has been approximately $39 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 September 30,
1997, approximately 5.6 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 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
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 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 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
EchoStar'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.
1
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 launched EchoStar III on
October 5, 1997, and expects to launch its fourth satellite ("EchoStar IV")
during the first quarter of 1998. EchoStar III, which will serve the eastern
half of the U.S. from 61.5 DEG. West Longitude ("WL"), and EchoStar IV,
which is expected to serve the western half of the U.S. from 148 DEG. WL,
should enable the Company 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/or congressional or
regulatory actions necessary to extend and clarify the scope of the
statutory compulsory license to cover local satellite retransmission of
network-affiliated station signals) and to provide subscribers with
additional sports, foreign language, cultural, business, educational and
other niche programming. EchoStar III and EchoStar IV will also provide the
Company the capacity to offer subscribers high definition television
("HDTV") and popular Internet and other computer data at high transmission
speeds. By expanding its 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.
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 under the
JVC and DISH Network brand names. All consumers who purchase JVC branded
satellite receiver systems will subscribe to DISH Network programming. In
addition, on September 15, 1997, EchoStar announced that Sears, Roebuck and
Co. ("Sears") will begin to carry JVC branded EchoStar Receiver Systems.
Beginning in October 1997, JVC branded EchoStar Receiver Systems are now
available in more than 800 full-line, mall-based Sears stores.
PROVIDE ATTRACTIVELY PRICED PROGRAMMING AND SYSTEMS. The Company'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 are located at 90 Inverness Circle East,
Englewood, Colorado 80112-5300, and its telephone number is (303) 799-8222.
2
RECENT DEVELOPMENTS
LAUNCH OF ECHOSTAR III
The Company launched EchoStar III on October 5, 1997, from Cape Canaveral
Air Station, Florida. EchoStar III, which will serve the eastern half of the
U.S. from 61.5 DEG. WL, should enable the Company to retransmit local broadcast
signals in certain U.S. television markets (assuming receipt of all required
retransmission consents and copyright licenses and/or congressional or
regulatory actions necessary to extend and clarify the scope of the statutory
compulsory license to cover local satellite retransmission of network-affiliated
station signals) and to provide subscribers with additional sports, foreign
language, cultural, business, educational and other niche programming. EchoStar
III will also provide the Company the capacity to offer subscribers HDTV and
popular Internet and other computer data at high transmission speeds. Although
all tests to date have been successful, EchoStar III has not yet achieved
geostationary orbit. The ultimate success of the launch of EchoStar III will not
be determinable until up to 60 days after its October 5 launch date.
SEARS TO CARRY DISH NETWORK PRODUCTS
On September 15, 1997, EchoStar announced that Sears will begin to carry JVC
branded EchoStar Receiver Systems. Beginning in October 1997, JVC branded
EchoStar Receiver Systems are now available in more than 800 full-line,
mall-based Sears stores, creating a nationwide retail distribution channel for
such DISH compatible systems. EchoStar believes, but can give no assurance, that
this additional distribution channel will further enhance EchoStar's ability to
attract subscribers to the DISH Network.
SERIES B SENIOR REDEEMABLE EXCHANGEABLE PREFERRED OFFERING
On October 2, 1997, EchoStar consummated an offering (the "Series B
Preferred Offering") of 12 1/8% Series B Senior Redeemable Exchangeable
Preferred Stock due 2004, (the "Series B Preferred Stock"). The Series B
Preferred Offering resulted in net proceeds to EchoStar of approximately $193.0
million. The Series B Preferred Stock was issued in a private placement pursuant
to Rule 144A of the Securities Act. EchoStar presently intends to use the net
proceeds of the Series B Preferred Offering to fund subscriber acquisition and
marketing expenses and for other general corporate purposes.
3
THE OFFERING
Securities Offered................ 2,000,000 shares of EchoStar's % Series C Cumulative
Convertible Preferred Stock (the "Preferred Stock").
Additionally, EchoStar has granted the Underwriters an
option for 30 days to purchase up to an additional
300,000 shares of Preferred Stock at the initial
offering price solely to cover over-allotments, if any.
Issuer............................ EchoStar Communications Corporation, a Nevada
corporation.
Liquidation Preference............ $50 per share.
Deposit Account................... Simultaneously with the closing of the Preferred
Offering, the purchasers of the Preferred Stock will
deposit approximately $ million into an account (the
"Deposit Account"), and will be entitled to a quarterly
cash payment from the Deposit Account in an amount equal
to $ per share of Preferred Stock (the "Quarterly
Return Amount"), commencing , 1998 and
continuing until , 1999. After such date,
dividends will begin to accrue on the Preferred Stock.
EchoStar may, prior to the date on which any Quarterly
Return Amount would otherwise be payable, deliver notice
instructing the deposit agent (i) to purchase from
EchoStar, for transfer to each holder of Preferred
Stock, in lieu of the Quarterly Return Amount, that
number of whole shares of Class A Common Stock
determined by dividing the Quarterly Return Amount by
95% of the Market Value of the Class A Common Stock as
of the date of such notice or (ii) defer delivery of the
Quarterly Return Amount to holders of Preferred Stock on
such quarterly payment date until the next quarterly
payment date or any subsequent payment date. However, no
later than , 1999 (the "Deposit Expiration
Date"), any amounts remaining in the Deposit Account, as
of such date, or which have previously been deferred,
will be (i) paid to the holders of the Preferred Stock
or (ii) used to purchase from EchoStar for transfer to
each holder of Preferred Stock that number of whole
shares of Class A Common Stock determined by dividing
the balance remaining in the Deposit Account by 95% of
the Market Value of the shares of Class A Common Stock
as of the Deposit Expiration Date.
Dividends......................... Cumulative annual dividends of % of the Liquidation
Preference per share, payable quarterly out of assets
legally available therefor on ,
, , and of each year,
commencing , 2000, when, as and if declared
by the Board of Directors. Dividends will accrue from
, 1999, and as a result EchoStar will not
make any dividend payments on shares of Preferred Stock
until , 2000. Dividends, to the extent declared
by EchoStar's Board, may, at the option of EchoStar,
4
be paid in cash, by delivery of fully paid and
nonassessable shares of Class A Common Stock or a
combination thereof.
Conversion Rights................. Each share of Preferred Stock may be converted at any
time at the option of the holder into such number of
fully paid and nonassessable shares of Class A Common
Stock as is equal to the Liquidation Preference divided
by an initial conversion price of $ (the "Conversion
Price"). The Conversion Price is subject to adjustment
upon the occurrence of certain events.
Optional Redemption............... The Preferred Stock may not be redeemed prior to
, 2000. On or after , 2000, the
Preferred Stock may be redeemed, in whole or in part, at
the option of EchoStar, in cash, by delivery of fully
paid and nonassessable shares of Class A Common Stock or
a combination thereof, initially at a redemption price
of $ and thereafter at prices declining to $
per share, plus in each case all accumulated and unpaid
dividends to the redemption date.
Change of Control................. Upon any Change of Control (as defined), each holder of
Preferred Stock shall, in the event that the Market
Value (as defined) at such time is less than the
Conversion Price, have a one-time option to convert such
holder's shares of Preferred Stock into shares of Class
A Common Stock at a conversion price equal to the
greater of (i) Market Value (as defined) ending on the
date on which a Change of Control event occurs and (ii)
66.67% of the Market Value as of the date of this
Prospectus. In lieu of issuing the shares of Class A
Common Stock issuable upon conversion in the event of a
Change of Control, EchoStar may, at its option, make a
cash payment equal to the Market Value of the shares of
Class A Common Stock otherwise issuable.
Ranking........................... The Preferred Stock will rank senior to the Company's
common stock and senior to or PARI PASSU with other
existing and future offerings of preferred stock.
Voting Rights..................... Except as required by law, the holders of Preferred
Stock will have no voting rights unless dividends
payable on the Preferred Stock are in arrears for six
quarterly periods, in which case the holders of the
Preferred Stock voting separately as a class with the
shares of any other preferred stock or preference
securities having similar voting rights, will be
entitled at the next regular or special meeting of
stockholders of EchoStar to elect two directors of
EchoStar (such voting rights will continue until such
time as the dividend arrearage on the Preferred Stock
has been paid in full). The affirmative vote or consent
of holders of at least 66 2/3% of the outstanding
Preferred Stock will be required for the issuance of any
class or series of stock (or security convertible into
stock) of EchoStar ranking senior to or PARI PASSU with
the Preferred Stock as to dividends or liquidation
rights (other than additional shares of Series B
Preferred Stock
5
or certain PARI PASSU securities with an aggregate
liquidation preference not to exceed $100 million) and
for amendments to EchoStar's Articles of Incorporation
that would affect adversely the rights of holders of the
Preferred Stock. See "Description of the Preferred
Stock--Voting Rights."
Common Stock...................... The Class A Common Stock is traded on the Nasdaq
National Market under the symbol "DISH." On October 7,
1997, EchoStar had 11,870,521 shares of Class A Common
Stock issued and outstanding. The closing sale price of
the Class A Common Stock on the Nasdaq National Market
on October 9, 1997 was $23 1/8 per share. See
"Description of EchoStar Capital Stock."
Listing........................... Application will be made to list the Preferred Stock on
the Nasdaq National Market.
Tax Consequences.................. The Federal income tax consequences of acquiring and
holding the Preferred Stock and the shares of Class A
Common Stock issuable upon conversion of such Preferred
Stock or in redemption therefor or as a dividend thereon
are described in "Certain United States Federal Income
Tax Considerations." Prospective investors are urged to
consult their own tax advisors regarding the tax
consequences of acquiring, holding or disposing of the
Preferred Stock or the shares of Class A Common Stock
issuable upon conversion of such Preferred Stock or in
redemption therefor or as a dividend thereon in light of
their personal investment circumstances, including
consequences resulting from the possibility that
distributions on the Preferred Stock may exceed
EchoStar's current and accumulated earnings and profits
in which case they would not be treated as dividends for
tax purposes.
Use of Proceeds................... EchoStar presently intends to use the net proceeds of
the Preferred Offering to fund subscriber acquisition
and marketing expenses and for other general corporate
purposes.
Concurrent Offering............... EchoStar is also concurrently offering, by means of a
separate prospectus, 5,000,000 shares of Class A Common
Stock (the "Common Offering"). Consummation of the
Common Offering is not conditioned on consummation of
the Preferred Offering, and the Preferred Offering is
not conditioned on consummation of the Common Offering.
Risk Factors...................... Prospective investors should carefully consider certain
risk factors relating to an investment in the Preferred
Stock. See "Risk Factors."
6
SUMMARY FINANCIAL DATA
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 EchoStar, 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," EchoStar'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,
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1992 (1) 1993 (1) 1994 1995 1996 1996 1997
--------- --------- --------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA, RATIOS, SUBSCRIBERS AND SATELLITE
RECEIVERS SOLD)
(UNAUDITED)
STATEMENT OF OPERATIONS DATA:
Revenue......................................... $ 165,088 $ 220,941 $ 190,983 $ 163,890 $ 211,411 $ 114,991 $ 172,845
Operating income (loss)......................... 11,286 18,204 13,216 (8,027) (109,345) (22,686) (87,617)
Net income (loss)............................... 7,529 12,272 90 (11,486) (100,986) (29,775) (126,655)
Net income (loss) attributable to common
shares........................................ $ 7,529 $ 12,272 $ (849) $ (12,690) $(102,190) $ (30,377) $(127,257)
Weighted-average common shares outstanding...... 32,221 32,221 32,442 35,562 40,548 40,404 41,265
Net income (loss) per common and common-
equivalent share.............................. $ 0.23 $ 0.38 $ (0.03) $ (0.36) $ (2.52) $ (0.75) $ (3.08)
OTHER DATA:
EBITDA (2)...................................... $ 12,329 $ 19,881 $ 15,459 $ (4,913) $ (65,931) $ (12,930) $ (842)
Ratio of earnings to combined fixed charges and
preferred stock dividends (3)................. 15.0x 18.0x -- -- -- -- --
Deficiency of earnings to combined fixed charges
and preferred stock dividends (3)............. -- -- $ (6,145) $ (44,198) $(188,701) $ (61,657) $(143,845)
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 JUNE 30, 1997 (UNAUDITED)
---------------------------------------------------------------
AS ADJUSTED AS ADJUSTED
FOR THE FOR THE AS ADJUSTED
PREFERRED COMMON FOR THE
ACTUAL PRO FORMA (4) OFFERING(5) OFFERING OFFERINGS(5)
--------- ------------- ----------- ----------- -----------
BALANCE SHEET DATA:
Cash, cash equivalents and marketable
investment securities (6)................. $ 187,804 $ 380,804 $ 465,004 $ 490,637 $ 574,837
Total assets................................ 1,534,480 1,727,480 1,811,680 1,837,313 1,921,513
Total long-term obligations (less current
portion).................................. 1,311,902 1,311,902 1,311,902 1,311,902 1,311,902
Series B Preferred Stock (7)................ -- 193,000 193,000 193,000 193,000
Preferred Stock............................. -- -- 87,700 -- 87,700
Total stockholders' equity (deficit)........ (52,868) (52,868) 31,332 56,965 141,165
7
SUMMARY SATELLITE DATA
ECHOSTAR I ECHOSTAR II ECHOSTAR III ECHOSTAR IV
--------------- --------------- --------------------- ------------------------
Expected launch date....... Launched Launched Launched 1st Quarter 1998
Orbital slot............... 119 DEG. WL 119 DEG. WL 61.5 DEG. WL 148 DEG. WL (8)
Transponders............... 16 @ 24 MHz 16 @ 24 MHz 16/32 @ 24 MHz (9) 16/32 @ 24 MHz (9)
Approximate channel 100 channels 100 channels 100/200 channels 100/200 channels
capacity (10)............
Output power............... 130 Watts 130 Watts 240/120 Watts 240/120 Watts
Expected end of commercial 2011 2011 2012 2013
life (11)................
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 EchoStar's subsidiaries operated under Subchapter S of the
Internal Revenue Code of 1986, as amended (the "Code"), and comparable
provisions of applicable state income tax laws, until December 31, 1993. The
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 EchoStar had been
subject to corporate Federal and state income taxes for those years.
Earnings per share has been calculated and presented on a pro forma basis as
if the shares of EchoStar issued to reflect the December 31, 1993
reorganization were outstanding for the years ended December 31, 1992 and
1993, respectively. See Notes 1 and 7 of Notes to EchoStar'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 $92,000 and $61.4
million for the six months ended June 30, 1996 and 1997, respectively).
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 EchoStar's Consolidated Financial Statements
contained elsewhere in this Prospectus.
(3) For purposes of computing the ratio of earnings to combined fixed charges
and preferred stock dividends and the deficiency of earnings to combined
fixed charges and preferred stock dividends, earnings consist of earnings
from continuing operations before income taxes, plus fixed charges,
excluding capitalized interest. Fixed charges consist of interest incurred
on all indebtedness and the computed interest components of rental expense
under noncancelable operating leases. Preferred stock dividends consist of
the dividends accrued on the Company's Series A Preferred Stock. For the
years ended December 31, 1994, 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 Series B Preferred Offering and the application of the
net proceeds thereof.
(5) Excludes approximately $12.3 million to be deposited by purchasers of the
Preferred Stock into the Deposit Account.
(6) Excludes restricted cash and marketable investment securities which totaled
$229.6 million as of June 30, 1997.
(7) Net of estimated discounts and commissions and offering costs of $7.0
million.
(8) EchoStar presently intends to launch EchoStar IV into the 148 DEG. 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
1997 Notes Indenture (as defined), determine to launch or move EchoStar IV
into the 61.5 DEG. WL or the 119 DEG. WL orbital slot.
(9) 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.
(10) 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.
(11) 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.
8
THE ECHOSTAR ORGANIZATION
The following chart illustrates the Company's corporate structure:
[LOGO]
9
RISK FACTORS
PROSPECTIVE PURCHASERS OF THE PREFERRED STOCK SHOULD CAREFULLY REVIEW THE
INFORMATION CONTAINED IN THIS PROSPECTUS AND SHOULD PARTICULARLY CONSIDER THE
FOLLOWING MATTERS:
HOLDING COMPANY STRUCTURE. Since all of EchoStar's operations are conducted
through its subsidiaries, its ability to make cash dividend payments, (including
dividend payments on the Preferred Stock) or service any debt is dependent upon
the earnings of such subsidiaries and the payment of funds by such subsidiaries
to EchoStar in the form of loans, dividends or other payments. As a result,
EchoStar will be substantially dependent upon the receipt of funds from its
wholly owned subsidiary DBS Corp, which will be dependent upon the receipt of
funds from its wholly owned subsidiary ESBC, which in turn will be dependent
upon the receipt of funds from its wholly owned subsidiary Dish. None of
EchoStar's subsidiaries has any current obligations, contingent or otherwise, to
pay any amounts in respect of the Preferred Stock or to make any funds available
therefor, whether by dividends, loans or other payments. 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 DBS Corp without restrictions. In general, DBS Corp may pay
dividends on its equity securities only if: (i) no default exists under the 1997
Notes Indenture; (ii) after giving effect to such dividends, DBS Corp's ratio of
total indebtedness to cash flow would not exceed 6.0 to 1.0. Moreover, the
aggregate amount of such dividends generally may not exceed the sum of (A) the
difference of consolidated cash flow (less 100% of such deficit) minus 150% of
consolidated interest expense, in each case from July 1, 1997, plus (B) 100% of
the aggregate net proceeds to DBS Corp and its subsidiaries from the sale of
certain equity interests of DBS Corp or EchoStar.
In the event of the bankruptcy, liquidation or reorganization of EchoStar,
the assets of EchoStar will be available to pay obligations on the Preferred
Stock only after all of the then outstanding indebtedness and other liabilities
of EchoStar have been paid in full, and there may not be sufficient assets
remaining to pay amounts payable on any or all of the Preferred Stock then
outstanding.
SUBSTANTIAL LEVERAGE. EchoStar is highly leveraged, which makes it very
vulnerable to changes in general economic conditions.
Substantially all of the assets of DBS Corp, ESBC and Dish and their
subsidiaries are pledged as collateral for the 1997 Notes, 1996 Notes and the
1994 Notes. Further, the 1997, 1996 and 1994 Notes Indentures (as defined) and
the Series B Preferred Stock and the Series B Exchange Notes, if any, severely
restrict the ability of EchoStar, DBS Corp, ESBC and Dish to incur additional
debt. 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 1997, 1996
and 1994 Notes Indenture, the Series B Preferred Stock Certificate of
Designation and the Series B Exchange Notes Indenture, if any), 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 certain of such agreements, certain
subsidiaries of EchoStar 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
1997 Notes, 1996 Notes, 1994 Notes, deferred satellite contract payments on
EchoStar I and EchoStar II and mortgage debt). In addition, because
10
interest on the 1994 Notes currently is not payable in cash but accrues through
June 1, 1999, liability with respect to the 1994 Notes will increase by
approximately $156.8 million through that date to $624.0 million. Similarly,
because interest on the 1996 Notes currently is not payable in cash but accrues
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 EchoStar, DBS Corp, ESBC and Dish to meet their respective
payment obligations will depend on the success of EchoStar's business strategy,
which is subject to uncertainties and contingencies beyond EchoStar's control.
Under the terms of the 1996 Notes Indenture, EchoStar may pay cash dividends
on its equity securities, including the Preferred Stock, only if: (i) no default
exists under the 1996 Notes Indenture; (ii) after giving effect to such
dividends, EchoStar's ratio of total indebtedness to cash flow would not exceed
5.0 to 1.0; and (iii) the aggregate amount of such dividends, along with certain
other payments, does not exceed the sum of 50% of EchoStar's consolidated net
income (less 100% of consolidated net losses) from January 1, 1996 to the end of
its most recently completed fiscal quarter plus 100% of the aggregate net
proceeds received by EchoStar or its subsidiaries from a sale of EchoStar equity
securities.
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 September 30, 1997, DirecTv had approximately 2.9 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 obtained by competitors of EchoStar on an exclusive
basis, it will be unavailable to EchoStar's DISH Network. 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. 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. 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 agreement 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 Corporation ("News")
11
and MCI Telecommunications, Inc. ("MCI"), into a single DBS provider. 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. In addition, Tempo Satellite, Inc. ("Tempo"),
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. PrimeStar also has agreed to acquire Tempo's
license. As of September 30, 1997, according to published reports, PrimeStar had
approximately 1.8 million subscribers.
On July 18, 1997, PrimeStar and TSAT filed an application with the FCC
requesting FCC approval for the assignment of Tempo authorizations to PrimeStar
in connection with the PrimeStar "roll-up" restructuring. On August 15, 1997,
MCI and PrimeStar also filed an FCC application requesting approval for the
assignment of MCI's DBS authorizations to PrimeStar. The parties to the two
transactions have also initiated the antitrust clearance process with the
Department of Justice for each transaction, and EchoStar understands that
clearance has been obtained for one of the two transactions (the PrimeStar
roll-up). The FCC applications have been placed on public notice and have been
opposed by EchoStar and others, but there can be no assurance that any of these
oppositions will be successful. If the requests are approved by the FCC and if
the transactions are consummated by the parties, the resulting entity would
constitute 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
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 certain of these requirements are set to expire in 2002 unless
extended by the FCC. Moreover, 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 and FSS 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 FSS orbital locations later this year,
and that it will auction one or more of its DBS orbital locations during 1998.
Pursuant to the protocol, the FCC already has permitted a company to provide
Direct-to-Home ("DTH") services in the U.S. through a Mexican satellite.
Televisa International, LLC ("Televisa") is currently in the process of
developing DTH television and related services in Mexico, Latin America, North
America and Europe. Televisa received authorization from the FCC to operate 1
million receive-only earth stations in the U.S. which are capable of receiving
DTH television services from Mexico's
12
Solidaridad II satellite. The Solidaridad II satellite operates at 113 DEG. WL
providing full-CONUS coverage, and is licensed by the Mexican Government.
The FCC authorized Televisa to operate receive dishes that are larger, and
possibly less attractive to consumers, than the dishes made available by
EchoStar. Further, the FCC authorization for Televisa does not provide
Televisa's earth stations with protection from unacceptable radio interference
from nearby satellite networks. Nevertheless, the authorization of Televisa to
provide a service from the 113 DEG. WL orbital slot may produce additional
competition to the full-CONUS service provided by the Company from EchoStar I
and EchoStar II.
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 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. A Copyright Arbitration Royalty Panel
has reported on recommended royalties for local satellite retransmission of
network affiliated and superstation signals. See "Risk Factors--Impediments to
Retransmit Local Broadcast Signals." 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
13
"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 service to consumers, EchoStar has sustained
significant losses in recent periods. EchoStar's operating losses were $8.0
million, $109.3 million and $87.6 million for the years ended December 31, 1995
and 1996 and the six months ended June 30, 1997, respectively. EchoStar had net
losses of $11.5 million, $101.0 million and $126.7 million during those same
periods. Improvements in EchoStar'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 its costs. No assurance can be
given that EchoStar will be effective with regard to these matters. In addition,
EchoStar incurs significant acquisition costs to obtain DISH Network
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, the 1997 Notes, its obligation to redeem the Series B Preferred Stock or
retire the Series B Exchange Notes, if issued, or to pay cash dividends on the
Preferred Stock. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources."
POTENTIAL NEED FOR ADDITIONAL CAPITAL. EchoStar may require additional
funds to acquire DISH Network subscribers. In addition, EchoStar has conditional
licenses or applications pending with the FCC for a two satellite Ku-band
system, a two satellite Fixed Satellite Service ("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."
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 a larger number
of major consumer electronic product manufacturers (such as Sony and RCA), than
does EchoStar, 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 other than JVC. 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
14
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.
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"), DBS Corp 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 can be 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. See "Business--Government Regulation--Satellite
Home Viewer Act."
15
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 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 can be 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 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 "statutory" (or
compulsory) copyright license that generally 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", with respect
to a particular television network, is defined as one that cannot receive an
over-the-air network signal of "grade B" intensity (a predictive standard of
signal intensity employed by the FCC) of a primary network station affiliated
with that network 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 the signal of an affiliate of that network.
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. On
August 28, 1997, a Copyright Arbitration Royalty Panel ("CARP"), appointed to
recommend royalties for satellite retransmission of network-affiliated
television and superstation signals pursuant to the compulsory license of
Section 119 of the Copyright Act, delivered its Report to the Librarian of
Congress. In the CARP's
16
recommendation, which must be either adopted or changed by the Copyright Office
within 60 days from August 28, 1997, the CARP held it has no jurisdiction to set
royalties for local satellite retransmissions of the signals of
network-affiliated television stations, on the ground that the compulsory
license of the Copyright Act does not extend to such retransmissions. While
EchoStar has petitioned the Librarian to modify the CARP report, the petition
has been opposed, and there can be no assurance that the petition will be
granted. Moreover, EchoStar is continuing its efforts to secure passage of
legislation that will clarify and extend the scope of the compulsory license
with respect to local network signals. There can be no assurance that EchoStar
will be successful in these efforts. If the CARP's position is upheld by the
Librarian and legislation to clarify and extend the scope of the compulsory
license is not passed, EchoStar would be prevented from relying on the
compulsory copyright license to retransmit local network-affiliated stations'
signals and may have to engage in the relatively cumbersome process of
negotiating and obtaining copyright licenses from all individual copyright
holders instead.
The CARP also recommended setting at zero the royalty rate for local
retransmissions of superstation signals. This recommendation may be considered
favorable to EchoStar because it may provide a basis for the proposition that
the royalty rate for all local-into-local retransmission (to the extent
permitted) should be zero. However, there can be no assurance that the Librarian
will adopt the CARP's recommendation or that, in the absence of the legislation
whose passage is sought by EchoStar, EchoStar would be successful in any
litigation with copyright owners regarding this issue.
INCREASED COSTS FOR RETRANSMISSION OF DISTANT BROADCAST SIGNALS. In its
August 28, 1997 report, the CARP recommended that the royalty rate for satellite
retransmissions of distant network-affiliated station and distant superstation
signals be set at 27 cents per subscriber per month --a substantial increase
compared to the previously applicable rates, which ranged from 6 to 17.5 cents.
The Satellite Broadcasting & Communications Association, of which EchoStar is a
member, has requested modifications to the CARP's report. However, this request
has been opposed, and there can be assurance that it will be granted. Several
Congressmen have publicly voiced their opposition to the 27 cent royalty rate
recommended by CARP; a sub-committee chairman and ranking member have requested
that the Librarian of Congress stay the CARP's recommendation for 18 months, but
there can be no assurance that such opposition or request will produce favorable
results.
EchoStar believes but can provide no assurances that it may be able to pass
through the recommended increases (should they be adopted) to its customers by
separately tiering the channels involved, so that its operating margins are not
substantially affected. However, the recommended increases may adversely affect
the competitiveness of EchoStar vis-a-vis cable operators, which pay lower rates
to copyright holders.
DEPENDENCE ON SINGLE RECEIVER MANUFACTURER. EchoStar Receiver Systems are
currently manufactured exclusively by SCI Technology ("SCI"), a high-volume
contract electronics manufacturer, and only JVC manufactures other consumer
electronics products incorporating EchoStar Receiver Systems. SCI is currently
EchoStar's only source of stand-alone receivers. EchoStar is currently
negotiating with several brand-name consumer electronics manufacturers to
produce receivers for use with the DISH Network. 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 PROGRAMMING. Currently, the suggested retail price of a standard
EchoStar Receiver System is $199. The initial equipment cost required to receive
DISH Network 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.
17
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 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 accomplished on
May 24, carrying the Telestar 5 payload. 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 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 110 DEG. 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
15, 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.
18
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.
The Communications Act of 1934, as amended, and the FCC's implementing
regulations provide that, where subsidiaries of a holding company hold certain
types of FCC licenses, foreign nationals or their representatives may not own in
excess of 25% of the total equity of the holding company, considered on a
fully-diluted basis, except upon an FCC public interest determination. While the
FCC's International Bureau has ruled that these limitations do not apply to DBS
authorizations, the ruling has been challenged and the question remains open.
Furthermore, the limitations will apply to EchoStar's FSS authorizations if
EchoStar holds itself out as a common carrier or if the FCC decides to treat it
as such a carrier.
A recent survey of EchoStar's equity owners discloses that EchoStar's
foreign ownership in May of this year was under 5%, well below these limitations
if they were to apply. However, if the purchase by foreigners or their
representatives of EchoStar's existing or new equity securities or exercise of
any right to convert existing or new securities into equity securities,
including the shares subject to the Offerings, would cause the foreign ownership
limitations to be exceeded, a separate FCC determination that such ownership was
consistent with the public interest would be required in order to avoid a
violation of the Act and/or the FCC's rules.
The Communications Act of 1934, as amended, also requires prior FCC approval
of transfers of control over, or assignments of, Title III licenses. If the
purchase of the securities in the Offerings (or exercise of the right to convert
the Preferred Stock into shares of Common Stock) would result in a transfer of
control over the FCC licenses and permits, such transfer would require the prior
approval of the FCC.
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
election to public 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 a rulemaking proceeding in order to determine how to implement the
4-7% set-aside requirement. 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
19
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."
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.
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 119.05 DEG. WL and 118.95 DEG. WL
instead of at their authorized locations at 119.2 DEG. WL and 118.8 DEG. 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
20
EchoStar. EchoStar will also require further FCC authorizations to operate
EchoStar III and launch and operate 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 175 DEG. 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 119 DEG. WL
and 175 DEG. 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 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
119 DEG.WL, EchoStar would be required under certain circumstances to offer to
repurchase all or a portion of the 1994 Notes, the 1996 Notes, the 1997 Notes
and, if issued, the Series B Exchange Notes, under certain conditions. In the
event that a substantial number of holders of the 1994 Notes, the 1996 Notes,
the 1997 Notes, or, if issued, the Series B Exchange 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
61.5 DEG. WL and 175 DEG. 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.
DBSC's minor modification request was opposed by Tempo. 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. DBSC has submitted relevant data; and by order released
September 29, 1997, the FCC's International Bureau conditionally approved the
requested modification application.
EchoStar III was launched on October 5, 1997 pursuant to FCC authority which
was conditionally granted by the September 29, 1997 order of the FCC's
International Bureau. The International Bureau's September 29, 1997 order also
conditionally granted DBSC an STA to test all transponders on EchoStar III for
the earlier of eight weeks after launch or seven days prior to the launch of a
satellite to that orbital location by an authorized entity. The International
Bureau's order is subject to review by the full Commission and ultimately the
Court of Appeals, and there can be no assurance that the order will not be
challenged, or that any such challenges will not be successful. EchoStar also
expects to file applications for authority to operate the satellite as well as
feeder link earth stations and antennas for TT&C communications with EchoStar
III. On October 3, 1997 EchoStar filed an application for authority to operate
one of
21
the earth station antennas that it plans to deploy for TT&C and feeder link
communications with EchoStar III. There can be no assurance that this
application will be granted. Also on October 3, 1997, EchoStar filed a request
for an STA to allow it to begin testing that antenna immediately upon the launch
of EchoStar III. On the same date, the FCC staff verbally gave EchoStar a 90-day
STA to conduct such testing subject to certain power restrictions.
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 called for the completion
of construction at 61.5 DEG. WL of EchoStar III by July 31, 1997, and that
milestone was met. DBSC and DirectSat also must have operational satellites at
175 DEG. WL by 1998 and 1999, respectively, and DirectSat must have an
operational satellite at 110 DEG. 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
EchoStar Satellite Corporation's ("ESC") 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 175 DEG. WL (provided that ESC is found
to have a firm contract and receives frequency assignments at 175 DEG. WL),
EchoStar will still be required to construct and launch two or more satellites
in addition to EchoStar I, EchoStar II, 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 110 DEG. WL and 166 DEG. WL orbital slots in order to
avoid loss of those frequencies). Finally, with respect to the 24 orbital
assignments at the 148 DEG. 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 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
22
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 can be 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 in
March 1996, EchoStar'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 1.25%. To date,
a majority of EchoStar's subscribers have purchased annual subscriptions.
EchoStar expects that subscriber turnover may increase as annual subscribers
renew and convert to month-to-month subscriptions, as the number of overall DISH
Network subscribers increases, and as a result of certain other factors. In the
event that EchoStar 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
23
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 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 assurance 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 or in-orbit 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
1997 Notes Indenture DBS Corp would be required to use the proceeds from any
launch insurance to purchase satellites or, at DBS Corp's option, to make an
offer to repurchase the maximum amount of 1997 Notes that can be purchased with
those proceeds.
EchoStar III was launched on October 5, 1997 on an Atlas IIAS launch
vehicle. Although all tests to date have been successful, EchoStar III has not
yet achieved geostationary orbit. The ultimate success of the launch of EchoStar
III will not be determinable until up to 60 days after its October 5 launch
date.
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, EchoStar II and EchoStar III and
is constructing 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
provider for EchoStar IV, or from other factors beyond EchoStar's control. If
the launch of any of EchoStar's satellites, including EchoStar IV, is delayed,
EchoStar's strategy to provide additional programming to DISH Network
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
subscribers.
24
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 adaptations 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
73% 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
below 51%, his percentage ownership of the equity securities of EchoStar would
have to be reduced to below 10%. Following consummation of the Common Offering,
Mr. Ergen will own approximately 65% of the total equity securities of EchoStar
and would possess approximately 95% of the total voting power. Assuming
conversion of all of the shares of Preferred Stock and following consummation of
the Common Offering, Mr. Ergen would own approximately 61% of the total equity
securities of EchoStar and would possess approximately 94% of the total voting
power.
The holders of the Preferred Stock, upon the occurrence of certain events,
may elect two directors. See "Description of Preferred Stock--Voting Rights."
These directors, however, will not have the ability, acting alone, to control
Board decisions, nor will there exist any prohibition which would prevent the
Board from increasing its size to reduce the influence of any Board members so
elected by the holders of Preferred Stock.
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 maintain in-orbit
insurance for EchoStar I and EchoStar II. EchoStar is required under the 1996
Notes Indenture to maintain in-orbit insurance for EchoStar III and is required
under the 1997 Notes Indenture to obtain launch and in-orbit insurance for
EchoStar IV. EchoStar has procured the required in-orbit insurance for EchoStar
I, EchoStar II and EchoStar III. 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, EchoStar II and EchoStar III also are
25
subject to annual renewal provisions. There can be no assurance that such
renewals will be at rates or on terms favorable to EchoStar. 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, EchoStar III 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 launch
insurance required for 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 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 EchoStar's business.
POSSIBLE VOLATILITY OF STOCK PRICE. There may be significant volatility in
the market price for the Common Stock. Quarterly operating results of the
Company, changes in general conditions in the economy, the financial markets,
competition and changes in the subscription television industry, regulatory
changes, launch and satellite failures, operating results below future
expectations or other developments affecting EchoStar and its competitors could
cause the market price of the Common Stock and the Preferred Stock to fluctuate
substantially. In addition, price and volume fluctuations in the stock markets
may affect the market price of the Common Stock and the Preferred Stock for
reasons unrelated to EchoStar's operating performance.
NO PRIOR PUBLIC MARKET FOR PREFERRED STOCK. Prior to the Preferred
Offering, there has been no public market for the Preferred Stock. The
Underwriters have informed the Company that they currently intend
26
to make a market in the Preferred Stock. However, they are not obligated to do
so, and any market making with respect to the Preferred Stock may be
discontinued at any time without notice. There can be no assurance that an
active trading market for the Preferred Stock will develop or that the Preferred
Stock will trade subsequent to this Offering at or above the initial public
offering price. See "Underwriting."
CONSEQUENCE OF ORIGINAL ISSUE DISCOUNT. As a result of the deposit of $
million of the net proceeds from the Preferred Offering in the Deposit Account,
and, in light of the fact that dividends will not accrue on the Preferred Stock
until , 1999, the shares of Preferred Stock will be considered as
having been issued, for Federal tax purposes, at a substantial discount from
their liquidation preference amount. Consequently, purchasers of the Preferred
Stock generally will be required to include amounts in gross income for federal
income tax purposes in advance of receipt of the cash payments to which the
income is attributable. See "Certain Federal Income Tax Considerations" for a
more detailed discussion of the federal income tax consequences to purchasers of
the Preferred Stock.
In light of the foregoing, if a bankruptcy petition is filed by or against
EchoStar under the United States Bankruptcy Code after the issuance of the
Preferred Stock, the claim of a holder of Preferred Stock with respect to the
liquidation preference thereof may be limited to an amount equal to the sum of:
(i) the liquidation preference for the Preferred Stock less the discount at
which such shares of Preferred Stock are deemed to have been issued; and (ii)
that portion of the original discount that is not deemed to constitute
"unmatured interest" or accretion within the meaning of the United States
Bankruptcy Code. Any original issue discount that was not amortized as of any
such bankruptcy filing could constitute "unmatured interest."
27
USE OF PROCEEDS
The net proceeds to EchoStar from the Preferred Offering are estimated to be
approximately $ million (approximately $ million if the Underwriters'
over-allotment option is exercised in full) after deducting underwriting
discounts and commissions and the estimated expenses of the Preferred Offering
and excluding approximately $ million to be deposited by the purchasers of the
Preferred Stock into the Deposit Account. The net proceeds to EchoStar from the
Common Offering are estimated to be approximately $109.8 million (approximately
$126.4 million if the Underwriters over-allotment option is exercised in full),
based on a closing market price of $23 1/8 per share on October 9, 1997, after
deducting underwriting discounts and commissions and the estimated expenses of
the Common Offering. EchoStar presently intends to use the net proceeds of the
Offerings to fund subscriber acquisition and marketing expenses and for other
general corporate purposes.
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
EchoStar's Class A Common Stock is quoted on the Nasdaq National Market
under the symbol "DISH." Prior to June 21, 1995, there was no established
trading market for EchoStar's Class A Common Stock. The high and low closing
sale prices of the Class A Common Stock for 1995, 1996 and 1997 on the Nasdaq
National Market (as reported by Nasdaq) are set forth below:
1995 HIGH LOW
- ----------------------------------------------------------------------------- ------ ------
Second Quarter (beginning June 21, 1995)..................................... 17 14 3/4
Third Quarter................................................................ 17 13 1/2
Fourth Quarter............................................................... 24 1/4 12 1/4
1996
- -----------------------------------------------------------------------------
First Quarter................................................................ 38 3/4 21 9/16
Second Quarter............................................................... 36 27 3/4
Third Quarter................................................................ 28 1/2 24
Fourth Quarter............................................................... 32 1/4 21 3/4
1997
- -----------------------------------------------------------------------------
First Quarter................................................................ 26 3/4 15
Second Quarter............................................................... 21 3/8 11 3/8
Third Quarter................................................................ 24 1/4 13 1/2
Fourth Quarter (through October 9, 1997)..................................... 25 15/16 23 1/8
On October 9, 1997, the last reported sale price for the Common Stock on the
Nasdaq National Market was $23 1/8 per share.
As of October 7, 1997, there were approximately 2,334 record holders of the
EchoStar's Class A Common Stock, not including stockholders who beneficially own
Class A Common Stock held in nominee or street name. As of October 7, 1997, all
29,804,401 outstanding shares of EchoStar's Class B Common Stock were held by
Charles W. Ergen, EchoStar's Chief Executive Officer. There is currently no
trading market for EchoStar's Class B Common Stock.
EchoStar has never declared or paid any cash dividends on any class of its
common stock and does not expect to declare dividends in the foreseeable future.
Furthermore, under the terms of the 1996 Notes Indenture and the Certificate of
Designation related to the Series B Preferred Stock, EchoStar may only pay cash
dividends on its equity securities in limited circumstances. See "Risk
Factors--Substantial Leverage", "Description of Certain Indebtedness--1996
Notes" and "Description of EchoStar Capital Stock." Payment of any future
dividends will depend upon the earnings and capital requirements of EchoStar,
EchoStar's debt facilities, and other factors the Board of Directors considers
appropriate. EchoStar currently intends to retain its earnings, if any, to
support future growth and expansion. EchoStar's ability to declare dividends is
affected by covenants in its financing agreements that prohibit it from
declaring dividends and EchoStar's subsidiaries from transferring funds in the
form of cash dividends, loans or advances to EchoStar. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
28
CAPITALIZATION
The following table sets forth: (i) the consolidated capitalization of
EchoStar, on a historical basis as of June 30, 1997; (ii) the pro forma
consolidated capitalization of EchoStar as of June 30, 1997, which gives effect
to the Series B Preferred Offering; and (iii) as adjusted to give effect to the
Offerings and the application of the net proceeds thereof. 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.
AS OF JUNE 30, 1997 (UNAUDITED)
----------------------------------------------------------------------------
AS ADJUSTED
FOR THE AS ADJUSTED AS ADJUSTED
PREFERRED FOR THE FOR THE
ACTUAL PRO FORMA OFFERING(17) COMMON OFFERING OFFERINGS(17)
--------- -------------- ----------------- ---------------- ------------
(IN THOUSANDS)
Cash, cash equivalents, and marketable
investment securities (1)........... $ 187,804 $ 380,804 $ 465,004 $ 490,637 $ 574,837
--------- -------------- ----------------- ---------------- ------------
--------- -------------- ----------------- ---------------- ------------
Long-term debt (net of current
portion):
Mortgages and notes payable......... 45,379 45,379 45,379 45,379 45,379
1994 Notes.......................... 467,210 467,210 467,210 467,210 467,210
1996 Notes.......................... 411,256 411,256 411,256 411,256 411,256
1997 Notes.......................... 375,000 375,000 375,000 375,000 375,000
--------- -------------- ----------------- ---------------- ------------
Total long-term debt.............. 1,298,845 1,298,845 1,298,845 1,298,845 1,298,845
Series B Preferred Stock.............. - 193,000 193,000 193,000 193,000
Stockholders' Equity (Deficit):
Preferred Stock, $.01 par value,
20,000,000 shares authorized, the
following series issued and
outstanding:
Series A Preferred Stock,
1,616,681 shares issued and
outstanding, including accrued
dividends of $3,949,000....... 19,001 19,001 19,001 19,001 19,001
Preferred Stock................. - - 87,700 -- 87,700
Class A Common Stock, $.01 par
value, 200,000,000 shares
authorized, 11,821,513 shares
issued and outstanding, actual and
pro forma; 16,821,513 shares
issued and outstanding, as
adjusted.......................... 118 118 118 168 168
Class B Common Stock, $.01 par
value, 100,000,000 shares
authorized, 29,804,401 shares
issued and outstanding............ 298 298 298 298 298
Class C Common Stock, $.01 par
value, 100,000,000 shares
authorized, none outstanding...... - - - - -
Common Stock Warrants............... 11 11 11 11 11
Additional paid-in capital.......... 170,701 170,701 167,201 280,484 276,984
Unrealized holding losses on
available-for-sale securities, net
of deferred taxes................. (11) (11) (11) (11) (11)
Accumulated deficit................. (242,986) (242,986) (242,986) (242,986) (242,986)
--------- -------------- ----------------- ---------------- ------------
Total stockholders' equity
(deficit)....................... (52,868) (52,868) 31,332 56,965 141,165
--------- -------------- ----------------- ---------------- ------------
Total capitalization.................. $1,245,977 $1,438,977 $ 1,523,177 $1,548,810 $1,633,010
--------- -------------- ----------------- ---------------- ------------
--------- -------------- ----------------- ---------------- ------------
- ------------------------
(1) Excludes approximately $12.3 million to be deposited by purchasers of the
Preferred Stock into the Deposit Account.
(2) Excludes restricted cash and marketable investment securities which totaled
$229.6 million as of June 30, 1997.
29
SELECTED FINANCIAL DATA
The following selected financial data as of, and for the five years ended
December 31, 1996, are derived from the consolidated financial statements of
EchoStar, 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," EchoStar'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 PER SHARE DATA, RATIOS, SUBSCRIBERS AND SATELLITE
RECEIVERS SOLD)
(UNAUDITED)
STATEMENTS OF OPERATIONS DATA:
Revenue:
DTH products and technical services.............. $ 157,473 $ 206,311 $ 172,753 $ 146,910 $ 135,812 $ 97,199 $ 33,649
DISH Network subscription television services.... - - - - 37,898 6,046 57,588
DISH Network promotions--subscription television
services and products (2)...................... - - - - 22,746 - 76,251
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 3,034 5,103 1,278
--------- --------- --------- --------- --------- --------- ---------
Total revenue...................................... 165,088 220,941 190,983 163,890 211,411 114,991 172,845
Expenses:
DTH products and technical services.............. 120,826 161,447 133,635 116,758 123,790 90,278 27,718
Subscriber promotion subsidies (2)............... - - - - 33,591 - 31,013
DISH Network 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 38,525 90,372 29,816 66,389
Amortization of subscriber acquisition costs
(2)............................................ - - - - 15,991 92 61,418
Depreciation and amortization.................... 1,043 1,677 2,243 3,114 27,423 9,664 25,357
--------- --------- --------- --------- --------- --------- ---------
Total expenses..................................... 153,802 202,737 177,767 171,917 320,756 137,677 260,462
--------- --------- --------- --------- --------- --------- ---------
Operating income (loss)............................ $ 11,286 $ 18,204 $ 13,216 $ (8,027) $(109,345) $ (22,686) $ (87,617)
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Net income (loss).................................. $ 7,529 $ 12,272 $ 90 $ (11,486) $(100,986) $ (29,775) $(126,655)
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Net income (loss) attributable to common shares.... $ 7,529 $ 12,272 $ (849) $ (12,690) $(102,190) $ (30,377) $(127,257)
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Weighted-average common shares outstanding......... 32,221 32,221 32,442 35,562 40,548 40,404 41,265
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Net income (loss) per common and common-equivalent
share............................................ $ 0.23 $ 0.38 $ (0.03) $ (0.36) $ (2.52) $ (0.75) $ (3.08)
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
OTHER DATA:
EBITDA (3)....................................... $ 12,329 $ 19,881 $ 15,459 $ (4,913) $ (65,931) $ (12,930) $ (842)
Ratio of earnings to combined fixed charges and
preferred stock dividends (4).................. 15.0x 18.0x - - - - -
Deficiency of earnings to combined fixed charges
and preferred stock dividends (4).............. - - $ (6,145) $ (44,198) $(188,701) $ (61,657) $(143,845)
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
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
30
AS OF DECEMBER 31, AS OF JUNE 30, 1997
----------------------------------------------------- ----------------------------------------------
AS ADJUSTED AS ADJUSTED
FOR THE FOR THE
PRO PREFERRED COMMON
1992 1993 1994 1995 1996 ACTUAL FORMA(5) OFFERING(6) OFFERING
--------- --------- --------- --------- --------- --------- --------- ----------- -----------
(UNAUDITED)
BALANCE SHEETS DATA:
Cash, cash equivalents and
marketable investment
securities (7)........... $ 22,031 $ 27,232 $ 233,975 $ 37,424 $ 58,038 $ 187,804 $ 380,804 $ 465,004 $ 490,637
Total assets............... 88,529 106,476 472,492 623,091 1,141,380 1,534,480 1,727,480 1,811,680 1,837,313
Long-term obligations (less
current portion):
1994 Notes............... - - 334,206 382,218 437,127 467,210 467,210 467,210 467,210
1996 Notes............... - - - - 386,165 411,256 411,256 411,256 411,256
1997 Notes............... - - - - - 375,000 375,000 375,000 375,000
Notes payable to
stockholder............ 2,274 14,725 - - - - - - --
Other long-term
obligations............ 4,876 4,702 5,393 33,444 58,580 58,436 58,436 58,436 58,436
Series B Preferred Stock
(8)........................ - - - - - - 193,000 193,000 193,000
Preferred Stock.............. - - - - - - - 87,700 --
Total stockholders' equity
(deficit).................. 52,328 49,700 103,808 156,686 61,197 (52,868) (52,868) 31,332 56,965
AS ADJUSTED
FOR THE
OFFERINGS(6)
-----------
BALANCE SHEETS DATA:
Cash, cash equivalents and
marketable investment
securities (7)........... $ 574,837
Total assets............... 1,921,513
Long-term obligations (less
current portion):
1994 Notes............... 467,210
1996 Notes............... 411,256
1997 Notes............... 375,000
Notes payable to
stockholder............ --
Other long-term
obligations............ 58,436
Series B Preferred Stock
(8)........................ 193,000
Preferred Stock.............. 87,700
Total stockholders' equity
(deficit).................. 141,165
- ------------------------
(1) Certain of EchoStar's subsidiaries operated under Subchapter S of the
Internal Revenue Code of 1986, as amended (the "Code"), and comparable
provisions of applicable state income tax laws, until December 31, 1993. The
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 EchoStar had been
subject to corporate Federal and state income taxes for those years.
Earnings per share has been calculated and presented on a pro forma basis as
if the shares of EchoStar issued to reflect the December 31, 1993
reorganization were outstanding for the years ended December 31, 1992 and
1993, respectively. See Notes 1 and 7 of Notes to EchoStar's Consolidated
Financial Statements.
(2) For accounting and financial 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 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 $92,000 and $61.4
million for the six months ended June 30, 1996 and 1997, respectively).
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 EchoStar's Consolidated Financial Statements
contained elsewhere in this Prospectus.
(4) For purposes of computing the ratio of earnings to combined fixed charges
and preferred stock dividends and the deficiency of earnings to combined
fixed charges and preferred stock dividends, earnings consist of earnings
from continuing operations before income taxes, plus fixed charges,
excluding capitalized interest. Fixed charges consist of interest incurred
on all indebtedness and the computed interest components of rental expense
under noncancelable operating leases. Preferred stock dividends consist of
the dividends accrued on the Company's Series A Preferred Stock. For the
years ended December 31, 1994, 1995 and 1996 and the six months ended June
30, 1996 and 1997, earnings were insufficient to cover fixed charges.
(5) Gives effect to the Series B Preferred Stock Offering and the application of
the net proceeds thereof.
(6) Excludes approximately $12.3 million to be deposited by purchasers of the
Preferred Stock into the Deposit Account.
(7) Excludes restricted cash and marketable investment securities which totaled
$229.6 million as of June 30, 1997.
(8) Net of estimated discounts and commissions and offering costs of $7.0
million.
31
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ALL STATEMENTS CONTAINED HEREIN, AS WELL AS STATEMENTS MADE IN PRESS
RELEASES AND ORAL STATEMENTS THAT MAY BE MADE BY ECHOSTAR OR BY OFFICERS,
DIRECTORS OR EMPLOYEES OF ECHOSTAR ACTING ON ITS BEHALF, THAT ARE NOT STATEMENTS
OF HISTORICAL FACT CONSTITUTE "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF
THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. SUCH FORWARD-LOOKING
STATEMENTS INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES AND OTHER FACTORS THAT
COULD CAUSE THE ACTUAL RESULTS OF ECHOSTAR TO BE MATERIALLY DIFFERENT FROM
HISTORICAL RESULTS OR FROM ANY FUTURE RESULTS EXPRESSED OR IMPLIED BY SUCH
FORWARD-LOOKING STATEMENTS. AMONG THE FACTORS THAT COULD CAUSE ACTUAL RESULTS TO
DIFFER MATERIALLY ARE THE FOLLOWING: THE UNAVAILABILITY OF SUFFICIENT CAPITAL ON
SATISFACTORY TERMS TO FINANCE ECHOSTAR'S BUSINESS PLAN; INCREASED COMPETITION
FROM CABLE, DBS, OTHER SATELLITE SYSTEM OPERATORS AND OTHER PROVIDERS OF
SUBSCRIPTION TELEVISION SERVICES; CONTINUED MARKET ACCEPTANCE FOR DBS IN ITS
CURRENT BROADCASTING FORMAT AND PRICING STRUCTURE, THE INTRODUCTION OF NEW
TECHNOLOGIES AND COMPETITORS INTO THE SUBSCRIPTION TELEVISION BUSINESS;
INCREASED SUBSCRIBER ACQUISITION COSTS AND SUBSCRIBER PROMOTION SUBSIDIES; THE
INABILITY OF ECHOSTAR TO CONTINUE TO HOLD AND TO OBTAIN ADDITIONAL NECESSARY
SHAREHOLDER AND BONDHOLDER APPROVAL OF ANY STRATEGIC TRANSACTIONS; THE INABILITY
OF ECHOSTAR TO OBTAIN AND HOLD NECESSARY AUTHORIZATIONS FROM THE FEDERAL
COMMUNICATION COMMISSION ("FCC"); THE OUTCOME OF ANY LITIGATION IN WHICH
ECHOSTAR MAY BE INVOLVED; GENERAL BUSINESS AND ECONOMIC CONDITIONS; THOSE
FACTORS DESCRIBED UNDER THE CAPTION "RISK FACTORS"; AND OTHER RISK FACTORS
DESCRIBED FROM TIME TO TIME IN ECHOSTAR'S REPORTS FILED WITH THE COMMISSION. IN
ADDITION TO STATEMENTS THAT EXPLICITLY DESCRIBE SUCH RISKS AND UNCERTAINTIES,
READERS ARE URGED TO CONSIDER STATEMENTS THAT INCLUDE THE TERMS "BELIEVES,"
"BELIEF," "EXPECTS," "PLANS," "ANTICIPATES," "INTENDS" OR THE LIKE TO BE
UNCERTAIN AND FORWARD-LOOKING. ALL CAUTIONARY STATEMENTS MADE HEREIN SHOULD BE
READ AS BEING APPLICABLE TO ALL FORWARD-LOOKING STATEMENTS WHEREVER THEY APPEAR.
IN THIS CONNECTION, INVESTORS SHOULD CONSIDER THE RISKS DESCRIBED HEREIN.
OVERVIEW
EchoStar currently operates four related businesses: (i) operation of the
DISH Network 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.
EchoStar expects to derive its future revenue principally from periodic
subscription fees for DISH Network 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,
that 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.
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 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 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 America's Top 50 CD programming
package for $300. The
32
1997 Promotion allows consumers to subscribe to the DISH Network's 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 services.
RESULTS OF OPERATIONS
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 $172.8
million, an increase of $57.8 million, or 50%, as compared to total revenue for
the six months ended June 30, 1996 of $115.0 million. The increase in total
revenue in 1997 was primarily attributable to the introduction of EchoStar's
DISH Network service during March 1996, combined with significant DISH Network
subscriber growth since the launch of service. As of June 30, 1997, EchoStar had
approximately 590,000 DISH Network subscribers compared to approximately 70,000
at June 30, 1996 and 350,000 at December 31, 1996.
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 $8.7 million for the six months ended June 30, 1997.
Domestically, EchoStar 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 EchoStar's promotions.
Revenue from international sales of analog DTH products for the six months
ended June 30, 1997 totaled $13.0 million, a decrease of $9.2 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, EchoStar 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 more fully described below, EchoStar expects to focus its
future international efforts on the sale of digital set-top boxes and the
provision of consulting services to other DBS operators. As a result, during the
remainder of 1997, EchoStar expects to streamline its international operations,
including selected personnel reductions and the eventual elimination of all
sales of analog DTH products.
To expand its presence in international digital and DBS markets, EchoStar
has entered into distribution and consulting agreements with international
digital service providers. In January 1997, EchoStar entered into an agreement
(the "ExpressVu Agreement") with ExpressVu, Inc. ("ExpressVu") a majority owned
subsidiary of BCE, 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, EchoStar is assisting ExpressVu with the
construction of a digital broadcast center for use in conjunction with
ExpressVu's DTH service, which commenced operations in September 1997, and will
act as a distributor of satellite receivers and related equipment for
ExpressVu's Canadian DTH service. Among other things, EchoStar has agreed not to
provide DTH service in Canada and ExpressVu has agreed not to provide DTH
service, including DBS
33
service, in the U.S. EchoStar recognized revenues of approximately $11.9 million
related to the ExpressVu Agreement during the six 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 EchoStar to supply
digital set-top boxes for its satellite television service which commenced
operations in September 1997. Revenues from Telefonica's initial order of
100,000 digital set-top boxes are expected to approximate $40.0 million.
EchoStar 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. EchoStar expects to fulfill the remainder of the contract during early
1998 and while there can be no assurance, hopes to receive further orders during
1998.
While EchoStar continues to actively pursue other similar distribution
opportunities, no assurance can be given that any such additional negotiations
will be successful. Further, EchoStar'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 EchoStar's alliances with these, and potentially other, foreign
DBS operators.
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 $107.3 million, an increase of $9.2
million, or 9% compared to the same period in 1996. DTH products and technical
services expense decreased $62.6 million, or 69%, to $27.7 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 EchoStar's promotions. Subscriber promotion subsidies
aggregated $31.0 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. The 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. Selling, General and
Administrative ("SG&A") expenses totaled $66.4 million for the six months ended
June 30, 1997, an increase of $36.6 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, EchoStar expects that SG&A expenses as a percentage of total revenue
will decrease as subscribers are added.
EARNINGS BEFORE INTEREST, TAXES, DEPRECIATION AND AMORTIZATION. Earnings
before interest, taxes, depreciation and amortization (including amortization of
subscriber acquisition costs) ("EBITDA") was negative $842,000 for the six
months ended June 30, 1997, an improvement of $12.1 million, compared to
negative EBITDA of $12.9 million for the same period in 1996. This improvement
in negative EBITDA resulted from the factors affecting revenue and expenses
discussed above.
34
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 $61.4 million for the six months ended June 30,
1996 and June 30, 1997, respectively) aggregated $86.8 million, an increase of
$77.0 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 its second
DBS satellite ("EchoStar II") (placed in service during the fourth quarter of
1996).
OTHER INCOME AND EXPENSE. Other expense, net totaled $39.0 million for the
six months ended June 30, 1997, an increase of $15.1 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 combined with the continued accretion of
the 1994 Notes. Additionally, interest income decreased approximately $6.0
million as a result of a decrease in invested balances. EchoStar 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 $16.9 million
(from $16.8 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 EchoStar's decision to fully reserve the 1997 additions to its net
deferred tax asset.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995.
REVENUE. Total revenue for 1996 was $211.4 million, an increase of $47.5
million, or 29%, as compared to total revenue for 1995 of $163.9 million. The
increase in total revenue in 1996 was primarily attributable to the introduction
of EchoStar's DISH Network service during March 1996. In the future, EchoStar
expects to derive its revenue principally from DISH Network subscription
television services. As of December 31, 1996, EchoStar had approximately 350,000
DISH Network 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
$4.7 million, or 5%, to $98.3 million during 1996. Domestically, EchoStar sold
approximately 518,000 satellite receivers in 1996, an increase of 295% as
compared to approximately 131,000 receivers sold in 1995. Of the total number of
satellite receivers sold during 1996, approximately 474,000 were EchoStar
Receiver Systems. Although there was a significant increase in the number of
satellite receivers sold in 1996 as compared to 1995, overall revenue did not
increase proportionately as a result of the revenue recognition policy applied
to DBS satellite receivers sold under the 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 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
35
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 $3.0 million, an
increase of $1.3 million or 74%, as compared to 1995. The increase in loan
origination and participation income during 1996 was primarily due to an
increase in the number of consumer loans and leases funded.
DTH AND DISH NETWORK EXPENSES. DTH and DISH Network expenses in 1996
aggregated $187.0 million, an increase of $56.7 million, or 44%, as compared to
1995. This increase is directly attributable to the introduction of DISH Network
service in March 1996, partially offset by decreases in other DTH expenses. DTH
products and technical services expense increased $7.0 million, or 6%, to $123.8
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 $33.6 million during 1996 and
represent expenses associated with the 1996 Promotion. DISH Network 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 $90.4
million in 1996, an increase of $51.8 million or 135%, as compared to 1995. Such
expenses as a percentage of total revenue increased to 43% in 1996 as compared
to 24% in 1995. The increase in SG&A expenses was principally attributable to:
(i) increased personnel expenses as a result of introduction of DISH Network
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; (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 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 $65.9 million, an decrease
of $61.0 million compared to 1995. This decrease 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 $46.3 million in 1996,
an increase of $37.1 million, as compared to 1995. The increase in other expense
in 1996 resulted primarily from an increase in interest expense associated with
the issuance of the 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
36
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 $31.8 million (compared to $27.1 million during 1995).
INCOME TAX BENEFIT. The increase in the income tax benefit of $48.9 million
(from $5.7 million in 1995 to $54.7 million in 1996) principally resulted from
the increase in EchoStar's loss before income taxes. EchoStar's net deferred tax
assets (approximately $66.8 million at December 31, 1996) relate to temporary
differences for amortization of original issue discount on the 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.
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
37
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 $116.8 million for 1995, a
decrease of $16.9 million, or 13%, as compared to 1994. The decrease in DTH
operating expenses for 1995 resulted primarily from the decrease in sales of DTH
products. DTH product expenses as a percentage of DTH product revenue were 79%
for 1995, as compared to 77% for 1994. The increase was principally the result
of declining sales prices of C-band DTH products as described above, during 1995
as compared to 1994.
C-band programming expenses were $13.5 million for 1995, an increase of $1.9
million, or 16%, as compared to 1994. Programming expenses as a percentage of
programming revenue were 89% for 1995 as compared to 80% for 1994. Programming
expenses increased at a greater rate than revenues from programming principally
because the prior periods included the flow through of certain volume discounts.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. SG&A expenses totaled $38.5
million for 1995, an increase of $8.3 million, or 27%, as compared to 1994. Such
expenses as a percentage of total revenue increased to 24% for 1995 as compared
to 16% for 1994. The change was principally the result of the reduction of
revenues from domestic sales of DTH products and increased costs to support,
among other things, expansion of the EchoStar DTH product installation network
and administrative costs associated with development of the DISH Network. 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.
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OTHER INCOME AND EXPENSE. Other expense for 1995 was $9.2 million, a
decrease of $3.5 million, or 28%, as compared to 1994. The difference in other
income and expense for 1995 compared to 1994 resulted primarily from the
amortization of original issue discount and deferred debt issuance costs of
$23.5 million in 1995, and $20.7 million in 1994, net of capitalized interest,
on the 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 $27.1 million as
compared to $5.7 million for 1994.
BENEFIT FROM/PROVISION FOR INCOME TAXES. An income tax benefit of $5.7
million was recognized during 1995 as compared to the income tax provision for
1994 of $399,000. This change 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 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 its
acquisition of 24 DBS frequencies at the 148 DEG. WL orbital slot. Those
frequencies were acquired at the FCC's January 1996 auction of certain DBS
frequencies.
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. In June 1997, DBS
Corp consummated the 1997 Notes offering resulting in net proceeds of
approximately $362.5 million, including approximately $109.0 million restricted
to fund interest payments on the 1997 Notes through January 1, 2000 (the
"Interest Escrow"). In October 1997, EchoStar consummated the Series B Preferred
Offering resulting in net proceeds of approximately $193.0 million.
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
subscriber base. Such working capital requirements could vary if any of the
following, among other factors, occur: (i) subscriptions to DISH Network
programming differ from anticipated levels;
39
(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"). As a result of the litigation between News and EchoStar,
EchoStar's receipt of all or any portion of the News Funding, and the timing
thereof, is subject to significant uncertainty at this time. Accordingly,
EchoStar consummated the 1997 Notes Offering and plans to consummate this
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 manufacturing cost reductions for EchoStar Receiver Systems are
realized, thereby reducing the initial net cash outflow per new subscriber. From
time to time, EchoStar offers other promotions and incentives to attract
additional DISH Network subscribers. Costs associated with these additional
promotions and incentives are expensed as incurred (reported as a component of
subscriber promotion subsidies). After giving effect to these other promotions
and incentives, EchoStar expects that its aggregate net use of cash (i.e.,
subscriber acquisition costs) will approximate $300 per activation.
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 EchoStar'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 EchoStar Receiver Systems
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.
On 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 activation
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. 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
40
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, growth of the DISH Network subscriber
base may be negatively impacted.
1997 CAPITAL REQUIREMENTS
As of June 30, 1997, in addition to the working capital requirements
discussed above, during the remainder of 1997 EchoStar expects to expend
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 during the fourth quarter of 1997 as a
result of the launch of EchoStar III on October 5, 1997. Capital expenditures
related to 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 provider.
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 established in connection with the
1997 Notes offering (the "Satellite Escrow"), cash generated from operations,
and the proceeds from the Series B Preferred Stock Offering, and the Offerings.
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.
EchoStar may require additional funds to acquire DISH Network 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 unexpected increases in operating costs and
expenses, a
41
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 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 (including the 1994 Notes, the 1996 Notes, the 1997 Notes,
Deferred Payments on EchoStar I and EchoStar II, and mortgage notes payable).
Interest on the 1994 Notes and the 1996 Notes accrues, 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 1997 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 EchoStar's, DBS Corp's, ESBC's and Dish's operations are
conducted through subsidiaries, the cash flow of EchoStar, DBS Corp, ESBC and
Dish and their ability to service debt, including the 1994 Notes, the 1996 Notes
and the 1997 Notes are dependent upon the earnings of their respective
subsidiaries and, in general, the payment of funds by such subsidiaries to Dish,
by the payment of funds by Dish to ESBC, by the payment of funds by ESBC to DBS
Corp and by the payment of funds by DBS Corp to EchoStar in the form of loans,
dividends or other payments.
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, 1996 Notes and the 1997 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 substantially all of its
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 substantially all of its assets; and (vii) enter into transactions with
affiliates. The 1996 Notes Indenture permits ESBC to pay dividends and make
other distributions to DBS Corp without restrictions.
42
The 1997 Notes Indenture and the Certificate of Designation for the Series B
Preferred contain restrictive covenants that, among other things, impose
limitations on DBS Corp 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 EchoStar's subsidiaries; (vi) merge, consolidate or sell substantially all of
its assets; (vii) enter into transactions with affiliates; and (viii) pay
dividends. In general, DBS Corp may pay dividends on its equity securities only
if: (i) no default exists under the 1997 Notes Indenture; and (ii) after giving
effect to such dividends, DBS Corp's ratio of total indebtedness to cash flow
would not exceed 6.0 to 1.0. Moreover, the aggregate amount of such dividends
generally may not exceed the sum of (A) the difference of consolidated cash flow
(less 100% of such deficit) minus 150% of consolidated interest expense, in each
case from July 1, 1997, plus (B) 100% of the aggregate net proceeds to DBS Corp
and its subsidiaries from the sale of certain equity interests of DBS Corp or
EchoStar.
The Exchange Indenture for the Series B Exchange Notes (as defined) issuable
upon the exchange of the Series B Preferred Stock contains restrictive covenants
that, among other things, restricts the ability of EchoStar and certain of its
subsidiaries to (i) pay dividends with the proceeds from the Series B Preferred
Offering, (ii) pay cash dividends on any junior or parity securities and (iii)
incur indebtedness or pledge the stock of certain subsidiaries as collateral.
The certificate of designation associated with the Series B Preferred Stock also
restricts the ability of DBS Corp and its subsidiaries to (i) make restricted
payments, (ii) incur certain indebtedness or issue disqualified stock or
preferred equity interests, (iii) create payment restrictions affecting
subsidiaries, (iv) engage in transactions with affiliates or (v) engage in
certain asset sales. A majority of the covenants contained in the certificate of
designation associated with the Series B Preferred Stock and the indenture
related to the Series B Exchange Notes are applicable solely to DBS Corp and its
subsidiaries and do not impose restrictions or limitations on EchoStar or any of
EchoStar's subsidiaries which are not also subsidiaries of DBS Corp.
If cash generated from operation of the DISH Network is not sufficient to
meet the debt service requirements of the 1994 Notes, the 1996 Notes and the
1997 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 enable EchoStar to meet all of its obligations.
See "Description of Certain Indebtedness--1994 Notes," "--1996 Notes" and
"--1997 Notes" for other restrictions associated with the 1994 Notes, the 1996
Notes and the 1997 Notes. See "Description of Capital Stock."
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
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.
43
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.
44
BUSINESS
GENERAL
EchoStar is a leading provider of DBS programming services in the United
States. The Company commenced its DISH Network in March 1996, after the
successful launch of EchoStar I in December 1995. The Company launched EchoStar
II in September 1996 and EchoStar III in October 1997. Since December 31, 1996,
EchoStar has increased its DISH Network subscriber base from 350,000 to
approximately 820,000 subscribers on September 30, 1997. During the third
quarter of 1997, EchoStar believes that it captured approximately 40% of all new
DBS satellite subscribers in the U.S. Average monthly programming revenue during
1997 has been approximately $39 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 September 30,
1997, approximately 5.6 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 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
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 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 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 launched EchoStar III on
October 5, 1997, and expects to launch EchoStar IV in the first quarter of
1998. EchoStar III, which will serve the eastern half of the U.S. from
61.5 DEG. WL and EchoStar IV, which is expected to serve the western half of
the U.S. from 148 DEG. 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/or congressional or regulatory actions necessary to extend and clarify
the scope of the statutory compulsory license to cover local
satellite-retransmission of network-affiliated station signals) 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
45
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.
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 under the JVC and DISH Network
brand names. All consumers who purchase JVC branded satellite receiver
systems will subscribe to DISH Network programming. In addition, on
September 15, 1997, EchoStar announced that Sears will begin to carry JVC
branded EchoStar Receiver Systems. Beginning in October, 1997 JVC branded
EchoStar Receiver Systems are available in more than 800 full-line,
mall-based Sears stores.
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 101 DEG. WL, 110 DEG. WL and 119 DEG. WL
slots provide full-CONUS coverage and, therefore, these three slots are
considered the most strategic. With respect to a fourth orbital position,
61.5 DEG. WL, coverage of a majority of the continental U.S. is commercially
possible.
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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 61.5 DEG. 101 DEG. 110 DEG. 119 DEG.
--------------- ----- --- --- ---
EchoStar (1)................................................. 90 11 1 21
DirecTv...................................................... 54 27
MCI/News Corp. (2)........................................... 28 28
Continental (3).............................................. 22 11
Tempo (2).................................................... 22 11
Dominion..................................................... 16 8
USSB......................................................... 16 5 3
Unassigned................................................... 8 2
-- -- -- --
---
Totals....................................................... 256 32 32 32 32
-- -- -- --
-- -- -- --
---
---
148 DEG. 157 DEG. 166 DEG. 175 DEG.
--- --- --- ---
EchoStar (1)................................................. 24 1 32
DirecTv...................................................... 27
MCI/News Corp. (2)...........................................
Continental (3).............................................. 11
Tempo (2).................................................... 11
Dominion..................................................... 8
USSB......................................................... 8
Unassigned................................................... 5 1
-- -- -- --
Totals....................................................... 32 32 32 32
-- -- -- --
-- -- -- --
- ------------------------
(1) Includes 10 frequencies at 175 DEG. WL and one frequency at 166 DEG. 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 175 DEG. 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 and the Tempo licenses under PrimeStar. See "Risk
Factors--Competition from DBS and Other Satellite System Operators."
(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 61.5 DEG.
WL and 166 DEG. 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
47
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 September 30, 1997,
approximately 5.6 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 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 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 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, 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 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 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
48
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 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 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 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 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.
49
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 service.
ECHOSTAR'S EXPERIENCE IN THE DBS MARKET
The Company commenced commercial operations of the DISH Network in March
1996 and since that time has experienced rapid subscriber growth. As of
September 30, 1997, the Company had approximately 820,000 subscribers to its
DISH Network programming services. During the third quarter of 1997, the Company
believes that it captured approximately 40% 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 subscribers have
come from homes that are passed by cable. The DISH Network 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 1.25% 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 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.
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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 Multichannel Cinemax (3)
Cartoon Network Home Shopping Network PLUS: FLIX
CNBC The Learning Channel Animal Planet Multichannel HBO (6)
CNN Lifetime BET The Movie Channel (2)
Court TV MTV CNN-fn Multichannel Showtime (3)
Comedy Central NET--Political NewsTalk CNN International Sundance Channel
C-SPAN Network Game Show Network
C-SPAN 2 Nickelodeon KTLA-Los Angeles
Country Music Television Nick at Nite Classic TV MTV2
The Discovery Channel QVC Turner Classic Movies
Disney (2) The Sci-Fi Channel WGN-Chicago
E! The Travel Channel WPIX-New York
ESPN TBS WSBK--Boston
ESPN 2 TBN One Regional Sports Network
ESPNews TNN
EWTN TNT
The Family Channel TV Land
Food Network USA
Headline News VH-1
The History Channel The Weather 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 subscriber in a particular local market, EchoStar must obtain
the retransmission consent of the local affiliate. Furthermore, the compulsory
license provided in the SHVA may not extend to EchoStar's retransmission of
local network station signals, and any use of the compulsory license 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 "statutory" (or compulsory) copyright license that
generally 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", with respect to a particular television
network, is defined as one that cannot receive an over-the-air network signal of
"grade B" intensity (a predictive standard of signal intensity employed by the
FCC) of a primary network station affiliated with that network 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
the signal of an affiliate of that network. 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. On August 28, 1997, a Copyright Arbitration Royalty Panel
("CARP"), appointed to recommend royalties for satellite retransmission of
network-affiliated television and superstation signals pursuant to the
compulsory license of Section 119 of the Copyright Act, delivered its Report to
the Librarian of Congress. In the CARP's recommendation, which must be either
adopted or changed by the Copyright Office within 60 days from August 28, 1997,
the CARP held it has no jurisdiction to set royalties for local satellite
retransmissions of the signals of network-affiliated television stations, on the
ground that the compulsory license of the Copyright Act does not extend to such
retransmissions. While EchoStar has petitioned the Librarian to modify the CARP
report, the petition has been opposed, and there can be no assurance that the
petition will be granted. Moreover, EchoStar is continuing its efforts to secure
passage of legislation that will clarify and extend the scope of the compulsory
license with respect to local network signals. There can be no assurance that
EchoStar will
51
be successful in these efforts. If the CARP's position is upheld by the
Librarian and legislation to clarify and extend the scope of the compulsory
license is not passed, EchoStar would be prevented from relying on the
compulsory copyright license to retransmit local network-affiliated stations'
signals and may have to engage in the relatively cumbersome process of
negotiating and obtaining copyright licenses from all individual copyright
holders instead.
The CARP also recommended setting at zero the royalty rate for local
retransmissions of superstation signals. This recommendation may be considered
favorable to EchoStar because it may provide a basis for the proposition that
the royalty rate for all local-into-local retransmission (to the extent
permitted) should be zero. However, there can be no assurance that the Librarian
will adopt the CARP's recommendation or that, in the absence of the legislation
whose passage is sought by EchoStar, EchoStar would be successful in any
litigation with copyright owners regarding this issue.
DBS SALES AND MARKETING
EchoStar primarily utilizes its existing nationwide network of over 7,000
independent distribution and retail stores and outlets to market and distribute
DISH Network 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 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. EchoStar has
comprehensive dealer guides describing all aspects of the DISH Network 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 merchandise catalogue is also available for
distributors to add to their promotional materials. Additionally, one channel of
programming on the DISH Network provides information about additional services
and promotions offered by the DISH Network. 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 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
52
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 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 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 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 subscriber turnover rates (to date
less than 1.25% 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 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.
ECHOSTAR RECEIVER SYSTEMS
DISH Network 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 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. JVC also manufactures limited quantities of
other consumer electronics products, which incorporate EchoStar Receiver
Systems. EchoStar has managed its inventory levels based on its goal of reaching
one million subscribers by the end of 1997. There can be no
53
assurance that EchoStar will be successful in achieving this goal. To the extent
that EchoStar exceeds this goal, it may experience shortages of certain models
of EchoStar Receiver Systems. As previously described, EchoStar is negotiating
with several brand-name consumer electronics manufacturers to produce receivers
for use with the DISH Network. 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
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 October 1997. On
August 1, 1997, EchoStar began offering an internally-financed consumer lease
plan to prospective DISH Network customers. This plan provides for an 18 month
lease term at competitive rates to qualified consumers.
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 service grows.
OTHER COMPONENTS OF DBS SERVICE
SUBSCRIBER MANAGEMENT. EchoStar outsources its subscriber management,
billing and remittance services for DISH Network subscribers. Under the terms of
the outsourcing agreement, EchoStar is provided with access to a subscriber
management system maintained by the service provider. The provider facilitates
the authorization of programming to the subscriber and coordinates billing and
renewal functions.
CUSTOMER CARE CALL CENTER. EchoStar currently maintains call centers in
Thornton, Colorado and Harrisburg, Pennsylvania. Potential and existing
subscribers can call a single phone number to receive assistance for hardware,
programming, installation or service. The call center in Thornton, Colorado is
owned by the Company. The Pennsylvania facility is operated by a third party.
DIGITAL BROADCAST CENTER. The first step in the delivery of satellite
programming to the customer is the uplink of that programming to the satellite.
Uplink is the process by which signals are received from either the 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 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
54
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 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.
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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.
Applications to modify the permit for EchoStar III and for a launch
authorization for the satellite, which was launched on October 5, 1997, were
conditionally granted by International Bureau of the FCC. See "--Government
Regulation--FCC Permits and Licenses."
ESC's, DirectSat's, DBSC's and DBS Corp'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
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DISH Network 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 can be 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's 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 can be no assurance that EchoStar's application will be
granted by the FCC or that, if granted, EchoStar will be able to successfully
capitalize on any resulting business opportunity. In exchange for certain
payments to EchoStar, EchoStar and DBSI (the holder of the remaining 20%
interest in this subsidiary) have entered into an agreement that contemplates
the grant of an option to DBSI to hold an 80.1% interest in the subsidiary, with
EchoStar's holding reduced to a carried interest equivalent to approximately
19.9%. The agreement also contemplates an EchoStar right to use approximately
20% of the capacity of the subsidiary's system. Exercise of such an option would
be subject to FCC approval.
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 is, and EchoStar IV 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 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, EchoStar II and EchoStar III, and is constructing
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.
57
Launch delays could result from weather conditions or technical problems
with any EchoStar satellite or any launch vehicle utilized by the launch
provider for EchoStar IV or from other factors beyond EchoStar's control. If the
launch of EchoStar IV is delayed, the Company's strategy to provide additional
programming to DISH Network subscribers using transponders on these satellites
would be adversely affected.
SATELLITE LAUNCHES
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 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 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 contract for EchoStar IV, Lockheed Martin
bears the risk of loss 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
58
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 I and EchoStar II covered the
period from launch through completion of testing and commencement of commercial
operations. The policy also provided for in-orbit insurance for EchoStar II
through September 9, 1997. The policy protected 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, 1998 and for EchoStar II through September 9, 1998. The
in-orbit insurance policies for EchoStar I and EchoStar II include 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 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;
(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 1997 Notes 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- and HTS Tracker-TM- name brands,
with good, better and best options typically available for each line and each
geographic reception area. EchoStar sold approximately 264,000 C-band satellite
receivers worldwide in 1996. EchoStar's sales of DTH products are somewhat
seasonal, with
59
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. Prospectively, EchoStar expects to focus its international
efforts on the sale of digital set-top boxes and the provision of consulting
services to other DBS operators. As a result, during the remainder of 1997,
EchoStar expects to streamline its international operations, including selected
personnel reductions.
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 DTH service, which commenced operations in
September 1997, 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 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 satellite television service in Spain,
which commenced operations 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.
In addition to the orders described above, EchoStar has subsequently
received additional purchase orders from ExpressVu and Telefonica totaling $50
million. These orders are for first quarter 1998 delivery of digital set-top
boxes.
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,
60
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 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 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
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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.
In addition, TSAT has announced that it currently intends to provide digital
programming to TSAT and other cable subscribers from Tempo's DBS satellite
launched in March 1997. Tempo's DBS satellite would allow TSAT 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 subscribers must
purchase multiple EchoStar Receiver Systems in order to view different
programming on different televisions simultaneously. TSAT's complementary DBS
service could make cable a stronger competitor to the DISH Network. As indicated
below, the 11 full-CONUS frequencies assigned to Tempo are the subject of an
application for FCC consent to assignment to PrimeStar.
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. As of September 30, DirecTv had approximately 2.9
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 Tempo's DBS satellite, which is capable of providing full-CONUS
service. PrimeStar has announced plans to use Tempo'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 September 30, 1997, PrimeStar had approximately 1.8
million subscribers.
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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. 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. 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. PrimeStar also has agreed to acquire
Tempo's license.
On July 18, 1997, PrimeStar and TSAT filed an application with the FCC
requesting FCC approval for the assignment of Tempo's authorizations to
PrimeStar in connection with the PrimeStar "roll-up" restructuring. On August
15, 1997, MCI and PrimeStar also filed an FCC application requesting approval
for the assignment of MCI's DBS authorizations to PrimeStar. The parties to the
two transactions have also initiated the antitrust clearance process with the
Department of Justice for each transaction, and EchoStar understands that
clearance has been obtained for one of the two transactions (the PrimeStar roll-
up). The FCC applications have been placed on public notice and have been
opposed by EchoStar and others, but there can be no assurance that any of these
oppositions will be successful.
The proposed restructuring of PrimeStar, if approved and 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 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 they are currently set to expire in
2002. 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.
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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. 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.
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 to serve the U.S. if the home country of the
foreign-licensed satellite offers open "effective competitive opportunities"
("ECO") in the same satellite service to U.S. licensed satellites. 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 initiated a proceeding in July 1997 proposing to maintain the
ECO test with respect to foreign-licensed satellites seeking to provide DBS and
DTH service in the United States.
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.
Pursuant to the protocol, the FCC already has permitted a company to provide
DTH services in the U.S. through a Mexican satellite. Televisa International,
LLC ("Televisa") is currently in the process of developing DTH television and
related services in Mexico, Latin America, North America, and Europe. Televisa
received authorization from the FCC to operate one million receive-only earth
stations in the U.S.
64
which are capable of receiving DTH television services from Mexico's Solidaridad
II satellite. The Solidaridad II satellite operates at 113 DEG. WL providing
full-CONUS coverage, and is licensed by the Mexican Government.
The FCC authorized Televisa to operate receive dishes that are larger, and
possibly less attractive to consumers, than the dishes made available by
EchoStar. Further, the FCC authorization for Televisa does not provide
Televisa's earth stations with protection from unacceptable radio interference
from nearby satellite networks. Nevertheless, the authorization of Televisa to
provide service from the 113 DEG. WL orbital slot may produce additional
competition to the full-CONUS service by EchoStar from EchoStar I and EchoStar
II.
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.
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VHF/UHF BROADCASTERS. Most areas of the U.S. are covered by traditional
terrestrial VHF/UHF television broadcasts that typically include 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
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 is scheduled to occur in
December 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
66
negatively affected, and will continue to negatively affect, C-band sales.
However, EchoStar believes that many consumers may continue to choose to
purchase C-band systems for the next several years because of the remaining
orbital life of existing C-band satellites, the amount and quality of
programming available, and the continuing marketing efforts by programmers and
others designed to attract and retain C-band subscribers, among other factors.
Internationally, EchoStar competes against a variety of manufacturers and
distributors in different countries. In certain regions, EchoStar has a small
market share, while in others, such as Africa, EchoStar believes that it has a
larger market share than any of its competitors. In some markets, EchoStar
cannot effectively compete due to local restrictions on foreign companies and
due to the necessity of using proprietary products for which EchoStar does not
hold licenses.
DTH PROGRAMMING. EchoStar competes with many large DTH programming
packages, some of which are affiliated with well-known, large program
originators, and some of which are affiliated with cable operators. EchoStar
competes by offering promotional programming packages in conjunction with its
sales of DTH systems. Since a significant portion of EchoStar's programming
sales are generated through DTH retailers, EchoStar also competes for retailer
relationships on the basis of commission rates and quality of service offered to
the retailer and its customers. In addition, the programming market faces
competition from cable television as well as emerging technologies such as DBS
services, wireless cable systems, and others. The largest competitors of
EchoStar in programming distribution include NetLink Satellite USA, owned by
TCI, SuperStar Satellite Entertainment, National Programming Service, Turner
Home Satellite, Inc., HBO Direct, Inc. and Showtime Satellite Networks. These
competitors have substantially greater financial resources than EchoStar, have
substantially more subscribers, and are therefore able to obtain more favorable
pricing from programmers than EchoStar.
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
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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.
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 119 DEG. WL. ESC also has a
conditional construction permit for 11 unspecified western frequencies.
EchoStar's subsidiary DirectSat has a license to cover ten additional
frequencies at the 119 DEG. WL orbital location. The FCC also has issued
DirectSat a conditional permit for one frequency at 110 DEG. WL and 11
frequencies at 175 DEG. WL. DBSC holds a conditional construction permit and
specific orbital slot assignments for 11 DBS frequencies at each of 61.5 DEG. WL
and 175 DEG. WL.
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 20, 2002.
EchoStar's FCC permits are conditioned on satisfaction of ongoing due
diligence, construction, reporting and related obligations. There can be no
assurance that EchoStar will be able to comply with the FCC's due diligence
obligations or that the FCC will determine that 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 119 DEG. 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 119.2 DEG. WL and 118.8 DEG. 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 119.05 DEG. WL and EchoStar II at 118.95 DEG. 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 118.8 DEG. 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
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penalties on EchoStar. If the FCC denied the STA, EchoStar believes that 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, the EchoStar system's digital transmissions) 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 II, and EchoStar has cooperated, and
continues to cooperate, with the FCC in the preparation of its responses to any
ITU requests. 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 118.8 DEG. WL and for approval of certain modifications
made to the design of that satellite. In a separate order issued on the same
date in File No. 53-SAT-ML-95, the International Bureau granted DirectSat
conditional authority to use 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 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
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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.
EchoStar III was launched on October 5, 1997 pursuant to FCC authority which
was conditionally granted by the September 29, 1997 order of the FCC's
International Bureau. The International Bureau's September 29, 1997 order also
conditionally granted DBSC an STA to test all transponders on EchoStar III for
the earlier of eight weeks after launch or seven days prior to the launch of a
satellite to that orbital location by an authorized entity. The International
Bureau's order is subject to review by the full Commission and ultimately the
Court of Appeals, and there can be no assurance that the order will not be
challenged, or that any such challenges will not be successful. EchoStar also
expects to file applications for authority to operate the satellite as well as
feeder link earth stations and antennas for TT&C communications with EchoStar
III. On October 3, 1997 EchoStar also filed an application for authority to
operate one of the earth station antennas that it plans to deploy for TT&C and
feeder link communications with EchoStar III. There can be no assurance that
this application will be granted. On that same date, EchoStar filed a request
for an STA to allow it to begin testing that antenna immediately upon the launch
of EchoStar III. On the same date, the FCC staff verbally gave EchoStar a 90-day
STA to conduct such testing subject to certain power restrictions.
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 can be 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.
On July 18, 1997, EchoStar filed a request for an STA to use the 11 channels
assigned to Tempo at the 119 DEG. WL orbital location, on the ground that Tempo,
while it launched a satellite to that location on March 8, 1997, has not yet
started providing service. Tempo has opposed this request on several grounds,
including that it is currently testing its satellite. There can be no assurance
that the FCC will grant EchoStar's request.
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 License on the
ground that the supplemental financial
70
information, filed by ESC in response to the 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) 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.
EchoStar has also been granted a conditional 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 85 DEG. WL and 91 DEG. 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.
On August 20, 1997, GE Americom filed an application requesting modification
of its license for a C-band/Ku-band satellite currently located at 89 DEG. WL,
to allow relocation of that satellite to 83 DEG.WL. In support of that request,
GE has argued that the license for that satellite is set to expire before
EchoStar's FSS satellite is expected to be launched to that location. EchoStar
has opposed the modification application, but has stated that it would not
oppose a request for temporary relocation of GE's satellite to that slot on an
STA basis.
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 148 DEG. 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
71
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.
FOREIGN OWNERSHIP LIMITATIONS. The Communications Act of 1934, as amended,
and the FCC's implementing regulations provide that, where subsidiaries of a
holding company hold certain types of FCC licenses, foreign nationals or their
representatives may not own in excess of 25% of the total equity of the holding
company, considered on a fully-diluted basis, except upon an FCC public interest
determination. While the FCC's International Bureau has ruled that these
limitations do not apply to DBS authorizations, the ruling has been challenged
and the question remains open. Furthermore, the limitations will apply to
EchoStar's FSS authorizations if EchoStar holds itself out as a common carrier
or if the FCC decides to treat it as such a carrier.
A recent survey of EchoStar's equity owners discloses that EchoStar's
foreign ownership in May of this year was under 5%, well below these
limitations, if they were to apply. However, if the purchase by foreigners or
their representatives of EchoStar's existing or new equity securities or
exercise of any right to convert existing or new securities, including the
securities issued in the Offerings, would cause the foreign ownership
limitations to be exceeded, a separate FCC determination that such ownership was
consistent with the public interest would be required in order to avoid a
violation of the Act and/or the FCC's rules.
LIMITATIONS ON TRANSFER OF CONTROL AND ASSIGNMENT OF LICENSES. The
Communications Act of 1934, as amended, requires prior FCC approval of transfers
of control over, or assignment of Title III licenses. If the purchase of the
securities subject to the Offerings (or exercise of the right to convert the
Preferred Stock) would result in a transfer of control over the FCC licenses and
permits, such transfer would require prior approval of the FCC.
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.
72
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
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 availability) 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 by DBS licensees,
including, at a minimum, reasonable and non-discriminatory access by qualified
candidates for election to public 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 "statutory" (or
compulsory) copyright license that generally 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", with respect
to a particular television network, is defined as one that cannot receive an
over-the-air network signal of "grade B" intensity (a predictive standard of
signal intensity employed by the FCC) of a primary network station affiliated
with that network 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 the signal of an affiliate of that network.
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. On
August 28, 1997, a Copyright Arbitration Royalty Panel ("CARP"), appointed to
recommend royalties for satellite retransmission of network-affiliated
television and superstation signals pursuant to the compulsory license of
Section 119 of the Copyright Act, delivered its Report to the Librarian of
Congress. In the CARP's recommendation, which must be either adopted or changed
by the Copyright Office within 60 days from August 28, 1997, the CARP held it
has no jurisdiction to set royalties for local satellite retransmissions of the
signals of network-affiliated television stations, on the ground that the
compulsory license of the Copyright Act does not extend to such retransmissions.
While EchoStar has petitioned the Librarian to modify the CARP report, the
petition has been opposed, and there can be no assurance that the petition will
be granted. Moreover, EchoStar is continuing its efforts to secure passage of
legislation that will clarify and extend the scope of the compulsory license
with respect to local network signals. There can be no assurance that EchoStar
will be successful in these efforts. If the CARP's position is upheld by the
Librarian and legislation to clarify and extend the scope of the compulsory
license is not passed, EchoStar would be prevented from relying on the
compulsory copyright license to retransmit local network-affiliated
73
stations' signals and may have to engage in the relatively cumbersome process of
negotiating and obtaining copyright licenses from all individual copyright
holders instead.
The CARP also recommended setting at zero the royalty rate for local
retransmissions of superstation signals. This recommendation may be considered
favorable to EchoStar because it may provide a basis for the proposition that
the royalty rate for all local-into-local retransmission (to the extent
permitted) should be zero. However, there can be no assurance that the Librarian
will adopt the CARP's recommendation or that, in the absence of the legislation
whose passage is sought by EchoStar, EchoStar would be successful in any
litigation with copyright owners regarding this issue.
Subject to the foregoing considerations, 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.
In addition, in its August 28, 1997 report, the CARP recommended that the
royalty rate for satellite retransmissions of distant network-affiliated station
and distant superstation signals be set at 27 cents per subscriber per month--a
substantial increase compared to the previously applicable rates, which ranged
from 6 to 17.5 cents. While the Satellite Broadcasting & Communications
Association, of which EchoStar is a member, has requested modifications to the
CARP report, this request has been opposed, and there can be no assurance that
this request will be granted. Several Congressman have publicly voiced their
opposition to the 27 cent royalty rate recommended by CARP; a sub-committee
chairman and ranking member have requested that the Librarian of Congress stay
the CARP's recommendation for 18 months.
EchoStar believes that it may be able to pass through the recommended
increases (should they be adopted) to its customers by separately tiering the
channels involved, so that its operating margins are not substantially affected.
However, the recommended increases may adversely affect the competitiveness of
EchoStar vis-a-vis cable operators, which pay lower rates to copyright holders.
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.
PATENTS AND TRADEMARKS
EchoStar uses a number of trademarks for its products and services,
including "EchoStar-Registered Trademark-," "DISH Network-TM-," "DISH Network,"
"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.
74
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 1,650 employees at September 30, 1997, of which
approximately 1,575 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 future 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 OWNED
DESCRIPTION/USE LOCATION SQUARE FOOTAGE OR LEASED
- -------------------------------------------------------- ---------------------------- -------------- -----------
Future Corporate Headquarters........................... Littleton, Colorado 156,000 Owned
Corporate Headquarters and Warehouse Distribution Englewood, Colorado
Center................................................ 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
75
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 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 110 DEG. 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.
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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 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.
77
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 & Tourtillott, 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,
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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.
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.
79
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 1995 190,000 - - 14,705 15,158
Chief Executive Officer 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 1995 160,000 - 88,229 14,705 32,390
Vice President 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 1995 116,755 21,012 4,777 23,240 10,597
Financial Officer 1994 85,602 - - 10,713 -
David K. Moskowitz.......................... 1996 142,692 10,000 - 7,495 12,994
Senior Vice President and General 1995 130,000 10,000 - 28,048 13,270
Counsel 1994 125,384 - - 53,568 1,000
- ------------------------
(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.
80
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)
- ------------------------
(1) In August 1996, the Company 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 SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
NUMBER OF OPTIONS AT IN-THE-MONEY OPTIONS AT
SHARES DECEMBER 31, 1996 DECEMBER 31, 1996 (1)
ACQUIRED VALUE -------------------------- --------------------------
NAME ON EXERCISE REALIZED 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
- ------------------------
(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
81
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 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.
Effective July 1, 1997, the Executive Compensation Committee of the Board of
Directors (the "Executive Compensation Committee") voted to reprice all
outstanding options with an exercise price greater than $17.00 per share of
Class A Common Stock to $17.00 per share of Class A Common Stock. The price to
which the options were repriced exceeded the fair market value of EchoStar's
Class A Common Stock as of the date of the repricing. Options to purchase
approximately 288,000 shares of Class A Common Stock were affected by this
repricing.
LAUNCH BONUS PLAN. Effective September 9, 1996 EchoStar 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 September performance award approximated 7,390 shares. EchoStar
granted a performance award of ten shares of its Class A Common Stock to all
full-time employees with more than 90 days of service in connection with the
launch of EchoStar III, which occurred on October 5, 1997. The total number of
shares granted relative to the October performance award approximated 12,250.
401(K) PLAN. In 1983 EchoStar adopted a defined-contribution tax-qualified
401(k) plan. EchoStar'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. EchoStar may make a 50% matching contribution up to a maximum of $1,000
per participant per calendar year. EchoStar may also make an annual
discretionary profit sharing or employer stock contribution to the 401(k) plan
with the approval of the Board of Directors.
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%
82
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, EchoStar 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.
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 Series A
Preferred Stock 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.
83
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 August 31, 1997
by: (i) each person known by EchoStar to be the beneficial owner of more than
five percent of any class of EchoStar's capital stock; (ii) each Director of
EchoStar; (iii) each person acting as an executive officer of EchoStar; 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
- -------------------------------------------------------------------------------------- ------------ ---------------
SERIES A 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 77.6%
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%
- ------------------------
* 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 Series A Preferred Stock held in trust for the benefit of
Mr. Ergen's minor children and other members of his family. Mr. Ergen's
spouse is the trustee for that trust.
(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 Common Stock; (iii) 410,847 shares of Class A Common Stock
issuable upon conversion of Mr. Ergen's Series A Preferred Stock; and (iv)
1,125,000 shares of Class A Common Stock issuable upon conversion of Series
A Preferred Stock held in trust for the benefit of Mr. Ergen's minor
children and other members of his family.
(4) Beneficial ownership percentage was calculated assuming exercise or
conversion of all shares of Class B Common Stock, Series A 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, 72.6%; 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%.
84
(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.
(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
Series A Preferred Stock; (iii) 751 shares of Class A Common Stock held as
custodian for his minor children; and (iv) 375,000 shares of Class A Common
Stock controlled by Mr. DeFranco as general partner of a partnership.
(7) Based on information available to the Company, 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 Company, 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 Company, 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 Company, Chancellor LGT Asset
Management, Inc. owned 5.1% 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 Series A Preferred
Stock; (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.
85
DESCRIPTION OF CERTAIN INDEBTEDNESS
Set forth below is a summary of certain indebtedness to which Dish, ESBC and
DBS Corp 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 EchoStar.
1994 NOTES
On June 7, 1994, Dish issued 624,000 units, consisting of the 12 7/8% Senior
Secured Discount Notes due 2004 (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 13 1/8% Senior Secured Discount Notes due 2004 (the "1996
Notes") and the 12 1/2% Senior Secured Notes due 2004 (the "1997 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 indenture relating to the 1994 Notes (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 substantially all of
their 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
86
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 EchoStar.
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.
1996 NOTES
On March 25, 1996, ESBC completed the offering related to the 1996 Notes
(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
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 indenture relating to the 1996 Notes (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.
87
The 1996 Notes Indenture permits ESBC to pay dividends and make other
distributions to EchoStar, or any of EchoStar's wholly-owned subsidiaries,
without restrictions, but restricts the ability of EchoStar to pay dividends and
make other distributions.
1997 NOTES
On June 25, 1997, DBS Corp completed the offering related to the 1997 Notes
(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 $363.8 million (after payment of underwriting discount
and other issuance costs aggregating approximately $11.2 million). The 1997
Notes bear interest at a rate of 12 1/2%, computed on a semi-annual bond
equivalent basis. Interest on the 1997 Notes is payable in cash semi-annually on
January 1 and July 1 of each year, commencing January 1, 1998. The 1997 Notes
mature 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 EchoStar, and contingent upon the occurrence of certain events, will be
guaranteed by ESBC and Dish and certain other subsidiaries of DBS Corp and
EchoStar. The 1997 Notes are secured by liens on the capital stock of DBS Corp,
the EchoStar IV satellite 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 indebtedness to which the 1997 Notes would
be senior; and (ii) the 1997 Notes are effectively subordinated to all
liabilities of DBS Corp's subsidiaries, including liabilities to general
creditors (except to the extent that any subsidiary of DBS Corp may guarantee
the 1997 Notes), and the guarantee of EchoStar is effectively subordinated to
all liabilities of EchoStar, except liabilities to general creditors.
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 are subject to
redemption, at the option of DBS Corp, in whole or in part, at redemption prices
ranging from 106.5625% during the twelve month period commencing July 1, 2000 to
100% on or after July 1, 2002
In the event of a change of control, as described in the 1997 Notes
Indenture, DBS Corp will be required to make an offer to each holder of 1997
Notes to repurchase all of such holder's 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.
The indenture relating to the 1997 Notes (the "1997 Notes Indenture")
contains restrictive covenants that, among other things, impose limitations on
DBS Corp 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 DBS Corp's subsidiaries; (vi) merge,
consolidate or sell assets; and (vii) enter into transactions with affiliates.
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DESCRIPTION OF ECHOSTAR CAPITAL STOCK
GENERAL
Pursuant to EchoStar's Amended and Restated Articles of Incorporation, as in
effect on the date hereof, EchoStar's authorized capital stock consists of: (i)
400,000,000 shares of common stock, of which 200,000,000 shares are designated
"Class A Common Stock," 100,000,000 shares are designated "Class B Common
Stock," and 100,000,000 shares are designated "Class C Common Stock;" and (ii)
20,000,000 shares of preferred stock, including the following series which have
been authorized: 1,616,681 shares of Series A Preferred Stock and 900,000 shares
of Series B Preferred Stock. As of October 7, 1997, 11,870,521 shares of Class A
Common Stock were issued and outstanding and held of record by 2,334
stockholders, 29,804,401 shares of Class B Common Stock were issued and
outstanding and held of record by Charles W. Ergen, EchoStar's President and
Chief Executive Officer, and no shares of Class C Common Stock were issued and
outstanding. At October 7, 1997, there were 1,616,681 shares of Series A
Preferred Stock outstanding held by Messrs. Ergen and DeFranco, and 200,000
shares of Series B Preferred Stock outstanding held by certain qualified
institutional buyers. See "Security Ownership of Certain Beneficial Owners and
Management." All outstanding shares of the Class A Common Stock and Class B
Common Stock are fully paid and nonassessable. The designation and the powers,
preferences and rights of the shares of each class of common stock and each
series of preferred stock and the qualifications, limitations and restrictions
thereof are as set forth below.
The transfer agent for EchoStar's capital stock, including the Class A
Common Stock, is American Securities Transfer & Trust, Inc.
CLASS A COMMON STOCK
Each holder of Class A Common Stock is entitled to one vote for each share
of Class A Common Stock owned of record on all matters submitted to a vote of
stockholders. Except as otherwise required by law, the Class A Common Stock
votes together with the Class B Common Stock, the Class C Common Stock and the
Series A Preferred Stock on all matters submitted to a vote of stockholders.
Subject to the preferential rights of any outstanding series of Preferred Stock
and to the restrictions on payment of dividends imposed by the 1994 Notes, the
1996 Notes and the 1997 Notes (see "Description of Certain Indebtedness") and
any other indebtedness of EchoStar, the holders of Class A Common Stock are
entitled to such dividends as may be declared from time to time by the Board of
Directors from funds legally available therefor, and, together with the holders
of the Class B Common Stock, are entitled, after payment of all prior claims, to
receive pro rata all assets of EchoStar upon the liquidation, dissolution or
winding up of EchoStar. Holders of Class A Common Stock have no redemption,
conversion or preemptive rights.
CLASS B COMMON STOCK
Each holder of Class B Common Stock is entitled to ten votes for each share
of Class B Common Stock on all matters submitted to a vote of stockholders.
Except as otherwise required by law, the Class B Common Stock votes together
with the Class A Common Stock, the Class C Common Stock and the Series A
Preferred Stock on all matters submitted to a vote of the stockholders. Each
share of Class B Common Stock is convertible, at the option of the holder, into
one share of Class A Common Stock. The conversion ratio is subject to adjustment
from time to time upon the occurrence of certain events, including: (i)
dividends or distributions on Class A Common Stock payable in Class A Common
Stock or certain other capital stock; (ii) subdivisions, combinations or certain
reclassifications of Class A Common Stock; and (iii) issuances of rights,
warrants or options to purchase Class A Common Stock at a price per share less
than the fair market value of the Class A Common Stock. Each share of Class B
Common Stock is entitled to receive dividends and distributions upon liquidation
on a basis equivalent to that of the Class A Common Stock.
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CLASS C COMMON STOCK
Each holder of Class C Common Stock is entitled to one vote for each share
of Class C Common Stock on all matters submitted to a vote of stockholders.
Except with respect to transactions involving the issuance of capital stock
which negatively affect the rights of holders of Series A Preferred Stock, or as
otherwise required by law, the Class C Common Stock votes together with Class A
Common Stock, the Class B Common Stock and the Series A Preferred Stock on all
matters submitted to a vote of the stockholders. Each share of Class C Common
Stock is convertible into Class A Common Stock on the same terms as the Class B
Common Stock. Each share of Class C Common Stock is entitled to receive
dividends and distributions upon liquidation on a basis equivalent to that of
the Class A Common Stock. Upon a Change of Control (as defined) of EchoStar,
each holder of outstanding shares of Class C Common Stock is entitled to cast
ten votes for each share of Class C Common Stock held by such holder. "Change of
Control" has the same meaning as set forth in each of the Notes Indentures. See
"Description of Certain Indebtedness." EchoStar has no present intention to
issue any shares of Class C Common Stock and, under current NASD rules, will not
be able to issue so long as the Class A Common Stock is quoted on the Nasdaq
National Market.
SERIES A PREFERRED STOCK
EchoStar's Board of Directors is authorized to divide the preferred stock
into series and, with respect to each series, to determine the preferences and
rights and the qualifications, limitations, or restrictions thereof, including
the dividend rights, conversion rights, voting rights, redemption rights and
terms, liquidation preferences, sinking fund provisions, the number of shares
constituting the series and the designation of such series. The Board of
Directors may, without stockholder approval, issue preferred stock with voting
and other rights that could adversely affect the voting power of the holders of
common stock and could have certain anti-takeover effects.
Each share of Series A 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: (i) dividends or
distributions on Class A Common Stock payable in Class A Common Stock or certain
other capital stock; (ii) subdivisions, combinations or certain
reclassifications of Class A Common Stock; and (iii) issuances of rights,
warrants or options to purchase Class A Common Stock at a price per share less
than the liquidation preference per share. The aggregate liquidation preference
for all outstanding shares of Series A Preferred Stock is limited to
approximately $15.1 million plus cumulative unpaid dividends. At June 30, 1997,
accrued and unpaid dividends on the Series A Preferred Stock totaled $3.9
million. The holders of the Series A Preferred Stock contractually subordinated
their rights to receive dividends to the Series B Preferred Stock.
Each share of Series A Preferred Stock is entitled to receive dividends
equal to eight percent per annum of the liquidation preference for such share
calculated from May 6, 1994. The 1994 Notes Indenture, the 1996 Notes Indenture,
the 1997 Notes Indenture and the Series B Preferred Stock Certificate of
Designation restrict the Company's ability to pay dividends on the Series A
Preferred Stock. The Company currently has no intention to begin paying
dividends on the Series A Preferred Stock.
Shares of Series A Preferred Stock automatically convert into shares of
Class A Common Stock in the event they are transferred to any person other than
permitted transferees. Each share of Series A Preferred Stock is entitled to the
equivalent of ten votes for each share of Class A Common Stock into which it is
convertible and, except with respect to transactions involving the issuance of
capital stock which negatively affects the rights of holders of Series A
Preferred Stock (as more particularly described in the Certificate of
Designations, Preferences and Rights for the Series A Preferred Stock) or as
otherwise required by law, votes together with the Class A Common Stock, Class B
Common Stock and Class C Common Stock as a single class on all matters submitted
to a vote of stockholders.
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SERIES B PREFERRED STOCK
In 1997, EchoStar established from authorized preferred stock its Series B
Preferred Stock consisting of 900,000 shares authorized, and issued 200,000
shares to qualified institutional buyers. Each share of Series B Preferred Stock
is entitled to dividends at 12 1/8% per annum, payable when, as, and if declared
quarterly in cash or, at the sole discretion of EchoStar, in additional shares
of Series B Preferred Stock, on each January 1, April 1, July 1 and October 1 of
each year, commencing January 1, 1998. The liquidation preference of the Series
B Preferred Stock is $1,000 per share, plus accumulated and unpaid dividends. On
or after July 1, 2000, the Series B Preferred Stock will be redeemable in cash,
at the option of EchoStar, in whole or in part, at a price equal to the
redemption price (expressed as a percentage of the liquidation preference
thereof), together with accumulated and unpaid dividends thereon to the
applicable redemption date. At any time prior to July 1, 2000, EchoStar may,
subject to and upon compliance with certain conditions, redeem shares of Series
B Preferred Stock at a redemption price, payable in cash (expressed as a
percentage of the liquidation preference thereof, plus an amount equal to a
prorated dividend for the period from the dividend payment date immediately
prior to the redemption date), with the net proceeds of one public or private
sale of equity interests of EchoStar or any of its subsidiaries. The Series B
Preferred Stock will be subject to mandatory redemption in whole on July 1, 2004
at a price, payable in cash, equal to the liquidation preference thereof, plus
all accumulated and unpaid dividends to the date of redemption.
Upon the occurrence of a Change of Control (as such term is defined in the
Certificate of Designation for the Series B Preferred Stock), EchoStar will be
required, provided certain conditions are met, to make an offer to each holder
of Series B Preferred Stock to repurchase all or any part of such holder's
Series B Preferred Stock at a cash purchase price equal to 101% of the
liquidation preference thereof, plus accumulated and unpaid dividends to the
date of repurchase.
The Series B Preferred Stock ranks: (i) senior to all common stock of
EchoStar and to each series of preferred stock existing on September 26, 1997
and to each other class of capital stock or series of preferred stock issued by
EchoStar, which is established after September 26, 1997, the terms of which do
not expressly provide that it ranks senior to or on a parity with Series B
Preferred Stock; (ii) subject to certain conditions, on a parity with any class
of capital stock or series of preferred stock issued by EchoStar, which is
established after September 26, 1997, the terms of which expressly provide that
such class or series will rank on a parity with the Series B Preferred Stock;
and (iii) subject to certain conditions, junior to each class of capital stock
or series of preferred stock issued by EchoStar, which is established after
September 26, 1997, the terms of which expressly provide that such class or
series will rank senior to the Series B Preferred Stock.
Holders of the Series B Preferred Stock have no voting rights with respect
to general corporate matters except as provided by law or set forth in the
certificate of designation for the Series B Preferred Stock. The certificate of
designation for the Series B Preferred Stock restricts, among other things, the
ability of EchoStar and certain of its subsidiaries to (i) pay dividends with
the proceeds from the offering of the Series B Preferred Stock, (ii) pay cash
dividends on any junior or parity securities and (iii) incur indebtedness or
pledge the stock of certain subsidiaries as collateral. The Series B Preferred
Stock has not been registered under the Securities Act and is subject to certain
conditions on transfer.
Subject to certain conditions, the Series B Preferred Stock is exchangeable
into additional shares of Series B Preferred Stock or shares of a new series of
preferred stock with substantially identical rights and preferences or into
Series B Exchange Notes, in an aggregate principal amount equal to the aggregate
liquidation preference of, plus accumulated but unpaid dividends on, the Series
B Preferred Stock to the date of exchange, at any time at the option of
EchoStar, in whole, but not in part. Each Series B Exchange Note will bear
interest at 12 1/8% per annum and interest is payable on April 1 and October 1
of each year. EchoStar will pay interest on the Series B Exchange Notes in
additional Series B Exchange Notes or in cash. On or after July 1, 2000, the
Series B Exchange Notes will be redeemable in cash, at the option of EchoStar,
in whole or in part, at a price equal to the redemption price (expressed as a
percentage of the principal amount thereof), together with accrued and unpaid
interest thereon to the applicable redemption
91
date. At any time prior to July 1, 2000, EchoStar may redeem Series B Exchange
Notes at a redemption price, payable in cash, equal to 112.125% of the principal
amount thereof, together with accrued and unpaid interest thereon to the
redemption date, with net proceeds of one public or private sale of equity
interests of EchoStar or any of its subsidiaries.
Upon the occurrence of a Change of Control (as such term is defined in the
Indenture for the Series B Exchange Notes), EchoStar will be, provided certain
conditions are met, required to make an offer to each holder of Series B
Exchange Notes to repurchase all or any portion of such holder's Series B
Exchange Notes at a cash purchase price equal to 101% of the principal amount
thereof, plus accrued and unpaid interest thereon to the date of repurchase. In
addition, upon the occurrence of an certain events, EchoStar will be, provided
certain conditions are met, required to make an offer to repurchase one-half of
all outstanding Series B Exchange Notes at a cash purchase price of 101% of the
aggregate principal amount thereof, together with accrued and unpaid interest
thereon to the date of purchase. The holders of the Series B Preferred Stock are
entitled to certain registration rights pursuant to a Registration Rights
Agreement.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
The Amended and Restated Articles of Incorporation provide that a director
of EchoStar will not be personally liable to EchoStar or its stockholders for
monetary damages for any breach of fiduciary duty as a director, except in
certain cases where liability is mandated by the Nevada General Corporate Law
("NGCL"). The provision has no effect on any non-monetary remedies that may be
available to EchoStar or its stockholders, nor does it relieve EchoStar or its
directors from compliance with federal or state securities laws. The Amended and
Restated Articles of Incorporation and the By-Laws of EchoStar provide for
indemnification, to the fullest extent permitted by the NGCL, of any person who
is or was involved in any manner in any investigation, claim or other proceeding
by reason of the fact that such person is or was a director or officer of
EchoStar, or is or was serving at the request of EchoStar as a director or
officer of another corporation, against all expenses and liabilities actually
and reasonably incurred by such person in connection with the investigation,
claim or other proceeding 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 such
person's duty to EchoStar.
NEVADA LAW AND LIMITATIONS ON CHANGES IN CONTROL
The NGCL prevents an "interested stockholder" (defined in Section 78.423 of
the NGCL, generally, as a person owning 10% or more of a corporation's
outstanding voting stock) from engaging in a "combination" (as defined in
Section 78.416) with a publicly-held Nevada corporation for three years
following the date such person became an interested stockholder unless, before
such person became an interested stockholder, the board of directors of the
corporation approved the transaction in which the interested stockholder became
an interested stockholder or approves the combination.
The provisions authorizing the Board of Directors to issue Preferred Stock
without stockholder approval and the provisions of the NGCL relating to
combinations with interested stockholders could have the effect of delaying,
deferring or preventing a change in control of EchoStar or the removal of
existing management. Each of the Notes Indentures for the 1994, 1996 and 1997
Notes also contains provisions with respect to a change of control of EchoStar.
See "Description of Certain Indebtedness." The Series B Preferred Stock
certificate of designation also contains certain change of control provisions.
Charles W. Ergen, President and Chief Executive Officer of EchoStar, owns
29,804,401 shares of Class B Common Stock, which constitute all of the
outstanding shares of such stock. These shares are transferable to other persons
subject to securities laws limitations. In the event Mr. Ergen transferred
approximately 50.8% or more of his shares of Class B Common Stock, a change in
control of EchoStar would result and Mr. Ergen would receive any premium paid
for control of EchoStar. In addition, any such change in control would result in
an obligation on the part of EchoStar to offer to purchase at a premium all 1994
Notes. See "Description of Certain Indebtedness."
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DESCRIPTION OF THE PREFERRED STOCK
GENERAL
Under EchoStar's Amended and Restated Articles of Incorporation, EchoStar's
Board of Directors is authorized, without further stockholder action, to provide
for the issuance of up to 20,000,000 shares of preferred stock, par value $.01
per share, in one or more series, with such voting powers or without voting
powers, and with such designations, preferences and relative, participating,
optional or other special rights, and qualifications, limitations or
restrictions, as shall be set forth in the resolutions providing therefor. As of
the date of this Prospectus, EchoStar had 1,616,681 shares of its 8% Series A
Cumulative Preferred Stock (the "Series A Preferred Stock") outstanding and
200,000 shares of its 12 1/8% Series B Senior Redeemable Exchangeable Preferred
Stock due 2004 (the "Series B Preferred Stock", which term also includes any
series of preferred stock issued in exchange for the Series B Preferred Stock)
outstanding (and an additional 700,000 shares of Series B Preferred Stock
reserved for issuance upon the occurrence of certain events). The Preferred
Stock will rank junior to the Series B Preferred Stock, PARI PASSU with the
Series A Preferred Stock and senior to all classes of common stock with respect
to dividends and upon liquidation, dissolution or winding up of the Company.
The holders of the Preferred Stock will have no preemptive rights with
respect to any shares of capital stock of the Company or any other securities of
the Company convertible into or carrying rights or options to purchase any such
shares. The Preferred Stock will, when issued, be fully paid and nonassessable.
Simultaneously with the closing of the Preferred Offering, the purchasers of
the Preferred Stock will deposit approximately $ million into an account (the
"Deposit Account"), and will be entitled to a quarterly cash payment from the
Deposit Account in an amount equal to $ per share of Preferred Stock (the
"Quarterly Return Amount"), commencing , 1998 and continuing until
, 1999. After such date, dividends will begin to accrue on the
Preferred Stock. EchoStar may, prior to the date on which any Quarterly Return
Amount would otherwise be payable, deliver notice instructing the deposit agent
(i) to purchase from EchoStar, for transfer to each holder of Preferred Stock,
in lieu of the Quarterly Return Amount, that number of whole shares of Class A
Common Stock determined by dividing the Quarterly Return Amount by 95% of the
Market Value of the Class A Common Stock as of the date of such notice or (ii)
defer delivery of the Quarterly Return Amount to holders of Preferred Stock on
such quarterly payment date until the next quarterly payment date or any
subsequent payment date. However, no later than , 1999 (the "Deposit
Expiration Date"), any amounts remaining in the Deposit Account, as of such
date, or which have previously been deferred, will be (i) paid to the holders of
the Preferred Stock or (ii) used to purchase from EchoStar for transfer to each
holder of Preferred Stock that number of whole shares of Class A Common Stock
determined by dividing the balance remaining in the Deposit Account by 95% of
the Market Value of the shares of Class A Common Stock as of the Deposit
Expiration Date. For a discussion of the Federal taxation treatment of the
Deposit Account, and payments therefrom, see "Certain Federal Income Tax
Consequences."
The transfer agent, registrar, redemption, conversion and dividend
disbursing agent for shares of the Preferred Stock will be American Securities
Transfer & Trust, Inc. (the "Transfer Agent"). The Transfer Agent will send
notices to stockholders of any special meetings at which holders of the
Preferred Stock have the right to vote. See "--Voting Rights" below.
Set forth below is a description of the terms of the Preferred Stock and the
Deposit Account and the circumstances under which holders of shares of Preferred
Stock may be expected to receive payments from the Deposit Account. The
following summary of the Preferred Stock and the Deposit Account does not
purport to be complete and is subject to, and qualified in its entirety by
reference to, the provisions of the Amended and Restated Articles of
Incorporation and Certificate of Designation of the % Series C Cumulative
Preferred Stock of EchoStar (the "Certificate of Designation") and the Deposit
Agreement, copies of which will be filed as exhibits to the Registration
Statement of which this Prospectus forms a part. Application will be made to
list the Preferred Stock on the NASDAQ National Market.
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DEPOSIT ACCOUNT
The funds deposited in the Deposit Account will be invested in U.S.
government obligations, which, together with the earnings thereon, will be
sufficient to pay the aggregate Quarterly Return Amount through the Deposit
Expiration Date. See "Certain Federal Income Tax Consequences."
Unless on or prior to the Notice Date (as defined) EchoStar shall have
delivered to the Deposit Agent a Direction Notice (as defined), the Deposit
Agent will deliver to each holder of Preferred Stock the Quarterly Return Amount
on , , and of each year (each such date being a "Deposit
Payment Date"), commencing , 1998 and continuing until the Deposit
Expiration Date. In the event that EchoStar shall have delivered a Direction
Notice to the Deposit Agent on or prior to the Notice Date, the Deposit Agent
shall, as instructed by EchoStar in such Direction Notice, (i) purchase from
EchoStar, for transfer to each holder of Preferred Stock in lieu of the
Quarterly Return Amount on the next Deposit Payment Date, that number of whole
shares of Class A Common Stock determined by dividing the Quarterly Return
Amount by 95% of the Market Value of the Class A Common Stock as of the Notice
Date or (ii) defer payment of any Quarterly Return Amount until the next Deposit
Payment Date or any subsequent Deposit Payment Date. At the written request of
the Deposit Agent, EchoStar has agreed under the terms of the Deposit Agreement
to deliver, for and on behalf of the Deposit Agent, the shares of Class A Common
Stock acquired by the Deposit Agent directly to holders of Preferred Stock. The
Deposit Agreement further provides that the Deposit Agent's obligation to
purchase shares of Class A Common Stock from EchoStar is secured by the funds in
the Deposit Account.
In the event of any conversion of the Preferred Stock prior to the Deposit
Expiration Date, EchoStar shall immediately after such conversion be paid any
funds remaining in the Deposit Account allocable to the shares of Preferred
Stock so converted. Such allocation shall be made pro rata based upon the number
of shares of Preferred Stock so converted. The cumulative amount of any
allocable deferred Quarterly Return Amounts, at the time of such conversion,
shall be paid to the holders of Preferred Stock who are converting their
Preferred Stock at the time of such conversion. The Deposit Agent shall make any
such payment in cash unless, prior thereto, EchoStar delivers a Direction Notice
to the Deposit Agent requiring the Deposit Agent to purchase from EchoStar for
transfer to holders who are converting their Preferred Stock that number of
whole shares of Class A Common Stock determined by dividing the allocable
deferred Quarterly Return Amounts by 95% of the Market Value of the Class A
Common Stock as of the date of the Direction Notice.
On the Deposit Expiration Date, the Deposit Agreement requires the Deposit
Agent to deliver to the holders of Preferred Stock any cash remaining in the
Deposit Account on such date unless, prior thereto, EchoStar delivers a
Direction Notice to the Deposit Agent requiring the Deposit Agent to purchase
from EchoStar for transfer to holders who are converting their Preferred Stock
that number of whole shares of Common Stock determined by dividing the Deferred
Amounts by 95% of the Market Value of the Common Stock as of the conversion
date.
As a result of the foregoing, holders of Preferred Stock who have not
converted their Preferred Stock as of the Deposit Expiration Date will receive
through, and including, such Deposit Expiration Date, cash distributions or
shares of Class A Common Stock or a combination thereof in an aggregate amount
or value equal to $ for each share of Preferred Stock held by such
holder.
The term "Notice Date" means the twentieth day prior to the applicable
Deposit Payment Date or Deposit Expiration Date, as the case may be. The term
"Market Value" means, as of any date, the average of the daily closing price for
the five consecutive trading days ending on such date. The closing price for
each day shall be the last sales price or in case no such reported sales take
place on such day, the average of the last reported bid and asked price, in
either case on the principal national securities exchange on which the shares of
Class A Common Stock are admitted to trading or listed, or if not listed or
admitted to trading on such exchange, the representative closing bid price as
reported by the Nasdaq National Market, or other similar organization if the
Nasdaq National Market is no longer reporting such information, or if not so
available, the fair market price as determined, in good faith, by the Board of
Directors of EchoStar.
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DIVIDENDS
On and after the Deposit Expiration Date, holders of the Preferred Stock
will be entitled to receive cumulative dividends at an annual rate of % of
the Liquidation Preference, payable quarterly out of assets legally available
therefor on , , and of each year, commencing ,
2000, when, as and if declared by the Board of Directors. Dividends will accrue
from , 1999, and as a result the Company will not make any dividend
payments on the Preferred Stock until , 2000. Dividends, to the extent
declared by EchoStar's Board of Directors, may, at the option of EchoStar, be
paid in cash, by delivery of fully paid and nonassessable shares of Class A
Common Stock, or a combination thereof. Dividends will be payable to holders of
record as they appear on EchoStar's stock register on such record dates, not
more than 60 days nor less than 10 days preceding the payment dates thereof, as
shall be fixed by EchoStar's Board of Directors. Dividends payable on the
Preferred Stock for each full dividend period will be computed by dividing the
annual dividend rate by four. Dividends payable on the Preferred Stock for any
period less than a full dividend period will be computed on the basis of a
360-day year consisting of twelve 30-day months. The Preferred Stock will not be
entitled to any dividend, whether payable in cash, property or securities, in
excess of the full cumulative dividends. No interest, or sum of money in lieu of
interest, will be payable in respect of any accumulated and unpaid dividends.
If EchoStar elects to pay dividends in shares of Class A Common Stock, the
number of shares of Class A Common Stock to be distributed will be calculated by
dividing such payment by 95% of the Market Value as of the dividend payment
date.
No dividends or distributions (other than a dividend or distribution in
stock of EchoStar ranking junior to the Preferred Stock as to dividends and upon
liquidation, dissolution or winding up) may be declared, made or paid or set
apart for payment upon any stock of EchoStar ranking junior to or PARI PASSU
with the Preferred Stock as to dividends, nor may any stock of EchoStar ranking
junior to or PARI PASSU with the Preferred Stock as to dividends or upon
liquidation be redeemed, purchased or otherwise acquired for any consideration
(or any moneys paid to or made available for a sinking fund for the redemption
of any shares of any such stock unless such monies comprise proceeds from a sale
of such shares) by EchoStar (except by conversion into or exchange for stock of
EchoStar ranking junior to the Preferred Stock as to dividends and upon
liquidation) unless full cumulative dividends have been or contemporaneously are
paid or declared and a sum sufficient for the payment thereof is set apart for
such payment on the Preferred Stock for all dividend payment periods terminating
on or prior to the date of such declaration, payment, redemption, purchase or
acquisition. The Preferred Stock, with respect to dividends and upon
liquidation, dissolution or winding up, will rank junior to the Series B
Preferred Stock, and PARI PASSU with the Series A Preferred Stock.
Notwithstanding the foregoing, if full dividends have not been declared and
paid or set apart on the Preferred Stock and any other preferred stock ranking
PARI PASSU with the Preferred Stock as to dividends, dividends may be declared
and paid on the Preferred Stock and such other PARI PASSU preferred stock so
long as the dividends are declared and paid pro rata so that the amounts of
dividends declared per share on the Preferred Stock and such other PARI PASSU
preferred stock will in all cases bear to each other the same ratio that accrued
and unpaid dividends per share on the shares of the Preferred Stock and such
other preferred stock bear to each other; provided, that if such dividends are
paid in cash on the other PARI PASSU preferred stock, dividends will also be
paid in cash on the Preferred Stock.
The holders of shares of Preferred Stock at the close of business on a
dividend payment record date will be entitled to receive the dividend payment on
those shares (except that holders of shares called for redemption on a
redemption date between the record date and the dividend payment date will be
entitled to receive such dividend on such redemption date as indicated under
"--Optional Redemption") on the corresponding dividend payment date
notwithstanding the subsequent conversion thereof or EchoStar's default in
payment of the dividend due on that dividend payment date. Except as provided in
the immediately preceding sentence, EchoStar shall make no payment or allowance
for unpaid dividends,
95
whether or not in arrears, on converted shares or for dividends on the shares of
Class A Common Stock issued upon conversion.
EchoStar's ability to declare and pay cash dividends and make other
distributions with respect to its capital stock, including the Preferred Stock,
is limited by provisions contained in various financing agreements which
restrict dividend payments to EchoStar by its subsidiaries and which restrict
the payment of cash dividends by EchoStar or any of its subsidiaries on their
respective equity securities. Similarly, EchoStar's ability to declare and pay
dividends may be limited by applicable Nevada law.
LIQUIDATION PREFERENCE
The shares of Preferred Stock will be issued with a liquidation preference
equal to $50 per share (the "Liquidation Preference"). See also "Certain Federal
Income Tax Consequences."
If upon any voluntary or involuntary dissolution, liquidation or winding up
of EchoStar, the amounts payable with respect to the liquidation preference of
the Preferred Stock and any other shares of stock of EchoStar ranking as to any
such distribution PARI PASSU with the Preferred Stock are not paid in full, the
holders of the Preferred Stock and of such other shares will share pro rata in
proportion to the full distributable amounts to which they are entitled. After
payment of the full amount of the liquidating distribution to which they are
entitled, the holders of the Preferred Stock will have no right or claim to any
of the remaining assets of EchoStar. Neither the sale of all or substantially
all of the property or business of EchoStar (other than in connection with the
winding up of its business), nor the merger or consolidation of EchoStar into or
with any other corporation, will be deemed to be dissolution, liquidation or
winding up, voluntary or involuntary, of EchoStar. In the event of any voluntary
or involuntary dissolution, liquidation or winding up of EchoStar, the Deposit
Agent will be required to return to the holders of the Preferred Stock any funds
at the time remaining in the Deposit Account.
OPTIONAL REDEMPTION
The Preferred Stock is not subject to any sinking fund or other similar
provisions. The Preferred Stock may not be redeemed prior to , 2000. On or
after , 2000, the Preferred Stock may be redeemed, in whole or in part, at
the option of EchoStar, in cash, by delivery of fully paid and nonassessable
shares of Class A Common Stock or a combination thereof, upon not less than 20
days' notice nor more than 60 days' notice, during the twelve-month periods
commencing on of the years indicated below, at the following redemption
prices per share, plus in each case all accumulated and unpaid dividends to the
redemption date:
REDEMPTION
PRICE PER
YEAR SHARE
- ----------------------------------------------------------------------------------------------------- -----------
2000................................................................................................. $
2001.................................................................................................
2002.................................................................................................
2003.................................................................................................
-----------
2004 and thereafter..................................................................................
-----------
-----------
In the event that fewer than all the outstanding shares of the Preferred
Stock are to be redeemed, the shares to be redeemed will be determined pro rata.
If EchoStar elects to make redemption payments in shares of Class A Common
Stock, the number of shares of Class A Common Stock to be distributed will be
calculated by dividing such payment by 95% of the Market Value as of the
redemption notice date.
From and after the applicable redemption date (unless EchoStar shall be in
default of payment of the redemption price), dividends on the shares of the
Preferred Stock to be redeemed on such redemption date shall cease to
accumulate, such shares shall no longer be deemed to be outstanding, and all
rights of the holders thereof as stockholders of EchoStar (except the right to
receive the redemption price) will cease.
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If any dividends on the Preferred Stock are in arrears, no shares of the
Preferred Stock will be redeemed unless all outstanding shares of the Preferred
Stock are simultaneously redeemed.
VOTING RIGHTS
Except as required by law, holders of the Preferred Stock will have no
voting rights except as set forth below. Under Nevada law, holders of the
Preferred Stock will be entitled to vote as a class upon a proposed amendment to
the Certificate of Designation, whether or not entitled to vote thereon by the
Certificate of Designation, if the amendment would increase or decrease the par
value of the shares of such class, or alter or change the powers, preferences or
special rights of the Shares of such class so as to affect them adversely.
If the dividends payable on the Preferred Stock are in arrears for six
quarterly periods, the holders of the Preferred Stock voting separately as a
class with the shares of any other preferred stock or preference securities
having similar voting rights will be entitled at the next regular or special
meeting of stockholders of EchoStar to elect two directors of EchoStar (such
voting rights will continue only until such time as the dividend arrearage on
the Preferred Stock has been paid in full). The affirmative vote or consent of
the holders of at least 66 2/3% of the outstanding Preferred Stock will be
required for the issuance of any class or series of stock (or security
convertible into stock or evidencing a right to purchase any shares of any class
or series of stock) of EchoStar ranking senior to or PARI PASSU with the
Preferred Stock as to dividends, liquidation rights or voting rights (other than
additional shares of Series B Preferred Stock or PARI PASSU securities with an
aggregate liquidation preference, at any one time outstanding, not to exceed
$100 million), and for amendments to EchoStar's Articles of Incorporation that
would affect adversely the rights of holders of the Preferred Stock, including,
without limitation, (i) any increase in the authorized number of shares of
Preferred Stock and (ii) the issuance of any shares of Preferred Stock in excess
of the number of shares of such stock authorized in the Certificate of
Designation thereof as of the date of the original issuance of the Preferred
Stock. In all such cases each share of Preferred Stock shall be entitled to one
vote.
CONVERSION RIGHTS
The Preferred Stock will be convertible at any time at the option of the
holder thereof into such number of whole shares of Common Stock as is equal to
the Liquidation Preference divided by an initial conversion price of $ ,
subject to adjustment as described below (such price or adjusted price being
referred to as the "Conversion Price"). EchoStar may elect to pay all unpaid
dividends on the Preferred Stock which have accumulated since the Deposit
Expiration Date to the date of conversion in cash or by issuing that whole
number of shares of Class A Common Stock equal to the amount of accumulated and
unpaid dividends divided by 95% of the Market Value as of the conversion date. A
share of Preferred Stock called for redemption will be convertible into shares
of Class A Common Stock up to and including but not after the close of business
on the second business day prior to the date fixed for redemption unless
EchoStar defaults in the payment of the amount payable upon redemption.
No fractional shares of Class A Common Stock or securities representing
fractional shares of Class A Common Stock will be issued upon conversion. Any
fractional interest in a share of Class A Common Stock resulting from conversion
will be paid in cash based on the last reported sale price of the Class A Common
Stock on the Nasdaq National Market (or any national securities exchange or
authorized quotation system on which the Class A Common Stock is then listed) at
the close of business on the trading day next preceding the date of conversion
if EchoStar is legally and contractually able to purchase such fractional shares
on such date.
The Conversion Price is subject to adjustment (in accordance with formulas
set forth in the Certificate of Designation) in certain events, including (i)
any redemption payment or payment of a dividend (or other distribution) payable
in shares of any class of common stock on any class of capital stock of EchoStar
(other than the issuance of shares of Class A Common Stock in connection with
the payment in redemption for, of dividends on or the conversion of the
Preferred Stock), (ii) any issuance to all holders of
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shares of any class of common stock of rights, options or warrants entitling
them to subscribe for or purchase shares of common stock or securities
convertible into or exchangeable for shares of common stock at less than Market
Value as of the date of conversion or exchange; PROVIDED, HOWEVER, that no
adjustment shall be made with respect to such a distribution if the holder of
shares of Preferred Stock would be entitled to receive such rights, option or
warrants upon conversion at any time of shares of Preferred Stock into Class A
Common Stock and PROVIDED FURTHER, that if such options or warrants are only
exercisable upon the occurrence of certain triggering events, then the
Conversion Price will not be adjusted until such triggering events occur, (iii)
any subdivision, combination or reclassification of any class of common stock,
(iv) any distribution consisting exclusively of cash (excluding any cash
distributed upon a merger or consolidation to which the second succeeding
paragraph applies) to all holders of shares of any class of common stock in an
aggregate amount that, combined together with (a) all other such all-cash
distributions made within the then-preceding 12-months in respect of which no
adjustment has been made and (b) any cash and the fair market value of other
consideration paid or payable in respect of any tender offer by EchoStar or any
of its subsidiaries for shares of any class of common stock concluded within the
then-preceding 12-months in respect of which no adjustment has been made,
exceeds 15% of EchoStar's market capitalization (defined as the product of the
then-current market price of the Class A Common Stock times the number of shares
of Class A Common Stock then outstanding) on the record date of such
distribution, (v) the completion of a tender or exchange offer made by EchoStar
or any of its subsidiaries for shares of any class of common stock that involves
an aggregate consideration that, together with (a) any cash and other
consideration payable in a tender or exchange offer by EchoStar or any of its
subsidiaries for shares of any class of common stock expiring within the
then-preceding 12-months in respect of which no adjustment has been made and (b)
the aggregate amount of any such all-cash distributions referred to in (iv)
above to all holders of shares of common stock within the then-preceding
12-months in respect of which no adjustments have been made, exceeds 15% of
EchoStar's market capitalization on the expiration of such tender offer or (vi)
a distribution to all holders of any class of common stock consisting of
evidences of indebtedness, shares of capital stock other than common stock or
assets (including securities, but excluding those dividends, rights, options,
warrants and distributions referred to above). No adjustment of the Conversion
Price will be required to be made until the cumulative adjustments (whether or
not made) amount to 1.0% or more of the Conversion Price as last adjusted.
EchoStar reserves the right to make such reductions in the Conversion Price in
addition to those required in the foregoing provisions as it considers to be
advisable in order that any event treated for Federal income tax purposes as a
dividend of stock or stock rights will not be taxable to the recipients. In the
event EchoStar elects to make such a reduction in the Conversion Price, EchoStar
will comply with the requirements of Rule 14e-1 under the Exchange Act, and any
other securities laws and regulations thereunder if and to the extent that such
laws and regulations are applicable in connection with the reduction of the
Conversion Price.
In the event that EchoStar distributes rights or warrants (other than those
referred to in (ii) in the preceding paragraph) PRO RATA to holders of shares of
any class of common stock, so long as any such rights or warrants have not
expired or been redeemed by EchoStar, the holder of any Preferred Stock
surrendered for conversion will be entitled to receive upon such conversion, in
addition to the shares of common stock then issuable upon such conversion (the
"Conversion Shares"), a number of rights or warrants to be determined as
follows: (i) if such conversion occurs on or prior to the date for the
distribution to the holders of rights or warrants of separate certificates
evidencing such rights or warrants (the "Distribution Date"), the same number of
rights or warrants to which a holder of a number of shares of common stock equal
to the number of Conversion Shares is entitled at the time of such conversion in
accordance with the terms and provisions applicable to the rights or warrants
and (ii) if such conversion occurs after such Distribution Date, the same number
of rights or warrants to which a holder of the number of shares of common stock
into which such Preferred Stock was immediately prior to such Distribution Date
would have been entitled on such Distribution Date in accordance with the terms
and provisions of and applicable to the rights or warrants. In the event the
holders of the Preferred Stock are
98
not entitled to receive such rights or warrants, the Conversion Price will be
subject to adjustment upon any declaration or distribution of such rights or
warrants.
In case of any reclassification, consolidation or merger of EchoStar with or
into another person or any merger of another person with or into EchoStar (with
certain exceptions), or in case of any sale, transfer or conveyance of all or
substantially all of the assets of EchoStar (computed on a consolidated basis),
each share of Preferred Stock then outstanding will, without the consent of any
holder of Preferred Stock, become convertible only into the kind and amount of
securities, cash and other property receivable upon such reclassification,
consolidation, merger, sale, transfer or conveyance by a holder of the number of
shares of Class A Common Stock into which such Preferred Stock was convertible
immediately prior thereto, after giving effect to any adjustment event.
In the case of any distribution by EchoStar to its stockholders of
substantially all of its assets, each holder of Preferred Stock will participate
PRO RATA in such distribution based on the number of shares of Class A Common
Stock into which such holders' shares of Preferred Stock would have been
convertible immediately prior to such distribution.
CHANGE OF CONTROL
Notwithstanding the foregoing, upon a Change of Control (as defined below),
holders of Preferred Stock shall, in the event that the Market Value at such
time is less than the Conversion Price, have a one time option, upon not less
than 30 days' notice nor more than 60 days' notice, to convert all of their
outstanding shares of Preferred Stock into shares of Class A Common Stock at an
adjusted Conversion Price equal to the greater of (i) the Market Value as of the
Change of Control Date and (ii) 66.67% of the Market Value as of the date of
this Prospectus. In lieu of issuing the shares of Common Stock issuable upon
conversion in the event of a Change of Control, EchoStar may, at its option,
make a cash payment equal to the Market Value of such Class A Common Stock
otherwise issuable.
EchoStar's Certificate of Designation defines "Change of Control" as any of
the following events: (a) any transaction or series of transactions (including,
without limitation, a tender offer, merger or consolidation) the result of which
is that the Principals (as defined) and their Related Parties (as defined) 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 (as defined) 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 DBS Corp. and
have the voting power to elect at least a majority of the Board of Directors of
DBS Corp. or (d) the first day on which a majority of the members of the Board
of Directors of DBS Corp. are not Continuing Directors.
The phrase "all or substantially all" of the assets of EchoStar is likely to
be interpreted by reference to applicable state law at the relevant time, and
will be dependent on the facts and circumstances existing at such time. As a
result, there may be a degree of uncertainty in ascertaining whether a sale or
transfer is of "all or substantially all" of the assets of EchoStar.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES, INCORPORATORS AND
STOCKHOLDERS
No director, officer, employee, incorporator or stockholder of EchoStar or
any of its Affiliates, as such, shall have any liability for any obligations of
EchoStar under the Preferred Stock or the Certificate of Designation or for any
claim based on, in respect of, or by reason of, such obligations or their
creation. Each holder of Preferred Stock waives and releases all such liability.
The waiver and release are part of the consideration for issuance of the
Preferred Stock. Such waiver may not be effective to waive liabilities
99
under the federal securities laws and it is the view of the Commission that such
waiver is against public policy.
AMENDMENT, SUPPLEMENT AND WAIVER
Without the consent of any holder of Preferred Stock, EchoStar may amend or
supplement the Certificate of Designation to cure any ambiguity, defect or
inconsistency, to provide for uncertificated Preferred Stock in addition to or
in place of certificated Preferred Stock, to provide for the assumption of
EchoStar's obligations to holders of the Preferred Stock 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 Preferred Stock or that does not adversely affect
the legal rights under the Certificate of Designation of any such holder.
BOOK ENTRY; THE DEPOSITORY TRUST COMPANY
The Depository Trust Company ("DTC") will act as securities depository for
the shares of Preferred Stock offered hereby. The shares of Preferred Stock will
be issued only as fully-registered securities registered in the name of Cede &
Co. (as nominee for DTC). One or more fully-registered global certificates will
be issued, representing in the aggregate the total number of shares of Preferred
Stock, and will be deposited with DTC (collectively, the "Global Certificate").
The laws of some jurisdictions require that certain purchasers of securities
take physical delivery of securities in definitive from. Such laws may impair
the ability to transfer beneficial interests in the shares of Preferred Stock
represented by a Global Certificate.
DTC is a limited-purpose trust company organized under the New York Banking
Law, a "banking organization" within the meaning of the New York Banking Law, a
member of the Federal Reserve System, a "clearing corporation" within the
meaning of the New York Uniform Commercial Code and a "clearing agency"
registered pursuant to the provisions of Section 17A of the Exchange Act. DTC
holds securities that its participants ("Participants") deposit with DTC. DTC
also facilitates the settlement among Participants of securities transactions,
such as transfers and pledges, in deposited securities through electronic
computerized book-entry changes in Participants' accounts, thereby eliminating
the need for physical movement of securities certificates. Direct Participants
include securities brokers and dealers, banks, trust companies, clearing
corporations and certain other organizations ("Direct Participants"). DTC is
owned by a number of its Direct Participants and by the NYSE, the AMEX and the
National Association of Securities Dealers, Inc. Access to the DTC system is
also available to others such as securities brokers and dealers, banks and trust
companies that clear through or maintain a custodial relationship with a Direct
Participant, either directly or indirectly ("Indirect Participants").
Purchases of shares of Preferred Stock within the DTC system must be made by
or through Direct Participants, which will receive a credit for the Preferred
Stock on DTC's records. The ownership interest of each actual purchaser of a
share of Preferred Stock ("Beneficial Owner") is in turn to be recorded on the
Direct or Indirect Participant's records. Beneficial Owners will not receive
written confirmation from DTC of their purchases, but Beneficial Owners are
expected to receive written confirmations providing details of the transactions,
as well as periodic statements of their holdings, from the Direct or Indirect
Participants through which the Beneficial Owners purchased the Preferred Stock.
Transfers of ownership interests in the Preferred Stock are to be accomplished
by entries made on the books of Participants acting on behalf of Beneficial
Owners. Beneficial Owners will not receive certificates representing their
ownership interests in the Preferred Stock, except upon a resignation of DTC or
upon a decision by EchoStar to discontinue the book-entry system for the
Preferred Stock.
To facilitate subsequent transfers, all the Preferred Stock deposited by
Participants with DTC are registered in the name of DTC's nominee, Cede & Co.
The deposit of shares of Preferred Stock with DTC and their registration in the
name of Cede & Co. effect no change in beneficial ownership. DTC has no
knowledge of the actual Beneficial Owners of the Preferred Stock; DTC's records
reflect only the identity of the Direct Participants to whose accounts such
shares of Preferred Stock are credited, which may or may
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not be the Beneficial Owners. The Participants will remain responsible for
keeping account of their holdings on behalf of their customers.
Conveyance of notices and other communications by DTC to Direct
Participants, by Direct Participants to Indirect Participants and by Direct
Participants and Indirect Participants to Beneficial Owners will be governed by
arrangements among them, subject to any statutory or regulatory requirements as
may be in effect from time to time.
Redemption notices with respect to the shares of Preferred Stock shall be
sent to Cede & Co. If less than all of the shares of Preferred Stock are being
redeemed, DTC's practice is to determine by lot the amount of the interest of
each Direct Participant in such securities to be redeemed.
Although voting with respect to the Preferred Stock is limited, in those
cases where a vote is required, neither DTC nor Cede & Co. will itself consent
or vote with respect to the Preferred Stock. Under its usual procedures, DTC
would mail an "Omnibus Proxy" (I.E., a proxy conferring on Direct Participants
the right to vote as their interests appear) to the Direct Participants as soon
as possible after the record date. The Omnibus Proxy assigns Cede & Co.'s
consenting or voting rights to those Direct Participants to whose accounts the
Preferred Stock are credited on the record date (identified in a listing
attached to the Omnibus Proxy). EchoStar believes that the arrangements among
DTC, Direct and Indirect Participants and Beneficial Owners will enable the
Beneficial Owners to exercise rights equivalent in substance to the rights that
can be directly exercised by a Direct Participant.
Cash distribution payments and distribution payments in shares of Class A
Common Stock on the shares of Preferred Stock will be made to DTC. DTC's
practice is to credit Direct Participants' accounts on the relevant payment date
in accordance with their respective holdings shown on DTC's records unless DTC
has reason to believe that it will not receive payments on such payment date.
Payments by Participants to Beneficial Owners will be governed by standing
instructions and customary practices, as is the case with securities held for
the account of customers in bearer from or registered in "street name," and will
be the responsibility of such Participant and not of DTC or EchoStar, subject to
any statutory or regulatory requirements as may be in effect from time to time.
Payment of distributions to DTC is the responsibility of EchoStar, disbursement
of such payments to Direct Participants is the responsibility of DTC and
disbursement of such payments to the Beneficial Owners is the responsibility of
Direct and Indirect Participants.
Except as provided herein, a Beneficial Owner in a Global Certificate will
not be entitled to receive physical delivery of shares of Preferred Stock.
Accordingly, each Beneficial Owner must rely on the procedures of DTC to
exercise any rights under the Preferred Stock, including elections as to form of
payment.
DTC may discontinue providing its services as securities depositary with
respect to the Preferred Stock at any time by giving reasonable notice to
EchoStar. Under such circumstances, in the event that a successor securities
depositary is not obtained, certificates representing the shares of Preferred
Stock will be printed and delivered. If EchoStar decides to discontinue use of
the system of book-entry transfers through DTC (or a successor depositary),
certificates representing the shares of Preferred Stock will be printed and
delivered.
The information in this section concerning DTC and DTC's book-entry system
has been obtained from sources that EchoStar believes to be reliable, but
EchoStar takes no responsibility for the accuracy thereof.
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CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following discussion of certain of the Federal income tax consequences
of the purchase, ownership, and disposition of the Preferred Stock, and any
Common Stock received as dividends thereon or in connection with an ownership
interest in the Deposit Account, is based upon the provisions of the Internal
Revenue Code of 1986, as amended (the "Code"), the final, temporary and proposed
Treasury Regulations promulgated thereunder, and administrative rulings and
judicial decisions now in effect, all of which are subject to change (possibly
with retroactive effect) or different interpretations. This summary does not
purport to deal with all aspects of Federal income taxation that may be relevant
to an investor's decision to purchase shares of Preferred Stock, nor any tax
consequences arising under the laws of any state, locality or foreign
jurisdiction. This summary is not intended to be applicable to all categories of
investors, such as dealers in securities, banks, insurance companies, tax-exempt
organizations, foreign persons, persons that hold the Preferred Stock or Common
Stock as part of a straddle or conversion transaction, or holders subject to the
alternative minimum tax, which may be subject to special rules. In addition,
this discussion is limited to persons who hold the Preferred Stock or Common
Stock as "capital assets" (generally, property held for investment) within the
meaning of Section 1221 of the Code. ALL PROSPECTIVE PURCHASERS OF PREFERRED
STOCK ARE ADVISED TO CONSULT THEIR OWN TAX ADVISERS REGARDING THE FEDERAL,
STATE, LOCAL, AND FOREIGN TAX CONSEQUENCES OF THE PURCHASE, OWNERSHIP, AND
DISPOSITION OF PREFERRED STOCK AND THE RECEIPT OF COMMON STOCK.
CONSEQUENCES TO HOLDERS OF PREFERRED STOCK
INCLUSION IN INCOME
The Liquidation Preference with respect to each share of Preferred Stock
will exceed the amount EchoStar receives upon the issuance of the Preferred
Stock and the Preferred Stock will pay no dividends until , 1999. The
precise treatment of preferred stock with these terms is not entirely clear.
However, EchoStar intends to treat the Preferred Stock as if it were purchased
at a discount from its Liquidation Preference and provided for accretion in its
Liquidation Preference equal to $ on each Deposit Payment Date, so long
as the Preferred Stock remains outstanding.
Under Section 305(b)(4) of the Code, the accretion in the Liquidation
Preference of the Preferred Stock on each Deposit Payment Date should be treated
as a dividend taxable as ordinary income to the Preferred Stock holders to the
extent of EchoStar's current and accumulated earnings and profits as determined
under U.S. federal income tax principles. The amount of the distribution on each
share of Preferred Stock will equal the fair market value of the accretion in
the Liquidation Preference with respect to the Preferred Stock. To the extent
that the value of the accretion in Liquidation Preference on the Preferred Stock
exceeds current and accumulated earnings and profits, such accretion will be
treated as a nontaxable return of capital and will be applied against and reduce
the adjusted tax basis of such Preferred Stock in the hands of each holder (but
not below zero). However, such reduction will be exactly offset by an increase
in basis resulting from the holder's receipt of the additional Liquidation
Preference. If the value of any accretion in Liquidation Preference exceeds the
adjusted tax basis of the Preferred Stock in the hands of the holder, such
excess will be treated as capital gain and will be either long-term, mid-term or
short-term capital gain depending on the holder's holding period for the
Preferred Stock.
On and after the Deposit Expiration Date, a holder of Preferred Stock will
be entitled to receive dividends at an annual rate of % of the Liquidation
Preference in cash or at the option of the EchoStar in EchoStar Common Stock. In
the event EchoStar exercises its rights to pay dividends in Common Stock, (after
the expiration of the Deposit Agreement) the number of shares of such Common
Stock to be distributed shall be determined by dividing the amount of cash that
would be paid by 95% of the Market Value of the Common Stock. A holder of
Preferred Stock must include in income as ordinary income the amount of any such
cash distributions and the fair market value of any Common Stock distributions
to the
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extent that EchoStar has current or accumulated earnings and profits. If
EchoStar has no current or accumulated earnings and profits, distributions are
first treated as a return of capital to the extent of the Preferred Stock
holder's basis, and thereafter as capital gain.
EchoStar presently does not have any current or accumulated earnings and
profits as determined under United States federal income tax principles and it
is unlikely to have current or accumulated earnings and profits in the
foreseeable future. As a result, until such time as EchoStar has earnings and
profits, an increase in the Liquidation Preference on a distribution will reduce
the adjusted tax basis (but not below zero) in the hands of each holder of the
shares of Preferred Stock. The basis reduction should be offset for each share
of Preferred Stock by a corresponding increase in tax basis for a holder
resulting from the increase in Liquidation Preference. Further, until EchoStar
has current or accumulated earnings and profits, any accretion in the
Liquidation Value or other distributions with respect to the Preferred Stock
will not be treated as dividends for United States federal income tax purposes
and, thus, will not qualify for any dividends received deduction as described
below. Holders would recognize gain to the extent that any distribution was to
exceed current or accumulated earnings and profits and basis in the Preferred
Stock.
DIVIDENDS TO CORPORATE SHAREHOLDERS
In general, a distribution that is treated as a dividend for Federal income
tax purposes and that is made to a corporate shareholder with respect to the
Preferred Stock or Common Stock will qualify for the 70% dividends-received
deduction under Section 243 of the Code. Holders should note, however, that
there can be no assurance that EchoStar will have current or accumulated
earnings and profits in the future. Accordingly, there can be no assurance that
the dividends-received deduction will apply to distributions on the Preferred
Stock or Common Stock.
In addition, there are many exceptions and restrictions relating to the
availability of the dividends received deduction such as restrictions relating
to (i) the holding period of stock the dividends on which are sought to be
deducted, (ii) debt-financed portfolio stock, (iii) dividends treated as
"extraordinary dividends" for purposes of Section 1059 of the Code, and (iv)
taxpayers that pay alternative minimum tax. Corporate shareholders should
consult their own tax advisors regarding the extent, if any, to which such
exceptions and restrictions (as amended by the Taxpayer Relief Act of 1997) may
apply to their particular factual situation.
COMMON STOCK--HOLDING PERIOD
A stockholder's holding period for shares of Common Stock received in lieu
of cash dividends (after the expiration of the Deposit Agreement) or in
connection with EchoStar's rights to transfer shares of Common Stock under the
Deposit Agreement will commence on the day following the date of transfer and
will not include such stockholder's holding period for the shares of Preferred
Stock with respect to which the shares of Common Stock were distributed.
However, a stockholder's holding period for Common Stock received on conversion
of the Preferred Stock will include the stockholder's holding period for the
Preferred Stock.
SALE OR REDEMPTION
Upon a sale or other disposition (other than a redemption or a conversion of
Preferred Stock into Common Stock) of Preferred Stock or Common Stock, a holder
will generally recognize capital gain or loss equal to the difference between
the amount of cash and the fair market value of property received by the holder
in such sale or other disposition and such holder's adjusted tax basis in such
shares. Such gain or loss will be long-term gain or loss if the holder's holding
period for such Preferred Stock or Common Stock is more than 12 months. In the
case of individuals, long-term capital gains with respect to property held for
more than 18 months are taxed at a maximum 20% federal tax rate, and long-term
capital gains with respect to property held more than twelve months but no more
than 18 months are taxed at a maximum
103
28% federal tax rate. Net capital gain of corporations is taxed the same as
ordinary income, with a maximum federal tax rate of 35%.
Any gain or loss recognized by a holder upon redemption of the Preferred
Stock or Common Stock will be treated as gain or loss from the sale or exchange
of Preferred Stock or Common Stock, if, taking into account stock that is
actually or constructively owned as determined under Section 318 of the Code,
(i) such holder's interest in the Company's Common and Preferred Stock is
completely terminated as a result of the redemption, (ii) such holder's
percentage ownership in the Company's voting stock immediately after the
redemption is less than 80% of such percentage ownership immediately before such
redemption, or (iii) the redemption is "not essentially equivalent to a
dividend" (within the meaning of Section 302 of the Code). If a redemption of
the Preferred Stock or Common Stock is treated as a distribution that is taxable
as a dividend, the holder will be taxed on the payment received in the same
manner as described above under "--Distributions," and the holder's adjusted tax
basis in the redeemed Preferred Stock or Common Stock will be transferred to any
remaining shares held by such holder in the Company.
CONVERSION OR EXCHANGE OF PREFERRED STOCK
A holder of Preferred Stock will generally not recognize gain or loss by
reason of receiving Common Stock in exchange for Preferred Stock upon the
redemption or conversion of the Preferred Stock, except that gain or loss will
be recognized with respect to any cash received in lieu of fractional shares and
the fair market value of any shares of Common Stock attributable to dividend
arrearages will be treated as a constructive distribution as described above
under "--Distributions." The adjusted tax basis of the Common Stock (including
fractional share interests) so acquired will be equal to the tax basis of the
shares of Preferred Stock exchanged therefor and the holding period of the
Common Stock received upon conversion will include the holding period of the
shares of Preferred Stock exchanged. The tax basis of any Common Stock treated
as a constructive distribution taxable as a dividend will be equal to its fair
market value on the date of the exchange.
ADJUSTMENT OF CONVERSION PRICE
If at any time the Company makes a distribution of property to holders of
Common Stock that would be taxable to such stockholders as a dividend for
Federal income tax purposes and, in accordance with the antidilution provisions,
the Conversion Price of the Preferred Stock is decreased, the amount of such
decrease may be deemed to be the payment of a taxable dividend to holders of
Preferred Stock. For example, a decrease in the Conversion Price in the event of
distributions of indebtedness or assets of the Company will generally result in
deemed dividend treatment to holders of the Preferred Stock, but generally, a
decrease in the event of stock dividends or the distribution of rights to
subscribe for the Common Stock will not result in a taxable stock dividend.
DEPOSIT ACCOUNT
Pursuant to the terms of the Deposit Agreement, each holder of Preferred
Stock will be treated as owning a pro-rata portion of the cash deposited in the
Deposit Account. Although there is no authority directly on point with respect
to the treatment of the Deposit Account, EchoStar believes that the intended
treatment is appropriate, because (1) such cash is not subject to the claims of
EchoStar's creditors, (2) except in the event that EchoStar elects to sell
additional shares of Common Stock to the holders of the Preferred Stock in
exchange for the cash in the Deposit Account, EchoStar will under no
circumstances be entitled to receive the cash in the Deposit Account, and (3)
the holders are entitled to distributions of all earnings generated by the cash
held in the Deposit Account.
Cash distributions of $ per share of Preferred Stock on each Deposit
Payment Date should be treated as withdrawals by the holders of the Preferred
Stock of amounts deposited in the Deposit
104
Account. Income earned on the cash deposited in the Deposit Account, if any,
will be included in income by each holder of shares of Preferred Stock pro rata
in proportion to the number of shares of Preferred Stock held by such holder.
Each holder will include such amounts in income in the same manner as though the
holder directly owned a pro rata share of the cash in the Deposit Account.
Distributions of Common Stock by the Deposit Agent to the holders of the
Preferred Stock following an election by EchoStar to transfer Common Stock to
the Deposit Agent should be treated as a purchase by each holder of Preferred
Stock of such Common Stock for an amount equal to the Preferred Stockholder's
share of the cash deposited in the Deposit Account allocated to such purchase.
BACKUP WITHHOLDING
Under the backup withholding provisions of the Code and applicable Treasury
Regulations, a holder of Preferred Stock or Common Stock may be subject to
backup withholding at the rate of 31% with respect to dividends paid on, or the
proceeds of a sale, exchange or redemption of, Preferred Stock or Common Stock
unless such holder (a) is a corporation or comes within certain other exempt
categories and when required demonstrates this fact or (b) provides a taxpayer
identification number, certifies as to no loss of exemption from backup
withholding, and otherwise complies with applicable requirements of the backup
withholding rules. The amount of any backup withholding from a payment to a
holder will be allowed as a credit against the holder's Federal income tax
liability and may entitle such holder to a refund, provided that the required
information is furnished to the Internal Revenue Service.
105
UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting Agreement
(the "Underwriting Agreement"), the Underwriters have severally agreed to
purchase from EchoStar, the shares of Preferred Stock set forth opposite the
name of such Underwriter below:
NUMBER OF SHARES
OF PREFERRED
UNDERWRITER STOCK
- ----------------------------------------------------------------------------------------------- -----------------
Donaldson, Lufkin & Jenrette Securities Corporation............................................
Lehman Brothers Inc............................................................................
-----------------
Total.......................................................................................... 2,000,000
-----------------
-----------------
The Underwriting Agreement provides that the obligations of the several
Underwriters to pay for and accept delivery of the shares of Preferred Stock
offered hereby are subject to approval of certain legal matters by counsel and
to certain other conditions. The Underwriters are obligated to take and pay for
all the shares of Preferred Stock offered hereby (other than in connection with
the over-allotment option described below) if any are taken.
The Underwriters have advised EchoStar that the Underwriters propose to
offer the shares of Preferred Stock directly to the public initially at the
public offering price set forth on the cover page of this Prospectus and to
certain dealers at such price less a concession not in excess of $ per
share. Any Underwriter may allow, and such dealers may re-allow, a discount not
in excess of $ per share to any other Underwriter and to certain other
dealers. After the initial public offering of the shares of Preferred Stock, the
public offering price and other selling terms may be changed by the
Underwriters.
Pursuant to the Underwriting Agreement, EchoStar has granted to the
Underwriters an option, exercisable for 30 days from the date hereof, to
purchase up to an additional 300,000 shares of Preferred Stock at the public
offering price less the underwriting discounts and commissions set forth on the
cover page hereof. The Underwriters may exercise such option to purchase
additional shares solely for the purpose of covering over-allotments, if any,
made in connection with the sale of the shares of Preferred Stock offered
hereby. To the extent such over-allotment option is exercised, each Underwriter
will become obligated, subject to certain conditions, to purchase the same
percentage of such additional shares as the number set forth next to such
Underwriter's name in the preceding table bears to the total number of shares
set forth on the cover page hereof.
EchoStar and certain directors and executive officers of EchoStar will agree
with the Underwriters not to offer, sell, grant any other option to purchase or
otherwise dispose of, directly or indirectly, any shares of capital stock or any
securities convertible into or exercisable or exchangeable for, or warrants,
rights or options to acquire, capital stock, or enter into any agreement to do
any of the foregoing for a period of 180 days after the date of this Prospectus,
without the prior written consent of Donaldson, Lufkin & Jenrette Securities
Corporation ("DLJ").
EchoStar and its direct and indirect subsidiaries have agreed to indemnify
the Underwriters against certain liabilities, including liabilities under the
Securities Act, or to contribute to payments the Underwriters may be required to
make in respect thereof.
In connection with this Preferred Offering, the Underwriters may engage in
transactions that stabilize, maintain or otherwise affect the price of the
Preferred Stock. Specifically, the Underwriters may overallot this Preferred
Offering, creating a syndicate short position. In addition, the Underwriters may
bid for, and purchase, shares of the Preferred Stock in the open market to cover
syndicate shorts or to stabilize the price of the Preferred Stock. Finally, the
underwriting syndicate may reclaim selling concessions allowed for distributed
Preferred Stock (in syndicate covering transactions, in stabilization
transactions or otherwise). Any of these activities may stabilize or maintain
the market price of the Preferred Stock above
106
independent market levels. The underwriters are not required to engage in these
activities, and may end any of these activities at any time.
DLJ acted as underwriter in connection with the 1994 Notes Offering, the
June 1995 IPO, the 1996 Notes Offering 1997 Notes Offering, and the Series B
Preferred Stock Offering, and received customary underwriting discounts and
commissions in connection therewith. In addition, in August 1994, certain
officers and other employees of DLJ purchased an aggregate of 324,006 shares of
Class A Common Stock from EchoStar for an aggregate purchase price of
approximately $3.8 million. Further, in January 1996, certain affiliates of DLJ
received a commitment fee, in connection with the FCC Auction, of $3.0 million
from EchoStar. DLJ has also rendered financial advisory services to EchoStar and
may do so in the future. Lehman Brothers Inc. acted as underwriter in connection
with the 1997 Notes Offering and the Series B Preferred Stock Offering and
received customary underwriting discounts and commissions in connection
therewith.
LEGAL MATTERS
The legality of the Preferred Stock to be sold in the Preferred Offering
will be passed upon for EchoStar by Friedlob Sanderson Raskin Paulson &
Tourtillott, LLC ("Friedlob Sanderson"). Mr. Friedlob, a member of Friedlob
Sanderson, is also a member of the Board of Directors of EchoStar, and owns
options to purchase 6,000 shares of Class A Common Stock of EchoStar. Certain
legal matters relating to the Preferred Offering will be passed on for the
Underwriters by Paul, Hastings, Janofsky & Walker LLP (a limited liability
partnership including professional corporations) ("Paul, Hastings"). Friedlob
Sanderson and Paul, Hastings will rely upon the opinion of Hale, Lane, Peek,
Dennison, Howard, Anderson and Pearl as to certain matters of Nevada law.
INDEPENDENT ACCOUNTANTS
The audited financial statements of EchoStar included in this Prospectus
have been audited by Arthur Andersen LLP, independent public accountants, as
indicated in their report with respect thereto, and are included herein in
reliance upon the authority of such firm as experts in giving such report.
AVAILABLE INFORMATION
EchoStar is subject to the informational requirements of the Exchange Act
and, in accordance therewith files reports, proxy statements and other
information with the Commission. The reports, proxy statements and other
information filed by EchoStar may be inspected and copied at the public
reference facilities maintained by the Commission at Room 1024, 450 Fifth
Street, N.W. Washington D.C. 20549, and at the Commission's regional offices
located at 7 World Trade Center, New York, New York 10048, and 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661. Copies of such material can be
obtained at prescribed rates from the Public Reference Section of the Commission
at 450 Fifth Street, N.W., Washington, D.C. 20549. Class A Common Stock is
traded on the Nasdaq National Market and reports and other information herein
and therein concerning EchoStar can also be inspected at the Nasdaq National
Market Exchange, 1735 K Street, N.W., Washington, D.C. 20546. Such material may
also be accessed electronically by means of the Commission's home page on the
Internet at HTTP://WWW.SEC.GOV.
EchoStar has filed with the Commission a Registration Statement on Form S-3
under the Securities Act with respect to the Preferred Stock offered hereby and
the Common Stock issuable upon conversion thereof or in redemption therefor or
as a dividend thereon. This Prospectus does not contain all of the information
set forth in the Registration Statement and the exhibits and schedules thereto.
For further information with respect to EchoStar and the securities offered
hereby, reference is made to the Registration Statement, including the exhibits
and schedules thereto, which may be inspected at, and copies thereof may be
obtained at prescribed rates from, the public reference facilities of the
Commission at the address set forth above.
107
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed with the Commission are incorporated by
reference into this Prospectus:
(i) EchoStar's Annual Report on Form 10-K, as amended, for the year
ended December 31, 1996;
(ii) EchoStar's Quarterly Report on Form 10-Q for the quarterly
periods ended March 31, 1997 and June 30, 1997;
(iii) EchoStar's Current Reports on Form 8-K dated March 3, 1997,
April 28, 1997, and September 11, 1997;
(iv) EchoStar's definitive proxy statement for its annual meeting of
shareholders held on September 12, 1997.
All documents filed by EchoStar pursuant to Section 13(a), 13(c), 14 or
15(d) of the Exchange Act subsequent to the date of this Prospectus and prior to
the termination of the Preferred Offering shall be deemed to be incorporated by
reference into this Prospectus and to be a part hereof from the date of filing
such documents.
Any statement contained in a document incorporated by reference herein shall
be deemed to be modified or superseded for purposes of this Prospectus to the
extent that a statement contained in this Prospectus, or in any other
subsequently filed document which is also incorporated herein by reference,
modifies or supersedes such statement. Any such statement so modified or
superseded shall not be deemed to constitute a part of this Prospectus except as
so modified or superseded.
EchoStar hereby undertakes to provide without charge to each person to whom
a copy of this Prospectus has been delivered, on the written or oral request of
any such person, a copy of any or all of the documents referred to above which
have been or may be incorporated into this Prospectus by reference, other than
exhibits to such documents. Requests for such copies should be directed to
Investor Relations, EchoStar Communications Corporation, 90 Inverness Circle
East, Englewood, Colorado 80112, telephone number (303) 799-8222.
108
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
ECHOSTAR COMMUNICATIONS CORPORATION
Consolidated Financial Statements:
Report of Independent Public Accountants............................................ F-2
Consolidated Balance Sheets at December 31, 1995 and 1996 and June 30, 1997......... F-3
Consolidated Statements of Operations for the years ended December 31, 1994, 1995
and 1996, and the six months ended June 30, 1996 and 1997......................... F-4
Consolidated Statements of Stockholders' Equity (Deficit) for the years ended
December 31, 1994, 1995 and 1996, and the six months ended June 30, 1997.......... F-5
Consolidated Statements of Cash Flows for the years ended December 31, 1994, 1995
and 1996, and the six months ended June 30, 1996 and 1997......................... F-6
Notes to Consolidated Financial Statements.......................................... F-7
F-1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To EchoStar Communications Corporation:
We have audited the accompanying consolidated balance sheets of EchoStar
Communications Corporation (a Nevada corporation) and subsidiaries, as described
in Note 1, as of December 31, 1995 and 1996, and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
three years in the period ended December 31, 1996. These financial statements
are the responsibility of the Companies' management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of EchoStar
Communications Corporation and subsidiaries as of December 31, 1995 and 1996,
and the consolidated results of their operations and their cash flows for each
of the three years in the period ended December 31, 1996, in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Denver, Colorado,
March 14, 1997.
F-2
ECHOSTAR COMMUNICATIONS CORPORATION
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
DECEMBER 31,
-------------------- JUNE 30,
1995 1996 1997
--------- --------- -----------
(UNAUDITED)
ASSETS
Current Assets:
Cash and cash equivalents................................................... $ 21,754 $ 39,231 $ 182,852
Marketable investment securities............................................ 15,670 18,807 4,952
Trade accounts receivable, net of allowance for uncollectible accounts of
$1,106, $1,494 and $1,642, respectively................................... 9,179 13,516 29,475
Inventories................................................................. 38,769 72,767 63,043
Income tax refund receivable................................................ 3,554 4,830 145
Deferred tax assets......................................................... 1,779 - -
Subscriber acquisition costs, net........................................... - 68,129 68,584
Other current assets........................................................ 13,037 18,356 10,177
--------- --------- -----------
Total current assets.......................................................... 103,742 235,636 359,228
Restricted Cash and Marketable Investment Securities:
1994 Notes escrow........................................................... 73,291 - -
1996 Notes escrow........................................................... - 47,491 -
Satellite Escrow............................................................ - - 112,086
Interest Escrow............................................................. - - 109,084
Other....................................................................... 26,400 31,800 8,445
--------- --------- -----------
Total restricted cash and marketable investment securities.................... 99,691 79,291 229,615
Property and equipment, net................................................... 354,000 590,621 728,237
FCC authorizations, net....................................................... 11,309 72,667 94,386
Deferred tax assets........................................................... 12,109 79,339 79,339
Other noncurrent assets....................................................... 42,240 83,826 43,675
--------- --------- -----------
Total assets.............................................................. $ 623,091 $1,141,380 $1,534,480
--------- --------- -----------
--------- --------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Trade accounts payable...................................................... $ 19,063 $ 40,819 $ 49,752
Deferred revenue--DISH Network subscriber promotions........................ - 97,959 117,121
Deferred programming revenue -- DISH Network................................ - 4,407 5,269
Deferred programming revenue--C-band........................................ 584 734 588
Accrued expenses and other current liabilities.............................. 26,314 30,495 78,186
Deferred tax liabilities.................................................... - 12,563 12,198
Current portion of long-term obligations.................................... 4,782 11,334 12,332
--------- --------- -----------
Total current liabilities..................................................... 50,743 198,311 275,446
Long-term obligations, net of current portion:
Long-term deferred signal carriage revenue.................................. - 5,949 7,366
1994 Notes.................................................................. 382,218 437,127 467,210
1996 Notes.................................................................. - 386,165 411,256
1997 Notes.................................................................. - - 375,000
Mortgage and other notes payable, excluding current portion................. 33,444 51,428 45,379
Other long-term obligations................................................. - 1,203 5,691
--------- --------- -----------
Total long-term obligations, net of current portion........................... 415,662 881,872 1,311,902
--------- --------- -----------
Total liabilities......................................................... 466,405 1,080,183 1,587,348
Commitments and Contingencies (Note 11)
Stockholders' Equity (Deficit) (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, $3,347 and $3,949, respectively...................... 17,195 18,399 19,001
Class A Common Stock, $.01 par value, 200,000,000 shares authorized,
10,535,003, 11,115,582 and 11,821,513 shares issued and outstanding,
respectively.............................................................. 105 111 118
Class B Common Stock, $.01 par value, 100,000,000 shares authorized,
29,804,401 shares issued and outstanding.................................. 298 298 298
Class C Common Stock, $.01 par value, 100,000,000 shares authorized, none
outstanding............................................................... - - -
Common Stock Warrants....................................................... 714 16 11
Additional paid-in capital.................................................. 151,674 158,113 170,701
Unrealized holding gains (losses) on available-for-sale securities, net of
deferred taxes............................................................ 239 (11) (11)
Accumulated deficit......................................................... (13,539) (115,729) (242,986)
--------- --------- -----------
Total stockholders' equity (deficit).......................................... 156,686 61,197 (52,868)
--------- --------- -----------
Total liabilities and stockholders' equity (deficit)...................... $ 623,091 $1,141,380 $1,534,480
--------- --------- -----------
--------- --------- -----------
See accompanying Notes to Consolidated Financial Statements.
F-3
ECHOSTAR COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
----------------------------------- -----------------------
1994 1995 1996 1996 1997
---------- ---------- ----------- ---------- -----------
(UNAUDITED)
REVENUE:
DTH products and technical services.............. $ 172,753 $ 146,910 $ 135,812 $ 97,199 $ 33,649
DISH Network promotions -- subscription
television services and products............... -- -- 22,746 -- 76,251
DISH Network subscription television services.... -- -- 37,898 6,046 57,588
C-band programming............................... 14,540 15,232 11,921 6,643 4,079
Loan origination and participation income........ 3,690 1,748 3,034 5,103 1,278
---------- ---------- ----------- ---------- -----------
Total revenue...................................... 190,983 163,890 211,411 114,991 172,845
EXPENSES:
DTH products and technical services.............. 133,635 116,758 123,790 90,278 27,718
DISH Network programming......................... -- -- 19,079 1,769 45,259
C-band programming............................... 11,670 13,520 10,510 6,058 3,308
Selling, general and administrative.............. 30,219 38,525 90,372 29,816 66,389
Subscriber promotion subsidies................... -- -- 33,591 -- 31,013
Amortization of subscriber acquisition costs..... -- -- 15,991 92 61,418
Depreciation and amortization.................... 2,243 3,114 27,423 9,664 25,357
---------- ---------- ----------- ---------- -----------
Total expenses..................................... 177,767 171,917 320,756 137,677 260,462
---------- ---------- ----------- ---------- -----------
Operating income (loss)............................ 13,216 (8,027) (109,345) (22,686) (87,617)
Other Income (Expense):
Interest income.................................. 8,420 14,059 15,630 9,383 3,343
Interest expense, net of amounts capitalized..... (21,408) (23,985) (61,487) (33,184) (42,043)
Minority interest in loss of consolidated joint
venture and other.............................. 261 722 (477) (134) (294)
---------- ---------- ----------- ---------- -----------
Total other income (expense)....................... (12,727) (9,204) (46,334) (23,935) (38,994)
---------- ---------- ----------- ---------- -----------
Income (loss) before income taxes.................. 489 (17,231) (155,679) (46,621) (126,611)
Income tax (provision) benefit, net................ (399) 5,745 54,693 16,846 (44)
---------- ---------- ----------- ---------- -----------
Net income (loss).................................. $ 90 $ (11,486) $ (100,986) $ (29,775) $ (126,655)
---------- ---------- ----------- ---------- -----------
---------- ---------- ----------- ---------- -----------
Net loss attributable to common shares............. $ (849) $ (12,690) $ (102,190) $ (30,377) $ (127,257)
---------- ---------- ----------- ---------- -----------
---------- ---------- ----------- ---------- -----------
Weighted-average common shares outstanding......... 32,442 35,562 40,548 40,404 41,265
---------- ---------- ----------- ---------- -----------
---------- ---------- ----------- ---------- -----------
Loss per common and common equivalent share........ $ (0.03) $ (0.36) $ (2.52) $ (0.75) $ (3.08)
---------- ---------- ----------- ---------- -----------
---------- ---------- ----------- ---------- -----------
See accompanying Notes to Consolidated Financial Statements.
F-4
ECHOSTAR COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS 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)
----------------- ----------- ----------- ----------- ----------- ------------
(NOTES 1 AND 9)
Balance, December 31, 1993........... 32,221 $ - $ 322 $ - $ 49,378 $ -
Issuance of Class A Common Stock:
For acquisition of DirectSat,
Inc. .......................... 999 - 11 - 8,989 -
For cash......................... 324 - 3 - 3,830 -
Issuance of 1,616,681 shares of 8%
Series A Cumulative Preferred
Stock............................ - 15,052 - - - -
Issuance of Common Stock
Warrants......................... - - - 26,133 - -
8% Series A Cumulative Preferred
Stock dividends.................. - 939 - - - (939)
Net income......................... - - - - - 90
------ ----------- ----- ----------- ----------- ------------
Balance, December 31, 1994........... 33,544 15,991 336 26,133 62,197 (849)
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 -
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 -
Unrealized holding gains on
available-for-sale securities,
net.............................. - - - - - 239
Net loss........................... - - - - - (11,486)
------ ----------- ----- ----------- ----------- ------------
Balance, December 31, 1995........... 40,339 17,195 403 714 151,674 (13,300)
8% Series A Cumulative Preferred
Stock dividends.................. - 1,204 - - - (1,204)
Exercise of Class A Common Stock
options.......................... 442 - 4 - 2,255 -
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 -
Employee Savings Plan contribution
issuable and launch bonuses
funded by issuance of Class A
Common Stock..................... 64 - 1 - 1,115 -
Unrealized holding losses on
available-for-sale securities,
net.............................. - - - - - (250)
Net loss........................... - - - - - (100,986)
------ ----------- ----- ----------- ----------- ------------
Balance, December 31, 1996........... 40,920 18,399 409 16 158,113 (115,740)
Issuance of Class A Common Stock
for acquisition of Direct
Broadcasting Satellite
Corporation (unaudited).......... 647 - 6 - 11,986 -
8% Series A Cumulative Preferred
Stock dividends (unaudited)...... - 602 - - - (602)
Exercise of Class A Common Stock
options (unaudited).............. 58 - 1 - 543 -
Exercise of Common Stock Warrants
(unaudited)...................... - - - (5) 5 -
Employee incentives funded by
issuance of Class A Common Stock
(unaudited)...................... 1 - - - 54 -
Net loss (unaudited)............... - - - - - (126,655)
------ ----------- ----- ----------- ----------- ------------
Balance, June 30, 1997 (unaudited)... 41,626 $ 19,001 $ 416 $ 11 $ 170,701 $ (242,997)
------ ----------- ----- ----------- ----------- ------------
------ ----------- ----- ----------- ----------- ------------
TOTAL
---------
Balance, December 31, 1993........... $ 49,700
Issuance of Class A Common Stock:
For acquisition of DirectSat,
Inc. .......................... 9,000
For cash......................... 3,833
Issuance of 1,616,681 shares of 8%
Series A Cumulative Preferred
Stock............................ 15,052
Issuance of Common Stock
Warrants......................... 26,133
8% Series A Cumulative Preferred
Stock dividends.................. -
Net income......................... 90
---------
Balance, December 31, 1994........... 103,808
8% Series A Cumulative Preferred
Stock dividends.................. -
Issuance of Class A Common Stock
pursuant to initial public
offering, net of stock issuance
costs of $5,067.................. 62,933
Exercise of Common Stock
Warrants......................... -
Employee Savings Plan contribution
and launch bonuses funded by
issuance of Class A Common
Stock............................ 1,192
Unrealized holding gains on
available-for-sale securities,
net.............................. 239
Net loss........................... (11,486)
---------
Balance, December 31, 1995........... 156,686
8% Series A Cumulative Preferred
Stock dividends.................. -
Exercise of Class A Common Stock
options.......................... 2,259
Exercise of Common Stock
Warrants......................... -
Income tax benefit of deduction for
income tax purposes on exercise
of Class A Common Stock
options.......................... 2,372
Employee Savings Plan contribution
issuable and launch bonuses
funded by issuance of Class A
Common Stock..................... 1,116
Unrealized holding losses on
available-for-sale securities,
net.............................. (250)
Net loss........................... (100,986)
---------
Balance, December 31, 1996........... 61,197
Issuance of Class A Common Stock
for acquisition of Direct
Broadcasting Satellite
Corporation (unaudited).......... 11,992
8% Series A Cumulative Preferred
Stock dividends (unaudited)...... -
Exercise of Class A Common Stock
options (unaudited).............. 544
Exercise of Common Stock Warrants
(unaudited)...................... -
Employee incentives funded by
issuance of Class A Common Stock
(unaudited)...................... 54
Net loss (unaudited)............... (126,655)
---------
Balance, June 30, 1997 (unaudited)... $ (52,868)
---------
---------
See accompanying Notes to Consolidated Financial Statements.
F-5
ECHOSTAR COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
------------------------------- --------------------
1994 1995 1996 1996 1997
--------- --------- --------- --------- ---------
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)..................................... $ 90 $ (11,486) $(100,986) $ (29,775) $(126,655)
Adjustments to reconcile net income (loss) to net cash
flows from operating activities:
Depreciation and amortization..................... 2,243 3,114 27,423 9,664 25,357
Amortization of subscriber acquisition costs...... - - 15,991 92 61,418
Deferred income tax benefit....................... (7,330) (4,763) (50,365) (11,534) (365)
Amortization of debt discount and deferred
financing costs................................. 20,662 23,528 61,695 24,530 38,731
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 2,866 634 1,987
Change in long-term deferred signal carriage
revenue......................................... - - 5,949 4,163 1,417
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 (666) 4,542
Changes in current assets and current liabilities,
net(see Note 2)................................. 8,354 (32,640) 11,537 (17,163) (15,623)
--------- --------- --------- --------- ---------
Net cash flows provided by (used in) operating
activities.......................................... 24,205 (20,328) (27,425) (20,055) (9,191)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of marketable investment securities......... (15,100) (25,230) (138,295) (44,782) (4,706)
Sales of marketable investment securities............. 4,439 40,563 135,176 15,479 18,561
Purchases of restricted marketable investment
securities.......................................... (11,400) (15,000) (21,100) (9,800) (1,645)
Funds released from restricted cash and marketable
investment securities -- other...................... - - 15,700 - -
Purchases of property and equipment................... (3,507) (4,048) (50,954) (7,537) (19,129)
Offering proceeds and investment earnings placed in
escrow.............................................. (329,831) (9,589) (193,972) (181,778) (221,654)
Funds released from escrow accounts................... 144,400 122,149 219,352 71,545 72,975
Investment in SSET.................................... (8,750) - -
Payments received on (investments in) convertible
subordinated debentures from SSET................... - - 6,445 - (500)
Investment in convertible subordinated debentures from
DBSI................................................ - (1,000) (3,640) (3,000) -
Long-term notes receivable from and investment in
DBSC................................................ (4,210) (16,000) (30,000) (12,500) -
Expenditures for satellite systems under
construction........................................ (115,752) (129,506) (170,935) (73,932) (47,975)
Expenditures for FCC authorizations................... (159) (458) (55,419) (13,652) (129)
Other................................................. 1,305 - - - (478)
--------- --------- --------- --------- ---------
Net cash flows used in investing activities........... (338,565) (38,119) (287,642) (259,957) (204,680)
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.............. - - 336,916 337,043 -
Net proceeds from issuance of 1997 Notes.............. - - - - 362,500
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) (1,082) (5,551)
Loans from stockholder, net........................... 4,000 - - - -
Repayment of loans from stockholder................... (4,075) - - - -
Stock options exercised............................... - - 2,259 722 543
Dividends paid........................................ (3,000) - - - -
--------- --------- --------- --------- ---------
Net cash flows provided by financing activities....... 325,011 62,695 332,544 336,683 357,492
--------- --------- --------- --------- ---------
Net increase in cash and cash equivalents............. 10,651 4,248 17,477 56,671 143,621
Cash and cash equivalents, beginning of year.......... 6,855 17,506 21,754 21,754 39,231
--------- --------- --------- --------- ---------
Cash and cash equivalents, end of year................ $ 17,506 $ 21,754 $ 39,231 $ 78,425 $ 182,852
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
See accompanying Notes to Consolidated Financial Statements.
F-6
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF JUNE 30, 1997 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1996 AND JUNE 30, 1997 IS UNAUDITED)
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 and 590,000 subscribers to DISH
Network programming as of December 31, 1996 and June 30, 1997, respectively.
RECENT DEVELOPMENTS
SERIES B SENIOR REDEEMABLE EXCHANGEABLE PREFERRED OFFERING
On October 2, 1997, EchoStar consummated an offering (the "Preferred
Offering") of 12 1/8% Series B Senior Redeemable Exchangeable Preferred Stock
due 2004, par value $0.01 per share (including any additional shares of such
stock issued from time to time in lieu of cash dividends, (the "Senior Preferred
Stock"). The Preferred Offering resulted in net proceeds to EchoStar of
approximately $193.0 million. The Senior Preferred Stock was issued in a private
placement pursuant to Rule 144A of the Securities Act. Each share of Senior
Preferred Stock will have a liquidation preference of $1,000 per share.
Dividends on the Senior Preferred Stock are payable quarterly in arrears,
commencing on January 1, 1998. EchoStar may, at its option, pay dividends in
cash or by issuing additional shares of Senior Preferred Stock having an
aggregate liquidation preference equal to the amount of such dividends. EchoStar
may, at its option, exchange all, but not less than all, of the shares of Senior
Preferred Stock then outstanding for EchoStar's 12 1/8% Senior Exchange Notes
due 2004 (including any such senior notes issued from time to time in lieu of
cash interest, the "Senior Exchange Notes"). The Senior Exchange Notes will bear
interest at a rate of 12 1/8 per annum, payable semiannually in arrears on April
1 and October 1 of each year, commencing with the first such date to occur after
the date of the exchange. Interest on the Senior Exchange Notes may, at the
option of EchoStar, be paid in cash or by issuing additional Senior Exchange
Notes in an aggregate principal amount equal to the amount of such interest.
EchoStar presently intends to use the net proceeds of the Preferred Offering to
fund subscriber acquisition and marketing expenses and for other general
corporate purposes.
F-7
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND BUSINESS ACTIVITIES (CONTINUED)
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 September 15, 1997 filed an amendment to 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 110 DEG. 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.
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, 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
F-8
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND BUSINESS ACTIVITIES (CONTINUED)
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.
F-9
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND BUSINESS ACTIVITIES (CONTINUED)
The following summarizes the Company's organizational structure for EchoStar
and its significant subsidiaries as described above as of June 30, 1997.
REFERRED TO HEREIN
LEGAL ENTITY AS OWNERSHIP
- ------------------------------------------ -------------------- -------------------------
EchoStar Communications Corporation ECC Publicly owned
EchoStar DBS Corporation DBS Corp Wholly-owned by ECC
EchoStar Satellite Broadcasting Wholly-owned by DBS Corp
Corporation ESBC
Dish Network Credit Corporation DNCC Wholly-owned by ECC
Dish, Ltd. Dish, Ltd. Wholly-owned by ESBC
EchoStar Satellite Corporation Wholly-owned by Dish,
ESC Ltd.
Echosphere Corporation Wholly-owned by Dish,
EchoCorp Ltd.
Houston Tracker Systems, Inc. Wholly-owned by Dish,
HTS Ltd.
EchoStar International Corporation Wholly-owned by Dish,
EIC 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 1997 Notes. The 1997 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.
F-10
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 and June 30, 1997, these
investments were not material to the consolidated financial statements.
The consolidated financial statements as of June 30, 1997 and for the six
months ended June 30, 1996 and 1997 include, in the opinion of management, all
adjustments (consisting of normal recurring adjustments) necessary to present
fairly the Company's consolidated financial position, results of operations and
cash flows. Operating results for the six months ended June 30, 1997 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 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.
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 and the six-month periods ended
June 30, 1996 and 1997 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 and June 30, 1997 consist of money market funds,
corporate notes and commercial paper; such balances are stated at cost which
equates to market value.
F-11
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. 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:
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
------------------------------- --------------------
1994 1995 1996 1996 1997
--------- --------- --------- --------- ---------
(UNAUDITED)
Cash paid for interest, net of amounts capitalized............. $ 436 $ 461 $ 3,007 $ 7,953 $ 2,352
Cash paid for income taxes..................................... 7,140 3,203 - - -
8% Series A Cumulative Preferred Stock dividends............... 939 1,204 1,204 602 602
Accrued satellite contract costs............................... - 15,000 - - 32,950
Satellite launch payment for EchoStar II applied to EchoStar I
launch....................................................... - - 15,000 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 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 8 20
The purchase price of DBS was allocated as follows in the
realted purchase accounting:
EchoStar III satellite under construction.................. -- -- -- -- 51,321
FCC authorizations......................................... -- -- -- -- 16,543
Notes receivable from DBSC, including accrued interest of
$3,382................................................... -- -- -- -- (49,382)
Investment in DBSC......................................... -- -- -- -- (4,044)
Accounts payable and accrued expenses...................... -- -- -- -- (1,946)
Other notes payable........................................ -- -- -- -- (500)
Common stock and additional paid-in capital................ -- -- -- -- (11,992)
F-12
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
MARKETABLE INVESTMENT SECURITIES AND RESTRICTED CASH AND MARKETABLE INVESTMENT
SECURITIES
At December 31, 1995 and 1996 and June 30, 1997, 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, and $6,000 at June 30, 1997.
The specific identification method is used to determine cost in computing
realized gains and losses.
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, $5.7 million
and $5.7 million at December 31, 1995 and 1996 and June 30, 1997, 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 and June 30, 1997, $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 and June 30, 1997, $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.
F-13
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The major components of Restricted Cash and Marketable Investment Securities
are as follows (in thousands):
DECEMBER 31, 1995 DECEMBER 31, 1996
----------------------------------- -----------------------------------
UNREALIZED UNREALIZED
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. Inventories consist of the following (in thousands):
DECEMBER 31,
-------------------- JUNE 30,
1995 1996 1997
--------- --------- ------------
(UNAUDITED)
EchoStar Receiver Systems..................................................... $ - $ 32,799 $ 46,499
Consigned DBS receiver components............................................. - 23,525 15,201
DBS receiver components....................................................... 9,615 15,736 2,681
Finished goods--C-band........................................................ 11,161 600 4,181
Finished goods--International................................................. 9,297 3,491 359
Competitor DBS Receivers...................................................... 9,404 - -
Spare parts................................................................... 2,089 2,279 1,771
Reserve for excess and obsolete inventory..................................... (2,797) (5,663) (7,649)
--------- --------- ------------
$ 38,769 $ 72,767 $ 63,043
--------- --------- ------------
--------- --------- ------------
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 and $12.8 million and $11.4
million during the six-month periods ended June 30, 1996 and 1997, 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-
F-14
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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, and $1.6
million and $5.2 million during the six-month periods ended June 30, 1996 and
1997, 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 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
F-15
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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,
-------------------- JUNE 30,
1995 1996 1997
--------- --------- ------------
(UNAUDITED)
Accrued expenses.............................................................. $ 3,850 $ 20,269 $ 32,378
Accrued satellite contract costs.............................................. 15,000 - 32,950
Accrued programming........................................................... 4,979 9,463 12,095
Reserve for warranty costs.................................................... 1,013 763 763
Other......................................................................... 1,472 - -
--------- --------- ------------
$ 26,314 $ 30,495 $ 78,186
--------- --------- ------------
--------- --------- ------------
The Company's C-band proprietary products are under warranty against defects
in material and workmanship for a period of one year from the date of original
retail purchase. The reserve for warranty costs is based upon historical units
sold and expected repair costs. The Company does not have a warranty reserve for
its DBS products because the warranty is provided by the contract manufacturer.
ADVERTISING COSTS
Advertising costs are expensed as incurred and totaled $2.3 million, $1.9
million and $16.5 million for the years ended December 31, 1994, 1995 and 1996,
respectively.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs, which are expensed as incurred, totaled $5.9
million, $5.0 million and $6.0 million for the years ended December 31, 1994,
1995 and 1996, respectively.
NET LOSS ATTRIBUTABLE TO COMMON SHARES
Net loss attributable to common shares is calculated based on the
weighted-average number of shares of common stock issued and outstanding for the
respective periods. Common stock equivalents (warrants and employee stock
options) are excluded as they are antidilutive. Net loss attributable to common
shares is also adjusted for cumulative dividends on the 8% Series A Cumulative
Preferred Stock.
RECLASSIFICATIONS
Certain amounts from the prior years consolidated financial statements have
been reclassified to conform with the 1996 presentation.
F-16
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. OTHER CURRENT ASSETS
Other current assets consist of the following (in thousands):
DECEMBER 31,
-------------------- JUNE 30,
1995 1996 1997
--------- --------- -----------
(UNAUDITED)
Deposit held by non-performing manufacturer.................................... $ 10,000 $ 10,000 $ -
Other.......................................................................... 3,037 8,356 10,177
--------- --------- -----------
$ 13,037 $ 18,356 $ 10,177
--------- --------- -----------
--------- --------- -----------
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 and June 30, 1997, 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.
4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following (in thousands):
DECEMBER 31,
LIFE ---------------------- JUNE 30,
(IN YEARS) 1995 1996 1997
------------- ---------- ---------- -----------
(UNAUDITED)
EchoStar I...................................................... 12 $ - $ 201,607 $ 201,607
EchoStar II..................................................... 12 - 228,694 228,694
Furniture, fixtures and equipment............................... 2-12 35,127 72,945 82,083
Buildings and improvements...................................... 7-40 21,006 26,035 27,488
Tooling and other............................................... 2 2,039 3,253 3,781
Land............................................................ - 1,613 2,295 2,317
Vehicles........................................................ 7 1,310 1,323 1,334
Construction in progress........................................ - 303,174 89,733 241,189
---------- ---------- -----------
Total property and equipment.................................... 364,269 625,885 788,493
Accumulated depreciation........................................ (10,269) (35,264) (60,256)
---------- ---------- -----------
Property and equipment, net..................................... $ 354,000 $ 590,621 $ 728,237
---------- ---------- -----------
---------- ---------- -----------
F-17
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. PROPERTY AND EQUIPMENT (CONTINUED)
Construction in progress consists of the following (in thousands):
DECEMBER 31,
--------------------- JUNE 30,
1995 1996 1997
---------- --------- -----------
(UNAUDITED)
Progress amounts for satellite construction, launch, launch insurance, and
capitalized interest:
EchoStar I................................................................. $ 193,629 $ - $ -
EchoStar II................................................................ 88,634 - -
EchoStar III............................................................... 20,801 29,123 151,570
EchoStar IV................................................................ - 56,320 77,002
Other........................................................................ 110 4,290 12,617
---------- --------- -----------
$ 303,174 $ 89,733 $ 241,189
---------- --------- -----------
---------- --------- -----------
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 was launched on October 5, 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,
-------------------- JUNE 30,
1995 1996 1997
--------- --------- -----------
(UNAUDITED)
Long-term notes receivable from DBSC and accrued interest...................... $ 16,000 $ 49,382 $ -
Deferred debt issuance costs................................................... 10,622 21,284 33,619
SSET convertible subordinated debentures and accrued interest.................. 9,610 3,649 4,075
Investment in DBSC............................................................. 4,111 4,044 -
DBSI convertible subordinated debentures....................................... 1,000 4,640 4,640
Other, net..................................................................... 897 827 1,341
--------- --------- -----------
$ 42,240 $ 83,826 $ 43,675
--------- --------- -----------
--------- --------- -----------
In 1994, the Company purchased $8.75 million of SSET's 6.5% convertible
subordinated debentures. During 1996, EchoStar received $6.4 million of payments
from SSET ($5.2 million principal and $1.2 million interest) related to these
convertible debentures. As of December 31, 1996, the debentures, if converted,
would represent approximately 5% of SSET's common stock, based on the number of
shares of SSET common stock outstanding at December 31, 1996. Management
estimates that the fair value of the SSET debentures approximates their carrying
value in the accompanying financial statements based on current interest rates
and the conversion features contained in the debentures. SSET is a reporting
company under the Securities Exchange Act of 1934 and is engaged in the
manufacture and sale of satellite telecommunications equipment. In March 1994,
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-18
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. OTHER NONCURRENT ASSETS (CONTINUED)
In November 1994, the Company resolved a lawsuit 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"). Through June 30, 1997 EchoStar had issued
approximately 647,000 shares (and expects to issue an additional 11,000 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.
F-19
ECHOSTAR COMMUNICATIONS CORPORATION
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 (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.
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
F-20
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. LONG-TERM DEBT (CONTINUED)
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 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
F-21
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. LONG-TERM DEBT (CONTINUED)
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.
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.
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
F-22
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. LONG-TERM DEBT (CONTINUED)
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.
F-23
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. LONG-TERM DEBT (CONTINUED)
OTHER LONG-TERM DEBT
In addition to the 1994 Notes, the 1996 Notes and the 1997 Notes, other
long-term debt consists of the following (in thousands, except monthly payment
data):
DECEMBER 31,
-------------------- JUNE 30,
1995 1996 1997
--------- --------- -----------
(UNAUDITED)
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 $ 27,333
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 24,873
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 3,613
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.................................................... 910 892 882
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.............................. 574 531 510
9.5% note payable due 90 days following the successful launch and checkout of
EchoStar III................................................................. - - 500
--------- --------- -----------
Total long-term debt, excluding the 1994 Notes, 1996 Notes and 1997 Notes...... 38,226 62,762 57,711
Less current portion........................................................... (4,782) (11,334) (12,332)
--------- --------- -----------
Long-term debt, excluding current portion...................................... $ 33,444 $ 51,428 $ 45,379
--------- --------- -----------
--------- --------- -----------
F-24
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. LONG-TERM DEBT (CONTINUED)
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 NOTES PAYABLE TOTAL
----------- ----------- ----------- ------------- ------------
YEAR ENDING DECEMBER 31,
1997......................................... $ - $ - $ 11,061 $ 273 $ 11,334
1998......................................... - - 12,009 1,141 13,150
1999......................................... - - 13,038 289 13,327
2000......................................... - - 14,156 309 14,465
2001......................................... - - 7,360 331 7,691
Thereafter................................... 624,000 580,000 - 2,795 1,206,795
Unamortized discount......................... (186,873) (193,835) - - (380,708)
----------- ----------- ----------- ------ ------------
Total........................................ $ 437,127 $ 386,165 $ 57,624 $ 5,138 $ 886,054
----------- ----------- ----------- ------ ------------
----------- ----------- ----------- ------ ------------
The following table summarizes the book and fair values of the Company's
debt facilities at December 31, 1996 (dollars in thousands). Fair values for the
Company's 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.
F-25
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. LONG-TERM DEBT (CONTINUED)
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.
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.
F-26
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. INCOME TAXES (CONTINUED)
The temporary differences which give rise to deferred tax assets and
liabilities as of December 31, 1995 and 1996 are as follows (in thousands):
DECEMBER 31,
---------------------
1995 1996
--------- ----------
Current deferred tax assets:
Accrued royalties......................................................................... $ - $ 3,029
Inventory reserves and cost methods....................................................... 834 1,811
Accrued expenses and other................................................................ 257 1,582
Allowance for doubtful accounts........................................................... 456 674
Reserve for warranty costs................................................................ 385 284
--------- ----------
Total current deferred tax assets........................................................... 1,932 7,380
Current deferred tax liabilities:
Unrealized holding gain on marketable investment securities............................... (153) (6)
Subscriber acquisition costs.............................................................. - (19,937)
--------- ----------
Total current deferred tax liabilities...................................................... (153) (19,943)
--------- ----------
Net current deferred tax assets (liabilities)........................................... 1,779 (12,563)
Noncurrent deferred tax assets:
Net operating loss 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
--------- ----------
--------- ----------
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. EchoStar has fully reserved the 1997
additions to its deferred tax assets.
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
----------- ----------- --------- ----------- ---------
Statutory rate............................................. $ (166) (34.0)% $ 6,031 35.0% $ 54,488
State income taxes, net of federal benefit................. (88 ) (18.0 ) 203 1.2 2,864
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)
Other...................................................... (103 ) (21.1 ) (237) (1.5 ) (560)
----- ----- --------- --- ---------
Total (provision for) benefit from income taxes.......... $ (399 ) (81.6 )% $ 5,745 33.3% $ 54,693
----- ----- --------- --- ---------
----- ----- --------- --- ---------
PERCENT
-----------
Statutory rate............................................. 35.0%
State income taxes, net of federal benefit................. 1.8
Tax exempt interest income................................. -
Research and development credits........................... -
Non-deductible interest expense............................ (1.3 )
Other...................................................... (0.4 )
---
Total (provision for) benefit from income taxes.......... 35.1%
---
---
F-27
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. EMPLOYEE BENEFIT PLAN
The Company sponsors a 401(k) Employee Savings Plan (the "401(k) Plan") for
eligible employees. Voluntary employee contributions to the 401(k) Plan may be
matched 50% by the Company, subject to a maximum annual contribution by the
Company of $1,000 per employee. The Company may also make an annual
discretionary contribution to the plan with approval by the Company's Board of
Directors, subject to the maximum deductible limit provided by the Internal
Revenue Code of 1986, as amended. The Company's total cash contributions to the
401(k) Plan totaled $170,000, $177,000 and $226,000 during 1994, 1995 and 1996,
respectively. Additionally, the Company contributed 55,000 shares of its Class A
Common Stock in each of 1995 and 1996 (fair value of approximately $1.1 million
and $935,000, respectively) to the 401(k) Plan as discretionary contributions.
9. STOCKHOLDERS' EQUITY
COMMON STOCK
The Class A, Class B and Class C Common Stock are equivalent in all respects
except voting rights. Holders of Class A and Class C Common Stock are entitled
to one vote per share and holders of Class B Common Stock are entitled to ten
votes per share. Each share of Class B and Class C Common Stock is convertible,
at the option of the holder, into one share of Class A Common Stock. Upon a
change in control of ECC, each holder of outstanding shares of Class C Common
Stock is entitled to ten votes for each share of Class C Common Stock held.
ECC's principal stockholder owns all outstanding Class B Common Stock and all
other stockholders own Class A Common Stock.
8% SERIES A CUMULATIVE PREFERRED STOCK
On May 6, 1994, the Company exchanged 1,616,681 shares of its 8% Series A
Cumulative Preferred Stock with its principal stockholder in consideration for
the cancellation of a note, plus accrued and unpaid interest thereon.
Approximately 5%, or 80,834 shares, of the 8% Series A Cumulative Preferred
Stock were subsequently transferred to another stockholder and officer of the
Company.
Each share of the 8% Series A Cumulative Preferred Stock is convertible, at
the option of the holder, into one share of Class A Common Stock, subject to
adjustment from time to time upon the occurrence of certain events, including,
among other things: (i) dividends or distributions on Class A Common Stock
payable in Class A Common Stock or certain other capital stock; (ii)
subdivisions, combinations or certain reclassifications of Class A Common Stock;
and (iii) issuance of Class A Common Stock or rights, warrants or options to
purchase Class A Common Stock at a price per share less than the liquidation
preference per share. In the event of the liquidation, dissolution or winding up
of EchoStar, the holders of 8% Series A Cumulative Preferred Stock would be
entitled to receive an amount equal to approximately $11.38 per share as of
December 31, 1996.
The aggregate liquidation preference for all outstanding shares of 8% Series
A Cumulative Preferred Stock is limited to the principal amount represented by
the note, plus accrued and unpaid dividends thereon. Each share of 8% Series A
Cumulative Preferred Stock is entitled to receive dividends equal to eight
percent per annum of the initial liquidation preference for such share. Each
share of 8% Series A Cumulative Preferred Stock automatically converts into
shares of Class A Common Stock in the event they are transferred to any person
other than certain permitted transferees and is entitled to the equivalent of
ten votes for each share of Class A Common Stock into which it is convertible.
Except as otherwise
F-28
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. STOCKHOLDERS' EQUITY (CONTINUED)
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 and June 30, 1997, additional accrued
dividends payable to Mr. Ergen by ECC on the ECC 8% Series A Cumulative
Preferred Stock totaled $1.7 million and $2.0 million, respectively. Cumulative
but unpaid dividends totaled approximately $2.1 million, $3.3 million and $3.6
million at December 31, 1995 and 1996 and June 30, 1997 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
F-29
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. STOCK COMPENSATION PLANS (CONTINUED)
Company'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 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.
F-30
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. STOCK COMPENSATION PLANS (CONTINUED)
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
EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE
---------- ----------- ---------- -----------
Options outstanding at beginning of year......................... 744,872 $ 9.33 1,117,133 $ 12.23
Granted.......................................................... 419,772 17.13 138,790 27.02
Exercised........................................................ (4,284) 9.33 (103,766) 10.24
Forfeited........................................................ (43,227) 10.55 (126,884) 13.27
---------- ----------- ---------- -----------
Options outstanding at end of year............................... 1,117,133 $ 12.23 1,025,273 $ 14.27
---------- ----------- ---------- -----------
---------- ----------- ---------- -----------
Exercisable at end of year....................................... 142,474 $ 9.33 258,368 $ 11.31
---------- ----------- ---------- -----------
---------- ----------- ---------- -----------
Weighted-average fair value of options granted................... $ 9.86 $ 16.96
----------- -----------
----------- -----------
Exercise prices for options outstanding as of December 31, 1996 are as
follows:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------- ------------------------
NUMBER WEIGHTED- NUMBER
OUTSTANDING AVERAGE WEIGHTED- EXERCISABLE WEIGHTED-
AS OF REMAINING AVERAGE AS OF AVERAGE
RANGE OF DECEMBER CONTRACTUAL EXERCISE DECEMBER EXERCISE
EXERCISE PRICES 31, 1996 LIFE PRICE 31, 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.
F-31
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
In addition to its working capital requirements, 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.
During the fourth quarter of 1997, EchoStar's debt service requirements on the
deferred satellite construction payments will increase to approximately $1.6
million per month following the launch of EchoStar III (launched on October 5,
1997). Capital expenditures related to 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
provider.
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
F-32
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. OTHER COMMITMENTS AND CONTINGENCIES (CONTINUED)
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 June 30, 1997, the 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 available cash, the proceeds of
the 1997 Notes 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.
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
F-33
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. CONDENSED CONSOLIDATING FINANCIAL INFORMATION FOR SUBSIDIARY GUARANTORS
(CONTINUED)
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 Other direct wholly owned subs of ECC (referred to as
as "C&E") "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-34
ECHOSTAR COMMUNICATIONS CORPORATION
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)
DBS
DISH ESBC- PC C&E ESBC DBS CORP- PC C&E CORP
--------- ----------- --------- --------- ------------- --------- ---------
ASSETS
Current Assets:
Cash and cash equivalents.................... $ 25 $ 14 $ - $ 39 $ - $ - $ 39
Marketable investment securities............. - 19 - 19 - - 19
Trade accounts receivable, net............... 14 - - 14 - - 14
Inventories.................................. 73 - - 73 - - 73
Subscriber acquisition costs, net............ 68 - - 68 - - 68
Other current assets......................... 19 - - 19 - - 19
--------- ----- --------- --------- ----- --------- ---------
Total current assets........................... 199 33 - 232 - - 232
Investment in subsidiary....................... - 3 (3) - - - -
Restricted cash and marketable investment
securities................................... 32 47 - 79 - - 79
Property and equipment, net.................... 500 - - 500 29 - 529
Advances to affiliates, net.................... - 280 (135) 145 - (76) 69
Deferred tax assets............................ 74 5 - 79 - - 79
Other noncurrent assets........................ 26 12 - 38 60 - 98
--------- ----- --------- --------- ----- --------- ---------
Total assets............................... $ 831 $ 380 $ (138) $ 1,073 $ 89 $ (76) $ 1,086
--------- ----- --------- --------- ----- --------- ---------
--------- ----- --------- --------- ----- --------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Trade accounts payable....................... $ 41 $ - $ - $ 41 $ - $ - $ 41
Deferred revenue............................. 103 - - 103 - - 103
Accrued expenses and other current
liabilities................................ 29 - - 29 2 - 31
Deferred tax liabilities..................... 13 - - 13 - - 13
Current portion of long-term debt............ 11 - - 11 - - 11
--------- ----- --------- --------- ----- --------- ---------
Total current liabilities...................... 197 - - 197 2 - 199
Long-term deferred signal carriage revenue..... 6 - - 6 - - 6
Advances from affiliates, net.................. 135 - (135) - 76 (76) -
Investment in subsidiaries..................... - - - - 6 (6) -
1994 Notes..................................... 437 - - 437 - - 437
1996 Notes..................................... - 386 - 386 - - 386
Mortgage and other notes payable, excluding
current portion.............................. 52 - - 52 12 - 64
Other long-term liabilities.................... 1 - - 1 - - 1
--------- ----- --------- --------- ----- --------- ---------
Total long-term liabilities.................. 631 386 (135) 882 94 (82) 894
--------- ----- --------- --------- ----- --------- ---------
Total liabilities.......................... 828 386 (135) 1,079 96 (82) 1,093
--------- ----- --------- --------- ----- --------- ---------
Stockholders' equity (deficit)................. 3 (6) (3) (6) (7) 6 (7)
--------- ----- --------- --------- ----- --------- ---------
Total liabilities and stockholders' equity
(deficit).................................. $ 831 $ 380 $ (138) $ 1,073 $ 89 $ (76) $ 1,086
--------- ----- --------- --------- ----- --------- ---------
--------- ----- --------- --------- ----- --------- ---------
ECC- PC OTHER C&E ECC
----- ----------- --------- ---------
ASSETS
Current Assets:
Cash and cash equivalents.................... $ - $ - $ - $ 39
Marketable investment securities............. - - - 19
Trade accounts receivable, net............... - - - 14
Inventories.................................. - - - 73
Subscriber acquisition costs, net............ - - - 68
Other current assets......................... 1 3 - 23
----- ----- --------- ---------
Total current assets........................... 1 3 - 236
Investment in subsidiary....................... - - - -
Restricted cash and marketable investment
securities................................... - - - 79
Property and equipment, net.................... - 62 - 591
Advances to affiliates, net.................... - - (69) -
Deferred tax assets............................ - 1 (1) 79
Other noncurrent assets........................ 70 - (12) 156
----- ----- --------- ---------
Total assets............................... $ 71 $ 66 $ (82) $ 1,141
----- ----- --------- ---------
----- ----- --------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Trade accounts payable....................... $ - $ 1 $ (1) $ 41
Deferred revenue............................. - - - 103
Accrued expenses and other current
liabilities................................ 1 - (2) 30
Deferred tax liabilities..................... - - - 13
Current portion of long-term debt............ - - - 11
----- ----- --------- ---------
Total current liabilities...................... 1 1 (3) 198
Long-term deferred signal carriage revenue..... - - - 6
Advances from affiliates, net.................. 2 64 (66) -
Investment in subsidiaries..................... 7 - (7) -
1994 Notes..................................... - - - 437
1996 Notes..................................... - - - 386
Mortgage and other notes payable, excluding
current portion.............................. - - (12) 52
Other long-term liabilities.................... - - - 1
----- ----- --------- ---------
Total long-term liabilities.................. 9 64 (85) 882
----- ----- --------- ---------
Total liabilities.......................... 10 65 (88) 1,080
----- ----- --------- ---------
Stockholders' equity (deficit)................. 61 1 6 61
----- ----- --------- ---------
Total liabilities and stockholders' equity
(deficit).................................. $ 71 $ 66 $ (82) $ 1,141
----- ----- --------- ---------
----- ----- --------- ---------
F-35
ECHOSTAR COMMUNICATIONS CORPORATION
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-36
ECHOSTAR COMMUNICATIONS CORPORATION
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- DBS
DISH PC C&E ESBC PC C&E CORP
--------- ----------- ----- ----------- --------------- ----- ---------
(IN MILLIONS, EXCEPT PER SHARE DATA)
REVENUE:
DTH products and technical
services........................ $ 136 $ - $ - $ 136 $ - $ - $ 136
DISH Network
promotions-subscription
television services and
products........................ 23 - - 23 - - 23
DISH Network subscription
television services............. 38 - - 38 - - 38
C-band programming................ 12 - - 12 - - 12
Loan origination and participation
income.......................... 1 - - 1 - - 1
--------- ----- --- ----- ----- ----- ---------
Total revenue....................... 210 - - 210 - - 210
EXPENSES:
DTH products and technical
services........................ 124 - - 124 - - 124
DISH Network programming.......... 19 - - 19 - - 19
C-band programming................ 11 - - 11 - - 11
Selling, general and
administrative.................. 87 - - 87 - - 87
Subscriber promotion subsidies.... 35 - - 35 - - 35
Amortization of subscriber
acquisition costs............... 16 - - 16 - - 16
Depreciation and amortization..... 27 - - 27 - - 27
--------- ----- --- ----- ----- ----- ---------
Total expenses...................... 319 - - 319 - - 319
--------- ----- --- ----- ----- ----- ---------
Operating income (loss)............. (109) - - (109) - - (109)
Other Income (Expense):
Interest income................... 4 10 - 14 - - 14
Interest expense, net of amounts
capitalized..................... (37) (24) - (61) (1) - (62)
Equity in losses of
subsidiaries.................... - (92) 92 - (101) 101 -
--------- ----- --- ----- ----- ----- ---------
Total other income (expense), net... (33) (106) 92 (47) (102) 101 (48)
--------- ----- --- ----- ----- ----- ---------
Income (loss) before income taxes... (142) (106) 92 (156) (102) 101 (157)
Income tax (provision) benefit,
net................................. 50 5 - 55 - - 55
--------- ----- --- ----- ----- ----- ---------
Net income (loss)................... $ (92) $ (101) $ 92 $ (101) $ (102) $ 101 $ (102)
--------- ----- --- ----- ----- ----- ---------
--------- ----- --- ----- ----- ----- ---------
Net loss attributable to common
shares.............................. - - - - - - -
--------- ----- --- ----- ----- ----- ---------
--------- ----- --- ----- ----- ----- ---------
Weighted-average common shares
outstanding....................... - - - - - - -
--------- ----- --- ----- ----- ----- ---------
--------- ----- --- ----- ----- ----- ---------
Loss per common and common
equivalent share.................. - - - - - - -
--------- ----- --- ----- ----- ----- ---------
--------- ----- --- ----- ----- ----- ---------
ECC-
PC OTHER C&E ECC
----------- ----------- ----- ---------
REVENUE:
DTH products and technical
services........................ $ - $ - $ - $ 136
DISH Network
promotions-subscription
television services and
products........................ - - - 23
DISH Network subscription
television services............. - - - 38
C-band programming................ - - - 12
Loan origination and participation
income.......................... - 2 - 3
----- ----- ----- ---------
Total revenue....................... - 2 - 212
EXPENSES:
DTH products and technical
services........................ - - - 124
DISH Network programming.......... - - - 19
C-band programming................ - - - 11
Selling, general and
administrative.................. - 3 - 90
Subscriber promotion subsidies.... - - (1) 34
Amortization of subscriber
acquisition costs............... - - - 16
Depreciation and amortization..... - - - 27
----- ----- ----- ---------
Total expenses...................... - 3 (1) 321
----- ----- ----- ---------
Operating income (loss)............. - (1) 1 (109)
Other Income (Expense):
Interest income................... 1 - - 15
Interest expense, net of amounts
capitalized..................... - - - (62)
Equity in losses of
subsidiaries.................... (101) - 101 -
----- ----- ----- ---------
Total other income (expense), net... (100) - 101 (47)
----- ----- ----- ---------
Income (loss) before income taxes... (100) (1) 102 (156)
Income tax (provision) benefit,
net................................. (1) 1 - 55
----- ----- ----- ---------
Net income (loss)................... $ (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-37
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. CONDENSED CONSOLIDATING FINANCIAL INFORMATION FOR SUBSIDIARY GUARANTORS
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-38
ECHOSTAR COMMUNICATIONS CORPORATION
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
DISH ESBC- PC C&E ESBC CORP-PC C&E DBS CORP
----- ----------- ----- ----------- ----------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)......................... $ (92) $ (101) $ 92 $ (101) $ (102) $ 101 $ (102)
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 -- -- 27
Amortization of subscriber acquisition
costs................................. 16 -- -- 16 -- -- 16
Deferred income tax benefit............. (45) (5) -- (50) -- -- (50)
Amortization of debt discount and
deferred financing costs.............. 34 24 3 61 -- -- 61
Other, net.............................. 10 -- -- 10 -- -- 10
Changes in current assets and current
liabilities, net...................... 14 -- -- 14 1 -- 15
----- ----- --- ----- ----- --------- ---------
Net cash flows provided by (used in)
operating activities.................... (36) 10 3 (23) -- -- (23)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of marketable investment
securities.............................. -- (138) -- (138) -- -- (138)
Sales of marketable investment
securities.............................. -- 120 -- 120 -- -- 120
Purchases of restricted marketable
investment securities................... (21) -- -- (21) -- -- (21)
Funds released from restricted cash and
marketable investment securities --
other................................... 16 -- -- 16 -- -- 16
Advances (to) from affiliates, net........ 138 (268) (3) (133) 69 -- (64)
Purchases of property and equipment....... (46) -- -- (46) -- -- (46)
Offering proceeds and investment earnings
placed in escrow........................ (11) (183) -- (194) -- -- (194)
Funds released from escrow accounts....... 84 136 -- 220 -- -- 220
Payments received on (investments in)
convertible subordinated debentures from
SSET.................................... 6 -- -- 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) -- (138)
Expenditures for FCC authorizations....... -- -- -- -- (55) -- (55)
Other..................................... -- -- -- -- -- -- --
----- ----- --- ----- ----- --------- ---------
Net cash flows used in investing
activities.............................. 54 (333) (3) (282) (12) -- (294)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of 1996
Notes................................... -- 337 -- 337 -- -- 337
Proceeds from note payable to ECC......... -- -- -- -- 12 -- 12
Repayments of mortgage indebtedness and
notes payable........................... (8) -- -- (8) -- -- (8)
Stock options exercised................... -- -- -- -- -- -- --
----- ----- --- ----- ----- --------- ---------
Net cash flows provided by (used in)
financing activities.................... (8) 337 -- 329 12 -- 341
----- ----- --- ----- ----- --------- ---------
Net increase (decrease) in cash and cash
equivalents............................. 10 14 -- 24 -- -- 24
Cash and cash equivalents, beginning of
year.................................... 14 -- -- 14 -- -- 14
----- ----- --- ----- ----- --------- ---------
Cash and cash equivalents, end of year.... $ 24 $ 14 $ -- $ 38 $ -- $ -- $ 38
----- ----- --- ----- ----- --------- ---------
----- ----- --- ----- ----- --------- ---------
ECC- PC OTHER C&E ECC
----- ----------- ----- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)......................... $ (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
Amortization of subscriber acquisition
costs................................. -- -- -- 16
Deferred income tax benefit............. -- -- -- (50)
Amortization of debt discount and
deferred financing costs.............. -- -- -- 61
Other, net.............................. (2) -- -- 8
Changes in current assets and current
liabilities, net...................... 4 -- (8) 11
----- --- ----- ---------
Net cash flows provided by (used in)
operating activities.................... 2 -- (7) (28)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of marketable investment
securities.............................. -- -- -- (138)
Sales of marketable investment
securities.............................. 15 -- -- 135
Purchases of restricted marketable
investment securities................... -- -- -- (21)
Funds released from restricted cash and
marketable investment securities --
other................................... -- -- -- 16
Advances (to) from affiliates, net........ 22 38 4 --
Purchases of property and equipment....... -- (5) -- (51)
Offering proceeds and investment earnings
placed in escrow........................ -- -- -- (194)
Funds released from escrow accounts....... -- -- -- 220
Payments received on (investments in)
convertible subordinated debentures from
SSET.................................... -- -- -- 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............................ -- (33) -- (171)
Expenditures for FCC authorizations....... -- -- -- (55)
Other..................................... (3) -- 3 --
----- --- ----- ---------
Net cash flows used in investing
activities.............................. (11) -- 19 (286)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of 1996
Notes................................... -- -- -- 337
Proceeds from note payable to ECC......... -- -- (12) --
Repayments of mortgage indebtedness and
notes payable........................... -- -- -- (8)
Stock options exercised................... 2 -- -- 2
----- --- ----- ---------
Net cash flows provided by (used in)
financing activities.................... 2 -- (12) 331
----- --- ----- ---------
Net increase (decrease) in cash and cash
equivalents............................. (7) -- -- 17
Cash and cash equivalents, beginning of
year.................................... 8 -- -- 22
----- --- ----- ---------
Cash and cash equivalents, end of year.... $ 1 $ -- $ -- $ 39
----- --- ----- ---------
----- --- ----- ---------
F-39
ECHOSTAR COMMUNICATIONS CORPORATION
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):
UNITED OTHER
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)................................... $ (7,916) $ 146 $ (257) $ (8,027)
------------ --------- ------------
------------ --------- ------------
Other income (expense), net............................... (9,204)
------------
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 31, 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-40
ECHOSTAR COMMUNICATIONS CORPORATION
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
BEGINNING CHARGED TO
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-41
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS PREFERRED
OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY ECHOSTAR OR THE UNDERWRITERS. THIS PROSPECTUS 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 TO ANY PERSON 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 PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF ECHOSTAR 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........................................................ 1
Risk Factors.............................................................. 10
Use of Proceeds........................................................... 28
Price Range of Common Stock and Dividend Policy........................... 28
Capitalization............................................................ 29
Selected Financial Data................................................... 30
Management's Discussion and Analysis of Financial Condition and Results of
Operations.............................................................. 32
Business.................................................................. 45
Management................................................................ 78
Certain Relationships and Related Transactions............................ 83
Security Ownership of Certain Beneficial Owners and Management............ 84
Description of Certain Indebtedness....................................... 86
Description of EchoStar Capital Stock..................................... 89
Description of the Preferred Stock........................................ 93
Certain Federal Income Tax Consequences................................... 102
Underwriting.............................................................. 106
Legal Matters............................................................. 107
Independent Accountants................................................... 107
Available Information..................................................... 107
Incorporation of Certain Documents by Reference........................... 108
Index to Consolidated Financial Statements................................ F-1
2,000,000 SHARES
[LOGO]
ECHOSTAR COMMUNICATIONS
CORPORATION
% SERIES C CUMULATIVE
CONVERTIBLE PREFERRED STOCK
---------------------
PROSPECTUS
---------------------
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
LEHMAN BROTHERS
OCTOBER , 1997
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SUBJECT TO COMPLETION, DATED OCTOBER , 1997
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.
PROSPECTUS
, 1997
5,000,000 SHARES
[LOGO]
ECHOSTAR COMMUNICATIONS CORPORATION
CLASS A COMMON STOCK
All of the shares of Class A Common Stock, par value $0.01 (the "Class A
Common Stock"), offered hereby (the "Common Offering") are being sold by
EchoStar Communications Corporation ("EchoStar" or the "Company"). The Class A
Common Stock is listed on the Nasdaq National Market under the symbol "DISH."
The closing sale price of the Class A Common Stock on the Nasdaq National Market
on October 9, 1997 was $23 1/8 per share.
The Company is also concurrently offering, by means of a separate
prospectus, 2,000,000 shares of % Series C Convertible Preferred Stock (the
"Preferred Stock"). Consummation of the Common Offering is not conditioned on
the Preferred Offering, and the offering of the Preferred Stock is not
conditioned on consummation of the Common Offering.
SEE "RISK FACTORS" BEGINNING ON PAGE 10 FOR INFORMATION THAT SHOULD BE
CONSIDERED BY PROSPECTIVE INVESTORS.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION (THE "COMMISSION") OR ANY STATE SECURITIES
COMMISSION NOR HAS THE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
- -------------------------------------------------------------------------------------------
PRICE UNDERWRITING PROCEEDS
TO THE DISCOUNTS AND TO THE
PUBLIC COMMISSIONS (1) COMPANY (2)
- -------------------------------------------------------------------------------------------
Per Share......................... $ $ $
Total (3)......................... $ $ $
- -------------------------------------------------------------------------------------------
(1) ECHOSTAR HAS AGREED TO INDEMNIFY THE UNDERWRITERS (AS DEFINED) AGAINST
CERTAIN LIABILITIES UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
"SECURITIES ACT").
(2) BEFORE DEDUCTING EXPENSES OF THE COMMON OFFERING PAYABLE BY ECHOSTAR
ESTIMATED TO BE $ .
(3) ECHOSTAR HAS GRANTED THE UNDERWRITERS AN OPTION, EXERCISABLE WITHIN 30 DAYS
OF THE DATE HEREOF, TO PURCHASE UP TO 750,000 ADDITIONAL SHARES OF CLASS A
COMMON STOCK AT THE PRICE TO THE PUBLIC SHOWN ABOVE. IF THE OPTION IS
EXERCISED IN FULL, THE TOTAL PRICE TO THE PUBLIC, UNDERWRITING DISCOUNTS AND
COMMISSIONS, AND PROCEEDS TO THE COMPANY WILL BE $ , $ AND
$ RESPECTIVELY. SEE "UNDERWRITING."
The Class A Common Stock is offered by several underwriters (the
"Underwriters"), subject to prior sale, when, as and if issued to and accepted
by the Underwriters and subject to certain conditions, including the right of
the Underwriters to reject any order in whole or in part. It is expected that
delivery of the Class A Common Stock will be made through the facilities of The
Depository Trust Company ("DTC") against payment therefor in immediately
available funds, in New York, New York on or about October , 1997.
DONALDSON, LUFKIN & JENRETTE BT ALEX. BROWN
SECURITIES CORPORATION
CERTAIN PERSONS PARTICPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE PREFERRED STOCK.
SPECIFICALLY, THE UNDERWRITERS MAY OVER-ALLOT IN CONNECTION WITH THIS OFFERING,
AND MAY BID FOR, AND PURCHASE, SHARES OF THE PREFERRED STOCK IN THE OPEN MARKET.
FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
i
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. AS USED IN THIS PROSPECTUS,
UNLESS THE CONTEXT OTHERWISE REQUIRES, "ECHOSTAR" OR THE "COMPANY" REFERS TO
ECHOSTAR COMMUNICATIONS CORPORATION, A NEVADA CORPORATION, THE CLASS A COMMON
STOCK OF WHICH IS QUOTED ON THE NASDAQ NATIONAL MARKET UNDER THE SYMBOL "DISH"
OR, IF THE CONTEXT REQUIRES, TO ECHOSTAR TOGETHER WITH ITS SUBSIDIARIES.
THE COMPANY
EchoStar is a leading provider of direct broadcast satellite ("DBS")
programming services in the United States. The Company commenced its DISH
Network-SM- DBS service (the "DISH Network") 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, and launched
its third satellite ("EchoStar III") in October 1997. Since December 31, 1996,
EchoStar has increased its DISH Network subscriber base from 350,000 to
approximately 820,000 subscribers as of September 30, 1997. During the third
quarter of 1997, EchoStar believes that it captured approximately 40% of all new
DBS satellite subscribers in the U.S. Average monthly programming revenue during
1997 has been approximately $39 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 September 30,
1997, approximately 5.6 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 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
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 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 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
EchoStar'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.
1
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 launched EchoStar III on
October 5, 1997, and expects to launch its fourth satellite ("EchoStar IV")
during the first quarter of 1998. EchoStar III, which will serve the eastern
half of the U.S. from 61.5 DEG. West Longitude ("WL"), and EchoStar IV,
which is expected to serve the western half of the U.S. from 148 DEG. WL,
should enable the Company 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/or congressional or
regulatory actions necessary to extend and clarify the scope of the
statutory compulsory license to cover local satellite retransmission of
network-affiliated station signals) and to provide subscribers with
additional sports, foreign language, cultural, business, educational and
other niche programming. EchoStar III and EchoStar IV will also provide the
Company the capacity to offer subscribers high definition television
("HDTV") and popular Internet and other computer data at high transmission
speeds. By expanding its 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.
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 under the
JVC and DISH Network brand names. All consumers who purchase JVC branded
satellite receiver systems will subscribe to DISH Network programming. In
addition, on September 15, 1997, EchoStar announced that Sears, Roebuck and
Co. ("Sears") will begin to carry JVC branded EchoStar Receiver Systems.
Beginning in October 1997, JVC branded EchoStar Receiver Systems are now
available in more than 800 full-line, mall-based Sears stores.
PROVIDE ATTRACTIVELY PRICED PROGRAMMING AND SYSTEMS. The Company'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 are located at 90 Inverness Circle East,
Englewood, Colorado 80112-5300, and its telephone number is (303) 799-8222.
2
RECENT DEVELOPMENTS
LAUNCH OF ECHOSTAR III
The Company launched EchoStar III on October 5, 1997, from Cape Canaveral
Air Station, Florida. EchoStar III, which will serve the eastern half of the
U.S. from 61.5 DEG. WL, should enable the Company to retransmit local broadcast
signals in certain U.S. television markets (assuming receipt of all required
retransmission consents and copyright licenses and/or congressional or
regulatory actions necessary to extend and clarify the scope of the statutory
compulsory license to cover local satellite retransmission of network-affiliated
station signals) and to provide subscribers with additional sports, foreign
language, cultural, business, educational and other niche programming. EchoStar
III will also provide the Company the capacity to offer subscribers HDTV and
popular Internet and other computer data at high transmission speeds. Although
all tests to date have been successful, EchoStar III has not yet achieved
geostationary orbit. The ultimate success of the launch of EchoStar III will not
be determinable until up to 60 days after its October 5 launch date.
SEARS TO CARRY DISH NETWORK PRODUCTS
On September 15, 1997, EchoStar announced that Sears will begin to carry JVC
branded EchoStar Receiver Systems. Beginning in October 1997, JVC branded
EchoStar Receiver Systems are now available in more than 800 full-line,
mall-based Sears stores, creating a nationwide retail distribution channel for
such DISH compatible systems. EchoStar believes, but can give no assurance, that
this additional distribution channel will further enhance EchoStar's ability to
attract subscribers to the DISH Network.
SERIES B SENIOR REDEEMABLE EXCHANGEABLE PREFERRED OFFERING
On October 2, 1997, EchoStar consummated an offering (the "Series B
Preferred Offering") of 12 1/8% Series B Senior Redeemable Exchangeable
Preferred Stock due 2004, (the "Series B Preferred Stock"). The Series B
Preferred Offering resulted in net proceeds to EchoStar of approximately $193.0
million. The Series B Preferred Stock was issued in a private placement pursuant
to Rule 144A of the Securities Act. EchoStar presently intends to use the net
proceeds of the Series B Preferred Offering to fund subscriber acquisition and
marketing expenses and for other general corporate purposes.
3
THE OFFERING
Common Stock Offered.............. 5,000,000 shares of Class A Common Stock
Voting Rights..................... EchoStar's issued and outstanding capital stock consists
of Class A Common Stock, Class B Common Stock, Series A
Preferred Stock and Series B Preferred Stock. Each
holder of Class A Common Stock is entitled to one vote
per share, and each holder of Class B Common Stock and
Series A Preferred Stock is entitled to ten votes per
share, on all matters submitted to a vote of
stockholders. Except as required by law, holders of the
Class A Common Stock, the Class B Common Stock, the
Class C Common Stock (which is authorized but unissued)
and the Series A Preferred Stock vote together as a
single class. The Series B Preferred Stock is and, in
the event the Preferred Offering is consummated, the
Series C Preferred Stock will be, nonvoting. Each share
of Class A Common Stock and Class B Common Stock will
share ratably in any dividends or other distributions,
including upon the liquidation, dissolution or winding
up of EchoStar. See "Description of Capital Stock."
Use of Proceeds................... The net proceeds to EchoStar from the Common Offering,
after deducting estimated underwriting discounts and
commissions and expenses of the Common Offering, are
estimated to be $109.8 million. EchoStar presently
intends to use the net proceeds of the Common Offering
to fund subscriber acquisition and marketing expenses
and for other general corporate purposes.
Nasdaq Symbol..................... DISH
Concurrent Offering............... EchoStar is also concurrently offering, by means of a
separate prospectus, 2,000,000 shares of Series C
Preferred Stock (the "Preferred Offering"). Consummation
of the Common Offering is not conditioned on the
Preferred Offering and consummation of the Preferred
Offering is not conditioned on consummation of the
Common Offering.
Risk Factors...................... Prospective investors should carefully consider certain
risk factors relating to an investment in the Class A
Common Stock. See "Risk Factors."
4
SUMMARY FINANCIAL DATA
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 EchoStar, 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," EchoStar'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 PER SHARE DATA, RATIOS, SUBSCRIBERS AND SATELLITE
RECEIVERS SOLD)
(UNAUDITED)
STATEMENT OF OPERATIONS DATA:
Revenue......................................... $ 165,088 $ 220,941 $ 190,983 $ 163,890 $ 211,411 $ 114,991 $ 172,845
Operating income (loss)......................... 11,286 18,204 13,216 (8,027) (109,345) (22,686) (87,617)
Net income (loss)............................... 7,529 12,272 90 (11,486) (100,986) (29,775) (126,655)
Net income (loss) attributable to common
shares........................................ $ 7,529 $ 12,272 $ (849) $ (12,690) $(102,190) $ (30,377) $(127,257)
Weighted-average common shares outstanding...... 32,221 32,221 32,442 35,562 40,548 40,404 41,265
Net income (loss) per common and common-
equivalent share.............................. $ 0.23 $ 0.38 $ (0.03) $ (0.36) $ (2.52) $ (0.75) $ (3.08)
OTHER DATA:
EBITDA (2)...................................... $ 12,329 $ 19,881 $ 15,459 $ (4,913) $ (65,931) $ (12,930) $ (842)
Ratio of earnings to combined fixed charges and
preferred stock dividends (3)................. 15.0x 18.0x -- -- -- -- --
Deficiency of earnings to combined fixed charges
and preferred stock dividends (3)............. -- -- $ (6,145) $ (44,198) $(188,701) $ (61,657) $(143,845)
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 JUNE 30, 1997 (UNAUDITED)
---------------------------------------------------------------
AS ADJUSTED AS ADJUSTED
FOR THE FOR THE AS ADJUSTED
COMMON PREFERRED FOR THE
ACTUAL PRO FORMA (4) OFFERING OFFERING(5) OFFERINGS(5)
--------- ------------- ----------- ----------- -----------
BALANCE SHEET DATA:
Cash, cash equivalents and marketable
investment securities (6)................. $ 187,804 $ 380,804 $ 490,637 $ 465,004 $ 574,837
Total assets................................ 1,534,480 1,727,480 1,837,313 1,811,680 1,921,513
Total long-term obligations (less current
portion).................................. 1,311,902 1,311,902 1,311,902 1,311,902 1,311,902
Series B Preferred Stock (7)................ -- 193,000 193,000 193,000 193,000
Preferred Stock............................. -- -- -- 87,700 87,700
Total stockholders' equity (deficit)........ (52,868) (52,868) 56,965 31,332 141,165
5
SUMMARY SATELLITE DATA
ECHOSTAR I ECHOSTAR II ECHOSTAR III ECHOSTAR IV
--------------- --------------- --------------------- ------------------------
Expected launch date....... Launched Launched Launched 1st Quarter 1998
Orbital slot............... 119 DEG. WL 119 DEG. WL 61.5 DEG. WL 148 DEG. WL (8)
Transponders............... 16 @ 24 MHz 16 @ 24 MHz 16/32 @ 24 MHz (9) 16/32 @ 24 MHz (9)
Approximate channel 100 channels 100 channels 100/200 channels 100/200 channels
capacity (10)............
Output power............... 130 Watts 130 Watts 240/120 Watts 240/120 Watts
Expected end of commercial 2011 2011 2012 2013
life (11)................
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 EchoStar's subsidiaries operated under Subchapter S of the
Internal Revenue Code of 1986, as amended (the "Code"), and comparable
provisions of applicable state income tax laws, until December 31, 1993. The
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 EchoStar had been
subject to corporate Federal and state income taxes for those years.
Earnings per share has been calculated and presented on a pro forma basis as
if the shares of EchoStar issued to reflect the December 31, 1993
reorganization were outstanding for the years ended December 31, 1992 and
1993, respectively. See Notes 1 and 7 of Notes to EchoStar'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 $92,000 and $61.4
million for the six months ended June 30, 1996 and 1997, respectively).
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 EchoStar's Consolidated Financial Statements
contained elsewhere in this Prospectus.
(3) For purposes of computing the ratio of earnings to combined fixed charges
and preferred stock dividends and the deficiency of earnings to combined
fixed charges and preferred stock dividends, earnings consist of earnings
from continuing operations before income taxes, plus fixed charges,
excluding capitalized interest. Fixed charges consist of interest incurred
on all indebtedness and the computed interest components of rental expense
under noncancelable operating leases. Preferred stock dividends consist of
the dividends accrued on the Company's Series A Preferred Stock. For the
years ended December 31, 1994, 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 Series B Preferred Offering and the application of the
net proceeds thereof.
(5) Excludes approximately $12.3 million to be deposited by purchasers of the
Preferred Stock into a deposit account established pursuant to the Preferred
Offering.
(6) Excludes restricted cash and marketable investment securities which totaled
$229.6 million as of June 30, 1997.
(7) Net of estimated discounts and commissions and offering costs of $7.0
million.
(8) EchoStar presently intends to launch EchoStar IV into the 148 DEG. 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
1997 Notes Indenture (as defined), determine to launch or move EchoStar IV
into the 61.5 DEG. WL or the 119 DEG. WL orbital slot.
(9) 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.
(10) 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.
(11) 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.
6
THE ECHOSTAR ORGANIZATION
The following chart illustrates the Company's corporate structure:
[LOGO]
7
RISK FACTORS
PROSPECTIVE PURCHASERS OF THE CLASS A COMMON STOCK SHOULD CAREFULLY REVIEW
THE INFORMATION CONTAINED IN THIS PROSPECTUS AND SHOULD PARTICULARLY CONSIDER
THE FOLLOWING MATTERS:
HOLDING COMPANY STRUCTURE. Since all of EchoStar's operations are conducted
through its subsidiaries, its ability to make cash dividend payments, or service
any debt is dependent upon the earnings of such subsidiaries and the payment of
funds by such subsidiaries to EchoStar in the form of loans, dividends or other
payments. As a result, EchoStar will be substantially dependent upon the receipt
of funds from its wholly owned subsidiary DBS Corp, which will be dependent upon
the receipt of funds from its wholly owned subsidiary ESBC, which in turn will
be dependent upon the receipt of funds from its wholly owned subsidiary Dish.
None of EchoStar's subsidiaries has any current obligations, contingent or
otherwise, to pay any amounts in respect of the Class A Common Stock or to make
any funds available therefor, whether by dividends, loans or other payments. 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 DBS Corp without restrictions. In
general, DBS Corp may pay dividends on its equity securities only if: (i) no
default exists under the 1997 Notes Indenture; (ii) after giving effect to such
dividends, DBS Corp's ratio of total indebtedness to cash flow would not exceed
6.0 to 1.0. Moreover, the aggregate amount of such dividends generally may not
exceed the sum of (A) the difference of consolidated cash flow (less 100% of
such deficit) minus 150% of consolidated interest expense, in each case from
July 1, 1997, plus (B) 100% of the aggregate net proceeds to DBS Corp and its
subsidiaries from the sale of certain equity interests of DBS Corp or EchoStar.
SUBSTANTIAL LEVERAGE. EchoStar is highly leveraged, which makes it very
vulnerable to changes in general economic conditions.
Substantially all of the assets of DBS Corp, ESBC and Dish and their
subsidiaries are pledged as collateral for the 1997 Notes, 1996 Notes and the
1994 Notes. Further, the 1997, 1996 and 1994 Notes Indentures (as defined) and
the Series B Preferred Stock and the Series B Exchange Notes, if any, severely
restrict the ability of EchoStar, DBS Corp, ESBC and Dish to incur additional
debt. 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 1997, 1996
and 1994 Notes Indenture, the Series B Preferred Stock Certificate of
Designation and the Series B Exchange Notes Indenture, if any), 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 certain of such agreements, certain
subsidiaries of EchoStar 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
1997 Notes, 1996 Notes, 1994 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 accrues 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 accrues 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.
8
The ability of EchoStar, DBS Corp, ESBC and Dish to meet their respective
payment obligations will depend on the success of EchoStar's business strategy,
which is subject to uncertainties and contingencies beyond EchoStar's control.
Under the terms of the 1996 Notes Indenture, EchoStar may pay cash dividends
on its equity securities only if: (i) no default exists under the 1996 Notes
Indenture; (ii) after giving effect to such dividends, EchoStar's ratio of total
indebtedness to cash flow would not exceed 5.0 to 1.0; and (iii) the aggregate
amount of such dividends, along with certain other payments, does not exceed the
sum of 50% of EchoStar's consolidated net income (less 100% of consolidated net
losses) from January 1, 1996 to the end of its most recently completed fiscal
quarter plus 100% of the aggregate net proceeds received by EchoStar or its
subsidiaries from a sale of EchoStar equity securities.
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 September 30, 1997, DirecTv had approximately 2.9 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 obtained by competitors of EchoStar on an exclusive
basis, it will be unavailable to EchoStar's DISH Network. 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. 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. 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 agreement 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 Corporation ("News") and MCI
Telecommunications, Inc. ("MCI"), into a single DBS provider. 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. In addition, Tempo Satellite, Inc. ("Tempo"), 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
9
satellite to that location. PrimeStar also has agreed to acquire Tempo's
license. As of September 30, 1997, according to published reports, PrimeStar had
approximately 1.8 million subscribers.
On July 18, 1997, PrimeStar and TSAT filed an application with the FCC
requesting FCC approval for the assignment of Tempo authorizations to PrimeStar
in connection with the PrimeStar "roll-up" restructuring. On August 15, 1997,
MCI and PrimeStar also filed an FCC application requesting approval for the
assignment of MCI's DBS authorizations to PrimeStar. The parties to the two
transactions have also initiated the antitrust clearance process with the
Department of Justice for each transaction, and EchoStar understands that
clearance has been obtained for one of the two transactions (the PrimeStar
roll-up). The FCC applications have been placed on public notice and have been
opposed by EchoStar and others, but there can be no assurance that any of these
oppositions will be successful. If the requests are approved by the FCC and if
the transactions are consummated by the parties, the resulting entity would
constitute 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
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 certain of these requirements are set to expire in 2002 unless
extended by the FCC. Moreover, 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 and FSS 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 FSS orbital locations later this year,
and that it will auction one or more of its DBS orbital locations during 1998.
Pursuant to the protocol, the FCC already has permitted a company to provide
Direct-to-Home ("DTH") services in the U.S. through a Mexican satellite.
Televisa International, LLC ("Televisa") is currently in the process of
developing DTH television and related services in Mexico, Latin America, North
America and Europe. Televisa received authorization from the FCC to operate 1
million receive-only earth stations in the U.S. which are capable of receiving
DTH television services from Mexico's Solidaridad II satellite. The Solidaridad
II satellite operates at 113 DEG. WL providing full-CONUS coverage, and is
licensed by the Mexican Government.
The FCC authorized Televisa to operate receive dishes that are larger, and
possibly less attractive to consumers, than the dishes made available by
EchoStar. Further, the FCC authorization for Televisa does not provide
Televisa's earth stations with protection from unacceptable radio interference
from nearby
10
satellite networks. Nevertheless, the authorization of Televisa to provide a
service from the 113 DEG. WL orbital slot may produce additional competition to
the full-CONUS service provided by the Company from EchoStar I and EchoStar II.
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 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. A Copyright Arbitration Royalty Panel
has reported on recommended royalties for local satellite retransmission of
network affiliated and superstation signals. See "Risk Factors--Impediments to
Retransmit Local Broadcast Signals." 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."
11
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 service to consumers, EchoStar has sustained
significant losses in recent periods. EchoStar's operating losses were $8.0
million, $109.3 million and $87.6 million for the years ended December 31, 1995
and 1996 and the six months ended June 30, 1997, respectively. EchoStar had net
losses of $11.5 million, $101.0 million and $126.7 million during those same
periods. Improvements in EchoStar'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 its costs. No assurance can be
given that EchoStar will be effective with regard to these matters. In addition,
EchoStar incurs significant acquisition costs to obtain DISH Network
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. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
POTENTIAL NEED FOR ADDITIONAL CAPITAL. EchoStar may require additional
funds to acquire DISH Network subscribers. In addition, EchoStar has conditional
licenses or applications pending with the FCC for a two satellite Ku-band
system, a two satellite Fixed Satellite Service ("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."
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 a larger number
of major consumer electronic product manufacturers (such as Sony and RCA), than
does EchoStar, 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 other than JVC. 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.
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
12
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"), DBS Corp 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 can be 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. See "Business--Government Regulation--Satellite
Home Viewer Act."
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
13
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 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 can be 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 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 "statutory" (or
compulsory) copyright license that generally 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", with respect
to a particular television network, is defined as one that cannot receive an
over-the-air network signal of "grade B" intensity (a predictive standard of
signal intensity employed by the FCC) of a primary network station affiliated
with that network 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 the signal of an affiliate of that network.
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. On
August 28, 1997, a Copyright Arbitration Royalty Panel ("CARP"), appointed to
recommend royalties for satellite retransmission of network-affiliated
television and superstation signals pursuant to the compulsory license of
Section 119 of the Copyright Act, delivered its Report to the Librarian of
Congress. In the CARP's recommendation, which must be either adopted or changed
by the Copyright Office within 60 days from August 28, 1997, the CARP held it
has no jurisdiction to set royalties for local satellite retransmissions of the
signals of network-affiliated television stations, on the ground that the
compulsory license of the Copyright Act does not extend to such retransmissions.
While EchoStar has petitioned the Librarian to modify the CARP report, the
petition has been opposed, and there can be no assurance that the petition will
be granted. Moreover, EchoStar is continuing its efforts to secure passage of
legislation that will clarify and extend the scope of the compulsory license
with respect to local network signals. There can be no assurance that EchoStar
will be successful in these efforts. If the CARP's position is upheld by the
Librarian and legislation to clarify and extend the scope of the compulsory
license is not passed, EchoStar
14
would be prevented from relying on the compulsory copyright license to
retransmit local network-affiliated stations' signals and may have to engage in
the relatively cumbersome process of negotiating and obtaining copyright
licenses from all individual copyright holders instead.
The CARP also recommended setting at zero the royalty rate for local
retransmissions of superstation signals. This recommendation may be considered
favorable to EchoStar because it may provide a basis for the proposition that
the royalty rate for all local-into-local retransmission (to the extent
permitted) should be zero. However, there can be no assurance that the Librarian
will adopt the CARP's recommendation or that, in the absence of the legislation
whose passage is sought by EchoStar, EchoStar would be successful in any
litigation with copyright owners regarding this issue.
INCREASED COSTS FOR RETRANSMISSION OF DISTANT BROADCAST SIGNALS. In its
August 28, 1997 report, the CARP recommended that the royalty rate for satellite
retransmissions of distant network-affiliated station and distant superstation
signals be set at 27 cents per subscriber per month --a substantial increase
compared to the previously applicable rates, which ranged from 6 to 17.5 cents.
The Satellite Broadcasting & Communications Association, of which EchoStar is a
member, has requested modifications to the CARP's report. However, this request
has been opposed, and there can be assurance that it will be granted. Several
Congressmen have publicly voiced their opposition to the 27 cent royalty rate
recommended by CARP; a sub-committee chairman and ranking member have requested
that the Librarian of Congress stay the CARP's recommendation for 18 months, but
there can be no assurance that such opposition or request will produce favorable
results.
EchoStar believes but can provide no assurances that it may be able to pass
through the recommended increases (should they be adopted) to its customers by
separately tiering the channels involved, so that its operating margins are not
substantially affected. However, the recommended increases may adversely affect
the competitiveness of EchoStar vis-a-vis cable operators, which pay lower rates
to copyright holders.
DEPENDENCE ON SINGLE RECEIVER MANUFACTURER. EchoStar Receiver Systems are
currently manufactured exclusively by SCI Technology ("SCI"), a high-volume
contract electronics manufacturer, and only JVC manufactures other consumer
electronics products incorporating EchoStar Receiver Systems. SCI is currently
EchoStar's only source of stand-alone receivers. EchoStar is currently
negotiating with several brand-name consumer electronics manufacturers to
produce receivers for use with the DISH Network. 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 PROGRAMMING. Currently, the suggested retail price of a standard
EchoStar Receiver System is $199. The initial equipment cost required to receive
DISH Network 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 has contracts providing for the launch of
at least six non-EchoStar western satellites throughout 1997.
15
The first commercial Proton launch in 1997 was successfully accomplished on
May 24, carrying the Telestar 5 payload. 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 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 110 DEG. 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
15, 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.
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.
16
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.
The Communications Act of 1934, as amended, and the FCC's implementing
regulations provide that, where subsidiaries of a holding company hold certain
types of FCC licenses, foreign nationals or their representatives may not own in
excess of 25% of the total equity of the holding company, considered on a
fully-diluted basis, except upon an FCC public interest determination. While the
FCC's International Bureau has ruled that these limitations do not apply to DBS
authorizations, the ruling has been challenged and the question remains open.
Furthermore, the limitations will apply to EchoStar's FSS authorizations if
EchoStar holds itself out as a common carrier or if the FCC decides to treat it
as such a carrier.
A recent survey of EchoStar's equity owners discloses that EchoStar's
foreign ownership in May of this year was under 5%, well below these limitations
if they were to apply. However, if the purchase by foreigners or their
representatives of EchoStar's existing or new equity securities or exercise of
any right to convert existing or new securities into equity securities,
including the shares subject to the Offerings, would cause the foreign ownership
limitations to be exceeded, a separate FCC determination that such ownership was
consistent with the public interest would be required in order to avoid a
violation of the Act and/or the FCC's rules.
The Communications Act of 1934, as amended, also requires prior FCC approval
of transfers of control over, or assignments of, Title III licenses. If the
purchase of the securities in the Offerings (or exercise of the right to convert
the Preferred Stock into shares of Common Stock) would result in a transfer of
control over the FCC licenses and permits, such transfer would require the prior
approval of the FCC.
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
election to public 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 a rulemaking proceeding in order to determine how to implement the
4-7% set-aside requirement. 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
17
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."
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.
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 119.05 DEG. WL and 118.95 DEG. WL
instead of at their authorized locations at 119.2 DEG. WL and 118.8 DEG. 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 operate EchoStar III and launch
and operate 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 175 DEG. 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
18
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 119 DEG. WL and 175 DEG. 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 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
119 DEG.WL, EchoStar would be required under certain circumstances to offer to
repurchase all or a portion of the 1994 Notes, the 1996 Notes, the 1997 Notes
and, if issued, the Series B Exchange Notes, under certain conditions. In the
event that a substantial number of holders of the 1994 Notes, the 1996 Notes,
the 1997 Notes, or, if issued, the Series B Exchange 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
61.5 DEG. WL and 175 DEG. 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.
DBSC's minor modification request was opposed by Tempo. 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. DBSC has submitted relevant data; and by order released
September 29, 1997, the FCC's International Bureau conditionally approved the
requested modification application.
EchoStar III was launched on October 5, 1997 pursuant to FCC authority which
was conditionally granted by the September 29, 1997 order of the FCC's
International Bureau. The International Bureau's September 29, 1997 order also
conditionally granted DBSC an STA to test all transponders on EchoStar III for
the earlier of eight weeks after launch or seven days prior to the launch of a
satellite to that orbital location by an authorized entity. The International
Bureau's order is subject to review by the full Commission and ultimately the
Court of Appeals, and there can be no assurance that the order will not be
challenged, or that any such challenges will not be successful. EchoStar also
expects to file applications for authority to operate the satellite as well as
feeder link earth stations and antennas for TT&C communications with EchoStar
III. On October 3, 1997 EchoStar filed an application for authority to operate
one of the earth station antennas that it plans to deploy for TT&C and feeder
link communications with EchoStar III. There can be no assurance that this
application will be granted. Also on October 3, 1997, EchoStar filed a request
for an STA to allow it to begin testing that antenna immediately upon the launch
of EchoStar III. On the same date, the FCC staff verbally gave EchoStar a 90-day
STA to conduct such testing subject to certain power restrictions.
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
19
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 called for the completion of construction at
61.5 DEG. WL of EchoStar III by July 31, 1997, and that milestone was met. DBSC
and DirectSat also must have operational satellites at 175 DEG. WL by 1998 and
1999, respectively, and DirectSat must have an operational satellite at 110 DEG.
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
EchoStar Satellite Corporation's ("ESC") 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 175 DEG. WL (provided that ESC is found
to have a firm contract and receives frequency assignments at 175 DEG. WL),
EchoStar will still be required to construct and launch two or more satellites
in addition to EchoStar I, EchoStar II, 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 110 DEG. WL and 166 DEG. WL orbital slots in order to
avoid loss of those frequencies). Finally, with respect to the 24 orbital
assignments at the 148 DEG. 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 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 can be 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.
20
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 in
March 1996, EchoStar'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 1.25%. To date,
a majority of EchoStar's subscribers have purchased annual subscriptions.
EchoStar expects that subscriber turnover may increase as annual subscribers
renew and convert to month-to-month subscriptions, as the number of overall DISH
Network subscribers increases, and as a result of certain other factors. In the
event that EchoStar 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 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
21
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 assurance
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 or in-orbit 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
1997 Notes Indenture DBS Corp would be required to use the proceeds from any
launch insurance to purchase satellites or, at DBS Corp's option, to make an
offer to repurchase the maximum amount of 1997 Notes that can be purchased with
those proceeds.
EchoStar III was launched on October 5, 1997 on an Atlas IIAS launch
vehicle. Although all tests to date have been successful, EchoStar III has not
yet achieved geostationary orbit. The ultimate success of the launch of EchoStar
III will not be determinable until up to 60 days after its October 5 launch
date.
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, EchoStar II and EchoStar III and
is constructing 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
provider for EchoStar IV, or from other factors beyond EchoStar's control. If
the launch of any of EchoStar's satellites, including EchoStar IV, is delayed,
EchoStar's strategy to provide additional programming to DISH Network
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
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 adaptations 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
22
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
73% 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
below 51%, his percentage ownership of the equity securities of EchoStar would
have to be reduced to below 10%. Following consummation of the Common Offering,
Mr. Ergen will own approximately 65% of the total equity securities of EchoStar
and would possess approximately 95% of the total voting power. Assuming
conversion of all of the shares of Preferred Stock and following consummation of
the Common Offering, Mr. Ergen would own approximately 61% of the total equity
securities of EchoStar and would possess approximately 94% of the total voting
power.
LIMITATION OF VOTING RIGHTS. EchoStar's equity securities consist of common
and preferred stock. EchoStar's common stock has been divided into three classes
with different voting rights. Holders of Class A Common Stock and Class C Common
Stock are entitled to one vote per share on all matters submitted to a vote of
stockholders and holders of Class B Common Stock and Series A Preferred Stock
are entitled to ten votes per share. No Class C Common Stock is currently issued
and outstanding. However, upon a Change in Control (as defined) of EchoStar,
each holder, if any, of shares of Class C Common Stock would be entitled to cast
ten votes for each share of Class C Common Stock held by such holder. See
"Description of Capital Stock." Holders of Class A Common Stock, Class B Common
Stock and Class C Common Stock and the Series A Preferred Stock vote together as
a single class on all matters
submitted to stockholders, except where separate class voting is required by law
and except as otherwise provided in the Certificate of Designations, Preferences
and Rights for the Series A Preferred Stock. The Series B Preferred Stock is
and, in the event the Preferred Offering is consummated, the Series C Preferred
Stock will be, nonvoting. Holders of Class A Common Stock will not be able to
meaningfully participate in the affairs of EchoStar absent a restructuring of
the capital stock of EchoStar, or the conversion into Class A Common Stock of
EchoStar's outstanding shares of Class B Common Stock and Series A Preferred
Stock.
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 maintain in-orbit
insurance for EchoStar I and EchoStar II. EchoStar is required under the 1996
Notes Indenture to maintain in-orbit insurance for EchoStar III and is required
under the 1997 Notes Indenture to obtain launch and in-orbit insurance for
EchoStar IV. EchoStar has procured the required in-orbit insurance for EchoStar
I, EchoStar II and EchoStar III. 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
23
commitment entirely. The in-orbit insurance policies for EchoStar I, EchoStar II
and EchoStar III also are subject to annual renewal provisions. There can be no
assurance that such renewals will be at rates or on terms favorable to EchoStar.
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, EchoStar III 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 launch insurance required for 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 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 EchoStar's business.
POSSIBLE VOLATILITY OF STOCK PRICE. There may be significant volatility in
the market price for the Class A Common Stock. Quarterly operating results of
the Company, changes in general conditions in the economy, the financial
markets, competition and changes in the subscription television industry,
regulatory changes, launch and satellite failures, operating results below
future expectations or other developments affecting EchoStar and its competitors
could cause the market price of the Class A Common Stock to fluctuate
substantially. In addition, price and volume fluctuations in the stock markets
may affect the market price of the Class A Common Stock for reasons unrelated to
EchoStar's operating performance.
24
USE OF PROCEEDS
The net proceeds to EchoStar from the Common Offering are estimated to be
approximately $109.8 million (approximately $126.4 million if the Underwriters'
over-allotment option is exercised in full), based on a closing market price of
$23 1/8 per share on October 9, 1997, after deducting underwriting discounts and
commissions and the estimated expenses of the Common Offering. The net proceeds
to EchoStar from the Preferred Offering are estimated to be approximately $
million (approximately $ million if the Underwriters' over-allotment option is
exercised in full) after deducting underwriting discounts and commissions and
the estimated expenses of the Preferred Offering and excluding approximately
$ million to be deposited by the purchasers of the Preferred Stock into a
deposit account established pursuant to the Preferred Offering. EchoStar
presently intends to use the net proceeds of the Offerings to fund subscriber
acquisition and marketing expenses and for other general corporate purposes.
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
EchoStar's Class A Common Stock is quoted on the Nasdaq National Market
under the symbol "DISH." Prior to June 21, 1995, there was no established
trading market for EchoStar's Class A Common Stock. The high and low closing
sale prices of the Class A Common Stock for 1995, 1996 and 1997 on the Nasdaq
National Market (as reported by Nasdaq) are set forth below:
1995 HIGH LOW
- ----------------------------------------------------------------------------- ------ ------
Second Quarter (beginning June 21, 1995)..................................... 17 14 3/4
Third Quarter................................................................ 17 13 1/2
Fourth Quarter............................................................... 24 1/4 12 1/4
1996
- -----------------------------------------------------------------------------
First Quarter................................................................ 38 3/4 21 9/16
Second Quarter............................................................... 36 27 3/4
Third Quarter................................................................ 28 1/2 24
Fourth Quarter............................................................... 32 1/4 21 3/4
1997
- -----------------------------------------------------------------------------
First Quarter................................................................ 26 3/4 15
Second Quarter............................................................... 21 3/8 11 3/8
Third Quarter................................................................ 24 1/4 13 1/2
Fourth Quarter (through October 9, 1997)..................................... 25 15/16 23 1/8
On October 9, 1997, the last reported sale price for the Common Stock on the
Nasdaq National Market was $23 1/8 per share.
As of October 7, 1997, there were approximately 2,334 record holders of the
EchoStar's Class A Common Stock, not including stockholders who beneficially own
Class A Common Stock held in nominee or street name. As of October 7, 1997, all
29,804,401 outstanding shares of EchoStar's Class B Common Stock were held by
Charles W. Ergen, EchoStar's Chief Executive Officer. There is currently no
trading market for EchoStar's Class B Common Stock.
EchoStar has never declared or paid any cash dividends on any class of its
common stock and does not expect to declare dividends in the foreseeable future.
Furthermore, under the terms of the 1996 Notes Indenture and the Certificate of
Designation related to the Series B Preferred Stock, EchoStar may only pay cash
dividends on its equity securities in limited circumstances. See "Risk
Factors--Substantial Leverage," "Description of Certain Indebtedness--1996
Notes" and "Description of EchoStar Capital Stock." Payment of any future
dividends will depend upon the earnings and capital requirements of EchoStar,
EchoStar's debt facilities, and other factors the Board of Directors considers
appropriate. EchoStar currently intends to retain its earnings, if any, to
support future growth and expansion. EchoStar's ability to declare dividends is
affected by covenants in its financing agreements that prohibit it from
declaring dividends and EchoStar's subsidiaries from transferring funds in the
form of cash dividends, loans or advances to EchoStar. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
25
CAPITALIZATION
The following table sets forth: (i) the consolidated capitalization of
EchoStar, on a historical basis as of June 30, 1997; (ii) the pro forma
consolidated capitalization of EchoStar as of June 30, 1997, which gives effect
to the Series B Preferred Offering; and (iii) as adjusted to give effect to the
Offerings and the application of the net proceeds thereof. 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.
AS OF JUNE 30, 1997 (UNAUDITED)
----------------------------------------------------------------------------
AS ADJUSTED
AS ADJUSTED FOR THE AS ADJUSTED
FOR THE PREFERRED FOR THE
ACTUAL PRO FORMA COMMON OFFERING OFFERING(1) OFFERINGS(1)
--------- -------------- ---------------- ----------------- ------------
(IN THOUSANDS)
Cash, cash equivalents, and marketable
investment securities (2)........... $ 187,804 $ 380,804 $ 490,637 $ 465,004 $ 574,837
--------- -------------- ---------------- ----------------- ------------
--------- -------------- ---------------- ----------------- ------------
Long-term debt (net of current
portion):
Mortgages and notes payable......... 45,379 45,379 45,379 45,379 45,379
1994 Notes.......................... 467,210 467,210 467,210 467,210 467,210
1996 Notes.......................... 411,256 411,256 411,256 411,256 411,256
1997 Notes.......................... 375,000 375,000 375,000 375,000 375,000
--------- -------------- ---------------- ----------------- ------------
Total long-term debt.............. 1,298,845 1,298,845 1,298,845 1,298,845 1,298,845
Series B Preferred Stock.............. - 193,000 193,000 193,000 193,000
Stockholders' Equity (Deficit):
Preferred Stock, $.01 par value,
20,000,000 shares authorized, the
following series issued and
outstanding:
Series A Preferred Stock,
1,616,681 shares issued and
outstanding, including accrued
dividends of $3,949,000....... 19,001 19,001 19,001 19,001 19,001
Preferred Stock................. - - -- 87,700 87,700
Class A Common Stock, $.01 par
value, 200,000,000 shares
authorized, 11,821,513 shares
issued and outstanding, actual and
pro forma; 16,821,513 shares
issued and outstanding, as
adjusted.......................... 118 118 168 118 168
Class B Common Stock, $.01 par
value, 100,000,000 shares
authorized, 29,804,401 shares
issued and outstanding............ 298 298 298 298 298
Class C Common Stock, $.01 par
value, 100,000,000 shares
authorized, none outstanding...... - - - - -
Common Stock Warrants............... 11 11 11 11 11
Additional paid-in capital.......... 170,701 170,701 280,484 167,201 276,984
Unrealized holding losses on
available-for-sale securities, net
of deferred taxes................. (11) (11) (11) (11) (11)
Accumulated deficit................. (242,986) (242,986) (242,986) (242,986) (242,986)
--------- -------------- ---------------- ----------------- ------------
Total stockholders' equity
(deficit)....................... (52,868) (52,868) 56,965 31,332 141,165
--------- -------------- ---------------- ----------------- ------------
Total capitalization.................. $1,245,977 $1,438,977 $1,548,810 $ 1,523,177 $1,633,010
--------- -------------- ---------------- ----------------- ------------
--------- -------------- ---------------- ----------------- ------------
- ------------------------
(1) Excludes approximately $12.3 million to be deposited by purchasers of the
Preferred Stock into a deposit account established pursuant to the Preferred
Offering.
(2) Excludes restricted cash and marketable investment securities which totaled
$229.6 million as of June 30, 1997.
26
SELECTED FINANCIAL DATA
The following selected financial data as of, and for the five years ended
December 31, 1996, are derived from the consolidated financial statements of
EchoStar, 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," EchoStar'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 PER SHARE DATA, RATIOS, SUBSCRIBERS AND SATELLITE
RECEIVERS SOLD)
(UNAUDITED)
STATEMENTS OF OPERATIONS DATA:
Revenue:
DTH products and technical services.............. $ 157,473 $ 206,311 $ 172,753 $ 146,910 $ 135,812 $ 97,199 $ 33,649
DISH Network subscription television services.... - - - - 37,898 6,046 57,588
DISH Network promotions--subscription television
services and products (2)...................... - - - - 22,746 - 76,251
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 3,034 5,103 1,278
--------- --------- --------- --------- --------- --------- ---------
Total revenue...................................... 165,088 220,941 190,983 163,890 211,411 114,991 172,845
Expenses:
DTH products and technical services.............. 120,826 161,447 133,635 116,758 123,790 90,278 27,718
Subscriber promotion subsidies (2)............... - - - - 33,591 - 31,013
DISH Network 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 38,525 90,372 29,816 66,389
Amortization of subscriber acquisition costs
(2)............................................ - - - - 15,991 92 61,418
Depreciation and amortization.................... 1,043 1,677 2,243 3,114 27,423 9,664 25,357
--------- --------- --------- --------- --------- --------- ---------
Total expenses..................................... 153,802 202,737 177,767 171,917 320,756 137,677 260,462
--------- --------- --------- --------- --------- --------- ---------
Operating income (loss)............................ $ 11,286 $ 18,204 $ 13,216 $ (8,027) $(109,345) $ (22,686) $ (87,617)
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Net income (loss).................................. $ 7,529 $ 12,272 $ 90 $ (11,486) $(100,986) $ (29,775) $(126,655)
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Net income (loss) attributable to common shares.... $ 7,529 $ 12,272 $ (849) $ (12,690) $(102,190) $ (30,377) $(127,257)
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Weighted-average common shares outstanding......... 32,221 32,221 32,442 35,562 40,548 40,404 41,265
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Net income (loss) per common and common-equivalent
share............................................ $ 0.23 $ 0.38 $ (0.03) $ (0.36) $ (2.52) $ (0.75) $ (3.08)
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
OTHER DATA:
EBITDA (3)....................................... $ 12,329 $ 19,881 $ 15,459 $ (4,913) $ (65,931) $ (12,930) $ (842)
Ratio of earnings to combined fixed charges and
preferred stock dividends (4).................. 15.0x 18.0x - - - - -
Deficiency of earnings to combined fixed charges
and preferred stock dividends (4).............. - - $ (6,145) $ (44,198) $(188,701) $ (61,657) $(143,845)
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
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
27
AS OF DECEMBER 31, AS OF JUNE 30, 1997
----------------------------------------------------- ----------------------------------------------
AS ADJUSTED AS ADJUSTED
FOR THE FOR THE
PRO COMMON PREFERRED
1992 1993 1994 1995 1996 ACTUAL FORMA(5) OFFERING OFFERING(6)
--------- --------- --------- --------- --------- --------- --------- ----------- -----------
(UNAUDITED)
BALANCE SHEETS DATA:
Cash, cash equivalents and
marketable investment
securities (7)........... $ 22,031 $ 27,232 $ 233,975 $ 37,424 $ 58,038 $ 187,804 $ 380,804 $ 490,637 $ 465,004
Total assets............... 88,529 106,476 472,492 623,091 1,141,380 1,534,480 1,727,480 1,837,313 1,811,680
Long-term obligations (less
current portion):
1994 Notes............... - - 334,206 382,218 437,127 467,210 467,210 467,210 467,210
1996 Notes............... - - - - 386,165 411,256 411,256 411,256 411,256
1997 Notes............... - - - - - 375,000 375,000 375,000 375,000
Notes payable to
stockholder............ 2,274 14,725 - - - - - - --
Other long-term
obligations............ 4,876 4,702 5,393 33,444 58,580 58,436 58,436 58,436 58,436
Series B Preferred Stock
(8)........................ - - - - - - 193,000 193,000 193,000
Preferred Stock.............. - - - - - - - -- 87,700
Total stockholders' equity
(deficit).................. 52,328 49,700 103,808 156,686 61,197 (52,868) (52,868) 56,965 31,332
AS ADJUSTED
FOR THE
OFFERINGS(6)
-----------
BALANCE SHEETS DATA:
Cash, cash equivalents and
marketable investment
securities (7)........... $ 574,837
Total assets............... 1,921,513
Long-term obligations (less
current portion):
1994 Notes............... 467,210
1996 Notes............... 411,256
1997 Notes............... 375,000
Notes payable to
stockholder............ --
Other long-term
obligations............ 58,436
Series B Preferred Stock
(8)........................ 193,000
Preferred Stock.............. 87,700
Total stockholders' equity
(deficit).................. 141,165
- ------------------------
(1) Certain of EchoStar's subsidiaries operated under Subchapter S of the
Internal Revenue Code of 1986, as amended (the "Code"), and comparable
provisions of applicable state income tax laws, until December 31, 1993. The
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 EchoStar had been
subject to corporate Federal and state income taxes for those years.
Earnings per share has been calculated and presented on a pro forma basis as
if the shares of EchoStar issued to reflect the December 31, 1993
reorganization were outstanding for the years ended December 31, 1992 and
1993, respectively. See Notes 1 and 7 of Notes to EchoStar's Consolidated
Financial Statements.
(2) For accounting and financial 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 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 $92,000 and $61.4
million for the six months ended June 30, 1996 and 1997, respectively).
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 EchoStar's Consolidated Financial Statements
contained elsewhere in this Prospectus.
(4) For purposes of computing the ratio of earnings to combined fixed charges
and preferred stock dividends and the deficiency of earnings to combined
fixed charges and preferred stock dividends, earnings consist of earnings
from continuing operations before income taxes, plus fixed charges,
excluding capitalized interest. Fixed charges consist of interest incurred
on all indebtedness and the computed interest components of rental expense
under noncancelable operating leases. Preferred stock dividends consist of
the dividends accrued on the Company's Series A Preferred Stock. For the
years ended December 31, 1994, 1995 and 1996 and the six months ended June
30, 1996 and 1997, earnings were insufficient to cover fixed charges.
(5) Gives effect to the Series B Preferred Stock Offering and the application of
the net proceeds thereof.
(6) Excludes approximately $12.3 million to be deposited by purchasers of the
Preferred Stock into a deposit account established pursuant to the Preferred
Offering.
(7) Excludes restricted cash and marketable investment securities which totaled
$229.6 million as of June 30, 1997.
(8) Net of estimated discounts and commissions and offering costs of $7.0
million.
28
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ALL STATEMENTS CONTAINED HEREIN, AS WELL AS STATEMENTS MADE IN PRESS
RELEASES AND ORAL STATEMENTS THAT MAY BE MADE BY ECHOSTAR OR BY OFFICERS,
DIRECTORS OR EMPLOYEES OF ECHOSTAR ACTING ON ITS BEHALF, THAT ARE NOT STATEMENTS
OF HISTORICAL FACT CONSTITUTE "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF
THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. SUCH FORWARD-LOOKING
STATEMENTS INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES AND OTHER FACTORS THAT
COULD CAUSE THE ACTUAL RESULTS OF ECHOSTAR TO BE MATERIALLY DIFFERENT FROM
HISTORICAL RESULTS OR FROM ANY FUTURE RESULTS EXPRESSED OR IMPLIED BY SUCH
FORWARD-LOOKING STATEMENTS. AMONG THE FACTORS THAT COULD CAUSE ACTUAL RESULTS TO
DIFFER MATERIALLY ARE THE FOLLOWING: THE UNAVAILABILITY OF SUFFICIENT CAPITAL ON
SATISFACTORY TERMS TO FINANCE ECHOSTAR'S BUSINESS PLAN; INCREASED COMPETITION
FROM CABLE, DBS, OTHER SATELLITE SYSTEM OPERATORS AND OTHER PROVIDERS OF
SUBSCRIPTION TELEVISION SERVICES; CONTINUED MARKET ACCEPTANCE FOR DBS IN ITS
CURRENT BROADCASTING FORMAT AND PRICING STRUCTURE, THE INTRODUCTION OF NEW
TECHNOLOGIES AND COMPETITORS INTO THE SUBSCRIPTION TELEVISION BUSINESS;
INCREASED SUBSCRIBER ACQUISITION COSTS AND SUBSCRIBER PROMOTION SUBSIDIES; THE
INABILITY OF ECHOSTAR TO CONTINUE TO HOLD AND TO OBTAIN ADDITIONAL NECESSARY
SHAREHOLDER AND BONDHOLDER APPROVAL OF ANY STRATEGIC TRANSACTIONS; THE INABILITY
OF ECHOSTAR TO OBTAIN AND HOLD NECESSARY AUTHORIZATIONS FROM THE FEDERAL
COMMUNICATION COMMISSION ("FCC"); THE OUTCOME OF ANY LITIGATION IN WHICH
ECHOSTAR MAY BE INVOLVED; GENERAL BUSINESS AND ECONOMIC CONDITIONS; THOSE
FACTORS DESCRIBED UNDER THE CAPTION "RISK FACTORS"; AND OTHER RISK FACTORS
DESCRIBED FROM TIME TO TIME IN ECHOSTAR'S REPORTS FILED WITH THE COMMISSION. IN
ADDITION TO STATEMENTS THAT EXPLICITLY DESCRIBE SUCH RISKS AND UNCERTAINTIES,
READERS ARE URGED TO CONSIDER STATEMENTS THAT INCLUDE THE TERMS "BELIEVES,"
"BELIEF," "EXPECTS," "PLANS," "ANTICIPATES," "INTENDS" OR THE LIKE TO BE
UNCERTAIN AND FORWARD-LOOKING. ALL CAUTIONARY STATEMENTS MADE HEREIN SHOULD BE
READ AS BEING APPLICABLE TO ALL FORWARD-LOOKING STATEMENTS WHEREVER THEY APPEAR.
IN THIS CONNECTION, INVESTORS SHOULD CONSIDER THE RISKS DESCRIBED HEREIN.
OVERVIEW
EchoStar currently operates four related businesses: (i) operation of the
DISH Network 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.
EchoStar expects to derive its future revenue principally from periodic
subscription fees for DISH Network 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,
that 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.
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 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 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 America's Top 50 CD programming
package for $300. The
29
1997 Promotion allows consumers to subscribe to the DISH Network's 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 services.
RESULTS OF OPERATIONS
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 $172.8
million, an increase of $57.8 million, or 50%, as compared to total revenue for
the six months ended June 30, 1996 of $115.0 million. The increase in total
revenue in 1997 was primarily attributable to the introduction of EchoStar's
DISH Network service during March 1996, combined with significant DISH Network
subscriber growth since the launch of service. As of June 30, 1997, EchoStar had
approximately 590,000 DISH Network subscribers compared to approximately 70,000
at June 30, 1996 and 350,000 at December 31, 1996.
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 $8.7 million for the six months ended June 30, 1997.
Domestically, EchoStar 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 EchoStar's promotions.
Revenue from international sales of analog DTH products for the six months
ended June 30, 1997 totaled $13.0 million, a decrease of $9.2 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, EchoStar 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 more fully described below, EchoStar expects to focus its
future international efforts on the sale of digital set-top boxes and the
provision of consulting services to other DBS operators. As a result, during the
remainder of 1997, EchoStar expects to streamline its international operations,
including selected personnel reductions and the eventual elimination of all
sales of analog DTH products.
To expand its presence in international digital and DBS markets, EchoStar
has entered into distribution and consulting agreements with international
digital service providers. In January 1997, EchoStar entered into an agreement
(the "ExpressVu Agreement") with ExpressVu, Inc. ("ExpressVu") a majority owned
subsidiary of BCE, 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, EchoStar is assisting ExpressVu with the
construction of a digital broadcast center for use in conjunction with
ExpressVu's DTH service, which commenced operations in September 1997, and will
act as a distributor of satellite receivers and related equipment for
ExpressVu's Canadian DTH service. Among other things, EchoStar has agreed not to
provide DTH service in Canada and ExpressVu has agreed not to provide DTH
service, including DBS
30
service, in the U.S. EchoStar recognized revenues of approximately $11.9 million
related to the ExpressVu Agreement during the six 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 EchoStar to supply
digital set-top boxes for its satellite television service which commenced
operations in September 1997. Revenues from Telefonica's initial order of
100,000 digital set-top boxes are expected to approximate $40.0 million.
EchoStar 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. EchoStar expects to fulfill the remainder of the contract during early
1998 and while there can be no assurance, hopes to receive further orders during
1998.
While EchoStar continues to actively pursue other similar distribution
opportunities, no assurance can be given that any such additional negotiations
will be successful. Further, EchoStar'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 EchoStar's alliances with these, and potentially other, foreign
DBS operators.
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 $107.3 million, an increase of $9.2
million, or 9% compared to the same period in 1996. DTH products and technical
services expense decreased $62.6 million, or 69%, to $27.7 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 EchoStar's promotions. Subscriber promotion subsidies
aggregated $31.0 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. The 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. Selling, General and
Administrative ("SG&A") expenses totaled $66.4 million for the six months ended
June 30, 1997, an increase of $36.6 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, EchoStar expects that SG&A expenses as a percentage of total revenue
will decrease as subscribers are added.
EARNINGS BEFORE INTEREST, TAXES, DEPRECIATION AND AMORTIZATION. Earnings
before interest, taxes, depreciation and amortization (including amortization of
subscriber acquisition costs) ("EBITDA") was negative $842,000 for the six
months ended June 30, 1997, an improvement of $12.1 million, compared to
negative EBITDA of $12.9 million for the same period in 1996. This improvement
in negative EBITDA resulted from the factors affecting revenue and expenses
discussed above.
31
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 $61.4 million for the six months ended June 30,
1996 and June 30, 1997, respectively) aggregated $86.8 million, an increase of
$77.0 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 its second
DBS satellite ("EchoStar II") (placed in service during the fourth quarter of
1996).
OTHER INCOME AND EXPENSE. Other expense, net totaled $39.0 million for the
six months ended June 30, 1997, an increase of $15.1 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 combined with the continued accretion of
the 1994 Notes. Additionally, interest income decreased approximately $6.0
million as a result of a decrease in invested balances. EchoStar 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 $16.9 million
(from $16.8 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 EchoStar's decision to fully reserve the 1997 additions to its net
deferred tax asset.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995.
REVENUE. Total revenue for 1996 was $211.4 million, an increase of $47.5
million, or 29%, as compared to total revenue for 1995 of $163.9 million. The
increase in total revenue in 1996 was primarily attributable to the introduction
of EchoStar's DISH Network service during March 1996. In the future, EchoStar
expects to derive its revenue principally from DISH Network subscription
television services. As of December 31, 1996, EchoStar had approximately 350,000
DISH Network 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
$4.7 million, or 5%, to $98.3 million during 1996. Domestically, EchoStar sold
approximately 518,000 satellite receivers in 1996, an increase of 295% as
compared to approximately 131,000 receivers sold in 1995. Of the total number of
satellite receivers sold during 1996, approximately 474,000 were EchoStar
Receiver Systems. Although there was a significant increase in the number of
satellite receivers sold in 1996 as compared to 1995, overall revenue did not
increase proportionately as a result of the revenue recognition policy applied
to DBS satellite receivers sold under the 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 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
32
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 $3.0 million, an
increase of $1.3 million or 74%, as compared to 1995. The increase in loan
origination and participation income during 1996 was primarily due to an
increase in the number of consumer loans and leases funded.
DTH AND DISH NETWORK EXPENSES. DTH and DISH Network expenses in 1996
aggregated $187.0 million, an increase of $56.7 million, or 44%, as compared to
1995. This increase is directly attributable to the introduction of DISH Network
service in March 1996, partially offset by decreases in other DTH expenses. DTH
products and technical services expense increased $7.0 million, or 6%, to $123.8
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 $33.6 million during 1996 and
represent expenses associated with the 1996 Promotion. DISH Network 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 $90.4
million in 1996, an increase of $51.8 million or 135%, as compared to 1995. Such
expenses as a percentage of total revenue increased to 43% in 1996 as compared
to 24% in 1995. The increase in SG&A expenses was principally attributable to:
(i) increased personnel expenses as a result of introduction of DISH Network
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; (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 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 $65.9 million, an decrease
of $61.0 million compared to 1995. This decrease 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 $46.3 million in 1996,
an increase of $37.1 million, as compared to 1995. The increase in other expense
in 1996 resulted primarily from an increase in interest expense associated with
the issuance of the 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
33
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 $31.8 million (compared to $27.1 million during 1995).
INCOME TAX BENEFIT. The increase in the income tax benefit of $48.9 million
(from $5.7 million in 1995 to $54.7 million in 1996) principally resulted from
the increase in EchoStar's loss before income taxes. EchoStar's net deferred tax
assets (approximately $66.8 million at December 31, 1996) relate to temporary
differences for amortization of original issue discount on the 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.
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
34
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 $116.8 million for 1995, a
decrease of $16.9 million, or 13%, as compared to 1994. The decrease in DTH
operating expenses for 1995 resulted primarily from the decrease in sales of DTH
products. DTH product expenses as a percentage of DTH product revenue were 79%
for 1995, as compared to 77% for 1994. The increase was principally the result
of declining sales prices of C-band DTH products as described above, during 1995
as compared to 1994.
C-band programming expenses were $13.5 million for 1995, an increase of $1.9
million, or 16%, as compared to 1994. Programming expenses as a percentage of
programming revenue were 89% for 1995 as compared to 80% for 1994. Programming
expenses increased at a greater rate than revenues from programming principally
because the prior periods included the flow through of certain volume discounts.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. SG&A expenses totaled $38.5
million for 1995, an increase of $8.3 million, or 27%, as compared to 1994. Such
expenses as a percentage of total revenue increased to 24% for 1995 as compared
to 16% for 1994. The change was principally the result of the reduction of
revenues from domestic sales of DTH products and increased costs to support,
among other things, expansion of the EchoStar DTH product installation network
and administrative costs associated with development of the DISH Network. 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.
35
OTHER INCOME AND EXPENSE. Other expense for 1995 was $9.2 million, a
decrease of $3.5 million, or 28%, as compared to 1994. The difference in other
income and expense for 1995 compared to 1994 resulted primarily from the
amortization of original issue discount and deferred debt issuance costs of
$23.5 million in 1995, and $20.7 million in 1994, net of capitalized interest,
on the 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 $27.1 million as
compared to $5.7 million for 1994.
BENEFIT FROM/PROVISION FOR INCOME TAXES. An income tax benefit of $5.7
million was recognized during 1995 as compared to the income tax provision for
1994 of $399,000. This change 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 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 its
acquisition of 24 DBS frequencies at the 148 DEG. WL orbital slot. Those
frequencies were acquired at the FCC's January 1996 auction of certain DBS
frequencies.
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. In June 1997, DBS
Corp consummated the 1997 Notes offering resulting in net proceeds of
approximately $362.5 million, including approximately $109.0 million restricted
to fund interest payments on the 1997 Notes through January 1, 2000 (the
"Interest Escrow"). In October 1997, EchoStar consummated the Series B Preferred
Stock Offering resulting in net proceeds of approximately $193.0 million.
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
subscriber base. Such working capital requirements could vary if any of the
following, among other factors, occur: (i) subscriptions to DISH Network
programming differ from anticipated levels;
36
(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"). As a result of the litigation between News and EchoStar,
EchoStar's receipt of all or any portion of the News Funding, and the timing
thereof, is subject to significant uncertainty at this time. Accordingly,
EchoStar consummated the 1997 Notes Offering, the Series B Preferred Stock
Offering and plans to consummate the Offerings to fund its 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 manufacturing cost reductions for EchoStar Receiver Systems are
realized, thereby reducing the initial net cash outflow per new subscriber. From
time to time, EchoStar offers other promotions and incentives to attract
additional DISH Network subscribers. Costs associated with these additional
promotions and incentives are expensed as incurred (reported as a component of
subscriber promotion subsidies). After giving effect to these other promotions
and incentives, EchoStar expects that its aggregate net use of cash (i.e.,
subscriber acquisition costs) will approximate $300 per activation.
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 EchoStar'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 EchoStar Receiver Systems
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.
On 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 activation
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. 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
37
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, growth of the DISH Network subscriber
base may be negatively impacted.
1997 CAPITAL REQUIREMENTS
As of June 30, 1997, in addition to the working capital requirements
discussed above, during the remainder of 1997 EchoStar expects to expend
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 during the fourth quarter of 1997 as a
result of the launch of EchoStar III on October 5, 1997. Capital expenditures
related to 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 provider.
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 established in connection with the
1997 Notes offering (the "Satellite Escrow"), cash generated from operations,
and the proceeds from the Series B Preferred Stock Offering, and the Offerings.
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.
EchoStar may require additional funds to acquire DISH Network 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 unexpected increases in operating costs and
expenses, a
38
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 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 (including the 1994 Notes, the 1996 Notes, the 1997 Notes,
Deferred Payments on EchoStar I and EchoStar II, and mortgage notes payable).
Interest on the 1994 Notes and the 1996 Notes accrues, 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 1997 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 EchoStar's, DBS Corp's, ESBC's and Dish's operations are
conducted through subsidiaries, the cash flow of EchoStar, DBS Corp, ESBC and
Dish and their ability to service debt, including the 1994 Notes, the 1996 Notes
and the 1997 Notes are dependent upon the earnings of their respective
subsidiaries and, in general, the payment of funds by such subsidiaries to Dish,
by the payment of funds by Dish to ESBC, by the payment of funds by ESBC to DBS
Corp and by the payment of funds by DBS Corp to EchoStar in the form of loans,
dividends or other payments.
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, 1996 Notes and the 1997 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 substantially all of its
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 substantially all of its assets; and (vii) enter into transactions with
affiliates. The 1996 Notes Indenture permits ESBC to pay dividends and make
other distributions to DBS Corp without restrictions.
39
The 1997 Notes Indenture and the Certificate of Designation for the Series B
Preferred contain restrictive covenants that, among other things, impose
limitations on DBS Corp 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 EchoStar's subsidiaries; (vi) merge, consolidate or sell substantially all of
its assets; (vii) enter into transactions with affiliates; and (viii) pay
dividends. In general, DBS Corp may pay dividends on its equity securities only
if: (i) no default exists under the 1997 Notes Indenture; and (ii) after giving
effect to such dividends, DBS Corp's ratio of total indebtedness to cash flow
would not exceed 6.0 to 1.0. Moreover, the aggregate amount of such dividends
generally may not exceed the sum of (A) the difference of consolidated cash flow
(less 100% of such deficit) minus 150% of consolidated interest expense, in each
case from July 1, 1997, plus (B) 100% of the aggregate net proceeds to DBS Corp
and its subsidiaries from the sale of certain equity interests of DBS Corp or
EchoStar.
The Exchange Indenture for the Series B Exchange Notes (as defined) issuable
upon the exchange of the Series B Preferred Stock contains restrictive covenants
that, among other things, restricts the ability of EchoStar and certain of its
subsidiaries to (i) pay dividends with the proceeds from the Series B Preferred
Offering, (ii) pay cash dividends on any junior or parity securities and (iii)
incur indebtedness or pledge the stock of certain subsidiaries as collateral.
The certificate of designation associated with the Series B Preferred Stock also
restricts the ability of DBS Corp and its subsidiaries to (i) make restricted
payments, (ii) incur certain indebtedness or issue disqualified stock or
preferred equity interests, (iii) create payment restrictions affecting
subsidiaries, (iv) engage in transactions with affiliates or (v) engage in
certain asset sales. A majority of the covenants contained in the certificate of
designation associated with the Series B Preferred Stock and the indenture
related to the Series B Exchange Notes are applicable solely to DBS Corp and its
subsidiaries and do not impose restrictions or limitations on EchoStar or any of
EchoStar's subsidiaries which are not also subsidiaries of DBS Corp.
If cash generated from operation of the DISH Network is not sufficient to
meet the debt service requirements of the 1994 Notes, the 1996 Notes and the
1997 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 enable EchoStar to meet all of its obligations.
See "Description of Certain Indebtedness--1994 Notes," "--1996 Notes" and
"--1997 Notes" for other restrictions associated with the 1994 Notes, the 1996
Notes and the 1997 Notes. See "Description of Capital Stock."
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
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.
40
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.
41
BUSINESS
GENERAL
EchoStar is a leading provider of DBS programming services in the United
States. The Company commenced its DISH Network in March 1996, after the
successful launch of EchoStar I in December 1995. The Company launched EchoStar
II in September 1996 and EchoStar III in October 1997. Since December 31, 1996,
EchoStar has increased its DISH Network subscriber base from 350,000 to
approximately 820,000 subscribers on September 30, 1997. During the third
quarter of 1997, EchoStar believes that it captured approximately 40% of all new
DBS satellite subscribers in the U.S. Average monthly programming revenue during
1997 has been approximately $39 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 September 30,
1997, approximately 5.6 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 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
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 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 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 launched EchoStar III on
October 5, 1997, and expects to launch EchoStar IV in the first quarter of
1998. EchoStar III, which will serve the eastern half of the U.S. from
61.5 DEG. WL and EchoStar IV, which is expected to serve the western half of
the U.S. from 148 DEG. 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/or congressional or regulatory actions necessary to extend and clarify
the scope of the statutory compulsory license to cover local
satellite-retransmission of network-affiliated station signals) 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
42
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.
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 under the JVC and DISH Network
brand names. All consumers who purchase JVC branded satellite receiver
systems will subscribe to DISH Network programming. In addition, on
September 15, 1997, EchoStar announced that Sears will begin to carry JVC
branded EchoStar Receiver Systems. Beginning in October, 1997 JVC branded
EchoStar Receiver Systems are available in more than 800 full-line,
mall-based Sears stores.
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 101 DEG. WL, 110 DEG. WL and 119 DEG. WL
slots provide full-CONUS coverage and, therefore, these three slots are
considered the most strategic. With respect to a fourth orbital position,
61.5 DEG. WL, coverage of a majority of the continental U.S. is commercially
possible.
43
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 61.5 DEG. 101 DEG. 110 DEG. 119 DEG.
--------------- ----- --- --- ---
EchoStar (1)................................................. 90 11 1 21
DirecTv...................................................... 54 27
MCI/News Corp. (2)........................................... 28 28
Continental (3).............................................. 22 11
Tempo (2).................................................... 22 11
Dominion..................................................... 16 8
USSB......................................................... 16 5 3
Unassigned................................................... 8 2
-- -- -- --
---
Totals....................................................... 256 32 32 32 32
-- -- -- --
-- -- -- --
---
---
148 DEG. 157 DEG. 166 DEG. 175 DEG.
--- --- --- ---
EchoStar (1)................................................. 24 1 32
DirecTv...................................................... 27
MCI/News Corp. (2)...........................................
Continental (3).............................................. 11
Tempo (2).................................................... 11
Dominion..................................................... 8
USSB......................................................... 8
Unassigned................................................... 5 1
-- -- -- --
Totals....................................................... 32 32 32 32
-- -- -- --
-- -- -- --
- ------------------------
(1) Includes 10 frequencies at 175 DEG. WL and one frequency at 166 DEG. 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 175 DEG. 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 and the Tempo licenses under PrimeStar. See "Risk
Factors--Competition from DBS and Other Satellite System Operators."
(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 61.5 DEG.
WL and 166 DEG. 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
44
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 September 30, 1997,
approximately 5.6 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 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 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 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, 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 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 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
45
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 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 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 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 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.
46
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 service.
ECHOSTAR'S EXPERIENCE IN THE DBS MARKET
The Company commenced commercial operations of the DISH Network in March
1996 and since that time has experienced rapid subscriber growth. As of
September 30, 1997, the Company had approximately 820,000 subscribers to its
DISH Network programming services. During the third quarter of 1997, the Company
believes that it captured approximately 40% 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 subscribers have
come from homes that are passed by cable. The DISH Network 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 1.25% 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 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.
47
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 Multichannel Cinemax (3)
Cartoon Network Home Shopping Network PLUS: FLIX
CNBC The Learning Channel Animal Planet Multichannel HBO (6)
CNN Lifetime BET The Movie Channel (2)
Court TV MTV CNN-fn Multichannel Showtime (3)
Comedy Central NET--Political NewsTalk CNN International Sundance Channel
C-SPAN Network Game Show Network
C-SPAN 2 Nickelodeon KTLA-Los Angeles
Country Music Television Nick at Nite Classic TV MTV2
The Discovery Channel QVC Turner Classic Movies
Disney (2) The Sci-Fi Channel WGN-Chicago
E! The Travel Channel WPIX-New York
ESPN TBS WSBK--Boston
ESPN 2 TBN One Regional Sports Network
ESPNews TNN
EWTN TNT
The Family Channel TV Land
Food Network USA
Headline News VH-1
The History Channel The Weather 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 subscriber in a particular local market, EchoStar must obtain
the retransmission consent of the local affiliate. Furthermore, the compulsory
license provided in the SHVA may not extend to EchoStar's retransmission of
local network station signals, and any use of the compulsory license 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 "statutory" (or compulsory) copyright license that
generally 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", with respect to a particular television
network, is defined as one that cannot receive an over-the-air network signal of
"grade B" intensity (a predictive standard of signal intensity employed by the
FCC) of a primary network station affiliated with that network 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
the signal of an affiliate of that network. 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. On August 28, 1997, a Copyright Arbitration Royalty Panel
("CARP"), appointed to recommend royalties for satellite retransmission of
network-affiliated television and superstation signals pursuant to the
compulsory license of Section 119 of the Copyright Act, delivered its Report to
the Librarian of Congress. In the CARP's recommendation, which must be either
adopted or changed by the Copyright Office within 60 days from August 28, 1997,
the CARP held it has no jurisdiction to set royalties for local satellite
retransmissions of the signals of network-affiliated television stations, on the
ground that the compulsory license of the Copyright Act does not extend to such
retransmissions. While EchoStar has petitioned the Librarian to modify the CARP
report, the petition has been opposed, and there can be no assurance that the
petition will be granted. Moreover, EchoStar is continuing its efforts to secure
passage of legislation that will clarify and extend the scope of the compulsory
license with respect to local network signals. There can be no assurance that
EchoStar will
48
be successful in these efforts. If the CARP's position is upheld by the
Librarian and legislation to clarify and extend the scope of the compulsory
license is not passed, EchoStar would be prevented from relying on the
compulsory copyright license to retransmit local network-affiliated stations'
signals and may have to engage in the relatively cumbersome process of
negotiating and obtaining copyright licenses from all individual copyright
holders instead.
The CARP also recommended setting at zero the royalty rate for local
retransmissions of superstation signals. This recommendation may be considered
favorable to EchoStar because it may provide a basis for the proposition that
the royalty rate for all local-into-local retransmission (to the extent
permitted) should be zero. However, there can be no assurance that the Librarian
will adopt the CARP's recommendation or that, in the absence of the legislation
whose passage is sought by EchoStar, EchoStar would be successful in any
litigation with copyright owners regarding this issue.
DBS SALES AND MARKETING
EchoStar primarily utilizes its existing nationwide network of over 7,000
independent distribution and retail stores and outlets to market and distribute
DISH Network 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 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. EchoStar has
comprehensive dealer guides describing all aspects of the DISH Network 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 merchandise catalogue is also available for
distributors to add to their promotional materials. Additionally, one channel of
programming on the DISH Network provides information about additional services
and promotions offered by the DISH Network. 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 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
49
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 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 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 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 subscriber turnover rates (to date
less than 1.25% 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 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.
ECHOSTAR RECEIVER SYSTEMS
DISH Network 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 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. JVC also manufactures limited quantities of
other consumer electronics products, which incorporate EchoStar Receiver
Systems. EchoStar has managed its inventory levels based on its goal of reaching
one million subscribers by the end of 1997. There can be no
50
assurance that EchoStar will be successful in achieving this goal. To the extent
that EchoStar exceeds this goal, it may experience shortages of certain models
of EchoStar Receiver Systems. As previously described, EchoStar is negotiating
with several brand-name consumer electronics manufacturers to produce receivers
for use with the DISH Network. 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
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 October 1997. On
August 1, 1997, EchoStar began offering an internally-financed consumer lease
plan to prospective DISH Network customers. This plan provides for an 18 month
lease term at competitive rates to qualified consumers.
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 service grows.
OTHER COMPONENTS OF DBS SERVICE
SUBSCRIBER MANAGEMENT. EchoStar outsources its subscriber management,
billing and remittance services for DISH Network subscribers. Under the terms of
the outsourcing agreement, EchoStar is provided with access to a subscriber
management system maintained by the service provider. The provider facilitates
the authorization of programming to the subscriber and coordinates billing and
renewal functions.
CUSTOMER CARE CALL CENTER. EchoStar currently maintains call centers in
Thornton, Colorado and Harrisburg, Pennsylvania. Potential and existing
subscribers can call a single phone number to receive assistance for hardware,
programming, installation or service. The call center in Thornton, Colorado is
owned by the Company. The Pennsylvania facility is operated by a third party.
DIGITAL BROADCAST CENTER. The first step in the delivery of satellite
programming to the customer is the uplink of that programming to the satellite.
Uplink is the process by which signals are received from either the 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 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
51
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 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
52
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.
Applications to modify the permit for EchoStar III and for a launch
authorization for the satellite, which was launched on October 5, 1997, were
conditionally granted by International Bureau of the FCC. See "--Government
Regulation--FCC Permits and Licenses."
ESC's, DirectSat's, DBSC's and DBS Corp'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 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
53
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
can be 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's 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 can be no assurance that EchoStar's application will be
granted by the FCC or that, if granted, EchoStar will be able to successfully
capitalize on any resulting business opportunity. In exchange for certain
payments to EchoStar, EchoStar and DBSI (the holder of the remaining 20%
interest in this subsidiary) have entered into an agreement that contemplates
the grant of an option to DBSI to hold an 80.1% interest in the subsidiary, with
EchoStar's holding reduced to a carried interest equivalent to approximately
19.9%. The agreement also contemplates an EchoStar right to use approximately
20% of the capacity of the subsidiary's system. Exercise of such an option would
be subject to FCC approval.
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 is, and EchoStar IV 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 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, EchoStar II and EchoStar III, and is constructing
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.
54
Launch delays could result from weather conditions or technical problems
with any EchoStar satellite or any launch vehicle utilized by the launch
provider for EchoStar IV or from other factors beyond EchoStar's control. If the
launch of EchoStar IV is delayed, the Company's strategy to provide additional
programming to DISH Network subscribers using transponders on these satellites
would be adversely affected.
SATELLITE LAUNCHES
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 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 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 contract for EchoStar IV, Lockheed Martin
bears the risk of loss 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
55
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 I and EchoStar II covered the
period from launch through completion of testing and commencement of commercial
operations. The policy also provided for in-orbit insurance for EchoStar II
through September 9, 1997. The policy protected 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, 1998 and for EchoStar II through September 9, 1998. The
in-orbit insurance policies for EchoStar I and EchoStar II include 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 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;
(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 1997 Notes 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- and HTS Tracker-TM- name brands,
with good, better and best options typically available for each line and each
geographic reception area. EchoStar sold approximately 264,000 C-band satellite
receivers worldwide in 1996. EchoStar's sales of DTH products are somewhat
seasonal, with
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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. Prospectively, EchoStar expects to focus its international
efforts on the sale of digital set-top boxes and the provision of consulting
services to other DBS operators. As a result, during the remainder of 1997,
EchoStar expects to streamline its international operations, including selected
personnel reductions.
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 DTH service, which commenced operations in
September 1997, 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 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 satellite television service in Spain,
which commenced operations 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.
In addition to the orders described above, EchoStar has subsequently
received additional purchase orders from ExpressVu and Telefonica totaling $50
million. These orders are for first quarter 1998 delivery of digital set-top
boxes.
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,
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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 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 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
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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.
In addition, TSAT has announced that it currently intends to provide digital
programming to TSAT and other cable subscribers from Tempo's DBS satellite
launched in March 1997. Tempo's DBS satellite would allow TSAT 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 subscribers must
purchase multiple EchoStar Receiver Systems in order to view different
programming on different televisions simultaneously. TSAT's complementary DBS
service could make cable a stronger competitor to the DISH Network. As indicated
below, the 11 full-CONUS frequencies assigned to Tempo are the subject of an
application for FCC consent to assignment to PrimeStar.
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. As of September 30, DirecTv had approximately 2.9
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 Tempo's DBS satellite, which is capable of providing full-CONUS
service. PrimeStar has announced plans to use Tempo'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 September 30, 1997, PrimeStar had approximately 1.8
million subscribers.
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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. 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. 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. PrimeStar also has agreed to acquire
Tempo's license.
On July 18, 1997, PrimeStar and TSAT filed an application with the FCC
requesting FCC approval for the assignment of Tempo's authorizations to
PrimeStar in connection with the PrimeStar "roll-up" restructuring. On August
15, 1997, MCI and PrimeStar also filed an FCC application requesting approval
for the assignment of MCI's DBS authorizations to PrimeStar. The parties to the
two transactions have also initiated the antitrust clearance process with the
Department of Justice for each transaction, and EchoStar understands that
clearance has been obtained for one of the two transactions (the PrimeStar roll-
up). The FCC applications have been placed on public notice and have been
opposed by EchoStar and others, but there can be no assurance that any of these
oppositions will be successful.
The proposed restructuring of PrimeStar, if approved and 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 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 they are currently set to expire in
2002. 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.
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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. 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.
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 to serve the U.S. if the home country of the
foreign-licensed satellite offers open "effective competitive opportunities"
("ECO") in the same satellite service to U.S. licensed satellites. 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 initiated a proceeding in July 1997 proposing to maintain the
ECO test with respect to foreign-licensed satellites seeking to provide DBS and
DTH service in the United States.
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.
Pursuant to the protocol, the FCC already has permitted a company to provide
DTH services in the U.S. through a Mexican satellite. Televisa International,
LLC ("Televisa") is currently in the process of developing DTH television and
related services in Mexico, Latin America, North America, and Europe. Televisa
received authorization from the FCC to operate one million receive-only earth
stations in the U.S.
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which are capable of receiving DTH television services from Mexico's Solidaridad
II satellite. The Solidaridad II satellite operates at 113 DEG. WL providing
full-CONUS coverage, and is licensed by the Mexican Government.
The FCC authorized Televisa to operate receive dishes that are larger, and
possibly less attractive to consumers, than the dishes made available by
EchoStar. Further, the FCC authorization for Televisa does not provide
Televisa's earth stations with protection from unacceptable radio interference
from nearby satellite networks. Nevertheless, the authorization of Televisa to
provide service from the 113 DEG. WL orbital slot may produce additional
competition to the full-CONUS service by EchoStar from EchoStar I and EchoStar
II.
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.
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VHF/UHF BROADCASTERS. Most areas of the U.S. are covered by traditional
terrestrial VHF/UHF television broadcasts that typically include 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
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 is scheduled to occur in
December 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
63
negatively affected, and will continue to negatively affect, C-band sales.
However, EchoStar believes that many consumers may continue to choose to
purchase C-band systems for the next several years because of the remaining
orbital life of existing C-band satellites, the amount and quality of
programming available, and the continuing marketing efforts by programmers and
others designed to attract and retain C-band subscribers, among other factors.
Internationally, EchoStar competes against a variety of manufacturers and
distributors in different countries. In certain regions, EchoStar has a small
market share, while in others, such as Africa, EchoStar believes that it has a
larger market share than any of its competitors. In some markets, EchoStar
cannot effectively compete due to local restrictions on foreign companies and
due to the necessity of using proprietary products for which EchoStar does not
hold licenses.
DTH PROGRAMMING. EchoStar competes with many large DTH programming
packages, some of which are affiliated with well-known, large program
originators, and some of which are affiliated with cable operators. EchoStar
competes by offering promotional programming packages in conjunction with its
sales of DTH systems. Since a significant portion of EchoStar's programming
sales are generated through DTH retailers, EchoStar also competes for retailer
relationships on the basis of commission rates and quality of service offered to
the retailer and its customers. In addition, the programming market faces
competition from cable television as well as emerging technologies such as DBS
services, wireless cable systems, and others. The largest competitors of
EchoStar in programming distribution include NetLink Satellite USA, owned by
TCI, SuperStar Satellite Entertainment, National Programming Service, Turner
Home Satellite, Inc., HBO Direct, Inc. and Showtime Satellite Networks. These
competitors have substantially greater financial resources than EchoStar, have
substantially more subscribers, and are therefore able to obtain more favorable
pricing from programmers than EchoStar.
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
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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.
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 119 DEG. WL. ESC also has a
conditional construction permit for 11 unspecified western frequencies.
EchoStar's subsidiary DirectSat has a license to cover ten additional
frequencies at the 119 DEG. WL orbital location. The FCC also has issued
DirectSat a conditional permit for one frequency at 110 DEG. WL and 11
frequencies at 175 DEG. WL. DBSC holds a conditional construction permit and
specific orbital slot assignments for 11 DBS frequencies at each of 61.5 DEG. WL
and 175 DEG. WL.
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 20, 2002.
EchoStar's FCC permits are conditioned on satisfaction of ongoing due
diligence, construction, reporting and related obligations. There can be no
assurance that EchoStar will be able to comply with the FCC's due diligence
obligations or that the FCC will determine that 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 119 DEG. 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 119.2 DEG. WL and 118.8 DEG. 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 119.05 DEG. WL and EchoStar II at 118.95 DEG. 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 118.8 DEG. 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
65
penalties on EchoStar. If the FCC denied the STA, EchoStar believes that 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, the EchoStar system's digital transmissions) 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 II, and EchoStar has cooperated, and
continues to cooperate, with the FCC in the preparation of its responses to any
ITU requests. 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 118.8 DEG. WL and for approval of certain modifications
made to the design of that satellite. In a separate order issued on the same
date in File No. 53-SAT-ML-95, the International Bureau granted DirectSat
conditional authority to use 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 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
66
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.
EchoStar III was launched on October 5, 1997 pursuant to FCC authority which
was conditionally granted by the September 29, 1997 order of the FCC's
International Bureau. The International Bureau's September 29, 1997 order also
conditionally granted DBSC an STA to test all transponders on EchoStar III for
the earlier of eight weeks after launch or seven days prior to the launch of a
satellite to that orbital location by an authorized entity. The International
Bureau's order is subject to review by the full Commission and ultimately the
Court of Appeals, and there can be no assurance that the order will not be
challenged, or that any such challenges will not be successful. EchoStar also
expects to file applications for authority to operate the satellite as well as
feeder link earth stations and antennas for TT&C communications with EchoStar
III. On October 3, 1997 EchoStar also filed an application for authority to
operate one of the earth station antennas that it plans to deploy for TT&C and
feeder link communications with EchoStar III. There can be no assurance that
this application will be granted. On that same date, EchoStar filed a request
for an STA to allow it to begin testing that antenna immediately upon the launch
of EchoStar III. On the same date, the FCC staff verbally gave EchoStar a 90-day
STA to conduct such testing subject to certain power restrictions.
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 can be 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.
On July 18, 1997, EchoStar filed a request for an STA to use the 11 channels
assigned to Tempo at the 119 DEG. WL orbital location, on the ground that Tempo,
while it launched a satellite to that location on March 8, 1997, has not yet
started providing service. Tempo has opposed this request on several grounds,
including that it is currently testing its satellite. There can be no assurance
that the FCC will grant EchoStar's request.
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 License on the
ground that the supplemental financial
67
information, filed by ESC in response to the 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) 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.
EchoStar has also been granted a conditional 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 85 DEG. WL and 91 DEG. 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.
On August 20, 1997, GE Americom filed an application requesting modification
of its license for a C-band/Ku-band satellite currently located at 89 DEG. WL,
to allow relocation of that satellite to 83 DEG.WL. In support of that request,
GE has argued that the license for that satellite is set to expire before
EchoStar's FSS satellite is expected to be launched to that location. EchoStar
has opposed the modification application, but has stated that it would not
oppose a request for temporary relocation of GE's satellite to that slot on an
STA basis.
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 148 DEG. 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
68
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.
FOREIGN OWNERSHIP LIMITATIONS. The Communications Act of 1934, as amended,
and the FCC's implementing regulations provide that, where subsidiaries of a
holding company hold certain types of FCC licenses, foreign nationals or their
representatives may not own in excess of 25% of the total equity of the holding
company, considered on a fully-diluted basis, except upon an FCC public interest
determination. While the FCC's International Bureau has ruled that these
limitations do not apply to DBS authorizations, the ruling has been challenged
and the question remains open. Furthermore, the limitations will apply to
EchoStar's FSS authorizations if EchoStar holds itself out as a common carrier
or if the FCC decides to treat it as such a carrier.
A recent survey of EchoStar's equity owners discloses that EchoStar's
foreign ownership in May of this year was under 5%, well below these
limitations, if they were to apply. However, if the purchase by foreigners or
their representatives of EchoStar's existing or new equity securities or
exercise of any right to convert existing or new securities, including the
securities issued in the Offerings, would cause the foreign ownership
limitations to be exceeded, a separate FCC determination that such ownership was
consistent with the public interest would be required in order to avoid a
violation of the Act and/or the FCC's rules.
LIMITATIONS ON TRANSFER OF CONTROL AND ASSIGNMENT OF LICENSES. The
Communications Act of 1934, as amended, requires prior FCC approval of transfers
of control over, or assignment of Title III licenses. If the purchase of the
securities subject to the Offerings (or exercise of the right to convert the
Preferred Stock) would result in a transfer of control over the FCC licenses and
permits, such transfer would require prior approval of the FCC.
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.
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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
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 availability) 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 by DBS licensees,
including, at a minimum, reasonable and non-discriminatory access by qualified
candidates for election to public 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 "statutory" (or
compulsory) copyright license that generally 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", with respect
to a particular television network, is defined as one that cannot receive an
over-the-air network signal of "grade B" intensity (a predictive standard of
signal intensity employed by the FCC) of a primary network station affiliated
with that network 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 the signal of an affiliate of that network.
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. On
August 28, 1997, a Copyright Arbitration Royalty Panel ("CARP"), appointed to
recommend royalties for satellite retransmission of network-affiliated
television and superstation signals pursuant to the compulsory license of
Section 119 of the Copyright Act, delivered its Report to the Librarian of
Congress. In the CARP's recommendation, which must be either adopted or changed
by the Copyright Office within 60 days from August 28, 1997, the CARP held it
has no jurisdiction to set royalties for local satellite retransmissions of the
signals of network-affiliated television stations, on the ground that the
compulsory license of the Copyright Act does not extend to such retransmissions.
While EchoStar has petitioned the Librarian to modify the CARP report, the
petition has been opposed, and there can be no assurance that the petition will
be granted. Moreover, EchoStar is continuing its efforts to secure passage of
legislation that will clarify and extend the scope of the compulsory license
with respect to local network signals. There can be no assurance that EchoStar
will be successful in these efforts. If the CARP's position is upheld by the
Librarian and legislation to clarify and extend the scope of the compulsory
license is not passed, EchoStar would be prevented from relying on the
compulsory copyright license to retransmit local network-affiliated
70
stations' signals and may have to engage in the relatively cumbersome process of
negotiating and obtaining copyright licenses from all individual copyright
holders instead.
The CARP also recommended setting at zero the royalty rate for local
retransmissions of superstation signals. This recommendation may be considered
favorable to EchoStar because it may provide a basis for the proposition that
the royalty rate for all local-into-local retransmission (to the extent
permitted) should be zero. However, there can be no assurance that the Librarian
will adopt the CARP's recommendation or that, in the absence of the legislation
whose passage is sought by EchoStar, EchoStar would be successful in any
litigation with copyright owners regarding this issue.
Subject to the foregoing considerations, 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.
In addition, in its August 28, 1997 report, the CARP recommended that the
royalty rate for satellite retransmissions of distant network-affiliated station
and distant superstation signals be set at 27 cents per subscriber per month--a
substantial increase compared to the previously applicable rates, which ranged
from 6 to 17.5 cents. While the Satellite Broadcasting & Communications
Association, of which EchoStar is a member, has requested modifications to the
CARP report, this request has been opposed, and there can be no assurance that
this request will be granted. Several Congressman have publicly voiced their
opposition to the 27 cent royalty rate recommended by CARP; a sub-committee
chairman and ranking member have requested that the Librarian of Congress stay
the CARP's recommendation for 18 months.
EchoStar believes that it may be able to pass through the recommended
increases (should they be adopted) to its customers by separately tiering the
channels involved, so that its operating margins are not substantially affected.
However, the recommended increases may adversely affect the competitiveness of
EchoStar vis-a-vis cable operators, which pay lower rates to copyright holders.
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.
PATENTS AND TRADEMARKS
EchoStar uses a number of trademarks for its products and services,
including "EchoStar-Registered Trademark-," "DISH Network-TM-," "DISH Network,"
"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.
71
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 1,650 employees at September 30, 1997, of which
approximately 1,575 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 future 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 OWNED
DESCRIPTION/USE LOCATION SQUARE FOOTAGE OR LEASED
- -------------------------------------------------------- ---------------------------- -------------- -----------
Future Corporate Headquarters........................... Littleton, Colorado 156,000 Owned
Corporate Headquarters and Warehouse Distribution Englewood, Colorado
Center................................................ 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
72
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 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 110 DEG. 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.
73
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 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.
74
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 & Tourtillott, 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,
75
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.
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.
76
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 1995 190,000 - - 14,705 15,158
Chief Executive Officer 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 1995 160,000 - 88,229 14,705 32,390
Vice President 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 1995 116,755 21,012 4,777 23,240 10,597
Financial Officer 1994 85,602 - - 10,713 -
David K. Moskowitz.......................... 1996 142,692 10,000 - 7,495 12,994
Senior Vice President and General 1995 130,000 10,000 - 28,048 13,270
Counsel 1994 125,384 - - 53,568 1,000
- ------------------------
(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.
77
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)
- ------------------------
(1) In August 1996, the Company 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 SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
NUMBER OF OPTIONS AT IN-THE-MONEY OPTIONS AT
SHARES DECEMBER 31, 1996 DECEMBER 31, 1996 (1)
ACQUIRED VALUE -------------------------- --------------------------
NAME ON EXERCISE REALIZED 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
- ------------------------
(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
78
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 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.
Effective July 1, 1997, the Executive Compensation Committee of the Board of
Directors (the "Executive Compensation Committee") voted to reprice all
outstanding options with an exercise price greater than $17.00 per share of
Class A Common Stock to $17.00 per share of Class A Common Stock. The price to
which the options were repriced exceeded the fair market value of EchoStar's
Class A Common Stock as of the date of the repricing. Options to purchase
approximately 288,000 shares of Class A Common Stock were affected by this
repricing.
LAUNCH BONUS PLAN. Effective September 9, 1996 EchoStar 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 September performance award approximated 7,390 shares. EchoStar
granted a performance award of ten shares of its Class A Common Stock to all
full-time employees with more than 90 days of service in connection with the
launch of EchoStar III, which occurred on October 5, 1997. The total number of
shares granted relative to the October performance award approximated 12,250.
401(K) PLAN. In 1983 EchoStar adopted a defined-contribution tax-qualified
401(k) plan. EchoStar'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. EchoStar may make a 50% matching contribution up to a maximum of $1,000
per participant per calendar year. EchoStar may also make an annual
discretionary profit sharing or employer stock contribution to the 401(k) plan
with the approval of the Board of Directors.
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%
79
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, EchoStar 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.
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 Series A
Preferred Stock 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.
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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 August 31, 1997
by: (i) each person known by EchoStar to be the beneficial owner of more than
five percent of any class of EchoStar's capital stock; (ii) each Director of
EchoStar; (iii) each person acting as an executive officer of EchoStar; 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
- -------------------------------------------------------------------------------------- ------------ ---------------
SERIES A 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 77.6%
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%
- ------------------------
* 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 Series A Preferred Stock held in trust for the benefit of
Mr. Ergen's minor children and other members of his family. Mr. Ergen's
spouse is the trustee for that trust.
(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 Common Stock; (iii) 410,847 shares of Class A Common Stock
issuable upon conversion of Mr. Ergen's Series A Preferred Stock; and (iv)
1,125,000 shares of Class A Common Stock issuable upon conversion of Series
A Preferred Stock held in trust for the benefit of Mr. Ergen's minor
children and other members of his family.
(4) Beneficial ownership percentage was calculated assuming exercise or
conversion of all shares of Class B Common Stock, Series A 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, 72.6%; 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%.
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(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.
(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
Series A Preferred Stock; (iii) 751 shares of Class A Common Stock held as
custodian for his minor children; and (iv) 375,000 shares of Class A Common
Stock controlled by Mr. DeFranco as general partner of a partnership.
(7) Based on information available to the Company, 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 Company, 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 Company, 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 Company, Chancellor LGT Asset
Management, Inc. owned 5.1% 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 Series A Preferred
Stock; (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.
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DESCRIPTION OF CERTAIN INDEBTEDNESS
Set forth below is a summary of certain indebtedness to which Dish, ESBC and
DBS Corp 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 EchoStar.
1994 NOTES
On June 7, 1994, Dish issued 624,000 units, consisting of the 12 7/8% Senior
Secured Discount Notes due 2004 (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 13 1/8% Senior Secured Discount Notes due 2004 (the "1996
Notes") and the 12 1/2% Senior Secured Notes due 2004 (the "1997 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 indenture relating to the 1994 Notes (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 substantially all of
their 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
83
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 EchoStar.
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.
1996 NOTES
On March 25, 1996, ESBC completed the offering related to the 1996 Notes
(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
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 indenture relating to the 1996 Notes (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.
84
The 1996 Notes Indenture permits ESBC to pay dividends and make other
distributions to EchoStar, or any of EchoStar's wholly-owned subsidiaries,
without restrictions, but restricts the ability of EchoStar to pay dividends and
make other distributions.
1997 NOTES
On June 25, 1997, DBS Corp completed the offering related to the 1997 Notes
(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 $363.8 million (after payment of underwriting discount
and other issuance costs aggregating approximately $11.2 million). The 1997
Notes bear interest at a rate of 12 1/2%, computed on a semi-annual bond
equivalent basis. Interest on the 1997 Notes is payable in cash semi-annually on
January 1 and July 1 of each year, commencing January 1, 1998. The 1997 Notes
mature 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 EchoStar, and contingent upon the occurrence of certain events, will be
guaranteed by ESBC and Dish and certain other subsidiaries of DBS Corp and
EchoStar. The 1997 Notes are secured by liens on the capital stock of DBS Corp,
the EchoStar IV satellite 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 indebtedness to which the 1997 Notes would
be senior; and (ii) the 1997 Notes are effectively subordinated to all
liabilities of DBS Corp's subsidiaries, including liabilities to general
creditors (except to the extent that any subsidiary of DBS Corp may guarantee
the 1997 Notes), and the guarantee of EchoStar is effectively subordinated to
all liabilities of EchoStar, except liabilities to general creditors.
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 are subject to
redemption, at the option of DBS Corp, in whole or in part, at redemption prices
ranging from 106.5625% during the twelve month period commencing July 1, 2000 to
100% on or after July 1, 2002
In the event of a change of control, as described in the 1997 Notes
Indenture, DBS Corp will be required to make an offer to each holder of 1997
Notes to repurchase all of such holder's 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.
The indenture relating to the 1997 Notes (the "1997 Notes Indenture")
contains restrictive covenants that, among other things, impose limitations on
DBS Corp 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 DBS Corp's subsidiaries; (vi) merge,
consolidate or sell assets; and (vii) enter into transactions with affiliates.
85
DESCRIPTION OF ECHOSTAR CAPITAL STOCK
GENERAL
Pursuant to EchoStar's Amended and Restated Articles of Incorporation, as in
effect on the date hereof, EchoStar's authorized capital stock consists of: (i)
400,000,000 shares of common stock, of which 200,000,000 shares are designated
"Class A Common Stock," 100,000,000 shares are designated "Class B Common
Stock," and 100,000,000 shares are designated "Class C Common Stock;" and (ii)
20,000,000 shares of preferred stock, including the following series which have
been authorized: 1,616,681 shares of Series A Preferred Stock and 900,000 shares
of Series B Preferred Stock. As of October 7, 1997, 11,870,521 shares of Class A
Common Stock were issued and outstanding and held of record by 2,334
stockholders, 29,804,401 shares of Class B Common Stock were issued and
outstanding and held of record by Charles W. Ergen, EchoStar's President and
Chief Executive Officer, and no shares of Class C Common Stock were issued and
outstanding. At October 7, 1997, there were 1,616,681 shares of Series A
Preferred Stock outstanding held by Messrs. Ergen and DeFranco, and 200,000
shares of Series B Preferred Stock outstanding held by certain qualified
institutional buyers. See "Security Ownership of Certain Beneficial Owners and
Management." All outstanding shares of the Class A Common Stock and Class B
Common Stock are fully paid and nonassessable. The designation and the powers,
preferences and rights of the shares of each class of common stock and each
series of preferred stock and the qualifications, limitations and restrictions
thereof are as set forth below.
The transfer agent for EchoStar's capital stock, including the Class A
Common Stock, is American Securities Transfer & Trust, Inc.
CLASS A COMMON STOCK
Each holder of Class A Common Stock is entitled to one vote for each share
of Class A Common Stock owned of record on all matters submitted to a vote of
stockholders. Except as otherwise required by law, the Class A Common Stock
votes together with the Class B Common Stock, the Class C Common Stock and the
Series A Preferred Stock on all matters submitted to a vote of stockholders.
Subject to the preferential rights of any outstanding series of Preferred Stock
and to the restrictions on payment of dividends imposed by the 1994 Notes, the
1996 Notes and the 1997 Notes (see "Description of Certain Indebtedness") and
any other indebtedness of EchoStar, the holders of Class A Common Stock are
entitled to such dividends as may be declared from time to time by the Board of
Directors from funds legally available therefor, and, together with the holders
of the Class B Common Stock, are entitled, after payment of all prior claims, to
receive pro rata all assets of EchoStar upon the liquidation, dissolution or
winding up of EchoStar. Holders of Class A Common Stock have no redemption,
conversion or preemptive rights.
CLASS B COMMON STOCK
Each holder of Class B Common Stock is entitled to ten votes for each share
of Class B Common Stock on all matters submitted to a vote of stockholders.
Except as otherwise required by law, the Class B Common Stock votes together
with the Class A Common Stock, the Class C Common Stock and the Series A
Preferred Stock on all matters submitted to a vote of the stockholders. Each
share of Class B Common Stock is convertible, at the option of the holder, into
one share of Class A Common Stock. The conversion ratio is subject to adjustment
from time to time upon the occurrence of certain events, including: (i)
dividends or distributions on Class A Common Stock payable in Class A Common
Stock or certain other capital stock; (ii) subdivisions, combinations or certain
reclassifications of Class A Common Stock; and (iii) issuances of rights,
warrants or options to purchase Class A Common Stock at a price per share less
than the fair market value of the Class A Common Stock. Each share of Class B
Common Stock is entitled to receive dividends and distributions upon liquidation
on a basis equivalent to that of the Class A Common Stock.
86
CLASS C COMMON STOCK
Each holder of Class C Common Stock is entitled to one vote for each share
of Class C Common Stock on all matters submitted to a vote of stockholders.
Except with respect to transactions involving the issuance of capital stock
which negatively affect the rights of holders of Series A Preferred Stock, or as
otherwise required by law, the Class C Common Stock votes together with Class A
Common Stock, the Class B Common Stock and the Series A Preferred Stock on all
matters submitted to a vote of the stockholders. Each share of Class C Common
Stock is convertible into Class A Common Stock on the same terms as the Class B
Common Stock. Each share of Class C Common Stock is entitled to receive
dividends and distributions upon liquidation on a basis equivalent to that of
the Class A Common Stock. Upon a Change of Control (as defined) of EchoStar,
each holder of outstanding shares of Class C Common Stock is entitled to cast
ten votes for each share of Class C Common Stock held by such holder. "Change of
Control" has the same meaning as set forth in each of the Notes Indentures. See
"Description of Certain Indebtedness." EchoStar has no present intention to
issue any shares of Class C Common Stock and, under current NASD rules, will not
be able to issue so long as the Class A Common Stock is quoted on the Nasdaq
National Market.
SERIES A PREFERRED STOCK
EchoStar's Board of Directors is authorized to divide the preferred stock
into series and, with respect to each series, to determine the preferences and
rights and the qualifications, limitations, or restrictions thereof, including
the dividend rights, conversion rights, voting rights, redemption rights and
terms, liquidation preferences, sinking fund provisions, the number of shares
constituting the series and the designation of such series. The Board of
Directors may, without stockholder approval, issue preferred stock with voting
and other rights that could adversely affect the voting power of the holders of
common stock and could have certain anti-takeover effects.
Each share of Series A 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: (i) dividends or
distributions on Class A Common Stock payable in Class A Common Stock or certain
other capital stock; (ii) subdivisions, combinations or certain
reclassifications of Class A Common Stock; and (iii) issuances of rights,
warrants or options to purchase Class A Common Stock at a price per share less
than the liquidation preference per share. The aggregate liquidation preference
for all outstanding shares of Series A Preferred Stock is limited to
approximately $15.1 million plus cumulative unpaid dividends. At June 30, 1997,
accrued and unpaid dividends on the Series A Preferred Stock totaled $3.9
million. The holders of the Series A Preferred Stock contractually subordinated
their rights to receive dividends to the Series B Preferred Stock.
Each share of Series A Preferred Stock is entitled to receive dividends
equal to eight percent per annum of the liquidation preference for such share
calculated from May 6, 1994. The 1994 Notes Indenture, the 1996 Notes Indenture,
the 1997 Notes Indenture and the Series B Preferred Stock Certificate of
Designation restrict the Company's ability to pay dividends on the Series A
Preferred Stock. The Company currently has no intention to begin paying
dividends on the Series A Preferred Stock.
Shares of Series A Preferred Stock automatically convert into shares of
Class A Common Stock in the event they are transferred to any person other than
permitted transferees. Each share of Series A Preferred Stock is entitled to the
equivalent of ten votes for each share of Class A Common Stock into which it is
convertible and, except with respect to transactions involving the issuance of
capital stock which negatively affects the rights of holders of Series A
Preferred Stock (as more particularly described in the Certificate of
Designations, Preferences and Rights for the Series A Preferred Stock) or as
otherwise required by law, votes together with the Class A Common Stock, Class B
Common Stock and Class C Common Stock as a single class on all matters submitted
to a vote of stockholders.
SERIES B PREFERRED STOCK
In 1997, EchoStar established from authorized preferred stock its Series B
Preferred Stock consisting of 900,000 shares authorized, and issued 200,000
shares to qualified institutional buyers. Each share of
87
Series B Preferred Stock is entitled to dividends at 12 1/8% per annum, payable
when, as, and if declared quarterly in cash or, at the sole discretion of
EchoStar, in additional shares of Series B Preferred Stock, on each January 1,
April 1, July 1 and October 1 of each year, commencing January 1, 1998. The
liquidation preference of the Series B Preferred Stock is $1,000 per share, plus
accumulated and unpaid dividends. On or after July 1, 2000, the Series B
Preferred Stock will be redeemable in cash, at the option of EchoStar, in whole
or in part, at a price equal to the redemption price (expressed as a percentage
of the liquidation preference thereof), together with accumulated and unpaid
dividends thereon to the applicable redemption date. At any time prior to July
1, 2000, EchoStar may, subject to and upon compliance with certain conditions,
redeem shares of Series B Preferred Stock at a redemption price, payable in cash
(expressed as a percentage of the liquidation preference thereof, plus an amount
equal to a prorated dividend for the period from the dividend payment date
immediately prior to the redemption date), with the net proceeds of one public
or private sale of equity interests of EchoStar or any of its subsidiaries. The
Series B Preferred Stock will be subject to mandatory redemption in whole on
July 1, 2004 at a price, payable in cash, equal to the liquidation preference
thereof, plus all accumulated and unpaid dividends to the date of redemption.
Upon the occurrence of a Change of Control (as such term is defined in the
Certificate of Designation for the Series B Preferred Stock), EchoStar will be
required, provided certain conditions are met, to make an offer to each holder
of Series B Preferred Stock to repurchase all or any part of such holder's
Series B Preferred Stock at a cash purchase price equal to 101% of the
liquidation preference thereof, plus accumulated and unpaid dividends to the
date of repurchase.
The Series B Preferred Stock ranks: (i) senior to all common stock of
EchoStar and to each series of preferred stock existing on September 26, 1997
and to each other class of capital stock or series of preferred stock issued by
EchoStar, which is established after September 26, 1997, the terms of which do
not expressly provide that it ranks senior to or on a parity with Series B
Preferred Stock; (ii) subject to certain conditions, on a parity with any class
of capital stock or series of preferred stock issued by EchoStar, which is
established after September 26, 1997, the terms of which expressly provide that
such class or series will rank on a parity with the Series B Preferred Stock;
and (iii) subject to certain conditions, junior to each class of capital stock
or series of preferred stock issued by EchoStar, which is established after
September 26, 1997, the terms of which expressly provide that such class or
series will rank senior to the Series B Preferred Stock.
Holders of the Series B Preferred Stock have no voting rights with respect
to general corporate matters except as provided by law or set forth in the
certificate of designation for the Series B Preferred Stock. The certificate of
designation for the Series B Preferred Stock restricts, among other things, the
ability of EchoStar and certain of its subsidiaries to (i) pay dividends with
the proceeds from the offering of the Series B Preferred Stock, (ii) pay cash
dividends on any junior or parity securities and (iii) incur indebtedness or
pledge the stock of certain subsidiaries as collateral. The Series B Preferred
Stock has not been registered under the Securities Act and is subject to certain
conditions on transfer.
Subject to certain conditions, the Series B Preferred Stock is exchangeable
into additional shares of Series B Preferred Stock or shares of a new series of
preferred stock with substantially identical rights and preferences or into
Series B Exchange Notes, in an aggregate principal amount equal to the aggregate
liquidation preference of, plus accumulated but unpaid dividends on, the Series
B Preferred Stock to the date of exchange, at any time at the option of
EchoStar, in whole, but not in part. Each Series B Exchange Note will bear
interest at 12 1/8% per annum and interest is payable on April 1 and October 1
of each year. EchoStar will pay interest on the Series B Exchange Notes in
additional Series B Exchange Notes or in cash. On or after July 1, 2000, the
Series B Exchange Notes will be redeemable in cash, at the option of EchoStar,
in whole or in part, at a price equal to the redemption price (expressed as a
percentage of the principal amount thereof), together with accrued and unpaid
interest thereon to the applicable redemption date. At any time prior to July 1,
2000, EchoStar may redeem Series B Exchange Notes at a redemption price, payable
in cash, equal to 112.125% of the principal amount thereof, together with
accrued and
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unpaid interest thereon to the redemption date, with net proceeds of one public
or private sale of equity interests of EchoStar or any of its subsidiaries.
Upon the occurrence of a Change of Control (as such term is defined in the
Indenture for the Series B Exchange Notes), EchoStar will be, provided certain
conditions are met, required to make an offer to each holder of Series B
Exchange Notes to repurchase all or any portion of such holder's Series B
Exchange Notes at a cash purchase price equal to 101% of the principal amount
thereof, plus accrued and unpaid interest thereon to the date of repurchase. In
addition, upon the occurrence of an certain events, EchoStar will be, provided
certain conditions are met, required to make an offer to repurchase one-half of
all outstanding Series B Exchange Notes at a cash purchase price of 101% of the
aggregate principal amount thereof, together with accrued and unpaid interest
thereon to the date of purchase. The holders of the Series B Preferred Stock are
entitled to certain registration rights pursuant to a Registration Rights
Agreement.
SERIES C PREFERRED STOCK
Concurrently with the Common Stock Offering, EchoStar is also offering by
means of a separate prospectus 2,000,000 shares of % Series C Cumulative
Convertible Preferred Stock. The liquidation preference of the Preferred Stock
is $50 per share (the "Liquidation Preference").
Simultaneously with the closing of the Preferred Offering, the purchasers of
the Preferred Stock will deposit approximately $ million into an account (the
"Deposit Account"), and will be entitled to a quarterly cash payment from the
Deposit Account in an amount equal to $ per share of Preferred Stock (the
"Quarterly Return Amount"), commencing , 1998 and continuing until
, 1999. After such date, dividends will begin to accrue on the Preferred
Stock. EchoStar may, prior to the date on which any Quarterly Return Amount
would otherwise be payable, deliver notice instructing the deposit agent (i) to
purchase from EchoStar, for transfer to each holder of Preferred Stock, in lieu
of the Quarterly Return Amount, that number of whole shares of Class A Common
Stock determined by dividing the Quarterly Return Amount by 95% of the Market
Value of the Class A Common Stock as of the date of such notice or (ii) defer
delivery of the Quarterly Return Amount to holders of Preferred Stock on such
quarterly payment date until the next quarterly payment date or any subsequent
payment date. However, no later than , 1999 (the "Deposit Expiration
Date"), any amounts remaining in the Deposit Account, as of such date, or which
have previously been deferred, will be (i) paid to the holders of the Preferred
Stock or (ii) used to purchase from EchoStar for transfer to each holder of
Preferred Stock that number of whole shares of Class A Common Stock determined
by dividing the balance remaining in the Deposit Account by 95% of the Market
Value of the shares of Class A Common Stock as of the Deposit Expiration Date.
Dividends on the Preferred Stock will accrue from , 1999, and
holders of the Preferred Stock will be entitled to receive cumulative dividends
at an annual rate of % of the Liquidation Preference, payable quarterly in
arrears, commencing , 2000. Dividends may, at the option of EchoStar,
be paid in cash, by delivery of fully paid and nonassessable shares of Class A
Common Stock, or a combination thereof. The Preferred Stock is redeemable at any
time on or after , 2000, in whole or in part, at the option of EchoStar,
in cash, by delivery of fully paid and nonassessable shares of Class A Common
Stock, or a combination thereof, initially at a price of $ per share and
thereafter at prices declining to $ per share on or after , 2004, plus in
each case all accumulated and unpaid dividends to the redemption date.
Upon any Change of Control holders of Preferred Stock will, in the event
that the Market Value at such time is less than the Conversion Price, have a one
time option to convert all of their outstanding shares into shares of Class A
Common Stock at an adjusted conversion price equal to the greater of (i) the
Market Value as of the Change of Control Date and (ii) 66.67% of the Market
Value as of the date of this Prospectus. In lieu of issuing the shares of Class
A Common Stock issuable upon conversion in the event of a Change of Control,
EchoStar may, at its option, make a cash payment equal to the Market Value of
such Class A Common Stock otherwise issuable.
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The Preferred Stock is convertible at any time, unless previously redeemed,
at the option of the holder thereof, into such number of whole shares of Class A
Common Stock as is equal to the Liquidation Preference divided by an initial
conversion price of $ , subject to adjustment under certain circumstances.
The Preferred Stock will rank prior to the Class A Common Stock and senior
or PARI PASSU with other existing and future offerings of preferred stock in
right of payment. Holders of the Preferred Stock have no voting rights with
respect to general corporate matters except as provided by law or as set forth
in the Certificate of Designation for the Preferred Stock. The affirmative vote
or consent of holders of at least 66 2/3% of the outstanding Preferred Stock
will be required for the issuance of any class or series of stock (or security
convertible into stock) of EchoStar ranking senior to or PARI PASSU with the
Preferred Stock as to dividends or liquidation rights (other than additional
shares of Series B Preferred Stock or certain PARI PASSU securities with an
aggregate liquidation preference not to exceed $100 million) and for amendments
to EchoStar's Articles of Incorporation that would affect adversely the rights
of holders of the Preferred Stock.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
The Amended and Restated Articles of Incorporation provide that a director
of EchoStar will not be personally liable to EchoStar or its stockholders for
monetary damages for any breach of fiduciary duty as a director, except in
certain cases where liability is mandated by the Nevada General Corporate Law
("NGCL"). The provision has no effect on any non-monetary remedies that may be
available to EchoStar or its stockholders, nor does it relieve EchoStar or its
directors from compliance with federal or state securities laws. The Amended and
Restated Articles of Incorporation and the By-Laws of EchoStar provide for
indemnification, to the fullest extent permitted by the NGCL, of any person who
is or was involved in any manner in any investigation, claim or other proceeding
by reason of the fact that such person is or was a director or officer of
EchoStar, or is or was serving at the request of EchoStar as a director or
officer of another corporation, against all expenses and liabilities actually
and reasonably incurred by such person in connection with the investigation,
claim or other proceeding 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 such
person's duty to EchoStar.
NEVADA LAW AND LIMITATIONS ON CHANGES IN CONTROL
The NGCL prevents an "interested stockholder" (defined in Section 78.423 of
the NGCL, generally, as a person owning 10% or more of a corporation's
outstanding voting stock) from engaging in a "combination" (as defined in
Section 78.416) with a publicly-held Nevada corporation for three years
following the date such person became an interested stockholder unless, before
such person became an interested stockholder, the board of directors of the
corporation approved the transaction in which the interested stockholder became
an interested stockholder or approves the combination.
The provisions authorizing the Board of Directors to issue Preferred Stock
without stockholder approval and the provisions of the NGCL relating to
combinations with interested stockholders could have the effect of delaying,
deferring or preventing a change in control of EchoStar or the removal of
existing management. Each of the Notes Indentures for the 1994, 1996 and 1997
Notes also contains provisions with respect to a change of control of EchoStar.
See "Description of Certain Indebtedness." The Series B Preferred Stock
certificate of designation also contains certain change of control provisions.
Charles W. Ergen, President and Chief Executive Officer of EchoStar, owns
29,804,401 shares of Class B Common Stock, which constitute all of the
outstanding shares of such stock. These shares are transferable to other persons
subject to securities laws limitations. In the event Mr. Ergen transferred
approximately 50.8% or more of his shares of Class B Common Stock, a change in
control of EchoStar would result and Mr. Ergen would receive any premium paid
for control of EchoStar. In addition, any such change in control would result in
an obligation on the part of EchoStar to offer to purchase at a premium all 1994
Notes. See "Description of Certain Indebtedness."
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UNDERWRITING
Subject to certain conditions contained in the underwriting agreement (the
"Underwriting Agreement"), a syndicate of underwriters named below (the
"Underwriters"), for whom Donaldson, Lufkin & Jenrette Securities Corporation
and BT Alex. Brown Incorporated are acting as representatives (the
"Representatives"), have severally agreed to purchase from EchoStar all of the
shares offered in the Common Offering. The number of shares of Class A Common
Stock that each Underwriter has agreed to purchase is set forth opposite its
name below:
NUMBER OF SHARES
UNDERWRITER OF CLASS A COMMON STOCK
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