AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 15, 1997
REGISTRATION NO. 333- 31929
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
________________________
POST-EFFECTIVE AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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ECHOSTAR DBS CORPORATION
(Exact name of registrant as specified in its charter)
COLORADO 84-1328967
(State of Registrant's Incorporation) (I.R.S. Employer Identification No.)
and affiliate guarantors
EchoStar Communications Corporation
EchoStar Satellite Broadcasting Corporation
Dish, Ltd.
(Exact name of registrants as specified in their respective charters)
NEVADA 88-0336997
COLORADO 84-1337871
NEVADA 88-0312499
(State of Registrant's Incorporation) (I.R.S. Employer Identification No.)
5064
(Registrant's Standard Industrial Classification Code Number)
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DAVID K. MOSKOWITZ, ESQ.
90 INVERNESS CIRCLE EAST SENIOR VICE PRESIDENT, GENERAL COUNSEL AND SECRETARY
ENGLEWOOD, COLORADO 80112 ECHOSTAR COMMUNICATIONS CORPORATION
(303) 799-8222 90 INVERNESS CIRCLE EAST
(Address, Including Zip Code, and Englewood, Colorado 80112
Telephone Number, including Area Code, (303) 799-8222
of Registrant's Principal Executive Office) (Name, Address, Including Zip Code, and
Telephone Number of Agent for Service)
COPIES TO:
WILLIAM APPLETON, ESQ. WILLIAM F. SCHWITTER, ESQ.
BAKER & HOSTETLER LLP PAUL, HASTINGS, JANOFSKY & WALKER LLP
3200 NATIONAL CITY CENTER 399 PARK AVENUE.
1900 E. 9TH STREET NEW YORK, NEW YORK 10022-4697
CLEVELAND, OHIO 44114-3485 (212) 318-6000
(216) 621-0200
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this registration statement.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
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CALCULATION OF REGISTRATION FEE
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PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF SECURITIES TO BE AMOUNT TO BE OFFERING PRICE PER AGGREGATE OFFERING AMOUNT OF
REGISTERED REGISTERED UNIT PRICE REGISTRATION FEE
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12 1/2% Senior Secured Notes due 2002........ $375,000,000 100% $375,000,000 $113,637
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Guarantees of 12 1/2% Senior Secured Notes
due 2002..................................... $375,000,000 (1) $375,000,000 (1)
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Total ....................................... $375,000,000 100% $375,000,000 $113,637
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(1) No additional consideration will be paid by the recipients of the 12 1/2%
Senior Secured Notes due 2002 for the Guarantees. Pursuant to Rule 457(n)
under the Securities Act of 1933, no separate fee is payable for the
Guarantees.
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION,
ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
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ECHOSTAR DBS CORPORATION
CROSS-REFERENCE SHEET
PURSUANT TO ITEM 501(b) OF REGULATION S-K
ITEM
NUMBER ITEM LOCATION IN PROSPECTUS
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A. INFORMATION ABOUT THE TRANSACTION
1. Forepart of the Registration
Statement and Outside Front Cover Facing Page; Cross-Reference Sheet;
of Page of Prospectus ................. Outside Front Cover Page of Prospectus
2. Inside Front and Outside Back Cover
Pages of Prospectus .................. Inside Front Cover Page of Prospectus
and Outside Back Cover Page of Prospectus
3. Risk Factors and Ratio of Earnings
to Fixed Charges and Other........... Prospectus Summary; Summary
Information Financial Data; Selected Financial Data;
Risk Factors
4. Terms of the Transaction.............. Prospectus Summary; The Exchange
Offer; Description of the Exchange Notes;
Certain Federal Income Tax Consequences;
Plan of Distribution
5. Pro Forma Financial ................... Not Applicable
Information
6. Material Contracts with Company
Being Acquired........................ Not Applicable
7. Additional Information Required for
Reoffering by Persons and Parties
Deemed to Be Underwriters ............ Not Applicable
8. Interest of Named Experts and
Counsel.............................. Not Applicable
9. Disclosure of Commission Position
on Indemnification for Securities
Act Liabilities...................... Not Applicable
B. INFORMATION ABOUT THE REGISTRANT
10. Information with Respect to S-3
Registrants......................... Not Applicable
11. Incorporation of Certain Information
by Reference........................ Not Applicable
12. Information with Respect to S-2 or
S-3 Registrants..................... Not Applicable
13. Incorporation of Certain Information
by Reference........................ Not Applicable
14. Information with Respect to Registrants
Other Than S-3 or S-2 Registrants.... Available Information; Prospectus
Summary; Selected Financial Data;
Management's Discussion and Analysis
of Financial Condition and Results of
Operations; Business; Index to
Consolidated Financial Statements
C. INFORMATION ABOUT THE COMPANY
BEING ACQUIRED
15. Information with Respect to S-3
Companies............................ Not Applicable
16. Information with Respect to S-2 or
S-3 Companies........................ Not Applicable
17. Information with Respect to
Companies Other Than S-2 or S-3
Companies........................... Not Applicable
D. VOTING AND MANAGEMENT INFORMATION
18. Information if Proxies, Consents or
Authorizations are to be Solicited... Not Applicable
19. Information if Proxies, Consents or
Authorizations are not to be
Solicited in an Exchange............. The Exchange Offer; Certain
Relationships Offer and Related
Transactions; Security Ownership
of Certain Beneficial Owners
and Management
PROSPECTUS
ECHOSTAR DBS CORPORATION
OFFER TO EXCHANGE $1,000 PRINCIPAL AMOUNT OF ITS
12 1/2% SENIOR SECURED NOTES DUE 2002
WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT
FOR EACH $1,000 IN PRINCIPAL AMOUNT OF ITS
OUTSTANDING 12 1/2% SENIOR SECURED NOTES DUE 2002
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., EASTERN TIME,
ON JANUARY 8, 1998, UNLESS EXTENDED
EchoStar DBS Corporation, a Colorado corporation (the "Issuer"), hereby
offers to exchange (the "Exchange Offer") up to $375,000,000 in aggregate
principal amount of its new 12 1/2% Senior Secured Notes due 2002 (the "Exchange
Notes") for up to $375,000,000 in aggregate principal amount of its outstanding
12 1/2% Senior Secured Notes due 2002 (the "Old Notes" and, together with the
Exchange Notes, the "Notes") that were issued and sold in a transaction exempt
from registration under the Securities Act of 1933, as amended (the "Securities
Act").
The terms of the Exchange Notes are substantially identical (including principal
amount, interest rate, maturity, security and ranking) to the terms of the Old
Notes for which they may be exchanged pursuant to the Exchange Offer, except
that the Exchange Notes: (i) are freely transferable by holders thereof (except
as provided below); and (ii) are not entitled to certain registration rights and
certain liquidated damages which are applicable to the Old Notes under the
Registration Rights Agreement (as defined). The Exchange Notes will be issued
under the indenture governing the Old Notes (the "Indenture"). The Notes rank
PARI PASSU in right of payment with all senior indebtedness of the Issuer. The
Notes are guaranteed on a subordinated basis by EchoStar Communications
Corporation ("EchoStar"), the Issuer's direct parent, (the "EchoStar Guarantee")
and, contingent upon the occurrence of certain events, will be guaranteed by
EchoStar Satellite Broadcasting Corporation ("ESBC," issuer of the 1996 Notes),
a direct, wholly-owned subsidiary of the Issuer, and Dish, Ltd. ("Dish," issuer
of the 1994 Notes), a direct, wholly-owned subsidiary of ESBC, and certain other
subsidiaries of the Issuer and EchoStar (the "Guarantors" and, collectively with
the EchoStar Guarantee, the "Guarantees"). The Notes are secured by liens on
the capital stock of the Issuer, the EchoStar IV satellite and certain other
assets of the Issuer. See "Description of Exchange Notes - Security." Although
the Notes are titled "Senior": (i) the Issuer has not issued, and does not have
any plans to issue, any indebtedness to which the Notes would be senior; and
(ii) the Notes are effectively subordinated to all liabilities of the Issuer's
subsidiaries, including liabilities to general creditors (except to the extent
that any subsidiary of the Issuer may guarantee the Notes), and the EchoStar
Guarantee is subordinated to all liabilities of EchoStar (except liabilities to
general creditors). As of June 30, 1997, including the effect of the offering
of the Old Notes (the "Old Notes Offering"), the consolidated liabilities of
EchoStar and its subsidiaries aggregated approximately $1.6 billion.
Approximately $1.2 billion of the consolidated liabilities of EchoStar and its
subsidiaries (including liabilities of the Issuer) are effectively senior in
right of payment to the Notes. EchoStar and its subsidiaries do not have any
liabilities which rank either junior to or PARI PASSU with the Notes. In
addition the ability of Dish to make distributions to the Issuer is severely
limited by the terms of the 1994 Indenture (as defined), and the cash flow
generated by the assets and operations of the Issuer's subsidiaries will
therefore only be available to satisfy the Issuer's obligations on the Notes to
the extent that such subsidiaries are able to make distributions, directly or
indirectly, to the Issuer. In this regard, as of June 30, 1997, the guarantee of
Dish is effectively subordinated to approximately $900.0 million of indebtedness
of Dish and its subsidiaries. Upon full accretion of the 1994 Notes, the
guarantee of Dish will be effectively subordinated to at least an additional
approximately $156.8 million of indebtedness of Dish and its subsidiaries solely
as a result of the accretion of the 1994 Notes. Additionally, the 1994
Indenture places severe limitations on the incurrence of additional indebtedness
(including the guarantee of indebtedness) by Dish and its subsidiaries until
such time as their consolidated indebtedness to cash flow ratio would not exceed
4.0 to 1 after taking the issuance of the indebtedness into account. As of
June 30, 1997, Dish and its subsidiaries do not meet this ratio of
(CONTINUED ON NEXT PAGE)
________________________
HOLDERS OF OLD NOTES SHOULD CAREFULLY CONSIDER THE MATTERS SET FORTH IN "RISK
FACTORS" COMMENCING ON PAGE 20 OF THIS PROSPECTUS PRIOR TO MAKING A DECISION
WITH RESPECT TO THE EXCHANGE OFFER.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
________________________
The date of this Prospectus is October 10, 1997
(COVER PAGE CONTINUED)
indebtedness to cash flow. Accordingly, as of June 30, 1997, the guarantee of
Dish is not in effect and Dish and its subsidiaries are not able to make
distributions to the Issuer. While the 1996 Indenture (as defined) permits ESBC
to pay dividends and make other distributions to the Issuer without
restrictions, as of June 30, 1997, the guarantee of ESBC is effectively
subordinated to approximately $1.2 billion of indebtedness of ESBC and its
subsidiaries. Upon full accretion of the 1994 and 1996 Notes, the guarantee of
ESBC will be effectively subordinated to at least an additional approximately
$325.5 million of indebtedness of ESBC and its subsidiaries solely as a result
of the accretion of the 1994 and 1996 Notes. Further, the 1996 Indenture places
severe limitations on the incurrence of additional indebtedness (including the
guarantee of indebtedness) by ESBC and its subsidiaries until such time as their
consolidated indebtedness to cash flow ratio would not exceed 5.0 to 1 after
taking the issuance of the indebtedness into account. As of June 30, 1997, ESBC
and its subsidiaries do not meet this ratio of indebtedness to cash flow.
Accordingly, as of June 30, 1997, the guarantee of ESBC is not in effect.
Therefore, there can be no assurance that the guarantees of Dish and ESBC will
ever provide additional collateral to the holders of Notes. See "Description of
Certain Indebtedness."
Concurrently with the closing of the Old Notes Offering, approximately
$109.0 million and $112.0 million of the net proceeds of the Old Notes Offering
were placed into an Interest Escrow Account and a Satellite Escrow Account,
respectively. Funds in the Interest Escrow Account, together with reasonably
expected proceeds from the investment thereof will be sufficient to pay the
first five semi-annual interest payments on the Notes. Funds in the Satellite
Escrow Account, together with reasonably expected proceeds from the investment
thereof, will be sufficient to fully fund, through launch, the construction,
launch and insurance of EchoStar IV. Funds may be disbursed from the escrow
accounts only upon satisfaction of applicable provisions of the Escrow and
Disbursement Agreement. The escrow accounts serve as collateral for the Notes.
For a complete description of the terms of the Exchange Notes, see "Description
of Exchange Notes." There will be no cash proceeds to the Issuer from the
Exchange Offer.
Interest on the Exchange Notes will be payable semi-annually on January 1
and July 1 of each year, commencing January 1, 1998. Holders of the Old Notes
whose Old Notes are accepted for exchange will be deemed to have waived the
right to have interest accrue, or to receive any payment in respect of interest
on the Old Notes, accrued from June 25, 1997 to the date of issuance of the
Exchange Notes.
Except as set forth below, the Notes are not redeemable at the Issuer's
option prior to July 1, 2000. Thereafter, the Notes are subject to redemption,
at the option of the Issuer, at the redemption prices set forth herein. In
addition, at any time prior to July 1, 2000, the Issuer may redeem up to one-
third of the Notes at a redemption price equal to 112.50% of the principal
amount thereof (other than Disqualified Stock) on the repurchase date, with the
net proceeds of one public or private sale of certain Equity Interests (other
than Disqualified Stock) of the Issuer, EchoStar or any of their subsidiaries
(other than proceeds from a sale to EchoStar, the Issuer or any of their
subsidiaries). In the event of a Change of Control, the Issuer is required to
make an offer to repurchase all or any part of the Notes at a purchase price
equal to 101% of the aggregate principal amount thereof, together with accrued
and unpaid interest thereon, to the date of repurchase.
The Old Notes were originally issued and sold on June 25, 1997 in a
transaction not registered under the Securities Act, in reliance upon the
exemption provided in Section 4(2) of the Securities Act and Rule 144A
promulgated under the Securities Act (the "Old Notes Offering"). Accordingly,
the Old Notes may not be reoffered, resold or otherwise pledged, hypothecated or
transferred in the United States unless so registered or unless an applicable
exemption from the registration requirements of the Securities Act is available.
Based upon its view of interpretations provided to third parties by the Staff
(the "Staff") of the Securities and Exchange Commission (the "Commission"), the
Issuer believes that the Exchange Notes issued pursuant to the Exchange Offer in
exchange for the Old Notes may be offered for resale, resold and otherwise
transferred by holders thereof (other than any holder which is: (i) an
"affiliate" of the Issuer within the meaning of Rule 405 under the Securities
Act (an "Affiliate"); (ii) a broker-dealer who acquired Old Notes directly from
the Issuer; (iii) a broker-dealer who acquired Old Notes as a result of market
making or other trading activities), without compliance with the registration
and prospectus delivery provisions of the Securities Act, provided that such
Exchange Notes are acquired in the ordinary course of such holders' business and
such holders are not engaged in, and do not intend to engage in, and have no
arrangement or understanding with any person to participate in, a distribution
of such Exchange Notes. In order to participate in the Exchange Offer, each
entity must certify to the Company in the Letter of Transmittal that it is not
an Affiliate of the Issuer, that it is not engaged in, and does not intend to
engage in, a distribution of the Exchange Notes, and that the Exchange Notes are
being acquired in the ordinary course of business. Each broker-dealer that
receives Exchange Notes for its own account pursuant to the Exchange Offer must
acknowledge that it will deliver a prospectus in connection with any resale of
Exchange Notes. The Letter of Transmittal that is filed as an exhibit to the
Registration Statement of which this Prospectus is
(CONTINUED ON NEXT PAGE)
2
(COVER PAGE CONTINUED)
a part (the "Letter of Transmittal") states that by so acknowledging and by
delivering a prospectus, a broker-dealer will not be deemed to admit that it is
an "underwriter" within the meaning of the Securities Act. Broker-dealers who
acquired Old Notes as a result of market making or other trading activities may
use this Prospectus, as supplemented or amended, in connection with resales of
the Exchange Notes. The Issuer has agreed that, for a period of 180 days after
the Registration Statement of which this Prospectus is a part is declared
effective by the Commission, it will make this Prospectus available to any
broker-dealer for use in connection with any such resale. Any holder who
tenders in the Exchange Offer for the purpose of participating in a distribution
of the Exchange Notes and any other holder that cannot rely upon interpretations
must comply with the registration and prospectus requirements of the Securities
Act in connection with a secondary resale transaction.
Old Notes initially purchased by qualified institutional buyers were
initially represented by a global Note in registered form, deposited with, or on
behalf of, The Depository Trust Company (the "Depositary"), and registered in
the name of Cede & Co., as nominee of the Depositary. The Exchange Notes
exchanged for Old Notes represented by the global Note will be represented by
one or more global Exchange Notes in registered form, registered in the name of
the nominee of the Depositary. See "Description of Exchange Notes - Book-entry,
Delivery and Form." Exchange Notes issued to non-qualified institutional buyers
in exchange for Old Notes held by such investors will be issued only in
certificated, fully registered, definitive form. Except as described herein,
Exchange Notes in definitive certificated form will not be issued in exchange
for the global Note or interests therein.
The Old Notes and the Exchange Notes constitute new issues of securities
with no established public trading market. If a trading market does not develop
or is not maintained, holders of the Exchange Notes may experience difficulty in
reselling the Exchange Notes or may be unable to sell them at all. If a market
for the Exchange Notes develops, any such market may be discontinued at any time
and the Exchange Notes could trade at prices that may be lower than the initial
market values thereof, depending on many factors, including prevailing interest
rates, the markets for similar services and the financial performance of the
Issuer. Although there is currently no market for the Exchange Notes, the
Initial Purchasers have advised the Issuer that they will make a market in the
Exchange Notes. However, they are not obligated to do so, and any such market
making with respect to the Exchange Notes may be discontinued at any time
without notice. In addition, such market making activity will be subject to the
limits imposed by the Securities Act and the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), and may be limited during the Exchange Offer and
the pendency of any applicable shelf registration statement. Accordingly, there
can be no assurance as to the development or liquidity of any market for the
Exchange Notes. The Issuer does not intend to apply for listing of any of the
Exchange Notes on any securities exchange or for quotation through the Nasdaq
National Market or any other securities quotation service.
Any Old Notes not tendered and accepted in the Exchange Offer will remain
outstanding. To the extent that Old Notes are tendered and accepted in the
Exchange Offer, a holder's ability to sell untendered and tendered, but
unaccepted, Old Notes are likely to be adversely affected. Following
consummation of the Exchange Offer, the holders of any remaining Old Notes will
continue to be subject to the existing restrictions on transfer thereof and the
Issuer will have no further obligation to such holders to provide for the
registration under the Securities Act of the Old Notes except under certain very
limited circumstances. See "Description of Exchange Notes - Old Notes'
Registration Rights; Liquidated Damages." No assurance can be given as to the
liquidity of the trading market for either the Old Notes or the Exchange Notes.
The Exchange Offer is not conditioned upon any minimum aggregate principal
amount of Old Notes being tendered or accepted for exchange. The Exchange Offer
will expire at 5:00 p.m., Eastern time, on January 8, 1998, unless extended (the
"Expiration Date"). The date of acceptance for exchange (the "Exchange Date")
will be the first business day following the Expiration Date, upon surrender of
the Old Note. Old Notes tendered pursuant to the Exchange Offer may be
withdrawn at any time prior to the Expiration Date; otherwise such tenders are
irrevocable.
3
TABLE OF CONTENTS
Page
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Available Information. . . . . . . . . . . . . . . . . . . . . . 5
Prospectus Summary. . . . . . . . . . . . . . . . . . . . . . . 7
Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Use of Proceeds. . . . . . . . . . . . . . . . . . . . . . . . . 37
The Exchange Offer . . . . . . . . . . . . . . . . . . . . . . . 38
Capitalization . . . . . . . . . . . . . . . . . . . . . . . . . 45
Selected Financial Data. . . . . . . . . . . . . . . . . . . . . 46
Management's Discussion of Financial Condition and Results of
Operations . . . . . . . . . . . . . . . . . . . . . . . . . . 48
Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
Management . . . . . . . . . . . . . . . . . . . . . . . . . . . 88
Certain Relationships and Related Transactions . . . . . . . . . 93
Security Ownership of Certain Beneficial Owners and Management . 94
Description of Certain Indebtedness. . . . . . . . . . . . . . . 96
Description of Exchange Notes. . . . . . . . . . . . . . . . . . 98
Certain United States Federal Income Tax Considerations. . . . . 134
Plan of Distribution . . . . . . . . . . . . . . . . . . . . . . 135
Notice to Investors. . . . . . . . . . . . . . . . . . . . . . . 136
Independent Accountants. . . . . . . . . . . . . . . . . . . . . 138
Legal Matters. . . . . . . . . . . . . . . . . . . . . . . . . . 138
Index to Consolidated Financial Statements . . . . . . . . . . . F-1
DISH NETWORKSM IS A SERVICE MARK OF ECHOSTAR COMMUNICATIONS CORPORATION
4
AVAILABLE INFORMATION
The Issuer and the Guarantors have filed with the Securities and Exchange
Commission (the "Commission) a Registration Statement on Form S-4 (together with
all amendments, exhibits, schedules and supplements thereto, the "Registration
Statement") under the Securities Act with respect to the Exchange Notes being
offered hereby. This Prospectus, which forms a part of the Registration
Statement, does not contain all of the information set forth in the Registration
Statement, certain items of which are omitted as permitted by the rules and
regulations of the Commission. For further information with respect to the
Issuer, the Guarantors and the Exchange Notes, reference is hereby made to the
Registration Statement. Statements contained in this Prospectus as to the
contents of any contract or other document are not necessarily complete and,
where such contract or other document is an exhibit to the Registration
Statement, each such statement is qualified in all respects by the provisions in
such exhibit, to which reference is hereby made.
The Issuer, ESBC and Dish, Ltd. are not currently subject to the
informational requirements of the Exchange Act. However, ESBC is required by the
indenture (the "1996 Indenture") under which ESBC issued its 13 1/8% Senior
Secured Discount Notes due 2004 (the "1996 Notes"), whether or not it is then
subject to Section 13 or 15(d) of the Exchange Act, to file with the Commission
and furnish to holders of the 1996 Notes and the trustee under the 1996
Indenture copies of the annual reports, quarterly reports and other periodic
reports which ESBC and Direct Broadcasting Satellite Corporation ("New DBSC")
would have been required to file with the Commission pursuant to Section 13 or
15(d) of the Exchange Act if they were subject to such sections. ESBC and New
DBSC also agreed to provide all of the foregoing information for ESBC and New
DBSC taken as a single entity. Likewise, Dish, Ltd. is required by the
indenture (the "1994 Indenture") under which Dish, Ltd. issued its 12 7/8%
Senior Secured Discount Notes due 2004 (the "1994 Notes"), whether or not it is
then subject to Section 13 or 15(d) of the Exchange Act, to file with the
Commission and furnish to holders of the 1994 Notes and the trustee under the
1994 Indenture copies of the annual reports, quarterly reports and other
periodic reports which Dish, Ltd. would have been required to file with the
Commission pursuant to Section 13 or 15(d) of the Exchange Act if Dish, Ltd.
were subject to such sections. EchoStar Communications Corporation is subject
to the informational requirements of the Exchange Act. Upon the effectiveness
of the Registration Statement or, if earlier, the Shelf Registration Statement
(as defined herein), pursuant to the Indenture, the Issuer will file all reports
and other information required by the Exchange Act. The Registration Statement,
as well as periodic reports, proxy statements and other information filed by the
Issuer with the Commission, may be inspected at the public reference facilities
maintained by the Commission at Room 1024, 450 Fifth Street, N.W., Washington,
D.C. 20549, or at its regional offices located at Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661 and Seven World Trade
Center, Suite 1300, New York, New York 10048. Copies of such material can be
obtained from the Issuer upon request. Any such request should be addressed to
the Issuer's principal offices at 90 Inverness Circle East, Englewood, Colorado
80112-5300 (telephone (303) 799-8222).
The Issuer's, Dish, Ltd.'s and ESBC's obligation to file periodic reports
with the Commission pursuant to the Exchange Act may be suspended if the Notes
are held of record by fewer than 300 holders at the beginning of any fiscal year
of the Issuer, other than the fiscal year in which the Registration Statement or
the Shelf Registration Statement becomes effective. However, the Issuer has
agreed, pursuant to the indenture dated as of June 25, 1997 (the "Indenture")
governing the Notes, that, whether or not it is then subject to Section 13 or
15(d) of the Exchange Act, it will file with the Commission and furnish to the
holders of the Notes and the Trustee under the Indenture (and, if filing such
documents with the Commission is prohibited, to prospective holders of the Notes
upon request) copies of the annual reports, quarterly reports and other periodic
reports which the Issuer would have been required to file with the Commission
pursuant to Section 13 or 15(d) of the Exchange Act if the Issuer were subject
to such Sections. In addition, the Issuer will furnish, upon request of any
holder of a Note, such information as is specified in paragraph (d)(4) of Rule
144A, to the holder or to a prospective purchaser of such Note who the holder
reasonably believes is a qualified institutional buyer within the meaning of
Rule 144A, in order to permit compliance by such holder with Rule 144A in
connection with the resale of such Note by such holder unless, at the time of
the request, the Issuer is subject to the reporting requirements of Section 13
or 15(d) of the Exchange Act.
5
UNTIL JANUARY 8, 1998 (90 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
NOTICE TO INVESTORS
THIS PROSPECTUS (THE "PROSPECTUS") DOES NOT CONSTITUTE AN OFFER TO SELL, OR A
SOLICITATION OF AN OFFER TO BUY, ANY NOTES BY ANY PERSON IN ANY JURISDICTION IN
WHICH IT IS UNLAWFUL FOR SUCH PERSON TO MAKE SUCH AN OFFERING OR SOLICITATION.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER
ANY CIRCUMSTANCES IMPLY THAT THE INFORMATION HEREIN IS CORRECT AS OF ANY DATE
SUBSEQUENT TO THE DATE HEREOF.
6
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION, INCLUDING THE CONSOLIDATED FINANCIAL STATEMENTS AND THE NOTES
THERETO, APPEARING ELSEWHERE IN THIS PROSPECTUS. ECHOSTAR DBS CORPORATION, A
COLORADO CORPORATION, WAS INCORPORATED DURING 1996 BY ITS PARENT, ECHOSTAR
COMMUNICATIONS CORPORATION, A NEVADA CORPORATION, THE CLASS A COMMON STOCK OF
WHICH IS QUOTED ON THE NASDAQ NATIONAL MARKET UNDER THE SYMBOL "DISH." AS USED
IN THIS PROSPECTUS, UNLESS THE CONTEXT OTHERWISE REQUIRES, "ECHOSTAR" OR THE
"COMPANY" REFERS TO ECHOSTAR COMMUNICATIONS CORPORATION AND ITS SUBSIDIARIES AND
"ISSUER" REFERS TO ECHOSTAR DBS CORPORATION.
THE COMPANY
EchoStar is a leading provider of direct broadcast satellite ("DBS")
programming services in the United States. The Company commenced its DBS service
(the "DISH NetworkSM") in March 1996, after the successful launch of its first
satellite ("EchoStar I") in December 1995. The Company launched its second
satellite ("EchoStar II") in September 1996. Since December 31, 1996, EchoStar
has increased its DISH NetworkSM subscriber base approximately 134% from 350,000
to approximately 820,000 subscribers at September 30, 1997. During 1997,
EchoStar believes that it has captured approximately 30% of all new DBS
satellite subscribers in the U.S. Average monthly programming revenue during
1997 has been approximately $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 August 31,
1997, approximately 5.3 million U.S. households subscribed to DBS and other
digital direct-to-home ("DTH") satellite services. Industry sources project that
the DTH market could grow to as many as 19 million subscribers by the year 2002.
EchoStar believes that there is significant unsatisfied demand for
high-quality, reasonably-priced television programming. Of the approximately
96 million television households in the U.S., it is estimated that more than
60 million subscribers pay an average of $34 per month for multichannel
programming services. EchoStar's primary target market for the DISH
Network-SM- includes cable subscribers in urban and suburban areas who are
dissatisfied with the quality or price of their cable programming, or who
want niche programming services not available from most cable operators.
Other target markets for the DISH Network-SM-include the approximately 7
million households not passed by cable television systems and the
approximately 21 million households currently passed by cable television
systems with relatively limited channel capacity.
EchoStar has rights to more U.S. licensed DBS frequencies than any of its
competitors, and currently controls 90 frequencies, including 21 frequencies at
an orbital slot capable of providing nationwide DBS service. The Company
currently provides approximately 120 channels of digital television programming
and over 30 channels of CD quality audio programming to the entire continental
U.S. DISH Network-SM- subscribers can choose from a variety of programming
packages that EchoStar believes have a better price-to-value relationship than
packages currently offered by most pay television providers.
DISH Network-SM- programming is available to any subscriber who purchases or
leases an 18-inch satellite dish, an EchoStar digital satellite receiver, a
user-friendly remote control and related components (collectively, an "EchoStar
Receiver System"). EchoStar Receiver Systems are fully compatible with MPEG-2,
the world digital standard for computers and consumer electronics products, and
provide image and sound quality superior to current analog cable or wireless
cable service. EchoStar Receiver Systems are designed and engineered by the
Company's wholly-owned subsidiary, Houston Tracker Systems, Inc. ("HTS").
Satellite receivers designed by HTS have won numerous awards from dealers,
retailers and industry trade publications.
The Company's primary objective is to become a leading provider of
subscription television services in the U.S. To achieve this objective, the
Company will seek to:
EXPAND PROGRAMMING OFFERINGS. The Company currently expects to launch
its third and fourth satellites ("EchoStar III" and "EchoStar IV") on
October 5, 1997 and in the first quarter of 1998, respectively. EchoStar
III, which is expected to serve the eastern half of the U.S. from 61.5DEG.
West Longitude ("WL"), and EchoStar IV, which is expected to serve the
western half of the U.S. from 148DEG. WL, should enable EchoStar to
retransmit local broadcast signals in 20 of the largest U.S. television
markets (assuming receipt of all required retransmission consents and
copyright licenses and/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
7
also provide EchoStar the capacity to offer subscribers high definition
television ("HDTV") and popular Internet and other computer data at high
transmission speeds. By expanding its 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 satellite receiver
systems compatible with DISH Network programming. The JVC branded
satellite receiver systems will be available beginning October 1997 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
responsiveness to its customers, the Company has established a single
telephone number (1-800-333-DISH), which customers can call 24 hours a day,
seven days a week to order EchoStar Receiver Systems, activate programming
services, schedule installation and obtain technical support. The Company
believes it is the only DBS provider to offer a comprehensive single-point
customer service function.
The principal offices of EchoStar and the Issuer are located at 90 Inverness
Circle East, Englewood, Colorado 80112-5300, and their telephone number is (303)
799-8222.
8
RECENT DEVELOPMENTS
SERIES B SENIOR REDEEMABLE EXCHANGEABLE PREFERRED STOCK OFFERING
On October 2, 1997, EchoStar consummated an offering (the "Preferred Stock
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 Stock 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 Stock Offering to fund subscriber acquisition and
marketing expenses and for other general corporate purposes.
EXPECTED LAUNCH OF ECHOSTAR III
EchoStar expects to launch EchoStar III on October 5, 1997, from Cape
Canaveral Air Station, Florida. EchoStar III, which is expected to serve the
eastern half of the U.S. from 61.5DEG. WL, should enable EchoStar 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 EchoStar the capacity to offer subscribers high definition
television ("HDTV") and popular Internet and other computer data at high
transmission speeds.
SEARS TO CARRY DISH NETWORK PRODUCTS
On September 15, 1997, EchoStar announced that Sears will begin to carry JVC
branded satellite receiver systems compatible with DISH Network programming. JVC
branded satellite receiver systems will be available beginning October 1997 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.
NEW MARKETING PROMOTION
Beginning June 1, 1997, EchoStar implemented a new marketing program in which
independent retailers are able to offer standard EchoStar Receiver Systems to
consumers for a suggested retail price of $199 (the "1997 Promotion").
Previously, consumers could purchase EchoStar Receiver Systems for
approximately $199, but were also required to purchase a prepaid one-year
subscription to the DISH Network's-SM- America's Top 50 CD programming
package for $300 (the "1996 Promotion"). The 1997 Promotion allows consumers
to subscribe to the DISH Network's-SM- various programming offerings on a
month-to-month basis, without requiring an extended subscription commitment
or significant up front programming payments. While there can be no
assurance, EchoStar believes that by significantly reducing the "up front"
cost to the consumer and eliminating extended subscription commitments, the
1997 Promotion may increase consumer demand for DISH Network-SM- services.
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations."
JVC ALLIANCE
On April 14, 1997, EchoStar and JVC announced their plan to enter into a
strategic alliance (the "JVC Alliance") pursuant to which JVC will distribute
EchoStar Receiver Systems through JVC's national retail network. The JVC brand
name will appear on three models of EchoStar Receiver Systems.
9
TELEFONICA AGREEMENT
On June 2, 1997, Distribuidora de Television Digital S.A. ("Telefonica"),
a DBS joint venture in Spain, selected EchoStar to supply digital set top
boxes for its satellite television service scheduled to launch in September
1997. Total revenues from Telefonica's initial order of 100,000 digital
set-top boxes are expected to be approximately $40 million, of which
approximately one-half is expected to be recognized during 1997.
NEWS CORPORATION LITIGATION
On February 24, 1997, EchoStar and The News Corporation Limited ("News")
announced an agreement (the "News Agreement") pursuant to which, among other
things, News agreed to acquire approximately 50% of the outstanding capital
stock of EchoStar. News also agreed to make available for use by EchoStar the
DBS permit for 28 frequencies at 110DEG. WL purchased by MCI Communications
Corporation ("MCI") for over $682 million following a 1996 Federal
Communications Commission ("FCC") auction. During late April 1997,
substantial disagreements arose between the parties regarding their
obligations under the News Agreement.
During May 1997, EchoStar initiated litigation alleging, among other
things, breach of contract, failure to act in good faith, and other causes of
action. News has denied all of EchoStar's material allegations and has
asserted numerous counterclaims against EchoStar and its Chairman and Chief
Executive Officer, Charles W. Ergen. While EchoStar is confident of its
position and believes it will ultimately prevail, the litigation process
could continue for many years and there can be no assurance concerning the
outcome of the litigation.
DOMINION AGREEMENT
The FCC has granted Dominion Video Satellite, Inc. ("Dominion") a
conditional construction permit and related rights to eight frequencies at
61.5DEG. WL, the same orbital location where EchoStar III is expected to be
located. EchoStar has exercised its right under its agreement with Dominion
(the "Dominion Agreement"), subject to obtaining any necessary FCC approvals,
to use and program, for the expected life of the satellite, six of the eight
transponders on EchoStar III originally made available to Dominion.
Consequently, assuming necessary FCC approvals are obtained, EchoStar would
have the right to use a total of up to 17 transponders on EchoStar III.
10
THE EXCHANGE OFFER
The Exchange Offer........... The Issuer is offering to exchange (the
"Exchange Offer") up to $375,000,000 aggregate
principal amount of its new 12 1/2% Senior
Secured Notes due 2002 (the "Exchange Notes")
for up to $375,000,000 aggregate principal
amount of its outstanding 12 1/2 % Senior
Secured Notes due 2002 that were issued and
sold in a transaction exempt from registration
under the Securities Act (the "Old Notes" and,
together with the Exchange Notes, the "Notes").
The form and terms of the Exchange Notes are
substantially identical (including principal
amount, interest rate, maturity, security and
ranking) to the form and terms of the Old Notes
for which they may be exchanged pursuant to the
Exchange Offer, except that the Exchange Notes
are freely transferable by holders thereof
except as provided herein (see "The Exchange
Offer - Terms of the Exchange" and "- Terms and
Conditions of the Letter of Transmittal") and
are not entitled to certain registration rights
and certain liquidated damages which are
applicable to the Old Notes under a
registration rights agreement dated as of June
25, 1997 (the "Registration Rights Agreement")
among the Issuer, and the Guarantors and
Donaldson, Lufkin & Jenrette Securities
Corporation and Lehman Brothers Inc., as
initial purchasers (collectively, the "Initial
Purchasers"). See Description of Exchange Notes
- Old Notes' Registration Rights; Liquidated
Damages.
Exchange Notes issued pursuant to the Exchange
Offer in exchange for the Old Notes may be
offered for resale, resold and otherwise
transferred by holders thereof (other than any
holder which is: (i) an Affiliate of the
Issuer; (ii) a broker dealer who acquired Old
Notes directly from the Issuer; or (iii) a
broker-dealer who acquired Old Notes as a
result of market-making or other trading
activities), without compliance with the
registration and prospectus delivery provisions
of the Securities Act, provided that such
Exchange Notes are acquired in the ordinary
course of such holders' business and such
holders are not engaged in, do not intend to
engage in, and have no arrangement or
understanding with any person to participate
in, a distribution of such Exchange Notes.
Minimum Condition............ The Exchange Offer is not conditioned upon any
minimum aggregate principal amount of Old Notes
being tendered or accepted for exchange.
Expiration Date.............. The Exchange Offer will expire at 5:00 p.m.,
Eastern time, on , 1997, unless
extended (the "Expiration Date").
Exchange Date................ The first date of acceptance for exchange of
the Old Notes will be the first business day
following the Expiration Date.
Conditions to the
Exchange Offer............... The obligation of the Issuer to consummate
the Exchange Offer is subject to certain
conditions. See "The Exchange Offer -
Conditions to the Exchange Offer." The Issuer
reserves the right to terminate or amend the
Exchange Offer at any time prior to the
Expiration Date upon the occurrence of any of
those conditions.
Withdrawal Rights............ Tenders of Old Notes pursuant to the Exchange
Offer may be withdrawn at any time prior to the
Expiration Date. Any Old Notes not accepted
for any reason will be returned without expense
to the tendering holders thereof as promptly as
practicable after the expiration or termination
of the Exchange Offer.
11
Procedures for Tendering
Old Notes.................... See "The Exchange Offer - How to Tender."
Federal Income Tax
Consequences................. The exchange of Old Notes for Exchange Notes by
tendering holders will not be a taxable
exchange for federal income tax purposes, and
such holders should not recognize any taxable
gain or loss or any interest income as a result
of such exchange. See "Certain United States
Federal Income Tax Considerations."
Use of Proceeds.............. There will be no cash proceeds to the
Issuer from the exchange pursuant to the
Exchange Offer.
Effect on Holders of Old
Notes........................ As a result of the making of this Exchange
Offer, and upon acceptance for exchange of all
validly tendered Old Notes pursuant to the
terms of this Exchange Offer, the Issuer will
have fulfilled obligations contained in the
terms of the Old Notes and the Registration
Rights Agreement, and, accordingly, the holders
of the Old Notes will have no further
registration or other rights under the
Registration Rights Agreement, except under
certain limited circumstances. See
"Description of Exchange Notes - Old Notes'
Registration Rights; Liquidated Damages."
Holders of the Old Notes who do not tender
their Old Notes in the Exchange Offer will
continue to hold such Old Notes and will be
entitled to all the rights and limitations
applicable thereto under the Indenture. All
untendered, and tendered but unaccepted, Old
Notes will continue to be subject to the
restrictions on transfer provided for in the
Old Notes and the Indenture. To the extent
that Old Notes are tendered and accepted in the
Exchange Offer, the trading market, if any, for
the Old Notes not so tendered is likely to be
adversely affected. See "Risk Factors
-Consequences of Failure to Exchange Old Notes."
TERMS OF THE EXCHANGE NOTES
The Exchange Offer applies to $375,000,000 aggregate principal amount of
Old Notes. The form and terms of the Exchange Notes are substantially
identical to the form and terms of the Old Notes, except that the Exchange
Notes have been registered under the Securities Act, and therefore, will not
bear legends restricting the transfer thereof. The Exchange Notes will
evidence the same debt as the Old Notes and will be entitled to the benefits
of the Indenture. See "Description of Exchange Notes."
Securities Offered........... $375.0 million aggregate principal amount of
12 1/2% Senior Secured Notes due 2002 (the
"Exchange Notes").
Maturity Date................ July 1, 2002.
Interest Payment Dates....... Interest will accrue at the rate of 12 1/2%
per annum and will be payable semi-annually
in cash on January 1 and July 1 of each year,
commencing January 1, 1998.
Ranking...................... The Notes will rank senior in right of payment
to all subordinated indebtedness of the Issuer
and PARI PASSU in right of payment with all
senior indebtedness of the Issuer. Although the
Notes are titled "Senior": (i) the Issuer has
not issued, and does not have any plans to
issue, any indebtedness to which the Notes
would be senior; and (ii) the Notes will be
effectively subordinated to all liabilities of
the Issuer's subsidiaries, including
liabilities to general creditors (except to the
extent that any subsidiary of the Issuer may
guarantee the Notes), and the EchoStar
Guarantee (see below) of the Notes will be
subordinated to all liabilities of EchoStar
(except liabilities to general creditors). As
of June 30, 1997, including the effect of the
Old Notes Offering, the consolidated
liabilities of EchoStar and its subsidiaries
aggregated approximately $1.6
12
billion. Approximately $1.2 billion of the
consolidated liabilities of EchoStar and its
subsidiaries (including liabilities of the
Issuer) are effectively senior in right of
payment to the Notes. EchoStar and its
subsidiaries do not have any liabilities
which rank either junior to or PARI PASSU with
the Notes. In addition the ability of Dish to
make distributions to the Issuer is severely
limited by the terms of the 1994 Indenture, and
the cash flow generated by the assets and
operations of the Issuer's subsidiaries will
therefore only be available to satisfy the
Issuer's obligations on the Notes to the extent
that such subsidiaries are able to make
distributions, directly or indirectly, to the
Issuer. In this regard, as of June 30, 1997, the
guarantee of Dish is effectively subordinated to
approximately $900.0 million of indebtedness of
Dish and its subsidiaries. Upon full accretion
of the 1994 Notes, the guarantee of Dish will be
effectively subordinated to at least an
additional approximately $156.8 million of
indebtedness of Dish and its subsidiaries
solely as a result of the accretion of the 1994
Notes. Additionally, the 1994 Indenture places
severe limitations on the incurrence of
additional indebtedness (including the
guarantee of indebtedness) by Dish and its
subsidiaries until such time as their
consolidated indebtedness to cash flow ratio
would not exceed 4.0 to 1 after taking the
issuance of the indebtedness into account. As
of June 30, 1997, Dish and its subsidiaries do
not meet this ratio of indebtedness to cash
flow. Accordingly, as of June 30, 1997, the
guarantee of Dish is not in effect and Dish and
its subsidiaries are not able to make
distributions to the Issuer. While the 1996
Indenture permits ESBC to pay dividends and
make other distributions to the Issuer without
restrictions, as of June 30, 1997, the
guarantee of ESBC is effectively subordinated
to approximately $1.2 billion of indebtedness
of ESBC and its subsidiaries. Upon full
accretion of the 1994 and 1996 Notes, the
guarantee of ESBC will be effectively
subordinated to at least an additional
approximately $325.5 million of indebtedness of
ESBC and its subsidiaries solely as a result of
the accretion of the 1994 and 1996 Notes.
Further, the 1996 Indenture places severe
limitations on the incurrence of additional
indebtedness (including the guarantee of
indebtedness) by ESBC and its subsidiaries
until such time as their consolidated
indebtedness to cash flow ratio would not
exceed 5.0 to 1 after taking the issuance of
the indebtedness into account. As of June 30,
1997, ESBC and its subsidiaries do not meet
this ratio of indebtedness to cash flow.
Accordingly, as of June 30, 1997, the guarantee
of ESBC is not in effect. Therefore, there can
be no assurance that the guarantees of Dish and
ESBC will ever provide additional collateral to
the holders of Notes. See "Description of
Exchange Notes" and "Capitalization."
Optional Redemption.......... Except as set forth below, the Notes will not
be redeemable at the Issuer's option prior to
July 1, 2000. Thereafter, the Notes will be
subject to redemption, at the option of the
Issuer, in whole or in part, at the redemption
prices set forth herein. In addition, at any
time prior to July 1, 2000, the Issuer may
redeem Notes at a redemption price equal to
112.50% of the principal amount thereof,
together with accrued and unpaid interest
thereon to the redemption date, with the net
proceeds of one public or private sale of
certain Equity Interests (as defined herein) of
EchoStar, the Issuer or any of their
subsidiaries (other than proceeds from a sale
to EchoStar, the Issuer or any of their
subsidiaries), provided that: (i) at least
two-thirds of the Notes remain outstanding
immediately after the occurrence of such
redemption; and (ii) such redemption occurs
within 120 days of the date of the closing of
any such sale.
Change of Control............ Upon the occurrence of a Change of Control (as
defined herein), the Issuer will be required to
make an offer to each holder of the Notes to
repurchase all or any part of such holder's
Notes at a purchase price equal to 101% of the
principal amount thereof, together with accrued
and unpaid interest thereon to the date of
repurchase. There can be no assurance that the
Issuer will have sufficient funds at the time
of a Change of Control to repurchase Notes
tendered. If the Issuer does not have
sufficient funds to redeem all Notes tendered
for purchase upon the occurrence of a Change of
Control, the Issuer would be required to raise
additional capital. No assurance can be given
that additional capital would be available on
terms acceptable to the Issuer, or at all. If
the Issuer were unable to purchase all Notes
tendered in connection with a Change of
Control, such occurrence would constitute an
Event of Default under the Indenture.
The indentures related to the 1994 and 1996
Notes contain substantially identical
provisions with regard to a Change of Control.
There can be no assurance that EchoStar will
have sufficient funds at the time of a Change
of Control to repurchase 1994 Notes or 1996
Notes tendered. If EchoStar does not have
sufficient funds to redeem all 1994 Notes or
1996 Notes tendered for purchase upon the
occurrence of a Change of Control, EchoStar
would be required to raise additional capital.
No assurance can be given that additional
capital would be available on terms acceptable
to EchoStar, or at all. If EchoStar were
unable to purchase 1994 Notes or 1996 Notes
tendered in connection with a Change of
Control, such occurrence would constitute an
Event of Default under each of the respective
indentures and, as a result, would constitute
an Event of Default under the Indenture.
Offer to Purchase............ Upon the occurrence of certain events described
under "Description of Exchange Notes--Offer to
Purchase upon the Occurrence of Certain
Events," the Issuer will be required to offer
to repurchase a specified amount of Notes at a
purchase price equal to 101% of the principal
amount thereof, together with accrued and
unpaid interest thereon to the date of
repurchase. There can be no assurance that the
Issuer will have sufficient funds at the time
of an Offer to Purchase upon the Occurrence of
Certain Events to repurchase Notes tendered.
14
If the Issuer does not have sufficient funds to
redeem all Notes tendered for Purchase upon the
Occurrence of Certain Events, the Issuer would
be required to raise additional capital. No
assurance can be given that additional capital
would be available on terms acceptable to the
Issuer, or at all. If the Issuer were unable to
purchase all Notes tendered in connection with
an Offer to Purchase upon the Occurrence of
Certain Events, such occurrence would
constitute an Event of Default under the
Indenture.
The indentures related to the 1994 and 1996
Notes contain substantially identical
provisions with regard to an Offer to Purchase
upon the Occurrence of Certain Events. There
can be no assurance that EchoStar will have
sufficient funds at the time of an Offer to
Purchase upon the Occurrence of Certain Events
to repurchase 1994 Notes or 1996 Notes
tendered. If EchoStar does not have sufficient
funds to redeem all 1994 Notes or 1996 Notes
tendered for Purchase upon the Occurrence of
Certain Events, EchoStar would be required to
raise additional capital. No assurance can be
given that additional capital would be
available on terms acceptable to EchoStar, or
at all. If EchoStar were unable to purchase
1994 Notes or 1996 Notes tendered in connection
with an Offer to Purchase upon the Occurrence
of Certain Events, such occurrence would
constitute an Event of Default under each of
the respective indentures and, as a result,
would constitute an Event of Default under the
Indenture.
Significant Transactions..... EchoStar and its subsidiaries will be permitted
to engage in certain Significant Transactions
(as defined), notwithstanding the fact that
such transactions would otherwise be prohibited
under the Indenture, PROVIDED that: (i) such
transactions are for fair market value in the
opinion of an investment banking firm of
national standing and the Board of Directors;
and (ii) prior to consummation of such
transactions, the Issuer makes an offer to each
holder of Notes to repurchase all or any part
of such holder's Notes at a purchase price
equal to 101% of the principal amount thereof,
together with accrued and unpaid interest
thereon to the date of repurchase. See
"Description of Exchange Notes--Significant
Transactions."
Interest Escrow Account...... The Issuer has placed approximately $109.0
million of the net proceeds realized from the
sale of the Old Notes into an Interest Escrow
Account held by the Escrow Agent for the
benefit of the holders of the Notes. Such
funds, together with the reasonably expected
proceeds from the investment thereof, will
secure, and will be sufficient to pay, the
first five semi-annual interest payments on the
Notes. See "Description of Exchange
Notes--Disbursement of Funds--Escrow Accounts."
Satellite Escrow Account..... The Issuer has placed $112.0 million of the net
proceeds realized from the sale of the Old
Notes into a Satellite Escrow Account held by
the Escrow Agent for the benefit of the holders
of the Notes. Such funds, together with the
reasonably expected proceeds from the
investment thereof, will be retained in escrow
until disbursed, under certain conditions, for
payment of construction, launch and insurance
costs for EchoStar IV. See "Description of
Exchange Notes--Disbursement of Funds--Escrow
Accounts."
Security..................... The Exchange Notes are initially secured by:
(i) a pledge by EchoStar of the capital stock
of the Issuer; (ii) a first priority security
interest in both the Interest and Satellite
Escrow Accounts; (iii) a first priority
security interest, when launched, in EchoStar
IV; (iv) a first priority security interest in
the proceeds of any sale upon foreclosure of
the Issuer's permit from the FCC for the
148DEG. WL orbital slot frequency assignments;
and (v) a collateral assignment of all
contracts relating to the construction, launch,
insurance and TT&C (as defined)
15
of EchoStar IV (in the case of such collateral
assignments, the Issuer has agreed to use its
best efforts to obtain any required consents
(none of which required consents had been
obtained as of the date of the Prospectus)).
See "Description of Exchange Notes--Security."
Guarantees................... The Notes are guaranteed by EchoStar on a
subordinated basis. On and after the ESBC
Guarantee Date (as defined), the Notes will be
guaranteed by ESBC, a wholly-owned subsidiary
of the Issuer, which guarantee will rank PARI
PASSU with all senior unsecured indebtedness of
ESBC. On and after the Dish Guarantee Date (as
defined), the Notes will be guaranteed by Dish,
a wholly-owned subsidiary of ESBC, which
guarantee will rank PARI PASSU with all senior
unsecured indebtedness of Dish. See
"Description of Exchange Notes--Affiliate
Guarantees."
Maintenance of Insurance..... The Indenture requires the Issuer to obtain
Launch Insurance (as defined) for EchoStar IV,
in an amount equal to or greater than the cost
of construction and launch of and insurance on
EchoStar IV. The Indenture also requires the
Issuer to maintain In-orbit Insurance (as
defined) for EchoStar IV in an amount equal to
or greater than the cost of construction,
launch and insurance of EchoStar IV.
Certain Other Covenants...... The Indenture restricts, among other things,
the payment of dividends, the repurchase of
stock and subordinated indebtedness of the
Issuer, the making of certain other Restricted
Payments (as defined), the incurrence of
indebtedness and the issuance of preferred
stock, certain asset sales, the creation of
certain liens, certain mergers and
consolidations, and transactions with
Affiliates (as defined).
The Indenture permits the Issuer to launch,
move or otherwise assign (collectively,
"Transfer") in a transaction which is not an
Asset Sale under the terms of the Indenture,
EchoStar IV into an orbital slot other than
148DEG. WL provided the Issuer delivers to the
Trustee an Opinion of Counsel to the effect,
among other things, that the holders of the
Notes will maintain their security interest in
EchoStar IV. See "Description of Exchange
Notes--Asset Sales; Transfer of EchoStar IV."
Registration Rights;
Liquidated Damages........... Pursuant to a registration rights agreement
among the Issuer, the Guarantors and the
Initial Purchasers (the "Registration Rights
Agreement"), the Issuer and the Guarantors
agreed: (i) to file a registration statement
(the "Exchange Offer Registration Statement")
on or prior to July 25, 1997 relating to an
exchange offer for the Old Notes and Guarantees
(the "Exchange Offer"); and (ii) to use their
best efforts to cause the Exchange Offer
Registration Statement to be declared effective
by the Commission on or prior to November 22,
1997. In certain circumstances, the Issuer and
the Guarantors will be required to provide a
shelf registration statement (the "Shelf
Registration Statement") to cover resales of
the Notes and Guarantees by the holders
thereof. If the Issuer and the Guarantors do
not comply with their obligations under the
Registration Rights Agreement, they will be
required to pay Liquidated Damages to holders
of the Notes under certain circumstances. See
"Description of Exchange Notes--Registration
Rights; Liquidated Damages."
Transfer Restrictions........ The Old Notes and Guarantees have not been
registered under the Securities Act and are
subject to certain restrictions on transfer.
The Exchange Notes, and Old Notes registered
pursuant to an effective registration
statement, will generally be freely
transferable. See "Notice to Investors." The
Issuer does not intend to apply for listing of
the Notes on any securities exchange or for
quotation through the Nasdaq National Market or
any other securities quotation
16
service.
17
SUMMARY FINANCIAL DATA
Prior to consummation of the Old Notes Offering, EchoStar contributed all of
the outstanding capital stock of ESBC to the Issuer (the "Contribution").
Similarly, in January 1996, EchoStar contributed all of the outstanding
capital stock of Dish to ESBC (the "Dish Contribution"). The Contribution and
the Dish Contribution have been accounted for as reorganizations of entities
under common control, in which Dish was treated as the predecessor to ESBC
and ESBC was treated as the predecessor to the Issuer. The following summary
financial data and the selected financial data presented elsewhere in this
Prospectus for the five years ended December 31, 1996 are derived from the
Consolidated Financial Statements of the Issuer and the Issuer's predecessor
entities, audited by Arthur Andersen LLP, independent public accountants. The
following summary financial data with respect to the six months ended June
30, 1996 and 1997 are unaudited; however, in the opinion of management, such
data reflect all adjustments (consisting only of normal recurring
adjustments) necessary to fairly present the data for such interim periods.
Operating results for interim periods are not necessarily indicative of the
results that may be expected for a full year. The data set forth in this
table should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations," the Issuer's
Consolidated Financial Statements and the Notes thereto, and other financial
information included elsewhere in this Prospectus.
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
------------------------------------------------- --------------------
1992(1) 1993(1) 1994 1995 1996 1996 1997
(IN THOUSANDS, EXCEPT RATIOS, SUBSCRIBERS AND SATELLITE RECEIVERS SOLD)
(UNAUDITED)
STATEMENT OF OPERATIONS DATA:
Revenue . . . . . . . . . . . . . . . . . . . . $165,088 $220,941 $190,983 $163,890 $ 209,731 $110,380 $ 171,437
Operating income (loss) . . . . . . . . . . . . 11,286 18,204 13,216 (8,006) (108,865) (26,579) (86,831)
Net income (loss) . . . . . . . . . . . . . . . 7,529 12,272 90 (12,361) (101,676) (28,921) (126,425)
OTHER DATA:
EBITDA (2) . . . . . . . . . . . . . . . . . . $ 12,329 $19,881 $ 15,459 $ (4,892) $ (65,496) $(16,823) $ (243)
Ratio of earnings to fixed charges (3) . . . . 15.0x 18.0x -- -- -- -- --
----- ----- -- -- -- -- --
Deficiency of earnings to fixed charges (3) . . -- -- $ (5,206) $(44,315) $(188,347) $(59,443) $(143,013)
-- -- -------- -------- --------- -------- ---------
DBS subscribers (end of period) . . . . . . . . -- -- -- -- 350,000 70,000 590,000
Satellite receivers sold (in units):
Domestic. . . . . . . . . . . . . . . . . . . 116,000 132,000 114,000 131,000 518,000 155,000 348,000
International . . . . . . . . . . . . . . . . 85,000 203,000 289,000 331,000 239,000 126,000 91,000
----------------------------------------------------------------------
Total . . . . . . . . . . . . . . . . . . . 201,000 335,000 403,000 462,000 757,000 281,000 439,000
----------------------------------------------------------------------
----------------------------------------------------------------------
AS OF MARCH 31, 1997 JUNE 30,
----------------------- 1997
ACTUAL AS ADJUSTED(4) --------------
(UNAUDITED)
BALANCE SHEET DATA:
Cash, cash equivalents and marketable investment securities (5) . . . . . . . . . . $ 33,517 $ 175,017 $ 186,883(10)
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,084,639 1,459,639 1,433,783
Old Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- 375,000 375,000
Total long-term obligations (less current portion) . . . . . . . . . . . . . . . . . 910,604 1,285,604 1,323,762
Total stockholder's equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (68,626) (68,626) (133,100)
SUMMARY SATELLITE DATA
ECHOSTAR I ECHOSTAR II ECHOSTAR III ECHOSTAR IV
Expected launch date . . . . . . . . Launched Launched October 1997 1st Quarter 1998
Orbital slot . . . . . . . . . . . . 119 DEG. WL 119 DEG. WL 61.5 DEG. WL 148 DEG. WL (6)
Transponders . . . . . . . . . . . . 16 @ 24 MHz 16 @ 24 MHz 16/32 @ 24 MHz (7) 16/32 @ 24 MHz (7)
Approximate channel capacity (8). . . 100 channels 100 channels 100/200 channels 100/200 channels
Output power . . . . . . . . . . . . 130 Watts 130 Watts 240/120 Watts 240/120 Watts
Expected end of commercial life (9) . 2011 2011 2012 2013
Coverage area . . . . . . . . . . . . Continental U.S. and certain Eastern and Western and Central U.S.
regions of Canada and Mexico Central U.S. Alaska and Hawaii
18
- ----------------------
(1) Certain of the Issuer's subsidiaries operated under Subchapter S of the
Internal Revenue Code of 1986, as amended (the "Code"), and comparable
provisions of applicable state income tax laws, until December 31, 1993.
The net income for 1992 and 1993 presented above is net of pro forma
income taxes of $3,304 and $7,846, respectively, determined as if the
Issuer had been subject to corporate Federal and state income taxes for
those years. See Note 7 of Notes to the Issuer's Consolidated Financial
Statements.
(2) EBITDA represents earnings before interest (net), taxes, depreciation and
amortization (including amortization of subscriber acquisition costs of
$16.0 million for the year ended December 31, 1996 and $61.3 million for
the six months ended June 30, 1997). EBITDA is commonly used in the
communications industry to analyze companies on the basis of operating
performance, leverage and liquidity. EBITDA is not intended to represent
cash flows for the period, nor has it been presented as an alternative to
operating income as an indicator of operating performance and should not be
considered in isolation or as a substitute for measures of performance
determined in accordance with generally accepted accounting principles. See
the Issuer's Consolidated Financial Statements contained elsewhere in this
Prospectus.
(3) For purposes of computing the ratio of earnings to fixed charges and the
deficiency of earnings to fixed charges, earnings consist of earnings from
continuing operations before income taxes, plus fixed charges. Fixed
charges consist of interest incurred on all indebtedness and the computed
interest components of rental expense under noncancelable operating leases.
For the years ended December 31, 1994, 1995 and 1996 and the six months
ended June 30, 1996 and 1997, earnings were insufficient to cover fixed
charges. Gives effect to the Old Notes Offering and the application of the
net proceeds thereof.
(5) Excludes amounts held in escrow and other restricted cash of approximately
$51.5 million as of March 31, 1997. The March 31, 1997, as adjusted, data
also excludes $112.0 million placed in the Satellite Escrow Account and
approximately $109.0 million placed in the Interest Escrow Account.
(6) EchoStar presently intends to launch EchoStar IV into the 148DEG. WL
orbital slot during the first quarter of 1998. The Company may, however,
subject in each case to applicable FCC approvals and other conditions in
the Indenture, determine to launch or move EchoStar IV into the 61.5DEG.
WL or the 119DEG. WL orbital slot. See "Description of Exchange Notes--
Significant Transactions" and "--Certain Covenants--Asset Sales; Transfer
of EchoStar IV."
(7) The transponders on each of these satellites can be independently switched
to provide a range from 16 transponders operating at 240 Watts each to 32
transponders operating at 120 Watts each.
(8) EchoStar's DBS permits cover: (i) 11 of the 16 transponders (approximately
65 of 100 channels) on EchoStar I; (ii) 10 of the 16 transponders
(approximately 60 of 100 channels) on EchoStar II; (iii) 11 of the 16
transponders (approximately 65 of 100 channels) on EchoStar III; and (iv)
24 of the 32 transponders (approximately 150 of 200 channels) on EchoStar
IV.
(9) The expected end of commercial life of each satellite has been estimated by
EchoStar based on each satellite's actual or expected launch date and the
terms of the construction and launch contracts. The minimum design life is
12 years. The licenses are issued for ten year periods, and would, unless
renewed by the FCC, expire prior to the end of the minimum design life.
(10) Excludes amounts held in escrow and other restricted cash of approximately
$8.4 million as of June 30, 1997. The June 30, 1997 data also excludes
$112.1 million held in the Satellite Escrow Account and approximately
$109.1 million held in the Interest Escrow Account.
THE ECHOSTAR ORGANIZATION
The following chart illustrates where significant EchoStar assets and
rights are, or are expected to be, held following the Contribution:
ECHOSTAR
COMMUNICATIONS
CORPORATION
NASDAQ: DISH
DIRECT BROADCASTING ECHOSTAR DBS ECHOSTAR DISH NETWORK
SATELLITE CORPORATION SPACE CORPORATION CREDIT CORPORATION
CORPORATION
- ECHOSTAR III SATELLITE ISSUER OF THE - LAUNCH CONTRACTS FOR - CONSUMMER FINANCING OF
NOTES ECHOSTAR III AND ECHOSTAR RECEIVER
- 11 FREQUENCIES 61.5DEG. WL ECHOSTAR IV SYSTEMS
- 11 FREQUENCIES 175DEG. WL
- ECHOSTAR IV SATELLITE
- 24 FREQUENCIES 148DEG. WL
ECHOSTAR SATELLITE
BROADCASTING
CORPORATION
ISSUER OF THE
1996 NOTES
DISH, LTD.
ISSUER OF THE
1994 NOTES
HOUSTON TRACKER ECHOSPHERE ECHOSTAR ECHOSTAR DIRECTSAT
SYSTEMS, INC. CORPORATION SATELLITE INTERNATIONAL CORPORATION
CORPORATION CORPORATION
- - U.S. DISTRIBUTION OF - U.S. DISTRIBUTION OF - ECHOSTAR I SATELLITE - INTERNATIONAL DISTRIBUTION - ECHOSTAR II SATELLITE
DTH PRODUCTS AND DTH PRODUCTS AND - 11 FREQUENCIES OF DTH PRODUCTS - 10 FREQUENCIES 119DEG. WL
ECHOSTAR RECEIVER ECHOSTAR RECEIVER 119DEG. WL - 11 FREQUENCIES 175DEG. WL
SYSTEMS TO ECHOSHPERE SYSTEMS TO - 10 FREQUENCIES EXPECTED - 1 FREQUENCIES 110DEG. WL
AND OTHER DISTRIBUTORS SATELLITE RETAILERS AT 175DEG. WL
- 1 FREQUENCY EXPECTED AT
- - DBS RESEARCH AND 166DEG. WL
DEVELOPMENT - DBS PROGRAMMING CONTRACTS
- DIGITAL BROADCAST
CENTER
- UPLINK EARTH STATIONS
The Notes are initially secured by:
(i) A pledge of the capital stock of the Issuer.
(ii) A first priority security interest in the proceeds of any sale upon
foreclosure of the Issuer's permit from the FCC for the 148DEG. WL
orbital slot frequency assignments.
(iii) A first priority security interest, when launched, in EchoStar IV.
(iv) A collateral assignment of certain construction, launch and insurance
contracts relating to EchoStar IV (in the case of such collateral
assignments, the Issuer has agreed to use its best efforts to obtain any
required consents (none of which required consents had been obtained as
of the date of the Prospectus)).
(v) A first priority security interest in each of the Satellite Escrow
Account and the Interest Escrow Account.
20
RISK FACTORS
HOLDERS OF THE OLD NOTES SHOULD CONSIDER CAREFULLY ALL OF THE INFORMATION
CONTAINED IN THIS PROSPECTUS, WHICH MAY BE GENERALLY APPLICABLE TO THE OLD NOTES
AS WELL AS TO THE EXCHANGE NOTES, BEFORE DECIDING WHETHER TO TENDER THEIR OLD
NOTES FOR THE EXCHANGE NOTES OFFERED HEREBY AND, IN PARTICULAR, THE FOLLOWING
FACTORS:
COMPETITION FROM DBS AND OTHER SATELLITE SYSTEM OPERATORS. The
subscription television industry is highly competitive. EchoStar faces
competition from companies offering video, audio, data, programming and
entertainment services. Many of these competitors have substantially greater
financial and marketing resources than EchoStar. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources."
EchoStar competes with companies offering programming through various
satellite broadcasting systems. One competitor, DirecTv, Inc. ("DirecTv"), has
launched three DBS satellites and has 27 frequencies that are capable of
transmitting to the entire continental U.S. ("full-CONUS"). DirecTv and U.S.
Satellite Broadcasting Corporation ("USSB"), which owns five transponders on one
of DirecTv's satellites, currently offer over 150 channels of combined DBS video
programming. As of August 31, 1997, DirecTv had approximately 2.8 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-SM-. DirecTv currently
has exclusive distribution rights for out-of-market National Football League
telecasts. There may be additional sports and other programming offered by other
pay television providers that will not be available on the DISH NetworkSM. 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 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 110DEG. WL orbital location. This proposed transaction requires certain
federal regulatory approvals. In addition, Tempo Satellite, Inc. ("Tempo"), a
subsidiary of TSAT, has a license for a satellite using 11 full-CONUS
frequencies at the 119DEG. WL orbital location, and recently launched a
satellite to that location. PrimeStar also has agreed to acquire Tempo's
license. As of August 31, 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.
21
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 113DEG. 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 113DEG. 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-SM- also encounters substantial competition in the overall
market for pay television households from cable television and other
terrestrial systems. Cable television operators have a large, established
customer base, and many cable operators have significant investments in, and
access to, programming. Cable television service is currently available to
approximately 90% of the approximately 96 million U.S. television households,
and approximately 65% of total television households currently subscribe to
cable. Cable television
22
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."
EXPECTED OPERATING LOSSES. Due to the substantial expenditures required to
complete development, construction and deployment of the EchoStar DBS System and
introduction of its DISH Network-SM- service to consumers, the Issuer has
sustained significant losses in recent periods. The Issuer's operating losses
were $8.0 million, $108.9 million and $86.8 million for the years ended December
31, 1995 and 1996 and the six months ended June 30, 1997, respectively. The
Issuer had net losses of $12.4 million, $101.7 million and $126.4 million during
those same periods. Improvements in the Issuer's results of operations are
largely dependent upon its ability to increase its customer base while
maintaining its price structure, controlling subscriber turnover (i.e., the rate
at which subscribers terminate service), and effectively managing the Issuer's
costs. No assurance can be given that the Issuer will be effective with regard
to the above. In addition, the Issuer incurs significant acquisition costs to
acquire DISH Network-SM- subscribers. The high cost of obtaining new subscribers
magnifies the negative effects of subscriber turnover. See "--Risk of Inability
to Manage Rapidly Expanding Operations; Subscriber Turnover." EchoStar
anticipates that it will continue to experience operating losses through at
least 1999. There can be no assurance that such operating losses will not
continue beyond 1999 or that EchoStar's operations will generate sufficient cash
flows to pay its obligations, including its obligations on the 1994 Notes (as
defined), the 1996 Notes and the Notes. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and Capital
Resources."
SUBSTANTIAL LEVERAGE. The Issuer's direct and indirect subsidiaries,
including ESBC and Dish, are highly leveraged, and the Issuer, as a result of
the issuance of the Notes, also is highly leveraged. This leverage makes
EchoStar very vulnerable to changes in general economic conditions.
Substantially all of the assets of ESBC and Dish and its subsidiaries are
pledged as collateral for the 1996 Notes and the 1994 Notes, and a substantial
portion of EchoStar's remaining assets are pledged as collateral for the Notes.
Thus it is, and will continue to be, difficult for EchoStar and its subsidiaries
to obtain additional debt if required or desired in order to implement
EchoStar's business strategy. ESBC, Dish and certain of Dish's subsidiaries are
also parties to other agreements (in addition to the 1996 and 1994 Notes
Indentures (as defined)) that severely restrict their ability to obtain
additional debt financing for working capital, capital expenditures and general
corporate purposes. As security for the performance of its obligations under
such agreements, certain subsidiaries of Dish have pledged substantial assets as
collateral.
As of June 30, 1997, EchoStar had outstanding long-term debt (including
both the current and long-term portion) of approximately $1.3 billion (including
the 1996 Notes, 1994 Notes, the Notes, deferred satellite contract payments on
EchoStar I and EchoStar II and mortgage debt). In addition, because interest on
the 1994 Notes currently is not payable in cash but accretes through June 1,
1999, liability with respect to the 1994 Notes will increase by approximately
$156.8 million through that date to $624.0 million. Similarly, because interest
on the 1996 Notes currently is not payable in cash but accretes through
March 15,
23
2000, liability with respect to the 1996 Notes will increase by approximately
$168.7 million through that date to $580.0 million.
The ability of ESBC, Dish and the Issuer to meet their respective debt
obligations will depend on the success of EchoStar's business strategy, which is
subject to uncertainties and contingencies beyond EchoStar's control.
NEED FOR ADDITIONAL CAPITAL. EchoStar may require additional funds to
acquire DISH Network-SM- subscribers. In addition, EchoStar has conditional
licenses or applications pending with the FCC for a two satellite Ku-band
system, a two satellite FSS Ka-band system, a two satellite extended Ku-band
system and a six satellite low earth orbit ("LEO") satellite system. EchoStar
will need to raise additional funds for the foregoing purposes. Further, there
are a number of factors, some of which are beyond EchoStar's control or ability
to predict, that could require EchoStar to raise additional capital. These
factors include slower than expected subscriber acquisition, a defect in or the
loss of any satellite or an increase in the cost of acquiring subscribers due to
additional competition, among other things. There can be no assurance that
EchoStar will be able to raise additional capital at the time necessary or on
terms satisfactory to EchoStar. The inability to raise sufficient capital would
have a material adverse effect on the Company. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and Capital
Resources."
RESTRICTIVE COVENANTS; ABILITY TO TRANSFER ECHOSTAR IV. The Indenture
contains restrictive covenants that, among other things, limit the ability of
the Issuer and its subsidiaries to: (i) incur additional indebtedness;
(ii) issue preferred stock; (iii) sell assets; (iv) create, incur or assume
liens; (v) create dividend and other payment restrictions with respect to the
Issuer's subsidiaries; (vi) merge, consolidate or sell assets; (vii) incur
subordinated or junior debt; (viii) enter into transactions with affiliates; and
(ix) pay dividends. Both the 1996 and 1994 Notes Indentures contain restrictive
covenants that, among other things, limit the ability of ESBC and Dish and their
subsidiaries to: (i) incur additional indebtedness; (ii) issue preferred stock;
(iii) sell assets; (iv) create, incur or assume liens; (v) create dividend and
other payment restrictions with respect to ESBC's and Dish's subsidiaries;
(vi) merge, consolidate or sell assets; (vii) enter into transactions with
affiliates; and (viii) pay dividends. These restrictions may inhibit EchoStar's
ability to manage its business and to react to changing market conditions. See
"Description of Exchange Notes."
The Indenture permits the Issuer to launch, move or otherwise assign, in a
transaction which is not an Asset Sale under the terms of the Indenture,
EchoStar IV into an orbital slot other than 148DEG. WL provided the Issuer
delivers to the Trustee an Opinion of Counsel to the effect, among other things,
that the holders of the Notes will maintain their security interest in
EchoStar IV. See "Description of Exchange Notes--Asset Sales; Transfer of
EchoStar IV."
HOLDING COMPANY STRUCTURE; STRUCTURAL SUBORDINATION. Since all of the
Issuer's, ESBC's and Dish's operations are conducted through subsidiaries, the
cash flow of the Issuer, ESBC and Dish and their ability to service debt,
including the 1994 Notes, the 1996 Notes and the Notes, are dependent upon the
earnings of such subsidiaries and the payment of funds by such subsidiaries to
Dish, by the payment of funds by Dish to ESBC, and by the payment of funds by
ESBC to the Issuer in the form of loans, dividends or other payments. ESBC, Dish
and its subsidiaries have no current obligations, contingent or otherwise, to
pay any amounts due pursuant to the Notes or to make any funds available
therefor, whether by dividends, loans or other payments, other than the possible
guarantee of the Notes by each of Dish and ESBC, which will become effective
when and if permitted by the applicable indenture to which such entities are
subject. The cash flow generated by subsidiaries of Dish will only be available
if and to the extent that Dish is able to make such cash available to ESBC in
the form of dividends, loans or other payments. In general, Dish may pay
dividends on its equity securities only if: (i) no default exists under the 1994
Notes Indenture; and (ii) after giving effect to such dividends, Dish's ratio of
total indebtedness to cash flow would not exceed 4.0 to 1.0. Moreover, the
aggregate amount of such dividends generally may not exceed the sum of 50% of
Dish's consolidated net income (less 100% of consolidated net losses) from
April 1, 1994, plus 100% of the aggregate net proceeds to Dish from the sale and
issuance of certain equity interests of Dish. The 1996 Notes Indenture permits
ESBC to pay dividends and make other distributions to the Issuer without
restrictions. If available cash flows of ESBC's subsidiaries are not sufficient
to service the Notes, the Issuer would be required to obtain cash from other
sources, such as sales of assets or equity or debt securities by EchoStar, or
capital contributions or loans made by EchoStar from proceeds thereof, or cash
otherwise available to EchoStar or its other direct subsidiaries. There can be
no assurance that those alternative sources would be available, or, if
available, that the funds therefrom would be sufficient to service the Notes.
Although the Notes are titled "Senior": (i) the Issuer has not issued, and
does not have any plans to issue, any indebtedness to which the Notes would be
senior; and (ii) the Notes are effectively subordinated to all liabilities of
the Issuer's subsidiaries, including liabilities to general creditors (except to
the extent that any subsidiary of the Issuer may guarantee the Notes), and the
EchoStar guarantee of the Notes will be subordinated to all liabilities of
EchoStar (except liabilities to general creditors). As of
24
June 30, 1997, including the effect of the Old Notes Offering, the consolidated
liabilities of EchoStar and its subsidiaries aggregated approximately $1.6
billion. Approximately $1.2 billion of the consolidated liabilities of EchoStar
and its subsidiaries (including liabilities of the Issuer) are effectively
senior in right of payment to the Notes. EchoStar and its subsidiaries do not
have any liabilities which rank either junior to or PARI PASSU with the Notes.
In addition the ability of Dish to make distributions to the Issuer is severely
limited by the terms of the 1994 Indenture (as defined), and the cash flow
generated by the assets and operations of the Issuer's subsidiaries will
therefore only be available to satisfy the Issuer's obligations on the Notes to
the extent that such subsidiaries are able to make distributions, directly or
indirectly, to the Issuer. In this regard, as of June 30, 1997, the guarantee of
Dish is effectively subordinated to approximately $900.0 million of indebtedness
of Dish and its subsidiaries. Upon full accretion of the 1994 Notes, the
guarantee of Dish will be effectively subordinated to at least an additional
approximately $156.8 million of indebtedness of Dish and its subsidiaries solely
as a result of the accretion of the 1994 Notes. Additionally, the 1994
Indenture places severe limitations on the incurrence of additional indebtedness
(including the guarantee of indebtedness) by Dish and its subsidiaries until
such time as their consolidated indebtedness to cash flow ratio would not exceed
4.0 to 1 after taking the issuance of the indebtedness into account. As of June
30, 1997, Dish and its subsidiaries do not meet this ratio of indebtedness to
cash flow. Accordingly, as of June 30, 1997, the guarantee of Dish is not in
effect and Dish and its subsidiaries are not able to make distributions to the
Issuer. While the 1996 Indenture permits ESBC to pay dividends and make other
distributions to the Issuer without restrictions, as of June 30, 1997, the
guarantee of ESBC is effectively subordinated to approximately $1.2 billion of
indebtedness of ESBC and its subsidiaries. Upon full accretion of the 1994 and
1996 Notes, the guarantee of ESBC will be effectively subordinated to at least
an additional approximately $325.5 million of indebtedness of ESBC and its
subsidiaries solely as a result of the accretion of the 1994 and 1996 Notes.
Further, the 1996 Indenture places severe limitations on the incurrence of
additional indebtedness (including the guarantee of indebtedness) by ESBC and
its subsidiaries until such time as their consolidated indebtedness to cash flow
ratio would not exceed 5.0 to 1 after taking the issuance of the indebtedness
into account. As of June 30, 1997, ESBC and its subsidiaries do not meet this
ratio of indebtedness to cash flow. Accordingly, as of June 30, 1997, the
guarantee of ESBC is not in effect. Therefore, there can be no assurance that
the guarantees of Dish and ESBC will ever provide additional collateral to the
holders of Notes. See "Description of Certain Indebtedness."
UNCERTAINTY OF SPRINGING GUARANTEES. Initially, the Issuer's payment
obligations under the Notes are only guaranteed (on a subordinated basis) by
EchoStar. On and after the ESBC Guarantee Date, the Issuer's payment obligations
under the Notes and the Indenture will be guaranteed by ESBC (the "ESBC
Guarantee"), which guarantee will rank PARI PASSU with all senior unsecured
indebtedness of ESBC. The ESBC Guarantee will not be issued until the earlier
of: (i) the first date upon which ESBC is permitted, pursuant to the terms of
the 1996 Notes Indenture, to guarantee the Issuer's total payment obligations
under all then-outstanding Notes; and (ii) the first date upon which the 1996
Notes are no longer outstanding or have been defeased. On and after the Dish
Guarantee Date, the Issuer's payment obligations under the Notes and the
Indenture will be guaranteed by Dish (the "Dish Guarantee"), which obligation
will rank PARI PASSU with all senior unsecured indebtedness of Dish. The Dish
Guarantee will not be issued until the earlier of: (i) the first date upon which
Dish is permitted, pursuant to the terms of both the 1994 Notes Indenture and
the 1996 Notes Indenture, to guarantee the Issuer's total payment obligations
under all of the then-outstanding Notes; and (ii) the first date upon which both
the 1994 Notes and the 1996 Notes are no longer outstanding or have been
defeased. Neither ESBC nor Dish may incur or guarantee debt, subject to certain
limited exceptions, unless, after giving effect to such debt or guarantee, its
respective Indebtedness to Cash Flow Ratio would be less than certain specified
ratios set forth in the 1994 and 1996 Notes Indentures, as applicable. For the
six months ended June 30, 1997, each of Dish and ESBC had negative cash flow.
Therefore, there can be no assurance that the Dish Guarantee or ESBC Guarantee
will be effected at any time. See "Description of Exchange Notes--Affiliate
Guarantees."
RISK OF INABILITY TO REALIZE UPON SECURITY INTERESTS. The Notes are
intended to be secured by, among other things, liens on the capital stock of the
Issuer, certain assets of the Issuer, collateral assignments of certain
contracts and insurance proceeds and amounts segregated in certain escrow
accounts. See "Description of Exchange Notes--Security" and "--Disbursement of
Funds--Escrow Account." Current FCC policy permits lenders to hold security
interests in the proceeds from the sale of FCC licenses, but not direct security
interests in the licenses themselves. The security interests will be perfected
in accordance with practices frequently utilized in the satellite industry, and
financing statements will be filed in jurisdictions considered appropriate. The
ability of the Trustee under the Indenture to foreclose on such collateral upon
the occurrence of an Event of Default (as defined herein), however, will be
subject to perfection and priority issues and to practical problems associated
with realization upon the security interest in addition to compliance with the
requirements of the Communications Act of 1934, as amended (the "Communications
Act") including without limitation the requirement of prior approval for
transfer or assignment of Title III licenses. In particular, unlike most other
forms of collateral, there is no clearly established system for granting or
perfecting security interests in satellites. No assurance can be given that the
holders of the Notes will obtain the benefit of a valid or perfected security
interest in the satellites. In addition, although the Issuer holds title to
EchoStar IV and the outstanding
25
capital stock of the Issuer is being pledged to secure the Notes, the Issuer
may, subject to compliance with the terms of the Indenture, incur additional
Indebtedness and other liabilities (including trade liabilities). As a result,
title to EchoStar IV is held by an entity that may have creditors other than the
holders of the Notes who may assert rights in EchoStar IV in the event of an
inability to obtain or perfect such security interest.
If an Event of Default occurs with respect to the Notes, there can be no
assurance that the liquidation of the collateral securing the Notes would
produce proceeds in an amount sufficient to pay the principal, premium, if any,
and accrued interest on the Notes. In this regard, since the carrying value of
the orbital slot for 24 frequencies at 148DEG. WL (the "148 Frequencies") and
EchoStar IV is currently less than the principal amount of the Notes, the
proceeds generated from the sale of those assets would not be sufficient to
repay the Notes unless these assets were sold for significantly in excess of
their carrying value. There can be no assurance that either of these assets
could be sold for an amount significantly in excess of its carrying value. With
respect to the 148 Frequencies, there would be a limited external market through
which such frequencies could be sold since, among other things, it is not
possible to provide full-CONUS coverage from the 148DEG. WL orbital location.
Since EchoStar possesses the right to use a total of 90 frequencies (including
the 148 Frequencies), the 148 Frequencies may be more valuable to EchoStar than
to others, including other DBS operators, since EchoStar's current business plan
contemplates a complementary use of these frequencies. Therefore, other
companies, including other DBS providers which have rights to use less orbital
spectrum than EchoStar, may attribute less value to the 148 Frequencies.
Accordingly, it is possible that the proceeds from any foreclosure sale of this
FCC license actually would be less than the carrying value of the asset on
EchoStar's balance sheet. While there are currently no other liens against
EchoStar IV, since there is a relatively limited market through which EchoStar
IV could be sold in the event of a liquidation sale, it is possible that
proceeds from any liquidation sale of EchoStar IV would be less than the
carrying value of that asset on EchoStar's balance sheet. Further, if an Event
of Default occurs with respect to the Notes, it is likely that an event of
default also would result with respect to the indentures associated with both
the 1994 and 1996 Notes. Accordingly, while the capital stock of both ESBC and
Dish could, subject to the occurrence of certain events, be used as springing
collateral by the Trustee to secure the 1997 Notes, it is unlikely that the
capital stock of ESBC and Dish would provide additional significant collateral
value to the holders of Notes in the near term.
In any foreclosure sale of the assets of the Issuer, the purchaser of such
assets (including the Trustee if it purchased and chose not, or was unable, to
resell such assets) would need to be authorized by the FCC in advance to operate
the EchoStar DBS System. Since potential bidders who wish to operate the
EchoStar DBS System must be authorized in advance by the FCC (which, among other
things, may restrict foreign ownership), the number of potential bidders in a
foreclosure sale could be smaller than in foreclosures of other types of
facilities, and such requirements may delay the sale of, and may adversely
affect the sales price for, the EchoStar DBS System. The ability to take
possession and dispose of the collateral securing the Notes upon acceleration is
likely to be significantly impaired or delayed by applicable bankruptcy law if a
bankruptcy action were to be commenced by or against the Issuer.
RISK THAT THE ISSUER WILL BE UNABLE TO PURCHASE NOTES TENDERED UPON A
CHANGE OF CONTROL OR UPON THE OCCURRENCE OF CERTAIN EVENTS. There can be no
assurance that the Issuer will have sufficient funds to repurchase Notes
tendered upon a Change of Control or to repurchase Notes tendered Upon the
Occurrence of Certain Events. If the Issuer does not have sufficient funds to
redeem all Notes tendered for purchase upon the occurrence of a Change of
Control or Upon the Occurrence of Certain Events, the Issuer would be required
to raise additional capital. No assurance can be given that additional capital
would be available on terms acceptable to the Issuer, or at all. If the Issuer
were unable to purchase all Notes, tendered in connection with a Change of
Control or Upon the Occurrence of Certain Events, either occurrence would
constitute an Event of Default under the Indenture.
The indentures related to the 1994 and 1996 Notes contain substantially
identical provisions with regard to a Change of Control and an Offer to Purchase
Upon the Occurrence of Certain Events. There can be no assurance that EchoStar
will have sufficient funds at the time of a Change of Control or Upon the
Occurrence of Certain Events to repurchase 1994 Notes or 1996 Notes tendered.
If EchoStar does not have sufficient funds to redeem all 1994 Notes or 1996
Notes tendered for purchase upon a Change of Control or Upon the Occurrence of
Certain Events, EchoStar would be required to raise additional capital. No
assurance can be given that additional capital would be available on terms
acceptable to EchoStar, or at all. If EchoStar were unable to purchase 1994
Notes or 1996 Notes tendered in connection with a Change of Control, such
occurrence would constitute an Event of Default under each of the respective
indentures and, as a result, would constitute an Event of Default under the
Indenture.
POSSIBLE NASDAQ DELISTING OF ECHOSTAR COMMON STOCK. EchoStar's Class A
Common Stock is listed on the Nasdaq National Market. Currently, in order for an
issuer to continue to have one of its securities designated as a Nasdaq National
Market security, the issuer of the security must meet certain maintenance
criteria. Among other things, the issuer of a Nasdaq
26
National Market security must have net tangible assets of at least: (i) $1
million; or (ii) $2 million, if the issuer has sustained losses from continuing
operations and/or net losses in two of its three most recent fiscal years; or
(iii) $4 million, if the issuer sustained losses from continuing operations
and/or net losses in three of its four most recent fiscal years. If an issuer's
security is not eligible to be listed on the Nasdaq National Market, it may be
eligible to be listed on the Nasdaq SmallCap Market. In order for an issuer to
have one of its securities designated as a Nasdaq SmallCap Market security, the
issuer of the security must meet certain maintenance criteria, including, among
other things, capital and surplus of at least $1 million.
EchoStar's net tangible assets are not sufficient to meet the Nasdaq
National Market maintenance criteria, and EchoStar's capital and surplus are not
sufficient to meet the Nasdaq SmallCap Market maintenance criteria. However,
during September 1997, EchoStar received written confirmation that its Class A
Common Stock will continue to be listed on the Nasdaq National Market
notwithstanding EchoStar's technical non-compliance. There can be no assurance
that EchoStar's Class A Common Stock will continue to be listed on the Nasdaq
National Market. If EchoStar were delisted from Nasdaq, trading in EchoStar's
Class A Common Stock would thereafter likely be conducted in the
over-the-counter market. If this were to occur, an investor might find it more
difficult to dispose of, or to obtain accurate quotations as to the price of,
EchoStar's Class A Common Stock. If EchoStar's Class A Common Stock were no
longer listed on Nasdaq, the Notes could be negatively affected.
LACK OF BRAND-NAME RECOGNITION. The absence of brand-name recognition for
the EchoStar DBS System impairs the Company's ability to market its receivers
through consumer electronics stores as effectively as it would like. Some of the
Company's competitors (such as DirecTv) have arrangements with 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
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."
27
A significant delay in the delivery or launch of any EchoStar satellite
would adversely affect EchoStar's operations and may result in the cancellation
of any of the permits of EchoStar Satellite Corporation ("ESC"), DirectSat
Corporation ("DirectSat"), the Issuer and DBSC by the FCC. See "--Risk of
Satellite Defect, Loss or Reduced Performance." In addition, any material delay
in the delivery of EchoStar Receiver Systems or related components would
negatively affect EchoStar's financial condition and results of operations. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
EFFECT OF LOSS OF KEY PERSONNEL. EchoStar believes that its future success
will depend to a significant extent upon the performance of certain individuals,
particularly Charles W. Ergen, Chairman, Chief Executive Officer and President
of EchoStar, and James DeFranco, Executive Vice President. The loss of either of
these individuals could have an adverse effect on EchoStar's business. EchoStar
does not maintain "key man" insurance with respect to any such individuals.
While all executives of the Company have executed agreements limiting their
ability to work for or consult with competitors if they leave the Company, the
Company does not have any employment agreements with either of the above named
individuals, nor any other executive officer of the Company.
DEPENDENCE ON THIRD PARTY PROGRAMMERS. EchoStar is dependent on third
parties to provide it with programming services. EchoStar's programming
agreements have remaining terms ranging from one to ten years and contain
various renewal and cancellation provisions. There can be no assurance that any
of these agreements will be renewed or will not be cancelled prior to expiration
of their original term. In the event that any such agreements are not renewed or
are cancelled, there is no assurance that EchoStar would be able to obtain or
develop substitute programming, or that such substitute programming would be
comparable in quality or cost to EchoStar's existing programming. EchoStar's
competitors currently offer substantially the same programming as EchoStar. The
ability of EchoStar to compete successfully will depend on EchoStar's ability to
continue to obtain desirable programming and attractively package it to its
customers at competitive prices. See "Business--Programming."
Pursuant to the Cable Act and the FCC's rules, programming developed by
vertically integrated cable-affiliated programmers generally must be offered to
all multi-channel video programming distributors on non-discriminatory terms and
conditions. The Cable Act and the FCC's rules also prohibit certain exclusive
programming contracts. EchoStar anticipates purchasing a substantial percentage
of its programming from cable-affiliated programmers. Certain of the
restrictions on cable-affiliated programmers will expire in 2002 unless extended
by the FCC. As a result, any expiration of, amendment to, or interpretation of,
the Cable Act and the FCC's rules that permits the cable industry or programmers
to discriminate in the sale of programming against competing businesses, such as
that of EchoStar, could adversely affect EchoStar's ability to acquire
programming or acquire programming on a cost-effective basis. In addition, laws,
regulations and the need to obtain certain retransmission consents and copyright
licenses may limit the ability of the Company to implement a local programming
strategy in multiple markets.
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 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
28
FCC approvals would be required with respect to replacement satellites,
including but not limited to renewal of EchoStar's ten year DBS licenses. There
is no assurance that the FCC will grant the required approvals.
EchoStar also relies upon a single digital broadcast center located in
Cheyenne, Wyoming for key operations such as reception of programming signals,
encryption and compression. If a natural or other disaster damaged the digital
broadcast center, there can be no assurance that EchoStar would be able to
continue to provide programming services to its customers.
IMPEDIMENTS TO RETRANSMIT LOCAL BROADCAST SIGNALS. EchoStar intends to
offer programming telecast by local affiliates of national television networks
to major population centers within the continental U.S. via DBS satellite. In
order to retransmit this programming to any DISH NetworkSM subscriber in a
particular local market, EchoStar must obtain the retransmission consent of the
local affiliate. There can be no assurance that the Company will obtain
retransmission consents of any local affiliate. The inability to transmit such
programming into the local markets from which the programming is generated could
have an adverse effect on the Company.
The Satellite Home Viewer Act ("SHVA") establishes a "compulsory"
copyright license that allows a DBS operator, for a statutorily-established fee,
to retransmit local affiliate programming to subscribers for private home
viewing so long as that retransmission is limited to those persons in "unserved
households." An "unserved household", with respect to a particular television
network, is defined as one that cannot receive a sufficient over-the-air network
signal 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
that network signal. While management believes the SHVA could be read to allow
the Company to retransmit this programming to certain local markets via DBS
satellite, management also believes that the "compulsory" copyright license
under the SHVA may not be sufficient to permit the Company to implement its
strategy to retransmit such programming in the most efficient and comprehensive
manner. 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 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. 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. There can be no assurance that
EchoStar will be successful in having local affiliate copyright legislation
enacted, or that, in the absence of such legislation, it would be successful in
any litigation with copyright owners regarding this issue.
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
29
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, Inc. ("SCI"), a
high-volume contract electronics manufacturer. 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-SM-. No assurances can be
provided regarding the ultimate success of those negotiations. If SCI is unable
for any reason to produce receivers in a quantity sufficient to meet EchoStar's
requirements, EchoStar's ability to add additional subscribers would be
materially impaired and its results of operations would be adversely affected.
RISK THAT INITIAL EQUIPMENT COSTS WILL LIMIT CONSUMER DEMAND FOR DISH
NETWORK-SM- PROGRAMMING. Currently, the suggested retail price of a standard
EchoStar Receiver System is $199. The initial equipment cost required to
receive DISH Network-SM- programming may reduce the demand for EchoStar
Receiver Systems, since EchoStar Receiver Systems generally must be
purchased, while cable and certain of EchoStar's satellite competitors lease
their equipment to the consumer with little if any initial hardware payment
required.
POLITICAL RISKS PERTAINING TO LAUNCH PROVIDERS AND RESTRICTIONS ON EXPORT
OF TECHNOLOGY. EchoStar has contracted with
Lockheed-Khrunichev-Energia-International, Inc. ("LKE") for the launch of
EchoStar IV during the first quarter of 1998 from the Baikonur Cosmodrome in the
Republic of Kazakhstan (the "LKE Contract"). EchoStar will launch EchoStar IV on
a Proton K/Block DM four stage launch vehicle. Astra 1F, the first commercial
launch on a Proton K/Block DM, was successfully launched on April 9, 1996 and
Inmarsat 3 F2, the second such commercial launch, was successfully launched on
September 6, 1996. LKE now markets commercial Proton launches under a new
organization called International Launch Services ("ILS"), a joint venture
between LKE and Lockheed Services. ILS currently has contracts providing for the
launch of at least six non-EchoStar western satellites throughout 1997.
The first commercial Proton launch in 1997 was successfully launched on
May 24, carrying the Telestar 5 payload. ILS has a current commercial backlog of
18 satellites to be launched by the end of 1999 on Proton. However, two of the
launches of the Proton four stage launch vehicle have failed in the last twelve
months. In February 1996, a Proton Block DM failed during launch when its main
engine did not start properly. Additionally, in November 1996, the main engine
of a Proton Block D-2 failed to properly start a planned second burn during the
launch of the Mars 96 spacecraft.
In order for EchoStar IV to be launched from Kazakhstan, the satellite
contractor will need to obtain a technical data exchange license and a satellite
export license from the U.S. government. There can be no assurance those
licenses can be obtained in a timely manner to avoid a launch delay. Any
political or social instability, such as that recently experienced in the former
Soviet bloc countries, could affect the cost, timing and overall advisability of
utilizing LKE as a launch provider for EchoStar's satellites. See
"Business--Satellite Launches."
NEWS CORPORATION LITIGATION. On February 24, 1997, EchoStar and News
announced the News Agreement pursuant to which, among other things, News agreed
to acquire approximately 50% of the outstanding capital stock of EchoStar. News
also agreed to make available for use by EchoStar the DBS permit for 28
frequencies at 110DEG. WL purchased by MCI for over $682 million following a
1996 FCC auction. During late April 1997, substantial disagreements arose
between the parties regarding their obligations under the News Agreement.
On May 8, 1997, EchoStar filed a Complaint in the U.S. District Court for
the District of Colorado (the "Court"), Civil Action No. 97-960, requesting that
the Court confirm EchoStar's position and declare that News is obligated
pursuant to the News Agreement to lend $200 million to EchoStar without interest
and upon such other terms as the Court orders.
On May 9, 1997, EchoStar filed a First Amended Complaint significantly
expanding the scope of the litigation, to include breach of contract, failure to
act in good faith, and other causes of action. EchoStar seeks specific
performance of the News Agreement and damages, including lost profits based on,
among other things, a jointly prepared ten-year business plan showing expected
profits for EchoStar in excess of $10 billion based on consummation of the
transactions contemplated by the News Agreement.
On June 9, 1997, News filed an answer and counterclaims seeking unspecified
damages. News' answer denies all of the material allegations in the First
Amended Complaint and asserts twenty defenses, including bad faith, misconduct
and failure to
30
disclose material information on the part of EchoStar and its Chairman and Chief
Executive Officer, Charles W. Ergen. The counterclaims, in which News is joined
by its subsidiary ASkyB assert that EchoStar and Ergen breached their agreements
with News and failed to act and negotiate with News in good faith. EchoStar has
responded to News' answer and denied the allegations in their counterclaims.
EchoStar also has asserted various affirmative defenses. EchoStar intends to
diligently defend against the counterclaims. The parties are now in discovery.
The case has been set for a five week trial commencing June 1, 1998, but that
date could be postponed. The litigation process could continue for many years
and there can be no assurance concerning the outcome of the litigation. An
adverse decision could have a material adverse effect on EchoStar's financial
position and results of operations.
ABSENCE OF PUBLIC MARKET FOR THE EXCHANGE NOTES; RESTRICTIONS ON TRANSFERS.
The Exchange Notes are being offered to the holders of the Old Notes. The Old
Notes were offered and sold in June 1997 to a small number of institutional and
accredited investors and are eligible for trading in Private Offerings, Resale
and Trading through Automatic Linkages (PORTAL) Market.
The Exchange Notes will constitute a new issue of securities, for which
there is no established trading market. If a trading market does not develop or
is not maintained, holders of the Exchange Notes may experience difficulty in
reselling the Exchange Notes or may be unable to sell them at all. If a market
for the Exchange Notes develops, any such market may be discontinued at any time
and the Exchange Notes could trade at prices that may be lower than the initial
market values thereof, depending on many factors, including prevailing interest
rates, the markets for similar services and the financial performance of the
Issuer. The Initial Purchasers have made a market in the Old Notes. Although
there is currently no market for the Exchange Notes, the Initial Purchasers have
advised the Issuer that they will make a market in the Exchange Notes. However,
they are not obligated to do so, and any such market making with respect to the
Old Notes and the Exchange Notes may be discontinued at any time without notice.
In addition, such market making activity will be subject to the limits imposed
by the Securities Act and the Exchange Act, and may be limited during the
Exchange Offer and the pendency of any applicable shelf registration statement.
See "Description of Exchange Notes--Old Notes' Registration Right; Liquidated
Damages." Accordingly, there can be no assurance as to the development or
liquidity of any market for the Old Notes and the Exchange Notes. The Issuer
does not intend to apply for listing of any of the Exchange Notes on any
securities exchange or for quotation through the Nasdaq National Market or any
other securities quotation service.
CONSEQUENCES OF FAILURE TO EXCHANGE OLD NOTES. Holders of Old Notes who do
not exchange their Old Notes for Exchange Notes pursuant to the Exchange Offer
will continue to be subject to the restrictions on transfer of such Old Notes,
as set forth in the legend thereon, as a consequence of the issuance of the Old
Notes pursuant to exemptions from, or in transactions not subject to, the
registration requirements of the Securities Act and applicable state securities
laws. In general, the Old Notes may not be offered, sold, pledged or otherwise
transferred, unless registered under the Securities Act and applicable state
securities laws, or pursuant to an exemption therefrom. Except under certain
limited circumstances, the Issuer does not intend to register the Old Notes
under the Securities Act. In addition, any holder of Old Notes who tenders in
the Exchange Offer for the purpose of participating in a distribution of the
Exchange Notes may be deemed to have received restricted securities and, if so,
will be required to comply with the registration and prospectus delivery
requirements of the Securities Act in connection with any resale transaction.
To the extent Old Notes are tendered and accepted in the Exchange Offer, the
trading market, if any, for the Old Notes not so tendered could be adversely
affected. See "The Exchange Offer" and "Description of Exchange Notes - Old
Notes' Registration Rights; Liquidated Damages."
RISKS OF ADVERSE EFFECTS OF GOVERNMENT REGULATION. EchoStar is subject to
the regulatory authority of the U.S. Government and the national communications
authorities of the countries in which it operates. The business prospects of
EchoStar could be adversely affected by the adoption of new laws, policies or
regulations, or changes in the interpretation or application of existing laws,
policies and regulations, that modify the present regulatory environment, as
well as its failure to comply with existing laws, policies and regulations.
EchoStar must comply with all applicable Communications Act requirements and FCC
regulations and policies, including, among other things, proceeding with
diligence to construct satellites and commence operations within prescribed
milestones and in accordance with required filings of periodic progress reports.
EchoStar believes that it remains free to set prices and serve customers
according to its business judgment, without rate regulation or the statutory
obligation under Title II of the Communications Act to avoid undue
discrimination among customers. There can be no assurances that the FCC would
not find that EchoStar is subject to the requirements of Title II. If the FCC
made such a finding, EchoStar would be required to comply with the applicable
portions of Title II.
The Communications Act of 1934, as amended, and the FCC's implementing
regulations provide that, where
31
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, including the
preferred convertible shares subject to this offering, 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.
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 this proceeding. The Company cannot predict at this time the extent
or nature of the public interest programming requirements that will be imposed
by the FCC, or when the FCC will issue these rules. There can be no assurance
that these public interest requirements will not have an adverse effect on the
quantity and mix of programming that EchoStar is able to offer its subscribers.
See "Business--Government Regulation."
Pursuant to the 1996 Act, the FCC has established regulations that prohibit
(with certain exceptions) governmental and non-governmental restrictions, such
as private covenants and homeowners' association rules, that impair a viewer's
ability to receive video programming through devices designed for DBS Service,
MMDS, or over-the-air reception of television broadcast service. These rules
apply to property within the exclusive control of the antenna user where the
user has an ownership interest in the property. In an ongoing proceeding, the
FCC is examining whether the rules should apply to the placement of antennas on
common areas or rental properties where the antenna user does not own or control
the property. While the Company cannot predict the outcome of this proceeding, a
decision not to extend these rules to such properties or other adverse decision
potentially could limit the growth of DBS subscribers. See "Business--Government
Regulation."
While DBS operators like EchoStar currently are not subject to the "must
carry" requirements of the Cable Act, the cable industry has argued that DBS
operators should be subject to these requirements. In the event the "must carry"
requirements of the Cable Act are revised to include DBS operators, or to the
extent that new legislation or regulation of a similar nature is promulgated,
EchoStar's future plans to provide local programming may be adversely affected,
and such must carry requirements could cause the displacement of possibly more
attractive programming.
INABILITY TO PROVIDE CONSUMER FINANCING. Historically, EchoStar has
maintained agreements with third-party finance companies to make consumer credit
available to its customers. These financing plans provide consumers the
opportunity to lease or finance their EchoStar Receiver Systems, including
installation costs and certain DISH Network-SM- programming packages, on
competitive terms. The third-party finance company that provides the program
currently utilized by EchoStar has notified EchoStar that it does not intend to
renew the agreement, which expires during October 1997. During March 1997,
EchoStar's wholly-owned subsidiary, Dish Network Credit Corporation ("DNCC"),
began offering an internally-financed consumer lease plan to prospective DISH
NetworkSM customers. This plan provides for a four-year lease term at
competitive rates to qualified consumers. Additional capital will be required
for EchoStar to implement the program on a larger scale. There can be no
assurance that additional capital will be available to fund the lease program on
terms acceptable to EchoStar, or at all. In the event that EchoStar is unable to
fund DNCC or to finalize consumer credit agreements with other third-party
finance companies, EchoStar's ability to attract new subscribers may be
adversely affected.
OPPOSITION TO, AND RISK OF LOSS OF, CERTAIN ECHOSTAR AUTHORIZATIONS. Many
aspects of EchoStar's operations require the
32
retention or renewal of existing FCC authorizations, or the procurement of
additional authorizations. The FCC has granted EchoStar conditional authority to
use C-band frequencies for telemetry, tracking and control ("TT&C") functions
for EchoStar I, stating that the required coordination process with Canada and
Mexico had been completed. In January 1996, however, the FCC received a
communication from an official of the Ministry of Communications and
Transportation of Mexico stating that EchoStar I's TT&C operations could cause
unacceptable interference to Mexican satellites. There can be no assurance that
such objections will not subsequently require EchoStar to relinquish the use of
such C-band frequencies for TT&C purposes. This could result in the inability to
control EchoStar I and a total loss of the satellite. Further, the FCC has
granted EchoStar conditional authority to use "extended" C-band frequencies for
TT&C functions for EchoStar II, but only until January 1, 1999, at which time
the FCC will review the suitability of those frequencies for TT&C operations.
There can be no assurance that the FCC will extend the authorization to use
these C-band frequencies for TT&C purposes beyond that date. Such failure to
extend the authorization could result in the inability to control EchoStar II
and a total loss of the satellite. Also, there can be no assurance that the
rights of EchoStar under the Dominion Agreement will be given effect in the
absence of FCC approval, which has not yet been received and may not be
forthcoming. In addition, certain of EchoStar's pending and future requests to
the FCC for extensions, waivers and approvals have been, and are expected to
continue to be, opposed by third parties. Among other things, the precise
location of ESC's and DirectSat's licensed EchoStar I and EchoStar II satellites
may be outside the parameters set forth in their licenses. EchoStar has
requested temporary authority to operate, for 180 days, EchoStar I and EchoStar
II closer together (at 119.05DEG. WL and 118.95DEG. WL instead of at their
authorized locations at 119.2DEG. WL and 118.8DEG. WL), which would improve
signal quality and facilitate better customer service. The FCC has raised
concerns about this request, and the request has been opposed by Tempo. See
"Business--Government Regulation--FCC Permits and Licenses." Failure of the FCC
to grant or renew EchoStar's request would require EchoStar to take steps to
ensure that EchoStar I and EchoStar II are positioned consistent with present
FCC authorizations, or to reposition the satellites, and could have an adverse
effect on the operation of these satellites. If EchoStar I and EchoStar II were
found to have been operated outside their authorized parameters, the FCC could
impose monetary forfeitures or other penalties on EchoStar. There can be no
assurance that EchoStar's requests will be granted or, if granted, that they
will be granted on a timely basis or on terms favorable to EchoStar. EchoStar
will also require further FCC authorizations to launch and operate EchoStar III
and EchoStar IV. The loss of any of EchoStar's FCC authorizations, the failure
to obtain requested extensions or waivers or the imposition of conditions would
adversely affect EchoStar's plan of operations, and its current business plan
could not be fully implemented. See "Business--Other Components of DBS Service"
and "--Government Regulation--FCC Permits and Licenses."
By order released January 11, 1996, the FCC's International Bureau extended
the DBS permit of DirectSat for 11 channels at the 175DEG. WL orbital slot to
1999, subject to the condition that the FCC may reconsider the extension and
modify or cancel it, in whole or in part, if DirectSat fails to make progress
toward construction and operation of its DBS system substantially in compliance
with its promised timetable, or with any more expedited timetable ordered by the
FCC. In the same order, the FCC's staff denied reconsideration of its earlier
decision to assign channels and orbital locations to DirectSat at 119DEG. WL
and 175DEG. WL for its DBS system. PrimeStar has applied for full FCC review of
this order and other parties may seek reconsideration and/or judicial review of
the eventual FCC order. There can be no assurance that the full FCC will affirm
the International Bureau's decision or render a decision favorable to EchoStar.
Failure of the full FCC to affirm the decision would have a substantial adverse
effect upon EchoStar's operations and may result in a loss of authorizations. In
addition, in the event that EchoStar loses the DirectSat frequencies at 119DEG.
WL, EchoStar would be required under certain circumstances to offer to
repurchase all or a portion of the 1994 Notes, the 1996 Notes and the Notes. In
the event that a substantial number of holders of the 1994 Notes, the 1996 Notes
or the Notes accepted that offer, EchoStar's plan of operations, including its
liquidity, would be adversely affected and it might not be possible to implement
EchoStar's current business plan without obtaining additional financing. See
"Business--Legal Proceedings."
DBSC's authorization to construct and operate two DBS satellites at
61.5DEG. WL and 175DEG. WL initially expired on August 15, 1995. Prior to that
date, DBSC applied for an extension of time, based upon a variety of factors.
DBSC indicated that it had signed an amendment to the DBSC Satellite Contract,
by which DBSC ordered a 32 transponder satellite in lieu of the previously
contracted for 16 transponder satellite. DBSC filed an application for FCC
approval of this minor modification in design. In December 1995, the FCC staff
approved DBSC's request for an extension of time, giving it until 1998 to
complete construction and launch of its satellites subject to continued
compliance with the FCC's due diligence requirements. PrimeStar has sought full
FCC review of this order, and other parties may seek reconsideration and/or
judicial review of the eventual FCC order. There can be no assurance that the
full FCC will affirm the International Bureau's decision or render a decision
favorable to EchoStar. Failure of the full FCC to affirm the decision would have
a substantial adverse effect upon EchoStar's operations, and may result in loss
of the authorization. The FCC has not yet ruled on PrimeStar's petition, and no
assurances can be given that the FCC will sustain the staff's determination.
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
33
interference data based on the proposed new satellite design. While DBSC has
submitted relevant data, there can be no assurance that the FCC will grant the
modification application. Failure of the FCC to grant the modification
application would have an adverse effect on EchoStar's operations, and may
preclude its ability to launch EchoStar III and to deliver service at this
orbital location in accordance with its business plan and prescribed milestones.
EchoStar III is anticipated to be launched on October 5, 1997. EchoStar
also expects to file applications for authority to operate the satellite as well
as feeder-link earth stations that will communicate with EchoStar III. There
can be no assurance that these applications will be granted.
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 61.5DEG. WL of EchoStar III by July 31, 1997, and that
milestone was met. DBSC and DirectSat also must have operational satellites at
175DEG. WL by 1998 and 1999, respectively, and DirectSat must have an
operational satellite at 110DEG. WL by 1999. Both DBSC and DirectSat must
comply with other intermediate milestones. Any delay in this schedule may cause
total or partial revocation of DBSC's or DirectSat's permits. The FCC also has
declared that it will carefully monitor the semi-annual reports required to be
filed by DBS permittees. Failure of EchoStar to file adequate semi-annual
reports or to demonstrate progress in the construction of its DBS systems may
result in cancellation of its permits. EchoStar has not filed all required
progress reports with the FCC. There is a risk that the FCC may find that
EchoStar has not complied fully with the FCC's due diligence requirements,
including without limitation the filing of semi-annual progress reports and
satisfaction of construction and payment obligations consistent with the FCC's
rules and the semi-annual progress reports filed by EchoStar.
Further, the FCC has not yet completed its review to determine whether
EchoStar's contract for the construction of the western satellite of its system
meets the FCC's requirements and has deferred a decision on whether to extend
ESC's permit for western assignments. Therefore, the FCC has not yet assigned to
EchoStar frequencies for that satellite. While it is possible that DBSC,
DirectSat and ESC may construct a satellite for joint use by all three at
175DEG. WL (provided that ESC is found to have a firm contract and receives
frequency assignments at 175DEG. WL), EchoStar will still be required to
construct and launch two or more satellites in addition to EchoStar I, EchoStar
II, EchoStar III and EchoStar IV in order to preserve all of its DBS permits
(plus additional satellites for the single frequencies at each of the 110DEG.
WL and 166DEG. WL orbital slots in order to avoid loss of those frequencies).
Finally, with respect to the 24 orbital assignments at the 148DEG. WL orbital
slot, EchoStar must complete contracting for a satellite by December 20, 1997,
must complete construction by December 20, 2000, and must launch and operate a
satellite by December 20, 2002. Absent infusion of additional significant
capital, EchoStar will not be able to retain all of its assigned frequencies and
orbital slots. There can be no assurance that EchoStar will be able to comply
with the FCC's due diligence requirements or that the FCC will determine that
EchoStar has complied with such due diligence requirements.
In addition, ESC recently received from the FCC's International Bureau a
conditional license for two FSS satellites in the Ka-band. That license was
based on an orbital plan agreed upon by applicants in EchoStar's processing
round. Certain of these applicants have now requested changes to that orbital
plan. One company (Norris) has filed a request to stay the plan, and petitions
for reconsideration are also pending against certain of the licenses covered by
the plan. There can be no assurance that review of the recently granted Ka-band
licenses and orbital plan by the International Bureau and the full FCC will not
eliminate the basis for EchoStar's conditional license and result in loss of
that license.
In November 1996, ESC also received a conditional license for two Ku-band
FSS satellites, subject, among other things, to submitting additional proof of
its financial qualifications. While ESC has submitted such proof, GE Americom
and PrimeStar have challenged it and have requested cancellation of ESC's
license. GE Americom and PrimeStar have also requested reconsideration of ESC's
license and reassignment of one EchoStar satellite to a different orbital slot,
on the ground that the satellite will interfere with the GE Americom satellite
used by PrimeStar for its medium-power Ku-band service. Finally, GE Americom and
PrimeStar have opposed ESC's request to add C-band capabilities to one satellite
of its Ku-band system, and EchoStar Ku-X Corporation's pending application for
an extended Ku-band system has also been opposed. There is no assurance as to
how the FCC will rule with respect to any of these challenges. Rulings in favor
of these challengers would adversely affect EchoStar's ability to use these FSS
satellites.
34
EchoStar also must comply with certain construction and launch milestones
imposed or expected to be imposed with respect to its conditionally authorized
operations in the Ku and Ka-bands. Failure to comply with such requirements may
result in termination of the authorizations.
RISK OF INABILITY TO MANAGE RAPIDLY EXPANDING OPERATIONS. EchoStar must
expand its operations rapidly to achieve its business objectives. Several of
EchoStar's key activities, including satellite in-orbit control, satellite
receiver manufacturing, billing and subscriber management are out-sourced to
third party vendors. To manage its growth effectively, EchoStar must continue to
develop its internal and external sales force, installation capability, customer
service operations, and information systems, and maintain its relationships with
third party vendors. EchoStar will also need to continue to expand, train and
manage its employee base, and its management personnel will be required to
assume even greater levels of responsibility. If EchoStar is unable to manage
its growth effectively, EchoStar's business and results of operations could be
materially adversely affected.
SUBSCRIBER TURNOVER. Since commencing operation of the DISH Network-SM-
in March 1996, the Issuer's monthly subscriber turnover (which represents the
number of subscriber disconnects during the period divided by the
weighted-average number of subscribers during the period) has averaged less
than 1.0%. To date, a majority of the Issuer's subscribers have purchased
annual subscriptions. The Issuer expects that subscriber turnover may
increase as annual subscribers renew and convert to month-to-month
subscriptions, as the number of overall DISH Network-SM- subscribers
increases, and as a result of certain other factors. In the event that the
Issuer is unable to control subscriber turnover, its financial condition and
results of operations would be adversely affected.
LIMITED MARKETING EXPERIENCE. EchoStar began marketing the EchoStar DBS
System in March 1996. The Company markets EchoStar Receiver Systems throughout
the U.S. through its own sales and marketing organization using national and
regional broadcast and print advertising, independent distributors and retailers
and consumer electronics stores and outlets. The Company's success will
ultimately depend in large part upon its ability to successfully demonstrate to
consumers the ease of use, reliability and cost-effectiveness of the EchoStar
DBS System, and upon its ability to have EchoStar Receiver Systems distributed
in consumer mass marketing channels, such as consumer electronics stores and
outlets.
EchoStar is presently selling EchoStar Receiver Systems through a limited
number of consumer electronics stores. Some of EchoStar's competitors, including
DirecTv, began selling their products through consumer electronics stores before
EchoStar and, as a result, are carried by a greater number of retailers and have
a competitive advantage in the consumer electronics distribution channel.
Further, some of EchoStar's competitors have maintained this competitive
advantage through extensive monetary support of consumer electronics advertising
campaigns. This is particularly true in the case of those consumer electronics
outlet chains that have chosen, for the time being, to sell only one or a
limited number of DBS receiver products. Consequently, there can be no assurance
that EchoStar will be able to effectively market its EchoStar Receiver Systems.
RISK OF SATELLITE DEFECT, LOSS OR REDUCED PERFORMANCE. Satellites are
subject to significant risks, including satellite defects, launch failure,
destruction and damage that may result in incorrect orbital placement or prevent
proper commercial operation. Approximately 15% of all commercial geosynchronous
satellite launches have resulted in a total or constructive total loss. The
failure rate varies by launch vehicle and manufacturer. While the FCC granted
EchoStar authority in 1995 to construct a satellite to serve as a ground spare
for EchoStar I and EchoStar II, EchoStar has not constructed ground spares for
its DBS system, and therefore may not have satellites immediately available to
use as replacements in the event of a serious in-orbit problem which could cause
a substantial delay in the restoration of EchoStar's DBS service.
In the event of a failure or loss of any of EchoStar I, EchoStar II, or
EchoStar III, and subject to FCC consent, EchoStar may relocate EchoStar IV and
utilize the satellite as a replacement for the failed or lost satellite. Such a
relocation would require prior FCC approval and, among other things, a showing
to the FCC that EchoStar IV would not cause additional interference compared to
EchoStar I, EchoStar II, or EchoStar III. Should EchoStar choose to utilize
EchoStar IV in this manner, there can be no assurances that such use would not
adversely affect EchoStar's ability to meet the construction, launch and
operation deadlines associated with its permits. Failure to meet such deadlines
could result in the loss of such permits and would have an adverse effect on
EchoStar's planned operations.
In the event of a launch failure of EchoStar III, under the 1996 Notes
Indenture EchoStar would be required to use the proceeds from any launch
insurance to purchase satellites or, at ESBC's option, to make an offer to
repurchase the maximum amount of 1996 Notes that can be purchased with those
proceeds. Similarly, in the event of a launch failure of EchoStar IV, under the
Indenture the Issuer would be required to use the proceeds from any launch
insurance to purchase satellites or, at the
35
Issuer's option, to make an offer to repurchase the maximum amount of Notes that
can be purchased with those proceeds.
A number of satellites constructed by Lockheed Martin Corporation
("Lockheed Martin") over the past three years have experienced defects resulting
in total or partial loss following launch. The type of failures experienced have
varied widely. Lockheed Martin constructed EchoStar I and EchoStar II and is
constructing EchoStar III and EchoStar IV. No assurances can be given that
EchoStar I, EchoStar II, EchoStar III or EchoStar IV will perform according to
specifications.
Launch delays could result from weather conditions or technical problems
with any EchoStar satellite or any launch vehicle utilized by the launch
providers for EchoStar III or EchoStar IV, or from other factors beyond
EchoStar's control. If the launch of any of EchoStar's satellites, including
EchoStar III or EchoStar IV, is delayed, the Company's strategy to provide
additional programming to DISH Network-SM- subscribers using transponders on
these satellites would be adversely affected.
RISK OF SIGNAL THEFT. The delivery of subscription programming requires
the use of encryption technology. Signal theft or "piracy" in the C-band DTH,
cable television and European DBS industries has been widely reported. There can
be no assurance that the encryption technology used by the EchoStar DBS System
will remain totally effective. If EchoStar's encryption technology is
compromised in a manner which is not promptly corrected, EchoStar's revenue and
its ability to contract for video and audio services provided by programmers
would be adversely affected. Recent published reports indicate that the DirecTv
and USSB encryption systems have been compromised. There can be no assurance
that continued theft of DirecTv programming will not adversely affect EchoStar's
operations. A Canadian court recently ruled that pirating of DirecTv programming
is not illegal in Canada. This ruling may encourage the attempted piracy of
EchoStar programming in Canada, resulting in lost revenue for EchoStar and
increased piracy of DirecTv programming. Piracy of DirecTv programming could
result in increased sales of DirecTv receivers at the expense of loss of
potential DISH Network-SM- subscribers.
36
RISKS OF FAILURE OF COMPLEX TECHNOLOGY. The EchoStar DBS System is highly
complex. New applications and adaptations of existing and new technology
(including compression, conditional access, on screen guides and other matters),
and significant software development, are integral to the EchoStar DBS System.
As a result of the introduction of such new applications and adaptions from time
to time, the EchoStar DBS System may, at times, not function as expected.
Technology in the satellite television industry is in a rapid and
continuing state of change as new technologies develop. Although the digital
compression technology utilized in connection with the EchoStar DBS System is
the world standard, the integration and implementation of that technology is
also undergoing rapid change. There can be no assurance that EchoStar and its
suppliers will be able to keep pace with technological developments. In
addition, delays in the delivery of components or other unforeseen problems in
the EchoStar DBS System may occur that could adversely affect performance, cost
or timely deployment and operation of the EchoStar DBS System and could have an
adverse effect on EchoStar. Further, in the event that a competitive satellite
receiver technology becomes commonly accepted as the standard for satellite
receivers in the U.S., EchoStar would be at a significant technological
disadvantage. See "Business--Programming."
CONTROL OF ECHOSTAR BY PRINCIPAL STOCKHOLDER. Although Charles W. Ergen,
the Chairman, Chief Executive Officer and President of EchoStar, currently owns
72% of the total equity securities of EchoStar (assuming exercise of employee
stock options), he currently possesses approximately 96% of the total voting
power. Thus, Mr. Ergen has the ability to elect a majority of the directors of
EchoStar and to control all other matters requiring the approval of EchoStar's
stockholders. See "Security Ownership of Certain Beneficial Owners and
Management." For Mr. Ergen's total voting power in EchoStar to be reduced to
below 51%, his percentage ownership of the equity securities of EchoStar would
have to be reduced to below 10%.
LIMITATIONS ON WARRANTIES AND INSURANCE. Pursuant to satellite
construction contracts between Lockheed Martin and EchoStar and certain of its
subsidiaries (collectively, the "Satellite Contracts"), and EchoStar's launch
services contracts (the "Launch Contracts"), EchoStar and certain of its
subsidiaries are the beneficiaries of limited warranties on their satellites and
launch vehicles. However, the limited warranties do not cover a substantial
portion of the risk inherent in satellite launches or satellite operations.
EchoStar is required under the 1994 Notes Indenture to maintain in-orbit
insurance for EchoStar I and EchoStar II. EchoStar is required under the 1996
Notes Indenture to obtain launch and in-orbit insurance for EchoStar III and is
required under the 1997 Notes Indenture to obtain launch and in-orbit insurance
for EchoStar IV. EchoStar has procured the required in- orbit insurance for
EchoStar I and EchoStar II. The launch insurance policies contain (or are
expected to contain), and the insurance policies with respect to in-orbit
operation contain (or are expected to contain), standard commercial satellite
insurance provisions, including a material change condition, that, if
successfully invoked, will give insurance carriers the ability to increase the
cost of the insurance (potentially to a commercially impracticable level),
require exclusions from coverage that would leave the risk uninsured or rescind
their coverage commitment entirely. The in-orbit insurance policies for EchoStar
I and EchoStar II also are subject to annual renewal provisions. There can be no
assurance that such renewals will be at rates or on terms favorable to 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 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 launch insurance
required for EchoStar III and EchoStar IV (including in-orbit insurance for 365
days after launch), there can be no assurance that EchoStar will be able to
obtain or maintain insurance for EchoStar III and EchoStar IV. See
"Business--Insurance."
If the launch of any EchoStar satellite is a full or partial failure or if,
following launch, any EchoStar satellite does not perform to specifications,
there may be circumstances in which insurance will not fully reimburse EchoStar
for any loss. In addition, insurance will not reimburse EchoStar for business
interruption, loss of business and similar losses that might arise from delay in
the launch of any EchoStar satellite. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Liquidity and Capital
Resources."
LIMITED LIFE OF SATELLITES. Each EchoStar satellite has a limited useful
life. A number of factors affect the useful lives of the satellites, including
the quality of their construction, the durability of their component parts, the
longevity of their orbits and the
37
launch vehicle used. The minimum design life of each of EchoStar I, EchoStar II,
EchoStar III and EchoStar IV is 12 years. There can be no assurance, however, as
to the useful lives of the satellites. EchoStar's operating results would be
adversely affected in the event the useful life of any of these satellites were
significantly shorter than 12 years. The Satellite Contracts contain no
warranties in the event of a failure of EchoStar I, EchoStar II, EchoStar III or
EchoStar IV following launch. Additionally, a move of any of these satellites,
either temporarily or permanently, to another orbital location, would result in
a decrease in the orbital life of the satellite of up to six months per
movement.
RISK OF SATELLITE DAMAGE OR LOSS FROM ACTS OF WAR, ELECTROSTATIC STORM AND
SPACE DEBRIS. The loss, damage or destruction of any EchoStar satellites as a
result of military actions or acts of war, anti-satellite devices, electrostatic
storm or collision with space debris would have a material adverse effect on
EchoStar. EchoStar's insurance policies include customary exclusions including:
(i) military or similar actions; (ii) laser, directed energy or nuclear
anti-satellite devices; and (iii) insurrection and similar acts or governmental
action.
STATE TAXES. In addition to being subject to FCC regulation, operators of
satellite broadcast systems in the U.S. may be affected by imposition of state
and/or local sales taxes on satellite-delivered programming. According to the
Satellite Broadcasting and Communications Association, several states, including
Maryland, Missouri, North Dakota, New York and Washington, have either adopted
or proposed such taxes. Other states are in various stages of considering
proposals that would tax providers of satellite-delivered programming and other
communications providers. The adoption of state imposed sales taxes could have
adverse consequences to the Issuer's business.
38
USE OF PROCEEDS
There will be no cash proceeds to the Issuer from the Exchange Offer. The
gross proceeds to the Issuer from the Old Notes Offering were approximately
$375.0 million, with net proceeds to the Issuer of approximately $362.5 million.
The net proceeds from the Old Notes offering will be used to fund: (i) the
Satellite Escrow Account; (ii) the Interest Escrow Account; and (iii) subscriber
acquisition and marketing expenses, general corporate purposes, and to the
extent otherwise available, the construction, launch and insurance of
EchoStar III. Although the estimates set forth under "Uses" below represent
EchoStar's best estimate of the intended use of the proceeds from the Old Notes
Offering, the specific amounts allocated to each use (other than amounts
segregated in the Satellite and Interest Escrow Accounts) may change depending
on such factors as unanticipated costs or requirements necessary for development
and operation of the EchoStar DBS System.
(IN MILLIONS)
SOURCES:
Net proceeds from the Old Notes Offering (1) . . . . . . $362.5
-------------
-------------
USES:
Deposit to the Satellite Escrow Account (2). . . . . . . $112.0
Deposit to the Interest Escrow Account (3) . . . . . . . 109.0
Construction, launch and insurance of EchoStar
III, subscriber acquisition and marketing
expenses and general corporate purposes. . . . . . . . 141.5
-------------
Total uses . . . . . . . . . . . . . . . . . . . . . $362.5
-------------
-------------
- ----------------------
(1) Net proceeds from the Old Notes Offering are net of approximately $12.5
million of estimated transaction expenses, including discounts and
commissions.
(2) Represents the amount placed in escrow to fund, together with the proceeds
from the investment thereof, the construction, launch and insurance of
EchoStar IV.
(3) Represents the amount placed in escrow to fund, together with the proceeds
from the investment thereof, the first five semi-annual interest payments
on the Notes.
39
THE EXCHANGE OFFER
PURPOSE OF THE EXCHANGE OFFER
The sole purpose of the Exchange Offer is to fulfill the obligations of the
Issuer and the Guarantors with respect to the registration of the Old Notes.
The Old Notes were originally issued and sold on June 25, 1997 (the
"Issue Date"). Such sales were not registered under the Securities Act in
reliance upon the exemption provided in section 4(2) of the Securities Act
and Rule 144A promulgated under the Securities Act. In connection with the
sale of the Old Notes, the Issuer agreed to file with the Commission a
registration statement relating to the Exchange Offer (the "Registration
Statement"), pursuant to which the Exchange Notes, consisting of another
series of senior subordinated notes of the Issuer covered by such
Registration Statement and containing substantially identical terms to the
Old Notes, except as set forth in this Prospectus, would be offered in
exchange for Old Notes tendered at the option of the holders thereof. If:
(i) the Issuer is not required to file the Registration Statement or
permitted to consummate the Exchange Offer because the Exchange Offer is not
permitted by applicable law or Commission policy; or (ii) any holder of
Transfer Restricted Notes notifies the Issuer within the specific time period
that: (A) it is prohibited by law or Commission policy from participating in
the Exchange Offer; (B) that it may not resell the Exchange Notes acquired by
it in the Exchange Offer to the public without delivering a prospectus and
the prospectus contained in the Registration Statement is not appropriate or
available for such resales; or (C) that it is a broker-dealer and owns Old
Notes acquired directly from the Issuer or an affiliate of the Issuer, the
Issuer and the Guarantors will file with the Commission a registration
statement (the "Shelf Registration Statement") to cover resales of the Old
Notes by the holders thereof who satisfy certain conditions relating to the
provision of information in connection with the Shelf Registration Statement.
For purposes of the foregoing, "Transfer Restricted Notes" means each Old
Note until: (i) the date on which such Old Note has been exchanged by a
person other than a broker-dealer for an Exchange Note in the Exchange Offer;
(ii) following the exchange by a broker-dealer in the Exchange Offer of a
Note for an Exchange Note, the date on which such Exchange Note is sold to a
purchaser who receives from such broker-dealer on or prior to the date of
such sale a copy of the prospectus contained in the Registration Statement;
(iii) the date on which such Old Note has been effectively registered under
the Securities Act and disposed of in accordance with the Shelf Registration
Statement; or (iv) the date on which such Old Note is distributed to the
public pursuant to Rule 144 under the Act. If: (a) the Issuer and the
Guarantors fail to file any of the Registration Statements required by the
Registration Rights Agreement on or before the date specified for such
filing; (b) any of such Registration Statements is not declared effective by
the Commission on or prior to the date specified for such effectiveness (the
"Effectiveness Target Date"); (c) the Issuer and the Guarantors fail to
consummate the Exchange Offer within 30 business days of the Effectiveness
Target Date with respect to the Registration Statement; or (d) the Shelf
Registration Statement or the Registration Statement is declared effective
but thereafter ceases to be effective or usable in connection with resales of
Transfer Restricted Notes during the periods specified in the Registration
Rights Agreement (each such event referred to in clauses (a) through (d)
above a "Registration Default") then the Issuer and the Guarantors jointly
and severally agree to pay liquidated damages to each holder of Old Notes,
with respect to the first 90-day period immediately following the occurrence
of such Registration Default in an amount equal to $.05 per week per $1,000
principal amount of Old Notes held by such holder ("Liquidated Damages").
The amount of the Liquidated Damages will increase by an additional $.05 per
week per $1,000 principal amount of Old Notes with respect to each subsequent
90-day period until all Registration Defaults have been cured, up to a
maximum amount of Liquidated Damages of $.40 per week per $1,000 principal
amount of Old Notes constituting Transfer Restricted Notes. All accrued
Liquidated Damages will be paid by the Issuer on each damages payment date to
the Global Note Holder (as defined) by wire transfer to the accounts
specified by them or by mailing checks to their registered addressed if no
such accounts have been specified. Following the cure of all Registration
Defaults the accrual of Liquidated Damages will cease. See "Description of
Exchange Notes - Old Notes' Registration rights; Liquidated Damages."
Holders of Old Notes will be required to make certain representations to
the Issuer (as described in the Registration Rights Agreement) in order to
participate in the Exchange Offer and will be required to deliver information
to be used in connection with the Shelf Registration Statement and to provide
comments on the Shelf Registration Statement within the time periods set
forth in the Registration Rights Agreement in order to have their Old Notes
included in the Shelf Registration Statement and benefit form the provisions
regarding Liquidated Damages set forth above.
Terms of the Exchange
The Issuer hereby offers to exchange, upon the terms and subject to the
conditions set forth herein and in the Letter of Transmittal accompanying
this Prospectus (the "Letter of Transmittal"), $1,000 in principal amount of
Exchange Notes for each $1,000 in principal amount of Old Notes. The terms
of the Exchange Notes are substantially identical to the terms of the Old
Notes for which they may be exchanged pursuant to this Exchange Offer, except
that the Exchange Notes will generally be
40
freely transferable by holders thereof, and the holders of the Exchange Notes
(as well as remaining holders of any Old Notes) are not entitled to certain
registration rights and certain liquidated damages provisions which are
applicable to the Old Notes under the Registration Rights Agreement. The
Exchange Notes will evidence the same debt as the Old Notes and will be
entitled to the benefits of the Indenture. See "Description of Exchange
Notes."
The Exchange Offer is not conditioned upon any minimum aggregate principal
amount of Old Notes being tendered or accepted for exchange.
Based on its view of interpretations set forth in no-action letters issued
by the Staff to third parties, the Issuer believes that Exchange Notes issued
pursuant to the Exchange Offer in exchange for the Old Notes may be offered for
resale, resold and otherwise transferred by holders thereof (other than any
holder which is (i) an Affiliate of the Issuer, (ii) a broker-dealer who
acquired Old Notes directly from the Issuer or (iii) a broker-dealer who
acquired Old Notes as a result of market making or other trading activities)
without compliance with the registration and prospectus delivery provisions of
the Securities Act, provided that such Exchange Notes are acquired in the
ordinary course of such holders' business, and such holders are not engaged in,
and do not intend to engage in, and have no arrangement or understanding with
any person to participate in, a distribution of such Exchange Notes. Any
broker-dealer that resells Exchange Notes that were received by it for its own
account pursuant to the Exchange Offer and any broker or dealer that
participates in a distribution of such Exchange Notes may be deemed to be an
"underwriter" within the meaning of the Securities Act and any profit on any
such resale of Exchange Notes and any commissions or concessions received by any
such persons may be deemed to be underwriting compensation under the Securities
Act. Broker-dealers who acquire Old Notes as a result of market making or other
trading activities may use this Prospectus, as supplemented or amended, in
connection with resales of the Exchange Notes. The Issuer has agreed that, for
a period of 180 days after the Registration Statement is declared effective,
they will make this prospectus available to any broker-dealer for use in
connection with any such resale. Any holder who tenders in the Exchange Offer
for the purpose of participating in a distribution of the Exchange Notes or any
other holder that cannot rely upon such interpretations must comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with a secondary resale transaction.
Tendering holders of Old Notes will not be required to pay brokerage
commissions or fees or, subject to the instructions in the Letter of
Transmittal, transfer taxes with respect to the exchange of the Old Notes
pursuant to the Exchange Offer.
The Exchange Notes will bear interest from June 25, 1997. Holders of Old
Notes whose Old Notes are accepted for exchange will be deemed to have waived
the right to have interest accrue, or to receive any payment in respect of
interest, on the Old Notes from June 25, 1997 to the date of the issuance of the
Exchange Notes. Interest on the Exchange Notes is payable semiannually in
arrears on January 1 and July 1 of each year, commencing January 1, 1998;
accruing from June 25, 1997 at a rate of 12 1/2% per annum.
EXPIRATION DATE; EXTENSIONS; TERMINATION; AMENDMENTS
The Exchange Offer expires on the Expiration Date. The term "Expiration
Date" means 5:00 p.m., Eastern time, on _______ , 1997 unless the Issuer in its
sole discretion extends the period during which the Exchange Offer is open, in
which event the term "Expiration Date" means the latest time and date on which
the Exchange Offer is open, in which event the term "Expiration Date" means the
latest time and date on which the Exchange Offer, as so extended by the Issuer,
expires. The Issuer reserves the right to extend the Exchange Offer at any time
and from time to time prior to the Expiration Date by giving written notice to
First Trust National Association (the "Exchange Agent") and by timely public
announcement communicated by no later than 5:00 p.m. on the next business day
following the Expiration Date, unless otherwise required by applicable law or
regulation, by making a release to the Dow Jones News Service. During any
extension of the Exchange Offer, all Old Notes previously tendered pursuant to
the Exchange Offer will remain subject to the Exchange Offer.
The initial Exchange Date will be the first business day following the
Expiration Date. The Issuer expressly reserves the right to (i) terminate the
Exchange Offer and not accept for exchange any Old Notes for any reason,
including if any of the events set forth below under "Conditions to the Exchange
Offer" shall have occurred and shall not have been waived by the Issuer and (ii)
amend the terms of the Exchange Offer in any manner, whether before or after any
tender of the Old Notes. If any such termination or amendment occurs, the
Issuer will notify the Exchange Agent in writing and will either issue a press
release or give written notice to the holder of the Old Notes as promptly as
practicable. Unless the Issuer terminates the Exchange Offer prior to 5:00
p.m., Eastern time, on the Expiration Date, the Issuer will exchange the
Exchange Notes for Old Notes on the Exchange Date.
41
This Prospectus and the related Letter of Transmittal and other relevant
materials will be mailed by the Issuer to record holders of Old Notes and will
be furnished to brokers, banks and similar persons whose names, or the names of
whose nominees, appear on the lists of holders for subsequent transmittal to
beneficial owners of Old Notes.
HOW TO TENDER
The tender to the Issuer of Old Notes by a holder thereof pursuant to one
of the procedures set forth below will constitute an agreement between such
holder and the Issuer in accordance with the terms and subject to the conditions
set forth herein and in the Letter of Transmittal.
GENERAL PROCEDURES
A holder of an Old Note may tender the same by (i) properly completing and
signing the Letter of Transmittal or a facsimile thereof (all references in this
Prospectus to the Letter of Transmittal shall be deemed to include a facsimile
thereof) and delivering the same, together with the certificate or certificates
representing the Old Notes being tendered and any required signature guarantees
(or a timely confirmation of a book-entry transfer (a "Book-Entry Confirmation")
pursuant to the procedure described below), to the Exchange Agent at its address
set forth on the back cover of this Prospectus on or prior to the Expiration
Date or (ii) complying with the guaranteed delivery procedures described below.
If tendered Old Notes are registered in the name of the signer of the
Letter of Transmittal and the Exchange Notes to be issued in exchange therefor
are to be issued (and any untendered Old Notes are to be reissued) in the name
of the registered holder, the signature of such signer need not be guaranteed.
In any other case, the tendered Old Notes must be endorsed or accompanied by
written instruments of transfer in form satisfactory to the Issuer and duly
executed by the registered holder and the signature on the endorsement or
instrument of transfer must be guaranteed by a bank, broker, dealer, credit
union, savings association, clearing agency or other institution (each an
"Eligible Institution") that is a member of a recognized signature guarantee
medallion program within the meaning of Rule 17Ad-15 under the Exchange Act. If
the Exchange Notes and/or Old Notes not exchanged are to be delivered to an
address other than that of the registered holder appearing on the note register
for the Old Notes, the signature on the Letter of Transmittal must be guaranteed
by an Eligible Institution.
Any beneficial owner whose Old Notes are registered in the name of a
broker, dealer, commercial bank, trust company or other nominee and who wishes
to tender Old Notes should contact such holder promptly and instruct such holder
to tender Old Notes on such beneficial owner's behalf. If such beneficial owner
wishes to tender such Old Notes himself, such beneficial owner must, prior to
completing and executing the Letter of Transmittal and delivering such Old
Notes, either make appropriate arrangements to register ownership of the Old
Notes in such beneficial owners name or follow the procedures described in the
immediately preceding paragraph. The transfer of record ownership may take
considerable time.
BOOK-ENTRY TRANSFER
The Exchange Agent will make a request to establish an account with respect
to the Old Notes at The Depository Trust Company (the "Book-Entry Transfer
Facility") for purposes of the Exchange Offer within two business days after
receipt of this Prospectus, and any financial institution that is a participant
in the Book-Entry Transfer Facility's systems may make book-entry delivery of
Old Notes by causing the Book-Entry Transfer Facility to transfer such Old Notes
into the Exchange Agent's account at the Book-Entry Transfer Facility in
accordance with the Book-Entry Transfer Facility's procedures for transfer.
However, although delivery of Old Notes may be effected through book-entry
transfer at the Book-Entry Transfer Facility, the Letter of Transmittal, with
any required signature guarantees and any other required documents, must, in any
case, be transmitted to and received by the Exchange Agent at the address
specified on the back cover of this prospectus on or prior to the Expiration
Date or the guaranteed delivery procedures described below must be complied
with.
THE METHOD OF DELIVERY OF OLD NOTES AND ALL OTHER DOCUMENTS IS AT THE
ELECTION AND RISK OF THE HOLDER. IF SENT BY MAIL, IT IS RECOMMENDED THAT
REGISTERED MAIL, RETURN RECEIPT REQUESTED, BE USED, PROPER INSURANCE BE
OBTAINED, AND THE MAILING BE MADE SUFFICIENTLY IN ADVANCE OF THE EXPIRATION DATE
TO PERMIT DELIVERY TO THE EXCHANGE AGENT ON OR BEFORE THE EXPIRATION DATE.
Unless an exemption applies under the applicable law and regulations
concerning "backup withholding" of federal income tax, the Exchange Agent will
be required to withhold, and will withhold 31% of the gross proceeds otherwise
payable to a holder pursuant to the Exchange Offer if the holder does not
provide his, her, or its taxpayer identification number (social security number
or employer identification number, as applicable) and certify that such number
is correct. Each tendering holder should complete and sign the main signature
form and the Substitute Form W-9 included as part of the Letter of Transmittal,
so as to provide the information and certification necessary to avoid backup
withholding, unless an applicable
42
exemption exists and is proven in a manner satisfactory to the Issuer and the
Exchange Agent.
GUARANTEED DELIVERY PROCEDURES
If a holder desires to accept the Exchange Offer and time will not permit
a Letter of Transmittal or Old Notes to reach the Exchange Agent before the
Expiration Date, a tender may be effected if the Exchange Agent has received
at its office listed on the Letter of Transmittal on or prior to the
Expiration Date a letter, telegram or facsimile transmission from an Eligible
Institution setting forth the name and address of the tendering holder, the
principal amount of the Old Notes being tendered, the names in which the Old
Notes are registered and, if possible, the certificate numbers of the Old
Notes to be tendered, and stating that the tender is being made thereby and
guaranteeing that within three New York Stock Exchange trading days after the
date of execution of such letter, telegram or facsimile transmission by the
Eligible Institution, the Old Notes, in proper form for transfer, will be
delivered by such Eligible Institution together with a properly completed and
duly executed Letter of Transmittal (and any other required documents).
Unless Old Notes being tendered by the above-described method (or a timely
Book-Entry Confirmation) are deposited with the Exchange Agent within the
time period set forth above (accompanied or preceded by a properly completed
Letter of Transmittal and any other required documents), the Issuer may, at
its option, reject the tender. Copies of a Notice of Guaranteed Delivery
which may be used by Eligible Institutions for the purposes described in this
paragraph are available form the Exchange Agent.
A tender will be deemed to have been received as of the date when the
tendering holder's properly completed and duly signed Letter of Transmittal
accompanied by the Old Notes (or a timely Book-Entry Confirmation) is
received by the Exchange Agent. Issuances of Exchange Notes in exchange for
Old Notes tendered pursuant to a Notice of Guaranteed Delivery or letter,
telegram or facsimile transmission to similar effect (as provided above) by
an Eligible Institution will be made only against deposit of the Letter of
Transmittal (and any other required documents) and the tendered Old Notes (or
a timely Book-Entry Confirmation).
All questions as to the validity, form, eligibility (including time of
receipt) and acceptance for exchange of any tender of Old Notes will be
determined by the Issuer, whose determination will be final and binding. The
Issuer reserves the absolute right to reject any or all tenders not in proper
form or the acceptances for exchange of which may, in the opinion of counsel
to the Issuer, be unlawful. The Issuer also reserves the absolute right to
waive any of the conditions of the Exchange Offer or any defect or
irregularities in tenders of any particular holder whether or not similar
defects or irregularities are waived in the case of other holder. Neither
the Issuer, the Exchange Agent nor any other person will be under any duty to
give notification of any defects or irregularities in tenders or shall incur
any liability for failure to give any such notification. The Issuer's
interpretation of the terms and conditions of the Exchange Offer (including
the Letter of Transmittal and the instructions thereto) will be final and
binding.
TERMS AND CONDITIONS OF THE LETTER OF TRANSMITTAL
The Letter of Transmittal contains, among other things, the following terms
and conditions, which are part of the Exchange Offer:
The party tendering Old Notes for exchange (the "Transferor") exchanges,
assigns and transfers the Old Notes to the Issuer and irrevocable constitutes
and appoints the Exchange Agent as the Transferor's agent and
attorney-in-fact to cause the Old Notes to be assigned, transferred and
exchanged. The Transferor represents and warrants that it has full power and
authority to tender, exchange, assign and transfer the Old Notes and to
acquire Exchange Notes issuable upon the exchange of such tendered Old Notes,
and that, when the same are accepted for exchange, the Issuer will acquire
good and unencumbered title to the tendered Old Notes, free and clear of all
liens, restrictions, charges and encumbrances and not subject to any adverse
claim. The Transferor also warrants that it will, upon request, execute and
deliver any additional documents deemed by the Issuer to be necessary or
desirable to complete the exchange, assignment and transfer of tendered Old
Notes. The Transferor further agrees that acceptance of any tendered Old
Notes by the Issuer and the issuance of Exchange Notes in exchange therefor
shall constitute performance in full by the Issuer of its obligations under
the Registration Rights Agreement and that the Issuer shall have no further
obligations or liabilities thereunder (except in certain limited
circumstances). All authority conferred by the Transferor will survive the
death or incapacity of the Transferor and every obligation of the Transferor
shall be binding upon the heirs, legal representatives, successors, assigns,
executors and administrators of such Transferor.
By tendering Old Notes and executing the Letter of Transmittal, the
Transferor certifies that (a) it is not an Affiliate of the Issuer, that it is
not a broker-dealer that owns Old Notes acquired directly from the Issuer or an
Affiliate of the Issuer, that it is acquiring the Exchange Notes offered hereby
in the ordinary course of such Transferor's business and that such
43
transferor has no arrangement with any person to participate in the
distribution of such Exchange Notes. In order to participate in the Exchange
Offer, each entity must certify to the Company in the Letter of Transmittal
that it is not an Affiliate of the Issuer, that it is not engaged in, and
does not intend to engage in, a distribution of the Exchange Notes, and that
the Exchange Notes are being acquired in the ordinary course of business.
WITHDRAWAL RIGHTS
Old Notes tendered pursuant to the Exchange Offer may be withdrawn at any
time prior to the Expiration date.
For a withdrawal to be effective, a written or facsimile transmission
notice of withdrawal must be timely received by the Exchange Agent at its
address set forth on the back cover of this prospectus prior to the Expiration
Date. Any such notice of withdrawal must specify the person named in the Letter
of Transmittal as having tendered Old Notes to be withdrawn, the certificate
numbers of Old Notes to be withdrawn, the principal amount of Old Notes to be
withdrawn, a statement that such holder is withdrawing his election to have such
Old Notes exchanged, and the name of the registered holder of such Old Notes,
and must be signed by the holder in the same manner as the original signature of
the Letter of Transmittal (including any required signature guarantees) or be
accompanied by evidence satisfactory to the Issuer that the person withdrawing
the tender has succeeded to the beneficial ownership of the Old Notes being
withdrawn. The Exchange Agent will return the properly withdrawn Old Notes
promptly following receipt of notice of withdrawal. All questions as to the
validity of notices of withdrawals, including time of receipt, will be
determined by the Issuer, and such determination will be final and binding on
all parties.
ACCEPTANCE OF OLD NOTES FOR EXCHANGE; DELIVERY OF EXCHANGE NOTES
Upon the terms and subject to the conditions of the Exchange Offer, the
acceptance for exchange of Old Notes validly tendered and not withdrawn and the
issuance of the Exchange Notes will be made on the Exchange Date.
The Exchange Agent will act as agent for the tendering holders of Old Notes
for the purposes of receiving Exchange Notes from the Issuer and causing the Old
Notes to be assigned, transferred and exchanged. Upon the terms and subject to
conditions of the Exchange Offer, delivery of Exchange Notes to be issued in
exchange for accepted Old Notes will be made by the Exchange Agent promptly
after acceptance of the tendered Old Notes. Old Notes not accepted for exchange
by the Issuer will be returned without expense to the tendering holders (or in
the case of Old Notes tendered by book-entry transfer into the Exchange Agent's
account at the Book-Entry Transfer Facility pursuant to the procedures described
above, such non-exchanged Old Notes will be credited to an account maintained
with such Book-Entry Transfer Facility) promptly following the Expiration Date
or, if the Issuer terminates the Exchange Offer prior to the Expiration Date,
promptly after the Exchange Offer is so terminated.
CONDITIONS TO THE EXCHANGE OFFER
Notwithstanding any other provision of the Exchange Offer, or any extension
of the Exchange Offer, the Issuer will not be required to issue Exchange Notes
in respect of any properly tendered Old Notes not previously accepted and may
terminate the Exchange Offer (by oral or written notice to the Exchange Agent
and by timely public announcement communicated no later than 5:00 p.m. on the
next business day following the Expiration Date, unless otherwise required by
applicable law or regulation, by making a release to the Dow Jones News Service)
or, at its option, modify or otherwise amend the Exchange Offer, if: (a) there
shall be threatened, instituted or pending any action or proceeding before, or
any injunction, order or decree shall have been issued by, any court or
governmental agency or other governmental regulatory or administrative agency or
commission, (i) seeking to restrain or prohibit the making or consummation of
the Exchange Offer or any other transaction contemplated by the Exchange Offer,
(ii) assessing or seeking any damages as a result thereof or (iii) resulting in
a material delay in the ability of the Issuer to accept for exchange some or all
of the Old Notes pursuant to the Exchange Offer; (b) any statute, rule,
regulation, order or injunction shall be sought, proposed, introduced, enacted,
promulgated or deemed applicable to the Exchange Offer or any of the
transactions contemplated by the Exchange Offer by any government or
governmental authority, domestic or foreign, or any action shall have been
taken, proposed or threatened, by any government, governmental authority, agency
or court, domestic or foreign, that in the sole judgment of the Issuer, might
directly or indirectly result in any of the consequences referred to in clauses
(a)(i) or (ii) above or, in the sole judgment of the Issuer, might result in the
holders of Exchange Notes having obligations with respect to resales and
transfers of Exchange Notes which are greater than those described in the
interpretations of the Staff referred to on the cover page of this Prospectus,
or would otherwise make it inadvisable to proceed with the Exchange Offer; or
(c) a material adverse change shall have occurred in the business, condition
(financial or otherwise), operations, or prospects of the Issuer.
44
The foregoing conditions are for the sole benefit of the Issuer and may be
asserted by it with respect to all or any portion of the Exchange Offer
regardless of the circumstances (including any action or inaction by the Issuer)
giving rise to such condition or may be waived by the Issuer in whole or in part
at any time or from time to time in its sole discretion. The failure by the
Issuer at any time to exercise any of the foregoing rights will not be deemed a
waiver of any such right, and each right will be deemed an ongoing right which
may be asserted at any time or from time to time. In addition, the Issuer has
reserved the right, notwithstanding the satisfaction of each of the foregoing
conditions, to terminate or amend the Exchange Offer.
Any determination by the Issuer concerning the fulfillment or
nonfulfillment of any conditions will be final and binding upon all parties.
In addition, the Issuer will not accept for exchange any Old Notes
tendered, and no Exchange Notes will be issued in exchange for any such Old
Notes, if at such time any stop order shall be threatened or in effect with
respect to the Registration Statement of which this Prospectus constitutes a
part or qualification of the Indenture under the Trust Indenture Act of 1939, as
amended (the "Trust Indenture Act").
EXCHANGE AGENT
First Trust National Association has been appointed as the Exchange Agent
for the Exchange Offer. Letters of Transmittal must be addressed to the
Exchange Agent at:
First Trust National Association
180 East Fifth Street
St. Paul, Minnesota 55101
Telephone: (612) 244-1197
Facsimile: (612) 244-1537
Attention: Phyllis Meath, Specialized Finance Group
Delivery to an address other than as set forth herein, or transmission of
instructions via a facsimile or telex number other than the ones set forth
herein, will not constitute a valid delivery.
SOLICITATION OF TENDERS; EXPENSES
The Issuer has not retained any dealer-manager or similar agent in
connection with the Exchange Offer and will not make any payments to brokers,
dealers or others for soliciting acceptances of the Exchange Offer. The Issuer
will, however, pay the Exchange Agent reasonable and customary fees for its
services and will reimburse it for reasonable out-of-pocket expenses in
connection therewith. The Issuer will also pay brokerage houses and other
custodians, nominees and fiduciaries the reasonable out-of-pocket expenses
incurred by them in forwarding tenders for their customers. The expenses to be
incurred in connection with the Exchange Offer, including the fees and expenses
of the Exchange Agent and printing, accounting, investment banking and legal
fees, will be paid by the Issuer and are estimated to be approximately $250,000.
No person has been authorized to give any information or to make any
representations in connection with the Exchange Offer other than those contained
in this Prospectus. If given or made, such information or representations
should not be relied upon as having been authorized by the Issuer. Neither the
delivery of this Prospectus nor any exchange made hereunder shall, under any
circumstances, create any implication that there has been no change in the
affairs of the Issuer since the respective dates as of which information is
given herein. The Exchange Offer is not being made to (nor will tenders be
accepted from or on behalf of) holders of Old Notes in any jurisdiction in which
the making of the Exchange Offer or the acceptance thereof would not be in
compliance with the laws of such jurisdiction. However, the Issuer may, at its
discretion, take such action as it may deem necessary to make the Exchange Offer
in any such jurisdiction and extend the Exchange Offer to holders of Old Notes
in such jurisdiction. In any jurisdiction the securities laws or blue sky laws
of which require the Exchange Offer to be made by a licensed broker or dealer,
the Exchange Offer is being made on behalf of the Issuer by one or more
registered brokers or dealers which are licensed under the laws of such
jurisdiction.
DISSENTER AND APPRAISAL RIGHTS
HOLDERS OF OLD NOTES WILL NOT HAVE DISSENTERS' RIGHTS OR APPRAISAL RIGHTS
IN CONNECTION WITH THE EXCHANGE OFFER.
45
FEDERAL INCOME TAX CONSEQUENCES
The exchange of Old Notes for Exchange Notes by tendering holders will not
be a taxable exchange for federal income tax purposes, and such holders should
not recognize any taxable gain or loss or any interest income as a result of
such exchange. See "Certain United States Federal Income Tax Considerations."
OTHER
Participation in the Exchange Offer is voluntary and holders of Old Notes
should carefully consider whether to accept the terms and conditions thereof.
Holders of the Old Notes are urged to consult their financial and tax advisors
in making their own decisions on what action to take with respect to the
Exchange Offer.
As a result of the making of, and upon acceptance for exchange of all
validly tendered Old Notes pursuant to the terms of this Exchange Offer, the
Issuer will have fulfilled obligations contained in the terms of the Old Notes
and the Registration Rights Agreement. Holders of the Old Notes who do not
tender their Old Notes in the Exchange Offer will continue to hold such Old
Notes and will be entitled to all the rights, and limitations applicable thereto
under the Indenture, except for any such rights under the Registration Rights
Agreement which by their terms terminate or cease to have further effect as a
result of the making of this Exchange Offer. See "Description of Exchange
Notes." All untendered Old Notes will continue to be subject to the restriction
on transfer set forth in the Indenture. To the extent that Old Notes are
tendered and accepted in the Exchange Offer, the trading market, if any, for any
remaining Old Notes could be adversely affected. See" Risk Factors -
Consequences of Failure to Exchange Old Notes."
The Issuer may in the future seek to acquire untendered Old Notes in open
market or privately negotiated transactions, through subsequent exchange offers
or otherwise. The Issuer has no present plan to acquire any Old Notes which are
not tendered in the Exchange Offer.
46
CAPITALIZATION
The following table sets forth: (i) the consolidated capitalization of
EchoStar, on a historical basis as of March 31, 1997; (ii) the consolidated
capitalization of EchoStar, as of March 31, 1997, as adjusted to give effect to
the Old Notes Offering; and (iii) the consolidated capitalization of EchoStar as
of June 30, 1997. The historical information in this table is derived from the
Consolidated Financial Statements of EchoStar, and should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements and the Notes thereto
included elsewhere in this Prospectus. The June 30, 1997 historical information
in this table is derived from the Condensed Consolidated Financial Statements of
EchoStar, and should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the Supplemental
Condensed Consolidated Financial Statements and the Notes thereto included
elsewhere in this Prospectus.
AS OF
MARCH 31, 1997
------------------------- JUNE 30,
ACTUAL AS ADJUSTED 1997
--------- ----------
--------------
(IN THOUSANDS)
(UNAUDITED)
Cash, cash equivalents, and marketable
investment securities (1).................. $ 33,980 $ 175,480 $ 186,883
--------- -------------- ----------
--------- -------------- ----------
Long-term obligations (net of current
portion):
Mortgages and notes payable................ $ 48,298 $ 48,298 $ 45,379
1994 Notes................................. 451,907 451,907 467,210
1996 Notes................................. 398,399 398,399 411,256
Old Notes.................................. -- 375,000 375,000
--------- -------------- ----------
Total long-term debt................... 898,604 1,273,604 1,298,845
Stockholders' Equity:
Preferred Stock, $.01 par value, 20,000,000
shares authorized, 1,616,681 shares of 8%
Series A Cumulative Preferred Stock
issued and outstanding, including accrued
dividends of $3,648,000 and $3,949,000,
respectively............................. 18,700 18,700 19,001
Class A Common Stock, $.01 par value,
200,000,000 shares authorized, 11,776,406
and 11,821,513 shares issued and
outstanding, respectively................ 118 118 118
Class B Common Stock, $.01 par value,
100,000,000 shares authorized, 29,804,401
shares issued and outstanding............ 298 298 298
Class C Common Stock, $.01 par value,
100,000,000 shares authorized, none
outstanding.............................. -- -- --
Common Stock Warrants...................... 16 16 11
Additional paid-in capital................. 170,252 170,252 170,701
Unrealized holding losses on
available-for-sale securities, net of
deferred taxes........................... (12) (12) (11)
Accumulated deficit........................ (178,896) (178,896) (242,986)
--------- -------------- ----------
Total stockholders' equity (deficit)... 10,476 10,476 (52,868)
--------- -------------- ----------
Total capitalization......................... $ 909,080 $1,284,080 $1,245,977
--------- -------------- ----------
--------- -------------- ----------
- ---------------
(1) Excludes amounts in escrow and other restricted cash of approximately $51.5
million and $8.4 million as of March 31, and June 30, 1997, respectively.
The March 31, 1997, as adjusted, data and the June 30, 1997 data also
excludes $112.0 million and $112.1 million, respectively, placed in the
Satellite Escrow Account and approximately $109.0 million and $109.1
million, respectively, placed in the Interest Escrow Account.
47
SELECTED FINANCIAL DATA
Prior to consummation of the Old Notes Offering, EchoStar contributed all of
the outstanding capital stock of ESBC to the Issuer. As a result, ESBC became a
direct wholly-owned subsidiary of the Issuer. Similarly, in January 1996
EchoStar contributed all of the outstanding capital stock of Dish to ESBC. The
Contribution and the Dish Contribution have been accounted for as
reorganizations of entities under common control, in which Dish was treated as
the predecessor to ESBC and ESBC was treated as the predecessor to the Issuer.
The following selected financial data as of, and for the five years ended
December 31, 1996, are derived from the financial statements of the Issuer and
the Issuer's predecessor entities, audited by Arthur Andersen LLP, independent
public accountants. The following selected financial data at June 30, 1997 and
with respect to the six months ended June 30, 1996 and 1997 are unaudited;
however, in the opinion of management, such data reflect all adjustments
(consisting only of normal recurring adjustments) necessary to fairly present
the data for such interim periods. Operating results for interim periods are not
necessarily indicative of the results that may be expected for a full year. The
data set forth in this table should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations," the
Issuer's Consolidated Financial Statements and the Notes thereto and the other
financial information included elsewhere in this Prospectus.
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
------------------------------------------------- -------------------
1992(1) 1993(1) 1994 1995 1996 1996 1997
-------- -------- -------- -------- --------- -------- ---------
(IN THOUSANDS, EXCEPT RATIOS, SUBSCRIBERS AND SATELLITE RECEIVERS
SOLD) (UNAUDITED)
STATEMENT OF OPERATIONS DATA:
Revenue:
DTH products and technical services............. $157,473 $206,311 $172,753 $146,910 $ 136,377 $ 97,199 $ 33,660
DISH Network-SM- subscription television
services...................................... -- -- -- -- 37,898 6,046 57,588
DISH Network-SM- promotions -- subscription
television services and products (2).......... -- -- -- -- 22,746 -- 75,825
C-band programming.............................. 6,436 10,770 14,540 15,232 11,921 6,643 4,079
Loan origination and participation income....... 1,179 3,860 3,690 1,748 789 492 285
-------- -------- -------- -------- --------- -------- ---------
Total revenue..................................... 165,088 220,941 190,983 163,890 209,731 110,380 171,437
Expenses:
DTH products and technical services............. 120,826 161,447 133,635 116,758 123,505 90,278 27,333
Subscriber promotion subsidies (2).............. -- -- -- -- 35,239 -- 31,090
DISH Network-SM-programming..................... -- -- -- -- 19,079 1,769 45,259
C-band programming.............................. 6,225 9,378 11,670 13,520 10,510 6,058 3,308
Selling, general and administrative............. 25,708 30,235 30,219 38,504 86,894 29,098 64,690
Amortization of subscriber acquisition
costs(2)...................................... -- -- -- -- 15,991 92 61,290
Depreciation and amortization................... 1,043 1,677 2,243 3,114 27,378 9,664 25,298
-------- -------- -------- -------- --------- -------- ---------
Total expenses.................................... 153,802 202,737 177,767 171,896 318,596 136,959 258,268
-------- -------- -------- -------- --------- -------- ---------
Operating income (loss)........................... 11,286 18,204 13,216 (8,006) (108,865) (26,579) (86,831)
-------- -------- -------- -------- --------- -------- ---------
-------- -------- -------- -------- --------- -------- ---------
Net income (loss)................................. $ 7,529 $ 12,272 $ 90 $(12,361) $(101,676) $(28,921) $(126,425)
-------- -------- -------- -------- --------- -------- ---------
-------- -------- -------- -------- --------- -------- ---------
OTHER DATA:
EBITDA (3)...................................... $ 12,329 $ 19,881 $ 15,459 $ (4,892) $ (65,496) $(16,823) $ (243)
Ratio of earnings to fixed charges (4).......... 15.0x 18.0x -- -- -- --
Deficiency of earnings to fixed charges (4)..... -- -- $ (5,206) $(44,315) $(188,347) $(59,443) $(143,013)
DBS subscribers (end of period)................. 350,000 70,000 590,000
Satellite receivers sold (in units):
Domestic...................................... 116,000 132,000 114,000 131,000 518,000 155,000 348,000
International................................. 85,000 203,000 289,000 331,000 239,000 126,000 91,000
-------- -------- -------- -------- --------- -------- ---------
Total....................................... 201,000 335,000 403,000 462,000 757,000 281,000 439,000
-------- -------- -------- -------- --------- -------- ---------
-------- -------- -------- -------- --------- -------- ---------
AS OF
AS OF DECEMBER 31, MARCH 31, 1997
------------------------------------------------- --------------------------- JUNE 30,
1992 1993 1994 1995 1996 ACTUAL AS ADJUSTED (5) 1997
------- -------- -------- -------- ---------- ---------- --------------- ----------
(UNAUDITED)
BALANCE SHEET DATA:
Cash, cash equivalents and
marketable investment
securities (6)............ $22,031 $ 27,232 $233,975 $ 14,159 $ 57,245 $ 33,517 $ 175,017 $ 186,883
Total assets................ 88,529 106,476 472,492 559,295 1,085,543 1,084,639 1,459,639 1,433,783
Long-term obligations (less
current portion):
Old Notes (7)............. -- -- -- -- -- -- 375,000 375,000
1994 Notes................ -- -- 334,206 382,218 437,127 451,907 451,907 467,210
1996 Notes................ -- -- -- -- 386,165 398,399 398,399 411,256
49
Notes payable to
stockholder............. 2,274 14,725 -- -- -- -- -- --
Other long-term
obligations............. 4,876 4,702 5,393 33,444 70,465 70,425 70,425 70,296
- ---------------
(1) Certain of the Issuer's subsidiaries operated under Subchapter S of the
Code and comparable provisions of applicable state income tax laws until
December 31, 1993. The net income for 1992 and 1993 presented above is
net of pro forma taxes of $3,304 and $7,846, respectively, determined as
if the Issuer had been subject to corporate Federal and state income
taxes for these years. See Note 7 of Notes to the Issuer's Consolidated
Financial Statements.
(2) For accounting and financial reporting purposes, the excess of
EchoStar's aggregate costs over related transaction proceeds associated
with the 1996 Promotion are expensed upon shipment of the equipment and
reflected in the Company's consolidated statements of operations as
subscriber promotion subsidies. Remaining transaction costs (excluding
programming) are capitalized as subscriber acquisition costs and
amortized over the initial prepaid subscription period. Programming
costs are accrued and expensed as the service is provided. Excluding
expected incremental revenues from premium and pay-per-view programming,
the accounting treatment described above results in revenue recognition
over the initial period of service equal to the sum of programming costs
and amortization of subscriber acquisition costs. The excess of
transaction costs over related proceeds associated with the 1997
Promotion (which commenced June 1, 1997) will be recognized as
subscriber promotion subsidies in the Company's statements of
operations. EBITDA in future periods will be negatively affected to the
extent that a larger portion of future subscriber additions result from
the 1997 Promotion rather than from the 1996 Promotion. This adverse
EBITDA impact will result from the immediate recognition of all
transaction costs at activation under the 1997 Promotion.
(3) EBITDA represents earnings before interest (net), taxes, depreciation
and amortization (including amortization of subscriber acquisition costs
of $16.0 million for the year ended December 31, 1996 and $61.3 million
for the six months ended June 30, 1997). EBITDA is commonly used in the
telecommunications industry to analyze companies on the basis of
operating performance, leverage and liquidity. EBITDA is not intended to
represent cash flows for the period, nor has it been presented as an
alternative to operating income as an indicator of operating performance
and should not be considered in isolation or as a substitute for
measures of performance determined in accordance with generally accepted
accounting principles. See the Issuer's Consolidated Financial
Statements and Supplemental Condensed Consolidated Financial Statements
contained elsewhere in this Prospectus.
(4) For purposes of computing the ratio of earnings to fixed charges and the
deficit of earnings to fixed charges, earnings consist of earnings from
continuing operations before income taxes, plus fixed charges. Fixed
charges consist of interest incurred on all indebtedness and the
computed interest component of rental expense under non-cancelable
operating leases. For the years ended December 31, 1994, 1995 and 1996
and the six months ended June 30, 1996 and 1997, earnings were
insufficient to cover the fixed charges.
(5) Gives effect to the Old Notes Offering and the application of the net
proceeds thereof.
(6) Excludes amounts in escrow and other restricted cash of approximately
$51.5 million and $8.4 million as of March 31 and June 30, 1997,
respectively. The March 31, 1997, as adjusted data and the June 30, 1997
data also excludes $112.0 million and $112.1 million, respectively
placed in the Satellite Escrow Account and approximately $109.0 million
and $109.1 million, respectively, placed in the Interest Escrow Account.
(7) The Notes are guaranteed on a subordinated basis by EchoStar. As
described above, the predecessor consolidated financial statements of
EchoStar and the Issuer through 1994 are the same. Summary consolidated
financial data for EchoStar and its subsidiaries for 1995, 1996 and the
six months ended June 30, 1996 and 1997 are presented below:
YEARS ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
------------------- -------------------
1995 1996 1996 1997
(IN THOUSANDS) (UNAUDITED)
STATEMENT OF OPERATIONS DATA:
Revenue............................................... $163,890 $ 211,411 $114,991 $ 172,845
Operating income (loss)............................... (8,027) (109,345) (22,686) (87,617)
Net income (loss)..................................... (11,486) (100,986) (29,775) (126,655)
OTHER DATA:
EBITDA................................................ (4,913) (65,931) (12,930) (842)
AS OF
MARCH 31, 1997
----------------------
DECEMBER 31, AS JUNE 30,
1995 1996 ACTUAL ADJUSTED 1997
-------- ---------- ----------
(UNAUDITED)
BALANCE SHEET DATA:
Cash, cash equivalents and marketable
investment securities............... $ 37,424 $ 58,038 $ 33,980 $ 175,480 $ 187,804
Total assets.......................... 623,091 1,141,380 1,155,990 1,530,990 1,534,480
Old Notes............................. -- -- -- 375,000 375,000
Total long-term obligations (excluding
current portion).................... 415,662 881,872 898,604 1,273,604 1,311,902
Total stockholders' equity
(deficit)........................... 156,686 61,197 10,476 10,476 (52,868)
49
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION AND ANALYSIS RELATES TO THE CONSOLIDATED RESULTS
OF OPERATIONS OF THE ISSUER AND ITS PREDECESSORS, ESBC AND DISH, and THE
CONSOLIDATED FINANCIAL CONDITION OF ECHOSTAR. THIS DISCUSSION SHOULD BE READ IN
CONJUNCTION WITH THE CONSOLIDATED FINANCIAL STATEMENTS AND THE NOTES THERETO OF
THE ISSUER AND ECHOSTAR INCLUDED ELSEWHERE IN THIS PROSPECTUS. PRIOR TO
CONSUMMATION OF THE OFFERING OF THE OLD NOTES, ECHOSTAR EFFECTED THE
CONTRIBUTION.
Overview
EchoStar currently operates four related businesses: (i) operation of the
DISH Network-SM- and the EchoStar DBS System; (ii) design, manufacture,
marketing, installation and distribution of various DTH products worldwide
(including EchoStar Receiver Systems and C-band systems); (iii) domestic
distribution of DTH programming services; and (iv) consumer financing of
EchoStar's domestic products and programming services. During March 1996,
EchoStar began broadcasting and selling programming packages available from
the DISH Network-SM-. EchoStar expects to derive its future revenue
principally from periodic subscription fees for DISH Network-SM- programming
and, to a lesser extent, from the sale of DBS equipment. The growth of DBS
service and equipment sales has had, and will continue to have, a material
negative impact on EchoStar's domestic sales of C-band DTH products. However,
during the year ended December 31, 1996, such negative impact was more than
offset by sales of EchoStar Receiver Systems. EchoStar expects the decline in
its sales of domestic C-band DTH products to continue at an accelerated rate.
The accompanying results of operations discussion reflects the historical
results of the Issuer and its predecessor entities. As substantially all of
EchoStar's operations are performed by the Issuer and its subsidiaries, the
results of operations of EchoStar do not differ materially from those of the
Issuer. For the year ended December 31, 1996 and the three and six months ended
June 30, 1997, total consolidated revenues of EchoStar were $211.4 million,
$100.8 million and $172.8 million, respectively, as compared to $209.7 million,
$100.0 million and $171.4 million, respectively, for the Issuer. EchoStar's loss
from operations totaled $109.3 million for the year ended December 31, 1996,
compared to $108.9 million for the Issuer. For the three months ended June 30,
1997, EchoStar's and the Issuer's losses from operations were $43.0 million and
$43.5 million, respectively. For the six months ended June 30, 1997, EchoStar's
and the Issuer's losses from operations were $87.6 million and $86.8 million,
respectively. EchoStar's and the Issuer's net losses for the year ended
December 31, 1996 and the three months ended June 30, 1997 were $101.0 million
and $101.7 million and $63.8 million and $64.5 million, respectively.
EchoStar's and the Issuer's net losses for the six months ended June 30, 1997
were $127.3 million and $126.4 million, respectively. The differences described
above result from assets and operations of EchoStar's subsidiaries that are not
subsidiaries of the Issuer. Such operations principally consist of the assets
and operations of DNCC, Direct Broadcasting Satellite Corporation ("DBSC") and
EchoStar Space Corporation. DBSC holds EchoStar III and certain FCC
authorizations, and EchoStar Space Corporation holds the launch contracts for
EchoStar III and EchoStar IV. The accompanying discussion under "--Liquidity and
Capital Resources" is presented for EchoStar.
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'sSM 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 NetworkSM service.
NEW MARKETING PROMOTION. Beginning June 1, 1997, EchoStar implemented a
new marketing program in which independent retailers are permitted to offer
standard EchoStar Receiver Systems to consumers for a suggested retail price
of $199 (the "1997 Promotion"). Previously, consumers could purchase
EchoStar Receiver Systems for approximately $199, but were also required to
purchase a prepaid one-year subscription to the DISH Network's-SM- America's
Top 50 CD programming package for $300. The 1997 Promotion allows consumers
to subscribe to the DISH Network's-SM- various programming offerings on a
month-to-month basis without an extended subscription commitment. While
there can be no assurance, EchoStar believes that by reducing the "up front"
cost to the consumer significantly and eliminating extended subscription
commitments, the 1997 Promotion may significantly increase consumer demand
for DISH Network-SM-services.
50
Results of Operations
THREE MONTHS ENDED JUNE 30, 1997 COMPARED TO THE THREE MONTHS ENDED JUNE 30,
1996.
REVENUE. Total revenue for the three months ended June 30, 1997 was $100.0
million, an increase of $30.6 million, or 44%, as compared to total revenue for
the three months ended June 30, 1996 of $69.4 million. The increase in total
revenue in 1997 was primarily attributable to DISH Network subscriber growth.
As of June 30, 1997, the Company had approximately 590,000 DISH Network
subscribers compared to approximately 70,000 at June 30, 1996. The Company
expects this trend to continue as it adds additional DISH Network subscribers.
The increase in total revenue for the three months ended June 30, 1997 was
partially offset by a decrease in international and domestic sales of C-band
satellite receivers and equipment. As was anticipated, domestic and
international demand for C-band DTH products continued to decline during the
second quarter of 1997; this decline is expected to continue for the foreseeable
future. Consistent with the increases in total revenue during the three months
ended June 30,1997, the Company experienced a corresponding increase in trade
accounts receivable at June 30, 1997. The Company expects this trend to
continue as the number of DISH Network subscribers increases, and as the Company
develops additional channels of distribution for DISH Network equipment.
Revenue from domestic sales of DTH products and technical services
decreased $46.8 million, or 92%, to $4.1 million during the three months ended
June 30, 1997. Domestically, the Company sold approximately 174,000 satellite
receivers during the three months ended June 30, 1997, as compared to
approximately 110,000 receivers sold during the comparable period in 1996. Of
the total number of satellite receivers sold during the three months ended June
30, 1997, approximately 173,000 were EchoStar Receiver Systems. Although there
was a significant increase in the number of satellite receivers sold in the
second quarter of 1997 as compared to same quarter in 1996, overall revenue from
domestic sales of DTH products decreased as a result of decreased prices charged
for DBS receivers combined with the revenue recognition policy applied to DBS
satellite receivers sold under the Company's promotions.
Revenue from international sales of analog DTH products for the three
months ended June 30, 1997 was $6.1 million, a decrease of $3.5 million, or 36%,
as compared to the same period in 1996. This decrease was principally
attributable to a decrease in the number of analog satellite receivers sold,
combined with decreased prices on products sold. Internationally, the Company
sold approximately 38,000 analog satellite receivers in the three months ended
June 30, 1997, a decrease of 25%, compared to approximately 51,000 units sold
during the comparable period of 1996. Overall, international demand for the
Company's analog DTH products continued to decline in the second quarter of 1997
as a result of consumer anticipation of new international digital services.
This international decline in demand for analog satellite receivers, which was
expected by the Company, is similar to the decline which has occurred in the
United States. 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 markets, the Company has entered
into distribution and consulting agreements with international digital service
providers. In January 1997, the Company entered into an agreement (the
"ExpressVu Agreement") with ExpressVu, Inc. ("ExpressVu") a majority owned
subsidiary of BEC, Inc. ("Bell Canada"). The first phase of this agreement
includes an initial order for 62,000 satellite receivers, and primary uplink
integration payments, which combined are expected to exceed $40.0 million.
Pursuant to the ExpressVu Agreement, the Company is assisting ExpressVu with the
construction of a digital broadcast center for use in conjunction with
ExpressVu's planned DTH service and will act as a distributor of satellite
receivers and related equipment for ExpressVu's Canadian DTH service. Among
other things, the Company has agreed not to provide DTH service in Canada and
ExpressVu has agreed not to provide DTH service, including DBS service, in the
U.S. The Company recognized revenues of approximately $11.9 million related to
the ExpressVu Agreement during the three months ended June 30, 1997 (included
within the "DTH products and technical services" caption in the Company's
statements of operations).
Additionally, in June 1997, Distribuidora de Television Digital S.A.
("Telefonica"), a DBS joint venture in Spain, selected the Company to supply
digital set-top boxes for its satellite television service scheduled to launch
in September 1997. Revenues from Telefonica's initial order of 100,000 digital
set-top boxes are expected to approximate $40.0 million. The Company expects to
begin delivery of set-top boxes to Telefonica in September 1997 and to fulfill
approximately one-
51
half of the contract during the remainder of 1997. The Company expects to
fulfill the remainder of the contract during early 1998.
While the Company continues to actively pursue other similar distribution
opportunities, no assurance can be given that any such additional negotiations
will be successful. Further, the Company's future revenue from the sale of DBS
equipment and receivers in international markets depends largely on the success
of the DBS operator in that country, which, in turn, depends on other factors,
such as the level of consumer acceptance of DBS products and the intensity of
competition for international subscription television subscribers. No assurance
can be given regarding the level of expected future revenues which could be
generated from the Company's alliances with these, and potentially other,
foreign DBS operators.
C-band programming revenue totaled $1.9 million for the three months ended
June 30, 1997, a decrease of $1.3 million, or 40%, compared to the three months
ended June 30, 1996. This decrease was primarily attributable to the industry-
wide decline in demand for domestic C-band programming services. C-band
programming revenue is expected to continue to decrease for the foreseeable
future.
DTH AND DISH NETWORK EXPENSES. DTH and DISH Network expenses for the three
months ended June 30, 1997 aggregated $63.8 million, an increase of $1.7
million, or 3% compared to the same period in 1996. DTH products and technical
services expenses decreased $39.4 million, or 69%, to $18.1 million for the
three months ended June 30, 1997. These expenses include the costs of C-band
systems and the costs of EchoStar Receiver Systems and related components sold
prior to commencement of the Company's promotions. Subscriber promotion
subsidies aggregated $18.3 million for the three months ended June 30, 1997 and
represent expenses associated with the Company's various promotions. DISH
Network programming expenses totaled $25.8 million for the three months ended
June 30, 1997 as compared to $1.7 million for the comparable period in 1996.
The Company expects that DISH Network programming expenses will continue to
increase in future periods in proportion to increases in the number of DISH
Network subscribers. Such expenses, relative to related revenues, will vary
based on the services subscribed to by DISH Network customers, the number and
types of pay-per-view events purchased by subscribers, and the extent to which
the Company is able to realize volume discounts from programming providers.
C-band programming expenses totaled $1.5 million for the three months ended
June 30, 1997, a decrease of $1.3 million, or 46%, as compared to the same
period in 1996. This decrease is consistent with the decrease in C-band
programming revenue. As previously described, demand for C-band DTH products
continued to decrease as a result of the introduction and widespread consumer
acceptance of DBS products and services.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative ("SG&A") expenses totaled $33.8 million for the three months
ended June 30, 1997, an increase of $15.4 million as compared to the same period
in 1996. SG&A expenses as a percentage of total revenue increased to 34% for
the three months ended June 30, 1997 as compared to 27% for the same period in
1996. The increase in SG&A expenses was principally attributable to increased
personnel expenses to support the growth of DISH Network service and increased
expenses associated with the operation of EchoStar's digital broadcast center
and DBS satellites (collectively the "EchoStar DBS System").
EARNINGS BEFORE INTEREST, TAXES, DEPRECIATION AND AMORTIZATION. Earnings
before interest, taxes, depreciation and amortization (including amortization of
subscriber acquisition costs) ("EBITDA") was $2.4 million for the three months
ended June 30, 1997, an improvement of $13.5 million, compared to negative
EBITDA of $11.2 million during the same period of 1996. This improvement in
EBITDA resulted from the factors affecting revenue and expenses discussed above.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expenses for
the three months ended June 30, 1997 (including amortization of subscriber
acquisition costs of $92,000 and $33.2 million for the three months ended June
30, 1996 and June 30, 1997, respectively), aggregated $45.9 million, an increase
of $39.5 million, as compared to the same period 1996. The increase in
depreciation and amortization expenses principally resulted from amortization of
subscriber acquisition costs and depreciation expense associated with the
Company's second DBS satellite, EchoStar II (placed in service during the fourth
quarter of 1996).
OTHER INCOME AND EXPENSE. Other expense, net totaled $20.9 million for the
three months ended June 30, 1997, an increase of $6.4 million, as compared to
the same period 1996. The increase in other income and expense in the second
quarter of 1997 resulted primarily from a decrease interest income of
approximately $4.4 million as a result of a decrease in invested balances.
Additionally, interest expense increased $2.0 million as compared to the same
period of 1996 as a result of the continued accretion of the 1994 Notes and 1996
Notes. The Company capitalized interest of approximately $8.6
52
million during the three months ended June 30, 1997, compared to approximately
$5.5 million during the three months ended June 30, 1996.
INCOME TAX BENEFIT. The decrease in the income tax benefit of $11.0
million (from $11.0 million for the three months ended June 30, 1996 to an
income tax provision of $25,000 for the three months ended June 30, 1997)
principally resulted from the Company's decision to fully reserve the second
quarter addition to its net deferred tax asset. The Company's net deferred tax
assets (approximately $67.4 million at June 30, 1997) relate to temporary
differences for amortization of original issue discount on the 1994 Notes and
1996 Notes, net operating loss carryforwards, and various accrued expenses which
are not deductible until paid. If future operating results differ materially
and adversely from the Company's current expectations, its judgment regarding
the magnitude of its reserve may change.
SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 1996.
REVENUE. Total revenue for the six months ended June 30, 1997 was $171.4
million, an increase of $61.0 million, or 55%, as compared to total revenue for
the six months ended June 30, 1996 of $110.4 million. The increase in total
revenue in 1997 was primarily attributable to the introduction of the Company's
DISH Network service during March 1996, combined with significant DISH Network
subscriber growth since the launch of service. 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 $8.8 million for the six months ended June
30, 1997. Domestically, the Company sold approximately 348,000 satellite
receivers during the six months ended June 30, 1997, as compared to
approximately 155,000 receivers sold during the comparable period of 1996. Of
the total number of satellite receivers sold during the six months ended June
30, 1997, approximately 345,000 were EchoStar Receiver Systems. Although there
was a significant increase in the number of satellite receivers sold during the
six months ended June 30, 1997 as compared to same period in 1996, overall
revenue from domestic sales of DTH products decreased as a result of decreased
prices charged for DBS satellite receivers combined with the revenue recognition
policy applied to DBS satellite receivers sold under the Company's promotions.
Revenue from international sales of analog DTH products for the six months
ended June 30, 1997 totaled $13.0 million, a decrease of $9.3 million, or 42%,
as compared to the same period in 1996. This decrease was directly attributable
to a decrease in the number of analog satellite receivers sold, combined with
decreased prices on products sold. Internationally, the Company sold
approximately 91,000 analog satellite receivers during the six months ended June
30, 1997, a decrease of 28%, compared to approximately 126,000 units sold in the
comparable period in 1996. As previously described, the Company also recognized
revenues totaling $11.9 million during the six months ended June 30, 1997
related to the ExpressVu Agreement.
C-band programming revenue totaled $4.1 million for the six months ended
June 30, 1997, a decrease of $2.6 million, or 39%, compared to the six months
ended June 30, 1996. This decrease was primarily attributable to the
industry-wide decline in demand for domestic C-band programming services.
DTH AND DISH NETWORK EXPENSES. DTH and DISH Network expenses for the six
months ended June 30, 1997 aggregated $107.0 million, an increase of $8.9
million, or 9% compared to the same period in 1996. DTH products and technical
services expense decreased $62.9 million, or 70%, to $27.3 million during the
six months ended June 30, 1997. These expenses include the costs of C-band
systems and the costs of EchoStar Receiver Systems and related components sold
prior to commencement of the Company's promotions. Subscriber promotion
subsidies aggregated $31.1 million for the six months ended June 30, 1997. DISH
Network programming expenses totaled $45.3 million for the six months ended June
30, 1997 as compared to $1.8 million for the comparable period in 1996. This
increase is directly attributable to the increase in DISH Network subscribers at
June 30, 1997 compared to June 30, 1996.
C-band programming expenses totaled $3.3 million for the six months ended
June 30, 1997, a decrease of $2.8 million, or 45%, as compared to the same
period in 1996. This decrease is consistent with the decrease in C-band
53
programming revenue.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. SG&A expenses totaled
$64.7 million for the six months ended June 30, 1997, an increase of $35.6
million as compared to the same period in 1996. SG&A expenses as a percentage
of total revenue increased to 38% for the six months ended June 30, 1997 as
compared to 26% for the same period in 1996. The increase in SG&A expenses was
principally attributable to increased personnel expenses to support the growth
of DISH Network service and increased expenses associated with the operation of
the EchoStar DBS System. In future periods, the Company expects that SG&A
expenses as a percentage of total revenue will decrease as subscribers are
added.
EARNINGS BEFORE INTEREST, TAXES, DEPRECIATION AND AMORTIZATION. EBITDA was
negative $243,000 for the six months ended June 30, 1997, an improvement of
$16.6 million, compared to negative EBITDA of $16.8 million for the same period
in 1996. This improvement in negative EBITDA resulted from the factors
affecting revenue and expenses discussed above.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expenses for
the six months ended June 30, 1997 (including amortization of subscriber
acquisition costs of $92,000 and $61.3 million for the six months ended June 30,
1996 and June 30, 1997, respectively) aggregated $86.6 million, an increase of
$76.8 million, as compared to the same period 1996. The increase in
depreciation and amortization expenses primarily was attributable to
amortization of subscriber acquisition costs and depreciation expense associated
with EchoStar II.
OTHER INCOME AND EXPENSE. Other expense, net totaled $39.6 million for the
six months ended June 30, 1997, an increase of $21.1 million, as compared to the
same period 1996. The increase in other expense in the first half of 1997
resulted primarily from an increase in interest expense associated with the
March 1996 issuance of the 1996 Notes and 1997 Notes combined with the continued
accretion of the 1994 Notes. Additionally, interest income decreased $4.8
million as a result of a decrease in invested balances. The Company capitalized
$16.6 million and $14.4 million of interest in the six months ended June 30,
1997 and 1996, respectively.
INCOME TAX BENEFIT. The decrease in the income tax benefit of $16.1
million (from $16.1 million for the six months ended June 30, 1996 to an income
tax provision of $44,000 for the six months ended June 30, 1997) principally
resulted from the Company's decision to fully reserve the 1997 additions to its
net deferred tax asset.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995.
REVENUE. Total revenue for 1996 was $209.7 million, an increase of $45.8
million, or 28%, as compared to total revenue for 1995 of $163.9 million. The
increase in total revenue in 1996 was primarily attributable to the introduction
of EchoStar's DISH Network-SM- service during March 1996. In the future, the
Issuer expects to derive its revenue principally from DISH Network-SM-
subscription television services. As of December 31, 1996, the Issuer had
approximately 350,000 DISH Network-SM- subscribers.
The increase in total revenue in 1996 was partially offset by a decrease in
international and domestic sales of C-band satellite receivers and equipment.
The domestic and international markets for C-band DTH products continued to
decline during 1996. Consistent with the increases in total revenue during 1996,
EchoStar experienced a corresponding increase in trade accounts receivable at
December 31, 1996.
Revenue from domestic sales of DTH products and technical services
increased $5.2 million, or 6%, to $98.9 million during 1996. Domestically, the
Issuer sold approximately 518,000 satellite receivers in 1996, an increase of
295% as compared to approximately 131,000 receivers sold in 1995. Of the total
number of satellite receivers sold during 1996, approximately 474,000 were
EchoStar Receiver Systems. Although there was a significant increase in the
number of satellite receivers sold in 1996 as compared to 1995, overall revenue
did not increase proportionately as a result of the revenue recognition policy
applied to DBS satellite receivers sold under the 1996 Promotion, combined with
decreasing sales of, and lower prices charged for, C-band products. Included in
the number of DTH satellite receivers sold are sales of a competitor's DBS
receiver manufactured and supplied by a third-party manufacturer. Such sales,
which ceased during the second quarter of 1996 coincident with the launch of the
DISH Network-SM- service, totaled approximately 19,000 units during 1996, as
compared to 67,000 units sold in 1995. Revenues generated from the sale of
competitor DBS receivers aggregated $8.0 million during 1996, compared to $34.0
million in 1995. No revenue will be generated from the sale of competitor DBS
receivers in 1997.
54
Revenue from international sales of DTH products for the year ended
December 31, 1996 was $37.5 million, a decrease of $15.8 million, or 30%, as
compared to 1995. This decrease was directly attributable to a decrease in the
number of analog satellite receivers sold, combined with decreased prices on
products sold. Internationally, EchoStar sold approximately 239,000 analog
satellite receivers in 1996, a decrease of 28%, compared to approximately
331,000 units sold in 1995.
C-band programming service revenue totaled $11.9 million in 1996, a
decrease of $3.3 million, or 22%, compared to 1995. This decrease was primarily
attributable to the industry-wide decline in demand for domestic C-band
programming services. C-band programming revenue is expected to continue to
decrease for the foreseeable future.
Loan origination and participation income in 1996 was $789,000, a decrease
of $959,000, or 55%, as compared to 1995. The decrease in loan origination and
participation income during 1996 was primarily due to the commencement of
operations of DNCC in 1996. DNCC is a subsidiary of EchoStar, not of the Issuer.
The introduction of the DISH Network-SM- has increased the number of consumer
loans and leases funded, but since DNCC is the responsible entity, this increase
is not reflected in ESBC's statements of operations.
DTH AND DISH NETWORK-SM- EXPENSES. DTH and DISH Network-SM- expenses in
1996 aggregated $188.3 million, an increase of $58.1 million, or 45%, as
compared to 1995. This increase is directly attributable to the introduction
of DISH Network-SM- service in March 1996, partially offset by decreases in
other DTH expenses. DTH products and technical services expense increased
$6.7 million, or 6%, to $123.5 million during 1996. These expenses include
the costs of EchoStar Receiver Systems and related components sold prior to
commencement of the 1996 Promotion. Subscriber promotion subsidies aggregated
$35.2 million during 1996 and represent expenses associated with the 1996
Promotion. DISH Network-SM-programming expenses totaled $19.1 million for
the year ended December 31, 1996.
C-band programming expenses totaled $10.5 million during the year ended
December 31, 1996, a decrease of $3.0 million, or 22%, as compared to 1995. This
decrease is consistent with the decrease in C-band programming revenue. Gross
margins realized on C-band programming sales remained relatively constant.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. SG&A expenses totaled $86.9
million in 1996, an increase of $48.4 million or 126%, as compared to 1995. Such
expenses as a percentage of total revenue increased to 41% in 1996 as compared
to 23% in 1995. The increase in SG&A expenses was principally attributable to:
(i) increased personnel expenses as a result of introduction of DISH Network-SM-
service in March 1996 (EchoStar's number of employees doubled during 1996 as
compared to 1995); (ii) marketing and advertising expenses associated with the
launch and ongoing operation of the DISH Network-SM-; (iii) increased expenses
related to the Digital Broadcast Center, which commenced operations in the third
quarter of 1995; and (iv) increased expenses associated with operation of DISH
Network-SM- call centers and subscription management related services.
EARNINGS BEFORE INTEREST, TAXES, DEPRECIATION AND AMORTIZATION. EBITDA
(including amortization of subscriber acquisition costs of $16.0 million for the
year ended December 31, 1996) for 1996 was a negative $65.5 million, an increase
of $60.6 million, as compared to negative $4.9 million in 1995. This increase in
negative EBITDA resulted from the factors affecting revenue and expenses
described above.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense for
the year ended December 31, 1996, including the amortization of subscriber
acquisition costs, aggregated $43.4 million, an increase of $40.3 million, as
compared to 1995. The increase in depreciation and amortization expenses
resulted from depreciation expenses associated with the Digital Broadcast
Center, EchoStar I and EchoStar II (placed in service during the fourth quarter
of 1995, the first quarter of 1996, and the fourth quarter of 1996,
respectively), and amortization of subscriber acquisition costs.
OTHER INCOME AND EXPENSE. Other expense, net totaled $47.7 million in
1996, an increase of $37.1 million, as compared to 1995. The increase in other
expense in 1996 resulted primarily from an increase in interest expense
associated with the issuance of the 1996 Notes. This increase in interest
expense was partially offset by an increase in interest income attributable to
increases in invested balances as a result of the investment of proceeds
received from the issuance of the 1996 Notes. Interest capitalized relating to
development of the EchoStar DBS System during 1996 was $19.8 million (compared
to $25.0 million during 1995).
INCOME TAX BENEFIT. The increase in the income tax benefit of $48.7
million (from $6.2 million in 1995 to $54.9 million in 1996) principally
resulted from the increase in EchoStar's loss before income taxes. EchoStar's
net deferred tax assets (approximately $67.0 million at December 31, 1996)
relate to temporary differences for amortization of original issue discount
55
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 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 "-SM-all dish"
equipment. Additionally, EchoStar sold competitor DBS Receivers for reception of
programming offered by other service providers. Competitor DBS Receiver sales
partially offset the decline in domestic C-band sales in 1995.
Programming revenue for 1995 was $15.2 million, an increase of $692,000, or
5%, as compared to 1994. The increase was primarily due to additional sales of
programming packages through retailers and, to a lesser extent, the renewal and
retention of existing customers as a result of more attractive pricing and more
effective marketing.
DTH EXPENSES. Costs of DTH products sold were $130.3 million for 1995, a
decrease of $15.0 million, or 13%, as compared to 1994. The decrease in DTH
operating expenses for 1995 resulted primarily from the decrease in sales of DTH
products. DTH product expenses as a percentage of DTH product revenue were 79%
for 1995, as compared to 77% for 1994. The increase was principally the result
of declining sales prices of C-band DTH products as described above, during 1995
as
56
compared to 1994.
C-band programming expenses were $13.5 million for 1995, an increase of
$1.9 million, or 16%, as compared to 1994. Programming expenses as a percentage
of programming revenue were 89% for 1995 as compared to 80% for 1994.
Programming expenses increased at a greater rate than revenues from programming
principally because the prior periods included the flow through of certain
volume discounts.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. SG&A expenses totaled
$38.5 million for 1995, an increase of $8.3 million, or 27%, as compared to
1994. Such expenses as a percentage of total revenue increased to 23% for
1995 as compared to 16% for 1994. The change was principally the result of
the reduction of revenues from domestic sales of DTH products and increased
costs to support, among other things, expansion of the EchoStar DTH product
installation network and administrative costs associated with development of
the DISH Network-SM-. In addition, $1.1 million of compensation expense was
recorded with regard to 55,000 shares of Class A Common Stock contributed by
EchoStar to EchoStar's 401(k) plan.
Research and development costs totaled $5.0 million during 1995 as compared
to $5.9 million during 1994. The decrease was principally due to the reduction
in research necessary to provide C- band receivers to domestic and international
markets. EchoStar expenses such costs as incurred and includes such costs in
selling, general and administration expenses.
EARNINGS BEFORE INTEREST, TAXES, DEPRECIATION AND AMORTIZATION. EBITDA for
1995 was a negative $4.9 million, a decrease of $20.4 million, or 132%, as
compared to 1994. The decrease resulted from the factors affecting revenue and
expenses discussed above.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expenses
totaled $3.1 million during 1995, an increase of $871,000, or 39%, as compared
to 1994. The overall increase primarily resulted from depreciation on assets
placed in service during the third and fourth quarters of 1995.
OTHER INCOME AND EXPENSE. Other expense for 1995 was $10.5 million, a
decrease of $2.2 million, or 17%, as compared to 1994. The difference in other
income and expense for 1995 compared to 1994 resulted primarily from the
amortization of original issue discount and deferred debt issuance costs of
$23.5 million in 1995, and $20.7 million in 1994, net of capitalized interest,
on the 1994 Notes, which were issued on June 7, 1994. Other expense was reduced
by investment income on monies deposited in an escrow account of $8.8 million
for 1995, and $6.5 million for 1994. Interest capitalized relating to
development of the EchoStar DBS System for 1995 totaled $25.0 million as
compared to $5.7 million for 1994.
BENEFIT FROM/PROVISION FOR INCOME TAXES. An income tax benefit of $6.2
million was recognized during 1995 as compared to the income tax provision for
1994 of $399,000. This change was principally the result of changes in
components of income and expenses discussed above during 1995 and 1994,
respectively. EchoStar's deferred tax assets (approximately $13.9 million at
December 31, 1995) relate principally to temporary differences for amortization
of original issue discount on the 1994 Notes and various accrued expenses which
are not deductible until paid. No valuation allowance was provided because
EchoStar believed it was more likely than not that these assets would be
realized.
Liquidity and Capital Resources
EchoStar's working capital and capital expenditure requirements were
substantial during the three-year period ended December 31, 1996. Those
expenditures principally resulted from the construction of EchoStar's DBS
system during 1994, 1995 and 1996, and the commercial launch of DISH
Network-SM- service in March 1996. Capital expenditures, including
expenditures for satellite systems under construction, totaled $119.3
million, $133.6 million and $221.9 million during the years ended December
31, 1994, 1995 and 1996, respectively, and $81.5 million and $67.1 million
during the six-month periods ended June 30, 1996 and 1997, respectively.
Additionally, during 1996, EchoStar expended $55.4 million for DBS
authorizations obtained from the FCC, principally relating to the Company's
acquisition of 24 DBS frequencies at the 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,
57
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, the Issuer 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").
On October 2, 1997, EchoStar consummated the Preferred Stock. The
Preferred Stock 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 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 Stock
Offering to fund subscriber acquisition and marketing expenses and for other
general corporate purposes.
During the years ended December 31, 1995 and 1996, net cash flows used in
operations totaled $20.3 million and $27.4 million, respectively. Net cash flows
used in operations totaled $9.2 million for the six months ended June 30, 1997,
compared to $20.1 million used by operations for the six months ended June 30,
1996. EchoStar anticipates that its capital expenditure and working capital
requirements, including subscriber acquisition costs, will increase
substantially throughout 1997 as it aggressively builds its DISH Network-SM-
subscriber base. Such working capital requirements could vary if any of the
following, among other factors, occur: (i) subscriptions to DISH Network-SM-
programming differ from anticipated levels; (ii) actual expenses differ from
present estimates; or (iii) the investment in subscriber acquisition costs
increases from planned levels. EchoStar had anticipated meeting its 1997 capital
requirements with $200.0 million of interim financing which was to be provided
by News pursuant to the News Agreement (the "News Funding"). 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 Old Notes
Offering and the Preferred Stock 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 activation. 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 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
58
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.
Beginning August 1, 1997, EchoStar began offering an internally-financed
lease program to consumers. The lease provides for an 18 month lease term at
competitive rates to qualified consumers. At the end of the lease term, the
consumer has the option of purchasing the equipment. Each subscriber
activatation under the lease program is expected to result in a net use of cash
to EchoStar of approximately $400 to $600 (depending on the number of outlets).
Accordingly, the lease program will result in a greater investment per customer
than either the 1997 Promotion or the 1996 Promotion. While there can be no
assurance, EchoStar believes that its investment per lease customer will
significantly improve at the end of the lease term when the subscriber either
continues on a month-to-month basis, purchases the equipment from EchoStar or
returns the equipment to the retailer. Depending upon the number of subscribers
added pursuant to the lease program, EchoStar may require additional capital to
finance the acquisition of additional lease subscribers. No assurance can be
given that additional capital will be available on terms acceptable to EchoStar,
or at all. EchoStar believes the lease program will be attractive to consumers
who would otherwise subscribe to a DBS service but for the initial "up front"
costs associated with DBS service. The lease program allows the consumer (for
less than $100) to receive an upgraded EchoStar Receiver System, including a
professional installation. Upon activation of service, the consumer is charged
a low monthly equipment rental fee in addition to charges associated with
programming services purchased.
Historically, EchoStar has maintained agreements with third-party finance
companies to make consumer credit available to EchoStar customers. These
financing plans provide consumers the opportunity to lease or finance EchoStar
Receiver Systems, including installation costs and certain DISH Network
programming packages, on competitive terms. Consumer financing provided by
third parties is generally non-recourse to EchoStar. EchoStar currently
maintains one such agreement which expires in October 1997. The third-party
finance company with which EchoStar maintains the above mentioned agreement has
notified the Company that it does not intend to renew the agreement. EchoStar
is currently negotiating similar agreements with other third-party finance
companies and expects to consummate at least one such agreement prior to the
expiration of its existing consumer financing agreement. There can be no
assurance that EchoStar will be successful in these negotiations, or if
successful, that any such new agreements will commence prior to the termination
of the existing agreement. In the event that EchoStar is unsuccessful in
executing a new agreement with a third-party finance company during 1997, future
loan origination income will be adversely affected and growth of the DISH
Network subscriber base may be negatively impacted.
1997 CAPITAL REQUIREMENTS
In addition to the working capital requirements discussed above, during the
remainder of 1997 EchoStar expects to expend: (i) approximately $128.1 million
in connection with the construction launch, insurance and deployment of
EchoStar III ($83.6 million) and EchoStar IV ($44.5 million). Additionally,
EchoStar will expend approximately $1.3 million per month to meet debt service
requirements relative to deferred satellite construction payments for EchoStar I
and EchoStar II. EchoStar's debt service requirements on the deferred satellite
construction payments will increase to approximately $1.6 million per month upon
the successful launch of EchoStar III (currently expected to be launched on
October 5, 1997). Capital expenditures related to EchoStar III and EchoStar IV
may increase in the event of delays, cost overruns, increased costs associated
with certain potential change orders under the Company's satellite or launch
contracts, or a change in launch providers.
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, cash generated from operations, and
the proceeds of the Preferred Stock
59
Offering. 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 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 Old Notes,
Deferred Payments on EchoStar I and EchoStar II, and mortgage notes payable).
Interest on the 1994 Notes and the 1996 Notes accretes, but currently is not
payable in cash. Semi-annual cash interest payments of approximately $40.2
million on the 1994 Notes commence December 1, 1999. The 1994 Notes Indenture
requires principal reductions of $156.0 million on each of June 1, 2002 and
2003. These principal reductions will result in decreases in semi-annual cash
interest payments to $30.1 million and $20.1 million, effective December 1, 2002
and December 1, 2003, respectively. Semi-annual cash interest payments of $38.1
million on the 1996 Notes commence on September 15, 2000. Semi-annual cash
interest payments of $23.4 million on the Old Notes commence January 1, 1998.
The first five such semi-annual interest payments will be funded from the
Interest Escrow Account. Gross Deferred Payments totaled $64.0 million for
EchoStar I and EchoStar II. As of June 30, 1997, approximately $52.2 million of
such Deferred Payments was outstanding. The Deferred Payments bear interest at
8.25% and are payable in equal monthly installments over five years following
launch of the respective satellites. Deferred Payments of $15.0 million will be
used for each of EchoStar III and EchoStar IV. The terms of such Deferred
Payments for EchoStar III and EchoStar IV will be similar to the terms
associated with EchoStar I and EchoStar II.
AVAILABILITY OF OPERATING CASH FLOW TO ECHOSTAR
Since all of the Issuer's, ESBC's and Dish's operations are conducted
through subsidiaries, the cash flow of the Issuer, ESBC and Dish and their
ability to service debt, including the 1994 Notes, the 1996 Notes and the Notes,
are dependent upon the earnings of such subsidiaries and, in general, the
payment of funds by such subsidiaries to Dish, by the payment of funds by Dish
to ESBC, and by the payment of funds by ESBC to the Issuer in the form of loans,
dividends or other payments.
ESBC, Dish and its subsidiaries have no current obligations, contingent or
otherwise, to pay any amounts due pursuant to the Notes or to make any funds
available therefor, whether by dividends, loans or other payments, other than
the possible guarantee of the Notes by each of Dish and ESBC, which will become
effective when and if permitted by the applicable indenture to which such
entities are subject. The cash flow generated by subsidiaries of Dish will only
be available if and to the extent that Dish is able to make such cash available
to ESBC in the form of dividends, loans or other payments. The indentures
related to the 1994 Notes and the 1996 Notes impose various restrictions on the
transfer of funds among EchoStar and its subsidiaries. The 1994 Notes Indenture
contains restrictive covenants that, among other things, impose limitations on
Dish and its subsidiaries with respect to their ability to: (i) incur additional
indebtedness; (ii) issue preferred stock; (iii) sell assets; (iv) create, incur
or assume liens; (v) create dividend and other payment restrictions with respect
to Dish's subsidiaries;
60
(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; (vii) incur subordinated or junior debt;
and (viii) enter into transactions with affiliates. The 1996 Notes Indenture
permits ESBC to pay dividends and make other distributions to the Issuer without
restrictions.
The Indenture contains restrictive covenants that, among other things,
impose limitations on the Issuer 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 the Issuer's subsidiaries; (vi) merge,
consolidate or sell substantially all of its assets; (vii) enter into
transactions with affiliates; and (viii) pay dividends. In general, the
Issuer may pay dividends on its equity securities only if: (i) no default
exists under the Indenture; and (ii) after giving effect to such dividends,
the Issuer'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 the Issuer and
its subsidiaries from the sale of certain equity interests of the Issuer or
EchoStar. For a complete description of the restrictive covenants contained
in the Notes, see "Description of Exchange Notes."
If cash generated from operation of the DISH Network-SM- is not
sufficient to meet the debt service requirements of the Notes, the 1994 Notes
and the 1996 Notes, EchoStar would be required to obtain cash from other
financing sources. There can be no assurance that such financing would be
available on terms acceptable to EchoStar, or if available, that the proceeds
of such financing would be sufficient to meet debt service requirements
associated with the Notes, the 1994 Notes and the 1996 Notes. See
"Description of Certain Indebtedness--1994 Notes" and "--1996 Notes" for
other restrictions associated with the 1994 Notes and the 1996 Notes.
EFFECTS OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In March 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 128, "Earnings Per Share" (SFAS
No. 128), which supersedes Accounting Principles Board Opinion No. 15, "Earnings
Per Share" ("APB No. 15"). SFAS No. 128 simplifies the requirements for
reporting earnings per share ("EPS") by requiring companies only to report
"basic" and "diluted" EPS. SFAS No. 128 is effective for both interim and
annual periods ending after December 15, 1997 but requires retroactive
restatement upon adoption. EchoStar will adopt SFAS No. 128 in the fourth
quarter of 1997. EchoStar does not believe such adoption will have a material
effect on either its previously reported or future EPS.
In March 1997, the FASB issued Statement of Financial Accounting Standards
No. 129, "Disclosure of Information about Capital Structure" (SFAS No. 129),
which continues the existing requirements of APB No. 15 but expands the number
of companies subject to portions of its requirements. Specifically, SFAS No.
129 requires that entities previously exempt from the requirements of APB No. 15
disclose the pertinent rights and privileges of all securities other than
ordinary common stock. SFAS No. 129 is effective for periods ending after
December 15, 1997. EchoStar was not exempt from APB No. 15; accordingly, the
adoption of SFAS No. 129 will not have any effect on EchoStar.
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income," ("SFAS No. 130"), which establishes
standards for reporting and display of comprehensive income and its components
(revenues, expenses, gains and losses) in a full set of general-purpose
financial statements. SFAS No. 130 requires that all items that are required to
be recognized under accounting standards as components of comprehensive income
be reported in a financial statement that is displayed with the same prominence
as other financial statements. SFAS No. 130 does not require a specific format
for that financial statement but requires that the enterprise display an amount
representing total comprehensive income for the period in that financial
statement. SFAS No. 130 is effective for fiscal years beginning after December
15, 1997. The adoption of SFAS No. 130 will require additional disclosure in
EchoStar's financial statements.
61
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.
62
BUSINESS
GENERAL
EchoStar is a leading provider of DBS programming services in the United
States. The Company commenced its DISH Network(-SM-) in March 1996, after the
successful launch of EchoStar I in December 1995. The Company launched EchoStar
II in September 1996. Since December 31, 1996, EchoStar has increased its DISH
Network(-SM-) subscriber base approximately 134% from 350,000 to approximately
820,000 subscribers at September 30, 1997. During 1997, EchoStar believes that
it has captured approximately 30% of all new DBS satellite subscribers in the
U.S. Average monthly revenue during 1997 has been approximately $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 August 31,
1997, approximately 5.3 million U.S. households subscribed to DBS and other
digital DTH satellite service. Industry sources project that the market could
grow to as many as 19 million subscribers by the year 2002.
EchoStar believes that there is significant unsatisfied demand for
high-quality, reasonably-priced television programming. Of the approximately 96
million television households in the U.S., it is estimated that more than 60
million subscribers pay an average of $34 per month for multichannel programming
services. EchoStar's primary target market for the DISH Network(-SM-) includes
cable subscribers in urban and suburban areas who are dissatisfied with the
quality or price of their cable programming, or who want niche programming
services not available from most cable operators. Other target markets for the
DISH Network(-SM-) include the approximately 7 million households not passed by
cable television systems and the approximately 21 million households currently
passed by cable television systems with relatively limited channel capacity.
EchoStar has rights to more U.S. licensed DBS frequencies than any of its
competitors, and currently controls 90 frequencies, including 21 frequencies at
an orbital slot capable of providing nationwide DBS service. The Company
currently provides approximately 120 channels of digital television programming
and over 30 channels of CD quality audio programming to the entire continental
U.S. DISH Network(-SM-) subscribers can choose from a variety of programming
packages that EchoStar believes have a better price-to-value relationship than
packages currently offered by most pay television providers.
DISH Network(-SM-) programming is available to any subscriber who purchases
or leases an EchoStar Receiver System. EchoStar Receiver Systems are fully
compatible with MPEG-2, the world digital standard for computers and consumer
electronics products, and provide image and sound quality superior to current
analog cable or wireless cable service. EchoStar Receiver Systems are designed
and engineered by the Company's wholly-owned subsidiary, HTS. Satellite
receivers designed by HTS have won numerous awards from dealers, retailers and
industry trade publications.
The Company's primary objective is to become the leading provider of
subscription television services in the U.S. To achieve this objective, the
Company will seek to:
EXPAND PROGRAMMING OFFERINGS. The Company expects to launch EchoStar
III and EchoStar IV on October 6, 1997 and in the first quarter of 1998,
respectively. EchoStar III, which is expected to serve the eastern half of
the U.S. from 61.5DEG. WL and EchoStar IV, which is expected to serve the
western half of the U.S. from 148DEG. WL, should enable EchoStar to
retransmit local broadcast signals in 20 of the largest U.S. television
markets (assuming receipt of all required retransmission consents and
copyright licenses and/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 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
63
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 will
begin to carry JVC branded satellite receiver systems compatible with
DISH Network programming. The JVC branded satellite receiver system will
be available beginning October 1997 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.
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. 148 DEG. 157 DEG. 166 DEG. 175 DEG.
----------- --------- -------- -------- -------- -------- -------- -------- --------
EchoStar (1). . . . . . . . . . . . . . 90 11 1 21 24 1 32
DirecTv . . . . . . . . . . . . . . . . 54 27 27
MCI/News Corp. (2). . . . . . . . . . . 28 28
Continental (3) . . . . . . . . . . . . 22 11 11
Tempo (2) . . . . . . . . . . . . . . . 22 11 11
Dominion. . . . . . . . . . . . . . . . 16 8 8
64
USSB. . . . . . . . . . . . . . . . . . 16 5 3 8
Unassigned. . . . . . . . . . . . . . . 8 2 5 1
--- -- -- -- -- -- -- -- --
Totals. . . . . . . . . . . . . . . . . 256 32 32 32 32 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
175DEG. WL orbital slot, which has limited utility for service to the
continental U.S.
(2) Does not take into account the recently announced proposed combination
of the MCI 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 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 August 31, 1997,
approximately 5.3 million U.S. households subscribed to DBS and other digital
DTH satellite services. This installed base represents a greater than 100%
increase from the approximately 2.2 million DBS subscribers as of the end of
1995 and more than ten times the approximately 500,000 DBS subscribers as of the
end of 1994. The Company believes that the market for digital satellite products
and services is growing and that there is significant unsatisfied demand for
high quality, reasonably priced television programming. Of the approximately 96
million television households in the U.S., it is estimated that more than 60
million subscribers pay an average of $34 per month for multichannel programming
services. The Company believes, therefore, that the potential market in the U.S.
for video, audio and data programming services consists of:
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(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(-SM-)
subscriber base.
HOUSEHOLDS PASSED BY CABLE. EchoStar has specifically targeted the
approximately 85 million households that are passed by cable television.
Management believes that over 60% of the Company's DISH Network(-SM-)
subscriber base consists of households that are passed by cable. Although
programming offerings of cable systems in major metropolitan areas are
significant, most cable systems have a typical analog capacity of 30 to 80
channels. In order to expand their service offering to one comparable to that
offered by the DISH Network(-SM-), the Company believes that cable systems
would have to upgrade their analog networks to fiber-based digital service.
Fiber upgrade implementation is in progress in a few cable systems in select
metropolitan markets, with a resultant increase of channel capacity
anticipated to be available in five to ten years. Due to the substantial
capital investment required for widescale deployment of fiber-based services,
several cable companies have delayed originally-announced deployment
schedules. The Company believes that the cost of such upgrades, when
undertaken, will ultimately be passed on to the consumer, which may further
enhance the attractiveness of the service offerings of the DISH Network(-SM-)
to the consumer. The Company believes that consumers will continue to demand
the improved audio and video quality, and expanded programming offerings,
that are currently available with DBS technology, but not available from
over-the-air VHF and UHF broadcasters or from cable. The Company believes
that the quality and variety of its DISH Network(-SM-) service offerings
relative to even the most advanced cable television systems makes it an
attractive alternative to traditional cable.
HOUSEHOLDS UNSERVED OR UNDERSERVED BY CABLE. The Company is also targeting
the approximately 7 million households which are not passed by cable and the
approximately 21 million households that are in areas served by cable systems
with fewer than 40 channels. Even the largest cable systems with sufficient
channel capacity (generally 54 or more channels) and good quality cable plant
will require costly upgrades to add bandwidth or incur significant maintenance
costs in order to offer digital programming services. The Company believes
however, that based on current compression technology, the number of channels
that a cable system would have to remove from its existing service offerings in
order to use them for digital services may, in the case of cable systems with
limited channel capacity, result in the value of their analog programming
offering being degraded and their subscribers alienated. Accordingly, pending
the availability of advanced digital compression technology now under
development, such smaller cable systems will be required to incur substantial
costs to upgrade their plant and distribution systems to expand their channel
capacity before they can introduce digital services. Due to the limited number
of subscribers across which any plant upgrades would be spread, the smaller
cable systems may find that the cost of such upgrades cannot be justified
economically. The Company believes areas served by cable systems which have not
been fully upgraded currently provide a prime market for digital satellite
services.
INTERNATIONAL, CULTURAL AND NICHE MARKETS. The Company believes that there
are approximately 8 million households headed by persons of foreign nationality
living in the U.S, encompassing approximately 23 million foreign-born persons
living in the U.S. who demand international, cultural and other niche
programming typically not provided by cable television, and who represent a
prime market for its DISH Network(-SM-) service offerings. Generally, it is not
cost effective for traditional broadcast television or cable companies to
provide targeted programming to these households due to the relatively low
number of such niche customers in any particular local market. These customers,
along with other customers interested in receiving international and other
cultural programming, are an important target market for the Company. The
Company's incremental cost to provide multicultural and niche programming is
relatively insignificant given the ability of digital DBS service to utilize a
national delivery system for all programming offerings. The Company believes
that, by directly marketing international programming to these potential
customers, it will also sell more of its most popular programming.
HIGH-SPEED INTERNET AND OTHER DATA SERVICES. The Company currently intends
to make space available on EchoStar III to begin test-marketing its high-speed
Internet and other related data services. The Company believes that there is
significant unsatisfied demand for alternative providers of such services and
believes that if it can provide a comparable product at a reasonable price, many
of its current DISH Network(-SM-) subscribers would also subscribe to the
Company's Internet and data services, thus leading to an increase in the average
recurring revenue per subscriber. Further, the Company believes that by offering
Internet and other high-speed data services, it may be able to attract
additional subscribers to the DISH Network(-SM-) who
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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.
C-BAND SUBSCRIBERS. The Company believes that the lower equipment prices
combined with the higher-quality digital video and audio output provided by DBS
and the smaller dish size will attract many more current C-band subscribers to
DBS. The Company believes that its historical presence in the C-band satellite
industry has enhanced its ability to persuade current C-band subscribers to
migrate to DISH Network(-SM-) service.
ECHOSTAR'S EXPERIENCE IN THE DBS MARKET
The Company commenced commercial operations of the DISH Network(-SM-) in
March 1996 and since that time has experienced rapid subscriber growth. As of
September 30, 1997, the Company had approximately 820,000 subscribers to its
DISH Network(-SM-) programming services. During 1997, the Company believes
that it has captured approximately 30% of all new DBS subscribers in the U.S.
The Company also has had a significant amount of success in marketing its
services to its primary target market--existing cable television subscribers.
Management believes that more than 60% of current DISH Network(-SM-)
subscribers have come from homes that are passed by cable. The DISH
Network(-SM-) has been marketed to consumers as an alternative to traditional
cable services and the Company has had much success in differentiating itself
from cable providers based on its superior quality video and audio
programming relative to cable, combined with a better price-to-value
relationship of its programming offerings. For example, the Company's
America's Top 50 CD programming package is priced at $26.99 per month.
Comparatively, on a national average, a similar package of cable programming
costs the consumer approximately $42 per month. Additionally, according to
industry estimates, more than 75% of subscribers are satisfied with the DBS
picture quality. Further, approximately 94% of those same consumers said they
would recommend satellite television to their friends. This high-level of
consumer satisfaction has been evident in the Company's low level of
subscriber turnover, which has averaged less than 1% per month. EchoStar's
first year of operations in the DBS industry also resulted in higher average
revenue per subscriber than initial expectations. This is due largely in part
to the popularity of the Company's multichannel premium service offerings,
which have proven to be very popular among subscribers.
DBS AND RELATED SERVICES
PROGRAMMING. EchoStar now provides approximately 120 channels of digital
television programming and over 30 channels of CD-quality audio programming
to the entire continental United States. EchoStar's America's Top 40 package
is priced at $19.99 per month and America's Top 50 CD is priced at $26.99 per
month. Multichannel premium services are also available for separate
purchase, at prices currently ranging from $10 to $25 per month, depending
upon the number of services purchased. EchoStar's DISH Network(-SM-) service
currently offers ten channels of pay-per-view programming. EchoStar's future
plans include, among other things, increasing the number of pay-per-view
channels offered to subscribers.
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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 PLUS: Multichannel Cinemax (3)
Cartoon Network Home Shopping Network Animal Planet FLIX
CNBC The Learning Channel BET Multichannel HBO (6)
CNN Lifetime CNN-fn The Movie Channel (2)
Court TV MTV CNN International Multichannel Showtime (3)
Comedy Central NET--Political NewsTalk Game Show Network Sundance Channel
C-SPAN Network KTLA-Los Angeles
C-SPAN 2 Nickelodeon MTV2
Country Music Nick at Nite Classic TV Turner Classic Movies
Television QVC WGN-Chicago
The Discovery The Sci-Fi Channel WPIX-New York
Channel The Travel Channel WSBK--Boston
Disney (2) TBS One Regional Sports Network
E! TBN
ESPN TNN
ESPN 2 TNT
ESPNews TV Land
EWTN USA
The Family Channel VH-1
Food Network The Weather Channel
Headline News
The History
Channel
- ----------------------
(1) Premium Services are available on an a-la-carte basis. Numbers in
parentheses represent the number of channels available through each
Premium Service.
EchoStar intends to offer programming telecast by local affiliates of
national television networks to certain population centers within the
continental U.S. via DBS satellite. In order to retransmit this programming to
any DISH Network(-SM-) subscriber in a particular local market, EchoStar must
obtain the retransmission consent of the local affiliate, and is subject to the
restrictions of the SHVA as described below. There can be no assurance that the
Company will obtain retransmission consents of any local affiliate. The
inability to transmit such programming into the local markets from which the
programming is generated could have an adverse effect on the Company.
The SHVA establishes a "compulsory" copyright license that allows a DBS
operator, for a statutorily-established fee, to retransmit local network
programming to subscribers for private home viewing so long as that
retransmission is limited to those persons in "unserved households." An
"unserved household," with respect to a particular television network, is
defined as one that cannot receive a sufficient over-the-air network signal "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 that
network signal. While management believes the SHVA could be read to allow the
Company to retransmit this programming to certain local markets via DBS
satellite, management also believes that the "compulsory" copyright license
under the SHVA may not be sufficient to permit the Company to implement its
strategy to retransmit such programming in the most efficient and comprehensive
manner. On August 28, 1997, a Copyright Arbitration Royalty Panel ("CARP"),
appointed to recommend royalties for satellite retransmissions 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 (the "Librarian"). In the CARP's recommendation,
which must be either adopted or changed by the Librarian 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
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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
69
passage of legislation that will clarify and extend the scope of the compulsory
license with respect to local network signals. If the CARP's position is upheld
by the Librarian and legislation to clarify and extend the scope of the
compulsory copyright 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 retransmissions (to the extent
permitted) should be zero. However, there can be no assurance that the
Librarian will adopt the CARP's recommendation.
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(-SM-) systems and programming services to its target
markets. EchoStar intends to enhance consumer awareness of its product
relative to other providers of DTH services by forming alliances with
nationally recognized distributors of other consumer electronics products. As
discussed previously, in May 1997 EchoStar entered into a strategic alliance
with JVC, pursuant to which JVC will distribute DISH Network(-SM-) satellite
receiver systems under a private label through its JVC national retail
network. EchoStar also has expanded its marketing efforts into direct sales.
To enhance the Company's responsiveness to its customers, the Company has
established a single telephone number (1-800-333-DISH) which customers can
call 24 hours a day, seven days a week to order EchoStar Receiver Systems,
activate programming services, schedule installation and obtain technical
support. The Company believes it is the only DBS provider to offer a
comprehensive single-point customer service function. EchoStar also is
expanding into other less-traditional means of distribution such as alliances
with electric and other utilities, multi-level marketing firms and other
non-consumer electronic retail businesses. Based on its knowledge of these
distribution channels from its marketing of C-band DTH products and services
domestically over the last 15 years and its marketing of DBS products in
Europe and the U.S., EchoStar believes it will be able to optimize the
marketing of its DBS products and services to distinguish itself from other
DBS suppliers.
EchoStar's marketing strategy includes national and regional broadcast
and print advertising, promoting the benefits of the DISH Network(-SM-).
EchoStar has comprehensive dealer guides describing all aspects of the DISH
Network(-SM-) and its integrated product lines (programming, hardware,
financing and installation). These dealer guides are provided to distributors
during nationwide educational seminars. EchoStar expects to continue to offer
a high level of retail support and to provide comprehensive point of sale
literature, product displays, demonstration kiosks and signage for retail
outlets. EchoStar also provides a promotional channel as well as a
programming subscription for in-store viewing. EchoStar's mobile sales and
marketing team visits retail outlets on a regular basis to reinforce training
and ensure point-of-sale needs are quickly fulfilled. A DISH Network(-SM-)
merchandise catalogue is also available for distributors to add to their
promotional materials. Additionally, one channel of programming on the DISH
Network(-SM-) provides information about additional services and promotions
offered by the DISH Network(-SM-). That channel is geared towards educating
retailers, satellite dealers and current and potential subscribers.
EchoStar offers a commission program that it believes is competitive with
that offered by other DBS operators. The program pays qualified distributors
and retailers a percentage of programming revenues generated by subscribers
to whom they sell DISH Network(-SM-) systems. Commissions are earned by
distributors and retailers over an extended period.
EchoStar's marketing programs and pricing strategies, such as the 1996
Promotion and the 1997 Promotion, have significantly increased the
affordability of EchoStar Receiver Systems for consumers. The primary
purposes of the 1996 Promotion and the 1997 Promotion are to rapidly build a
subscriber base, to expand retail distribution of EchoStar's products, and to
build consumer awareness of the DISH Network(-SM-) brand. These promotions
are consistent with, and emphasize, EchoStar's long-term business strategy
which focuses on generating the majority of its future revenue through the
sale of DISH Network(-SM-) programming to a large subscriber base. The 1996
and 1997 Promotions have resulted in, and will continue to result in,
EchoStar incurring significant costs to acquire subscribers. EchoStar
believes such costs will be fully recouped from future programming revenues
expected to be generated from customers obtained as a result of these
promotions. DISH Network(-SM-) reception equipment cannot be utilized with
competitors' systems. Consequently, subscribers cannot seamlessly migrate to
alternative DBS providers. Further, based on high DBS industry consumer
satisfaction ratings, initial feedback from consumers and dealers, and low
DISH Network(-SM-) subscriber turnover rates (to date less than 1.0% per
month), EchoStar anticipates high service renewal rates leading to an
expected average minimum subscriber life of at least three years.
Furthermore, a majority of DISH Network(-SM-) subscribers have purchased
premium and pay-per-view programming for incremental amounts above the
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prepaid minimum subscription required by the 1996 Promotion. Such incremental
revenues reduce the length of time necessary to recoup the average cost of
acquiring new subscribers.
EchoStar's present marketing strategy is based on current competitive
conditions, which may change; any such changes could be adverse to EchoStar.
Future changes in marketing strategy may include additional promotions,
including promotions geared toward further increasing the affordability to
consumers of EchoStar Receiver Systems and related accessories which, among
other things, could increase EchoStar's cost of acquiring new subscribers.
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ECHOSTAR RECEIVER SYSTEMS
DISH Network-SM- programming is available to consumers in the continental
U.S. who purchase or lease an EchoStar Receiver System. A typical EchoStar
Receiver System includes an 18-inch satellite dish, an EchoStar digital
satellite receiver (which processes and descrambles signals for television
viewing), a user-friendly remote control, and related components. EchoStar
Receiver Systems are available in a variety of models. Subscribers can
receive local broadcast signals, either through a standard television antenna
(a traditional rooftop or set-top antenna) or by subscribing to basic cable.
The standard EchoStar Receiver System incorporates infrared remote control
technology, an on-screen program guide and the ability to switch between DISH
Network-SM- and local programming signals using the remote control. In addition
to the on-screen program guide and local programming access features of the
basic model, the mid-level model features UHF remote control technology
(which allows the subscriber to control their EchoStar Receiver System from
up to 150 feet away through walls), and a high-speed data port. EchoStar's
premium receiver system includes UHF remote control technology, a high-speed
data port, enhanced on-screen program guide capabilities (including local
program information and seamless integration of local and satellite
channels), and on-screen caller identification capability.
The EchoStar DBS System integrates digital video and audio compression.
Authorization information for subscription programming is stored on
microchips placed on a credit card-sized access, or smart card. The smart
card, which can easily be updated or replaced periodically at low cost,
provides a simple and effective method to adjust a subscriber's level of
programming services. If the receiver's smart card is authorized for a
particular channel, the data is decrypted and passed on for video and audio
decompression.
While EchoStar Receiver Systems are internally designed and engineered,
EchoStar does not manufacture EchoStar Receiver Systems directly. Rather,
EchoStar has contracted for the manufacture of EchoStar Receiver Systems with
a high-volume contract electronics manufacturer. SCI is currently EchoStar's
only source of MPEG-2 DBS receivers. 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
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-SM-
programming packages, on competitive terms. The third-party finance company
that provides the program currently utilized by EchoStar has notified
EchoStar that it does not intend to renew the agreement, which expires during
1997. During March 1997, DNCC began offering an internally-financed consumer
lease plan to prospective DISH Network-SM- customers. This plan provides for a
four-year lease term at competitive rates to qualified consumers. Additional
capital will be required for EchoStar to implement the program on a larger
scale. There can be no assurance additional capital will be available for the
lease program on terms acceptable to EchoStar, or at all.
INSTALLATION
Currently, a majority of EchoStar Receiver System installations are
performed either by third-parties or are self-installed by consumers. A
subsidiary of EchoStar also offers installation services. EchoStar
anticipates that demand for its installation services may increase as demand
for its DISH Network-SM- service grows.
OTHER COMPONENTS OF DBS SERVICE
SUBSCRIBER MANAGEMENT. EchoStar outsources its subscriber management,
billing and remittance services for DISH Network-SM- subscribers. Under the
terms of the outsourcing agreement, EchoStar is provided with access to a
subscriber management system maintained by the service provider. The provider
facilitates the authorization of programming to the subscriber and
coordinates billing and renewal functions.
CUSTOMER CARE CALL CENTER. EchoStar currently maintains call centers in
Thornton, Colorado and Harrisburg,
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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-SM- programming. The access control
system is central to the security network that prevents unauthorized viewing
of programming. Access control systems of other DBS providers have been
commercially pirated. To date, the Company is unaware of any compromises of
its access control system. While there can be no assurance that breaches of
EchoStar's access control system will not occur in the future, the Company
believes its access control system will adequately prevent commercially
viable unauthorized access to programming. Further, the smart cards have been
designed with the flexibility to completely change the access control system
in the event of a security breach. In the event that such systems or products
fail to operate as intended, EchoStar's business would be adversely affected
if the vendor could not rapidly implement corrective measures.
COMPRESSION SYSTEM. EchoStar has entered into an agreement with a third
party to provide the necessary equipment to digitize, compress and encrypt
the analog signals transmitted by programmers to EchoStar's digital broadcast
center. Digitized signals are then multiplexed and modulated into an MPEG-2
transport stream for transmission to EchoStar's satellites. Once a customer
has ordered programming from EchoStar, an authorization code is transmitted
to the customer's satellite receiver, allowing the customer to receive the
programming within minutes after placing the order.
TRACKING, TELEMETRY AND CONTROL OF SATELLITES AFTER LAUNCH. Once a
satellite is placed at its orbital location, ground stations control it until
the end of its in-orbit lifetime. EchoStar has contracted for TT&C services
with respect to EchoStar I, EchoStar II and EchoStar III, including orbital
analysis and oversight of the construction phase-related to the satellite.
The agreement limits the liability of the contractor in the event it
negligently performs its services under the agreement or otherwise terminates
the agreement prior to the expiration of its term. It is expected that such
risks will be covered by in-orbit insurance; however, no assurances can be
given that such insurance can continue to be obtained on commercially
reasonable terms. While TT&C services have not yet been procured for EchoStar
IV, EchoStar believes that these services can be timely obtained from a
number of providers.
The FCC has granted EchoStar conditional authority to use C-band
frequencies for TT&C for EchoStar I, stating that the required coordination
process with Canada and Mexico had been completed. In January 1996, however,
the FCC received a communication from an official of the Ministry of
Communications and Transportation of Mexico stating that EchoStar I's TT&C
operations could cause unacceptable interference to Mexican satellites.
Although the Company believes it is unlikely, there can be no assurance that
such objections will not subsequently require EchoStar to relinquish use of
such C-band frequencies for TT&C purposes. This could result in the inability
to control EchoStar I, and a total loss of the satellite. Further, the FCC
has granted EchoStar conditional authority to use "extended" C-band
frequencies for TT&C function for EchoStar II, but only until January 1,
1999, at which time the FCC will review the suitability of those frequencies
for TT&C operations. There can be no assurance that the FCC will extend the
authorization to use these C-band frequencies for TT&C purposes beyond that
date. Such failure to extend the authorization could result in the inability
to control EchoStar II and a total loss of the satellite.
DBS AND OTHER PERMITS
EchoStar's subsidiaries have been assigned 21 DBS frequencies at 119DEG.
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 119DEG. WL, DirectSat has been assigned
11 frequencies at 175DEG. WL and one frequency at
73
110DEG. WL. DBSC holds a conditional satellite construction permit and
specific orbital slot assignments for 11 DBS frequencies at each of 61.5DEG.
WL and 175DEG. 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 175DEG. 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 61.5DEG. 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 119DEG. 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, scheduled to occur on October 6, 1997, are
pending at 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
148DEG. WL orbital slot. EchoStar acquired a DBS construction permit for the
use of the 24 frequencies at the 148DEG. WL orbital slot for $52.3 million.
EchoStar will be required to complete construction of that satellite by
December 20, 2000, and the satellite must be in operation by December 2002.
EchoStar's DBS system also requires feeder link earth stations, for which
EchoStar holds authorizations from the FCC. To EchoStar's knowledge, its
earth station authorizations are not subject to any pending regulatory
challenges.
EchoStar has been granted a license for a two satellite FSS Ku-band
system, which is conditioned on EchoStar making an additional financial
showing. EchoStar has also been granted a license for a two-satellite FSS
Ka-band system and has an application pending for a two-satellite extended
Ku-band satellite system. EchoStar also requested a modification of its
proposed Ku-band system to add C-band capabilities to one satellite. GE
Americom and PrimeStar have filed petitions for reconsideration or
cancellation and petitions to deny against EchoStar's Ku-band conditional
license, the additional financial showing made by EchoStar, and EchoStar's
C-band modification application. There can be no assurance that the FCC will
consider EchoStar's additional showing to be adequate or that it will deny GE
Americom's or PrimeStar's petitions. Moreover, EchoStar's Ka-band license was
based on an orbital plan agreed upon by applicants in EchoStar's processing
round. That plan is subject to several modification requests and a request
for a stay. If the pending applications are granted, and EchoStar
successfully constructs and launches Ku-band, extended Ku-band, and Ka-band
satellites, those satellites might be used to complement the Company's DISH
Network-SM- business, or for a variety of other uses. It is possible that the
unique FSS Ku-band and Ka-band orbital locations requested by EchoStar and
others could permit construction of satellites with sufficient power to allow
reception of satellite signals by relatively small dishes. All of these
projects are in an early stage of development, and there is no assurance that
EchoStar's applications will be granted by the FCC or that, if granted,
EchoStar will be able to successfully capitalize on any resulting business
opportunities. All of these applications are currently being challenged by
several companies with interests
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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 and 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 and EchoStar IV each will be Lockheed Martin
Series 2100AX satellites equipped with 32 transponders that will operate at
approximately 120 watts per channel (switchable to 16 transponders operating
at over 200 watts per channel). Each transponder will be capable of
transmitting multiple digital video, audio and data channels. EchoStar's
satellites have a minimum design life of 12 years. The majority of the
purchase price for the satellites is required to be paid in progress
payments, with the remainder payable in the form of Deferred Payments. The
Deferred Payments bear interest at rates ranging from 7.75% to 8.25% and are
due in equal monthly installments over five years following the launch of the
respective satellite. The loss, damage or destruction of any EchoStar
satellite as a result of military actions or acts of war, anti-satellite
devices, electrostatic storm or collision with space debris would have a
material adverse effect on EchoStar.
Lockheed Martin owns each satellite (and the components thereof) it
constructs for EchoStar until the launch of the satellite. Lockheed Martin
also is required to pay penalties to EchoStar if it fails to deliver EchoStar
III or EchoStar IV on time.
Satellites are subject to significant risks, including satellite defects,
launch failure, destruction and damage that may result in incorrect orbital
placement or prevent proper commercial operation. Approximately 15% of all
commercial geosynchronous satellite launches have resulted in a total or
constructive total loss. The failure rate varies by launch vehicle and
manufacturer. A number of satellites constructed by Lockheed Martin over the
past three years have experienced defects resulting in total or partial loss
following launch. The type of failures experienced have varied widely.
Lockheed Martin constructed EchoStar I and EchoStar II and is constructing
EchoStar III and EchoStar IV. Although EchoStar has been informed by Lockheed
Martin that it has made changes in its satellites to rectify the defects
responsible for past failures, no assurances can be given that EchoStar I,
EchoStar II, EchoStar III or EchoStar IV will perform according to
specifications.
Launch delays could result from weather conditions or technical problems
with any EchoStar satellite or any launch vehicle utilized by the launch
providers for EchoStar III, EchoStar IV, or from other factors beyond
EchoStar's control. If the launch of EchoStar III or EchoStar IV is delayed,
the Company's strategy to provide additional programming to DISH Network-SM-
subscribers using transponders on these satellites would be adversely
affected.
SATELLITE LAUNCHES
EchoStar has entered into a contract for launch services with Lockheed
Services for the launch of EchoStar III from Cape Canaveral Air Station,
Florida on October 5, 1997, subject to delay or acceleration in certain
circumstances. The Lockheed Contract provides for launch of the satellite
utilizing an Atlas IIAS launch vehicle. Pursuant to the Lockheed Contract,
substantially all of the price is required to be paid prior to the launch.
EchoStar has the right, in its sole discretion, to terminate the Lockheed
Contract at any time subject to forfeiture of certain amounts paid to
Lockheed Services. In addition, EchoStar has a right to terminate the
Lockheed Contract and receive a full refund for all amounts paid to Lockheed
Services if total launch delays (except certain excusable delays) caused by
Lockheed Services exceed 12 months. Lockheed Martin has the right to
terminate the Lockheed Contract if EchoStar postpones the launch by more than
12 months.
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EchoStar has contracted with LKE for the launch of EchoStar IV during the
first quarter of 1998 from the Baikonur Cosmodrome in the Republic of
Kazakhstan. EchoStar will launch EchoStar IV on a Proton K/Block DM four
stage launch vehicle. Astra 1F, the first commercial launch on a Proton
K/Block DM, was successfully launched on April 9, 1996 and Inmarsat 3 F2, the
second such commercial launch was successfully launched on September 6, 1996.
LKE now markets commercial Proton launches through ILS, a joint venture
between LKE and Lockheed Services. ILS currently has contracts providing for
the launch of at least six non-EchoStar western satellites throughout 1997.
The first commercial Proton launch in 1997 was successfully launched on
May 24, carrying the Telestar 5 payload. ILS has a current commercial backlog
of 18 satellites to be launched by the end of 1999 on Proton. However, two of
the launches of the Proton four stage launch vehicle have failed in the last
twelve months. In February 1996, a Proton Block DM failed during launch when
its main engine did not start properly. Based on representations made by ILS,
the Company believes that corrective actions have been taken that should
prevent a recurrence of that failure. In November 1996, the main engine of a
Proton Block D-Z failed to properly start a planned second burn during the
launch of the Mars 96 spacecraft. According to ILS, an analysis of the
November launch failure indicates that the improper start was most likely due
to faulty guidance and control system commands from the Mars 96 spacecraft.
The Proton Block DM, which will carry EchoStar IV, carries its own fully
integrated and system level guidance and control system, unlike the Proton
Block D-2 used in the November launch. Based on representations made by ILS,
the Company believes that the differences between the Proton Block D-2 and
the Proton Block DM make a recurrence of the causes of the Mars 96 launch
failure unlikely during the launch of EchoStar IV.
In order for EchoStar IV to be launched from Kazakhstan, the satellite
contractor will need to obtain a technical data exchange license and a
satellite export license from the U.S. government. There can be no assurance
those licenses can be obtained in a timely manner to avoid a launch delay.
Any political or social instability, such as that recently experienced in the
former Soviet bloc countries could affect the cost, timing and overall
advisability of utilizing LKE as a launch provider for EchoStar's satellites.
Either party may request a delay in the launch period, subject to the
payment of penalties based on the length of the delay and the proximity of
the request to the launch date. EchoStar has the right, in its sole
discretion, to terminate the LKE Contract at any time, subject to the
forfeiture of certain amounts paid to LKE. In addition, EchoStar has the
right to terminate the LKE Contract and receive a full refund of all amounts
paid to LKE in certain circumstances, including: (i) a launch delay caused by
LKE which exceeds nine months from the last day of the original launch
period; (ii) an increase in the price or change in payment or other terms
necessitated by compliance with, or implementation of, a trade agreement
between the U.S. and Russia; (iii) EchoStar's inability to obtain necessary
export licenses; (iv) the failure of Proton launch vehicles; and (v)
EchoStar's inability to procure launch insurance on commercially reasonable
terms. In the event termination of the LKE Contract is caused by the failure
of Proton launch vehicles, however, LKE would be entitled to retain up to
$15.0 million, depending on the number and proximity of Proton failures to
EchoStar's scheduled launch.
INSURANCE
Under the terms of the satellite contracts for EchoStar III and EchoStar
IV, Lockheed Martin bears the risk of loss of the EchoStar satellites during
the construction phase up to launch. At launch, title and risk of loss pass
to EchoStar, at which time launch insurance becomes operative. EchoStar
contracted for launch insurance coverage for EchoStar II in the amount of
approximately $220 million and, together with the cash segregated and
reserved on its balance sheet, satisfied its insurance obligations under the
1994 Notes Indenture.
The launch insurance policy for EchoStar 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
76
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 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 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.
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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 three and six months
ended June 30, 1997.
On June 2, 1997, the Company announced that Telefonica has selected
EchoStar to supply digital set top boxes for its 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.
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Information regarding EchoStar's operations in different geographic areas
as of December 31, 1994, 1995 and 1996, and for the years then ended, is
presented in Note 13 to EchoStar's consolidated financial statements.
PROGRAMMING. Since 1986, EchoStar has acquired DTH programming directly
from programming providers, and packaged and distributed that programming
throughout the U.S. to C-band system users through EchoStar's independent
retailer network. EchoStar has non-exclusive affiliation agreements for the
distribution of many of the most popular programming services available from
domestic satellites, including A&E-Registered Trademark-, CNN-Registered
Trademark-, The Discovery Channel-Registered Trademark-, The Disney
Channel-Registered Trademark-, ESPN-Registered Trademark-, HBO-Registered
Trademark-, MTV-Registered Trademark-, Showtime-Registered Trademark-,
TBS-TM-, TNT-TM-, USA-Registered Trademark-, national networks, broadcast
superstations, and other "best of cable" programming.
RESEARCH AND DEVELOPMENT AND MANUFACTURING
Satellite receivers designed by EchoStar's research and development group
have won numerous awards from dealers, retailers and industry trade
publications. EchoStar's research and development personnel focus on shaping
the EchoStar and HTS product lines to meet specific consumer needs and to
compete effectively against products designed and manufactured by larger
consumer electronics companies. EchoStar's quality assurance standards
require all EchoStar product models to undergo extensive testing. EchoStar
also sets and enforces product design and quality assurance requirements at
non-EchoStar manufacturing facilities in the U.S., Taiwan, Hong Kong, Korea,
China, Malaysia, India and the Philippines.
COMPETITION
Each of the businesses in which EchoStar operates is highly competitive.
EchoStar's existing and potential competitors include a wide range of
companies offering video, audio, data, programming and entertainment
services. EchoStar also faces competition from companies offering products
and services that perform similar functions, including companies that offer
hardwire cable television products and services, wireless cable products and
services, DTH products and services, as well as DBS and other satellite
programming, and companies developing new technologies. Many of EchoStar's
competitors have substantially greater financial and marketing resources than
EchoStar. EchoStar expects that quality and variety of programming, quality
of picture and service, and cost will be the key bases of competition.
Advances in communications technology, as well as changes in the
marketplace and the regulatory and legislative environment, are constantly
occurring. The Company cannot predict the effect that ongoing or future
developments might have on the video programming distribution industry
generally or the Company specifically.
CABLE TELEVISION. Cable television service is currently available to the
vast majority of U.S. television households. The U.S. cable television
industry currently serves over 60 million subscribers, representing
approximately 65% of U.S. television households. As an established provider
of subscription television services, cable television is a formidable
competitor in the overall market for television households. Cable television
systems generally offer 30 to 80 analog channels of video programming. Cable
television operators currently have an advantage relative to EchoStar with
regard to the provision of local programming as well as the provision of
service to multiple television sets within the same household. Many cable
television operators have either announced their intention to, or are in the
process of, upgrading their distribution systems to expand their existing
channel capacity for purposes of providing digital product offerings similar
to those offered by DBS providers. In addition, such expanded capacity may be
used to provide interactive and other new services.
Many of the largest cable systems in the U.S. have announced plans to
offer access to telephony services through their existing cable equipment,
and have entered into agreements with major telephony providers to further
these efforts. In some cases, certain cable systems have actually commenced
trial offerings of such services. If such trials are successful, many
consumers may find cable service to be more attractive than DBS for the
reception of programming.
Since reception of DBS signals requires line of sight to the satellite, it
may not be possible for some households served by cable to receive DBS
signals. In addition, the DISH Network-SM- is not available to households in
apartment complexes or other multiple dwelling units that do not facilitate
or allow the installation of EchoStar Receiver Systems. Additionally, the
initial cost required to receive DISH Network-SM- programming may reduce the
demand for EchoStar Receiver Systems, since EchoStar Receiver Systems must be
purchased, while cable and certain of EchoStar's satellite competitors lease
their equipment to the consumer with little if any initial hardware payment
required. The compulsory copyright license granted to satellite providers by
the Satellite Home Viewer Act is narrower in scope than the compulsory
license granted to cable operators, thus creating another competitive
advantage for cable operators.
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In addition, 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. DirecTv currently has
approximately 2.8 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--96.5DEG. WL, 101DEG.
WL, and 105.5DEG. 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 August 31, 1997, PrimeStar had approximately 1.8 million subscribers.
On June 11, 1997, TSAT announced that a binding letter of intent had been
signed for the restructuring of PrimeStar. PrimeStar, which is currently
owned by a group of multiple-system cable operators including TCI, has
entered into an agreement to combine its assets with ASkyB, a satellite
venture formed by News and MCI, into a single DBS provider. Each PrimeStar
partner will contribute its PrimeStar customers and partnership interests
into the newly formed entity. ASkyB has announced that it will contribute two
satellites under construction and 28 full-CONUS frequencies at the 110DEG.
WL orbital location. In addition, Tempo Satellite, Inc., a subsidiary of
TSAT, has a license for a satellite using 11 full-CONUS frequencies at the
119DEG. WL orbital location, and recently launched a satellite to that
location. 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
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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.
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
61.5DEG. WL orbital slot covering the eastern and central U.S. and 11
frequencies at the 166DEG. 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
61.5DEG. 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 119DEG. 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)
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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 166DEG. WL orbital slot
covering the western and central U.S.
During March 1996, AlphaStar Television Network, which is owned by
Tee-Comm Electronics, Inc., a Canadian company, began offering DTH
programming in the U.S. on a limited basis, and intends to expand to 200
channels by the end of 1997. The service uses MPEG-2/DVB digital compression
technology to receive medium power Ku-band signals via 24 to 36 inch dishes.
On May 27, 1997, AlphaStar filed for bankruptcy protection under Chapter 11.
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. which are capable of receiving DTH
television services from Mexico's Solidaridad II satellite. The Solidaridad
II satellite operates at 113DEG. 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 113DEG. 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
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transmission of high-quality video and audio signals, wireless cable
operators will be required to install digital decoders in each customer's
home at a cost comparable to the cost of an EchoStar Receiver System and make
certain modifications to their transmission facilities. The cost of such
digital upgrades will be significant and will have to be amortized over a
smaller base of potential customers. Wireless cable also requires direct line
of sight from the receiver to the transmission tower, which creates the
potential for substantial interference from terrain, buildings and foliage in
the line of sight. Wireless cable served approximately 1 million subscribers
at the end of 1996.
TELEPHONE COMPANIES. Certain telecommunications carriers, including
regional bell operating companies and long distance telephone companies,
could become significant competitors in the future, as they have expressed an
interest in becoming subscription television and information providers. The
1996 Act, which was enacted in February 1996, permits telephone companies to
provide a variety of competitive video services, including owning cable
systems, with certain regulatory safeguards. It is also possible for
telephone companies to provide high-power DBS service, although any telephone
company desiring to become a high-power DBS broadcaster must still obtain an
FCC license for an available orbital location. The 1996 Act removes barriers
to entry which previously inhibited telephone companies from competing in the
provision of video programming and information services. Several large
telephone companies have announced plans to acquire or merge with existing
cable and wireless cable systems. As more telephone companies begin to
provide cable programming and other information and communications services
to their customers, additional significant competition for subscribers will
develop. Among other things, telephone companies have an existing
relationship with virtually every household in their service area,
substantial economic resources, and an existing infrastructure and may be
able to subsidize the delivery of programming through their position as the
sole source of telephone service to the home.
VHF/UHF BROADCASTERS. Most areas of the U.S. are covered by traditional
terrestrial VHF/UHF 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.
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EchoStar believes that it generally competes effectively in all of these
areas. In recent years, EchoStar has consistently been highly rated in most
of these categories by polls conducted by industry trade publications.
EchoStar also faces competition in the distribution of DTH systems from
approximately 30 distributors in North America. The large number of
distributors creates intense competition, primarily with respect to price,
marketing and service. EchoStar responds to that competition by offering
24-hour turnaround time on repairs, same day order fulfillment, and what it
believes to be one of the top satellite retailer incentive programs in the
industry.
In addition, EchoStar competes against DBS technology and medium power
Ku-band DTH systems. As a result of the smaller dish size, DBS and medium
power Ku-band systems are more widely accepted than C-band systems,
particularly in urban areas. DBS and medium power Ku-band competition have
negatively affected, and will continue to negatively affect, C-band sales.
However, EchoStar believes that many consumers may continue to choose to
purchase C-band systems for the next several years because of the remaining
orbital life of existing C-band satellites, the amount and quality of
programming available, and the continuing marketing efforts by programmers
and others designed to attract and retain C-band subscribers, among other
factors.
Internationally, EchoStar competes against a variety of manufacturers
and distributors in different countries. In certain regions, EchoStar has a
small market share, while in others, such as Africa, EchoStar believes that
it has a larger market share than any of its competitors. In some markets,
EchoStar cannot effectively compete due to local restrictions on foreign
companies and due to the necessity of using proprietary products for which
EchoStar does not hold licenses.
DTH PROGRAMMING. EchoStar competes with many large DTH programming
packages, some of which are affiliated with well-known, large program
originators, and some of which are affiliated with cable operators. EchoStar
competes by offering promotional programming packages in conjunction with its
sales of DTH systems. Since a significant portion of EchoStar's programming
sales are generated through DTH retailers, EchoStar also competes for
retailer relationships on the basis of commission rates and quality of
service offered to the retailer and its customers. In addition, the
programming market faces competition from cable television as well as
emerging technologies such as DBS services, wireless cable systems, and
others. The largest competitors of EchoStar in programming distribution
include NetLink Satellite USA, owned by TCI, SuperStar Satellite
Entertainment, National Programming Service, Turner Home Satellite, Inc., HBO
Direct, Inc. and Showtime Satellite Networks. These competitors have
substantially greater financial resources than EchoStar, have substantially
more subscribers, and are therefore able to obtain more favorable pricing
from programmers than EchoStar.
GOVERNMENT REGULATION
THE FOLLOWING SUMMARY OF REGULATORY DEVELOPMENTS AND LEGISLATION DOES
NOT PURPORT TO DESCRIBE ALL PRESENT AND PROPOSED GOVERNMENT REGULATION AND
LEGISLATION AFFECTING THE VIDEO PROGRAMMING DISTRIBUTION INDUSTRY. OTHER
EXISTING GOVERNMENT REGULATIONS ARE CURRENTLY THE SUBJECT OF JUDICIAL
PROCEEDINGS, LEGISLATIVE HEARINGS OR ADMINISTRATIVE PROPOSALS THAT COULD
CHANGE, IN VARYING DEGREES, THE MANNER IN WHICH THIS INDUSTRY OPERATES.
NEITHER THE OUTCOME OF THESE PROCEEDINGS NOR THEIR IMPACT UPON THE INDUSTRY
OR THE COMPANY CAN BE PREDICTED AT THIS TIME. THIS SECTION SETS FORTH A BRIEF
DESCRIPTION OF REGULATORY ISSUES PERTAINING TO OPERATIONS OF THE COMPANY.
Authorizations and permits issued by the FCC and foreign regulatory
agencies performing similar functions are required for the construction,
launch and operation of satellites and other components of the EchoStar DBS
System, and the sale of satellite receivers and other EchoStar products in
certain countries. In addition, as the operator of a privately owned U.S.
satellite system, EchoStar is subject to the regulatory authority of the FCC
and the Radio Regulations promulgated by the ITU. As a distributor of
television programming, EchoStar is also affected by numerous laws and
regulations, including the Communications Act. EchoStar believes that it
remains free to set prices and serve customers according to its business
judgment, without rate regulation or the statutory obligation under Title II
of the Communications Act to avoid undue discrimination among customers. Even
if, under a future interpretation of the 1996 Act, EchoStar were to be
classified as a telecommunications carrier subject to Title II, EchoStar
believes that such reclassification would not likely increase substantially
the regulatory burdens imposed on EchoStar or have an adverse impact on
EchoStar's DBS operations, although there can be no assurance in this regard.
EchoStar believes that, because it is engaged in a subscription programming
service, it is not subject to many of the regulatory obligations imposed upon
broadcast licensees. However, there can be no assurances that the FCC will
not find in the future that EchoStar should be treated as a broadcast
licensee with respect to its current and future operations. If the FCC were
to determine that Echostar is, in fact, a broadcast licensee, EchoStar could
be required to comply with all regulatory obligations imposed upon broadcast
licensees. EchoStar also requires import and general destination export
licenses issued by the U.S. Department of
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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 119DEG. WL.
ESC also has a conditional construction permit for 11 unspecified western
frequencies. EchoStar's subsidiary DirectSat has a license to cover ten
additional frequencies at the 119DEG. WL orbital location. The FCC also has
issued DirectSat a conditional permit for one frequency at 110DEG. WL and 11
frequencies at 175DEG. WL. DBSC holds a conditional construction permit and
specific orbital slot assignments for 11 DBS frequencies at each of 61.5DEG.
WL and 175DEG. WL.
During January 1996, the FCC held an auction for 24 frequencies at the
148DEG. WL orbital slot. EchoStar acquired a DBS construction permit for the
use of the 24 frequencies at the 148DEG. WL orbital slot for $52.3 million.
EchoStar will be required to complete construction of that satellite by
December 20, 2000, and the satellite must be in operation by December 20,
2002.
EchoStar's FCC permits are conditioned on satisfaction of ongoing due
diligence, construction, reporting and related obligations. There can be no
assurance that EchoStar will be able to comply with the FCC's due diligence
obligations or that the FCC will determine that it has complied with such due
diligence obligations. EchoStar's permits and extension requests have been
and may continue to be contested in FCC proceedings and in court by several
companies with interests adverse to EchoStar's, including Dominion,
PrimeStar, Advanced, Tempo, DirecTv and others.
By an Order released January 11, 1996 in File No. 129-SAT-EXT-95, the
International Bureau of the FCC granted an extension of ESC's permit to
August 15, 1996 with respect to the 119DEG. WL orbital location. It deferred
decision on ESC's request for an extension of time with respect to ESC's
permit for western assignments pending the FCC's analysis of EchoStar's 1992
due diligence showing for these assignments. By separate Order released
January 11, 1996, File No. DBS-88-1, the FCC's International Bureau
conditionally granted ESC launch and positioning authority for EchoStar I.
ESC and DirectSat have licenses to cover their satellites at 119.2DEG. WL
and 118.8DEG. WL. The precise location of ESC's and DirectSat's licensed
EchoStar I and EchoStar II satellites may be outside the parameters set forth
in their licenses. Therefore, ESC and DirectSat have filed a joint request
for an STA to enable them to operate, for 180 days, EchoStar I at 119.05DEG.
WL and EchoStar II at 118.95DEG. WL, which also would improve signal quality
and facilitate better customer service. That application was not timely
opposed. The FCC has not yet ruled on ESC's and DirectSat's request. The
180 day STA, if granted, would commence contemporaneous with an FCC ruling in
ESC's and DirectSat's favor. On February 26, 1997, the FCC staff notified
EchoStar of its concern that the requested STA might cause interference to
the Tempo satellite at 118.8DEG. WL. The FCC required EchoStar to submit a
technical analysis in support of the request. EchoStar has submitted such
analysis, and Tempo has submitted its own technical analysis supporting a
contrary position. There can be no assurance that the FCC will grant or, if
granted, renew EchoStar's request. Failure of the FCC to grant EchoStar's
request would require EchoStar to take steps to ensure that EchoStar I and
EchoStar II are positioned consistent with present FCC authorizations, or to
reposition the satellites, and could have an adverse effect on the operation
of these satellites. If EchoStar I and EchoStar II were found to have been
operated outside their authorized parameters, the FCC could impose monetary
forfeitures or other penalties on EchoStar. If the FCC denied the STA,
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
85
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 118.8DEG. WL and for
approval of certain modifications made to the design of that satellite. In a
separate order issued on the same date in File No. 53-SAT-ML-95, the
International Bureau granted DirectSat conditional authority to use extended
C-band frequencies to perform TT&C functions for the EchoStar II satellite
until January 1, 1999, subject to the condition that it cause no harmful
interference to other satellites, at which time the FCC will review the
suitability of those frequencies for TT&C operations. There can be no
assurance that the FCC will extend the authorization to use these C-band
frequencies for TT&C purposes. The FCC's refusal to extend such authorization
could result in the inability to control EchoStar II and a total loss of the
satellite unless the satellite could be moved to another orbital slot with
FCC approval.
By an Order released December 8, 1995, DA 95-2439, in File No.
129-SAT-EXT-95, the FCC has also conditionally granted the request of DBSC
for an extension of its permit to November 30, 1998 subject to the condition
that the FCC may reconsider the extension and modify or cancel it if DBSC
fails to progress towards construction and operation of its system in
accordance with the timetable DBSC has submitted to the FCC. PrimeStar has
filed an application for review requesting that the FCC reverse the
International Bureau's decision to extend DBSC's construction permit. By
Order released August 30, 1996, DA-96-1482, in File Nos. DBS 87-01,
55-SAT-AL-96, the FCC consented to the assignment of DBSC's permit to a
subsidiary of EchoStar. ESC has a pending application for assignment of
western frequencies and an orbital position, which has been opposed. In 1992,
the FCC held that ESC had not completed contracting for its western
assignments, which is a prerequisite to the grant of specific assignments.
The FCC asked ESC to submit amended contract documentation. While EchoStar
has submitted such documentation, the FCC has not yet ruled on whether ESC
has completed contracting for that satellite. There are no assurances that
the FCC will rule favorably on this issue to enable ESC to receive western
assignments. The FCC has also deferred action on whether to extend ESC's
permit for the western assignments pending a ruling on completion of
contracting. The FCC also has declared that it will carefully monitor the
semi-annual reports required to be filed by DBS permittees. Failure of
EchoStar to file adequate semi-annual reports or to demonstrate timely
progress in the construction of its DBS systems may result in cancellation of
its permits. EchoStar has not filed all required progress reports with the
FCC, and there is a risk that the filed reports may be found by the FCC not
to comply fully with its due diligence requirements.
EchoStar III is anticipated to be launched on October 5, 1997. On August
26, 1997, DBSC filed a request for an STA to test all transponders on
EchoStar III. EchoStar also expects to file applications for authority to
operate feeder-link earth stations that will communicate with EchoStar III.
There can be no assurance that these applications will be granted.
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
86
adverse effect on EchoStar's planned operations.
The licenses which the FCC issues for an operational DBS system to use
frequencies at a specified orbital location are for a term of ten years. At
the expiration of the initial license term, the FCC may renew the satellite
operator's license or authorize the operator to operate for a period of time
on special authority, but there is no assurance that the FCC will take such
actions. In the event the FCC declines to renew the operator's license, the
operator would be required to cease operations and the frequencies would
revert to the FCC. EchoStar also requires FCC authority to operate earth
stations, including the earth stations necessary to uplink programming to its
satellites.
On July 18, 1997, EchoStar filed a request for an STA to use the 11
channels assigned to Tempo at the 119DEG. 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 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 85DEG. WL and 91DEG. WL. EchoStar
also has requested FCC authorization to modify its proposed Ku-band system to
add C-band capabilities to one satellite. These applications and requests for
modification have been opposed by various parties. There can be no assurance
that the FCC will grant any of these applications or requests for
modifications. Any such initial applications that are granted would have a
ten-year license term and the same renewal obligations as pertain to DBS
licenses.
On August 20, 1997, GE Americom filed an application requesting
modification of its license for a C-band/Ku-band satellite currently located
at 89DEG. WL, to allow relocation of that satellite to 83DEG. 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
87
construction of the satellites), and to place all satellite stations
comprising the system in operation within six years of grant of the permit.
In addition, holders of permits received after January 19, 1996 must complete
construction of the first satellite in their system within four years of
grant of the permit. The FCC also may impose other conditions on the grant of
the permit. The holders of new DBS authorizations issued on or after January
19, 1996 must also provide DBS service to Alaska and Hawaii where the service
is technically feasible from the acquired orbital locations, which includes
148DEG. WL. Those holding DBS permits as of January 1996 must either provide
DBS service to Hawaii or Alaska from at least one of their orbital locations
or relinquish their western assignments. Subject to applicable regulations
governing non-DBS operations, a licensee may make unrestricted use of its
assigned frequencies for non-DBS purposes during the first five years of the
ten-year license term. After the first five years, the licensee may continue
to provide non-DBS service so long as at least half of its total capacity at
a given orbital location is used each day to provide DBS service.
Failure to comply with applicable Communications Act requirements and
FCC rules, regulations, policies, and orders may result in the FCC's
revoking, conditioning, or declining to review or extend an authorization.
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,
including the Senior Preferred Stock issued pursuant to the Offering, 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 1996 ACT. The 1996 Act clarifies that the FCC has exclusive
jurisdiction over DTH satellite services and that criminal penalties may be
imposed for piracy of DTH satellite services. The 1996 Act also offers DBS
operators relief from private and local government-imposed restrictions on
the placement of receiving antennae. In some instances, DBS operators have
been unable to serve areas due to laws, zoning ordinances, homeowner
association rules, or restrictive property covenants banning the installation
of antennae on or near homes. The FCC recently promulgated rules designed to
implement Congress' intent by prohibiting any restriction, including zoning,
land use or building regulation, or any private covenant, homeowners'
association rule, or similar restriction on property within the exclusive use
or control of the antenna user where the user has a direct or indirect
ownership interest in the property, to the extent it impairs the
installation, maintenance or use of a DBS receiving antenna that is one meter
or less in diameter or diagonal measurement, except where such restriction is
necessary to accomplish a clearly defined safety objective or to preserve a
recognized historic district. Local governments and associations may apply to
the FCC for a waiver of this rule based on local concerns of a highly
specialized or unusual nature. The FCC also issued a further notice of
proposed rulemaking seeking comment on whether the 1996 Act applies to
restrictions on property not within the exclusive use or control of the
viewer and in which the viewer has no direct or indirect property interest.
The 1996 Act also preempted local (but not state) governments from imposing
taxes or fees on DTH services, including DBS. Finally, the 1996 Act required
that multichannel video programming distributors such as DBS operators fully
scramble or block channels providing indecent or sexually explicit adult
programming. If a multi-channel video programming distributor cannot fully
scramble or block such programming, it must restrict transmission to those
hours of the day when children are unlikely to view the programming (as
determined by the FCC). On March 24, 1997, the U.S. Supreme Court let stand a
lower court ruling that allows enforcement of this provision pending a
constitutional challenge. In response to this ruling, the FCC declared that
its rules implementing the scrambling provision would become effective on May
18, 1997.
THE CABLE ACT. In addition to regulating pricing practices and
competition within the franchise cable television industry, the Cable Act was
intended to establish and support existing and new multi-channel video
services, such as wireless cable and DBS, to provide subscription television
services. EchoStar has benefited from the programming access provisions of
the Cable Act and 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
88
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 "compulsory" copyright
license that allows a DBS operator, for a statutorily-established fee, to
retransmit local network programming to subscribers for private home viewing
so long as that retransmission is limited to those persons in unserved
households. In general, an "unserved household," with respect to a particular
television network, is defined as one that cannot receive, through the use of
a conventional outdoor rooftop antenna, a sufficient over-the-air network
signal "of a primary network station affiliated with that network", and has
not, within 90 days prior to subscribing to the DBS service, subscribed to a
cable service that provides that network signal. While the scope of the
compulsory license is not certain, the U.S. Copyright Office has indicated in
a letter it would not object to the filing of statements of account (which is
a method for calculating and paying royalties for retransmission) in
connection with the provision by satellite of local network signals into the
non-overlapping Grade B contour of a network affiliate.
On August 28, 1997, a Copyright Arbitration Royalty Panel ("CARP"),
appointed to recommend royalties for satellite retransmissions 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 Librarian 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 grounds 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. 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
favorable to EchoStar, because it may provide a basis for the proposition
that the royalty rate for all local-into-local retransmissions (to the extent
permitted) should be zero. However, there can be no assurance that the
Librarian will adopt the CARP's recommendation.
Subject to the foregoing discussion, 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.
89
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--SM--," "America's Top 40," "America's Top 50 CD," and others. Certain
of these trademarks are registered by EchoStar, and those trademarks that are
not registered are generally protected by common law and state unfair
competition laws. Although EchoStar believes that these trademarks are not
essential to EchoStar's business, EchoStar has taken affirmative legal steps
to protect its trademarks in the past and intends to actively protect these
trademarks in the future.
EchoStar is the assignee of certain patents for products and product
components manufactured and sold by EchoStar, none of which EchoStar
considers to be significant to its continuing operations. In addition,
EchoStar has obtained and, although no assurances can be given, expects to
obtain, licenses for certain patents necessary to the manufacture and sale by
EchoStar and others of DBS receivers and related components. EchoStar has
been notified that certain features of the EchoStar Receiver System allegedly
infringe on patents held by others, and that royalties are therefore required
to be paid. EchoStar is investigating allegations of infringement and, if
appropriate, intends to vigorously defend against any suit filed by the
parties. There can be no assurance that the Company will be able to
successfully defend any suit, if brought, or that the Company will be able to
obtain a license for any patent that might be required. See "Business--Legal
Proceedings."
EMPLOYEES
EchoStar had approximately 1,600 employees at August 31, 1997, of which
approximately 1,525 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.
90
PROPERTIES
EchoStar owns its corporate headquarters, its Digital Broadcast Center in
Cheyenne, Wyoming, its customer call center in Thornton, Colorado, and
office/warehouse facilities in three additional locations. The following
table sets forth certain information concerning EchoStar's properties.
APPROXIMATE
DESCRIPTION/USE LOCATION SQUARE FOOTAGE OWNED OR LEASED
Corporate Headquarters
and Warehouse
Distribution Center... Englewood, Colorado 155,000 Owned
Office and Distribution
Center................ Sacramento, California 78,500 Owned
Digital Broadcast
Center.................. Cheyenne, Wyoming 55,000 Owned
Customer Call Center.... Thornton, Colorado 55,000 Owned
European Headquarters
and Warehouse........... Almelo, The Netherlands 53,800 Owned
Warehouse Facility...... Denver, Colorado 40,000 Owned
Office and Distribution
Center................ Bensenville, Illinois 19,000 Leased
Office and Distribution
Center................ Miami, Florida 16,500 Leased
Office and Distribution
Center................ Norcross, Georgia 16,000 Leased
Office and Distribution
Center................ Columbia, Maryland 17,600 Leased
Office and Distribution
Center................ Dallas, Texas 11,200 Leased
Office and Distribution
Center................ Phoenix, Arizona 10,000 Leased
Asian Distribution
Center................ Singapore 7,000 Leased
Office.................. Madrid, Spain 2,100 Leased
Asian Headquarters...... Singapore 1,900 Leased
Office.................. Bombay, India 1,200 Leased
Office.................. Beijing, China 1,000 Leased
Office.................. Bangalore, India 1,200 Leased
91
LEGAL PROCEEDINGS
On July 29, 1996, EAC, DNCC, ESC and Echosphere Corporation
(collectively, "EchoStar Credit"), filed a civil action against Associates
which is currently pending in the U.S. District Court in the District of
Colorado. EchoStar Credit alleges that Associates, among other things,
breached its contract with EchoStar Credit pursuant to which Associates
agreed to finance the purchase of EchoStar Receiver Systems by consumers.
EchoStar Credit alleges that Associates' refusal to finance certain
prospective consumers has resulted in the loss of prospective customers to
EchoStar's competitors. In addition, EchoStar Credit alleges that the loss of
sales due to Associate's action forced EchoStar to lower the price on its
products. Associates filed counterclaims against EAC for fraud and breach of
contract. Associates seeks approximately $10.0 million by way of its
counterclaims. EAC intends to vigorously defend against such counterclaims. A
trial date has not yet been set. It is too early in the litigation to make an
assessment of the probable outcome.
On April 25, 1997, ESC and Sagem, S.A., ("Sagem"), a French corporation,
signed a settlement and release agreement under which Sagem agreed to return
a $10.0 million down payment made to Sagem and agreed to release the $15.0
million placed in escrow with a bank in connection with a manufacturing
agreement entered into in April 1995. ESC and Sagem have released all claims
against each other.
Certain purchasers of C-band and DISH Network-SM- systems have filed
actions in various state courts in Alabama naming EchoStar, EAC or Echosphere
Corporation as a defendant and seeking actual and punitive damages. At least
ten actions have been filed. EchoStar believes additional actions may be
filed. Plaintiffs' attorneys also may attempt to certify a class and/or add
additional plaintiffs to the existing actions and seek greater damages. A
trial date (March 2, 1998) has been established for only one of the
aforementioned actions. The actions filed to date also name as defendants the
dealer and its employees who sold the equipment and the EAC financing source,
which owns the consumer loans, made to the purchasers. Four of the actions
involve EAC and HRSI and six claims involve EAC and Bank One Dayton, N.A.
EchoStar denies liability and intends to vigorously defend against the
claims, which include allegations of fraud and lending law violations. While
the actual damages claimed are not material, EchoStar is aware that juries in
Alabama have recently issued a number of verdicts awarding substantial
punitive damages on actual damage claims of less than $10,000.
EAC and HRSI entered into a Merchandise Financing Agreement in 1989 (the
"Merchant Agreement") pursuant to which HRSI acted as a consumer financing
source for the purchase of, among other things, satellite systems distributed
by Echosphere Corporation, a subsidiary of EchoStar, to consumers through EAC
dealers. HRSI terminated the Merchant Agreement as of December 31, 1994.
During February 1995, EAC and Echosphere (the "EAC Parties") filed suit
against HRSI. The case is pending in U.S. District Court in Colorado (the
"HRSI Litigation"). The EAC Parties have alleged, among other things, breach
of contract, breach of fiduciary duty, fraud and wanton and willful conduct
by HRSI in connection with termination of the Merchant Agreement and related
matters. The EAC parties are seeking damages in excess of $10.0 million.
HRSI's counterclaims have been dismissed with prejudice. Summary judgment
motions have been pending on all remaining issues since May 1996. A trial
date has not been set.
On February 24, 1997, EchoStar and News announced the News Agreement
pursuant to which, among other things, News agreed to acquire approximately
50% of the outstanding capital stock of EchoStar. News also agreed to make
available for use by EchoStar the DBS permit for 28 frequencies at 110DEG.
WL purchased by MCI for over $682 million following a 1996 FCC auction.
During late April 1997, substantial disagreements arose between the parties
regarding their obligations under the News Agreement.
On May 8, 1997, EchoStar filed a Complaint in the Court, Civil Action
No. 97-960, requesting that the Court confirm EchoStar's position and declare
that News is obligated pursuant to the News Agreement to lend $200 million to
EchoStar without interest and upon such other terms as the Court orders.
On May 9, 1997, EchoStar filed a First Amended Complaint significantly
expanding the scope of the litigation, to include breach of contract, failure
to act in good faith, and other causes of action. EchoStar seeks specific
performance of the News 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
92
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.
93
MANAGEMENT
DIRECTORS AND OFFICERS
The following table sets forth information concerning certain officers
and directors of EchoStar:
NAME AGE POSITION
Charles W. Ergen............. 44 Chairman, Chief Executive Officer,
President and Director
Alan M. Angelich............. 53 Director
Raymond L. Friedlob.......... 52 Director
James DeFranco............... 44 Executive Vice President and Director
R. Scott Zimmer.............. 41 Vice Chairman and Vice President
David K. Moskowitz........... 39 Senior Vice President, General Counsel
and Secretary
Michael T. Dugan............. 48 Senior Vice President, Consumer
Products Division
Steven B. Schaver............ 43 Chief Financial and Chief Operating
Officer
John R. Hager................ 35 Treasurer and Controller
CHARLES W. ERGEN. Mr. Ergen has been Chairman of the Board of
Directors, Chief Executive Officer and President of EchoStar since its
formation and, during the past five years, has held various positions with
EchoStar's subsidiaries, including President and Chief Executive Officer of
Echosphere, Echonet Business Network, Inc. ("EBN") and ESC, and Director of
Echosphere, HTS, EchoStar International Corporation ("EIC"), ESC and EBN. Mr.
Ergen, along with his spouse and James DeFranco, was a co-founder of EchoStar
in 1980. Commencing in March 1995, Mr. Ergen also became a director of SSET,
a company principally engaged in the manufacture and sale of satellite
telecommunications equipment.
ALAN M. ANGELICH. Mr. Angelich has been a director of EchoStar and a
member of its Audit and Executive Compensation Committees since October 1995.
Mr. Angelich is presently a principal with Janco Partners, Inc., an
investment banking firm specializing in the telecommunications industry. From
May 1982 to October 1993, Mr. Angelich served in various executive capacities
with Jones Intercable, Inc., including Vice Chairman of its Board of
Directors from December 1988 to October 1993. From August 1990 to October
1993, Mr. Angelich was also the Chief Executive Officer of Jones Capital
Markets, Inc.
RAYMOND L. FRIEDLOB. Mr. Friedlob has been a director of EchoStar and
a member of its Audit and Executive Compensation Committees since October
1995. Mr. Friedlob is presently a member of the law firm of Friedlob
Sanderson Raskin Paulson & Tourtillot, LLC. Prior to 1995, Mr. Friedlob was a
partner of Raskin & Friedlob, where he had practiced since 1970. Mr. Friedlob
specializes in federal securities law, corporate law, leveraged acquisitions,
mergers and taxation.
JAMES DEFRANCO. Mr. DeFranco, currently the Executive Vice President
of EchoStar, has been a Vice President and a Director of EchoStar since its
formation and, during the past five years, has held various positions with
EchoStar's subsidiaries, including President of HTS, EAC and HT Ventures,
Inc. ("HTV"), Executive Vice President of ESC, Senior Vice President of
Echosphere and EBN, and Director of SSI, Echosphere, HTS, EAC, EBN and HTV.
Mr. DeFranco, along with Mr. Ergen and Mr. Ergen's spouse, was a co-founder
of EchoStar in 1980.
R. SCOTT ZIMMER. Mr. Zimmer has been a Vice President and a Director
of EchoStar since its formation. For the past five years, Mr. Zimmer has
managed the international operations of EchoStar and its subsidiaries.
DAVID K. MOSKOWITZ. Mr. Moskowitz is the Senior Vice President,
Secretary and General Counsel of EchoStar. Mr. Moskowitz joined EchoStar in
March 1990. Mr. Moskowitz is responsible for all legal and certain of the
business affairs of EchoStar and its subsidiaries. From June 1986 to March
1990, Mr. Moskowitz was corporate counsel for M.D.C. Holdings, Inc., a
publicly-held home builder and mortgage finance company.
MICHAEL T. DUGAN. Mr. Dugan is the Senior Vice President of the
Consumer Products Division of EchoStar. In that capacity, Mr. Dugan is
responsible for all engineering and manufacturing operations at EchoStar. Mr.
Dugan has been with EchoStar since 1990.
94
STEVEN B. SCHAVER. Mr. Schaver was named the Chief Financial Officer of
EchoStar in February 1996. In November 1996, Mr. Schaver also was named Chief
Operating Officer. From November 1993 to February 1996, Mr. Schaver was the
Vice President of EchoStar's European and African operations. From July 1992
to November 1993, Mr. Schaver was the Director of Sales and Marketing for
EchoStar's largest Spanish customer, Internacional de Telecomunicaciones,
S.A. in Madrid, Spain. Prior to July 1992 and since joining EchoStar in 1984,
he has held various positions with subsidiaries of EchoStar, including Vice
President of European operations. Prior to joining EchoStar Mr. Schaver was a
Banking Officer with Continental Illinois National Bank.
JOHN R. HAGER. Mr. Hager has been Treasurer and Controller of EchoStar
since February 1997. From August 1993 to February 1997, Mr. Hager was
Controller of American Telecasting, Inc., a national operator of multiple
wireless cable systems. Previously, Mr. Hager was with the Denver office of
Ernst & Young from May 1984 until August 1993, most recently as Audit Senior
Manager.
The Board of Directors of EchoStar currently has an Audit Committee and
an Executive Compensation Committee, both of which were established in
October 1995. The present members of the Audit and Executive Compensation
Committees are Messrs. Angelich and Friedlob. The principal functions of the
Audit Committee are: (i) to recommend to the Board of Directors the selection
of independent public accountants; (ii) review management's plan for engaging
EchoStar's independent public accountants during the year to perform
non-audit services and consider what effect these services will have on the
independence of the accountants; (iii) review the annual financial statements
and other financial reports which require approval by the Board of Directors;
(iv) review the adequacy of EchoStar's system of internal accounting
controls; and (v) review the scope of the independent public accountants'
audit plans and the results of the audit. The principal function of the
Executive Compensation Committee is to award grants under and administer
EchoStar's Stock Incentive Plan.
The Board of Directors of the Issuer consists of Messrs. Ergen, DeFranco
and Moskowitz. The Board of Directors of the Issuer has no committees. The
officers of the Issuer are Charles W. Ergen, Chairman and President; James
DeFranco, Director; and David K. Moskowitz, Senior Vice President, General
Counsel and Secretary.
95
EXECUTIVE COMPENSATION
Executive Officers are compensated by certain subsidiaries of EchoStar.
The following table sets forth the cash and non-cash compensation for the
fiscal years ended December 31, 1996, 1995 and 1994 for the Named Executive
Officers.
SUMMARY COMPENSATION TABLE
LONG TERM
COMPENSATION
AWARDS/
OTHER ANNUAL SECURITIES
COMPENSATION UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS (1) OPTIONS COMPENSATION (2)
Charles W. Ergen .......................... 1996 $190,000 $ -- $ -- 17,030 $140,680
Chairman and Chief Executive Officer 1995 190,000 -- -- 14,705 15,158
1994 177,578 -- -- 53,568 888
Carl E. Vogel (3) ......................... 1996 166,923 -- -- -- 12,798
President 1995 150,000 -- -- 21,641 11,346
1994 107,300 -- -- 375,776 500
R. Scott Zimmer ........................... 1996 160,000 -- 36,265 -- 22,461
Vice Chairman and Vice President 1995 160,000 -- 88,229 14,705 32,390
1994 148,006 -- 74,396 42,855 18,990
James DeFranco ............................ 1996 160,000 -- -- -- 48,990
Executive Vice President and Director 1995 156,923 -- -- 11,764 15,158
1994 154,461 -- -- 42,855 1,000
Steven B. Schaver ......................... 1996 142,498 11,787 14,340 -- 12,516
Chief Operating Officer and Chief Financial 1995 116,755 21,012 4,777 23,240 10,597
Officer 1994 85,602 -- -- 10,713 --
David K. Moskowitz ........................ 1996 142,692 10,000 -- 7,495 12,994
Senior Vice President and General Counsel 1995 30,000 10,000 -- 28,048 13,270
1994 25,384 -- -- 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 EchoStar and
such individuals. WithA 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.
96
The following table provides information concerning grants of options to
purchase shares of Class A Common Stock of EchoStar made in 1996 to the named
executive officers.
OPTION GRANTS IN LAST FISCAL YEAR
NUMBER OF PERCENT OF
SECURITIES TOTAL OPTIONS
UNDERLYING GRANTED TO EXERCISE
OPTIONS EMPLOYEE IN PRICE PER GRANT DATE
NAME GRANTED 1996 SHARE EXPIRATION DATE PRESENT VALUE
Charles W. Ergen ............. 17,030(1) 12.3% $29.36 August 1, 2006 $280,804(2)
David K. Moskowitz ........... 7,495(1) 5.4% 26.69 August 1, 2006 127,601(2)
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(1) In August 1996, EchoStar granted options to the Named Executive
Officers, among other key employees, to purchase shares of Class A
Common Stock. The options vest 20% on August 1, 1997, and 20% thereafter
on August 1, 1998, 1999, 2000 and 2001. See "--Stock Incentive Plan."
The options expire five years from the date on which each portion of the
option first becomes exercisable, subject to early termination in
certain circumstances.
(2) Option values reflect Black-Scholes model output for options. The
assumptions used in the model were expected volatility of 62%, risk free
rate of return of 6.8%, dividend yield of 0%, and time to exercise of
six years.
The following table provides information as of December 31, 1996,
concerning unexercised options to purchase Class A Common Stock:
FISCAL YEAR END OPTION VALUES
NUMBER OF NUMBER OF SECURITIES
SHARES UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
ACQUIRED VALUE OPTIONS AT IN-THE-MONEY OPTIONS AT
NAME ON EXERCISE REALIZED DECEMBER 31, 1996 DECEMBER 31, 1996 (1)
----------------------------- ----------------------------
EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
Charles W. Ergen ........... -- $ -- 24,367 60,936 $268,108 $465,963
R. Scott Zimmer ............ 17,000 300,589 3,082 37,478 16,499 384,532
Carl E. Vogel .............. 322,208 8,566,272 25,753 49,456 286,619 468,031
James DeFranco ............. -- -- 19,494 35,125 228,898 372,767
Steven B. Schaver .......... -- -- 8,931 25,022 76,524 170,486
David K. Moskowitz ......... -- -- 27,034 62,077 289,817 480,824
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(1) The dollar value of each exercisable and unexercisable option was
calculated by multiplying the number of shares of Class A Common Stock
underlying the option by the difference between the exercise price of
the option and the closing price (as quoted in the Nasdaq National
Market) of a share of Class A Common Stock on December 31, 1996.
EXECUTIVE COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION.
Prior to October 1995, the Company did not have an Executive Compensation
Committee, and its Board of Directors determined all matters concerning
executive compensation.
DIRECTOR COMPENSATION. Directors of the Company who are not also
Executive Officers of the Company receive $500 for each meeting of the Board
of Directors attended and are reimbursed for reasonable travel expenses
related to attendance at Board meetings. Directors of the Company are elected
annually by the stockholders of the Company. Directors of the Company are not
compensated for their services as Directors. Directors who are not also
employees of the Company are granted shares of options under the 1995
Nonemployee Director Stock Option Plan (the "Director Plan") to acquire 1,000
shares of Class A Common Stock of the Company upon election to the Board.
Each of Messrs. Angelich and Friedlob was granted options to acquire 1,000
shares of Class A Common Stock of the Company on December 22, 1995 pursuant
to the Director Plan. These options were 100% vested upon issuance and have
an exercise price of $20.25 per share and a term of five years. Additionally,
in February
97
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 performance award approximated 7,390 shares.
EchoStar expects to grant 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 is expected to be launched
on October 5, 1997. The total number of shares to be issued will not be
determinable until immediately prior to the launch of EchoStar III.
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
EchoStar 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% 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.
98
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Certain subsidiaries of EchoStar have agreed to indemnify Charles W. Ergen,
Chairman and Chief Executive Officer of EchoStar, James DeFranco, Executive Vice
President of EchoStar, R. Scott Zimmer, Vice Chairman and Vice President of
EchoStar, and Cantey M. Ergen, a former Director of HTS and the spouse of
Charles W. Ergen, for any adjustments to such individuals' federal, state or
local income taxes resulting from adjustments to EchoStar's subsidiaries'
taxable income or loss, tax credits or tax credit recapture for years during
which such individuals were shareholders of such subsidiaries and such
subsidiaries elected to be taxed as Subchapter S corporations. This indemnity
agreement also covers interest, penalties and additions to tax, as well as fees
and expenses, including attorneys' and accountants' fees, if any.
As of December 31, 1996 and June 30, 1997, accrued dividends on the Dish
Series A Preferred Shares and the Preferred Shares of EchoStar payable to
Messrs. Ergen and DeFranco aggregated $3.18 million and $3.75 million, and
$167,000 and $198,000, respectively.
Since March 1995, Mr. Ergen has served on the Board of Directors of SSET. In
1994, EchoStar purchased $8.75 million of SSET's seven-year, 6.5% subordinated
convertible debentures. In December 1994, DirectSat Corporation, a subsidiary of
SSET, was merged with a wholly-owned subsidiary of EchoStar. As a result of this
merger, SSET acquired 800,780 shares of Class A Common Stock of EchoStar. On
September 6, 1996, SSET repurchased $3.5 million of the outstanding convertible
debentures and paid all outstanding accrued interest through that date. As of
December 31, 1996, the SSET debentures, if converted, would have represented
approximately 5% of SSET's outstanding common stock. The total amount owed by
SSET to EchoStar as of December 31, 1996 and June 30, 1997 related to the
convertible debentures was approximately $3.6 million and $4.1 million,
respectively.
99
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 the Company; and
(iv) all Directors and Executive Officers as a group. Unless otherwise
indicated, each person listed in the following table (alone or with family
members) has sole voting and dispositive power over the shares listed opposite
such person's name.
Name (1) Number of Percentage of
Shares Class
8% SERIES A CUMULATIVE PREFERRED STOCK:
Charles W. Ergen (2)
1,535,847. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95.0%
James DeFranco . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80,834 5.0%
All Directors and Executive Officers as a Group (nine persons) . . . . . 1,616,681 100.0%
CLASS A COMMON STOCK:
Charles W. Ergen (3), (4), (5) . . . . . . . . . . . . . . . . . . . . . 31,387,620 72.0%
James DeFranco (6), (4). . . . . . . . . . . . . . . . . . . . . . . . . 1,525,320 3.5%
FMR Corp. (7). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,186,459 2.7%
R. Scott Zimmer (8), (4) . . . . . . . . . . . . . . . . . . . . . . . . 819,836 1.9%
T. Rowe Price Associates, Inc. (9) . . . . . . . . . . . . . . . . . . . 755,000 1.7%
SSE Telecom, Inc. (10) . . . . . . . . . . . . . . . . . . . . . . . . . 709,780 1.6%
Chancellor LGT Asset Management, Inc. (11) . . . . . . . . . . . . . . . 609,200 1.4%
David K. Moskowitz (12), (4) . . . . . . . . . . . . . . . . . . . . . . 49,521 *
Steven B. Schaver (13), (4). . . . . . . . . . . . . . . . . . . . . . . 12,781 *
All Directors and Executive Officers as a Group (nine persons)(4),(14) . 33,831,528 77.6%
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 shares of 8% Series A Cumulative 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 8% Series A Cumulative Preferred Stock ; and
(iv) 1,125,000 shares of Class A Common Stock issuable upon conversion
of Mr. Ergen's shares of 8% Series A Cumulative 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, 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%.
(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.
100
(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 shares of 8% Series A Cumulative 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 EchoStar, 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 EchoStar, 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 EchoStar, 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 EchoStar, 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 8% Series A Cumulative 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.
101
DESCRIPTION OF CERTAIN INDEBTEDNESS
Set forth below is a summary of certain indebtedness to which Dish and ESBC
are subject. This summary does not purport to be complete and is qualified in
its entirety by reference to the applicable agreements, copies of which may be
obtained from the Company.
1994 Notes
On June 7, 1994, Dish issued 624,000 units, consisting of the 1994 Notes, and
3,744,000 Class A Common Stock Purchase Warrants (the "Warrants"). Issuance of
the 1994 Notes resulted in net proceeds to Dish of approximately $323.3 million
(including amounts attributable to issuance of the Warrants and after payment of
underwriting discount and other issuance costs aggregating approximately $12.6
million). The 1994 Notes bear interest at a rate of 12 7/8%, computed on a
semi-annual bond equivalent basis. Interest on the 1994 Notes will not be
payable in cash prior to June 1, 1999, with the 1994 Notes accreting to a
principal amount at stated maturity of $624.0 million by that date. Commencing
December 1, 1999, interest on the 1994 Notes will be payable in cash on
December 1 and June 1 of each year. The 1994 Notes mature on June 1, 2004.
The 1994 Notes rank senior in right of payment to all subordinated
indebtedness of Dish and PARI PASSU in right of payment with all other senior
indebtedness of Dish, subject to the terms of an Intercreditor Agreement between
Dish, certain of its principal subsidiaries, and certain creditors thereof. The
1994 Notes are secured by liens on certain assets of Dish and its subsidiaries,
including EchoStar I and EchoStar II and all other components of the EchoStar
DBS System owned by Dish and its subsidiaries. The 1994 Notes are further
guaranteed by each material direct subsidiary of Dish. Although the 1994 Notes
are titled "Senior": (i) Dish has not issued, and does not have any current
arrangements to issue, any significant indebtedness to which the 1994 Notes
would be senior and (ii) the 1994 Notes are subordinated to certain obligations
of Dish's subsidiaries with respect to deferred payments on EchoStar I and
EchoStar II. The 1996 Notes and Notes are effectively subordinated to the 1994
Notes and all other liabilities of Dish and its subsidiaries.
Except under certain circumstances requiring prepayment premiums, and in
other limited circumstances, the 1994 Notes are not redeemable at Dish's option
prior to June 1, 1999. Thereafter, the 1994 Notes will be subject to redemption,
at the option of Dish, in whole or in part, at redemption prices ranging from
104.828% during the year commencing June 1, 1999 to 100% of principal amount at
stated maturity on or after June 1, 2002, together with accrued and unpaid
interest thereon to the redemption date. On each of June 1, 2002 and June 1,
2003, Dish will be required to redeem 25% of the original aggregate principal
amount of 1994 Notes at a redemption price equal to 100% of principal value at
stated maturity thereof, together with accrued and unpaid interest thereon to
the redemption date. The remaining principal of the 1994 Notes matures on June
1, 2004.
In the event of a change of control and upon the occurrence of certain other
events, as described in the 1994 Notes Indenture, Dish will be required to make
an offer to each holder of 1994 Notes to repurchase all or any part of such
holder's 1994 Notes at a purchase price equal to 101% of the accreted value
thereof on the date of purchase, if prior to June 1, 1999, or 101% of the
aggregate principal amount at stated maturity thereof, together with accrued and
unpaid interest thereon to the date of purchase, if on or after June 1, 1999.
The 1994 Notes Indenture contains restrictive covenants that, among other
things, impose limitations on Dish and its subsidiaries with respect to their
ability to: (i) incur additional indebtedness (including the guarantee of
indebtedness); (ii) issue preferred stock; (iii) sell assets; (iv) create, incur
or assume liens; (v) create dividend and other payment restrictions with respect
to Dish's subsidiaries; (vi) merge, consolidate or sell substantially all of
their assets; and (vii) enter into transactions with affiliates. As a result of
these restrictive covenants, Dish currently is not able to guarantee the Notes.
In addition, Dish, may pay dividends on its equity securities only if (1) no
default exists under the 1994 Notes Indenture; and (2) after giving effect to
such dividends, Dish's ratio of total indebtedness to cash flow (calculated in
accordance with the 1994 Notes Indenture) would not exceed 4.0 to 1.0. Moreover,
the aggregate amount of such dividends generally may not exceed the sum of 50%
of Dish's consolidated net income (less 100% of consolidated net losses)
(calculated in accordance with the 1994 Notes Indenture) from April 1, 1994,
plus 100% of the aggregate net proceeds received by Dish from the sale and
issuance of certain equity interests of Dish (including common stock). As of
the date of this Prospectus, Dish does not meet the above specified ratios and
is therefore unable to pay dividends or make other distributions to the Issuer..
The Warrants became separately transferable and exercisable on December 1,
1994. Each Warrant entitles the registered holder thereof to purchase from Dish
one share of Class A Common Stock at a purchase price of $0.01 per share, which
price has been paid in advance. No additional amounts are required to be paid
upon exercise of the Warrants. The Warrants expire on June 1, 2004.
Substantially all of the Warrants have been exercised.
102
1996 Notes
On March 25, 1996, ESBC completed the 1996 Notes Offering consisting of
$580.0 million aggregate principal amount at stated maturity of the 1996 Notes.
The 1996 Notes Offering resulted in net proceeds to ESBC of approximately $336.9
million (after payment of underwriting discount and other issuance costs
aggregating approximately $13.1 million). The 1996 Notes bear interest at a rate
of 13 1/8%, computed on a semi-annual bond equivalent basis. Interest on the
1996 Notes will not be payable in cash prior to March 15, 2000, with the 1996
Notes accreting to a principal amount at stated maturity of $580.0 million by
that date. Commencing September 15, 2000, interest on the 1996 Notes will be
payable in cash on September 15 and March 15 of each year. The 1996 Notes mature
on March 15, 2004.
The 1996 Notes rank PARI PASSU in right of payment with all senior
indebtedness of ESBC. The 1996 Notes are guaranteed on a subordinated basis by
ESBC's parent, EchoStar, and are secured by liens on certain assets of ESBC,
EchoStar and certain of EchoStar's subsidiaries, including all of the
outstanding capital stock of Dish, which currently owns substantially all of
EchoStar's operating subsidiaries. Although the 1996 Notes are titled "Senior":
(i) ESBC has not issued, and does not have any plans to issue, any indebtedness
to which the 1996 Notes would be senior; and (ii) the 1996 Notes are effectively
subordinated to all liabilities of EchoStar (except liabilities to general
creditors) and its other subsidiaries (except liabilities of ESBC), including
liabilities to general creditors.
Except under certain circumstances requiring prepayment premiums, and in
other limited circumstances, the 1996 Notes are not redeemable at ESBC's option
prior to March 15, 2000. Thereafter, the 1996 Notes are subject to redemption,
at the option of ESBC, in whole or in part, at redemption prices ranging from
106.5625% during the year commencing March 15, 2000 to 100% on or after
March 15, 2003 of principal amount at stated maturity, together with accrued and
unpaid interest thereon to the redemption date. The entire principal balance of
the 1996 Notes will mature on March 15, 2004.
In the event of a change of control, as described in the 1996 Notes
Indenture, ESBC will be required to make an offer to each holder of 1996 Notes
to repurchase all of such holder's 1996 Notes at a purchase price equal to 101%
of the accreted value thereof on the date of purchase, if prior to March 15,
2000, or 101% of the aggregate principal amount at stated maturity thereof,
together with accrued and unpaid interest thereon to the date of purchase, if on
or after March 15, 2000.
The 1996 Notes Indenture contains restrictive covenants that, among other
things, impose limitations on ESBC with respect to its ability to: (i) incur
additional indebtedness (including the guarantee of indebtedness); (ii) issue
preferred stock; (iii) sell assets; (iv) create, incur or assume liens;
(v) create dividend and other payment restrictions with respect to ESBC's
subsidiaries; (vi) merge, consolidate or sell assets; and (vii) enter into
transactions with affiliates. As a result of these restrictive covenants, ESBC
currently is not able to guarantee the Notes. The 1996 Notes Indenture permits
ESBC to pay dividends and make other distributions to the Issuer without
restrictions.
103
DESCRIPTION OF EXCHANGE NOTES
The following summary of certain provisions of: (i) the Indenture; and
(ii) the Registration Rights Agreement (the "Registration Rights Agreement"), by
and among the Issuer, the Guarantor and the Initial Purchasers, does not purport
to be complete and is qualified in its entirety by reference to the Indenture
and the Registration Rights Agreement. All material elements of the Indenture
and the Registration Rights Agreement are set forth below. The definitions of
certain terms used in the following summary are set forth below under "--Certain
Definitions." In the following summary, "EchoStar" refers solely to EchoStar
Communications Corporation and does not include any direct or indirect
subsidiaries of EchoStar. Unless the context otherwise requires, all references
herein to the "Notes" shall include the Old Notes and the Exchange Notes.
GENERAL
The Exchange Notes will be issued, and the Old Notes were issued, pursuant
to the Indenture among the Issuer, the Guarantor and First Trust National
Association, as trustee (the "Trustee"). The terms of the Exchange Notes are the
same in all respects (including principal amount, interest rate, maturity,
security and ranking) as the terms of the Old Notes for which they may be
exchanged pursuant to the Exchange Offer, except that the Exchange Notes (i) are
freely transferable by holders thereof (except as provided below) and (ii) are
not entitled to certain registration right and certain liquidated damages
provisions which are applicable to the Old Notes under the Registration Rights
Agreement. The Exchange Notes will be issued under the Indenture governing the
Notes. The Exchange Notes are subject to all such terms and holders of the
Notes are referred to the Trust Indenture Act of 1939, as amended (the "Trust
Indenture Act"). The Exchange Notes are subject to all such terms, and holders
of the Exchange Notes are referred to the Indenture and the Trust Indenture Act
for a statement thereof.
The Notes rank PARI PASSU in right of payment with all senior indebtedness
of the Issuer. Although the Notes are titled "Senior": (i) the Issuer has not
issued, and does not have any plans to issue, any indebtedness to which the
Notes would be senior and (ii) the Notes are effectively subordinated to all
liabilities of the Issuer's subsidiaries, including liabilities to general
creditors (except to the extent that any subsidiary of the Issuer may guarantee
the Notes), and the EchoStar guarantee of the Notes is subordinated to all
liabilities of EchoStar (except liabilities to general creditors). As of
March 31, 1997, the consolidated liabilities of EchoStar and its Subsidiaries
aggregated approximately $1.1 billion. On a pro forma basis, after giving effect
to issuance of the Old Notes and application of the net proceeds therefrom, the
Issuer's aggregate consolidated Indebtedness as of March 31, 1997, for purposes
of the Indenture, would have been approximately $1.3 billion. In addition, the
ability of Dish to make distributions to the Issuer is severely limited by the
terms of an indenture to which it is subject, and the cash flow generated by the
assets and operations of the Issuer's subsidiaries will therefore only be
available to satisfy the Issuer's obligations on the Notes to the extent that
such subsidiaries are able to make distributions, directly or indirectly, to the
Issuer. The Notes will be secured by liens on the capital stock of the Issuer
and certain other assets of the Issuer and EchoStar. See "--Security,"
"--Affiliate Guarantees," "Risk Factors--Springing Guarantees" and "Risk
Factors--Risk of Inability to Realize Upon Security Interests."
PRINCIPAL, MATURITY AND INTEREST
The Notes were issued in an aggregate principal amount of $375.0 million
which was sufficient to generate net proceeds to the Issuer of approximately
$362.5 million. The Notes mature on July 1, 2002. Interest on the Notes accrues
at the rate of 12 1/2% per annum and is payable semi-annually in cash on each
January 1 and July 1, commencing January 1, 1998, to holders of record on the
immediately preceding December 15 and June 15, respectively. Interest will
accrue from the most recent date to which interest has been paid or, if no
interest has been paid, from the date of issuance. Interest will be computed on
the basis of a 360-day year of twelve 30-day months.
The Notes will be payable both as to principal and interest at the office
or agency of the Issuer maintained for such purpose or, at the option of the
Issuer, payment of interest may be made by check mailed to the holders of the
Notes at their respective addresses set forth in the register of holders of
Notes. Until otherwise designated by the Issuer, the Issuer's office or agency
will be the office of the Trustee maintained for such purpose. The Exchange
Notes will be issued in registered form, without coupons, in denominations of
$1,000 and integral multiples thereof.
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OPTIONAL REDEMPTION
Except as provided in the next paragraph, the Issuer shall not have the
option to redeem the Notes prior to July 1, 2000. Thereafter, the Issuer shall
have the option to redeem the Notes, in whole or in part, upon not less than 30
nor more than 60 days notice, at the redemption prices (expressed as percentages
of principal amount) set forth below, together with accrued and unpaid interest
thereon to the applicable redemption date, if redeemed during the 12-month
period beginning on July 1 of the years indicated below:
Year Percentage
---- ----------
2000. . . . . . . . . . . . . . . . . . 106.250%
2001. . . . . . . . . . . . . . . . . . 103.125%
2002. . . . . . . . . . . . . . . . . . 100.000%
Notwithstanding the foregoing, at any time prior to July 1, 2000, the
Issuer may redeem Notes at a redemption price equal to 112.50% of the principal
amount thereof on the repurchase date with the net proceeds of one public or
private sale of Equity Interests (other than Disqualified Stock) of EchoStar,
the Issuer or any of their Subsidiaries (other than proceeds from a sale to
EchoStar, the Issuer or any of their Subsidiaries); PROVIDED that (a) at least
two-thirds in aggregate principal amount of the Notes originally issued remain
outstanding immediately after the occurrence of such redemption and (b) such
redemption occurs within 120 days of the date of the closing of any such sale.
SELECTION AND NOTICE
If less than all of the Notes are to be redeemed at any time, the selection
of Notes for redemption will be made by the Trustee in compliance with the
requirements of the principal national securities exchange, if any, on which the
Notes are listed, or if the Notes are not so listed on a PRO RATA basis, by lot
or in accordance with any other method the Trustee considers fair and
appropriate, PROVIDED that no Notes with a principal amount of $1,000 or less
shall be redeemed in part. In the event of partial redemption by lot, the
particular Notes to be redeemed shall be selected, unless otherwise provided
herein, not less than 30 nor more than 60 days prior to the redemption date by
the Trustee from the outstanding Notes not previously called for redemption.
The Trustee shall promptly notify the Issuer in writing of the Notes
selected for redemption and, in the case of any Note selected for partial
redemption, the principal amount thereof to be redeemed. Notes and portions of
them selected shall be in amounts of $1,000 or whole multiples of $1,000; except
that if all of the Notes of a Holder are to be redeemed, the entire outstanding
amount of Notes held by such Holder, even if not a multiple of $1,000, shall be
redeemed.
OFFER TO PURCHASE UPON CHANGE OF CONTROL
Upon the occurrence of a Change of Control, the Issuer shall make an offer
(a "Change of Control Offer") to each Holder of Notes to repurchase all or any
part (equal to $1,000 or an integral multiple thereof) of such Holder's Notes at
a purchase price equal to 101% of the aggregate principal amount thereof,
together with accrued and unpaid interest thereon to the date of repurchase (the
"Change of Control Payment"), PROVIDED that if the date of purchase is on or
after an interest record date and on or before the related interest payment
date, any accrued interest shall be paid to the Person in whose name a Note is
registered at the close of business on such record date, and no additional
interest shall be paid or payable to Holders who tender Notes pursuant to the
Change of Control Offer. Within 15 days following any Change of Control, the
Issuer shall mail a notice to the Trustee and each Holder stating:
(a) that the Change of Control Offer is being made pursuant to the
covenant entitled "Change of Control" and that all Notes tendered will
be accepted for payment;
(b) the purchase price and the purchase date, which shall be no earlier
than 30 days nor later than 40 days after the date such notice is
mailed (the "Change of Control Payment Date");
(c) that any Note not tendered will continue to accrue interest in
accordance with the terms of the Indenture;
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(d) that, unless the Issuer defaults in the payment of the Change of
Control Payment, all Notes accepted for payment pursuant to the Change
of Control Offer shall cease to accrue interest after the Change of
Control Payment Date;
(e) that Holders electing to have any Notes purchased pursuant to a Change
of Control Offer will be required to surrender the Notes, with the
form entitled "Option of Holder to Elect Purchase" on the reverse of
the Notes completed, to the Paying Agent at the address specified in
the notice prior to the close of business on the third Business Day
preceding the Change of Control Payment Date;
(f) that Holders will be entitled to withdraw their election if the Paying
Agent receives, not later than the close of business on the second
Business Day preceding the Change of Control Payment Date, a telegram,
telex, facsimile transmission or letter setting forth the name of the
Holder, the principal amount of Notes delivered for purchase, and a
statement that such Holder is withdrawing his election to have such
Notes purchased;
(g) that Holders whose Notes are being purchased only in part will be
issued new Notes equal in principal amount to the unpurchased portion
of the Notes surrendered, which unpurchased portion must be equal to
$1,000 in principal amount or an integral multiple thereof; and
(h) any other information material to such Holder's decision to tender the
Notes.
The Issuer shall comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent such laws and regulations are applicable in connection with the
repurchase of the Notes in connection with a Change of Control. Due to the
highly leveraged structure of the Issuer and the terms of other indebtedness to
which EchoStar and the Issuer's Subsidiaries are subject, the Issuer may not be
able to repurchase all of the Notes tendered for purchase upon the occurrence of
a Change of Control. If the Issuer fails to repurchase all of the Notes tendered
for purchase upon the occurrence of a Change of Control, such failure will
constitute an Event of Default. See " - Events of Default and Remedies."
Except as described above with respect to a Change of Control, the
Indenture does not contain provisions that permit the holders of the Notes to
require that the Issuer repurchase or redeem the Notes in the event of a
takeover, recapitalization or similar transaction.
OFFER TO PURCHASE UPON THE OCCURRENCE OF CERTAIN EVENTS
In the event that:
(a) EchoStar and its Subsidiaries do not have the right to use orbital
slot authorizations granted by the FCC covering a minimum of 21
transponders at a single Full-CONUS Orbital Slot; or
(b) EchoStar and its Subsidiaries at any time fail to timely obtain or
maintain any material license or permit that is necessary to operate
EchoStar I or EchoStar II in the manner and in accordance with the
plan of operations described in the Prospectus (unless (i) EchoStar or
any of its Subsidiaries is contesting the loss of such license or
permit in good faith at the FCC and has not exhausted its remedies at
the FCC and (ii) EchoStar (together with any Subsidiary) continue to
have the right to use such license or permit if previously obtained);
the Issuer will be required to make an offer (an "Offer to Purchase") (i) in the
case of clause (a), to repurchase one-half of all outstanding Notes and (ii) in
the case of clause (b), to repurchase all or any part (equal to $1,000 or an
integral multiple thereof) of each Holder's Notes, in each case at a purchase
price (the "Offer Payment") equal to 101% of the aggregate principal amount
thereof, together with accrued and unpaid interest thereon to the date of
purchase.
Within 15 days following any event described above, the Issuer shall mail a
notice to each Holder stating, among other things:
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(i) that the Offer to Purchase is being made pursuant to the covenant
entitled "Offer to Purchase upon the Occurrence of Certain
Events"";
(ii) the purchase price and the purchase date, which shall be no earlier
than 30 days nor later than 40 days after the date such notice is
mailed (the "Offer Payment Date");
(iii) that any Notes not tendered will continue to accrue interest in
accordance with the terms of the Indenture;
(iv) that, unless the Issuer defaults in the payment of the Offer
Payment, all Notes accepted for payment pursuant to the Offer to
Purchase shall cease to accrue interest after the Offer Payment
Date;
(v) that Holders will be entitled to withdraw their election if the
Paying Agent receives, not later than the close of business on the
second Business Day preceding the Offer Payment Date, a telegram,
telex, facsimile transmission or letter setting forth the name of
the Holder, the principal amount of Notes delivered for purchase,
and a statement that such Holder is withdrawing his election to
have such Notes purchased;
(vi) that Holders whose Notes are being purchased only in part will be
issued new Notes equal in principal amount to the unpurchased
portion of the Notes surrendered, which unpurchased portion must be
equal to $1,000 in principal amount or an integral multiple
thereof; and
(vii) any other information material to such Holder's decision to tender
the Notes.
The Issuer will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent such laws and regulations are applicable in connection with the
repurchase of the Notes in connection with an Offer to Purchase. Due to the
highly leveraged structure of the Issuer and the terms of other indebtedness to
which EchoStar and the Issuer's Subsidiaries are subject, the Issuer may not be
able to repurchase all of the Notes required to be purchased by it in connection
with an Offer to Purchase. If the Issuer fails to repurchase all of the Notes
required to be purchased by it in connection with an Offer to Purchase, such
failure will constitute an Event of Default. See " - Events of Default and
Remedies."
SIGNIFICANT TRANSACTIONS
EchoStar or any of its Subsidiaries may enter into a transaction or series
of transactions (a "Significant Transaction") with another entity (a "Strategic
Partner"), notwithstanding the fact that such Significant Transaction would
otherwise be prohibited under the terms of the Indenture, in which EchoStar or
any such Subsidiary (i) sells, leases, conveys or otherwise disposes of any of
its assets (including by way of a sale-and-leaseback transaction) to such
Strategic Partner or (ii) makes an Investment in or receives an Investment from
such Strategic Partner; PROVIDED that :
(i) EchoStar or such Subsidiary receives fair market value for any
property or assets (including capital stock) transferred in such
Significant Transaction in the opinion of a majority of the Board
of Directors of EchoStar as evidenced by an Officers' Certificate
delivered to the Trustee and an investment banking firm of national
standing selected by the Issuer; and
(ii) prior to the consummation of such Significant Transaction, the
Issuer makes an offer (a "Special Offer to Purchase") to each
Holder of Notes to repurchase, within 15 days following the
consummation of such Significant Transaction, all or any part
(equal to $1,000 or an integral multiple thereof) of such Holder's
Notes at a purchase price equal to 101% of the aggregate principal
amount thereof, together with accrued and unpaid interest thereon
to the date of purchase (in either case, the "Special Offer
Payment").
At least 30 days prior to the consummation of such Significant Transaction,
the Issuer shall mail a notice to each Holder stating:
(a) that the Special Offer to Purchase is being made pursuant to the
covenant entitled "Significant Transactions";
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(b) the purchase price and the purchase date, which shall be no earlier
than 30 days nor later than 60 days after the date such notice is
mailed (the "Special Offer Payment Date");
(c) that any Notes tendered will only be repurchased in the event that
such Significant Transaction is consummated;
(d) that any Notes not tendered or not repurchased will continue to
accrue interest in accordance with the terms of the Indenture;
(e) that, if such Significant Transaction is consummated, unless the
Issuer defaults in the payment of the Special Offer Payment, all
Notes accepted for payment pursuant to the Special Offer to
Purchase shall cease to accrue interest after the Special Offer
Payment Date;
(f) that Holders electing to have any Notes purchased pursuant to an
Offer to Purchase will be required to surrender the Notes, with the
form entitled "Option of Holder to Elect Purchase" on the reverse
of the Notes completed, to the Paying Agent at the address
specified in the notice prior to the close of business on the third
Business Day preceding the Special Offer Payment Date;
(g) that Holders will be entitled to withdraw their election if the
Paying Agent receives, not later than the close of business on the
second Business Day preceding the Special Offer Payment Date, a
telegram, telex, facsimile transmission or letter setting forth the
name of the Holder, the principal amount of Notes delivered for
purchase, and a statement that such Holder is withdrawing his
election to have such Notes purchased;
(h) that Holders whose Notes are being purchased only in part will be
issued new Notes equal in principal amount to the unpurchased
portion of the Notes surrendered, which unpurchased portion must be
equal to $1,000 in principal amount or an integral multiple
thereof; and
(i) a description of such Significant Transaction, as well as any other
information material to such Holder's decision to tender Notes.
The Issuer will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent such laws and regulations are applicable in connection with the
repurchase of Notes pursuant to a Special Offer to Purchase. Due to the highly
leveraged structure of the Issuer and the terms of other indebtedness to which
EchoStar and the Issuer's Subsidiaries are subject, the Issuer may not be able
to repurchase all of the Notes tendered for purchase in connection with a
Special Offer to Purchase. If a Significant Transaction is consummated and the
Issuer fails to repurchase all of the Notes tendered for purchase, such failure
will constitute an Event of Default. See " - Events of Default and Remedies."
DISBURSEMENT OF FUNDS ESCROW ACCOUNTS
The Issuer placed $109.0 million of the net proceeds realized from the sale
of the Notes in the Interest Escrow Account held by the Escrow Agent for the
benefit of the Holders of the Notes. The disbursement of such funds is governed
by the Interest Escrow Agreement. Such funds, together with the proceeds from
the investment thereof, will secure, and will be sufficient (and shall be
applied) to pay, the first five semi-annual interest payments on the Notes.
Funds will be released from the Interest Escrow Account, pro rata, to reflect
any reduction in the outstanding principal amount of Notes prior to the fifth
semi-annual interest payment date.
The Issuer placed $112.0 million of the net proceeds realized from the sale
of the Notes into a Satellite Escrow Account to be held by the Escrow Agent for
the benefit of the Holders of the Notes. The disbursement of such funds is
governed by the Satellite Escrow Agreement. The Escrow Agent will not be
permitted to disburse any proceeds from the Satellite Escrow Account unless the
Issuer delivers an Officers' Certificate, prior to such disbursement, to the
Trustee and the Escrow Agent certifying that such funds will be applied toward
required payments under the Satellite Contract or Launch Contract relating to
EchoStar IV or toward a payment on Launch Insurance or In-Orbit Insurance for
EchoStar IV. Funds from the Satellite Escrow Account will be released
therefrom, on a dollar-for-dollar basis, to the extent that the Additional
Payment Obligations of the Issuer, EchoStar or any of the
108
Issuer's Subsidiaries are contractually deferred to a date after the launch date
of EchoStar IV as evidenced by an Officers' Certificate delivered to the Trustee
and Escrow Agent.
Pending disbursement, funds maintained in the Interest Escrow Account and
the Satellite Escrow Account will be invested in Marketable Securities. The
Notes are secured by, among other things, a first priority security interest in
the Interest Escrow Account and the Satellite Escrow Account.
CERTAIN COVENANTS
RESTRICTED PAYMENTS. The Issuer shall not, and shall not permit any of its
Restricted Subsidiaries, to, directly or indirectly:
(a) declare or pay any dividend or make any distribution on account of
any Equity Interests of the Issuer or any of its Subsidiaries,
other than dividends or distributions payable in Equity Interests
(other than Disqualified Stock) of the Issuer or dividends or
distributions payable to any Wholly Owned Subsidiary of the Issuer
(other than Unrestricted Subsidiaries of the Issuer);
(b) purchase, redeem or otherwise acquire or retire for value any
outstanding Equity Interests of EchoStar, any of its Subsidiaries
or any other Affiliate of EchoStar, other than any such Equity
Interests owned by the Issuer or any of its Wholly Owned
Subsidiaries (other than Unrestricted Subsidiaries of the Issuer);
(c) voluntarily purchase, redeem, defease or otherwise acquire or
retire for value any Indebtedness that is expressly subordinated in
right of payment to the Notes, except in accordance with the
scheduled mandatory redemption or repayment provisions set forth in
the original documentation governing such Indebtedness; or
(d) make any Restricted Investment (all such prohibited payments and
other actions set forth in clauses (a) through (d) above being
collectively referred to as "Restricted Payments"), unless, at the
time of such Restricted Payment:
(1) no Default or Event of Default shall have occurred and be
continuing or would occur as a consequence thereof;
(2) after giving effect to such Restricted Payment and the
incurrence of any Indebtedness the net proceeds of which are
used to finance such Restricted Payment, the Indebtedness to
Cash Flow Ratio of the Issuer would not have exceeded 6.0 to
1; and
(3) such Restricted Payment, together with the aggregate of all
other Restricted Payments made by the Issuer after the date
of the Indenture, is less than the sum of: (A) the
difference of cumulative (x) Consolidated Cash Flow
determined at the time of such Restricted Payment (or, in
case such Consolidated Cash Flow shall be a deficit, minus
100% of such deficit) minus (y) 150% of Consolidated
Interest Expense of the Issuer, each as determined for the
period (taken as one accounting period) from July 1, 1997 to
the end of the Issuer's most recently ended fiscal quarter
for which internal financial statements are available at the
time of such Restricted Payment; plus (B) an amount equal to
100% of the aggregate net cash proceeds received by the
Issuer and its Subsidiaries from the issue or sale of Equity
Interests (other than Disqualified Stock) of the Issuer or
EchoStar (other than Equity Interests sold to a Subsidiary
of the Issuer or EchoStar, and PROVIDED that any sale of
Equity Interests of EchoStar shall only be included in such
calculation to the extent that the proceeds thereof are
contributed to the capital of the Issuer other than as
Disqualified Stock or Indebtedness), since the date of the
Indenture.
The foregoing provisions will not prohibit:
(1) the payment of any dividend within 60 days after the date of declaration
thereof, if at such date of declaration such payment would have complied
with the provisions of the Indenture;
109
(2) the redemption, repurchase, retirement or other acquisition of any Equity
Interests of the Issuer in exchange for, or out of the net proceeds of,
the substantially concurrent sale (other than to a Subsidiary of the
Issuer) of other Equity Interests of the Issuer (other than Disqualified
Stock);
(3) the payment of dividends on, or the redemption of, the Dish Preferred
Stock;
(4) Investments in an aggregate amount not to exceed $20 million; PROVIDED
that such Investments are in businesses of the type described under " -
Activities of EchoStar";
(5) Investments to fund the financing activity of DNCC in the ordinary course
of its business in an amount not to exceed, as of the date of
determination, the sum of (A) $25.0 million plus (B) 30% of the aggregate
cost to DNCC for each Satellite Receiver purchased by DNCC and leased by
DNCC to a retail consumer in excess of 100,000 units;
(6) the purchase of employee stock options, or capital stock issued pursuant
to the exercise of employee stock options, in an aggregate amount not to
exceed $2 million in any calendar year and in an aggregate amount not to
exceed $10 million since the date of the Indenture;
(7) a Permitted Refinancing (as defined below in " - Incurrence of
Indebtedness, Issuance of Disqualified Stock and Issuance of Preferred
Equity Interests of Subsidiaries");
(8) Investments in an amount equal to the net proceeds received by the Issuer
or any of its Restricted Subsidiaries from the issue and sale of Equity
Interests of EchoStar (other than Equity Interests sold to a Subsidiary
of EchoStar and other than Disqualified Stock), since the date of the
Indenture; PROVIDED that the entity making such Investment (if other than
the Issuer) receives a capital contribution from EchoStar in an amount
greater than or equal to the amount of such Investment;
(9) the purchase of odd-lots of Equity Interests of EchoStar, in an amount
not to exceed $1 million in the aggregate;
(10) Investments in ExpressVu Inc. or an Affiliate thereof, in an amount not
to exceed the amount necessary to exercise the purchase options granted,
through the date of the Indenture, to EchoStar or its Subsidiaries with
respect to ExpressVu, Inc.;
(11) Investments in ABCN, Inc. or an Affiliate thereof, in an amount not to
exceed the amount necessary to exercise the purchase options granted,
through the date of the Indenture, to EchoStar or its Subsidiaries with
respect to ABCN, Inc.; or
(12) the payment of any dividend, or making of any distribution or Investment,
the proceeds of which are, within five Business Days of receipt thereof,
used to pay for the construction, launch, operation or insurance of
EchoStar III, PROVIDED that at the time of any such payment, distribution
or Investment, EchoStar III shall be owned by EchoStar or any Wholly
Owned Subsidiary of EchoStar.
Restricted Payments made pursuant to clauses (1) and (8) shall be
included as Restricted Payments in any computation made pursuant to clause (iii)
above.
Not later than the date of making any Restricted Payment, the Issuer
shall deliver to the Trustee an Officers' Certificate stating that such
Restricted Payment is permitted and setting forth the basis upon which the
calculations required by the covenant "Restricted Payments" were computed, which
calculations shall be based upon the Issuer's latest available financial
statements.
INCURRENCE OF INDEBTEDNESS, ISSUANCE OF DISQUALIFIED STOCK AND ISSUANCE
OF PREFERRED EQUITY INTERESTS OF SUBSIDIARIES. The Indenture provides that the
Issuer shall not, and the Issuer shall not permit any of its Restricted
Subsidiaries to, directly or indirectly, create, incur, issue, assume, guaranty
or otherwise become directly or indirectly liable with respect to (collectively,
"incur") any Indebtedness (including Acquired Debt) and the Issuer shall not,
and the Issuer shall not permit any of its Restricted Subsidiaries to, issue any
Disqualified Stock or any Preferred Equity Interest; PROVIDED, HOWEVER, that
notwithstanding the foregoing the Issuer and each of its Restricted
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Subsidiaries may incur Indebtedness or issue Disqualified Stock if, after giving
effect to the incurrence of such Indebtedness or the issuance of such
Disqualified Stock and the application of the net proceeds thereof, the
Indebtedness to Cash Flow Ratio of the Issuer would not have exceeded 6.0 to 1.
The foregoing limitation will not apply to:
(i) the incurrence of the Deferred Payments and letters of credit with
respect thereto;
(ii) the incurrence of Bank Debt;
(iii) the incurrence of Indebtedness in an aggregate amount not to exceed
$15 million upon a finding by the Issuer (evidenced by a resolution
of the Board of Directors of EchoStar set forth in an Officers'
Certificate delivered to the Trustee) that such Indebtedness is
necessary to finance costs in connection with the development,
construction, launch or insurance of EchoStar III or IV (or any
permitted replacements thereof), PROVIDED that such Indebtedness is
subordinated by its terms in right and priority of payment to the
Notes;
(iv) Indebtedness between and among the Issuer and each of its
Restricted Subsidiaries;
(v) Acquired Debt of a person incurred prior to the date upon which
such person was acquired by the Issuer or any of its Subsidiaries
(excluding Indebtedness incurred by such entity other than in the
ordinary course of its business in connection with, or in
contemplation of, such entity being so acquired) in an aggregate
principal amount not to exceed $15 million, PROVIDED that such
Indebtedness and the holders thereof do not at any time have direct
or indirect recourse to any property or assets of the Issuer or any
of its Subsidiaries other than the property and assets of such
acquired entity and its Subsidiaries;
(vi) Existing Indebtedness;
(vii) additional Indebtedness in an aggregate amount not to exceed
$15 million at any one time outstanding;
(viii) the incurrence of Purchase Money Indebtedness by the Issuer and any
Restricted Subsidiary in an aggregate amount not to exceed
$30 million at any one time outstanding; or
(ix) the incurrence by the Issuer or any of its Restricted Subsidiaries
of Indebtedness issued in exchange for, or the proceeds of which
are used to extend, refinance, renew, replace, substitute or refund
Indebtedness referred to in clauses (1), (3), (5), (6), (7) and (8)
above ("Refinancing Indebtedness"); PROVIDED, HOWEVER, that (A) the
principal amount of such Refinancing Indebtedness shall not exceed
the principal amount and accrued interest of the Indebtedness so
extended, refinanced, renewed, replaced, substituted or refunded;
(B) the Refinancing Indebtedness shall have a final maturity later
than, and a Weighted Average Life to Maturity equal to or greater
than; the final maturity and Weighted Average Life to Maturity of
the Indebtedness being extended, refinanced, renewed, replaced or
refunded; and (C) the Refinancing Indebtedness shall be
subordinated in right of payment to the Notes, if at all, on terms
at least as favorable to the Holders of Notes as those contained in
the documentation governing the Indebtedness being extended,
refinanced, renewed, replaced or refunded (a "Permitted
Refinancing").
ASSET SALES; TRANSFER OF ECHOSTAR IV. If the Issuer or any of its
Restricted Subsidiaries, in a single transaction or a series of related
transactions:
(a) sells, leases, conveys or otherwise disposes of any assets
(including by way of a sale-and-leaseback transaction), other than
(i) sales of inventory in the ordinary course of business, (ii)
sales to the Issuer or a Wholly Owned Restricted Subsidiary of the
Issuer by any Restricted Subsidiary of the Issuer, (iii) sales of
accounts receivable by EAC or DNCC for cash in an amount at least
equal to the fair market value of such accounts receivable or (iv)
sales of rights to satellite launches (PROVIDED that the sale,
lease, conveyance or other disposition of all or substantially all
of the assets of the Issuer shall be governed by the provisions of
the Indenture described below under the caption "Merger,
Consolidation, or Sale of Assets");
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(b) issue or sell equity securities of any Restricted Subsidiary of the
Issuer, in the case of either (a) or (b) above, which assets or
securities (i) have a fair market value (as determined in good faith
by the Board of Directors of EchoStar evidenced by a resolution of the
Board of Directors of EchoStar and set forth in an Officers'
Certificate delivered to the Trustee; PROVIDED, HOWEVER, that if the
fair market value of such assets exceeds $20 million, the fair market
value shall be determined by an investment banking firm of national
standing selected by the Issuer) in excess of $10 million or (ii) are
sold or otherwise disposed of for net proceeds in excess of $10
million (each of the foregoing, an "Asset Sale") then:
(A) The Issuer or such Restricted Subsidiary, as the case may be,
must receive consideration at the time of such Asset Sale at least
equal to the fair market value (as determined in good faith by the
Board of Directors of EchoStar evidenced by a resolution of the Board
of Directors of EchoStar and set forth in an Officers' Certificate
delivered to the Trustee; PROVIDED, HOWEVER, that if the fair market
value of such assets exceeds $20 million, the fair market value shall
be determined by an investment banking firm of national standing
selected by the Issuer) of the assets sold or otherwise disposed of;
and
(B) at least 80% of the consideration therefor received by the Issuer
or such Restricted Subsidiary, as the case may be, is in the form of
cash or Cash Equivalents; provided, however, that the Issuer may
consider up to $15 million of non-cash assets at any one time to be
cash for purposes of this clause (B), PROVIDED that the provisions of
the next paragraph are complied with as such non-cash assets are
converted to cash.
The Indenture provides that the Net Proceeds from such Asset Sale shall be
placed in the Satellite Escrow Account, and shall be disbursed only: (i) to
make Receiver Subsidies, to buy or lease satellite frequencies at orbital slots
or to purchase tangible assets to be used in the business of EchoStar as
described " - Activities of EchoStar," or if any satellite is sold after launch,
only to purchase a replacement satellite or (ii) as set forth in the next
sentence. Any Net Proceeds from any Asset Sale that are not applied or invested
as provided in the preceding sentence within 180 days after such Asset Sale, and
not applied to an offer to repurchase 1994 Notes required by the 1994 Notes
Indenture or 1996 Notes required by the 1996 Notes Indenture, shall constitute
"Excess Proceeds" and shall be applied to an offer to purchase Notes as set
forth under " - Excess Proceeds Offer."
Notwithstanding the foregoing or any other provision of the Indenture to
the contrary, (i) any of DBSC, EchoStar Satellite Corporation or DirectSat
Corporation may transfer its right and interest in any permits and licenses
relating to the use of channels at the 166DEG. WL or 175DEG. WL orbital slot,
or any portions thereof, without receiving any consideration and (ii) the Issuer
may lease EchoStar IV to any Wholly Owned Subsidiary of EchoStar (other than an
Unrestricted Subsidiary of the Issuer) without receiving any consideration
provided (A) either (1) such Subsidiary has the right to operate at a full-CONUS
orbital slot and EchoStar IV is used in such orbital slot or (2)(x) there has
been a full or partial launch or in-orbit failure of EchoStar III, (y) such
Subsidiary has the right to operate at the 61.5DEG. WL orbital slot and (z)
EchoStar IV is used in such orbital slot and (B) prior to or contemporaneously
with executing such lease, the Issuer delivers to the Trustee an Opinion of
Counsel (which Opinion of Counsel may be subject to customary qualifications and
exceptions), substantially to the effect that (i) such lease is not prohibited
by applicable laws, rules or regulations (or any required consents, approvals or
filings have been obtained or made, as the case may be), (ii) such lease will
not result in a default or breach under any indenture or under any material
contract, agreement or understanding to which the Issuer is a party or by which
it or its properties is bound, and (iii) immediately following such lease, the
Trustee for the benefit of the Holders of the Notes will maintain its security
interest in EchoStar IV and all other collateral which, immediately prior to
such lease, secured the Issuer's or any Guarantor's obligations under the Notes
or Guarantee, as the case may be. The Issuer will not launch, move or otherwise
assign (collectively, "Transfer") EchoStar IV into an orbital slot other than
148DEG. WL unless prior to or contemporaneously with such Transfer the Issuer
delivers to the Trustee an Opinion of Counsel (which Opinion of Counsel may be
subject to customary qualifications and exceptions) substantially to the effect
that (i) such Transfer is not prohibited by applicable laws, rules or
regulations (or any required consents, approvals or filings have been obtained
or made, as the case may be), (ii) such Transfer will not result in a default or
breach under any indenture or under any material contract, agreement or
understanding to which the Issuer is a party or by which it or its properties is
bound, and (iii) immediately following such Transfer, the Trustee for the
benefit of the Holders of the Notes will maintain its security interest in
EchoStar IV and all other collateral which, immediately prior to such Transfer,
secured the Issuer's or any Guarantor's Obligations under the Notes or
Guarantee, as the case may be; provided however, that in the event the Transfer
constitutes an "Asset Sale", then the Issuer (i) shall not be
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obligated to comply with the requirements of this paragraph but (ii) shall
otherwise be required to comply with the covenant entitled "Asset Sales;
Transfer of EchoStar IV" (subject to the immediately preceding paragraph) and
all other applicable provisions of the Indenture.
LIENS. The Indenture provides that none of the Issuer or any Restricted
Subsidiary of the Issuer may directly or indirectly create, incur, assume or
suffer to exist any Lien on any asset now owned or hereafter acquired, or on any
income or profits therefrom or assign or convey any right to receive income
therefrom, except Permitted Liens.
MAINTENANCE OF INSURANCE. The Indenture provides that:
(a) Prior to the launch of EchoStar IV (and any permitted replacement
thereof, including any satellite purchased with the proceeds of an
Asset Sale), the Issuer shall obtain or cause to be obtained Launch
Insurance with respect to each such satellite; and
(b) at all times subsequent to the expiration of Launch Insurance on
EchoStar IV (and any permitted replacement thereof, including any
satellite purchased with the proceeds of an Asset Sale), the Issuer
shall maintain In-orbit Insurance with respect to each such satellite.
The Indenture provides that EchoStar IV (or any replacement thereof) may
not be launched unless Launch Insurance covering such satellite has been
obtained.
In the event that the Trustee, EchoStar, the Issuer or any of their
Subsidiaries (or a named loss payee) receives proceeds from any Launch Insurance
or In-orbit Insurance covering EchoStar IV (or any replacement thereof), or in
the event that EchoStar, the Issuer or any of their Subsidiaries receives
proceeds from any insurance maintained by Lockheed Martin or any launch provider
covering EchoStar IV (or any replacement thereof), all such proceeds (including
any cash or Cash Equivalents deemed to be proceeds of Launch Insurance or
In-orbit Insurance pursuant to the respective definition thereof) shall be
placed in the Satellite Escrow Account and shall be disbursed only: (i) to
purchase a replacement satellite, PROVIDED that if such replacement satellite
is of lesser value compared to the insured satellite, any insurance proceeds
remaining after purchase of such replacement satellite must be applied to the
construction, launch and insurance of a satellite of equal or greater value as
compared to the insured satellite (or in accordance with (ii) below); or (ii) to
the extent that such proceeds are not applied or contractually committed to be
applied as described in (i) above within 180 days of the receipt of such
proceeds as "Excess Proceeds" to be applied to an offer to purchase Notes as set
forth under " - Excess Proceeds Offer."
The Issuer shall grant or cause to be granted to the Trustee on behalf of
the Holders of the Notes (i) a first priority security interest in each
satellite constructed, launched or insured with any portion of the proceeds of
Launch or In-orbit Insurance covering EchoStar IV (or any replacement thereof);
and (ii) a collateral assignment of all contracts relating to the construction,
launch, insurance and TT&C of each such satellite. As soon as practicable, the
Issuer shall execute or cause to be executed a security agreement relating to
such Liens. The Issuer shall take or cause to be taken all actions necessary to
record, register and file any documents or instruments necessary to make
effective such Lien and shall provide an Opinion of Counsel prepared in
accordance with the Indenture with respect to such Lien.
CONSTRUCTION OF ECHOSTAR IV. The Indenture provides that EchoStar and the
Issuer shall cause the construction and launch of EchoStar IV (and any permitted
replacements thereof) to be prosecuted with diligence and continuity in a good
and workmanlike manner in accordance with the Satellite Contracts and the Launch
Contracts.
ACTIVITIES OF ECHOSTAR. The Indenture provides that neither EchoStar nor
any of its Subsidiaries may engage in any business other than developing,
owning, engaging in and dealing with all or any part of the business of domestic
and international satellite communications, and reasonably related extensions
thereof, including but not limited to the purchase, ownership, operation,
leasing and selling of, and generally dealing in or with, one or more
communications satellites and the transponders thereon, the acquisition,
transmission, broadcast, production and other provision of programming therewith
and the manufacturing, distribution and financing of equipment (including
consumer electronic equipment) relating thereto.
ADDITIONAL SUBSIDIARY GUARANTEES. The Indenture provides that if the
Issuer or any Guarantor transfers or causes to be transferred, in one or a
series of related transactions, property or assets (including, without
limitation,
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businesses, divisions, real property, assets or equipment) having a fair market
value (as determined in good faith by the Board of Directors of EchoStar
evidenced by a resolution of the Board of Directors of EchoStar and set forth in
an Officers' Certificate delivered to the Trustee; PROVIDED, HOWEVER that if the
fair market value exceeds $10 million, the fair market value shall be determined
by an investment banking firm of national standing selected by the Issuer)
exceeding $500,000 to any Restricted Subsidiary of the Issuer that is neither a
Subsidiary of ESBC nor a Guarantor, EchoStar, to the extent not otherwise
precluded by obligations set forth in the 1996 Notes Indenture or the 1994 Notes
Indenture, shall, or shall cause the owner of such Subsidiary to: (a) enter into
a pledge agreement in order to pledge all of the issued and outstanding Capital
Stock of such Subsidiary as security to the Trustee for the benefit of the
Holders of the Notes; and (b) cause such Subsidiary to: (i) execute and deliver
to the Trustee a Supplemental Indenture in form and substance reasonably
satisfactory to the Trustee pursuant to which such Subsidiary shall
unconditionally Guarantee all of the Issuer's obligations under the Notes and
execute a notation in form and substance reasonably satisfactory to the Trustee;
and (ii) deliver to the Trustee an Opinion of Counsel reasonably satisfactory to
the Trustee that such pledge agreement and such Supplemental Indenture have been
duly authorized, executed and delivered by and are valid and binding obligations
of such Subsidiary or such owner, as the case may be; PROVIDED, HOWEVER, that
the foregoing provisions shall not apply to transfers of property or assets
(other than cash) by the Issuer or any Guarantor in exchange for cash or Cash
Equivalents in an amount equal to the fair market value (as determined in good
faith by the Board of Directors of EchoStar evidenced by a resolution of the
Board of Directors of EchoStar and set forth in an Officers' Certificate
delivered to the Trustee; PROVIDED, HOWEVER, that if the fair market value
exceeds $10 million, the fair market value shall be determined by an investment
banking firm of national standing selected by the Issuer) of such property or
assets.
DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING SUBSIDIARIES. The
Indenture provides that the Issuer shall not, and the Issuer shall not permit
any of its Restricted Subsidiaries to, directly or indirectly, create or
otherwise cause or suffer to exist or become effective any encumbrance or
restriction on the ability of any Restricted Subsidiary to:
(a) pay dividends or make any other distributions to the Issuer or any of
its Restricted Subsidiaries on its Capital Stock or with respect to
any other interest or participation in, or measured by, its profits,
or pay any Indebtedness owed to the Issuer or any of its Subsidiaries;
(b) make loans or advances to the Issuer or any of its Subsidiaries; or
(c) transfer any of its properties or assets to the Issuer or any of its
Subsidiaries, except for such encumbrances or restrictions existing
under or by reasons of:
(i) Existing Indebtedness and existing agreements as in effect on
the date of the Indenture;
(ii) any Credit Agreement containing any encumbrances or
restrictions that are no more restrictive with respect to the
provisions set forth in clauses (a), (b) and (c) above than the
1994 Credit Agreement as in effect on the date of its
expiration;
(iii) applicable law or regulation;
(iv) any instrument governing Acquired Debt as in effect at the time
of acquisition (except to the extent such Indebtedness was
incurred in connection with, or in contemplation of, such
acquisition), which encumbrance or restriction is not
applicable to any Person, or the properties or assets of any
Person, other than the Person, or the property or assets of the
Person, so acquired, PROVIDED that the Consolidated Cash Flow
of such Person shall not be taken into account in determining
whether such acquisition was permitted by the terms of the
Indenture;
(v) by reason of customary non-assignment provisions in leases
entered into in the ordinary course of business and consistent
with past practices; or
(vi) Refinancing Indebtedness, as defined in " - Incurrence of
Indebtedness, Issuance of Disqualified Stock and Issuance of
Preferred Equity Interests of Subsidiaries"), PROVIDED that
the restrictions contained in the agreements governing such
Refinancing Indebtedness are no more restrictive than those
contained in the agreements governing the Indebtedness being
refinanced.
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ACCOUNTS RECEIVABLE SUBSIDIARY. The Indenture provides that the Issuer:
(a) may, and may permit any of its Subsidiaries to, notwithstanding the
provisions of the covenant entitled "Restricted Payments," of the
Indenture, make Investments in an Accounts Receivable Subsidiary: (i)
the proceeds of which are applied within five Business Days of the
making thereof solely to finance: (A) the purchase of accounts
receivable of the Issuer and its Subsidiaries or (B) payments required
in connection with the termination of all then existing arrangements
relating to the sale of accounts receivable or participation interests
therein by an Accounts Receivable Subsidiary (PROVIDED that the
Accounts Receivable Subsidiary shall receive cash, Cash Equivalents and
accounts receivable having an aggregate fair market value not less than
the amount of such payments in exchange therefor) and (ii) in the form
of Accounts Receivable Subsidiary Notes to the extent permitted by
clause (b) below;
(b) shall not, and shall not permit any of its Subsidiaries to, sell
accounts receivable to an Accounts Receivable Subsidiary except for
consideration in an amount not less than that which would be obtained in
an arm's length transaction and solely in the form of cash or Cash
Equivalents; PROVIDED that an Accounts Receivable Subsidiary may pay
the purchase price for any such accounts receivable in the form of
Accounts Receivable Subsidiary Notes so long as, after giving effect to
the issuance of any such Accounts Receivable Subsidiary Notes, the
aggregate principal amount of all Accounts Receivable Subsidiary Notes
outstanding shall not exceed 20% of the aggregate purchase price paid
for all outstanding accounts receivable purchased by an Accounts
Receivable Subsidiary since the date of the Indenture (and not
written-off or required to be written off in accordance with the normal
business practice of an Accounts Receivable Subsidiary);
(c) shall not permit an Accounts Receivable Subsidiary to sell any accounts
receivable purchased from the Issuer and its Subsidiaries or
participation interests therein to any other Person except on an arm's
length basis and solely for consideration in the form of cash or Cash
Equivalents or certificates representing undivided interests of a
Receivables Trust; provided an Accounts Receivable Subsidiary may not
sell such certificates to any other Person except on an arm's length
basis and solely for consideration in the form of cash or Cash
Equivalents;
(d) shall not, and shall not permit any of its Subsidiaries to, enter into
any Guarantee, subject any of their respective properties or assets
(other than the accounts receivable sold by them to an Accounts
Receivable Subsidiary) to the satisfaction of any liability or
obligation or otherwise incur any liability or obligation (contingent or
otherwise), in each case, on behalf of an Accounts Receivable Subsidiary
or in connection with any sale of accounts receivable or participation
interests therein by or to an Accounts Receivable Subsidiary, other than
obligations relating to breaches of representations, warranties,
covenants and other agreements of the Issuer or any of its Subsidiaries
with respect to the accounts receivable sold by the Issuer or any of its
Subsidiaries to an Accounts Receivable Subsidiary or with respect to the
servicing thereof; PROVIDED that neither the Issuer nor any of its
Subsidiaries shall at any time guarantee or be otherwise liable for the
collectibility of accounts receivable sold by them;
(e) shall not permit an Accounts Receivable Subsidiary to engage in any
business or transaction other than the purchase and sale of accounts
receivable or participation interests therein of the Issuer and its
Subsidiaries and activities incidental thereto;
(f) shall not permit an Accounts Receivable Subsidiary to incur any
Indebtedness other than the Accounts Receivable Subsidiary Notes,
Indebtedness owed to the Issuer and Non-Recourse Indebtedness; PROVIDED
that the aggregate principal amount of all such Indebtedness of an
Accounts Receivable Subsidiary shall not exceed the book value of its
total assets as determined in accordance with GAAP;
(g) shall cause any Accounts Receivable Subsidiary to remit to the Issuer or
a Subsidiary of the Issuer on a monthly basis as a distribution all
available cash and Cash Equivalents not held in a collection account
pledged to acquirors of accounts receivable or participation interests
therein, to the extent not applied to (i) pay interest or principal on
the Accounts Receivable Subsidiary Notes or any Indebtedness of such
Accounts Receivable Subsidiary owed to the Issuer, (ii) pay or maintain
reserves for reasonable operating expenses of such Accounts Receivable
Subsidiary or to satisfy reasonable minimum operating capital
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requirements or (iii) to finance the purchase of additional accounts
receivable of the Issuer and its Subsidiaries; and
(h) shall not, and shall not permit any of its Subsidiaries to, sell
accounts receivable to, or enter into any other transaction with or for
the benefit of, an Accounts Receivable Subsidiary (i) if such Accounts
Receivable Subsidiary pursuant to or within the meaning of any
Bankruptcy Law (A) commences a voluntary case, (B) consents to the entry
of an order for relief against it in an involuntary case, (C) consents
to the appointment of a Custodian of it or for all or substantially all
of its property, (D) makes general assignment for the benefit of its
creditors, or (E) generally is not paying its debts as they become due;
or (ii) if a court of competent jurisdiction enters an order or decree
under any Bankruptcy Law that (A) is for relief against such Accounts
Receivable Subsidiary in an involuntary case, (B) appoints a Custodian
of such Accounts Receivable Subsidiary or for all or substantially all
of the property of such Accounts Receivable Subsidiary, or (C) orders
the liquidation of such Accounts Receivable Subsidiary, and, with
respect to clause (ii) hereof, the order or decree remains unstayed and
in effect for 60 consecutive days.
MERGER, CONSOLIDATION, OR SALE OF ASSETS. The Indenture provides that the
Issuer may not consolidate or merge with or into (whether or not the Issuer is
the surviving entity), or sell, assign, transfer, lease, convey or otherwise
dispose of all or substantially all of its properties or assets in one or more
related transactions to, another Person unless:
(a) the Issuer is the surviving Person or the Person formed by or surviving
any such consolidation or merger (if other than the Issuer) or to which
such sale, assignment, transfer, lease, conveyance or other disposition
shall have been made is a corporation organized or existing under the
laws of the United States, any state thereof or the District of
Columbia;
(b) the Person formed by or surviving any such consolidation or merger (if
other than the Issuer) or the Person to which such sale, assignment,
transfer, lease, conveyance or other disposition shall have been made
assumes all the obligations of the Issuer, pursuant to a supplemental
indenture in a form reasonably satisfactory to the Trustee, under the
Notes and the Indenture;
(c) immediately after such transaction no Default or Event of Default
exists; and
(d) the Issuer or the Person formed by or surviving any such consolidation
or merger (if other than the Issuer), or to which such sale, assignment,
transfer, lease, conveyance or other disposition shall have been made
(i) shall have Consolidated Net Worth immediately after the transaction
(but prior to any purchase accounting adjustments or accrual of deferred
tax liabilities resulting from the transaction) not less than the
Consolidated Net Worth of the Issuer immediately preceding the
transaction and (ii) would, at the time of such transaction after giving
pro forma effect thereto as if such transaction had occurred at the
beginning of the applicable four-quarter period, be permitted to incur
at least $1.00 of additional Indebtedness pursuant to the Indebtedness
to Cash Flow Ratio test set forth in the covenant entitled "Incurrence
of Indebtedness, Issuance of Disqualified Stock and Issuance of
Preferred Equity Interests of Subsidiaries."
Notwithstanding the foregoing, the Issuer may merge with another Person if:
(a) the Issuer is the surviving Person;
(b) the consideration issued or paid by the Issuer in such merger consists
solely of Equity Interests (other than Disqualified Stock) of the
Issuer; and
(c) immediately after giving effect to such merger, the Issuer's
Indebtedness to Cash Flow Ratio does not exceed the Issuer's
Indebtedness to Cash Flow Ratio immediately prior to such merger.
TRANSACTIONS WITH AFFILIATES. The Indenture provides that EchoStar shall
not, and shall not permit any of its Subsidiaries to, sell, lease, transfer or
otherwise dispose of any of its properties or assets to, or purchase any
property or assets from, or enter into any contract, agreement, understanding,
loan, advance or guarantee with, or for the benefit of, any Affiliate (including
any Unrestricted Subsidiary) (each of the foregoing, an "Affiliate
Transaction"), unless:
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(a) such Affiliate Transaction is on terms that are no less favorable to the
Issuer or its Subsidiaries than those that would have been obtained in a
comparable transaction by the Issuer or such Subsidiaries with an
unrelated Person;
(b) if such Affiliate Transaction involves aggregate payments in excess of
$500,000, the Issuer delivers to the Trustee a resolution of the Board
of Directors of the Issuer set forth in an Officers' Certificate
certifying that such Affiliate Transaction complies with clause (a)
above and such Affiliate Transaction is approved by a majority of
disinterested members of the Board of Directors of EchoStar; and
(c) if such Affiliate Transaction involves aggregate payments in excess of
$15 million, the Issuer delivers to the Trustee an opinion as to the
fairness to the Issuer or such Subsidiaries from a financial point of
view of such Affiliate Transaction issued by an investment banking firm
of national standing;
PROVIDED, HOWEVER, that (i) the payment of compensation to directors and
management of EchoStar in amounts approved by the Compensation Committee of the
Board of Directors of EchoStar (which shall consist of a majority of outside
directors); (ii) transactions between or among the Issuer and its Wholly Owned
Subsidiaries (other than Unrestricted Subsidiaries of the Issuer); (iii) the
transfer of rights and interests in any permits or licenses relating to the use
of channels at the 166DEG. West Longitude or 175DEG. WL orbital slot; (iv)
transactions permitted by the provisions of the Indenture described above under
clauses (1), (3), (5), (6), (7), (9) and (12) of the second paragraph of the
covenant "Restricted Payments"; and (v) any transactions between or among
EchoStar and any Subsidiary of EchoStar which is not also a Subsidiary of the
Issuer, shall, in each case, not be deemed Affiliate Transactions.
REPORTS. Whether or not required by the rules and regulations of the
SEC, so long as any of the Notes remain outstanding, the Issuer shall cause
copies of all quarterly and annual financial reports and of the information,
documents, and other reports (or copies of such portions of any of the
foregoing as the SEC may by rules and regulations prescribe) which the Issuer
is required to file with the SEC pursuant to Section 13 or 15(d) of the
Exchange Act (including all information that would be required to be
contained in Forms 10-Q and 10-K) to be filed with the SEC and the Trustee
and mailed to the Holders at their addresses appearing in the register of
Notes maintained by the Registrar, in each case, within 15 days of filing
with the SEC. If the Issuer is not subject to the requirements of such
Section 13 or 15(d) of the Exchange Act, the Issuer shall nevertheless
continue to cause the annual and quarterly financial statements, including
any notes thereto (and, with respect to annual reports, an auditors' report
by an accounting firm of established national reputation) and a "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
comparable to that which would have been required to appear in annual or
quarterly reports filed under Section 13 or 15(d) of the Exchange Act
(including all information that would be required to be contained in Forms
10-Q and 10-K), to be so filed with the SEC for public availability and the
Trustee and mailed to the Holders within 120 days after the end of the
Issuer's fiscal years and within 60 days after the end of each of the first
three quarters of each such fiscal year. The Issuer and the Guarantors shall
also comply with the provisions of TIA Section 314(a).
PAYMENTS FOR CONSENTS. Neither EchoStar, the Issuer nor any of their
Subsidiaries may, directly or indirectly, pay or cause to be paid any
consideration, whether by way of interest, fee or otherwise, to any Holder of a
Note for or as an inducement to any consent, waiver or amendment of any of the
terms or provisions of the Indenture or the Notes unless such consideration is
offered to be paid or agreed to be paid to all Holders of the Notes that
consent, waive or agree to amend in the time frame set forth in the solicitation
documents relating to such consent, waiver or agreement.
EXCESS PROCEEDS OFFER. When the cumulative amount of Excess Proceeds that
have not been applied in accordance with the covenants entitled "Significant
Transactions," "Asset Sales; Transfer of EchoStar IV" and "Maintenance of
Insurance" or this paragraph exceeds $5.0 million, the Issuer shall be obligated
to make an offer to all Holders of the Notes (an "Excess Proceeds Offer") to
purchase the maximum principal amount of Notes that may be purchased out of such
Excess Proceeds at an offer price in cash in an amount equal to 101% of the
principal amount thereof, together with accrued and unpaid interest to the date
fixed for the closing of such offer in accordance with the procedures set forth
in the Indenture. If the aggregate principal amount of Notes surrendered by
Holders thereof exceeds the amount of such Excess Proceeds, the Trustee shall
select the Notes to be purchased on a PRO RATA basis.
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SECURITY AND COLLATERAL
The Notes initially are secured by: (i) a pledge by EchoStar of the
capital stock of the Issuer; (ii) a first priority security interest in both
the Interest and Satellite Escrow Accounts; (iii) a first priority security
interest, when launched, in EchoStar IV (iv) a first priority security
interest in the proceeds of any sale upon foreclosure of the Issuer's permit
from the FCC for the 148DEG. WL orbital slot frequency assignments; and (v)
a collateral assignment of all contracts relating to the construction,
launch, insurance and TT&C (as defined) of EchoStar IV. The Issuer has agreed
to use its best efforts to obtain any required consents necessary to effect a
collateral assignment of the contracts relating to the construction, launch,
insurance and TT&C of EchoStar IV by August 24, 1997 (none of such consents
have been obtained as of the date of the Prospectus).
The Issuer and certain of its Affiliates will enter into one or more
pledge agreements (the "Pledge Agreements") and one or more security
agreements (the "Security Agreements") providing for the grant by the Issuer
and such Affiliates to the Trustee, as collateral agent for the holders of
the Notes, of security interests in the Collateral. All such security
interests will secure the payment and performance when due of all of the
Obligations of the Issuer under the Notes and the Indenture.
In the event that the proceeds of Launch Insurance or In-Orbit Insurance
are applied to the purchase of one or more replacement satellites in
accordance with the covenant entitled "Maintenance of Insurance," the Notes
will be secured by: (i) a first priority security interest in each such
replacement satellite; and (ii) a collateral assignment of all contracts
relating to the construction, launch, insurance or TT&C of each such
replacement satellite.
Upon the occurrence and during the continuance of an Event of Default:
(i) all rights of EchoStar and its Subsidiaries to exercise voting or other
consensual rights with respect to any stock pledged to secure the Notes shall
cease, and all such rights shall become vested in the Trustee, which, to the
extent permitted by law, shall have the sole right to exercise such voting
and other consensual rights; (ii) all rights of EchoStar and its Subsidiaries
to receive cash dividends, interest and other payments made upon or with
respect to such pledged stock shall cease and such cash dividends, interest
and other payments shall be paid to the Trustee; and (iii) the Trustee may
sell the Collateral or any part thereof in accordance with the terms of the
Pledge Agreements and the Security Agreements. All funds distributed under
the Pledge Agreements, the Security Agreements or the Escrow and Disbursement
Agreement and received by the Trustee for the benefit of the holders of the
Notes shall be distributed by the Trustee in accordance with the provisions
of the Indenture.
Under the terms of the Pledge Agreements and the Security Agreements, the
Trustee will determine the circumstances and manner in which the Collateral
shall be disposed of, including, but not limited to, the determination of
whether to release all or any portion of the Collateral from the Liens
created by the Pledge Agreements or the Security Agreements and whether to
foreclose on the Collateral following an Event of Default. Moreover, upon the
full and final payment and performance of all Obligations of the Issuer under
the Notes and the Indenture, or upon defeasance of the Notes, the Pledge
Agreements and the Security Agreements shall terminate and the Collateral
shall be released. In addition, in the event that any Collateral is sold and
the Net Proceeds thereof are applied in accordance with the terms of the
covenant entitled "Asset Sales," the Trustee shall release the Liens in favor
of the Trustee in the assets sold; PROVIDED, that the Trustee shall have
received from the Issuer an Officers' Certificate and an Opinion of Counsel
that such Net Proceeds have been or will be so applied.
In the event that the Issuer or any of its Subsidiaries sells, transfers
or disposes of any property consisting partially or wholly of the Collateral
other than in accordance with the provisions of the covenant entitled "Asset
Sales; Transfer of EchoStar IV," the Trustee shall have a first priority
security interest in the pro rata portion of the net proceeds of such sale,
transfer or disposition attributable to such Collateral as determined by an
investment banking firm of national standing selected by the Issuer.
EXECUTION OF COLLATERAL DOCUMENTS
(a) Simultaneously with the execution of the Indenture, the Issuer
executed (i) the Escrow Accounts Security Agreement, (ii) the EchoStar IV
Security Agreement, (iii) the Orbital Slot Security Agreement, (iv) the
Collateral Assignment, (v) the Interest Escrow Agreement and (vi) the
Satellite Escrow Agreement.
(b) Simultaneously with the execution of the Indenture, EchoStar
executed the Stock Pledge Agreement.
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(c) Simultaneously with the execution of the Indenture, EchoStar Space
Corporation executed the Collateral Assignment.
(d) In connection with the Collateral Assignment, EchoStar, EchoStar
Space Corporation and the Issuer shall use their best efforts to obtain any
required consents necessary to effect a collateral assignment of (i) the
Launch Contract, the Satellite Contract and Launch Insurance relating to
EchoStar IV within 60 days after the date hereof, (ii) all TT&C contracts
relating to EchoStar IV at the time such TT&C contracts are entered into and
(iii) In-Orbit Insurance relating to EchoStar IV at the time such In-Orbit
Insurance is obtained.
SALE OF AND LIENS ON ECHOSTAR IV
(a) The Issuer shall not and shall not permit any of its Subsidiaries to
sell, transfer or dispose of EchoStar IV (or any replacement thereof) after
it is launched, unless, upon such sale, transfer or disposition, the Issuer
grants or causes to be granted to the Trustee on behalf of the Holders of the
Notes (i) a first priority security interest in an operational satellite in
geosynchronous orbit of equal or greater value than EchoStar IV (or such
replacement); and (ii) a collateral assignment of all contracts relating to
the construction, launch, insurance and TT&C of such satellite. Prior to
such sale, transfer or disposition, the Issuer shall execute or cause to be
executed a security agreement relating to such Liens. The Issuer shall take
or cause to be taken all actions necessary to record, register and file any
documents or instruments necessary to make effective such Lien, including the
filing of any required applications with the FCC for approval of any
collateral assignment hereunder, and shall provide an Opinion of Counsel
prepared in accordance with Section 10.03(a) of the Indenture with respect to
such Lien.
(b) EchoStar and its Subsidiaries may not incur or suffer to exist Liens
on EchoStar IV (or any replacement thereof), except (i) prior to launch,
Liens in favor of satellite contractor; (ii) after launch, Liens not to
exceed $20 million securing the Deferred Payments, ranking PARI PASSU with
the Liens on EchoStar IV (or such replacement) in favor of the Holders of the
Notes; and (iii) additional Liens securing the Deferred Payments,
subordinated to the Liens on EchoStar IV (or such replacement) in favor of
the Holders of the Notes.
AFFILIATE GUARANTEES
Initially, the Issuer's payment obligations under the Notes will be
guaranteed on a subordinated basis by EchoStar.
On and after the ESBC Guarantee Date, the Issuer's payment obligations
under the Notes and the Indenture will be guaranteed by ESBC (the "ESBC
Guarantee"), which Guarantee will rank PARI PASSU with all senior unsecured
Indebtedness of ESBC. On and after the Dish Guarantee Date, the Issuer's
payment obligations under the Notes and the Indenture will be guaranteed by
Dish (the "Dish Guarantee"), which Guarantee will rank PARI PASSU with all
senior unsecured Indebtedness of Dish.
There can be no assurance that any of the conditions to the issuance of
the ESBC Guarantee or Dish Guarantee will be satisfied at any time. See "Risk
Factors - Springing Guarantees."
The obligations of each Guarantor under its Guarantee will be limited, if
necessary, to such amount as will not constitute a fraudulent conveyance
under applicable law.
The Indenture provides that, subject to the next paragraph, EchoStar may
not consolidate or merge with or into (whether or not such Guarantor is the
surviving entity), or sell, assign, transfer, lease, convey or otherwise
dispose of all or substantially all of its properties or assets in one or
more related transactions to, another person unless:
(a) such Guarantor is the surviving person or the person formed by or
surviving any such consolidation or merger (if other than such
Guarantor) or to which such sale, assignment, transfer, lease,
conveyance or other disposition shall have been made is a corporation
organized or existing under the laws of the U.S., any state thereof or
the District of Columbia;
(b) the person formed by or surviving any such consolidation or member (if
other than such Guarantor) or the person to which such sale, assignment,
transfer, lease, conveyance or other disposition will have been made
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assumes all the obligations of such Guarantor, pursuant to a
supplemental indenture in form reasonably satisfactory to the Trustee,
under the Notes and the Indenture;
(c) immediately after such transaction, no Default or Event of Default
exists; and
(d) such Guarantor or the person formed by or surviving any such
consolidation or merger, or to which such sale, assignment, transfer,
lease, conveyance or other disposition will have been made: (i) will
have Consolidated Net Worth immediately after the transaction (but prior
to any purchase accounting adjustments or accrual of deferred tax
liabilities resulting from the transaction) not less than the
Consolidated Net Worth of such Guarantor immediately preceding the
transaction; and (ii) will have an Indebtedness to Cash Flow Ratio
immediately after the transaction that does not exceed such Guarantor's
Indebtedness to Cash Flow Ratio immediately preceding the transaction.
Except as set forth in the provisions entitled " - Certain Covenants" and
" -Merger, Consolidation, or Sale of Assets," nothing contained in the
Indenture shall prevent any consolidation or merger of a Guarantor with or
into the Issuer or shall prevent any sale or conveyance of the property of a
Guarantor as an entirety or substantially as an entirety to the Issuer.
The Indenture provides that in the event of a sale or other disposition
of all of the assets of any Guarantor which is a Subsidiary of the Issuer, by
way of merger, consolidation or otherwise, or a sale or other disposition of
all of the capital stock of any such Guarantor, then such Guarantor (in the
event of a sale or other disposition, by way of such a merger, consolidation
or otherwise, of all of the capital stock of such Guarantor) or the person
acquiring the property (in the event of a sale or other disposition of all of
the assets of such Guarantor) will be released and relieved of any
obligations under its Guarantee, PROVIDED that the Net Proceeds of such sale
or other disposition are applied in accordance with the provisions described
under " - Certain Covenants - Asset Sales."
EVENTS OF DEFAULT AND REMEDIES
The Indenture provides that each of the following constitutes an Event of
Default (unless the provisions described under " - Significant Transactions"
arc applicable and the Issuer complies with such provisions):
(a) default for 30 days in the payment when due of interest on the Notes;
(b) default in payment when due of principal on the Notes at maturity, upon
repurchase, redemption or otherwise;
(c) failure by EchoStar, the Issuer or any of their subsidiaries to comply
with the provisions described under " - Offer to Purchase upon Change of
Control," " - Offer to Purchase upon the Occurrence of Certain Events,"
" - Significant Transactions," " - Certain Covenants - Maintenance of
Insurance," " - Certain Covenants - Transactions with Affiliates," " -
Disbursement of Funds - Escrow Account" or " - Certain Covenants -
Asset Sales" or the failure by the Issuer to comply with the third
paragraph under " - Security";
(d) default under the provisions described under " - Certain Covenants -
Restricted Payments" or " - Certain Covenants - Incurrence of
Indebtedness, and Issuance of Disqualified Stock and Issuance of
Preferred Equity of Subsidiaries" or under any of the Collateral
Documents, which default remains uncured for 15 days, or the breach of
any representation or warranty, or the making of any untrue statement,
in any certificate delivered by the Issuer pursuant to the Indenture or
the Collateral Documents;
(e) failure by the Issuer for 60 days after notice from the Trustee or the
holders of at least 25% in principal amount of the Notes then
outstanding to comply with any of its other agreements in the Indenture
or the Notes;
(f) a continuing default after expiration of any applicable grace period by
the Issuer or any of its Affiliates under any of the Satellite Contracts
or the Launch Contracts, which default would permit a party other than
the Issuer or its Affiliates to terminate its obligations under such
contract;
(g) default under any mortgage, indenture or instrument under which there
may be issued or by which there may be secured or evidenced any
Indebtedness for money borrowed by EchoStar or any of its Subsidiaries
(or the
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payment of which is guaranteed by EchoStar or any of its Subsidiaries),
other than any Credit Agreement, which default is caused by a failure to
pay when due principal or interest on such Indebtedness within the grace
period provided in such Indebtedness (a "Payment Default"), and the
principal amount of any such Indebtedness, together with the principal
amount of any other such Indebtedness under which there has been a
Payment Default, aggregates $5 million or more;
(h) default under any mortgage, indenture or instrument under which there
may be issued or by which there may be secured or evidenced any
Indebtedness for money borrowed by EchoStar or any of its Subsidiaries
(or the payment of which is guaranteed by EchoStar or any of its
Subsidiaries), other than any Credit Agreement, which default results in
the acceleration of such Indebtedness prior to its express maturity and
the principal amount of any such Indebtedness, together with the
principal amount of any other such Indebtedness under which there has
been a Payment Default or the maturity of which has been so accelerated,
aggregates $5 million or more;
(i) failure by EchoStar, the Issuer (at any time at which the Notes are
secured by a pledge of all of the issued and outstanding Capital Stock
of the Issuer) or any of their Subsidiaries to pay final judgments
(other than any judgment as to which a reputable insurance company has
accepted full liability) aggregating in excess of $2.0 million, which
judgments are not stayed within 60 days after their entry;
(j) certain events of bankruptcy or insolvency with respect to EchoStar or
certain of its Subsidiaries (including the filing of a voluntary case,
the consent to an order of relief in an involuntary case, the consent to
the appointment of a custodian, a general assignment for the benefit of
creditors or an order of a court for relief in an involuntary case,
appointing a custodian or ordering liquidation, which order remains
unstayed for 60 days); and
(k) any Guarantee of the Notes shall be held in a judicial proceeding to be
unenforceable or invalid or shall cease for any reason to be in full
force and effect, or any Guarantor, or any person acting on behalf of
any Guarantor, shall deny or disaffirm its obligations under its
Guarantee of any Notes.
If any Event of Default occurs and is continuing, the Trustee or the
holders of at least 25% in principal amount of the then outstanding Notes may
declare all the Notes to be due and payable immediately (plus, in the case of
an Event of Default that is the result of an action by EchoStar or any of its
Subsidiaries intended to avoid restrictions on or premiums related to
redemptions of the Notes contained in the Indenture or the Notes, an amount
of premium that would have been applicable pursuant to the Notes or as set
forth in the Indenture). Notwithstanding the foregoing, in the case of an
Event of Default arising from the events of bankruptcy or insolvency with
respect to EchoStar or any of its Subsidiaries described in (j) above, all
outstanding Notes will become due and payable without further action or
notice. Holders of the Notes may not enforce the Indenture or the Notes
except as provided in the Indenture. Subject to certain limitations, holders
of a majority in principal amount of the then outstanding Notes may direct
the Trustee in its exercise of any trust or power. The Trustee may withhold
from holders of the Notes notice of any continuing Default or Event of
Default (except a Default or Event of Default relating to the payment of
principal or interest) if it determines that withholding notice is in such
holders' interest.
The holders of a majority in aggregate principal amount of the Notes then
outstanding, by notice to the Trustee, may on behalf of the holders of all of
the Notes waive any existing Default or Event of Default and its consequences
under the Indenture, except a continuing Default or Event of Default in the
payment of interest or premium on, or principal of the Notes.
The Issuer is required to deliver to the Trustee annually a statement
regarding compliance with the Indenture, and the Issuer is required upon
becoming aware of any Default or Event of Default to deliver to the Trustee a
statement specifying such Default or Event of Default.
All powers of the Trustee hereunder will be subject to applicable
provisions of the Communications Act, including without limitation, the
requirements of prior approval for transfer of control or assignment of Title
III licenses.
WAIVER OF PAST DEFAULTS. Holders of not less than a majority in
aggregate principal amount of Notes then outstanding, by notice to the
Trustee, may on behalf of the Holders of all of the Notes waive an existing
Default or Event of Default and its consequences under the Indenture, except
a continuing Default or Event of Default in the
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payment of the principal of, premium, if any, or interest on, the Notes. Upon
any such waiver, such Default shall cease to exist, and any Event of Default
arising therefrom shall be deemed to have been cured for every purpose of the
Indenture; but no such waiver shall extend to any subsequent or other Default or
impair any right consequent thereon.
CONTROL BY MAJORITY. Holders of a majority in principal amount of the
then outstanding Notes may direct the time, method and place of conducting
any proceeding for exercising any remedy available to the Trustee or
exercising any trust or power conferred on it. However, the Trustee may
refuse to follow any direction that conflicts with the law or the Indenture
that the Trustee determines may be unduly prejudicial to the rights of other
Holders of Notes or that may involve the Trustee in personal liability.
LIMITATION ON SUITS. A Holder of a Note may pursue a remedy with respect
to the Indenture or the Notes only if:
(a) the Holder of a Note gives to the Trustee written notice of a
continuing Event of Default;
(b) the Holders of at least 25% in principal amount of the then
outstanding Notes make a written request to the Trustee to pursue the remedy;
(c) such Holder of a Note or Holders of Notes offer and, if requested,
provide to the Trustee indemnity satisfactory to the Trustee against any
loss, liability or expense;
(d) the Trustee does not comply with the request within 60 days after
receipt of the request and the offer and, if requested, the provision of
indemnity; and
(e) during such 60-day period the Holders of a majority in principal
amount of the then outstanding Notes do not give the Trustee a direction
inconsistent with the request.
A Holder of a Note may not use the Indenture to prejudice the rights of another
Holder of a Note or to obtain a preference or priority over another Holder of a
Note.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES, INCORPORATORS AND
STOCKHOLDERS.
No director, officer, employee, incorporator or stockholder of EchoStar,
the Issuer or any of their Affiliates, as such, shall have any liability for
any obligations of EchoStar, the Issuer and any of their Affiliates under the
Notes or the Indenture or for any claim based on, in respect of, or by reason
of, such obligations or their creation. Each Holder of the Notes by
accepting a Note waives and releases all such liability. The waiver and
release are part of the consideration for issuance of the Notes. Such waiver
may not be effective to waive liabilities under the federal securities laws
and it is the view of the Commission that such waiver is against public
policy.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
The Issuer may, at its option and at any time, elect to have all
obligations discharged with respect to the outstanding Notes ("Legal
Defeasance"). Such Legal Defeasance means that the Issuer will be deemed to
have paid and discharged the entire indebtedness represented by the
outstanding Notes, except for: (a) the rights of holders of outstanding Notes
to receive payments in respect of the principal of, premium, if any, and
interest on the Notes when such payments are due, or on the redemption date,
as the case may be; (b) the Issuer's obligations with respect to the Notes
concerning issuing temporary Notes, registration of Notes, mutilated,
destroyed, lost or stolen Notes and the maintenance of an office or agency
for payment and money for security payments held in trust; (c) the rights,
powers, trust, duties and immunities of the Trustee, and the Issuer's
obligations in connection therewith; and (d) the Legal Defeasance provisions
of the Indenture. In addition, the Issuer may, at its option and at any time,
elect to have all obligations released with respect to certain covenants that
are described in the Indenture ("Covenant Defeasance") and thereafter any
omission to comply with such obligations shall not constitute a Default or
Event of Default with respect to the Notes. In the event Covenant Defeasance
occurs, certain events (not including non-payment, bankruptcy, receivership,
rehabilitation and insolvency events) described under " - Events of Default
and Remedies" will no longer constitute an Event of Default with respect to
the Notes.
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In order to exercise either Legal Defeasance or Covenant Defeasance: (i)
the Issuer must irrevocably deposit with the Trustee, in trust, for the
benefit of the holders of the Notes, cash in U.S. dollars, non-callable U.S.
government obligations, or a combination thereof, in such amounts as will be
sufficient, in the opinion of a nationally recognized firm of independent
public accountants selected by the Trustee, to pay the principal of, premium,
if any, and interest on the outstanding Notes on the stated maturity or on
the applicable optional redemption date, as the case may be; (ii) in the case
of Legal Defeasance, the Issuer shall have delivered to the Trustee an
Opinion of Counsel in the U.S. reasonably acceptable to the Trustee
confirming that (A) the Issuer has received from, or there has been published
by the Internal Revenue Service, a ruling or (B) since the date of the
Indenture, there has been a change in the applicable Federal income tax law,
in each case to the effect that, and based thereon such opinion of counsel
shall confirm that, the holders of such Notes will not recognize income, gain
or loss for Federal income tax purposes as a result of such Legal Defeasance,
and will be subject to Federal income tax in the same amount, in the same
manner and at the same times as would have been the case if such Legal
Defeasance had not occurred; (iii) in the case of Covenant Defeasance, the
Issuer shall have delivered to the Trustee an Opinion of Counsel reasonably
acceptable to such Trustee confirming that the holders of such Notes will not
recognize income, gain or loss for Federal income tax purposes as a result of
such Covenant Defeasance and will be subject to Federal income tax on the
same amounts, in the same manner and at the same times as would have been the
case if such Covenant Defeasance had not occurred; (iv) no Default or Event
of Default shall have occurred and be continuing on the date of such deposit
or insofar as Events of Default from bankruptcy or insolvency events are
concerned, at any time in the period ending on the 91st day after the date of
deposit; (v) such Legal Defeasance or Covenant Defeasance shall not result in
a breach or violation of, or constitute a default under the Indenture or any
other material agreement or instrument to which the Issuer or any of its
Subsidiaries is a party or by which EchoStar or any of its Subsidiaries is
bound; (vi) the Issuer shall have delivered to the Trustee an Officers'
Certificate stating that the deposit was not made by the Issuer with the
intent of preferring the holders of such Notes over any other creditors of
the Issuer or with the intent of defeating, hindering, delaying or defrauding
any other creditors of the Issuer or others; and (vii) the Issuer shall have
delivered to the Trustee an Officers' Certificate stating that all conditions
precedent provided for or relating to the Legal Defeasance or the Covenant
Defeasance have been complied with.
AMENDMENT, SUPPLEMENT AND WAIVER
Except as provided in the next paragraph, the Indenture, the Notes and
the Collateral Documents may be amended or supplemented with the consent of
the holders of at least a majority in principal amount of the Notes then
outstanding (including consents obtained in connection with a tender offer or
exchange offer for Notes), and any existing default or compliance with any
provision of the Indenture or the Notes may be waived with the consent of the
holders of a majority in principal amount of the then outstanding Notes
(including consents obtained in connection with a tender offer or exchange
offer for Notes).
Without the consent of each holder affected, however, an amendment or
waiver may not (with respect to any Senior Secured Note held by a
non-consenting holder):
(a) reduce the aggregate principal amount of Notes whose holders must
consent to an amendment, supplement or waiver;
(b) reduce the principal of or change the fixed maturity of any Senior
Secured Note or alter the provisions with respect to the redemption of
the Notes;
(c) reduce the rate of or change the time for payment of interest on any
Notes;
(d) waive a Default or Event of Default in the payment of principal of or
premium, if any, or interest on the Notes (except a rescission of
acceleration of the Notes by the holders of at least a majority in
aggregate principal amount of the Notes and a waiver of the payment
default that resulted from such acceleration);
(e) make any Senior Secured Note payable in money other than that stated in
the Notes;
(f) make any change in the provisions of the Indenture relating to waivers
of past Defaults or the rights of holders of Notes to receive payments
of principal of or interest on the Notes;
(g) waive a redemption payment with respect to any Senior Secured Note; or
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(h) make any change in the foregoing amendment and waiver provisions.
In addition, without the consent of at least 66 2/3% of the Notes then
outstanding, an amendment or a waiver may not make any change to the covenants
in the Indenture entitled "Offer to Purchase upon Change of Control," "Offer to
Purchase upon the Occurrence of Certain Events," "Asset Sales" and "Excess
Proceeds Offer" (including, in each case, the related definitions).
Notwithstanding the foregoing, without the consent of any holder of
Notes, the Issuer and the Trustee may amend or supplement the Indenture, the
Notes, the Pledge Agreement, the Security Agreement, the Satellite Escrow
Agreement or the Interest Escrow Agreement to cure any ambiguity, defect or
inconsistency, to provide for uncertificated Notes in addition to or in place
of certificated Notes, to provide for the assumption of the Issuer's
obligations to holders of the Notes in the case of a merger or consolidation,
to make any change that would provide any additional rights or benefits to
the holders of the Notes or that does not adversely affect the legal rights
under the Indenture of any such holder, or to comply with requirements of the
Commission in order to effect or maintain the qualification of the Indenture
under the Trust Indenture Act.
CONCERNING THE TRUSTEE
The Indenture contains certain limitations on the rights of the Trustee,
should the Trustee become a creditor of the Issuer, to obtain payment of
claims in certain cases, or to realize on certain property received in
respect of any such claim as security or otherwise. The Trustee will be
permitted to engage in other transactions with the Issuer; however, if the
Trustee acquires any conflicting interest, it must eliminate such conflict
within 90 days, apply to the Commission for permission to continue as Trustee
or resign.
The holders of a majority in principal amount of the then outstanding
Notes will have the right to direct the time, method and place of conducting
any proceeding for exercising any remedy available to the Trustee, subject to
certain exceptions. The Indenture provides that in case an Event of Default
shall occur (which shall not be cured), the Trustee will be required, in the
exercise of its power, to use the degree of care of a prudent man in the
conduct of his own affairs. The Trustee will not be relieved from liabilities
for its own negligent action, its own negligent failure to act or its own
willful misconduct, except that: (i) this sentence shall not limit the
preceding sentence of this paragraph; (ii) the Trustee shall not be liable
for any error of judgment made in good faith, unless it is proved that the
Trustee was negligent in ascertaining the pertinent facts; and (iii) the
Trustee shall not be liable with respect to any action it takes or omits to
take in good faith in accordance with a direction received by it pursuant to
the first sentence of this paragraph. Subject to such provisions, the Trustee
will be under no obligation to exercise any of its rights or powers under the
Indenture at the request of any holder of Notes, unless such holder shall
have offered to the Trustee security and indemnity satisfactory to it against
any loss, liability or expense.
NOTES BOOK-ENTRY, DELIVERY AND FORM
Old Notes initially purchased by qualified institutional buyers were
initially issued in the form of [three] global book-entry notes without
interest coupons (collectively the "Global Old Notes"). The Global Old Note
was deposited on the date of the closing of the sale of the Old Notes (the
"Closing Date") with the Trustee, as custodian for The Depository Trust
Company (the "DTC"), in New York, New York and registered in the name of
DTC., or its nominee, in each case for credit to the accounts of Direct and
Indirect Participants (as defined below). of the Depositary (such nominee
being referred to herein the "Global Note Holder"). Except as set forth in
the next paragraph, the Exchange Notes exchanged for Old Notes represented by
the Global Old Note will be represented by one or more global Exchange Notes
in registered form (collectively, the "Global Exchange Note" and, together
with the Global Old Note, the "Global Notes"), deposited with the DTC and
registered in the name of the Global Noteholder.
Exchange Notes that are issued as described below under " - Exchange of
Global Notes for Certificated Notes"). Such Certificated Notes may, unless
the Global Note has previously been exchanged for Certificated notes, be
exchanged for an interest in the global Note representing the principal
amount of Exchange Notes being transferred. In addition, transfer of
beneficial interests in any Global Notes will be subject to the applicable
rules and procedures of DTC and its Direct or Indirect Participants, which
may change from time to time.
DEPOSITARY PROCEDURES. DTC has advised the Company that DTC is a
limited-purpose trust company created to
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hold securities for its participating organizations (collectively, the
"Direct Participants") and to facilitate the clearance and settlement of
transactions in those securities between Direct Participants through
electronic book-entry changes in accounts of Participants. The Direct
Participants include securities brokers and dealers (including the Initial
Purchasers), banks, trust companies, clearing corporations and certain other
organizations. Access to DTC's system is also available to other entities
that clear through or maintain a direct or indirect custodial relationship
with a Direct Participant (collectively, the "Indirect Participants"). DTC
may hold securities beneficially owned by other persons only through the
Direct Participants or Indirect Participants and such other persons'
ownership interest and transfer of ownership interest will be recorded only
on the records of the Direct Participant and/or Indirect Participant, and not
on the records maintained by DTC.
DTC has also advised the Company that, pursuant to DTC procedures, (i)
upon deposit of the Global Notes, DTC will credit the accounts of Direct
Participants designated by the Initial Purchaser with portions of the
principal amount of Global Notes allocated by the Initial Purchasers to such
Direct Participants, and (ii) DTC will maintain records of the ownership
interests of Direct Participants in the Global Notes and the transfer of
ownership interests by and between direct Participants. DTC will not maintain
records of the ownership interests of, or the transfer of ownership interests
by and between, Indirect Participants or other owners of beneficial interests
in the Global Notes. Direct Participants and the Indirect Participants must
maintain their own records of the ownership interests of, and the transfer of
ownership interests by and between, Indirect Participants and other owners of
beneficial interests in the Global Notes.
Investors in the Global Notes may hold their interests therein directly
through DTC if they are Direct Participants in DTC or indirectly through
organizations which are Direct Participants in DTC. All ownership interests
in any Global Notes may be subject to the procedures and requirements of DTC.
The laws of some states require that certain persons take physical
delivery in definitive, certificated form, of securities that they own. This
may limit or curtail the ability to transfer beneficial interests in a Global
Note to such persons. Because DTC can act only on behalf of Direct
Participants, which in turn act on behalf of Indirect Participants and
others, the ability of a person having a beneficial interest in a Global Note
to pledge such interest to persons or entities that are not Direct
Participants in DTC, or to otherwise take actions in respect of such
interests, may be affected by the lack of physical certificates evidencing
such interests. For certain other restrictions on the transferability of the
Notes see "--Exchange of Book-Entry Notes for Certificated Notes."
Except as described below, owners of beneficial interests in the Global
Notes will not have Notes registered in their names, will not receive
physical delivery of Notes in certificated form and will not be considered
the registered owners or holders thereof under the Indenture for any purpose.
Under the terms of the Indenture, the Issuer, the Guarantors and the
Trustee will treat the persons in whose names the Notes are registered
(including Notes represented by Global Notes) as the owners thereof for the
purpose of receiving payments and for any and all other purposes whatsoever.
Payments in respect of the principal, premium, Liquidated Damages, if any,
and interest on Global Notes registered in the name of DTC or its nominee
will be payable by the Trustee to DTC or its nominee as the registered holder
under the Indenture. Consequently, neither the Company, the Trustee nor any
agent of the Company or the Trustee has or will have any responsibility or
liability for (i) any aspect of DTC's records or any Direct Participant's or
Indirect Participant's records relating to or payments made on account of
beneficial ownership interests in the Global Notes or for maintaining,
supervising or reviewing any of DTC's records or any Direct Participant's or
Indirect Participant's records relating to the beneficial ownership interests
in any Global Note or (ii) any other matter relating to the actions and
practices of DTC or any of its Direct Participants or Indirect Participants.
DTC has advised the Company that its current payment practice (for
payments of principal, interest and the like) with respect to securities such
as the Notes is to credit the accounts of the relevant Direct Participants
with such payment on the payment date in amounts proportionate to such Direct
Participant's respective holdings in principal amount of its ownership
interests in the Global Notes as shown on DTC's records. Payments by Direct
Participants and Indirect Participants to the beneficial owners of the Notes
will be governed by standing instructions and customary practices between
them and will not be the responsibility of DTC, the Trustee, the Company or
the Guarantors. Neither the Company, the Guarantors nor the Trustee will be
liable for any delay by DTC or its Direct Participants or Indirect
Participants in identifying the beneficial owners of the Notes, and the
Company and the Trustee may conclusively rely on and will be protected in
relying on instructions from DTC or its nominee as the registered owner of
the Notes for all purposes.
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The Global Notes will trade in DTC's Same-Day Funds Settlement System
and, therefore, transfers between Direct Participants in DTC will be effected
in accordance with DTC's procedures, and will be settled in immediately
available funds. Transfers between Indirect Participants who hold an interest
through a Direct Participant will be effected in accordance with the
procedures of such Direct Participant but generally will settle in
immediately available funds.
DTC has advised the Company that it will take any action permitted to be
taken by a holder of Notes only at the direction of one or more Direct
Participants to whose account interests in the Global Notes are credited and
only in respect of such portion of the aggregate principal amount of the
Notes as to which such Direct Participant or Direct Participants has or have
given direction. However, if there is an Event of Default under the Notes,
DTC reserves the right to exchange Global Notes (without the direction of one
or more of its Direct Participants) for legended Notes in certificated form,
and to distribute such certificated forms of Notes to its Direct
Participants. See "--Notes Book-Entry, Delivery and Form."
EXCHANGE OF GLOBAL NOTES FOR CERTIFICATED NOTES. An entire Global Note
may be exchanged for definitive Exchange Notes in registered, certificated
form without interest coupons ("Certificated Notes") if (i) DTC (x) notifies
the Company that it is unwilling or unable to continue as depositary for the
Global Notes and the Company thereupon fails to appoint a successor
depositary within 90 days or (y) has ceased to be a clearing agency
registered under the Exchange Act, (ii) the Company, at its option, notifies
the Trustee in writing that it elects to cause the issuance of Certificated
Notes or (iii) there shall have occurred and be continuing to occur a Default
or an Event of Default with respect to the Notes. In any such case, the
Company will notify the Trustee in writing that, upon surrender by the Direct
and Indirect Participants of their interest in such Global Note, Certificated
Notes will be issued to each person that such Direct and Indirect
Participants and DTC identify as being the beneficial owner of the related
Notes.
Beneficial interests in Global Notes held by any Direct or Indirect
Participant may be exchanged for Certificated Notes upon request to DTC, on
behalf of such Direct or Indirect Participant, to the Trustee in accordance
with customary DTC procedures. Certificated Notes delivered in exchange for
any beneficial interest in any Global Note will be registered in the names,
and issued in any approved denominations, requested by DTC on behalf of such
Direct or Indirect Participants (in accordance with DTC's customary
procedures).
In all cases described herein, such Certificated Notes will bear the
restrictive legend referred to in "Notice to Investors," unless the Company
determines otherwise in compliance with applicable law.
Neither the Company, the Guarantors nor the Trustee will be liable for
any delay by the holder of the Global Notes or DTC in identifying the
beneficial owners of Notes, and the Company and the Trustee may conclusively
rely on, and will be protected in relying on, instructions from the holder of
the Global Note or DTC for all purposes.
TRANSFER AND EXCHANGE OF CERTIFICATED NOTES. Certificated Notes may only
be transferred if the transferor first delivers to the Trustee a written
certificate (and in certain circumstances, an opinion of counsel) confirming
that, in connection with such transfer, it has complied with the restrictions
on transfer described under "--Notice to Investors." Beneficial interests in
Certificated Notes may not be transferred to a person that takes delivery
thereof in the form of an interest in a Global Note unless the transferor
first delivers to the Trustee a written certificate certifying that such
transfer has been effected pursuant to Rule 144A. As a result of the
foregoing, Accredited Institutional Investors that are not QIBs or non-U.S.
persons may not hold an interest in any Global Notes.
NEXT DAY SETTLEMENT AND PAYMENT. The Indenture requires that payments in
respect of the Exchange Notes represented by the Global Notes (including
principal, premium, if any, interest and Liquidated Damages, if any) be made
by wire transfer of immediately available next day funds to the accounts
specified by the holder of interests in such Global Notes. With respect to
Certificated Notes, the Company will make all payments of principal, premium,
if any, interest and Liquidated Damages, if any, by wire transfer of
immediately available next day funds to the accounts specified by the holders
thereof or, if no such account is specified, by mailing a check to each such
holder's registered address. The Issuer expects that secondary trading the
Certificated Notes will also be settled in immediately available funds.
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ADDITIONAL INFORMATION
Anyone who receives this prospectus may obtain a copy of the Indenture
without charge by writing to the Issuer, 90 Inverness Circle East, Englewood,
Colorado 80112, attention David K. Moskowitz, facsimile (303) 799-0354.
OLD NOTES' REGISTRATION RIGHTS; LIQUIDATED DAMAGES
The Issuer, the Guarantors and the Initial Purchasers entered into the
Registration Rights Agreement on June 20, 1997. Pursuant to the Registration
Rights Agreement, the Issuer and the Guarantors agreed to file with the
Commission the Exchange Offer Registration Statement on the appropriate form
under the Securities Act with respect to the Exchange Notes to be exchanged
for the Old Notes. Upon the effectiveness of the Exchange Offer Registration
Statement, the Issuer and the Guarantors will offer, pursuant to the Exchange
Offer, to the holders of Transfer Restricted Notes who are able to make
certain representations the opportunity to exchange their Transfer Restricted
Notes for Exchange Notes. If: (i) the Issuer is not permitted to file the
Exchange Offer Registration Statement or permitted to consummate the Exchange
Offer because the Exchange Offer is not permitted by applicable law or
Commission policy or (ii) any holder of Transfer Restricted Notes notifies
the Issuer within the specified time period that: (A) it is prohibited by law
or Commission policy from participating in the Exchange Offer; (B) that it
may not resell the Exchange Notes acquired by it in the Exchange Offer to the
public without delivering a prospectus and the prospectus contained in the
Exchange Offer Registration Statement is not appropriate or available for
such resales; or (C) that it is a broker-dealer and owns Old Notes acquired
directly from the Issuer or an affiliate of the Issuer, the Issuer and the
Guarantors will file with the Commission a Shelf Registration Statement to
cover resales of the Old Notes by the holders thereof who satisfy certain
conditions relating to the provisions of information in connection with the
Shelf Registration Statement. The Issuer and the Guarantors will use their
best efforts to cause the applicable registration statement to be declared
effective as promptly as possible by the Commission. For purposes of the
foregoing, "Transfer Restricted Notes" means each Senior Secured Note until:
(i) the date on which such Senior Secured Note has been exchanged by a person
other than a broker-dealer for an Exchange Note in the Exchange Offer; (ii)
following the exchange by a broker-dealer in the Exchange Offer of an Old
Note for an Exchange Note, the date on which such Exchange Note is sold to a
purchaser who receives from such broker-dealer on or prior to the date of
such sale a copy of the prospectus contained in the Exchange Offer
Registration Statement; (iii) the date on which such Old Note has been
effectively registered under the Securities Act and disposed of in accordance
with the Shelf Registration Statement; or (iv) the date on which such Old
Note is distributed to the public pursuant to Rule 144 under the Securities
Act.
The Registration Rights Agreement provides that: (i) the Issuer and the
Guarantors will file an Exchange Offer Registration Statement with the
Commission on or prior to July 25, 1997; (ii) the Issuer and the Guarantors
will use their best efforts to have the Exchange Offer Registration Statement
declared effective by the Commission on or prior to November 22, 1997; (iii)
unless the Exchange Offer would not be permitted by applicable law or
Commission policy, the Issuer and the Guarantors will commence the Exchange
Offer and use their best efforts to issue, on or prior to 30 business days
after the date on which the Exchange Offer Registration Statement was
declared effective by the Commission, Exchange Notes in exchange for all Old
Notes tendered prior thereto in the Exchange Offer; and (iv) if obligated to
file the Shelf Registration Statement, the Issuer and the Guarantors will use
their best efforts to file the Shelf Registration Statement with the
Commission on or prior to 30 days after such filing obligation arises (and in
any event by November 22, 1997) and to use their best efforts to cause the
Shelf Registration Statement to be declared effective by the Commission on or
prior to 150 days after such obligation arises. If: (a) the Issuer and the
Guarantors fail to file any of the Registration Statements required by the
Registration Rights Agreement on or before the date specified for such
filing; (b) any of such Registration Statements is not declared effective by
the Commission on or prior to the date specified for such effectiveness (the
"Effectiveness Target Date"); (c) the Issuer and the Guarantors fail to
consummate the Exchange Offer within 30 business days of the Effectiveness
Target Date with respect to the Exchange Offer Registration Statement; or (d)
the Shelf Registration Statement or the Exchange Offer Registration Statement
is declared effective but thereafter ceases to be effective or usable in
connection with resales of Transfer Restricted Notes during the periods
specified in the Registration Rights Agreement (each such event referred to
in clauses (a) through (d) above a "Registration Default"), then the Issuer
and the Guarantors jointly and severally agree to pay liquidated damages to
each holder of Old Notes, with respect to the first 90-day period immediately
following the occurrence of such Registration Default in an amount equal to
$.05 per week per $1,000 principal
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amount of Notes held by such holder ("Liquidated Damages"). The amount of the
Liquidated Damages will increase by an additional $.05 per week per $1,000
principal amount of Notes with respect to each subsequent 90-day period until
all Registration Defaults have been cured, up to a maximum amount of
Liquidated Damages of $.40 per week per $1,000 principal amount of Old Notes
constituting Transfer Restricted Notes. All accrued Liquidated Damages will
be paid by the Issuer on each Damages Payment Date to the Global Note Holder
by wire transfer to the accounts specified by it or by mailing checks to its
registered addresses if no such accounts have been specified. Following the
cure of all Registration Defaults, the accrual of Liquidated Damages will
cease.
Holders of Old Notes will be required to make certain representations to
the Issuer (as described in the Registration Rights Agreement) in order to
participate in the Exchange Offer and will be required to deliver information
to be used in connection with the Shelf Registration Statement and to provide
comments on the Shelf Registration Statement within the time periods set
forth in the Registration Rights Agreement in order to have their Old Notes
included in the Shelf Registration Statement and benefit from the provisions
regarding Liquidated Damages set forth above.
Certain Definitions
Set forth below are certain defined terms used in the Indenture.
Reference is made to the Indenture for a full disclosure of all such terms,
as well as any other capitalized terms used herein for which no definition is
provided.
"ACCOUNTS RECEIVABLE SUBSIDIARY" means one Unrestricted Subsidiary of the
Issuer specifically designated as an Accounts Receivable Subsidiary for the
purpose of financing the accounts receivable of the Issuer, and PROVIDED that
any such designation shall not be deemed to prohibit the Issuer from financing
accounts receivable through any other entity, including without limitation, any
other Unrestricted Subsidiary.
"ACCOUNTS RECEIVABLE SUBSIDIARY NOTES" means the notes to be issued by
the Accounts Receivable Subsidiary for the purchase of accounts receivable.
"ACQUIRED DEBT" means, with respect to any specified person, Indebtedness
of any other person existing at the time such other person merges with or
into or becomes a Subsidiary of such specified person, or Indebtedness
incurred by such person in connection with the acquisition of assets,
including Indebtedness incurred in connection with, or in contemplation of,
such other person merging with or into or becoming a Subsidiary of such
specified person or the acquisition of such assets, as the case may be.
"ADDITIONAL PAYMENT OBLIGATIONS" means the portion of the payment
obligations, under any vendor financing arrangements, of any of the Issuer,
EchoStar or any of the Issuer's Subsidiaries with respect to the
construction, launch or insurance of EchoStar IV in excess of $15.0 million.
"AFFILIATE" of any specified person means any other person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified person. For purposes of this definition,
"control" (including, with correlative meanings, the terms "controlling,"
"controlled by" and "under common control with"), as used with respect to any
person, shall mean the possession, directly or indirectly, of the power to
direct or cause the direction of the management or policies of such person,
whether through the ownership of voting securities, by agreement or
otherwise; PROVIDED, HOWEVER, that beneficial ownership of 10% or more of the
voting securities of a person shall be deemed to be control; PROVIDED FURTHER
that no individual, other than a director of EchoStar or an officer of
EchoStar with a policy making function, shall be deemed an Affiliate of
EchoStar or any of its Subsidiaries, solely by reason of such individual's
employment, position or responsibilities by or with respect to EchoStar or
any of its Subsidiaries.
"AGENT" means any Registrar, Paying Agent or co-registrar.
"BANK DEBT" means Indebtedness incurred pursuant to the Credit Agreement
in an aggregate amount not to exceed 90% of the accounts receivable of the
borrowers under the Credit Agreement eligible for inclusion in the borrowing
base under the Credit Agreement, plus 75% of the inventory of the Credit
Agreement borrowers under the Credit Agreement eligible for inclusion in the
borrowing base under the Credit Agreement, plus 100% of the cash collateral
and marketable securities of the Borrowers under the Credit Agreement
eligible for inclusion in the borrowing base under the Credit Agreement.
"BANKRUPTCY LAW" means title 11, U.S. Code or any similar federal or
state law for the relief of debtors.
"BUSINESS DAY" means any day other than a Legal Holiday.
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"CAPITAL LEASE" means, at the time any determination thereof is made, any
lease of property, real or personal, in respect of which the present value of
the minimum rental commitment would be capitalized on a balance sheet of the
lessee in accordance with GAAP.
"CAPITAL LEASE OBLIGATION" means, at the time any determination thereof
is to be made, the amount of the liability in respect of a capital lease that
would at such time be so required to be capitalized on the balance sheet in
accordance with GAAP.
"CAPITAL STOCK" means any and all shares, interests, participations,
rights or other equivalents (however designated) of corporate stock or
partnership or membership interests, whether common or preferred.
"CASH EQUIVALENTS" means: (a) U.S. dollars; (b) securities issued or
directly and fully guaranteed or insured by the U.S. government or any agency
or instrumentality thereof having maturities of not more than six months from
the date of acquisition; (c) certificates of deposit and eurodollar time
deposits with maturities of six months or less from the date of acquisition,
bankers' acceptances with maturities not exceeding six months and overnight
bank deposits, in each case with any domestic commercial bank having capital
and surplus in excess of $500 million; (d) repurchase obligations with a term
of not more than seven days for underlying securities of the types described
in clauses (b) and (c) entered into with any financial institution meeting
the qualifications specified in clause (c) above; and (e) commercial paper
rated P-1, A-l or the equivalent thereof by Moody's Investors Service, Inc.
or Standard & Poor's Corporation, respectively, and in each case maturing
within six months after the date of acquisition.
"CHANGE OF CONTROL" means: (a) any transaction or series of transactions
(including, without limitation, a tender offer, merger or consolidation) the
result of which is that the Principals and their Related Parties or an entity
controlled by the Principals and their Related Parties cease to (i) be the
"beneficial owners" (as defined in Rule 13(d)(3) under the Exchange Act) of
at least 30% of the total Equity Interests in EchoStar and (ii) have the
voting power to elect at least a majority of the Board of Directors of
EchoStar; (b) the first day on which a majority of the members of the Board
of Directors of EchoStar are not Continuing Directors; (c) any transaction or
series of transactions (including, without limitation, a tender offer, merger
or consolidation) the result of which is that the Principals and their
Related Parties or any entity controlled by the Principals and their Related
Parties cease to be the "beneficial owners" (as defined in Rule 13(d)(3)
under the Exchange Act) of at least 30% of the total Equity Interests in the
Issuer and have the voting power to elect at least a majority of the Board of
Directors of the Issuer, or (d) the first day on which a majority of the
members of the Board of Directors of the Issuer are not Continuing Directors.
"COLLATERAL" means all assets pledged, mortgaged or collaterally assigned
as Security pursuant to the Collateral Documents.
"COLLATERAL ASSIGNMENT" means the Security Agreement dated the date
hereof, substantially in the form of Exhibit I hereto.
"COLLATERAL DOCUMENTS" means (i) the Interest Escrow Agreement, (ii) the
Satellite Escrow Agreement, (iii) the Stock Pledge Agreement, (iv) the Escrow
Accounts Security Agreement, (v) the EchoStar IV Security Agreement, (vi) the
Collateral Assignment and (vii) the Orbital Slot Security Agreement.
"COMMUNICATIONS ACT" means the Communications Act of 1934, as amended.
"CONSOLIDATED CASH FLOW" means, with respect to any person for any
period, the Consolidated Net Income of such person for such period, plus, to
the extent deducted in computing Consolidated Net Income: (a) provision for
taxes based on income or profits; (b) Consolidated Interest Expense; (c)
depreciation and amortization (including amortization of goodwill and other
intangibles) of such person for such period; and (d) any extraordinary loss
and any net loss realized in connection with any Asset Sale, in each case, on
a consolidated basis determined in accordance with GAAP, PROVIDED that
Consolidated Cash Flow shall not include interest income derived from the net
proceeds of the Old Notes Offering.
"CONSOLIDATED INTEREST EXPENSE" means, with respect to any person for any
period, consolidated interest expense of such person for such period, whether
paid or accrued (including amortization of original issue discount
129
and deferred financing costs, non-cash interest payments and the interest
component of Capital Lease Obligations), on a consolidated basis determined
in accordance with GAAP.
"CONSOLIDATED NET INCOME" means, with respect to any person for any
period, the aggregate of the Net Income of such person and its Subsidiaries
for such period, on a consolidated basis, determined in accordance with GAAP;
PROVIDED, HOWEVER, that: (a) the Net Income of any person that is not a
Subsidiary or that is accounted for by the equity method of accounting shall
be included only to the extent of the amount of dividends or distributions
paid in cash to such person, in the case of a gain, or to the extent of any
contributions or other payments by the referent person, in the case of a
loss; (b) the Net Income of any person that is a Subsidiary that is not a
Wholly Owned Subsidiary shall be included only to the extent of the amount of
dividends or distributions paid in cash to the referent person; (c) the Net
Income of any person acquired in a pooling of interests transaction for any
period prior to the date of such acquisition shall be excluded; (d) the Net
Income of any Subsidiary of such person shall be excluded to the extent that
the declaration or payment of dividends or similar distributions is not at
the time permitted by operation of the terms of its charter or bylaws or any
other agreement, instrument, judgment, decree, order, statute, rule or
government regulation to which it is subject; and (e) the cumulative effect
of a change in accounting principles shall be excluded.
"CONSOLIDATED NET WORTH" means, with respect to any person, the sum of:
(a) the stockholders' equity of such person; plus (b) the amount reported on
such person's most recent balance sheet with respect to any series of
preferred stock (other than Disqualified Stock) that by its terms is not
entitled to the payment of dividends unless such dividends may be declared
and paid only out of net earnings in respect of the year of such declaration
and payment, but only to the extent of any cash received by such person upon
issuance of such preferred stock, less: (i) all write-ups (other than
write-ups resulting from foreign currency translations and write-ups of
tangible assets of a going concern business made within 12 months after the
acquisition of such business) subsequent to the date of the Indenture in the
book value of any asset owned by such person or a consolidated Subsidiary of
such person; and (ii) all unamortized debt discount and expense and
unamortized deferred charges, all of the foregoing determined in accordance
with GAAP.
"CONTINUING DIRECTOR" means, as of any date of determination, any member
of the Board of Directors of EchoStar or the Issuer, as the case may be, who:
(a) was a member of such Board of Directors on the date of the Indenture; or
(b) was nominated for election or elected to such Board of Directors with the
affirmative vote of a majority of the Continuing Directors who were members
of such Board at the time of such nomination or election.
"CORPORATE TRUST OFFICE OF THE TRUSTEE" shall be at the address of the
Trustee specified in the Section entitled "Notices" of the Indenture or such
other address as to which the Trustee may give notice to the Issuer.
"CREDIT AGREEMENT" means any one or more credit agreements (which may
include or consist of revolving credits) between EchoStar, the Issuer or any
of the Issuer's Restricted Subsidiaries and one or more banks or other
financial institutions providing financing for the business of EchoStar, the
Issuer and the Issuer's Restricted Subsidiaries, PROVIDED that the lenders
party to the Credit Agreement may not be Affiliates of EchoStar.
"CUSTODIAN" means any receiver, trustee, assignee, liquidator or similar
official under any Bankruptcy Law.
"DBS" means direct broadcast satellite.
"DEFAULT" means any event that is or with the passage of time or the
giving of notice or both would be an Event of Default.
"DEFERRED PAYMENTS" means Indebtedness to satellite contractors incurred
in connection with the construction and launch of EchoStar I, EchoStar II,
EchoStar III and EchoStar IV in an amount not to exceed $135.0 million.
"DISH" means Dish, Ltd., a Nevada corporation.
"DISH GUARANTEE" means the Guarantee dated the date hereof, by Dish, of
the Obligations of the Issuer under the Notes and the Indenture, in
substantially the same form as Exhibit D hereto.
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"DISH GUARANTEE DATE" means the earlier of: (i) the first date upon
which Dish is permitted, pursuant to the terms of both the 1996 Notes
Indenture and the 1994 Notes Indenture, to Guarantee the Issuer's total
payment obligations under all of the then-outstanding Notes; and (ii) the
first date upon which both the 1996 Notes and the 1994 Notes are no longer
outstanding or have been defeased.
"DISH PREFERRED STOCK" means Dish's 8% Series A Cumulative Preferred
Stock having an aggregate liquidation preference not in excess of $15.1
million.
"DISQUALIFIED STOCK" means any Capital Stock which, by its terms (or by
the terms of any security into which it is convertible or for which it is
exchangeable), or upon the happening of any event, matures or is mandatorily
redeemable, pursuant to a sinking fund obligation or otherwise, or redeemable
at the option of the holder thereof, in whole or in part, on or prior to date
on which the Notes mature.
"DNCC" means Dish Network Credit Corporation, a Colorado corporation.
"ECHOSTAR" means EchoStar Communications Corporation, a Nevada
corporation.
"ECHOSTAR DBS" means EchoStar DBS Corporation, a Colorado corporation.
"ECHOSTAR DBS SYSTEM" means the digital direct broadcast satellite system
of the Issuer.
"ECHOSTAR I" means the Issuer's high-powered direct broadcast satellite
designated as EchoStar I in the Prospectus.
"ECHOSTAR II" means the Issuer's high-powered direct broadcast satellite
designated as EchoStar II in the Prospectus.
"ECHOSTAR III" means the high-powered direct broadcast satellite being
constructed by DBSC as of the date of the Indenture, and any replacement
satellite thereof to the extent permitted by the terms of the Indenture.
"ECHOSTAR IV" means the high-powered direct broadcast satellite being
constructed which is designated as EchoStar IV in the Prospectus, and any
replacement satellite thereof to the extent permitted by the terms of the
Indenture.
"ECHOSTAR IV SECURITY AGREEMENT" means the Security Agreement dated the
date hereof, substantially in the form of Exhibit J hereto.
"ECHOSTAR GUARANTEE" means the Guarantee by EchoStar of the Obligations
of the Issuer under the Notes and the Indenture, in substantially the same
form as Exhibit B hereto.
"ECHOSTAR RECEIVER SYSTEM" means a satellite dish, digital satellite
receiver, remote control and related components, used in connection with the
DBS service provided by EchoStar and its Subsidiaries.
"ELIGIBLE INSTITUTION" means a commercial banking institution that has
combined capital and surplus of not less than $500 million or its equivalent
in foreign currency, whose debt is rated Investment Grade at the time as of
which any investment or rollover therein is made.
"EQUITY INTERESTS" means Capital Stock and all warrants, options or other
rights to acquire Capital Stock (but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock).
"ESBC" means EchoStar Satellite Broadcasting Corporation.
"ESBC GUARANTEE" means the Guarantee dated the date hereof, by ESBC, of
the Obligations of the Issuer under the Notes and the Indenture, in
substantially the same form as Exhibit C hereto.
"ESBC GUARANTEE DATE" means the earlier of: (i) the first date upon
which ESBC is permitted, pursuant to the terms of the 1996 Notes Indenture,
to Guarantee the Issuer's total payment obligations under all of the
131
then-outstanding Notes; and (ii) the first date upon which the 1996 Notes are
no longer outstanding or have been defeased.
"ESC" means EchoStar Satellite Corporation.
"ESCROW AGENT" means First Trust National Association, as Escrow Agent
under the Interest Escrow Agreement and the Satellite Escrow Agreement, or
any successor thereto appointed pursuant to such agreements.
"ESCROW ACCOUNTS SECURITY AGREEMENT" means the Security Agreement dated
the date hereof, substantially in the form of Exhibit H hereto.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended.
"EXCHANGE NOTES" means 12 1/2% Notes Due 2002 issued by the Issuer, and
containing terms identical to those of the Notes (except that such Exchange
Notes shall have been issued in an exchange offer registered under the
Securities Act), that are issued and exchanged for the Notes pursuant to the
Registration Rights Agreement and the Indenture.
"EXISTING INDEBTEDNESS" means the Notes and any other Indebtedness of the
Issuer and its Subsidiaries in existence on the date of the Indenture until
such amounts are repaid.
"FCC" means Federal Communications Commission.
"FULL-CONUS ORBITAL SLOT" means the 101, 110 or 119 degrees West
Longitude orbital slot.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the
American Institute of Certified Public Accountants and statements and
pronouncements of the Financial Accounting Standards Board or in such other
statements by such other entity as may be approved by a significant segment
of the accounting profession of the U.S., which are applicable as of the date
of determination; PROVIDED, HOWEVER; that these definitions and all ratios
and calculations contained in the covenants "Restricted Payments,"
"Incurrence of Indebtedness, Issuance of Disqualified Stock and Issuance of
Preferred Equity Interests of Subsidiaries," "Asset Sales," and "Dividend and
Other Payment Restrictions Affecting Subsidiaries" shall be determined in
accordance with GAAP as in effect and applied by EchoStar and its
Subsidiaries on the date of the Indenture, consistently applied; PROVIDED,
FURTHER, that in the event of any change in GAAP or in any change by EchoStar
or any of its Subsidiaries in GAAP applied that would result in any change in
any such ratio or calculation, the Issuer shall deliver to the Trustee, each
time any such ratio or calculation is required to be determined or made, an
Officers' Certificate setting forth the computations showing the effect of
such change or application on such ratio or calculation.
"GLOBAL NOTE" means a Note evidencing all or part of the Notes issued to
the Depositary for such Notes.
"GOVERNMENT SECURITIES" means direct obligations of, or obligations
guaranteed by, the United States of America for the payment of which
guarantee or obligations the full faith and credit of the United States of
America is pledged.
"GUARANTEE" means a guarantee (other than by endorsement of negotiable
instruments for collection in the ordinary course of business), direct or
indirect, in any manner (including, without limitation, letters of credit and
reimbursement agreements in respect thereof), of all or any part of any
Indebtedness.
"GUARANTOR" means EchoStar and any other entity that executes a Guarantee
of the obligations of the Issuer under the Notes, and their respective
successors and assigns.
"HEDGING OBLIGATIONS" means, with respect to any person, the obligations
of such person under: (a) interest rate swap agreements, interest rate cap
agreements and interest rate collar agreements; and (b) other agreements or
arrangements designed to protect such person against fluctuations in interest
rates.
"HOLDER" means a Person in whose name a Note is registered.
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"INDEBTEDNESS" means, with respect to any person, any indebtedness of
such person, whether or not contingent, in respect of borrowed money or
evidenced by bonds, notes, debentures or similar instruments or letters of
credit (or reimbursement agreements in respect thereof) or representing the
balance deferred and unpaid of the purchase price of any property (including
pursuant to capital leases) or representing any Hedging Obligations, except
any such balance that constitutes an accrued expense or trade payable, if and
to the extent any of the foregoing (other than Hedging Obligations) would
appear as a liability upon a balance sheet of such person prepared in
accordance with GAAP, and also includes, to the extent not otherwise
included, the Guarantee of items that would be included within this
definition.
"INDEBTEDNESS TO CASH FLOW RATIO" means, with respect to any person, the
ratio of: (a) the Indebtedness of such person and its Subsidiaries as of the
end of the most recently ended fiscal quarter, plus the amount of any
Indebtedness incurred subsequent to the end of such fiscal quarter; to (b)
such person's Consolidated Cash Flow for the most recently ended four full
fiscal quarters for which internal financial statements are available
immediately preceding the date on which such event for which such calculation
is being made shall occur (the "Measurement Period"), PROVIDED, HOWEVER;
that: (i) in making such computation, Indebtedness shall include the total
amount of funds outstanding and available under any revolving credit
facilities; and (ii) in the event that the Issuer or any of its Subsidiaries
consummates a material acquisition or an Asset Sale or other disposition of
assets subsequent to the commencement of the Measurement Period but prior to
the event for which the calculation of the Indebtedness to Cash Flow Ratio is
made, then the Indebtedness to Cash Flow Ratio shall be calculated giving pro
forma effect to such material acquisition or Asset Sale or other disposition
of assets, as if the same had occurred at the beginning of the applicable
period.
"INDENTURE" means the Indenture, as amended or supplemented from time to
time.
"IN-ORBIT INSURANCE" means, with respect to a satellite, In-Orbit
insurance providing coverage beginning 180 days after the launch (or
contemporaneously with the expiration of any applicable Launch Insurance) of
such satellite in an amount which is, together with cash and Cash Equivalents
(not including cash and Cash Equivalents in the Satellite Escrow Account)
segregated and reserved on the balance sheet of the Issuer, for the duration
of the useful life of the satellite or until applied in accordance with the
covenant entitled "Maintenance of Insurance," in an amount equal to or
greater than the cost of construction, launch and insurance of such
satellite, which insurance shall provide pro rata benefits to the insured
upon a loss of more than 20% of the capacity of such satellite and shall
compensate the insured for a total loss upon a loss of more than 50% of the
capacity of such satellite. For purposes of the Indenture, the proceeds of
any In-Orbit Insurance shall be deemed to include the amount of cash and Cash
Equivalents segregated and reserved by the Issuer for purposes of the
preceding sentence.
"INTEREST ESCROW ACCOUNT" means an escrow account for the deposit of the
proceeds from the sale of the Notes under the Interest Escrow Agreement.
"INTEREST ESCROW AGREEMENT" means the Interest Escrow Agreement, dated as
of the date hereof, by and among the Escrow Agent, the Trustee and the
Issuer, governing the disbursement and loan of funds from the Interest Escrow
Account, in the form of Exhibit E.
"INVESTMENT GRADE" means with respect to a security, that such security
is rated, by at least two nationally recognized statistical rating
organizations, in one of each such organization's four highest generic rating
categories.
"INVESTMENTS" means, with respect to any person, all investments by such
person in other persons (including Affiliates) in the forms of loans
(including Guarantees), advances or capital contributions (excluding
commission, travel and similar advances to officers and employees made in the
ordinary course of business), purchases or other acquisitions for
consideration of Indebtedness, Equity Interests or other securities and all
other items that are or would be classified as investments on a balance sheet
prepared in accordance with GAAP.
"LAUNCH CONTRACT" means any contract for the launching of EchoStar IV
into geostationary transfer orbit.
"LAUNCH INSURANCE" means, with respect to a satellite, launch insurance
(including, at the option of the Issuer, reflight coverage for any launch by
Lockheed Martin or LKE, PROVIDED that such coverage permits assignment of
the right to any subsequent launch, without consent of the launch provider)
covering the period of the launch of such
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satellite to 180 days after such launch (or for such period as otherwise
specified in the applicable policy) in an amount which, together with cash
and Cash Equivalents segregated and reserved on the consolidated balance
sheet of the Issuer until the successful launch of such satellite or until
applied in accordance with the covenant entitled "Maintenance of Insurance,"
is equal to or greater than the cost of construction, launch and insurance of
such satellite, which insurance shall provide pro rata benefits to the
insured upon a loss of more than 20% of the capacity of such satellite and
shall compensate the insured for a total loss upon a loss of more than 50% of
the capacity of such satellite; PROVIDED, HOWEVER, that the amount of cash
and Cash Equivalents that may be used by the Issuer for purposes of this
definition may include cash and Cash Equivalents contained in the Satellite
Escrow Account only for purposes of Launch Insurance with respect to EchoStar
IV, but only to the extent that the Issuer certifies, in an Officers'
Certificate delivered to the Trustee, that such cash and Cash Equivalents are
reasonably not expected to be necessary for the completion of the
development, construction, launch and operation of the relevant satellite.
For purposes of the Indenture, the proceeds of any Launch Insurance shall be
deemed to include the amount of cash and Cash Equivalents segregated and
reserved by the Issuer for purposes of the preceding sentence.
"LEGAL HOLIDAY" means a Saturday, a Sunday or a day on which banking
institutions in the City of New York or at a place of payment are authorized
by law, regulation or executive order to remain closed. If a payment date is
a Legal Holiday at a place of payment, payment may be made at that place on
the next succeeding day that is not a Legal Holiday, and no interest shall
accrue for the intervening period.
"LIEN" means, with respect to any asset, any mortgage, lien, pledge,
charge, security interest or encumbrance of any kind in respect of such
asset, whether or not filed, recorded or otherwise perfected under applicable
law (including any conditional sale or other title retention agreement, any
lease in the nature thereof, any option or other agreement to sell or give a
security interest in and any filing of or agreement to give any financing
statement under the Uniform Commercial Code (or equivalent status) of any
jurisdiction).
"LKE" means Lockheed-Khruenichev-Energia, Inc., a Delaware corporation.
"LOCKHEED MARTIN" means Lockheed Martin Corporation, a Maryland
corporation, and its successors.
"LOCKHEED MARTIN SATELLITE CONTRACT" means the Satellite Contract, dated
as of July 18, 1996, between Lockheed Martin and the Issuer, as amended from
time to time.
"MARKETABLE SECURITIES" means: (a) Government Securities; (b) any
certificate of deposit maturing not more than 365 days after the date of
acquisition issued by, or time deposit of, an Eligible Institution; (c)
commercial paper maturing not more than 365 days after the date of
acquisition issued by a corporation (other than an Affiliate of the Issuer)
with an Investment Grade rating, at the time as of which any investment
therein is made, issued or offered by an Eligible Institution; (d) any
bankers acceptances or money market deposit accounts issued or offered by an
Eligible Institution; and (e) any fund investing exclusively in investments
of the types described in clauses (a) through (d) above.
"MINIMUM APPRAISED VALUE" means: (a) an appraised value determined and
set forth in writing by a nationally recognized appraisal firm experienced in
the industry described under the covenant entitled "Activities of EchoStar"
in an amount not less than the aggregate principal amount of Notes then
outstanding plus all accrued and unpaid interest thereon (less any funds
remaining in the Interest Escrow Account as of the date of determination); or
(b) a satellite of equal or greater value as compared to EchoStar IV.
"NET INCOME" means, with respect to any person, the net income (loss) of
such person, determined in accordance with GAAP, excluding, however, any gain
(but not loss), together with any related provision for taxes on such gain
(but not loss), realized in connection with any Asset Sale (including,
without limitation, dispositions pursuant to sale and leaseback
transactions), and excluding any extraordinary gain (but not loss), together
with any related provision for taxes on such extraordinary gain (but not
loss).
"NET PROCEEDS" means the aggregate cash proceeds received by the Issuer
or any of its Restricted Subsidiaries, as the case may be, in respect of any
Asset Sale, net of the direct costs relating to such Asset Sale (including,
without limitation, legal, accounting and investment banking fees, and sales
commissions) and any relocation expenses incurred, as a result thereof, taxes
paid or payable as a result thereof (after taking into account any available
tax credits or deductions and any tax sharing arrangements), amounts required
to be applied to the
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repayment of Indebtedness secured by a Lien on the asset or assets that are the
subject of such Asset Sale and any reserve for adjustment in respect of the sale
price of such asset or assets. Net Proceeds shall exclude any non-cash proceeds
received from any Asset Sale, but shall include such proceeds when and as
converted by the Issuer or any Restricted Subsidiary to cash.
"1994 NOTES INDENTURE" means the Indenture relating to the 1994 Notes.
"1994 NOTES" means the 12 7/8% Senior Discount Notes due 2004 of Dish.
"1994 CREDIT AGREEMENT" has the meaning set forth in the 1996 Notes
Indenture.
"1996 NOTES INDENTURE" means the Indenture relating to the 1996 Notes.
"1996 NOTES" means the 13 1/8% Senior Discount Notes due 2004 of ESBC.
"NON-RECOURSE INDEBTEDNESS" of any person means Indebtedness of such person
that: (i) is not guaranteed by any other person (except a Wholly Owned
Subsidiary of the referent person); (ii) is not recourse to and does not
obligate any other person (except a Wholly Owned Subsidiary of the referent
person) in any way; (iii) does not subject any property or assets of any other
person (except a Wholly Owned Subsidiary of the referent person), directly or
indirectly, contingently or otherwise, to the satisfaction thereof; and (iv) is
not required by GAAP to be reflected on the financial statements of any other
person (other than a Subsidiary of the referent person) prepared in accordance
with GAAP.
"NOTES" means the 12 1/2% Notes due 2002 issued under the Indenture on the
date of the Indenture. For purpose of the Indenture, the term "Notes" shall
include any Exchange Notes and all Notes and Exchange Notes shall vote together
as a single class.
"OBLIGATIONS" means any principal, interest, penalties, fees,
indemnifications, reimbursements, damages and other liabilities payable under
the documentation governing any Indebtedness.
"OFFICER" means, with respect to any Person, the Chairman of the Board, the
Chief Executive Officer, the President, the Chief Operating Officer, the Chief
Financial Officer, the Treasurer, any Assistant Treasurer, Controller, Secretary
or any Vice-President of such Person.
"OFFICERS' CERTIFICATE" means a certificate signed on behalf of the Issuer
by two Officers of the Issuer, one of whom must be the principal executive
officer, principal financial officer, treasurer or principal accounting officer
of the Issuer.
"OPINION OF COUNSEL" means an opinion from legal counsel, who may be an
employee of or counsel to the Issuer (or any Guarantor, if applicable), any
Subsidiary of the Issuer (or any Guarantor, if applicable) or the Trustee.
"ORBITAL SLOT SECURITY AGREEMENT" means the Security Agreement dated the
date hereof, substantially in the form of Exhibit K hereto.
"PERMITTED INVESTMENTS" means: (a) Investments in the Issuer or in a
Wholly Owned Subsidiary of the Issuer, other than Unrestricted Subsidiaries of
the Issuer, (b) Investments in Cash Equivalents and Marketable Securities; (c)
conversion of debentures of SSET and DBS Industries, Inc. ("DBSI"), in
accordance with their terms, into Equity Interests of SSET and DBSI; and (d)
Investments by the Issuer or any Subsidiary of the Issuer in a person if, as a
result of such Investment: (i) such person becomes a Wholly Owned Restricted
Subsidiary of the Issuer, or (ii) such person is merged, consolidated or
amalgamated with or into, or transfers or conveys substantially all of its
assets to, or is liquidated into, the Issuer or a Wholly Owned Subsidiary of the
Issuer that is not an Unrestricted Subsidiary of the Issuer.
"PERMITTED LIENS" means: (a) Liens securing the Notes; (b) Liens securing
the Deferred Payments; (c) Liens on EchoStar IV to the extent permitted under
Article X of the Indenture and the Collateral Documents; (d) Liens securing the
Bank Debt on current assets of the Issuer's Restricted Subsidiaries; (e) Liens
securing the 1996 Notes and the 1994 Notes; (f) Liens securing Purchase Money
Indebtedness, PROVIDED that such Indebtedness was
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permitted to be incurred by the terms of the Indenture and such Liens do not
extend to any assets of the Issuer or its Restricted Subsidiaries other than the
assets so acquired; (g) Liens securing Indebtedness the proceeds of which are
used to develop, construct, launch or insure any satellites other than EchoStar
I, EchoStar II, EchoStar III or EchoStar IV (or any permitted replacements
thereof), PROVIDED that such Indebtedness was permitted to be incurred by the
terms of the Indenture and such Liens do not extend to any assets of the Issuer
or its Restricted Subsidiaries other than such satellites being developed,
constructed, launched or insured and to the related licenses, permits and
construction, launch, insurance and TT&C contracts; (h) Liens on orbital slots,
licenses and other assets and rights of the Issuer, PROVIDED that such orbital
slots, licenses and other assets and rights relate solely to the satellites
referred to in clause (g) of this definition; (i) Liens on property of a person
existing at the time such person is merged into or consolidated with the Issuer
or any Restricted Subsidiary of the Issuer, PROVIDED, that such Liens were not
incurred in connection with, or in contemplation of, such merger or
consolidation, other than in the ordinary course of business; (j) Liens on
property of an Unrestricted Subsidiary at the time that it is designated as a
Restricted Subsidiary pursuant to the definition of "Unrestricted Subsidiary,"
PROVIDED that such liens were not incurred in connection with, or contemplation
of, such designation; (k) Liens on property existing at the time of acquisition
thereof by the Issuer or any Restricted Subsidiary of the Issuer; PROVIDED that
such Liens were not incurred in connection with, or in contemplation of, such
acquisition and do not extend to any assets of the Issuer or any of its
Restricted Subsidiaries other than the property so acquired; (l) Liens to secure
the performance of statutory obligations, surety or appeal bonds or performance
bonds, or landlords', carriers', warehousemen's, mechanics', suppliers',
materialmen's or other like Liens, in any case incurred in the ordinary course
of business and with respect to amounts not yet delinquent or being contested in
good faith by appropriate process of law, if a reserve or other appropriate
provision, if any, as is required by GAAP shall have been made therefore; (m)
Liens existing on the date of the Indenture; (n) Liens for taxes, assessments or
governmental charges or claims that are not yet delinquent or that are being
contested in good faith by appropriate proceedings promptly instituted and
diligently concluded; PROVIDED that any reserve or other appropriate provision
as shall be required in conformity with GAAP shall have been made therefor; (o)
Liens incurred in the ordinary course of business of the Issuer or any
Restricted Subsidiary of the Issuer (including, without limitation, Liens
securing Purchase Money Indebtedness) with respect to obligations that do not
exceed $2 million in principal amount in the aggregate at any one time
outstanding; and (p) extensions, renewals or refundings of any Liens referred to
in clauses (a) through (o) above, PROVIDED that any such extension, renewal or
refunding does not extend to any assets or secure any Indebtedness not securing
or secured by the Liens being extended, renewed or refinanced.
"PERSON" means any individual, corporation, partnership, joint venture,
association, joint-stock Issuer, trust or unincorporated organization (including
any subdivision or ongoing business of any such entity or substantially all of
the assets of any such entity, subdivision or business).
"PREFERRED EQUITY INTEREST", in any person, means an Equity Interest of any
class or classes (however designated) which is preferred as to the payment of
dividends or distributions, or as to the distribution of assets upon any
voluntary or involuntary liquidation or dissolution of such person, over Equity
Interests of any other class in such person.
"PRINCIPALS" means Charles W. Ergen, James DeFranco, R. Scott Zimmer,
Steven B. Schaver and David K. Moskowitz.
"PURCHASE MONEY INDEBTEDNESS" means indebtedness of the Issuer or any of
its Restricted Subsidiaries incurred (within 180 days of such purchase) to
finance the purchase of any assets of the Issuer or any of its Restricted
Subsidiaries: (a) to the extent the amount of Indebtedness thereunder does not
exceed 80% of the purchase cost of such assets; (b) to the extent the purchase
cost of such assets is or should be included in "additions to property, plant
and equipment" in accordance with GAAP; (c) to the extent that such Indebtedness
is not recourse to the Issuer or any of its Restricted Subsidiaries or any of
their respective assets, other than the assets so purchased; and (d) if the
purchase of such assets is not part of an acquisition of any Person.
"RECEIVER SUBSIDY" means a subsidy, rebate or other similar payment by
EchoStar or any of its Subsidiaries, in the ordinary course of business, to
subscribers, vendors or distributors, relating to an EchoStar Receiver System,
not to exceed the cost of such EchoStar Receiver System, together with the cost
of installation of such EchoStar Receiver System.
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"RECEIVABLES TRUST" means a trust organized solely for the purpose of
securitizing the accounts receivable held by the Accounts Receivable Subsidiary
that (a) shall not engage in any business other than (i) the purchase of
accounts receivable or participation interests therein from the Accounts
Receivable Subsidiary and the servicing thereof, (ii) the issuance of and
distribution of payments with respect to the securities permitted to be issued
under clause (b) below and (iii) other activities incidental to the foregoing,
(b) shall not at any time incur Indebtedness or issue any securities, except (i)
certificates representing undivided interests in the Trust issued to the
Accounts Receivable Subsidiary and (ii) debt securities issued in an arm's
length transaction for consideration solely in the form of cash and Cash
Equivalents, all of which (net of any issuance fees and expenses) shall promptly
be paid to the Accounts Receivable Subsidiary, and (c) shall distribute to the
Accounts Receivable Subsidiary as a distribution on the Accounts Receivable
Subsidiary's beneficial interest in the Receivables Trust no less frequently
than once every six months all available cash and Cash Equivalents held by it,
to the extent not required for reasonable operating expenses or reserves
therefor or to service any securities issued pursuant to clause (b) above that
are not held by the Accounts Receivable Subsidiary.
"RELATED PARTY" means, with respect to any Principal, (a) the spouse and
each immediate family member of such Principal and (b) each trust, corporation,
partnership or other entity of which such Principal beneficially holds an 80% or
more controlling interest.
"REGISTRATION RIGHTS AGREEMENT" means the Registration Rights Agreement
among the Issuer, the Guarantors, Donaldson, Lufkin & Jenrette Securities
Corporation and Lehman Brothers Inc..
"RESPONSIBLE OFFICER," when used with respect to the Trustee, means any
officer within the Corporate Trust Administration of the Trustee (or any
successor group of the Trustee) or any other officer of the Trustee customarily
performing functions similar to those performed by any of the above designated
officers and also means, with respect to a particular corporate trust matter,
any other officer to whom such matter is referred because of his knowledge of
and familiarity with the particular subject.
"RESTRICTED INVESTMENT" means an Investment other than Permitted
Investments.
"RESTRICTED SUBSIDIARY" means, any corporation, association or other
business entity of which more than 50% of the total voting power of shares of
Capital Stock entitled (without regard to the occurrence of any contingency) to
vote in the election of directors, managers or trustees thereof is at the time
owned or controlled, directly or indirectly, by the Issuer or one or more
Subsidiaries of the Issuer or a combination thereof, other than Unrestricted
Subsidiaries.
"SATELLITE CONTRACT" means any contract relating to the construction of
EchoStar IV, including, without limitation, the Lockheed Martin Satellite
Contract.
"SATELLITE ESCROW ACCOUNT" means an escrow account for the deposit of the
proceeds from the sale of the Notes under the Satellite Escrow Agreement.
"SATELLITE ESCROW AGREEMENT" means the Satellite Escrow Agreement, dated as
of the date hereof, by and among the Escrow Agent, the Trustee and the Issuer,
governing the disbursement and loan of funds from the Satellite Escrow Account,
in the form of Exhibit F.
"SATELLITE RECEIVER" means any satellite receiver capable of receiving
programming from the EchoStar DISH Network .
"SEC" means the Securities and Exchange Commission.
"SECURITIES ACT" means the Securities Act of 1933, as amended.
"SENIOR ECHOSTAR INDEBTEDNESS" means all Indebtedness for borrowed money of
EchoStar, whether outstanding on the date of the Indenture or incurred after the
date of the Indenture, which is not by its terms subordinate and junior to other
Indebtedness of EchoStar.
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"SIGNIFICANT SUBSIDIARY" means any Subsidiary that would be a "significant
subsidiary" as defined in Article 1 of the Indenture, Rule 1-02 of Regulation
S-X promulgated pursuant to the Securities Act, as such Regulation is in effect
on the date of the Indenture.
"SPRINGING GUARANTEES" means the Guarantees by the Springing Guarantors of
the Obligations of the Issuer under the Notes and the Indenture.
"SPRINGING GUARANTORS" means Dish and ESBC.
"SSET" means Satellite Systems Engineering Technologies, Inc. and its
Affiliates.
"STOCK PLEDGE AGREEMENT" means the Pledge Agreement dated the date hereof,
substantially in the form of Exhibit G hereto.
"SUBSIDIARY" means, with respect to any person, any corporation,
association or other business entity of which more than 50% of the total voting
power of shares of Capital Stock entitled (without regard to the occurrence of
any contingency) to vote in the election of directors, managers or trustees
thereof is at the time owned or controlled, directly or indirectly, by such
person or one or more of the other Subsidiaries of such person or a combination
thereof.
"SUPPLEMENTAL INDENTURE" means any supplemental indenture relating to the
Indenture.
"TIA" means the Trust Indenture Act of 1939 as in effect on the date on
which the Indenture is qualified under the TIA.
"TRUSTEE" means the party named as such above until a successor replaces it
in accordance with the applicable provisions of the Indenture and thereafter
means the successor serving hereunder.
"TT&C" means telemetry, tracking and control.
"UNRESTRICTED SUBSIDIARY" means; (A) EchoStar Real Estate Corporation,
EchoStar International (Mauritius) Ltd., EchoStar Manufacturing and Distribution
Pvt. Ltd. and Satrec Mauritius Ltd.; and (B) any Subsidiary of the Issuer
designated as an Unrestricted Subsidiary in a resolution of the Board of
Directors of the Issuer: (a) no portion of the Indebtedness or any other
obligation (contingent or otherwise) of which, at the time of such designation:
(i) is guaranteed by the Issuer or any other Subsidiary of the Issuer (other
than another Unrestricted Subsidiary); (ii) is recourse to or obligates the
Issuer or any other Subsidiary of the Issuer (other than another Unrestricted
Subsidiary) in any way; or (iii) subjects any property or asset of the Issuer or
any other Subsidiary of the Issuer (other than another Unrestricted Subsidiary),
directly or indirectly, contingently or otherwise, to satisfaction thereof; (b)
with which neither the Issuer nor any other Subsidiary of the Issuer (other than
another Unrestricted Subsidiary) has any contract, agreement, arrangement,
understanding or is subject to an obligation of any kind, written or oral, other
than on terms no less favorable to the Issuer or such other Subsidiary than
those that might be obtained at the time from persons who are not Affiliates of
the Issuer; (c) with which neither the Issuer nor any other Subsidiary of the
Issuer (other than another Unrestricted Subsidiary) has any obligation: (i) to
subscribe for additional shares of Capital Stock or other equity interests
therein; or (ii) to maintain or preserve such Subsidiary's financial condition
or to cause such Subsidiary to achieve certain levels of operating results and
(d) which does not provide direct broadcast services in any capacity other than
as a selling, billing and collection agent for one or more of the Issuer and its
Restricted Subsidiaries; PROVIDED, HOWEVER, that none of the Issuer, Dish,
EchoStar Satellite Corporation, DirectSat Corporation, Echo Acceptance
Corporation, Houston Tracker Systems, Inc., EchoStar International Corporation
and Echosphere Corporation may be designated as Unrestricted Subsidiaries. At
the time that the Issuer designates a Subsidiary as an Unrestricted Subsidiary,
the Issuer will be deemed to have made a Restricted Investment in an amount
equal to the fair market value (as determined in good faith by the Board of
Directors of the Issuer evidenced by a resolution of the Board of Directors of
the Issuer and set forth in an Officers' Certificate delivered to the Trustee;
PROVIDED, HOWEVER, that if the fair market value of such Subsidiary exceeds $10
million, the fair market value shall be determined by an investment banking firm
of national standing selected by the Issuer) of such Subsidiary; PROVIDED that
the Issuer may designate DNCC as an Unrestricted Subsidiary at any time and such
designation shall not be deemed a Restricted Investment if, but only if, the
provisions of clauses (B) (a), (b), (c) and (d) shall have been complied with
prior to such designation. An Unrestricted Subsidiary may be designated as a
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Restricted Subsidiary of the Issuer if, at the time of such designation after
giving pro forma effect thereto as if such designation had occurred at the
beginning of the applicable four-quarter period, the Issuer would be permitted
to incur at least $1.00 of additional Indebtedness pursuant to the Cash Flow
Ratio test set forth in the covenant entitled "--Incurrence of Indebtedness,
Issuance of Disqualified Stock and Issuance of Preferred Equity Interest of
Subsidiaries."
"WEIGHTED AVERAGE LIFE TO MATURITY" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing (a) the then outstanding
principal amount of such Indebtedness into (b) the total of the product obtained
by multiplying (i) the amount of each then remaining installment, sinking fund,
serial maturity or other required payments of principal, including payment at
final maturity, in respect thereof, by (ii) the number of years (calculated to
the nearest one-twelfth) that will elapse between such date and the making of
such payment.
"WHOLLY OWNED RESTRICTED SUBSIDIARY" means a Wholly Owned Subsidiary of the
Issuer that is a Restricted Subsidiary of the Issuer.
"WHOLLY OWNED SUBSIDIARY" means, with respect to any person, any Subsidiary all
of the outstanding voting stock (other than directors' qualifying shares) of
which is owned by such person, directly or indirectly.
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CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following summary describes the principal U.S. federal income tax
consequences of the ownership and disposition of Notes. This summary is based on
the Internal Revenue Code of 1986, as amended to the date hereof (the "Code"),
administrative pronouncements, judicial decisions and existing and proposed
Treasury Regulations, changes to any of which subsequent to the date hereof may
affect the tax consequences described below. This summary addresses only initial
holders of Notes who acquire such Notes at the offering price, as defined below,
and discusses only Notes held as capital assets within the meaning of Section
1221 of the Code. It does not discuss all of the tax consequences that may be
relevant to a holder in light of such holder's particular circumstances or to
holders subject to special rules, such as certain financial institutions,
insurance companies, dealers in securities or persons holding the Notes as part
of a straddle or a hedging arrangement.
HOLDERS OF NOTES SHOULD CONSULT THEIR TAX ADVISORS WITH REGARD TO THE
APPLICATION OF THE UNITED STATES FEDERAL INCOME TAX LAWS TO THEIR PARTICULAR
SITUATIONS, AS WELL AS WITH REGARD TO ANY TAX CONSEQUENCES ARISING UNDER THE
LAWS OF ANY STATE, LOCAL OR FOREIGN JURISDICTION.
INTEREST
Holders of Notes will be required to include stated interest on the Notes
in gross income for Federal income tax purposes in accordance with their regular
method of accounting for tax purposes. The Notes were not issued with original
issue discount.
SALE, EXCHANGE OR RETIREMENT OF THE NOTES
In general, a holder of a Note will recognize gain or loss on the sale,
exchange, retirement or other taxable disposition of such Note measured by the
difference, if any, between (i) the amount of cash and the fair market value of
property received and (ii) the holder's tax basis in the Note.
Gain or loss realized on the sale, exchange or retirement of a Note will
be capital gain or loss and will be long-term capital gain or loss if the
holding period of the Note exceeds one year as of the date of the sale, exchange
or retirement. Under current law, the excess of net long-term capital gains over
net short-term capital losses is taxed at a lower rate than ordinary income for
certain non-corporate taxpayers. The distinction between capital gain or loss
and ordinary income or loss is also relevant for purposes of, among other
things, limitation on the deductibility of capital losses.
EXCHANGE OFFER
The exchange of Old Notes for the Exchange Notes will not be treated as a
taxable exchange for federal income tax purposes because, other than the fact
that the Exchange Notes will be registered under the Securities Act, the terms
of the Exchange Notes will be identical to the terms of the Old Notes.
BACKUP WITHHOLDING AND INFORMATION REPORTING
Certain noncorporate holders may be subject to backup withholding at a rate
of 31% on payments of principal and interest and premium on, and the proceeds of
disposition of, a Note. Backup withholding will apply only if the holder:
(i) fails to furnish its Taxpayer Identification Number ("TIN") which, for an
individual, would be his or her Social Security number; (ii) furnishes an
incorrect TIN; (iii) is notified by the IRS that it has failed properly to
report payments of interest and dividends; or (iv) under certain circumstances,
fails to certify, under penalty of perjury, that it has furnished a correct TIN
and has not been notified by the IRS that it is subject to backup withholding
for failure to report interest and dividend payments. Holders of the Notes
should consult their tax advisors regarding their qualification for exemption
from backup withholding and the procedure for obtaining such an exemption, if
applicable.
The amount of any backup withholding from a payment to a holder of a Note
will be allowed as a credit against the holder's U.S. federal income tax
liability and may entitle the holder to a refund, PROVIDED that the required
information is furnished to the Internal Revenue Service.
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OTHER TAX CONSEQUENCES
In addition to the federal income tax considerations described above,
prospective purchasers of Notes should consider potential state, local, income,
franchise, personal property and other taxation in any state or locality and the
tax effect of ownership, sale, exchange, or retirement of Notes in any state or
locality. Prospective purchasers of Notes are advised to consult their own tax
advisors with respect to any state or local income, franchise, personal property
or other tax consequences arising out of their ownership of the Notes.
THE FOREGOING DISCUSSION IS FOR GENERAL INFORMATION AND IS NOT TAX ADVICE.
ACCORDINGLY, EACH HOLDER OF NOTES SHOULD CONSULT HIS OWN TAX ADVISOR AS TO THE
PARTICULAR TAX CONSEQUENCES TO HIM OF THE NOTES, INCLUDING THE APPLICABILITY AND
EFFECT OF ANY STATE, LOCAL, OR FOREIGN INCOME TAX LAWS AND ANY RECENT OR
PROSPECTIVE CHANGES IN APPLICABLE TAX LAWS.
PLAN OF DISTRIBUTION
Based on interpretation by the Staff set forth in no-action letters issued
to third parties, the Issuer believes that Exchange Notes issued pursuant to the
Exchange Offer in exchange for the Old Notes may be offered for resale, resold
and otherwise transferred by holders thereof (other than any holder which is (i)
an affiliate of the Issuer, (ii) a broker-dealer who acquired Old Notes directly
from the Issuer or (iii) a broker-dealer who acquired Old Notes as a result of
market-making or other trading activities) without compliance with the
registration and prospectus delivery provisions of the Securities Act PROVIDED
that such Exchange Notes are acquired in the ordinary course of such holders'
business, and such holders are not engaged in, and do not intend to engage in,
and have no arrangement or understanding with any person to participate in, a
distribution of such Exchange Notes; PROVIDED that broker-dealers
("Participating Broker-Dealers") receiving Exchange Notes in the Exchange Offer
will be subject to a prospectus delivery requirement with respect to resales of
such Exchange Notes. To date, the Staff has taken the position that
Participating Broker-Dealers may fulfill their prospectus delivery requirements
with respect to transactions involving an exchange of securities such as the
exchange pursuant to the Exchange Offer (other than a resale of an unsold
allotment from the sale of the Old Notes to the Initial Purchasers) with the
prospectus contained in the Registration Statement. Pursuant to the
Registration Rights Agreement, the Issuer has agreed to permit Participating
Broker-Dealers and other persons, if any, subject to similar prospectus delivery
requirements to use this Prospectus in connection with the resale of such
Exchange Notes. The Issuer has agreed that, for a period of 180 days after the
Exchange Date, it will make this Prospectus, and any amendment or supplement to
this Prospectus, available to any broker-dealer that requests such documents in
the Letter of Transmittal.
Each holder of the Old Notes who wishes to exchange its Old Notes for
Exchange Notes in the Exchange Offer will be required to make certain
representations to the Issuer as set forth in "The Exchange Offer - Terms and
Conditions of the Letter of Transmittal." In addition, each holder who is a
broker-dealer and who receives Exchange Notes for its own account in exchange
for Old Notes that were acquired by it as a result of market-making activities
or other trading activities will be required to acknowledge that it will deliver
a Prospectus in connection with any resale by it of such Exchange Notes.
The Issuer will not receive any proceeds from any sale of Exchange Notes by
broker-dealers. Exchange Notes received by broker-dealers for their own account
pursuant to the Exchange Offer may be sold from time to time in one or more
transactions in the over-the-counter market, in negotiated transactions, through
the writing of options on the Exchange Notes or a combination of such methods of
resale, at market prices prevailing at the time of resale, at prices related to
such prevailing market prices or at negotiated prices. Any such resale may be
made directly to purchasers or to or through brokers or dealers who may receive
compensation in the form of commissions or concessions from any such
broker-dealer and/or the purchasers of any such Exchange Notes. Any
broker-dealer that resells Exchange Notes that were received by it for its own
account pursuant to the Exchange Offer and any broker or dealer that
participates in a distribution of such Exchange Notes may be deemed to be an
"underwriter" within the meaning of the Securities Act and any profit on any
such resale of Exchange Notes and any commissions or concessions received by any
such persons may be deemed to be underwriting compensation under the Securities
Act. The Letter of Transmittal states that by acknowledging that it will
deliver and by delivering a prospectus, a broker-dealer will not be deemed to
admit that it is an "underwriter" within the meaning of the Securities Act.
141
The Issuer has agreed to pay all expenses incidental to the Exchange Offer
other than commissions and concessions of any brokers or dealers and will
indemnify holders of the Notes (including any broker-dealers) against certain
liabilities, including liabilities under the Securities Act, as set forth in the
Registration Rights Agreement.
NOTICE TO INVESTORS
Because the following instructions will apply to any Old Notes held by
holders who do not participate in the Exchange Offer, holders of the Old Notes
are advised to consult legal counsel prior to making any offer, resale, pledge
or transfer of any of the Old Notes.
The Old Notes have not been registered under the Securities Act and may not
be offered or sold within the United States or to U.S. Persons (as such terms as
defined under the Securities Act) except pursuant to an exemption from, or in a
transaction not subject to the registration requirements of the Securities Act.
Accordingly, the Old Notes were offered only to "qualified institutional buyers"
(as defined in Rule 144A under the Securities Act) in reliance on the exemption
from the registration requirements of the Securities Act provided by Rule 144A,
and to a limited number of institutional "accredited investors" within the
meaning of Rule 501(a)(1), (2), (3) and (7) under the Securities Act.
Each purchaser of Old Notes purchased in a sale made in reliance on Rule
144A has been deemed to have represented and agreed as follows (terms used in
this paragraph that are defined in Rule 144A are used herein as defined
therein):
(1) The purchaser is either (A) a qualified institutional buyer and is
aware that the sale to it is being made in reliance on Rule 144A, and
such qualified institutional buyer has acquired such Old Notes for its
own account or for the account of another qualified institutional
buyer or, (B) an "accredited investor" within the meaning of Rule
501(a)(1), (2), (3) or (7) under the Securities Act (an "accredited
investor") or, (C) if the Old Notes are to be purchased for one or
more accounts ("investor accounts") for which it is acting as
fiduciary or agent, each such account is an accredited investor on a
like basis.
(2) The purchaser understands that the Old Notes were offered in a
transaction not involving any public offering in the United States
within the meaning of the Securities Act, that the Old Notes have not
been registered under the Securities Act and that: (A) the Old Notes
may be offered, resold, pledged or otherwise transferred only: (i) to
a person who the seller reasonable believes is a qualified
institutional buyer in the transaction meeting the requirements of
Rule 144A, in a transaction meeting the requirements of Rule 144 under
the Securities Act, outside the United States to a foreign person in a
transaction meeting the requirement of Rule 904 under the Securities
Act or in accordance with another exemption form the registration
requirements of the Securities Act (and based upon an Opinion to
Counsel if the Issuer so requests); (ii) to the Issuer; or (iii)
pursuant to an effective registration statement, and, in each case, in
accordance with any applicable securities laws of any State of the
United States or any other applicable jurisdiction; and (B) the
purchaser will, and each subsequent holder is required to, notify any
subsequent purchaser from it of the resale restrictions set forth in
(A) above.
(3) The purchaser understands that the certificates evidencing the Old
Notes bear, and if not exchanged pursuant to the Exchange Offer will
continue to bear, a legend substantially to the following effect
unless otherwise agreed by the Issuer and the holder thereof:
"THIS NOTE (OR ITS PREDECESSOR) HAS NOT BEEN REGISTERED
UNDER THE U.S. SECURITIES ACT OF 1933, AS AMENDED (THE
"SECURITIES ACT") AND, ACCORDINGLY, MAY NOT BE OFFERED,
SOLD, PLEDGED OR OTHERWISE TRANSFERRED WITHIN THE
UNITED STATES OR TO, OR FOR THE ACCOUNT OR BENEFIT OF,
U.S. PERSONS, EXCEPT AS SET FORTH IN THE FOLLOWING
SENTENCE. BY ITS ACQUISITION HEREOF OR OF A BENEFICIAL
INTEREST HEREIN, THE HOLDER (1) REPRESENTS THAT IT IS A
"QUALIFIED INSTITUTIONAL BUYER" (AS DEFINED IN RULE
144A UNDER THE SECURITIES ACT)(A "QIB"), (2) AGREES
THAT IT WILL NOT, WITHIN THE TIME PERIOD REFERRED TO
UNDER RULE 144(k) (TAKING INTO ACCOUNT THE PROVISIONS
OF RULE 144(d) UNDER THE SECURITIES ACT, IF APPLICABLE)
UNDER THE SECURITIES ACT AS IN EFFECT ON THE DATE OF
142
THE TRANSFER OF THIS NOTE, RESELL OR OTHERWISE TRANSFER
THIS NOTE EXCEPT (A) TO THE ISSUER OR ANY SUBSIDIARY
THEREOF, (B) TO A PERSON WHOM THE HOLDER REASONABLY
BELIEVES IS A QIB PURCHASING FOR ITS OWN ACCOUNT OR FOR
THE ACCOUNT OF A QIB IN COMPLIANCE WITH RULE 144A UNDER
THE SECURITIES ACT, (C) PURSUANT TO THE EXEMPTION FROM
REGISTRATION PROVIDED BY RULE 144 UNDER THE SECURITIES
ACT (IF AVAILABLE), (D) IN ACCORDANCE WITH ANOTHER
EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE
SECURITIES ACT (AND BASED UPON AN OPINION OF COUNSEL
ACCEPTABLE TO THE ISSUER) OR (E) PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES
ACT AND, IN EACH CASE, IN ACCORDANCE WITH APPLICABLE
STATE SECURITIES LAWS, AND (3) AGREES THAT IT WILL
DELIVER TO EACH PERSON TO WHOM THIS NOTE OR AN INTEREST
HEREIN IS TRANSFERRED A NOTICE SUBSTANTIALLY TO THE
EFFECT OF THIS LEGEND. THE INDENTURE CONTAINS A
PROVISION REQUIRING THE TRUSTEE TO REFUSE TO REGISTER
ANY TRANSFER OF THIS NOTE IN VIOLATION OF THE FOREGOING
RESTRICTIONS."
(4) The purchaser acknowledged that none of the Issuer, the Initial
Purchasers, or any person representing the Issuer or the Initial
Purchasers made any representations to it with respect to the Issuer
or the offering or sale of the Old Notes, other than the information
contained in the Prospectus, dated June 20, 1997, relating to the Old
Notes (the "Prospectus"), which was delivered to it and upon which it
relied in making its investment decision with respect to the Old
Notes. The purchaser had access to such financial and other
information concerning the Issuer and the Old Notes as it deemed
necessary in connection with its decision to purchase the Old Notes,
including an opportunity to ask questions of and request information
from the Issuer and the Initial Purchasers.
(5) The purchaser acknowledged that the Issuer and the Initial Purchasers,
and others relied upon the truth and accuracy of the foregoing
acknowledgements, representations and agreements and agrees that, if
any of the foregoing acknowledgements, representations or agreements
deemed to have been made by it are no longer accurate, it shall
promptly notify the Initial Purchasers. If such purchaser acquired
Old Notes as a fiduciary or agent for one or more investor accounts,
such purchaser represented that it has sole investment discretion with
respect to each such account and that it has full power to make the
foregoing acknowledgements, representations and agreements on behalf
of each such account.
Each purchaser of Old Notes that is an institutional accredited investor
executed and delivered a purchaser's letter for the benefit of the Initial
Purchasers and the Issuer, substantially in the form included as Appendix A to
the Prospectus, whereby such institutional accredited investor (a) agreed to the
restrictions on transfer set forth in clause (2) above, (b) confirmed that it:
(i) acquired Old Notes having a minimum purchase price of at least $100,000 for
its own account and for each separate account for which it is acting; (ii)
acquired such Old Notes for its own account or for certain qualified
institutional accounts, as specified therein; and (iii) did not acquire the
Notes with a view to distribution thereof in a transaction that would violate
the Securities Act or the securities laws of any State of the United States or
any other applicable jurisdiction; and (c) acknowledged that the registrar and
transfer agent for the Old Notes will not be required to accept for registration
of transfer any Old Notes acquired by them, except upon presentation of evidence
satisfactory to the Issuer that the restriction on transfer set forth in clause
(2) above have been complied with, and that any such Old Notes will be in the
form of definitive physical certificates bearing the legend set forth in clause
(3) above.
The Old Notes may not be sold or transferred to, and each purchaser, by its
purchase of the Old Notes has been deemed to have represented and covenanted
that it did not acquire the Old Notes for or on behalf of, and will not transfer
the Old Notes to, any pension or welfare plan (as defined in Section 3 of the
Employee Retirement Income Security Act of 1974; "ERISA") except that such a
purchase for or on behalf of a pension or welfare plan shall be permitted:
(1) to the extent such purchase is made by or on behalf of a bank
collective investment fund maintained by the purchaser in which
no plan (together with any other plans maintained by the same
employer or employee organization) has an interest in excess of
10% of the total assets in such collective
143
investment fund and the conditions of Section III of Prohibited
Transaction Class Exemption 91-38 issued by the Department of
Labor are satisfied;
(2) to the extent such purchase is made by or on behalf of an
insurance company pooled separate account maintained by the
purchaser in which, at any time while the Old Notes are
outstanding, no plan (together with any other plans maintained by
the same employer or employee organization) has an interest in
excess of 10% of the total of all assets in such pooled separate
account and the conditions of Section III of Prohibited
Transaction Class Exemption 90-1 issued by the Department of
Labor are satisfied;
(3) to the extent such purchase is made on behalf of a plan by: (i)
an investment advisor registered under the Investment Advisers
Act of 1940 that had as of the last day of its most recent fiscal
year total assets under its management and control in excess of
$50 million and had stockholders' or partners' equity in excess
of $0.75 million, as shown in its most recent balance sheet
prepared in accordance with generally accepted accounting
principles; or (ii) a bank as defined in Section 202(a)(2) of the
Investment Advisers Act of 1940 with equity capital in excess of
$1 million as of the last day of its most recent fiscal year; or
(iii) an insurance company which is qualified under the laws of
more than one state to manage, acquire or dispose of any assets
of a plan, which insurance company has as of the last day of its
most recent fiscal year, net worth in excess of $1 million and
which is subject to supervision and examination by a state
authority having supervision over insurance companies and, in any
case, such investment advisor, bank or insurance company is
otherwise a qualified professional asset manager, as such term is
used in Prohibited Transaction Class Exemption 84-14 issued by
the Department of Labor, and the assets of such plan when
combined with the assets of other plans established or maintained
by the same employer (or affiliate thereof) or employee
organization and managed by such investment advisor, bank or
insurance company, do not represent more than 20% of the total
client assets managed by such investment advisor, bank or
insurance company, and the conditions of Section I of such
exemption are otherwise satisfied; or
(4) to the extent such plan is a governmental plan (as defined in
Section 3 of ERISA) which is not subject to the provision of
Title I of ERISA of Section 401 of the Internal Revenue Code.
INDEPENDENT ACCOUNTANTS
The audited financial statements of the Issuer included in this Prospectus
have been audited by Arthur Andersen LLP, independent public accountants, as
indicated in their reports with respect thereto, and are included herein in
reliance upon the authority of such firm as experts in giving such reports.
LEGAL MATTERS
The validity of the Notes has been passed upon for the Issuer by Baker &
Hostetler LLP.
144
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
ECHOSTAR DBS CORPORATION PAGE
Consolidated Financial Statements:
Report of Independent Public Accountants................................ F-3
Consolidated Balance Sheets at December 31, 1995 and 1996............... F-4
Consolidated Statements of Operations for the years ended
December 31, 1994, 1995 and 1996...................................... F-5
Consolidated Statements of Stockholder's Equity for the years ended
December 31, 1994, 1995 and 1996...................................... F-6
Consolidated Statements of Cash Flows for the years ended
December 31, 1994, 1995 and 1996...................................... F-7
Notes to Consolidated Financial Statements.............................. F-8
ECHOSTAR COMMUNICATIONS CORPORATION
Consolidated Financial Statements:
Report of Independent Public Accountants................................ F-40
Consolidated Balance Sheets at December 31, 1995 and 1996............... F-41
Consolidated Statements of Operations for the years ended
December 31, 1994, 1995 and 1996...................................... F-42
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1994, 1995 and 1996...................................... F-43
Consolidated Statements of Cash Flows for the years ended
December 31, 1994, 1995 and 1996...................................... F-44
Notes to Consolidated Financial Statements.............................. F-45
ECHOSTAR SATELLITE BROADCASTING CORPORATION
Consolidated Financial Statements:
Report of Independent Public Accountants................................ F-77
Consolidated Balance Sheets at December 31, 1995 and 1996............... F-78
Consolidated Statements of Operations for the years ended
December 31, 1994, 1995 and 1996...................................... F-79
Consolidated Statements of Stockholder's Equity for the years ended
December 31, 1994, 1995 and 1996...................................... F-80
Consolidated Statements of Cash Flows for the years ended
December 31, 1994, 1995 and 1996...................................... F-81
Notes to Consolidated Financial Statements.............................. F-82
DISH, LTD.
Consolidated Financial Statements:
Report of Independent Public Accountants................................ F-113
Consolidated Balance Sheets at December 31, 1995 and 1996............... F-114
Consolidated Statements of Operations for the years ended
December 31, 1994, 1995 and 1996...................................... F-115
Consolidated Statements of Stockholder's Equity for the years ended
December 31, 1994, 1995 and 1996...................................... F-116
Consolidated Statements of Cash Flows for the years ended
December 31, 1994, 1995 and 1996........................................ F-117
Notes to Consolidated Financial Statements.............................. F-118
F-1
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SUPPLEMENTAL INTERIM FINANCIAL INFORMATION
ECHOSTAR DBS CORPORATION
Condensed Consolidated Financial Statements:
Balance Sheets at December 31, 1996 and June 30, 1997 (Unaudited)....... F-145
Statements of Operations for the three and six months ended
June 30, 1996 and 1997 (Unaudited).................................... F-146
Statement of Stockholder's Equity for the six months ended
June 30, 1997 (Unaudited)............................................. F-147
Statements of Cash Flows for the six months ended June 30, 1996
and 1997 (Unaudited).................................................. F-148
Notes to Condensed Consolidated Financial Statements.................... F-149
ECHOSTAR COMMUNICATIONS CORPORATION
Condensed Consolidated Financial Statements:
Balance Sheets at December 31, 1996 and June 30, 1997 (Unaudited)....... F-154
Statements of Operations for the three and six months ended
June 30, 1996 and 1997 (Unaudited).................................... F-155
Statement of Stockholders' Equity for the six months ended
June 30, 1997 (Unaudited)............................................. F-156
Statements of Cash Flows for the six months ended June 30, 1996
and 1997 (Unaudited).................................................. F-157
Notes to Condensed Consolidated Financial Statements.................... F-158
ECHOSTAR SATELLITE BROADCASTING CORPORATION
Condensed Consolidated Financial Statements:
Balance Sheets at December 31, 1996 and June 30, 1997 (Unaudited)....... F-164
Statements of Operations for the three and six months ended
June 30, 1996 and 1997 (Unaudited).................................... F-165
Statement of Stockholder's Equity for the six months ended
June 30, 1997 (Unaudited)............................................. F-166
Statements of Cash Flows for the six months ended June 30, 1996 and
1997 (Unaudited)...................................................... F-167
Notes to Condensed Consolidated Financial Statements.................... F-168
DISH, LTD.
Condensed Consolidated Financial Statements:
Balance Sheets at December 31, 1996 and June 30, 1997 (Unaudited)....... F-172
Statements of Operations for the three and six months ended June 30,
1996 and 1997 (Unaudited)............................................. F-173
Statement of Stockholder's Equity for the six months ended June 30,
1997 (Unaudited)...................................................... F-174
Statements of Cash Flows for the six months ended June 30, 1996 and
1997 (Unaudited)...................................................... F-175
Notes to Condensed Consolidated Financial Statements.................... F-176
F-2
REPORT OF INDEPENDENT ACCOUNTANTS
To EchoStar DBS Corporation:
We have audited the accompanying consolidated balance sheets of EchoStar
DBS Corporation (a Colorado corporation) and subsidiaries, as described in
Note 1, as of December 31, 1995 and 1996, and the related consolidated
statements of operations, stockholder's equity and cash flows for each of the
three years in the period ended December 31, 1996. These financial statements
are the responsibility of the Companies' management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
EchoStar DBS Corporation and subsidiaries as of December 31, 1995 and 1996,
and the consolidated results of their operations and their cash flows for
each of the three years in the period ended December 31, 1996, in conformity
with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Denver, Colorado,
March 14, 1997.
F-3
ECHOSTAR DBS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
DECEMBER 31,
-----------------------
1995 1996
-----------------------
ASSETS
Current Assets:
Cash and cash equivalents......................................... $ 13,949 $ 38,438
Marketable investment securities.................................. 210 18,807
Trade accounts receivable, net of allowance for uncollectible
accounts of $1,106 and $1,494, respectively..................... 9,115 13,483
Inventories....................................................... 38,769 72,767
Income tax refund receivable...................................... 3,870 4,830
Deferred tax assets............................................... 1,834 -
Subscriber acquisition costs, net................................. - 68,129
Other current assets.............................................. 12,791 15,031
-----------------------
Total current assets................................................ 80,538 231,485
Restricted Cash and Marketable Investment Securities:
1994 Notes escrow................................................. 73,291 -
1996 Notes escrow................................................. - 47,491
Other............................................................. 26,400 31,450
-----------------------
Total restricted cash and marketable investment securities.......... 99,691 78,941
Property and equipment, net......................................... 333,199 528,577
FCC authorizations, net............................................. 11,309 72,500
Advances to affiliates, net......................................... 1,320 68,607
Deferred tax assets................................................. 12,109 79,663
Other noncurrent assets............................................. 21,129 25,770
-----------------------
Total assets................................................... $559,295 $1,085,543
-----------------------
-----------------------
LIABILITIES AND STOCKHOLDER'S EQUITY
Current Liabilities:
Trade accounts payable............................................ $ 19,063 $ 41,228
Deferred programming and product revenue - DISH Network
subscriber promotions........................................... - 97,959
Deferred programming revenue - DISH Network....................... - 4,407
Deferred programming revenue - C-band............................. 584 734
Accrued expenses and other current liabilities.................... 26,314 30,125
Deferred tax liabilities.......................................... - 12,674
Current portion of long-term debt................................. 4,782 11,334
-----------------------
Total current liabilities........................................... 50,743 198,461
Long-term obligations, net of current portion:
Long-term deferred signal carriage revenue........................ - 5,949
1994 Notes........................................................ 382,218 437,127
1996 Notes........................................................ - 386,165
Mortgage and other notes payable, excluding current portion....... 33,444 51,428
Note payable to ECC............................................... - 12,000
Other long-term liabilities....................................... - 1,088
-----------------------
Total long-term obligations, net of current portion................. 415,662 893,757
-----------------------
Total liabilities................................................. 466,405 1,092,218
Commitments and Contingencies (Note 11)
Stockholder's Equity (Deficit) (Notes 2 and 9):
Preferred Stock, 20,000,000 and no shares authorized, 1,616,681
and no shares of 8% Series A Cumulative Preferred Stock issued
and outstanding, including accrued dividends of $1,555 and
$-0-, respectively.............................................. 16,607 -
Class A Common Stock, $.01 par value, 200,000,000, and no
shares authorized, 6,470,599 and -0- shares issued and
outstanding, respectively....................................... 65 -
Class B Common Stock, $.01 par value, 100,000,000, and no
shares authorized, 29,804,401 and -0- shares issued and
outstanding, respectively....................................... 298 -
Common Stock, $.01 par value, -0- and 1,000 shares authorized,
issued and outstanding, respectively............................ - -
Additional paid-in capital........................................ 89,495 108,839
Unrealized holding gains (losses) on available-for-sale
securities, net of deferred taxes............................... 251 (12)
Accumulated deficit............................................... (13,826) (115,502)
-----------------------
Total stockholder's equity (deficit)................................ 92,890 (6,675)
-----------------------
Total liabilities and stockholder's equity..................... $559,295 $1,085,543
-----------------------
-----------------------
See accompanying Notes to Consolidated Financial Statements.
F-4
ECHOSTAR DBS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands)
YEARS ENDED DECEMBER 31,
-----------------------------------
1994 1995 1996
-----------------------------------
REVENUE:
DTH products and technical services............................... $172,753 $146,910 $ 136,377
DISH Network promotions - subscription television services
and products.................................................... - - 22,746
DISH Network subscription television services..................... - - 37,898
C-band programming................................................ 14,540 15,232 11,921
Loan origination and participation income......................... 3,690 1,748 789
-----------------------------------
Total revenue....................................................... 190,983 163,890 209,731
EXPENSES:
DTH products and technical services............................... 133,635 116,758 123,505
DISH Network programming.......................................... - - 19,079
C-band programming................................................ 11,670 13,520 10,510
Selling, general and administrative............................... 30,219 38,504 86,894
Subscriber promotion subsidies.................................... - - 35,239
Amortization of subscriber acquisition costs...................... - - 15,991
Depreciation and amortization..................................... 2,243 3,114 27,378
-----------------------------------
Total expenses...................................................... 177,767 171,896 318,596
-----------------------------------
Operating income (loss)............................................. 13,216 (8,006) (108,865)
Other Income (Expense):
Interest income................................................... 8,420 12,545 15,111
Interest expense, net of amounts capitalized...................... (21,408) (23,985) (62,430)
Minority interest in loss of consolidated joint venture
and other....................................................... 261 894 (345)
-----------------------------------
Total other income (expense), net................................... (12,727) (10,546) (47,664)
-----------------------------------
Income (loss) before income taxes................................... 489 (18,552) (156,529)
Income tax (provision) benefit, net................................. (399) 6,191 54,853
-----------------------------------
Net income (loss)................................................... $ 90 $(12,361) $(101,676)
-----------------------------------
-----------------------------------
See accompanying Notes to Consolidated Financial Statements.
F-5
ECHOSTAR DBS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY (DEFICIT)
(In thousands)
ACCUMULATED
DEFICIT AND
SHARES OF UNREALIZED
COMMON COMMON ADDITIONAL HOLDING
STOCK PREFERRED COMMON STOCK PAID-IN GAINS
OUTSTANDING STOCK STOCK WARRANTS CAPITAL (LOSSES) TOTAL
-------------------------------------------------------------------------------------
(NOTES 1 AND 9)
Balance, December 31, 1993. . . . . . . . 32,221 $ - 322 $ - $ 49,378 $ - $ 49,700
Issuance of Class A Common Stock:
For acquisition of DirectSat, Inc. . 999 - 11 - 8,989 - 9,000
For cash . . . . . . . . . . . . . . 324 - 3 - 3,830 - 3,833
Issuance of 1,616,681 shares of 8%
Series A Cumulative Preferred Stock - 15,052 - - - - 15,052
Issuance of Common Stock Warrants . . . - - - 26,133 - - 26,133
8% Series A Cumulative Preferred Stock
dividends. . . . . . . . . . . . . . - 939 - - - (939) -
Net income. . . . . . . . . . . . . . . - - - - - 90 90
---------------------------------------------------------------------------------------
Balance, December 31, 1994. . . . . . . 33,544 15,991 336 26,133 62,197 (849) 103,808
8% Series A Cumulative Preferred Stock
dividends. . . . . . . . . . . . . . - 616 - - - (616) -
Exercise of Common Stock Warrants. . . 2,731 - 26 (25,419) 25,393 - -
Common Stock Warrants exchanged for
ECC Warrants . . . . . . . . . . . . - - - (714) 714 - -
Launch bonuses funded by issuance of
ECC's Class A Common Stock . . . . . - - - - 1,192 - 1,192
Unrealized holding gains on available-
for-sale securities, net . . . . . - - - - - 251 251
Net loss . . . . . . . . . . . . . . . - - - - - (12,361) (12,361)
---------------------------------------------------------------------------------------
Balance, December 31, 1995. . . . . . . . 36,275 16,607 362 - 89,496 (13,575) 92,890
Issuance of Common Stock (Note 1) . . 1 - - - 2 - 2
Reorganization of entities under
common control (Note 1) . . . . . . (36,275) (16,607) (362) - 16,969 - -
Income tax benefit of deduction for
income tax purposes on exercise
of Class A Common Stock options - - - - 2,372 - 2,372
Unrealized holding losses on
available-for-sale securities, net. - - - - - (263) (263)
Net loss. . . . . . . . . . . . . . . - - - - - (101,676) (101,676)
---------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------
Balance, December 31, 1996. . . . . . . . 1 $ - $ - $ - $108,839 $(115,514) $ (6,675)
---------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements.
F-6
ECHOSTAR DBS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
YEARS ENDED DECEMBER 31,
--------------------------------------
1994 1995 1996
--------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ...................................................................... $ 90 $ (12,361) $(101,676)
Adjustments to reconcile net income (loss) to net cash flows from operating activities:
Depreciation and amortization ...................................................... 2,243 3,114 27,378
Amortization of subscriber acquisition costs ....................................... - - 15,991
Deferred income tax benefit ........................................................ (7,330) (4,825) (50,515)
Amortization of debt discount and deferred financing costs ......................... 20,662 23,528 61,695
Employee benefits funded by issuance of Class A Common Stock ....................... - 1,192 -
Change in reserve for excess and obsolete inventory ................................ 502 1,212 2,866
Change in long-term deferred signal carriage revenue ............................... - - 5,949
Change in accrued interest on convertible subordinated debentures from SSET ........ (279) (860) (484)
Other, net ......................................................................... (37) 276 1,020
Changes in current assets and current liabilities, net (see Note 2) ................ 8,354 (33,164) 14,940
--------------------------------------
Net cash flows provided by (used in) operating activities .............................. 24,205 (21,888) (22,836)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of marketable investment securities .......................................... (15,100) (3,004) (138,328)
Sales of marketable investment securities .............................................. 4,439 33,816 119,730
Purchases of restricted marketable investment securities ............................... (11,400) (15,000) (21,100)
Funds released from restricted cash and marketable investment securities - other ...... - - 16,050
Advances (to) from affiliates, net ..................................................... - - (63,958)
Purchases of property and equipment .................................................... (3,507) (4,048) (45,822)
Offering proceeds and investment earnings placed in escrow ............................. (329,831) (9,589) (193,972)
Funds released from escrow accounts .................................................... 144,400 122,149 S219,352
Investment in SSET ..................................................................... (8,750) - -
Payments received on convertible subordinated debentures from SSET ..................... - - 6,445
Investment in DBSC ..................................................................... (4,210) 4,210 -
Expenditures for satellite systems under construction .................................. (115,752) (109,507) (137,939)
Expenditures for FCC authorizations .................................................... (159) (458) (55,420)
Other .................................................................................. 1,305 - -
--------------------------------------
Net cash flows provided by (used in) investing activities .............................. (338,565) 18,569 (294,962)
CASH FLOWS FROM FINANCING ACTIVITIES:
Minority investor investment in and loan to consolidated joint venture ................. 1,000 - -
Net proceeds from issuance of 1994 Notes and Common Stock Warrants ..................... 323,325 - -
Net proceeds from issuance of Class A Common Stock ..................................... 3,833 - -
Proceeds from issuance of Common Stock ................................................. - - 2
Proceeds from note payable to ECC ...................................................... - - 12,000
Net proceeds from issuance of 1996 Notes ............................................... - - 336,916
Expenditures from escrow for offering costs ............................................ (837) - -
Proceeds from refinancing of mortgage indebtedness ..................................... 4,200 - -
Repayments of mortgage indebtedness and notes payable .................................. (3,435) (238) (6,631)
Loans from stockholder, net ............................................................ 4,000 - -
Repayment of loans from stockholder .................................................... (4,075) - -
Dividends paid ......................................................................... (3,000) - -
--------------------------------------
Net cash flows provided by (used in) financing activities .............................. 325,011 (238) 342,287
--------------------------------------
Net increase (decrease) in cash and cash equivalents ................................... 10,651 (3,557) 24,489
Cash and cash equivalents, beginning of year ........................................... 6,855 17,506 13,949
--------------------------------------
Cash and cash equivalents, end of year ................................................. $ 17,506 $ 13,949 $ 38,438
--------------------------------------
--------------------------------------
See accompanying Notes to Consolidated Financial Statements.
F-7
ECHOSTAR DBS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THE ACCOMPANYING CONSOLIDATED FINANCIAL STATEMENTS FORM PART OF THE
PROSPECTUS TO EXCHANGE (THE "EXCHANGE OFFER") THE 12 1/2% SENIOR SECURED
NOTES DUE 2002 THAT WERE ISSUED IN A TRANSACTION EXEMPT FROM
REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "OLD
NOTES") FOR PUBLICLY REGISTERED NEW 12 1/2% SENIOR SECURED NOTES DUE
2002 WITH SUBSTANTIALLY IDENTICAL TERMS (THE "EXCHANGE NOTES" AND
TOGETHER WITH THE OLD NOTES, THE "NOTES"). THE OLD NOTES WERE ISSUED BY
ECHOSTAR DBS CORPORATION ("DBS CORP"), A WHOLLY-OWNED SUBSIDIARY OF
ECHOSTAR COMMUNICATIONS CORPORATION ("ECC") ON JUNE 25, 1997. IN
CONNECTION WITH THE ISSUANCE OF THE OLD NOTES, ECC CONTRIBUTED ALL OF
THE OUTSTANDING CAPITAL STOCK OF ITS WHOLLY-OWNED SUBSIDIARY, ECHOSTAR
SATELLITE BROADCASTING CORPORATION ("ESBC") TO DBS CORP. THE
ACCOMPANYING FINANCIAL STATEMENTS RETROACTIVELY REFLECT THE RESULTING
STRUCTURE AND HISTORICAL RESULTS OF DBS CORP AND ITS PREDECESSORS AS A
REORGANIZATION OF ENTITIES UNDER COMMON CONTROL. (SEE ORGANIZATIONAL
HISTORY AND LEGAL STRUCTURE BELOW).
ECC IS A PUBLICLY TRADED COMPANY ON THE NASDAQ NATIONAL MARKET. AS
USED HEREIN, "ECHOSTAR" REFERS TO ECC AND ITS SUBSIDIARIES. THE
"COMPANY" REFERS TO DBS CORP AND ITS SUBSIDIARIES, AS REORGANIZED.
DBS CORP WAS FORMED UNDER COLORADO LAW IN JANUARY 1996 FOR THE
INITIAL PURPOSE OF PARTICIPATING IN A FEDERAL COMMUNICATIONS COMMISSION
("FCC") AUCTION. ON JANUARY 26, 1996, DBS CORP SUBMITTED THE WINNING BID
OF $52.3 MILLION FOR 24 DIRECT BROADCAST SATELLITE ("DBS") FREQUENCIES
AT 148DEG. WL. FUNDS NECESSARY TO COMPLETE THE PURCHASE OF THE DBS
FREQUENCIES AND COMMENCE CONSTRUCTION OF THE COMPANY'S FOURTH DBS
SATELLITE, ECHOSTAR IV, HAVE BEEN ADVANCED TO DBS CORP BY ECC AND ESBC.
1. ORGANIZATION AND BUSINESS ACTIVITIES
PRINCIPAL BUSINESS
The Company currently is one of only three DBS companies in the
United States with the capacity to provide comprehensive nationwide DBS
programming service. The Company's DBS service (the "DISH Network")
commenced operations in March 1996 after the successful launch of its
first satellite ("EchoStar I"). The Company launched its second
satellite ("EchoStar II") on September 10, 1996. EchoStar II
significantly increased the channel capacity and programming offerings
of the DISH Network when it became fully operational in November 1996.
The Company currently provides approximately 120 channels of digital
video programming and over 30 channels of CD quality audio programming
to the entire continental United States. In addition to its DISH Network
business, the Company is engaged in the design, manufacture,
distribution and installation of satellite direct-to-home ("DTH")
products and domestic distribution of DTH programming.
The Company's business objective is to become one of the leading
providers of subscription television and other satellite-delivered
services in the United States. The Company had approximately 350,000
subscribers to DISH Network programming as of December 31, 1996.
F-8
ECHOSTAR DBS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND BUSINESS ACTIVITIES (CONTINUED)
ORGANIZATIONAL HISTORY AND LEGAL STRUCTURE
Certain companies principally owned and controlled by Mr. Charles W.
Ergen were reorganized in 1993 into Dish, Ltd., formerly known as
EchoStar Communications Corporation (together with its subsidiaries,
"Dish, Ltd."). The principal reorganized entities included EchoStar
Satellite Corporation ("ESC"), which holds licenses for certain DBS
frequencies and is the operator of the DISH Network, and Echosphere
Corporation and Houston Tracker Systems, Inc. ("HTS"), which are
primarily engaged in the design, assembly, marketing and worldwide
distribution of direct to home ("DTH") satellite television products.
The reorganized group also includes other less significant domestic
enterprises and several foreign entities involved in related activities
outside the United States.
During 1994, Dish, Ltd. merged one of its subsidiaries with DirectSat
Corporation ("DirectSat"), an approximately 80% owned subsidiary of SSE
Telecom, Inc. ("SSET") at that time. DirectSat stockholders received an
approximate 3% equity interest in Dish, Ltd. in exchange for all of
DirectSat's outstanding stock. DirectSat's principal assets are a
conditional satellite construction permit and frequency assignments for
ten DBS frequencies.
In June 1994, Dish, Ltd. completed an offering of 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").
In April 1995, ECC was formed to conduct an initial public offering
("IPO") of its Class A Common Stock and to become the parent of Dish,
Ltd. as described below. The assets of ECC are not subject to the 1994
Notes Indenture. Separate parent company only financial information for
ECC is supplementally provided in Note 16. As described in Note 6, the
1994 Notes Indenture places significant restrictions on the payment of
dividends or other transfers by Dish, Ltd.
In June 1995, ECC completed its IPO, which resulted in net proceeds
to the Company of approximately $62.9 million. Concurrently, Charles W.
Ergen, President and Chief Executive Officer of both ECC and Dish, Ltd.,
exchanged all of his then outstanding shares of Class B Common Stock and
8% Series A Cumulative Preferred Stock of Dish, Ltd. for like shares of
ECC (the "Exchange") in the ratio of 0.75 shares of ECC for each share
of Dish, Ltd. capital stock (the "Exchange Ratio"). All employee stock
options of Dish, Ltd. were also assumed by ECC, adjusted for the
Exchange Ratio. In December 1995, ECC merged Dish, Ltd. with a
wholly-owned subsidiary of ECC (the "Merger") and all outstanding shares
of Dish, Ltd. Class A Common Stock and 8% Series A Cumulative Preferred
Stock (other than those held by ECC) were automatically converted into
the right to receive like shares of ECC in accordance with the Exchange
Ratio. Also effective with the Merger, all outstanding Warrants for the
purchase of Dish, Ltd. Class A Common Stock automatically became
exercisable for shares of ECC's Class A Common Stock, adjusted for the
Exchange Ratio. As a result of the Exchange and Merger, ECC owned all
outstanding shares of Dish, Ltd. capital stock.
F-9
ECHOSTAR DBS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND BUSINESS ACTIVITIES (CONTINUED)
ESBC was formed as a wholly-owned subsidiary of ECC in January 1996.
In March 1996, ESBC completed an offering (the "1996 Notes Offering") of
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, ECC contributed all of the outstanding
capital stock of Dish, Ltd. to ESBC. This transaction was accounted for
as a reorganization of entities under common control whereby Dish, Ltd.
was treated as the predecessor to ESBC. ESBC is subject to all, and ECC
is subject to certain of, the terms and conditions of the Indenture
related to the 1996 Notes (the "1996 Notes Indenture").
The following summarizes the reorganized structure, following
issuance of the Old Notes for EchoStar and its significant subsidiaries
as described above:
LEGAL ENTITY REFERRED TO HEREIN AS OWNERSHIP
- ------------ --------------------- ---------
EchoStar Communications Corporation ECC Publicly owned
EchoStar DBS Corporation DBS Corp Wholly-owned by ECC
EchoStar Satellite Broadcasting Corporation ESBC Wholly-owned by DBS Corp
Dish, Ltd Dish, Ltd. Wholly-owned by ESBC
EchoStar Satellite Corporation ESC Wholly-owned by Dish, Ltd.
Echosphere Corporation EchoCorp Wholly-owned by Dish, Ltd.
Houston Tracker Systems, Inc. HTS Wholly-owned by Dish, Ltd.
EchoStar International Corporation EIC Wholly-owned by Dish, Ltd.
Substantially all of EchoStar's operating activities are conducted by
subsidiaries of Dish, Ltd.
SIGNIFICANT RISKS AND UNCERTAINTIES
The commencement of the Company's DBS business has dramatically
changed its operating results and financial position as compared to its
historical results. As a result, annual interest expense on the
Company's long-term debt, and depreciation of satellites and related
assets each exceeds historical levels of income before income taxes.
Consequently, the Company currently reports significant net losses and
expects such net losses to continue through at least 1999. The proceeds
generated from the issuance of the Old Notes is expected to be
sufficient to fund the Company's operations for at least 12 months. The
Company may require additional capital to fully implement its business
plan. There can be no assurance that necessary funds will be available
or, if available, that they will be available on terms acceptable to the
Company. A further increase in subscriber acquisition costs, or
significant delays or launch failures would significantly and adversely
affect the Company's operating results and financial condition.
The Company is currently dependent on one manufacturing source for
its receivers. This manufacturer presently manufactures receivers in
sufficient quantities to meet currently expected demand. If the
Company's sole manufacturer is unable for any reason to produce
receivers in a quantity sufficient to meet demand, the Company's
liquidity and results of operations would be adversely affected.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
F-10
ECHOSTAR DBS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The financial statements for 1996 and prior periods present the
consolidation of Dish, Ltd. and its subsidiaries through the date of closing
the 1996 Notes Offering (see Note 1), the consolidation of ESBC and its
subsidiaries, including Dish, Ltd., thereafter, and the combination of DBS
Corp from its inception in January 1996. The structural changes described in
Note 1 have been accounted for as reorganizations of entities under common
control and the historical cost basis of consolidated assets and liabilities
was not affected by the transactions. All significant intercompany accounts
and transactions have been eliminated.
The Company accounts for investments in 50% or less owned entities using
the equity method. At December 31, 1995 and 1996, these investments were not
material to the consolidated financial statements.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses for each
reporting period. Actual results could differ from those estimates.
FOREIGN CURRENCY TRANSACTION GAINS AND LOSSES
The functional currency of the Company's foreign subsidiaries is the U.S.
dollar because their sales and purchases are predominantly denominated in
that currency. Transactions denominated in currencies other than U.S. dollars
are recorded based on exchange rates at the time such transactions arise.
Subsequent changes in exchange rates result in transaction gains and losses
which are reflected in income as unrealized (based on period end translation)
or realized (upon settlement of the transaction). Net transaction gains
(losses) during the years ended December 31, 1994, 1995 and 1996 were not
material to the Company's results of operations.
CASH AND CASH EQUIVALENTS
The Company considers all liquid investments purchased with an original
maturity of ninety days or less to be cash equivalents. Cash equivalents as
of December 31, 1995 and 1996 consist of money market funds, corporate notes
and commercial paper; such balances are stated at cost which equates to
market value.
F-11
ECHOSTAR DBS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
STATEMENTS OF CASH FLOWS DATA
The following summarizes the changes in the Company's current assets and
current liabilities:
YEARS ENDED DECEMBER 31,
-------------------------------------
1994 1995 1996
-------------------------------------
Trade accounts receivable.................................. $ 372 $ (1,536) $ (4,368)
Inventories................................................ 3,049 (19,654) (36,864)
Income tax refund receivable............................... - (3,870) (960)
Subscriber acquisition costs............................... - - (84,120)
Other current assets....................................... (183) (10,218) (2,240)
Trade accounts payable..................................... 2,648 4,111 22,165
Deferred revenue - DISH Network subscriber
promotions.............................................. - - 97,959
Deferred programming revenue............................... 564 (1,009) 4,557
Accrued expenses and other current liabilities............. 1,670 (988) 18,811
Other, net................................................. 234 - -
-------------------------------------
Net increase (decrease) in current assets and current
liabilities........................................ $8,354 $(33,164) $14,940
-------------------------------------
-------------------------------------
The following presents the Company's supplemental cash flow statement
disclosure:
YEARS ENDED DECEMBER 31,
-------------------------------------
1994 1995 1996
-------------------------------------
Cash paid for interest, net of amounts capitalized..................... $ 436 $ 461 $ 3,007
Cash paid for income taxes............................................. 7,140 3,203 -
8% Series A Cumulative Preferred Stock dividends....................... 939 617 -
Accrued satellite contract costs....................................... - 15,000 -
Satellite launch payment for EchoStar II applied to EchoStar I launch.. - - 15,000
Exchange of note payable to stockholder, and interest thereon, for 8%
Series A Cumulative Preferred Stock.................................... 15,052 - -
Issuance of Class A Common Stock to acquire investment in DirectSat
Corporation......................................................... 9,000 - -
Property and equipment acquired under capital leases................... 934 - -
Note payable issued for deferred satellite construction payments for
EchoStar I.......................................................... - 32,833 3,167
Note payable issued for deferred satellite construction payments for
EchoStar II........................................................ - - 28,000
Employee Savings Plan Contribution and launch bonuses funded by
issuance of Class A Common Stock................................... - 1,192 -
MARKETABLE INVESTMENT SECURITIES AND RESTRICTED CASH AND MARKETABLE
INVESTMENT SECURITIES
At December 31, 1995 and 1996, the Company has classified all marketable
investment securities as available for sale. Accordingly, these investments
are reflected at market value based on quoted market prices. Related
unrealized gains and losses are reported as a separate component of
stockholder's equity, net of related deferred income taxes of $153,000 and
$6,000 at December 31, 1995 and 1996, respectively. The specific
identification method is used to determine cost in computing realized gains
and losses.
F-12
ECHOSTAR DBS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The major components of marketable investment securities as of December
31, 1995 and 1996 are as follows (in thousands):
DECEMBER 31, 1995 DECEMBER 31, 1996
------------------------------- -------------------------------
UNREALIZED UNREALIZED
HOLDING HOLDING
AMORTIZED GAIN MARKET AMORTIZED GAIN MARKET
COST (LOSS) VALUE COST (LOSS) VALUE
------------------------------- -------------------------------
Commercial paper............... $ - $ - $ - $16,065 $ - $16,065
Government bonds............... 38 - 38 2,540 - 2,540
Mutual funds................... 188 (16) 172 219 (17) 202
------------------------------- ------------------------------
$226 $(16) $210 $18,824 $(17) $18,807
------------------------------- ------------------------------
------------------------------- ------------------------------
Restricted Cash and Marketable Investment Securities in Escrow Accounts as
reflected in the accompanying consolidated balance sheets represent the
remaining net proceeds received from the 1994 Notes Offering, and a portion
of the proceeds from the 1996 Notes Offering, plus interest earned, less
amounts expended to date in connection with the development, construction and
continued growth of the DISH Network. These proceeds are held in separate
escrow accounts (the "1994 Notes Escrow" and the "1996 Notes Escrow") as
required by the respective indentures, and invested in certain permitted debt
and other marketable investment securities until disbursed for the express
purposes identified in the respective indentures.
Other Restricted Cash includes balances totaling $11.4 million, $5.7
million at December 31, 1995 and 1996, respectively, which were restricted to
satisfy certain covenants in the 1994 Notes Indenture regarding launch
insurance for EchoStar I and EchoStar II. In addition, as of each of December
31, 1995 and 1996, $15.0 million was held in escrow relating to a
non-performing manufacturer of DBS receivers (see Note 3). As of December 31,
1996, $10.0 million was on deposit in a separate escrow account established,
pursuant to an additional DBS receiver manufacturing agreement, to provide
for EchoStar's future payment obligations. The major components of Restricted
Cash and Marketable Investment Securities are as follows (in thousands):
DECEMBER 31, 1995 DECEMBER 31, 1996
------------------------------- -------------------------------
UNREALIZED UNREALIZED
HOLDING HOLDING
AMORTIZED GAIN MARKET AMORTIZED GAIN MARKET
COST (LOSS) VALUE COST (LOSS) VALUE
------------------------------- -------------------------------
Commercial paper.............. $66,214 $ - $66,214 $77,569 $ - $77,569
Government bonds.............. 32,904 420 33,324 368 - 368
Certificates of deposit....... - - - 750 - 750
Accrued interest.............. 153 - 153 254 - 254
------------------------------- -------------------------------
$99,271 $420 $99,691 $78,941 $ - $78,941
------------------------------- -------------------------------
------------------------------- -------------------------------
INVENTORIES
Inventories are stated at the lower of cost or market value. Cost is
determined using the first-in, first-out method. Proprietary products are
manufactured by outside suppliers to the Company's specifications. The
Company also distributes non-proprietary products purchased from other
manufacturers. Manufactured inventories include materials, labor and
manufacturing overhead. Cost of other inventories includes parts, contract
manufacturers' delivered price, assembly and testing labor, and related
overhead, including handling and storage costs.
F-13
ECHOSTAR DBS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Inventories consist of the following (in thousands):
DECEMBER 31,
-------------------
1995 1996
-------------------
EchoStar Receiver Systems.................. $ - $32,799
Consigned DBS receiver components.......... - 23,525
DBS receiver components.................... 9,615 15,736
Finished goods-C-band...................... 11,161 600
Finished goods-International............... 9,297 3,491
Competitor DBS Receivers................... 9,404 -
Spare parts and other...................... 2,089 2,279
Reserve for excess and obsolete inventory.. (2,797) (5,663)
-------------------
$38,769 $72,767
-------------------
-------------------
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Cost includes interest
capitalized of $5.7 million, $25.0 million and $19.8 million during the years
ended December 31, 1994, 1995 and 1996, respectively. The costs of
satellites under construction are capitalized during the construction phase,
assuming the eventual successful launch and in-orbit operation of the
satellite. If a satellite were to fail during launch or while in-orbit, the
resultant loss would be charged to expense in the period such loss was
realized. The amount of any such loss would be reduced to the extent of
insurance proceeds received as a result of the launch or in-orbit failure.
Depreciation is recorded on a straight-line basis for financial reporting
purposes. Repair and maintenance costs are charged to expense when incurred.
Renewals and betterments are capitalized.
FCC AUTHORIZATIONS
FCC authorizations are recorded at cost and amortized using the
straight-line method over a period of 40 years. Such amortization commences
at the time the related satellite becomes operational; capitalized costs are
written off at the time efforts to provide services are abandoned. FCC
authorizations include interest capitalized of $1.3 million and $1.1 million
during the years ended December 31, 1995 and 1996, respectively. The merger
with DirectSat described in Note 1 was accounted for as a purchase.
DirectSat's assets were valued at $9.0 million at the time of the merger and
are included in FCC authorizations (see Note 5).
ADVANCES TO AFFILIATES
Advances to affiliates are recorded at cost and represent the net amount
of funds advanced to, or received from, unconsolidated affiliates of DBS
Corp. Such advances principally have consisted of advances to Direct
Broadcasting Satellite Corporation ("DBSC") and EchoStar Space Corporation to
fund satellite construction and launch expenditures.
REVENUE RECOGNITION
Revenue from sales of DTH products is recognized upon shipment to
customers. Revenue from the provision of DISH Network service and C-band
programming service to subscribers is recognized as revenue in the period
such programming is provided.
SUBSCRIBER PROMOTION SUBSIDIES, SUBSCRIBER ACQUISITION COSTS, AND DISH
NETWORK PROMOTIONS-SUBSCRIPTION TELEVISION SERVICES AND PRODUCTS
Total transaction proceeds from DISH Network programming and equipment
sold as a package under EchoStar promotions are initially deferred and
recognized as revenue over the related service period (normally one year),
commencing upon authorization of each new subscriber. The excess of the
aggregate cost of the equipment, programming and other expenses for
F-14
ECHOSTAR DBS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
the initial prepaid subscription period for DISH Network service over
proceeds received is expensed upon shipment of the equipment. Remaining
costs, less programming costs and the amount expensed upon shipment as per
above, are capitalized and reflected in the accompanying balance sheets as
subscriber acquisition costs. Such costs are amortized over the related
prepaid subscription term of the customer. Programming costs are expensed as
service is provided. Excluding expected incremental revenues from premium and
Pay-Per-View programming, the accounting followed results in revenue
recognition over the initial period of service equal to the sum of
programming costs and amortization of subscriber acquisition costs.
DISH Network programming and equipment which were not sold as a package
under EchoStar promotions are separately presented in the accompanying
consolidated statements of operations.
DEFERRED DEBT ISSUANCE COSTS AND DEBT DISCOUNT
Costs of completing the 1994 Notes Offering and the 1996 Notes Offering
were deferred (Note 5) and are being amortized to interest expense over their
respective terms. The original issue discounts related to the 1994 Notes and
the 1996 Notes (Note 6) are being accreted to interest expense so as to
reflect a constant rate of interest on the accreted balance of the 1994 Notes
and the 1996 Notes.
DEFERRED PROGRAMMING REVENUE
Deferred programming revenue consists of prepayments received from
multiple-month subscriptions to DISH Network programming. Such amounts are
recognized as revenue in the period the programming is provided to the
subscriber. Similarly, the Company defers prepayments received from
subscribers to C-band programming sold by the Company as an authorized
distributor.
LONG-TERM DEFERRED SIGNAL CARRIAGE REVENUE
Long-term deferred signal carriage revenue consists of advance payments
from certain programming providers for carriage of their programming content
on the DISH Network. Such amounts are deferred and recognized as revenue on a
straight-line basis over the related contract terms (up to ten years).
ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities consist of the following
(in thousands):
DECEMBER 31,
-------------------
1995 1996
-------------------
Accrued expenses....................... $ 3,850 $19,899
Accrued satellite contract costs....... 15,000 -
Accrued programming.................... 4,979 9,463
Reserve for warranty costs............. 1,013 763
Other.................................. 1,472 -
-------------------
$ 26,314 $30,125
-------------------
-------------------
The Company's C-band proprietary products are under warranty against
defects in material and workmanship for a period of one year from the date of
original retail purchase. The reserve for warranty costs is based upon
historical units sold and expected repair costs. The Company does not have a
warranty reserve for its DBS products because the warranty is provided by the
contract manufacturer.
F-15
ECHOSTAR DBS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ADVERTISING COSTS
Advertising costs are expensed as incurred and totaled $2.3 million, $1.9
million and $16.5 million for the years ended December 31, 1994, 1995 and 1996,
respectively.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs, which are expensed as incurred, totaled
$5.9 million, $5.0 million and $6.0 million for the years ended December 31,
1994, 1995 and 1996, respectively.
RECLASSIFICATIONS
Certain amounts from the prior years consolidated financial statements
have been reclassified to conform with the 1996 presentation.
3. OTHER CURRENT ASSETS
Other current assets consist of the following (in thousands):
DECEMBER 31,
-----------------
1995 1996
-----------------
Deposit held by non-performing manufacturer . . . $10,000 $10,000
Other . . . . . . . . . . . . . . . . . . . . . . 2,791 5,031
-----------------
$12,791 $15,031
-----------------
-----------------
The Company previously maintained agreements with two manufacturers for DBS
receivers. Only one of the manufacturers produced receivers acceptable to the
Company. Previously, the Company deposited $10.0 million with the non-performing
manufacturer and as of December 31, 1996, had an additional $15.0 million on
deposit in an escrow account as security for its payment obligations under that
contract. During 1996, the Company provided the non-performing manufacturer
notice of its intent to terminate the contract and filed suit against that
manufacturer.
F-16
ECHOSTAR DBS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following (in thousands):
DECEMBER 31,
LIFE -----------------------
(IN YEARS) 1995 1996
---------- -----------------------
EchoStar I. . . . . . . . . . . . . . . . . . 12 $ - $201,607
EchoStar II . . . . . . . . . . . . . . . . . 12 - 228,694
Furniture, fixtures and equipment . . . . . . 2 - 12 35,127 72,932
Buildings and improvements. . . . . . . . . . 7 - 40 21,006 21,649
Tooling and other . . . . . . . . . . . . . . 2 2,039 3,253
Land. . . . . . . . . . . . . . . . . . . . . - 1,613 1,613
Vehicles. . . . . . . . . . . . . . . . . . . 7 1,310 1,323
Construction in progress. . . . . . . . . . . - 282,373 32,725
-----------------------
Total property and equipment. . . . . . . . . 343,468 563,796
Accumulated depreciation. . . . . . . . . . (10,269) (35,219)
-----------------------
Property and equipment, net . . . . . . . . . $333,199 $528,577
-----------------------
-----------------------
Construction in progress consists of the following (in thousands):
DECEMBER 31,
-----------------------
1995 1996
-----------------------
Progress amounts for satellite construction, launch,
launch insurance, and capitalized interest:
EchoStar I. . . . . . . . . . . . . . . . . . . . . . . . . . . $193,629 $ -
EchoStar II . . . . . . . . . . . . . . . . . . . . . . . . . . 88,634 -
EchoStar IV . . . . . . . . . . . . . . . . . . . . . . . . . . - 28,487
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 110 4,238
-----------------------
$282,373 $ 32,725
-----------------------
-----------------------
5. OTHER NONCURRENT ASSETS
Other noncurrent assets consist of the following (in thousands):
DECEMBER 31,
-----------------------
1995 1996
-----------------------
Deferred debt issuance costs. . . . . . . . . . . . . . . . . . $ 10,622 $ 21,284
SSET convertible subordinated debentures and accrued interest . 9,610 3,649
Other, net. . . . . . . . . . . . . . . . . . . . . . . . . . . 897 837
-----------------------
$ 21,129 $ 25,770
-----------------------
-----------------------
In 1994, the Company purchased $8.75 million of SSET's 6.5% convertible
subordinated debentures. During 1996, the Company received $6.4 million of
payments from SSET ($5.2 million principal and $1.2 million interest) related to
these convertible debentures. As of December 31, 1996, the debentures, if
converted, would represent approximately 5% of SSET's common stock, based on the
number of shares of SSET common stock outstanding at December 31, 1996.
Management estimates that the fair value of the SSET debentures approximates
their carrying value in the accompanying financial statements based on current
interest rates and the conversion features contained in the debentures. SSET is
a reporting company under the Securities Exchange Act of 1934 and is engaged in
the manufacture and sale of satellite telecommunications equipment. In March
1994, the Company purchased an approximate 6% ownership interest in the stock of
Direct Broadcasting Satellite Corporation ("DBSC") and certain of DBSC's notes
and accounts receivable from SSET for $1.25 million.
F-17
ECHOSTAR DBS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. LONG-TERM DEBT
1994 NOTES
On June 7, 1994, Dish, Ltd. issued the 1994 Notes which mature on June 1,
2004. The 1994 Notes issuance resulted in net proceeds to Dish, Ltd. of $323.3
million (including amounts attributable to the issuance of the Warrants and
after payment of underwriting discount and other issuance costs aggregating
approximately $12.6 million).
The 1994 Notes bear interest at a rate of 12 7/8%, computed on a
semi-annual bond equivalent basis. Interest on the 1994 Notes will not be
payable in cash prior to June 1, 1999, with the 1994 Notes accreting to a
principal value at stated maturity of $624.0 million by that date. Commencing
December 1, 1999, interest on the 1994 Notes will be payable in cash on
December 1 and June 1 of each year.
The 1994 Notes rank senior in right of payment to all subordinated
indebtedness of Dish, Ltd. and PARI PASSU in right of payment with all other
senior indebtedness of Dish, Ltd., subject to the terms of an Intercreditor
Agreement between Dish, Ltd., certain of its principal subsidiaries, and certain
creditors thereof. The 1994 Notes are secured by liens on certain assets of
Dish, Ltd., including EchoStar I and EchoStar II and all other components of the
EchoStar DBS System owned by Dish, Ltd. and its subsidiaries. The 1994 Notes are
further guaranteed by each material direct subsidiary of Dish, Ltd. (see Note
12). Although the 1994 Notes are titled "Senior," Dish, Ltd. has not issued, and
does not have any current arrangements to issue, any significant indebtedness to
which the 1994 Notes would be senior; however, the 1996 Notes are effectively
subordinated to the 1994 Notes and all other liabilities of Dish, Ltd. and its
subsidiaries. Furthermore, at December 31, 1995 and 1996, the 1994 Notes were
effectively subordinated to approximately $5.4 million and $5.1 million of
mortgage indebtedness, respectively, with respect to certain assets of Dish,
Ltd.'s subsidiaries, not including the EchoStar DBS System, and rank PARI PASSU
with the security interest of approximately $30.0 million of contractor
financing.
Except under certain circumstances requiring prepayment premiums, and in
other limited circumstances, the 1994 Notes are not redeemable at Dish, Ltd.'s
option prior to June 1, 1999. Thereafter, the 1994 Notes will be subject to
redemption, at the option of Dish, Ltd., in whole or in part, at redemption
prices ranging from 104.828% during the year commencing June 1, 1999 to 100% of
principal value at stated maturity on or after June 1, 2002 together with
accrued and unpaid interest thereon to the redemption date. On each of June 1,
2002 and June 1, 2003, Dish, Ltd. will be required to redeem 25% of the original
aggregate principal amount of 1994 Notes at a redemption price equal to 100% of
principal value at stated maturity thereof, together with accrued and unpaid
interest thereon to the redemption date. The remaining principal of the 1994
Notes matures on June 1, 2004.
In the event of a change of control and upon the occurrence of certain
other events, as described in the 1994 Notes Indenture, Dish, Ltd. will be
required to make an offer to each holder of 1994 Notes to repurchase all or any
part of such holder's 1994 Notes at a purchase price equal to 101% of the
accreted value thereof on the date of purchase, if prior to June 1, 1999, or
101% of the aggregate principal amount thereof, together with accrued and unpaid
interest thereon to the date of purchase, if on or after June 1, 1999.
The 1994 Notes Indenture contains restrictive covenants that, among other
things, impose limitations on Dish, Ltd. and its subsidiaries with respect to
their ability to: (i) incur additional indebtedness; (ii) issue preferred stock;
(iii) apply the proceeds of certain asset sales; (iv) create, incur or assume
liens; (v) create dividend and other payment restrictions with respect to Dish,
Ltd.'s subsidiaries; (vi) merge, consolidate or sell assets; (vii) incur
subordinated or junior debt; and (viii) enter into transactions with affiliates.
In addition, Dish, Ltd., may pay dividends on its equity securities only if
(1) no default is continuing under the 1994 Notes Indenture; and (2) after
giving effect to such dividend, Dish, Ltd.'s ratio of total indebtedness to cash
flow (calculated in accordance with the 1994 Notes Indenture) would not exceed
4.0 to 1.0. Moreover, the aggregate amount of such dividends generally may not
exceed the sum of 50% of Dish, Ltd.'s consolidated net income (calculated in
accordance with the 1994 Notes Indenture) from the date of issuance of the 1994
Notes, plus 100% of the aggregate net proceeds to Dish, Ltd. from the issuance
and sale of certain equity interests of Dish, Ltd. (including common stock).
F-18
ECHOSTAR DBS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. LONG-TERM DEBT (CONTINUED)
1996 NOTES
On March 25, 1996, ESBC completed the 1996 Notes Offering consisting of
$580.0 million aggregate principal amount at stated maturity of the 1996 Notes.
The 1996 Notes Offering resulted in net proceeds to ESBC of approximately $336.9
million (after payment of underwriting discount and other issuance costs
aggregating approximately $13.1 million). The 1996 Notes bear interest at a rate
of 13 1/8%, computed on a semi-annual bond equivalent basis. Interest on the
1996 Notes will not be payable in cash prior to March 15, 2000, with the 1996
Notes accreting to a principal amount at stated maturity of $580.0 million by
that date. Commencing September 15, 2000, interest on the 1996 Notes will be
payable in cash on September 15 and March 15 of each year. The 1996 Notes mature
on March 15, 2004.
The 1996 Notes rank PARI PASSU in right of payment with all senior
indebtedness of ESBC. The 1996 Notes are guaranteed on a subordinated basis by
ESBC's parent, EchoStar, and are secured by liens on certain assets of ESBC,
EchoStar and certain of EchoStar's subsidiaries, including all of the
outstanding capital stock of Dish, Ltd., which currently owns substantially all
of EchoStar's operating subsidiaries. Although the 1996 Notes are titled
"Senior," (i) ESBC has not issued, and does not have any current arrangements to
issue, any significant indebtedness to which the 1996 Notes would be senior; and
(ii) the 1996 Notes are effectively subordinated to all liabilities of ECC
(except liabilities to general creditors) and its other subsidiaries (except
liabilities of ESBC), including liabilities to general creditors. As of
December 31, 1996, the liabilities of EchoStar and its subsidiaries, exclusive
of the 1996 Notes, aggregated approximately $694.0 million. In addition, net
cash flows generated by the assets and operations of ESBC's subsidiaries will be
available to satisfy the obligations of the 1996 Notes only at any time after
payment of all amounts due and payable at such time under the 1994 Notes.
Except under certain circumstances requiring prepayment premiums, and in
other limited circumstances, the 1996 Notes are not redeemable at ESBC's option
prior to March 15, 2000. Thereafter, the 1996 Notes will be subject to
redemption, at the option of ESBC, in whole or in part, at redemption prices
ranging from 106.5625% during the year commencing March 15, 2000 to 100% on or
after March 15, 2003 of principal amount at stated maturity, together with
accrued and unpaid interest thereon to the redemption date. The entire principal
balance of the 1996 Notes will mature on March 15, 2004.
The 1996 Notes Indenture contains restrictive covenants that, among other
things, impose limitations on ESBC with respect to its ability to: (i) incur
additional indebtedness; (ii) issue preferred stock; (iii) apply the proceeds of
certain asset sales; (iv) create, incur or assume liens; (v) create dividend and
other payment restrictions with respect to ESBC's subsidiaries; (vi) merge,
consolidate or sell assets; (vii) incur subordinated or junior debt; and (viii)
enter into transactions with affiliates. In addition, ESBC may pay dividends on
its equity securities only if (1) no default is continuing under the 1996 Notes
Indenture; and (2) after giving effect to such dividend, ESBC's ratio of total
indebtedness to cash flow (calculated in accordance with the 1996 Notes
Indenture) would not exceed 5.0 to 1.0. Moreover, the aggregate amount of such
dividends generally may not exceed the sum of 50% of ESBC's consolidated net
income (calculated in accordance with the 1996 Notes Indenture) from January 1,
1996, plus 100% of the aggregate net cash proceeds received by ESBC and its
subsidiaries from the issue or sale of certain equity interests of EchoStar
(including common stock). The 1996 Notes Indenture permits ESBC to pay dividends
and make other distributions to DBS Corp without restrictions.
In the event of a change of control, as described in the 1996 Notes
Indenture, ESBC will be required to make an offer to each holder of 1996 Notes
to repurchase all of such holder's 1996 Notes at a purchase price equal to 101%
of the accreted value thereof on the date of purchase, if prior to March 15,
2000, or 101% of the aggregate principal amount at stated maturity thereof,
together with accrued and unpaid interest thereon to the date of purchase, if on
or after March 15, 2000.
F-19
ECHOSTAR DBS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. LONG-TERM DEBT (CONTINUED)
OTHER LONG-TERM DEBT
In addition to the 1994 Notes and 1996 Notes, other long-term debt consists
of the following (in thousands, except monthly payment data):
DECEMBER 31,
------------------------
1995 1996
------------------------
8.25% note payable for deferred satellite contract payments for
EchoStar I due in equal monthly installments of $722,027,
including interest, through February 2001 . . . . . . . . . . $32,833 $30,463
8.25% note payable for deferred satellite contract payments
for EchoStar II due in equal monthly installments of $561,577,
including interest, through November 2001 . . . . . . . . . . - 27,161
8.0% mortgage note payable due in equal monthly installments of
$41,635, including interest, through May 2008; secured by land
and office building with a net book value of approximately
$4.1 million. . . . . . . . . . . . . . . . . . . . . . . . . 3,909 3,715
10.5% mortgage note payable due in equal monthly installments of
$9,442, including interest, through November 1998; final payment
of $854,000 due November 1998; secured by land and warehouse
building with a net book value of approximately $886,000. 910 892
9.9375% mortgage note payable due in equal quarterly principal
installments of $10,625 plus interest through April 2009; secured
by land and office building with a net book value of
approximately $802,000. . . . . . . . . . . . . . . . . . . . 574 531
-----------------------
Total long-term debt, excluding the 1994 Notes and 1996 Notes . 38,226 62,762
Less current portion. . . . . . . . . . . . . . . . . . . . . . (4,782) (11,334)
-----------------------
Long-term debt, excluding current portion . . . . . . . . . . . $33,444 $51,428
-----------------------
-----------------------
In addition to the above other long-term debt, DBS Corp has a $12.0 million
demand note payable to ECC. This note payable bears interest at the prime rate
(8.25% at December 31, 1996).
Future maturities of amounts outstanding under the Company's long-term debt
facilities as of December 31, 1996 are summarized as follows (in thousands):
DEFERRED
SATELLITE MORTGAGE
CONTRACT NOTES
1994 NOTES 1996 NOTES PAYMENTS PAYABLE TOTAL
---------- ---------- --------- -------- ----------
YEAR ENDING DECEMBER 31,
1997 . . . . . . . . . . . $ - $ - $ 11,061 $ 273 $ 11,334
1998 . . . . . . . . . . . - - 12,009 1,141 13,150
1999 . . . . . . . . . . . - - 13,038 289 13,327
2000 . . . . . . . . . . . - - 14,156 309 14,465
2001 . . . . . . . . . . . - - 7,360 331 7,691
Thereafter . . . . . . . . 624,000 580,000 - 2,795 1,206,795
Unamortized discount . . . (186,873) (193,835) - - (380,708)
---------- ---------- --------- -------- -----------
Total. . . . . . . . . . . $ 437,127 $ 386,165 $ 57,624 $ 5,138 $ 886,054
---------- ---------- --------- -------- -----------
---------- ---------- --------- -------- -----------
F-20
ECHOSTAR DBS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. LONG-TERM DEBT (CONTINUED)
The following table summarizes the book and fair values of the Company's
debt facilities at December 31, 1996 (dollars in thousands). Fair values for
the Company's 1994 Notes and 1996 Notes are based on quoted market prices.
The fair value of the Company's deferred satellite contract payments and
mortgage notes payable are estimated using discounted cash flow analyses. The
interest rates assumed in such discounted cash flow analyses reflect interest
rates currently being offered for loans with similar terms to borrowers of
similar credit quality.
BOOK VALUE FAIR VALUE
---------- ----------
1994 Notes ........................... $ 437,127 $ 526,282
1996 Notes ........................... 386,165 435,986
Deferred satellite contract payments.. 57,624 56,471
Mortgage notes payable ............... 5,138 5,138
---------- ----------
$ 886,054 $1,023,877
---------- ----------
---------- ----------
DEFERRED SATELLITE CONTRACT PAYMENTS
The majority of the purchase price for the satellites is required to be
paid in progress payments, with the remainder payable in the form of
non-contingent payments which are deferred until after the respective
satellites are in orbit (the "Deferred Payments"). Interest rates on the
Deferred Payments range between 7.75% and 8.25% (to be determined 90 days
prior to the launch of each such satellite) and payments are made over a
period of five years after the delivery and launch of each such satellite.
DBS Corp utilized $36.0 million and $28.0 million of contractor financing for
EchoStar I and EchoStar II, respectively. The Deferred Payments with respect
to EchoStar I and EchoStar II are secured by substantially all assets of
Dish, Ltd. and its subsidiaries (subject to certain restrictions) and a
corporate guarantee of ECC.
BANK CREDIT FACILITY
From May 1994 to May 1996, certain of EchoStar's subsidiaries maintained
a revolving credit facility (the "Credit Facility") with a bank for the
purposes of funding working capital advances and meeting letter of credit
requirements associated with certain inventory purchases and satellite
construction payments. The Credit Facility expired in May 1996. EchoStar
currently does not intend to obtain a replacement credit facility.
7. INCOME TAXES
The components of the (provision for) benefit from income taxes are as
follows (in thousands):
YEAR ENDED DECEMBER 31,
-------------------------------
1994 1995 1996
-------------------------------
Current (provision) benefit:
Federal ............................ $(5,951) $1,711 $ 4,596
State .............................. (853) (44) (49)
Foreign ............................ (925) (301) (209)
-------------------------------
(7,729) 1,366 4,338
Deferred benefit:
Federal ............................ 6,342 4,440 48,043
State .............................. 988 385 2,472
-------------------------------
7,330 4,825 50,515
-------------------------------
Total (provision) benefit ........ $ (399) $6,191 $54,853
-------------------------------
-------------------------------
F-21
ECHOSTAR DBS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. INCOME TAXES (CONTINUED)
As of December 31, 1996, the Company had net operating loss carryforwards
("NOLs") for Federal income tax purposes of approximately $77.9 million. The
NOLs expire beginning in year 2011. The use of the NOLs is subject to
statutory and regulatory limitations regarding changes in ownership. SFAS No.
109 requires that the tax benefit of NOLs for financial reporting purposes be
recorded as an asset. To the extent that management assesses the realization
of deferred tax assets to be less than "more likely than not," a valuation
reserve is established.
The temporary differences which give rise to deferred tax assets and
liabilities as of December 31, 1995 and 1996 are as follows (in thousands):
DECEMBER 31,
----------------------
1995 1996
----------------------
Current deferred tax assets:
Accrued royalties .............................................. $ - $ 3,029
Inventory reserves and cost methods ............................ 834 1,811
Accrued expenses ............................................... - 1,414
Allowance for doubtful accounts ................................ 456 674
Reserve for warranty costs ..................................... 385 284
Other .......................................................... 312 57
----------------------
Total current deferred tax assets ................................ 1,987 7,269
Current deferred tax liabilities:
Unrealized holding gain on marketable investment securities .... (153) (6)
Subscriber acquisition costs ................................... - (19,937)
----------------------
Total current deferred tax liabilities ........................... (153) (19,943)
----------------------
Net current deferred tax assets (liabilities)................... 1,834 (12,674)
Noncurrent deferred tax assets:
Net operating loss carryforwards ................................ - 77,910
Amortization of original issue discount on 1994 and 1996 Notes... 15,439 34,912
Other ........................................................... 7 3,451
----------------------
Total noncurrent deferred tax assets 15,446 116,273
Noncurrent deferred tax liabilities:
Capitalized costs deducted for tax .............................. (2,351) (17,683)
Depreciation .................................................... (986) (18,927)
----------------------
Total noncurrent deferred tax liabilities ......................... (3,337) (36,610)
----------------------
Noncurrent net deferred tax assets ............................ 12,109 79,663
----------------------
Net deferred tax assets ....................................... $13,943 $ 66,989
----------------------
----------------------
F-22
ECHOSTAR DBS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. INCOME TAXES (CONTINUED)
No valuation reserve has been provided for the above deferred tax assets
because the Company currently believes it is more likely than not that these
assets will be realized. If future operating results differ materially and
adversely from the Company's current expectations, its judgment regarding the
need for a valuation allowance may change.
The actual tax provisions for 1994, 1995 and 1996 are reconciled to the
amounts computed by applying the statutory federal tax rate to income before
taxes as follows (dollars in thousands):
1994 1995 1996
------------------- ------------------ ------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
------------------- ------------------ ------------------
Statutory rate .............................. $(166) (34.0)% $6,493 35.0% $54,785 35.0%
State income taxes, net of federal benefit .. (88) (18.0) 222 1.2 2,839 1.8
Tax exempt interest income .................. 60 12.3 10 0.1 - -
Research and development credits ............ 156 31.9 31 0.2 - -
Non-deductible interest expense ............. (258) (52.7) (293) (1.7) (2,099) (1.4)
Other (103) (21.1) (272) (1.4) (672) (0.4)
------------------ ------------------ ------------------
Total (provision for) benefit from income taxes $(399) (81.6)% $6,191 33.4% $54,853 35.0%
------------------ ------------------ ------------------
------------------ ------------------ ------------------
8. EMPLOYEE BENEFIT PLAN
EchoStar sponsors a 401(k) Employee Savings Plan (the "401(k) Plan") for
eligible employees. Voluntary employee contributions to the 401(k) Plan may
be matched 50% by EchoStar, subject to a maximum annual contribution by
EchoStar of $1,000 per employee. EchoStar may also make an annual
discretionary contribution to the plan with approval by EchoStar's Board of
Directors, subject to the maximum deductible limit provided by the Internal
Revenue Code of 1986, as amended. EchoStar's total cash contributions to the
401(k) Plan totaled $170,000, $177,000 and $226,000 during 1994, 1995 and
1996, respectively. Additionally, EchoStar contributed 55,000 shares of its
Class A Common Stock in each of the years ended December 31, 1995 and 1996
(fair value of approximately $1.1 million and $935,000, respectively) to the
401(k) Plan as discretionary contributions.
9. STOCKHOLDER'S EQUITY
Effective March 10, 1994, the stockholders approved measures necessary to
increase the authorized capital stock of Dish, Ltd. to include 200 million
shares of Class A Common Stock, 100 million shares of Class B Common Stock,
and 20 million shares of Series A Convertible Preferred Stock and determined
to split all outstanding shares of common stock on the basis of approximately
4,296 to 1.
All accrued dividends payable to Mr. Ergen on his Dish, Ltd. 8% Series A
Cumulative Preferred Stock through the date of the Exchange ($1.4 million),
and all accrued dividends payable to the remaining holder of Dish, Ltd. 8%
Series A Cumulative Preferred Stock through the date of the Merger
($107,000), will remain obligations of Dish, Ltd. (Note 1); however, no
additional dividends will accrue with respect to the Dish, Ltd. 8% Series A
Cumulative Preferred Stock. The 1994 Notes Indenture places significant
restrictions on the payment of those dividends. As of December 31, 1996,
additional accrued dividends payable to Mr. Ergen by ECC on the ECC 8% Series
A Cumulative Preferred Stock totaled $1.7 million.
10. STOCK COMPENSATION PLANS
EchoStar has two stock-based compensation plans, which are described
below. EchoStar has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees," ("APB 25") and related
interpretations in accounting for its stock-based compensation plans. Under
APB 25, because the exercise price of EchoStar's employees stock options is
equal to the market price of the underlying stock on the date of the grant,
no compensation expense is recognized. In October 1995, the Financial
Accounting Standards Board issued SFAS No. 123, "Accounting and Disclosure of
Stock-Based Compensation," ("SFAS No. 123") which established an alternative
method of expense recognition for stock-based
F-23
ECHOSTAR DBS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. STOCK COMPENSATION PLANS (CONTINUED)
compensation awards to employees based on fair values. EchoStar elected to
not adopt SFAS No. 123 for expense recognition purposes.
Pro forma information regarding net income and earnings per share is
required by SFAS No. 123 and has been determined as if EchoStar had accounted
for its stock-based compensation plans using the fair value method prescribed
by that statement. The fair value for these options was estimated at the date
of grant using a Black-Scholes option pricing model with the following
weighted-average assumptions for 1995 and 1996, respectively: risk-free
interest rate of 6.12% and 6.80% for 1995 and 1996, respectively; dividend
yields of 0.0% during each period; volatility factors of the expected market
price of EchoStar's Class A Common Stock of 62%, and a weighted-average
expected life of the options of six years.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. All options
are initially assumed to vest. Compensation previously recognized is reversed
to the extent applicable to forfeitures of unvested options. The Company's
pro forma net loss was $12.8 million and $102.6 million for the years ended
December 31, 1995 and 1996, respectively.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, option valuation models
require the input of highly subjective assumptions including the expected
stock price characteristics significantly different from those of traded
options, and because changes in the subjective input assumptions can
materially affect the fair value estimate, in management's opinion, the
existing models do not necessarily provide a reliable single measure of the
fair value of its stock-based compensation awards.
In April 1994, EchoStar adopted a stock incentive plan (the "Stock
Incentive Plan") to provide incentive to attract and retain officers,
directors and key employees. ECC assumed all outstanding options for the
purchase of Dish, Ltd. common stock effective with the Exchange and Merger
and has reserved up to 10 million shares of its Class A Common Stock for
granting awards under the Stock Incentive Plan. Awards available under the
Stock Incentive Plan include: (i) common stock purchase options; (ii) stock
appreciation rights; (iii) restricted stock and restricted stock units; (iv)
performance awards; (v) dividend equivalents; and (vi) other stock-based
awards. All options granted through December 31, 1996 have included exercise
prices not less than the fair market value of the Shares at the date of grant
and vest as determined by EchoStar's Board of Directors, generally at the
rate of 20% per year.
A summary of EchoStar's incentive stock option activity for the years
ended December 31, 1995 and 1996 is as follows:
1995 1996
------------------------- -----------------------
WEIGHTED- WEIGHTED-
AVERAGE AVERAGE
EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE
------------------------- -----------------------
Options outstanding at beginning of period .... 744,872 $ 9.33 1,117,133 $12.23
Granted ....................................... 419,772 17.13 138,790 27.02
Exercised ..................................... (4,284) 9.33 (103,766) 10.24
Forfeited ..................................... (43,227) 10.55 (126,884) 13.27
------------------------- -----------------------
Options outstanding at end of period .......... 1,117,133 $ 12.23 1,025,273 14.27
------------------------- -----------------------
------------------------- -----------------------
Exercisable at end of period .................. 142,474 $ 9.33 258,368 $11.31
------------------------- -----------------------
------------------------- -----------------------
Weighted-average fair value of
options granted ............................ $ 9.86 $16.96
------------ ----------
------------ ----------
F-24
ECHOSTAR DBS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED)
10. STOCK COMPENSATION PLANS(CONTINUED)
Exercise prices for options outstanding as of December 31, 1996 are as
follows:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------------- ---------------------------------
NUMBER WEIGHTED- WEIGHTED- NUMBER
OUTSTANDING AS AVERAGE AVERAGE EXERCISABLE AS OF WEIGHTED-
OF DECEMBER 31, REMAINING EXERCISE DECEMBER 31, AVERAGE
RANGE OF EXERCISE PRICES 1996 CONTRACTUAL LIFE PRICE 1996 EXERCISE PRICE
- ------------------------- ----------------------------------------------- ---------------------------------
$9.333-$11.870 ........ 607,462 5.50 $ 9.48 203,757 $ 9.41
17.000- 20.250 ........ 279,021 6.71 18.48 54,611 18.51
26.690- 29.360 ........ 138,790 7.58 27.02 - -
----------------------------------------------- ---------------------------------
$9.333-$29.360 ........ 1,025,273 6.11 $14.27 258,368 $11.31
----------------------------------------------- ---------------------------------
----------------------------------------------- ---------------------------------
In March 1994, EchoStar entered into an employment agreement with one of
its executive officers. The officer was granted an option, containing certain
conditions to vesting, to purchase 322,208 shares of EchoStar Class A Common
Stock for $1.0 million at any time prior to December 31, 1999, subject to
certain limitations. One-half of this option became exercisable on December
31, 1994 and the remainder became exercisable on December 31, 1995. The
option was not granted pursuant to the Stock Incentive Plan. During 1996,
this option was fully exercised.
Effective March 1995, EchoStar granted an additional option to a key
employee to purchase 33,000 shares of EchoStar's Class A Common Stock, which
vests 50% in March 1996 and 50% in March 1997. The exercise price for each
share of Class A Common Stock is $11.87 per share. The option was not granted
pursuant to the Stock Incentive Plan. In December 1996, the vested portion of
this option was exercised and the unvested portion of the option was
canceled.
11. OTHER COMMITMENTS AND CONTINGENCIES
SATELLITE CONTRACTS
The Company has contracted with Martin for the construction and delivery
of high powered DBS satellites and for related services. Martin constructed
both EchoStar I and EchoStar II. During the remainder of 1997, EchoStar
expects to expend: (i) approximately $16.7 million for contractor financing
on EchoStar I, EchoStar II, and EchoStar III; (ii) approximately $118.7
million in connection with the launch and insurance of EchoStar III and
EchoStar IV; and (iii) approximately $50.0 million for construction of
EchoStar III and EchoStar IV. Funds for these expenditures are expected to
come from the 1996 Notes Escrow Account, the proceeds of the 1997 Offering,
and available cash and marketable investment securities. Beyond 1997,
EchoStar will expend approximately $88.6 million to repay contractor
financing debt related to EchoStar I, EchoStar II, EchoStar III, and EchoStar
IV. Additionally, EchoStar has committed to expend approximately an
additional $69.7 million to construct and launch EchoStar IV in 1998. The
construction contracts with Martin for the construction of EchoStar III and
EchoStar IV contain substantial termination penalties. The 1997 Offering is
expected to provide financing sufficient to fund the Company's commitments
for at least the next 12 months. In order to continue to build, launch and
support EchoStar III and EchoStar IV beyond the second quarter of 1998,
EchoStar may require additional capital. There can be no assurance that
additional capital will be available, or, if available, that it will be
available on terms acceptable to EchoStar.
EchoStar has filed applications with the Federal Communications
Commission ("FCC") for authorization to construct, launch and operate a
domestic fixed satellite service system ("FSS System") and a two satellite
Ka-band satellite system. No assurances can be given that the Company's
applications will be approved by the FCC or that, if approved, EchoStar will
successfully develop the FSS System or the Ka-band satellite system. EchoStar
believes that establishment of the FSS System or the Ka-band satellite system
would enhance its competitive position in the DTH industry. In the event
EchoStar's FSS or Ka-band satellite system applications are approved by the
FCC, additional debt or equity financing would be required. No assurances can
be given that financing will be available, or that it will be available on
terms acceptable to the Company.
F-25
ECHOSTAR DBS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. OTHER COMMITMENTS AND CONTINGENCIES (CONTINUED)
LEASES
Future minimum lease payments under noncancelable operating leases as of
December 31, 1996, are as follows (in thousands):
Year ending December 31,
1997 . . . . . . . . . . . . . . . . . . . . . $ 869
1998 . . . . . . . . . . . . . . . . . . . . . 492
1999 . . . . . . . . . . . . . . . . . . . . . 180
2000 . . . . . . . . . . . . . . . . . . . . . 21
2001 . . . . . . . . . . . . . . . . . . . . . 2
Thereafter . . . . . . . . . . . . . . . . . . -
-------
Total minimum lease payments . . . . . . . . . $1,564
-------
-------
Rental expense for operating leases aggregated $1.4 million, $1.2
million, and $950,000 during the years ended December 31, 1994, 1995 and
1996, respectively.
PURCHASE COMMITMENTS
The Company has entered into agreements with various manufacturers to
purchase DBS satellite receivers and related components manufactured to its
specifications. As of December 31, 1996, the remaining commitments totaled
approximately $82.9 million and the total of all outstanding purchase order
commitments with domestic and foreign suppliers was $85.9 million. All of the
purchases related to these commitments are expected to be made during 1997.
The Company expects to finance these purchases from available cash, the
proceeds of the 1997 Offering, and cash flows generated from sales of DISH
Network programming and related DBS inventory.
OTHER RISKS AND CONTINGENCIES
EchoStar is subject to various legal proceedings and claims which arise
in the ordinary course of its business. In the opinion of management, the
amount of ultimate liability with respect to these actions will not
materially affect EchoStar's financial position or results of operations.
F-26
ECHOSTAR DBS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. CONDENSED CONSOLIDATING FINANCIAL INFORMATION FOR SUBSIDIARY GUARANTORS
Presented below is condensed consolidating financial information for
EchoStar and its subsidiaries as of and for the years ended December 31, 1995
and 1996. See Note 6 for a more complete description of the subsidiary
guarantors of each of the 1996 Notes and the 1994 Notes. Because the
formations of EchoStar (incorporated in 1995), DBS Corp (incorporated in
1996) and ESBC (incorporated in 1996) were all accounted for as
reorganizations of entities under common control, the consolidated financial
statements of Dish, Ltd. as of December 31, 1994 and for the year then ended
also represent the financial statements of EchoStar, DBS Corp and ESBC.
Therefore, condensed consolidating financial information for the subsidiary
guarantors of the 1996 Notes and the 1994 Notes for the year ended December
31, 1994 is not presented.
Condensed consolidating financial information is presented for the
following entities:
Consolidated Dish, Ltd. (referred to as "Dish") Consolidated DBS Corp (referred to as "DBS Corp")
ESBC Parent Company Only (referred to as "ESBC - PC") ECC Parent Company Only (referred to as "ECC - PC")
Consolidating and eliminating adjustments (referred to as "C&E") Other direct wholly owned subs of ECC (referred to as "Other")
Consolidated ESBC (referred to as "ESBC") Consolidated ECC (referred to as "ECC")
DBS Corp Parent Company Only (referred to as "DBS Corp - PC")
CONDENSED CONSOLIDATING BALANCE SHEETS - AS OF DECEMBER 31, 1995 (IN
MILLIONS)
ECC -
Dish PC Other C&E ECC
-----------------------------------------------
ASSETS
Current Assets:
Cash and cash equivalents. . . . . . . . . . . . . . . . . . . . . $ 14 $ 8 $ -- $ -- $ 22
Marketable investment securities . . . . . . . . . . . . . . . . . -- 15 -- -- 15
Trade accounts receivable, net . . . . . . . . . . . . . . . . . . 10 -- -- -- 10
Inventories. . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 -- -- -- 39
Other current assets . . . . . . . . . . . . . . . . . . . . . . . 18 -- -- -- 18
-----------------------------------------------
Total current assets. . . . . . . . . . . . . . . . . . . . . . . . . 81 23 -- -- 104
Investments in subsidiaries.. . . . . . . . . . . . . . . . . . . . . -- 93 -- (93) --
Restricted cash and marketable investment securities. . . . . . . . . 100 -- -- -- 100
Property and equipment, net . . . . . . . . . . . . . . . . . . . . . 333 -- 21 -- 354
Advances to affiliates, net . . . . . . . . . . . . . . . . . . . . . -- 21 -- (21) --
Other noncurrent assets . . . . . . . . . . . . . . . . . . . . . . . 45 20 -- -- 65
-----------------------------------------------
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . $ 559 $ 157 $ 21 $(114) $ 623
-----------------------------------------------
-----------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Trade accounts payable . . . . . . . . . . . . . . . . . . . . . . $ 19 $ -- $ -- $ -- $ 19
Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . 1 -- -- -- 1
Accrued expenses and other current liabilities . . . . . . . . . . 26 -- -- -- 26
Current portion of long-term debt. . . . . . . . . . . . . . . . . 5 -- -- -- 5
-----------------------------------------------
Total current liabilities . . . . . . . . . . . . . . . . . . . . . . 51 -- -- -- 51
Advances from affiliates, net . . . . . . . . . . . . . . . . . . . . -- -- 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-27
ECHOSTAR DBS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. CONDENSED CONSOLIDATING FINANCIAL INFORMATION FOR SUBSIDIARY GUARANTORS
(CONTINUED)
CONDENSED CONSOLIDATING BALANCE SHEETS - AS OF DECEMBER 31, 1996 (IN
MILLIONS)
ESBC - DBS Corp- DBS ECC -
Dish PC C&E ESBC PC C&E Corp PC Other C&E ECC
----------------------------------------------------------------------------------------------
ASSETS
Current Assets:
Cash and cash equivalents. . . $ 25 $ 14 $ -- $ 39 $ -- $ -- $ 39 $ -- $ -- $ -- $ 39
Marketable investment
securities . . . . . . . . . -- 19 -- 19 -- -- 19 -- -- -- 19
Trade accounts receivable,
net. . . . . . . . . . . . . 14 -- -- 14 -- -- 14 -- -- -- 14
Inventories. . . . . . . . . . 73 -- -- 73 -- -- 73 -- -- -- 73
Subscriber acquisition
costs, net . . . . . . . . . 68 -- -- 68 -- -- 68 -- -- -- 68
Other current assets . . . . . 19 -- -- 19 -- -- 19 1 3 -- 23
----------------------------------------------------------------------------------------------
Total current assets . . . . . . 199 33 -- 232 -- -- 232 1 3 -- 236
Investment in subsidiary.. . . . -- 3 ( 3) -- -- -- -- -- -- -- --
Restricted cash and marketable
investment securities. . . . . 32 47 -- 79 -- -- 79 -- -- -- 79
Property and equipment, net. . . 500 -- -- 500 29 -- 529 -- 62 -- 591
Advances to affiliates, net. . . -- 280 (135) 145 -- (76) 69 -- -- (69) --
Deferred tax assets. . . . . . . 74 5 -- 79 -- -- 79 -- 1 ( 1) 79
Other noncurrent assets. . . . . 26 12 -- 38 60 -- 98 70 -- (12) 156
----------------------------------------------------------------------------------------------
Total assets . . . . . . . . $ 831 $ 380 $(138) $1,073 $ 89 $ (76) $1,086 $ 71 $ 66 $(82) $1,141
----------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIT)
Current Liabilities:
Trade accounts payable . . . . $ 41 $ -- $ -- $ 41 $ -- $ -- $ 41 $ -- $ 1 $ (1) $ 41
Deferred revenue . . . . . . . 103 -- -- 103 -- -- 103 -- -- -- 103
Accrued expenses and other
current liabilities. . . . . 29 -- -- 29 2 -- 31 1 -- (2) 30
Deferred tax liabilities . . . 13 -- -- 13 -- -- 13 -- -- -- 13
Current portion of long-
term debt. . . . . . . . . . 11 -- -- 11 -- -- 11 -- -- -- 11
----------------------------------------------------------------------------------------------
Total current liabilities. . . . 197 -- -- 197 2 -- 199 1 1 (3) 198
Long-term deferred signal
carriage revenue . . . . . . . 6 -- -- 6 -- -- 6 -- -- -- 6
Advances from affiliates, net. . 135 -- (135) -- 76 (76) -- 2 64 (66) --
Investment in subsidiaries . . . -- -- -- -- 6 (6) -- 7 -- (7) --
1994 Notes . . . . . . . . . . . 437 -- -- 437 -- -- 437 -- -- -- 437
1996 Notes . . . . . . . . . . . -- 386 -- 386 -- -- 386 -- -- -- 386
Mortgage and other notes
payable, excluding current
portion. . . . . . . . . . . . 52 -- -- 52 12 -- 64 -- -- (12) 52
Other long-term liabilities. . . 1 -- -- 1 -- -- 1 -- -- -- 1
----------------------------------------------------------------------------------------------
Total long-term liabilities. . 631 386 (135) 882 94 (82) 894 9 64 (85) 882
----------------------------------------------------------------------------------------------
Total liabilities. . . . . . 828 386 (135) 1,079 96 (82) 1,093 10 65 (88) 1,080
Stockholders' equity (deficit) . 3 ( 6) ( 3) ( 6) ( 7) 6 ( 7) 61 1 6 61
----------------------------------------------------------------------------------------------
Total liabilities and
stockholders' equity
(deficit). . . . . . . . . . $831 $380 $(138) $1,073 $ 89 $ (76) $1,086 $ 71 $ 66 $(82) $1,141
----------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------
F-28
ECHOSTAR DBS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. CONDENSED CONSOLIDATING FINANCIAL INFORMATION FOR SUBSIDIARY GUARANTORS
(CONTINUED)
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS - YEAR ENDED DECEMBER 31,
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-29
ECHOSTAR DBS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. CONDENSED CONSOLIDATING FINANCIAL INFORMATION FOR SUBSIDIARY GUARANTORS
(CONTINUED)
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS - YEAR ENDED DECEMBER 31,
1996 (IN MILLIONS, EXCEPT PER SHARE DATA)
ESBC - DBS Corp- DBS ECC-
Dish PC C&E ESBC PC C&E Corp PC Other C&E ECC
------------------------------------------------------------------------------------
REVENUE:
DTH products and technical services. . $136 $ -- $ -- $136 $ -- $ -- $136 $ -- $ -- $ -- $136
DISH Network promotions -
subscription television services
and products . . . . . . . . . . . . 23 -- -- 23 -- -- 23 -- -- -- 23
DISH Network subscription television
services . . . . . . . . . . . . . . 38 -- -- 38 -- -- 38 -- -- -- 38
C-band programming . . . . . . . . . . 12 -- -- 12 -- -- 12 -- -- -- 12
Loan origination and participation
income . . . . . . . . . . . . . . . 1 -- -- 1 -- -- 1 -- 2 -- 3
------------------------------------------------------------------------------------
Total revenue. . . . . . . . . . . . . . 210 -- -- 210 -- -- 210 -- 2 -- 212
EXPENSES:
DTH products and technical services. . 124 -- -- 124 -- -- 124 -- -- -- 124
DISH Network programming . . . . . . . 19 -- -- 19 -- -- 19 -- -- -- 19
C-band programming . . . . . . . . . . 11 -- -- 11 -- -- 11 -- -- -- 11
Selling, general and administrative. . 87 -- -- 87 -- -- 87 -- 3 -- 90
Subscriber promotion subsidies . . . . 35 -- -- 35 -- -- 35 -- -- ( 1) 34
Amortization of subscriber
acquisition costs. . . . . . . . . . 16 -- -- 16 -- -- 16 -- -- -- 16
Depreciation and amortization. . . . . 27 -- -- 27 -- -- 27 -- -- -- 27
------------------------------------------------------------------------------------
Total expenses . . . . . . . . . . . . . 319 -- -- 319 -- -- 319 -- 3 ( 1) 321
------------------------------------------------------------------------------------
Operating income (loss). . . . . . . . . (109) -- -- (109) -- -- (109) -- (1) 1 (109)
Other Income (Expense):. . . . . . . . .
Interest income. . . . . . . . . . . . 4 10 -- 14 -- -- 14 1 -- -- 15
Interest expense, net of amounts
capitalized. . . . . . . . . . . . . ( 37) ( 24) -- ( 61) ( 1) -- ( 62) -- -- -- ( 62)
Equity in losses of subsidiaries . . . -- ( 92) 92 -- (101) 101 -- (101) -- 101 --
------------------------------------------------------------------------------------
Total other income (expense), net. . . . ( 33) (106) 92 ( 47) (102) 101 ( 48) (100) -- 101 ( 47)
------------------------------------------------------------------------------------
Income (loss) before income taxes. . . . (142) (106) 92 (156) (102) 101 (157) (100) (1) 102 (156)
Income tax (provision) benefit, net. . . 50 5 -- 55 -- -- 55 ( 1) 1 -- 55
------------------------------------------------------------------------------------
Net income (loss). . . . . . . . . . . . $( 92) $(101) $92 $(101) $(102) $101 $(102) $(101) $ -- $102 $(101)
------------------------------------------------------------------------------------
------------------------------------------------------------------------------------
Net loss attributable to common shares . -- -- -- -- -- -- -- -- -- -- $(102)
------------------------------------------------------------------------------------
------------------------------------------------------------------------------------
Weighted-average common shares
outstanding. . . . . . . . . . . . . . -- -- -- -- -- -- -- -- -- -- 41
------------------------------------------------------------------------------------
------------------------------------------------------------------------------------
Loss per common and common equivalent
share. . . . . . . . . . . . . . . . . -- -- -- -- -- -- -- -- -- -- $(2.52)
------------------------------------------------------------------------------------
------------------------------------------------------------------------------------
F-30
ECHOSTAR DBS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. CONDENSED CONSOLIDATING FINANCIAL INFORMATION FOR SUBSIDIARY GUARANTORS
(CONTINUED)
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS - YEAR ENDED DECEMBER
31, 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-31
ECHOSTAR DBS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. CONDENSED CONSOLIDATING FINANCIAL INFORMATION FOR SUBSIDIARY GUARANTORS
(CONTINUED)
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS - YEAR ENDED DECEMBER
31, 1996 (IN MILLIONS)
DBS
ESBC Corp-
Dish - PC C&E ESBC PC C&E
--------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss). . . . . . . . . . . . . . . . . . . . . . . . . $( 92) $(101) $ 92 $(101) $(102) $101
Adjustments to reconcile net income (loss) to net cash flows
from operating activities:
Equity in (earnings) losses of subsidiaries . . . . . . . . . . -- 92 (92) -- 101 (101)
Depreciation and amortization . . . . . . . . . . . . . . . . . 27 -- -- 27 -- --
Amortization of subscriber acquisition costs. . . . . . . . . . 16 -- -- 16 -- --
Deferred income tax benefit . . . . . . . . . . . . . . . . . . ( 45) ( 5) -- ( 50) -- --
Amortization of debt discount and deferred financing
costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 24 3 61 -- --
Other, net. . . . . . . . . . . . . . . . . . . . . . . . . . . 10 -- -- 10 -- --
Changes in current assets and current liabilities, net. . . . . 14 -- -- 14 1 --
--------------------------------------------------------
Net cash flows provided by (used in) operating activities. . . . . ( 36) 10 3 ( 23) -- --
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of marketable investment securities. . . . . . . . . . . -- (138) -- (138) -- --
Sales of marketable investment securities. . . . . . . . . . . . . -- 120 -- 120 -- --
Purchases of restricted marketable investment securities . . . . . ( 21) -- -- ( 21) -- --
Funds released from restricted cash and marketable
investment securities - other. . . . . . . . . . . . . . . . . . 16 -- -- 16 -- --
Advances (to) from affiliates, net . . . . . . . . . . . . . . . . 138 (268) ( 3) (133) 69 --
Purchases of property and equipment. . . . . . . . . . . . . . . . ( 46) -- -- ( 46) -- --
Offering proceeds and investment earnings placed in
escrow . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ( 11) (183) -- (194) -- --
Funds released from escrow accounts. . . . . . . . . . . . . . . . 84 136 -- 220 -- --
Payments received on (investments in) convertible
subordinated debentures from SSET. . . . . . . . . . . . . . . . 6 -- -- 6 -- --
Investment in convertible subordinated debentures from
DBSI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- -- -- -- -- --
Long-term notes receivable from and investment in DBSC . . . . . . -- -- -- -- -- --
Long-term note receivable from DBS Corp. . . . . . . . . . . . . . -- -- -- -- -- --
Expenditures for satellite systems under construction. . . . . . . (112) -- -- (112) ( 26) --
Expenditures for FCC authorizations. . . . . . . . . . . . . . . . -- -- -- -- ( 55) --
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- -- -- -- -- --
--------------------------------------------------------
Net cash flows used in investing activities. . . . . . . . . . . . 54 (333) ( 3) (282) ( 12) --
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of 1996 Notes . . . . . . . . . . . . . -- 337 -- 337 -- --
Proceeds from note payable to ECC. . . . . . . . . . . . . . . . . -- -- -- -- 12 --
Repayments of mortgage indebtedness and notes payable. . . . . . . ( 8) -- -- ( 8) -- --
Stock options exercised. . . . . . . . . . . . . . . . . . . . . . -- -- -- -- -- --
--------------------------------------------------------
Net cash flows provided by (used in) financing activities. . . . . ( 8) 337 -- 329 12 --
--------------------------------------------------------
Net increase (decrease) in cash and cash equivalents . . . . . . . 10 14 -- 24 -- --
Cash and cash equivalents, beginning of year . . . . . . . . . . . 14 -- -- 14 -- --
--------------------------------------------------------
Cash and cash equivalents, end of year . . . . . . . . . . . . . . $ 24 $ 14 $ -- $ 38 $ -- $ --
--------------------------------------------------------
--------------------------------------------------------
DBS ECC -
Corp PC Other C&E ECC
------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss). . . . . . . . . . . . . . . . . . . . . . . . . $(102) $(101) $ -- $102 $(101)
Adjustments to reconcile net income (loss) to net cash flows
from operating activities:
Equity in (earnings) losses of subsidiaries . . . . . . . . . . -- 101 -- (101) --
Depreciation and amortization . . . . . . . . . . . . . . . . . 27 -- -- -- 27
Amortization of subscriber acquisition costs. . . . . . . . . . 16 -- -- -- 16
Deferred income tax benefit . . . . . . . . . . . . . . . . . . ( 50) -- -- -- ( 50)
Amortization of debt discount and deferred financing
costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61 -- -- -- 61
Other, net. . . . . . . . . . . . . . . . . . . . . . . . . . . 10 ( 2) -- -- 8
Changes in current assets and current liabilities, net. . . . . 15 4 -- ( 8) 11
-----------------------------------------------
Net cash flows provided by (used in) operating activities. . . . . ( 23) 2 -- ( 7) ( 28)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of marketable investment securities. . . . . . . . . . . (138) -- -- -- (138)
Sales of marketable investment securities. . . . . . . . . . . . . 120 15 -- -- 135
Purchases of restricted marketable investment securities . . . . . ( 21) -- -- -- ( 21)
Funds released from restricted cash and marketable
investment securities - other. . . . . . . . . . . . . . . . . . 16 -- -- -- 16
Advances (to) from affiliates, net . . . . . . . . . . . . . . . . ( 64) 22 38 4 --
Purchases of property and equipment. . . . . . . . . . . . . . . . ( 46) -- ( 5) -- ( 51)
Offering proceeds and investment earnings placed in
escrow . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (194) -- -- -- (194)
Funds released from escrow accounts. . . . . . . . . . . . . . . . 220 -- -- -- 220
Payments received on (investments in) convertible
subordinated debentures from SSET. . . . . . . . . . . . . . . . 6 -- -- -- 6
Investment in convertible subordinated debentures from
DBSI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- ( 3) -- -- ( 3)
Long-term notes receivable from and investment in DBSC . . . . . . -- ( 30) -- -- ( 30)
Long-term note receivable from DBS Corp. . . . . . . . . . . . . . -- ( 12) -- 12 --
Expenditures for satellite systems under construction. . . . . . . (138) -- ( 33) -- (171)
Expenditures for FCC authorizations. . . . . . . . . . . . . . . . ( 55) -- -- -- ( 55)
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- ( 3) -- 3 --
-----------------------------------------------
Net cash flows used in investing activities. . . . . . . . . . . . (294) ( 11) -- 19 (286)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of 1996 Notes . . . . . . . . . . . . . 337 -- -- -- 337
Proceeds from note payable to ECC. . . . . . . . . . . . . . . . . 12 -- -- ( 12) --
Repayments of mortgage indebtedness and notes payable. . . . . . . ( 8) -- -- -- ( 8)
Stock options exercised. . . . . . . . . . . . . . . . . . . . . . -- 2 -- -- 2
-----------------------------------------------
Net cash flows provided by (used in) financing activities. . . . . 341 2 -- ( 12) 331
-----------------------------------------------
Net increase (decrease) in cash and cash equivalents . . . . . . . 24 ( 7) -- -- 17
Cash and cash equivalents, beginning of year . . . . . . . . . . . 14 8 -- -- 22
-----------------------------------------------
Cash and cash equivalents, end of year . . . . . . . . . . . . . . $ 38 $ 1 $ -- $ -- $ 39
-----------------------------------------------
-----------------------------------------------
F-32
ECHOSTAR DBS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. OPERATIONS IN GEOGRAPHIC AREAS
The Company sells its products worldwide and has established operations in
Europe and the Pacific Rim. Information about the Company's operations in
different geographic areas as of December 31, 1994, 1995 and 1996 and for the
years then ended, is as follows (in thousands):
OTHER
UNITED STATES EUROPE INTERNATIONAL TOTAL
------------- ---------- ------------- -----------
AS OF AND FOR THE YEAR ENDED DECEMBER 31, 1994:
Total revenue. . . . . . . . . . . . . . . . . . $ 137,233 $ 24,072 $ 29,678 $ 190,983
------------- ---------- ------------- -----------
------------- ---------- ------------- -----------
Export sales . . . . . . . . . . . . . . . . . . $ 7,188
-------------
-------------
Operating income . . . . . . . . . . . . . . . . $ 10,811 $ 1,244 $ 1,161 $ 13,216
------------- ---------- ------------- -----------
------------- ---------- ------------- -----------
Other income (expense), net. . . . . . . . . . . $ (12,727)
-----------
Net income before income taxes . . . . . . . . . $ 489
-----------
-----------
Identifiable assets. . . . . . . . . . . . . . . $ 77,172 $ 6,397 $ 2,359 $ 85,928
------------- ---------- ------------- -----------
------------- ---------- ------------- -----------
Corporate assets . . . . . . . . . . . . . . . . 386,564
-----------
Total assets . . . . . . . . . . . . . . . . . . $ 472,492
-----------
-----------
AS OF AND FOR THE YEAR ENDED DECEMBER 31, 1995:
Total revenue. . . . . . . . . . . . . . . . . . $ 110,629 $ 31,351 $ 21,910 $ 163,890
------------- ---------- ------------- -----------
------------- ---------- ------------- -----------
Export sales . . . . . . . . . . . . . . . . . . $ 6,317
-------------
-------------
Operating income (loss). . . . . . . . . . . . . $ (7,895) $ 146 $ (257) $ (8,006)
------------- ---------- ------------- -----------
------------- ---------- ------------- -----------
Other income (expense), net. . . . . . . . . . . (9,260)
-----------
Loss before income taxes . . . . . . . . . . . . $ (17,266)
-----------
-----------
Identifiable assets. . . . . . . . . . . . . . . $ 63,136 $ 10,088 $ 3,788 $ 77,012
------------- ---------- ------------- -----------
------------- ---------- ------------- -----------
Corporate assets . . . . . . . . . . . . . . . . 482,283
-----------
Total assets . . . . . . . . . . . . . . . . . . $ 559,295
-----------
-----------
AS OF AND FOR THE YEAR ENDED DECEMBER 31, 1996:
Total revenue. . . . . . . . . . . . . . . . . . $ 172,239 $ 26,984 $ 10,508 $ 209,731
------------- ---------- ------------- -----------
------------- ---------- ------------- -----------
Export sales . . . . . . . . . . . . . . . . . . $ 1,536
-------------
-------------
Operating loss . . . . . . . . . . . . . . . . . $ (106,695) $ (1,274) $ (896) $ (108,865)
------------- ---------- ------------- -----------
------------- ---------- ------------- -----------
Other income (expense), net. . . . . . . . . . . (46,743)
-----------
Loss before income taxes . . . . . . . . . . . . $ (155,608)
-----------
-----------
Identifiable assets. . . . . . . . . . . . . . . $ 836,596 $ 5,795 $ 1,871 $ 844,262
------------- ---------- ------------- -----------
------------- ---------- ------------- -----------
Corporate assets . . . . . . . . . . . . . . . . 228,829
-----------
Total assets . . . . . . . . . . . . . . . . . . $1,073,091
-----------
-----------
F-33
ECHOSTAR DBS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. VALUATION AND QUALIFYING ACCOUNTS
The Company's valuation and qualifying accounts as of December 31, 1994,
1995 and 1996 are as follows (in thousands):
BALANCE AT CHARGED TO
BEGINNING OF COSTS AND BALANCE AT
YEAR EXPENSES DEDUCTIONS END OF YEAR
--------------------------------------------------------------------------
. . . . . . . . . . . . . . . . . . .
YEAR ENDED DECEMBER 31, 1994:
Assets:
Allowance for doubtful accounts . . . $ 346 $ 8 $ (168) $ 186
Loan loss reserve . . . . . . . . . . 50 75 (30) 95
Reserve for inventory . . . . . . . . 1,403 329 (147) 1,585
Liabilities:
Reserve for warranty costs. . . . . . 1,350 508 (458) 1,400
Other reserves. . . . . . . . . . . . 93 - - 93
YEAR ENDED DECEMBER 31, 1995:
Assets:
Allowance for doubtful accounts . . . $ 186 $ 1,160 $ (240) $ 1,106
Loan loss reserve . . . . . . . . . . 95 19 (36) 78
Reserve for inventory . . . . . . . . 1,585 1,511 (299) 2,797
Liabilities:
Reserve for warranty costs. . . . . . 1,400 562 (949) 1,013
Other reserves. . . . . . . . . . . . 93 - (1) 92
YEAR ENDED DECEMBER 31, 1996:
Assets:
Allowance for doubtful account. . . s $ 1,106 $ 2,340 $ (1,952) $ 1,494
Loan loss reserve . . . . . . . . . . 78 157 (94) 141
Reserve for inventory . . . . . . . . 2,797 4,304 (1,438) 5,663
Liabilities:
Reserve for warranty costs. . . . . . 1,013 (250) - 763
Other reserves. . . . . . . . . . . . 92 (92) - -
15. QUARTERLY FINANCIAL DATA (UNAUDITED)
The Company's quarterly results of operations are summarized as follows
(in thousands):
THREE MONTHS ENDED
----------------------------------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
----------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1995:
Total revenue. . . . . . . . . . . . . . $ 40,413 $ 39,252 $ 43,606 $ 40,619
Operating income (loss). . . . . . . . . (698) 768 341 (8,417)
Net loss . . . . . . . . . . . . . . . . (2,240) (1,813) (916) (7,392)
YEAR ENDED DECEMBER 31, 1996:
Total revenue. . . . . . . . . . . . . . $ 41,026 $ 69,354 $ 55,507 $ 43,844
Operating loss . . . . . . . . . . . . . (8,908) (17,671) (21,599) (60,687)
Net loss . . . . . . . . . . . . . . . . (7,787) (21,134) (22,766) (49,989)
In the fourth quarter of 1995 and each quarter in 1996, the Company
incurred operating and net losses principally as a result of expenses incurred
related to development of the EchoStar DBS System.
F-34
ECHOSTAR DBS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
16. PARENT COMPANY ONLY FINANCIAL INFORMATION
The following financial information reflects the parent company only
condensed statements of operations data, condensed balance sheet data, and
condensed cash flows data for DBS Corp:
FOR THE PERIOD
FROM
JANUARY 16, 1996
(INCEPTION)
THROUGH
DECEMBER 31, 1996
-------------------
(IN THOUSANDS)
STATEMENT OF OPERATIONS DATA:
Interest income. . . . . . . . . . . . . . . . . . . $ 20
Equity in losses of ESBC.. . . . . . . . . . . . . . (100,748)
Interest and other expense . . . . . . . . . . . . . (941)
-------------------
Net loss before income taxes . . . . . . . . . . . . (101,669)
Income tax provision . . . . . . . . . . . . . . . . (7)
-------------------
Net loss . . . . . . . . . . . . . . . . . . . . . $(101,676)
-------------------
-------------------
DECEMBER 31, 1996
-------------------
(IN THOUSANDS)
BALANCE SHEET DATA:
Cash and cash equivalents. . . . . . . . . . . . . . $ 10
Property and equipment . . . . . . . . . . . . . . . 28,588
Other noncurrent assets. . . . . . . . . . . . . . . 60,147
-------------------
Total assets . . . . . . . . . . . . . . . . . . . . $ 88,745
-------------------
-------------------
Current liabilities. . . . . . . . . . . . . . . . . $ 1,388
Note payable to ECC. . . . . . . . . . . . . . . . . 12,000
Restricted investment in ESBC. . . . . . . . . . . . 5,748
Advances from affiliates, net. . . . . . . . . . . . 76,284
-------------------
Total liabilities and investment in subsidiary . . . 95,420
Stockholder's equity:
Common Stock, $.01 par value, 1,000 shares
authorized, issued and outstanding . . . . . . . . -
Additional paid-in capital . . . . . . . . . . . . 108,839
Unrealized holding losses on available
for sale securities . . . . . . . . . . . . . . . (12)
Accumulated deficit. . . . . . . . . . . . . . . . (115,502)
-------------------
Total stockholder's equity . . . . . . . . . . . . . (6,675)
-------------------
Total liabilities and stockholder's equity . . . . . $ 88,745
-------------------
-------------------
F-35
ECHOSTAR DBS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
16. PARENT COMPANY ONLY FINANCIAL INFORMATION (CONTINUED)
FOR THE PERIOD
FROM
JANUARY 16, 1996
(INCEPTION)
THROUGH
DECEMBER 31, 1996
------------------
(IN THOUSANDS)
CASH FLOWS DATA:
Cash flows from operating activities:
Net income (loss). . . . . . . . . . . . . . . . . . . . . . . . $(101,676)
Adjustments: . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity in (earnings) losses of ESBC. . . . . . . . . . . . . . 100,748
Provision for deferred taxes . . . . . . . . . . . . . . . . . 7
Changes in current liabilities . . . . . . . . . . . . . . . . 1,400
-----------------
Net cash flows provided by operating activities. . . . . . . . . 479
Cash flows from investing activities:
Advances (to) from affiliates, net . . . . . . . . . . . . . . . 68,710
Expenditures for satellite systems under construction. . . . . . (25,864)
Expenditures for FCC authorizations. . . . . . . . . . . . . . . (55,316)
-----------------
Net cash flows used by investing activities. . . . . . . . . . . (12,470)
Cash flows from financing activities:
Net proceeds from note payable to ECC. . . . . . . . . . . . . . 12,000
Proceeds from issuance of Common Stock . . . . . . . . . . . . . 1
-----------------
Net cash flows provided by financing activities. . . . . . . . . 12,001
-----------------
Net increase (decrease) in cash and cash equivalents . . . . . . 10
Cash and cash equivalents, beginning of year . . . . . . . . . . -
Cash and cash equivalents, end of year . . . . . . . . . . . . . $ 10
-----------------
-----------------
The following financial information reflects the parent company only
condensed statements of operations data, condensed balance sheet data, and
condensed cash flows data for ECC, reflecting the assumed consummation of the
Exchange and Merger retroactive to January 1, 1993. The Exchange and Merger
described in Note 1 was accounted for as a reorganization of entities under
common control.
YEARS ENDED DECEMBER 31,
-----------------------------------------
1994 1995 1996
-----------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Equity in earnings (losses) of subsidiaries. . . . . . . . $ 90 $(12,361) $(100,853)
Other income . . . . . . . . . . . . . . . . . . . . . . . - 1,321 1,117
------------------------------------------
Net income (loss) before income taxes. . . . . . . . . . . 90 (11,040) (99,736)
Provision for income taxes . . . . . . . . . . . . . . . . - (446) (1,250)
------------------------------------------
Net income (loss) . . . . . . . . . . . . . . . . . . . $90 $(11,486) $(100,986)
------------------------------------------
------------------------------------------
Loss attributable to common shares. . . . . . . . . . . $ (849) $(12,690) $(102,190)
------------------------------------------
------------------------------------------
Weighted-average common shares outstanding. . . . . . . 32,442 35,562 40,548
------------------------------------------
------------------------------------------
Loss per common and common equivalent share . . . . . . $ (0.03) $ (0.36) $ (2.52)
------------------------------------------
------------------------------------------
F-36
ECHOSTAR DBS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
16. PARENT COMPANY ONLY FINANCIAL INFORMATION (CONTINUED)
DECEMBER 31,
-------------------------
1995 1996
-------------------------
(IN THOUSANDS)
BALANCE SHEET DATA:
Current assets:
Cash and cash equivalents. . . . . . . . . . . . . . . . . . . . . . . . . $ 7,802 $ 814
Marketable investment securities . . . . . . . . . . . . . . . . . . . . . 15,460 -
Advances to affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . 19,545 -
Other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . 191 1,349
-------------------------
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42,998 2,163
Investments in subsidiaries:
Restricted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92,613 -
Unrestricted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 280 -
-------------------------
Total investments in subsidiaries. . . . . . . . . . . . . . . . . . . . . . 92,893 -
Other noncurrent assets. . . . . . . . . . . . . . . . . . . . . . . . . . . 21,111 70,054
-------------------------
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $157,002 $ 72,217
-------------------------
-------------------------
Current liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 316 $ 1,304
Advances from affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . - 2,910
Investments in subsidiaries:
Restricted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 6,731
Unrestricted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 75
-------------------------
Total liabilities and investments in subsidiaries. . . . . . . . . . . . . . 316 11,020
Stockholders' equity:
Preferred Stock, 20,000,000 shares authorized, 1,616,681 shares of 8 %
Series A Cumulative Preferred Stock issued and outstanding, including
accrued dividends of $2,143,000 and $3,347,000, respectively. . . . . . 17,195 18,399
Class A Common Stock, $.01 par value, 200,000,000 shares authorized,
10,535,003 and 11,115,582 shares issued and outstanding, respectively . 105 111
Class B Common Stock, $.01 par value, 100,000,000 shares authorized,
29,804,401, shares issued and outstanding . . . . . . . . . . . . . . . 298 298
Class C Common Stock, $.01 par value, 100,000,000 shares authorized, none
outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - -
Common Stock Warrants. . . . . . . . . . . . . . . . . . . . . . . . . . . 714 16
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . 151,674 158,113
Unrealized holding gain (loss) on available-for-sale securities, net . . . 239 (11)
Accumulated deficit . . . . . . . . . . . . . . . . . . . . . . . . . . . (13,539) (115,729)
-------------------------
Total stockholders' equity . . . . . . . . . . . . . . . . . . . . . . . . . 156,686 61,197
-------------------------
Total liabilities and stockholders' equity . . . . . . . . . . . . . . . . . $157,002 $ 72,217
-------------------------
-------------------------
F-37
ECHOSTAR DBS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
16. PARENT COMPANY ONLY FINANCIAL INFORMATION (CONTINUED)
YEARS ENDED DECEMBER 31,
------------------------------------
1994 1995 1996
------------------------------------
CASH FLOWS DATA: (IN THOUSANDS)
Cash flows from operating activities:
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 90 $(11,486) $(100,986)
Adjustments:
Equity in (earnings) losses of subsidiaries . . . . . . . . . . . . . (90) 12,361 100,853
Provision for deferred taxes . . . . . . . . . . . . . . . . . . . . - - 56
Changes in:
Other current assets . . . . . . . . . . . . . . . . . . . . . . . - (191) 1,158
Current liabilities. . . . . . . . . . . . . . . . . . . . . . . . - 316 988
------------------------------------
Net cash flows provided by operating activities . . . . . . . . . . . . - 1,000 2,069
Cash flows from investing activities:
Advances (to) from affiliates . . . . . . . . . . . . . . . . . . . . . - (19,545) 22,167
(Purchases) sales of marketable investment securities, net. . . . . . . - (15,475) 15,460
Increase in noncurrent assets . . . . . . . . . . . . . . . . . . . . . - (21,111) (48,943)
------------------------------------
Net cash flows used by investing activities . . . . . . . . . . . . . . - (56,131) (11,316)
Cash flows from financing activities:
Stock options exercised . . . . . . . . . . . . . . . . . . . . . . . . - - 2,259
Net proceeds from IPO . . . . . . . . . . . . . . . . . . . . . . . . . - 62,933 -
------------------------------------
Net cash flows provided by financing activities . . . . . . . . . . . . - 62,933 2,259
------------------------------------
Net increase (decrease) in cash and cash equivalents. . . . . . . . . . - 7,802 (6,988)
Cash and cash equivalents, beginning of year. . . . . . . . . . . . . . - - 7,802
------------------------------------
Cash and cash equivalents, end of year. . . . . . . . . . . . . . . . . $ - $ 7,802 $ 814
------------------------------------
------------------------------------
NET LOSS ATTRIBUTABLE TO COMMON SHARES
Net loss attributable to common shares is calculated based on the
weighted-average number of shares of ECC common stock issued and outstanding for
the respective periods. Common stock equivalents (warrants and employee stock
options) are excluded as they are antidilutive. Net loss attributable to common
shares is also adjusted for cumulative dividends on the 8% Series A Cumulative
Preferred Stock.
ECC COMMON STOCK
The Class A, Class B and Class C Common Stock are equivalent in all
respects except voting rights. Holders of Class A and Class C Common Stock are
entitled to one vote per share and holders of Class B Common Stock are entitled
to ten votes per share. Each share of Class B and Class C Common Stock is
convertible, at the option of the holder, into one share of Class A Common
Stock. Upon a change in control of ECC, each holder of outstanding shares of
Class C Common Stock is entitled to ten votes for each share of Class C Common
Stock held. ECC's principal stockholder owns all outstanding Class B Common
Stock and all other stockholders own Class A Common Stock.
ECC 8% SERIES A CUMULATIVE PREFERRED STOCK
On May 6, 1994, EchoStar exchanged 1,616,681 shares of its 8% Series A
Cumulative Preferred Stock with its principal stockholder in consideration for
the cancellation of a note, plus accrued and unpaid interest thereon.
Approximately 5%, or 80,834 shares, of the 8% Series A Cumulative Preferred
Stock were subsequently transferred to another stockholder and officer of the
Company.
Each share of the 8% Series A Cumulative Preferred Stock is convertible,
at the option of the holder, into one share of Class A Common Stock, subject
to adjustment from time to time upon the occurrence of certain events,
including, among other things: (i) dividends or distributions on Class A
Common Stock payable in Class A Common Stock or certain other capital stock;
F-38
ECHOSTAR DBS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
16. PARENT COMPANY ONLY FINANCIAL INFORMATION (CONTINUED)
(ii) subdivisions, combinations or certain reclassifications of Class A Common
Stock; and (iii) issuance of Class A Common Stock or rights, warrants or options
to purchase Class A Common Stock at a price per share less than the liquidation
preference per share. In the event of the liquidation, dissolution or winding up
of EchoStar, the holders of 8% Series A Cumulative Preferred Stock would be
entitled to receive an amount equal to approximately $11.38 per share as of
December 31, 1996.
The aggregate liquidation preference for all outstanding shares of 8%
Series A Cumulative Preferred Stock is limited to the principal amount
represented by the note, plus accrued and unpaid dividends thereon. Each
share of 8% Series A Cumulative Preferred Stock is entitled to receive
dividends equal to eight percent per annum of the initial liquidation
preference for such share. Each share of 8% Series A Cumulative Preferred
Stock automatically converts into shares of Class A Common Stock in the event
they are transferred to any person other than certain permitted transferees
and is entitled to the equivalent of ten votes for each share of Class A
Common Stock into which it is convertible. Except as otherwise required by
law, holders of 8% Series A Cumulative Preferred Stock vote together with the
holders of Class A and Class B Common Stock as a single class.
Cumulative but unpaid dividends totaled approximately $2.1 million and
$3.3 million at December 31, 1995 and 1996, respectively, including amounts
which remain the obligation of Dish, Ltd.
Warrants
In conjunction with the 1994 Notes Offering, described in Note 6,
EchoStar issued 3,744,000 Warrants for the purchase of Dish, Ltd. Class A
Common Stock. Effective with the Merger (see Note 1), the Warrants became
exercisable for 2,808,000 shares of ECC's Class A Common Stock. The Warrants
were valued at $26.1 million.
Each Warrant entitles the registered holder thereof, at such holder's
option, to purchase one share of ECC Class A Common Stock at a purchase price
of $0.01 per share (the "Exercise Price"). The Exercise Price with respect
to all of the Warrants was paid in advance and, therefore, no additional
amounts are receivable by EchoStar upon exercise of the Warrants. As of
December 31, 1996, Warrants to purchase approximately 2,000 shares of the
Company's Class A Common Stock (as adjusted for the Exchange Ratio) remain
outstanding.
F-39
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-40
ECHOSTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
December 31,
---------------------
1995 1996
---------------------
ASSETS
Current Assets:
Cash and cash equivalents............................. $ 21,754 $ 39,231
Marketable investment securities...................... 15,670 18,807
Trade accounts receivable, net of allowance for
uncollectible accounts of $1,106 and $1,494,
respectively........................................ 9,179 13,516
Inventories........................................... 38,769 72,767
Income tax refund receivable.......................... 3,554 4,830
Deferred tax assets................................... 1,779 -
Subscriber acquisition costs, net..................... - 68,129
Other current assets.................................. 13,037 18,356
---------------------
Total current assets.................................... 103,742 235,636
Restricted Cash and Marketable Investment Securities:
1994 Notes escrow..................................... 73,291 -
1996 Notes escrow..................................... - 47,491
Other................................................. 26,400 31,800
---------------------
Total restricted cash and marketable investment
securities............................................ 99,691 79,291
Property and equipment, net............................. 354,000 590,621
FCC authorizations, net................................. 11,309 72,667
Deferred tax assets..................................... 12,109 79,339
Other noncurrent assets................................. 42,240 83,826
---------------------
Total assets...................................... $623,091 $1,141,380
---------------------
---------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Trade accounts payable................................ $ 19,063 $ 40,819
Deferred revenue - DISH Network subscriber promotions. - 97,959
Deferred programming revenue - DISH Network........... - 4,407
Deferred programming revenue - C-band................. 584 734
Accrued expenses and other current liabilities........ 26,314 30,495
Deferred tax liabilities.............................. - 12,563
Current portion of long-term obligations.............. 4,782 11,334
---------------------
Total current liabilities............................... 50,743 198,311
Long-term obligations, net of current portion:
Long-term deferred signal carriage revenue.......... - 5,949
1994 Notes.......................................... 382,218 437,127
1996 Notes.......................................... - 386,165
Mortgage and other notes payable, excluding current
portion........................................... 33,444 51,428
Other long-term obligations......................... - 1,203
---------------------
Total long-term obligations, net of current portion..... 415,662 881,872
---------------------
Total liabilities................................. 466,405 1,080,183
Commitments and Contingencies (Note 11)
Stockholders' Equity (Notes 2 and 9):
Preferred Stock, 20,000,000 shares authorized,
1,616,681 shares of 8% Series A Cumulative Preferred
Stock issued and outstanding, including accrued
dividends of $2,143 and $3,347, respectively........ 17,195 18,399
Class A Common Stock, $.01 par value, 200,000,000
shares authorized, 10,535,003, and 11,115,582
shares issued and outstanding, respectively......... 105 111
Class B Common Stock, $.01 par value, 100,000,000
shares authorized, 29,804,401 shares issued and
outstanding......................................... 298 298
Class C Common Stock, $.01 par value, 100,000,000
shares authorized, none outstanding................. - -
Common Stock Warrants................................. 714 16
Additional paid-in capital............................ 151,674 158,113
Unrealized holding gains (losses) on
available-for-sale securities, net of deferred
taxes............................................... 239 (11)
Accumulated deficit................................... (13,539) (115,729)
---------------------
Total stockholders' equity.............................. 156,686 61,197
---------------------
Total liabilities and stockholders' equity........ $623,091 $1,141,380
---------------------
---------------------
See accompanying Notes to Consolidated Financial Statements.
F-41
ECHOSTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
Years Ended December 31,
-----------------------------
1994 1995 1996
-----------------------------
REVENUE:
DTH products and technical services........... $172,753 $146,910 $ 135,812
DISH Network promotions - subscription
television services and products............ - - 22,746
DISH Network subscription television services. - - 37,898
C-band programming............................ 14,540 15,232 11,921
Loan origination and participation income..... 3,690 1,748 3,034
-----------------------------
Total revenue................................... 190,983 163,890 211,411
EXPENSES:
DTH products and technical services........... 133,635 116,758 123,790
DISH Network programming...................... - - 19,079
C-band programming............................ 11,670 13,520 10,510
Selling, general and administrative........... 30,219 38,525 90,372
Subscriber promotion subsidies................ - - 33,591
Amortization of subscriber acquisition costs.. - - 15,991
Depreciation and amortization................. 2,243 3,114 27,423
-----------------------------
Total expenses.................................. 177,767 171,917 320,756
-----------------------------
Operating income (loss)......................... 13,216 (8,027) (109,345)
Other Income (Expense):
Interest income............................... 8,420 14,059 15,630
Interest expense, net of amounts capitalized.. (21,408) (23,985) (61,487)
Minority interest in loss of consolidated
joint venture and other..................... 261 722 (477)
-----------------------------
Total other income (expense).................... (12,727) (9,204) (46,334)
-----------------------------
Income (loss) before income taxes............... 489 (17,231) (155,679)
Income tax (provision) benefit, net............. (399) 5,745 54,693
-----------------------------
Net income (loss)............................... $ 90 $(11,486) $(100,986)
-----------------------------
-----------------------------
Net loss attributable to common shares.......... $ (849) $(12,690) $(102,190)
-----------------------------
-----------------------------
Weighted-average common shares outstanding...... 32,442 35,562 40,548
-----------------------------
-----------------------------
Loss per common and common equivalent share..... $ (0.03) $ (0.36) $ (2.52)
-----------------------------
-----------------------------
See accompanying Notes to Consolidated Financial Statements.
F-42
ECHOSTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands)
ACCUMULATED
DEFICIT AND
SHARES OF UNREALIZED
COMMON COMMON ADDITIONAL HOLDING
STOCK PREFERRED COMMON STOCK PAID-IN GAINS
OUTSTANDING STOCK STOCK WARRANTS CAPITAL (LOSSES) TOTAL
----------------------------------------------------------------------------------
(NOTES 1 AND 9)
Balance, December 31, 1993..................... 32,221 $ - $322 $ - $ 49,378 $ - $ 49,700
Issuance of Class A Common Stock:
For acquisition of DirectSat, Inc.......... 999 - 11 - 8,989 - 9,000
For cash................................... 324 - 3 - 3,830 - 3,833
Issuance of 1,616,681 shares of 8% Series A
Cumulative Preferred Stock................. - 15,052 - - - - 15,052
Issuance of Common Stock Warrants............ - - - 26,133 - - 26,133
8% Series A Cumulative Preferred Stock
dividends.................................. - 939 - - - (939) -
Net income................................... - - - - - 90 90
----------------------------------------------------------------------------------
Balance, December 31, 1994..................... 33,544 15,991 336 26,133 62,197 (849) 103,808
8% Series A Cumulative Preferred Stock
dividends.................................. - 1,204 - - - (1,204) -
Issuance of Class A Common Stock pursuant to
initial public offering, net of stock
issuance costs of $5,067................... 4,004 - 40 - 62,893 - 62,933
Exercise of Common Stock Warrants............ 2,731 - 26 (25,419) 25,393 - -
Employee Savings Plan contribution and launch
bonuses funded by issuance of Class A
Common Stock............................... 60 - 1 - 1,191 - 1,192
Unrealized holding gains on
available-for-sale securities, net....... - - - - - 239 239
Net loss................................... - - - - - (11,486) (11,486)
----------------------------------------------------------------------------------
Balance, December 31, 1995..................... 40,339 17,195 403 714 151,674 (13,300) 156,686
8% Series A Cumulative Preferred Stock
dividends.................................. - 1,204 - - - (1,204) -
Exercise of Class A Common Stock options..... 442 - 4 - 2,255 - 2,259
Exercise of Common Stock Warrants............ 75 - 1 (698) 697 - -
Income tax benefit of deduction for income tax
purposes on exercise of Class A Common Stock
options.................................... - - - - 2,372 - 2,372
Employee Savings Plan contribution issuable
and launch bonuses funded by issuance of
Class A Common Stock....................... 64 - 1 - 1,115 - 1,116
Unrealized holding losses on available-
for-sale securities, net................... - - - - - (250) (250)
Net loss..................................... - - - - - (100,986) (100,986)
----------------------------------------------------------------------------------
Balance, December 31, 1996..................... 40,920 $18,399 $409 $ 16 $158,113 $(115,740) $ 61,197
----------------------------------------------------------------------------------
----------------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements.
F-43
ECHOSTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Years Ended December 31,
-------------------------------
1994 1995 1996
-------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)............................................................................. $ 90 $ (11,486) $(100,986)
Adjustments to reconcile net income (loss) to net cash flows from operating activities:
Depreciation and amortization............................................................... 2,243 3,114 27,423
Amortization of subscriber acquisition costs................................................ - - 15,991
Deferred income tax benefit................................................................. (7,330) (4,763) (50,365)
Amortization of debt discount and deferred financing costs.................................. 20,662 23,528 61,695
Employee benefits funded by issuance of Class A Common Stock................................ - 1,192 1,116
Change in reserve for excess and obsolete inventory......................................... 502 1,212 2,866
Change in long-term deferred signal carriage revenue........................................ - - 5,949
Change in accrued interest on notes receivable from DBSC.................................... - - (3,382)
Change in accrued interest on convertible subordinated debentures from SSET................. (279) (860) (484)
Other, net.................................................................................. (37) 375 1,215
Changes in current assets and current liabilities, net (see Note 2)......................... 8,354 (32,640) 11,537
-------------------------------
Net cash flows provided by (used in) operating activities..................................... 24,205 (20,328) (27,425)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of marketable investment securities................................................. (15,100) (25,230) (138,295)
Sales of marketable investment securities..................................................... 4,439 40,563 135,176
Purchases of restricted marketable investment securities...................................... (11,400) (15,000) (21,100)
Funds released from restricted cash and marketable investment securities - other.............. - - 15,700
Purchases of property and equipment........................................................... (3,507) (4,048) (50,954)
Offering proceeds and investment earnings placed in escrow.................................... (329,831) (9,589) (193,972)
Funds released from escrow accounts........................................................... 144,400 122,149 219,352
Investment in SSET............................................................................ (8,750) - -
Payments received on (investments in) convertible subordinated debentures from SSET........... - - 6,445
Investment in convertible subordinated debentures from DBSI................................... - (1,000) (3,640)
Long-term notes receivable from and investment in DBSC........................................ (4,210) (16,000) (30,000)
Expenditures for satellite systems under construction......................................... (115,752) (129,506) (170,935)
Expenditures for FCC authorizations........................................................... (159) (458) (55,419)
Other......................................................................................... 1,305 - -
-------------------------------
Net cash flows used in investing activities................................................... (338,565) (38,119) (287,642)
CASH FLOWS FROM FINANCING ACTIVITIES:
Minority investor investment in and loan to consolidated joint venture........................ 1,000 - -
Net proceeds from issuance of 1994 Notes and Common Stock Warrants............................ 323,325 - -
Net proceeds from issuance of Class A Common Stock............................................ 3,833 62,933 -
Net proceeds from issuance of 1996 Notes...................................................... - - 336,916
Expenditures from escrow for offering costs................................................... (837) - -
Proceeds from refinancing of mortgage indebtedness............................................ 4,200 - -
Repayments of mortgage indebtedness and notes payable......................................... (3,435) (238) (6,631)
Loans from stockholder, net................................................................... 4,000 - -
Repayment of loans from stockholder........................................................... (4,075) - -
Stock options exercised....................................................................... - - 2,259
Dividends paid................................................................................ (3,000) - -
-------------------------------
Net cash flows provided by (used in) financing activities..................................... 325,011 62,695 332,544
-------------------------------
Net increase (decrease) in cash and cash equivalents.......................................... 10,651 4,248 17,477
Cash and cash equivalents, beginning of year.................................................. 6,855 17,506 21,754
------------------------------
Cash and cash equivalents, end of year........................................................ $ 17,506 $ 21,754 $ 39,231
------------------------------
------------------------------
See accompanying Notes to Consolidated Financial Statements.
F-44
ECHOSTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND BUSINESS ACTIVITIES
PRINCIPAL BUSINESS
EchoStar Communications Corporation ("ECC"), and together with its
subsidiaries ("EchoStar" or the "Company"), currently is one of only three
direct broadcast satellite ("DBS") companies in the United States with the
capacity to provide comprehensive nationwide DBS programming service.
EchoStar's DBS service (the "DISH Network") commenced operations in March
1996 after the successful launch of its first satellite ("EchoStar I") in
December 1995. EchoStar launched its second satellite ("EchoStar II") on
September 10, 1996. EchoStar II significantly increased the channel capacity
and programming offerings of the DISH Network when it became fully
operational in November 1996. EchoStar currently provides approximately 120
channels of near laser disc quality digital video programming and over 30
channels of near CD quality audio programming to the entire continental
United States. In addition to its DISH Network business, EchoStar is engaged
in the design, manufacture, distribution and installation of satellite
direct-to-home ("DTH") products, domestic distribution of DTH programming,
and consumer financing of EchoStar's DISH Network and domestic DTH products
and services.
EchoStar's business objective is to become one of the leading providers
of subscription television and other satellite-delivered services in the
United States. EchoStar had approximately 350,000 subscribers to DISH Network
programming as of December 31, 1996.
F-45
ECHOSTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND BUSINESS ACTIVITIES (CONTINUED)
ORGANIZATIONAL HISTORY AND LEGAL STRUCTURE
Certain companies principally owned and controlled by Mr. Charles W. Ergen
were reorganized in 1993 into Dish, Ltd., formerly known as EchoStar
Communications Corporation (together with its subsidiaries, "Dish, Ltd."). The
principal reorganized entities, Echosphere Corporation (formed in 1980) and
Houston Tracker Systems, Inc. (acquired in 1986), are primarily engaged in the
design, assembly, marketing and worldwide distribution of direct-to-home ("DTH")
satellite television products. Satellite Source, Inc. contracts for rights to
purchase C-band satellite delivered television programming for resale to
consumers and other DTH retailers. Through January 1996, Echo Acceptance
Corporation ("EAC") arranged nationwide consumer financing for purchasers of DTH
systems and programming. The FCC has granted EchoStar Satellite Corporation
("ESC") licenses for certain DBS frequencies. The reorganized group also
includes other less significant domestic enterprises and several foreign
entities involved in related activities outside the United States.
During 1994, Dish, Ltd. merged one of its subsidiaries with DirectSat
Corporation ("DirectSat"), an approximately 80% owned subsidiary of SSE Telecom,
Inc. ("SSET") at that time. DirectSat's stockholders received an approximate 3%
equity interest in Dish, Ltd. (subsequently exchanged for stock of ECC) in
exchange for all of DirectSat's then outstanding stock. DirectSat's principal
assets are a conditional satellite construction permit and frequency assignments
for ten DBS frequencies.
In June 1994, Dish, Ltd. completed an offering of 127/8% Senior Secured
Discount Notes due 2004 (the "1994 Notes," see Note 6) and Common Stock Warrants
(the "Warrants") (collectively, the "1994 Notes Offering"), resulting in net
proceeds of approximately $323.3 million. Dish, Ltd. and its subsidiaries are
subject to the terms and conditions of the indenture related to the 1994 Notes
(the "1994 Notes Indenture"). 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 131/8% Senior Secured Discount Notes due 2004, which resulted in
net proceeds to the Company of approximately $337.0 million. In connection with
the 1996 Notes Offering, 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 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-46
ECHOSTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
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 December 31,
1996.
Legal Entity Referred to Herein As Ownership
- ------------ --------------------- ---------
EchoStar Communications Corporation ECC Publicly owned
EchoStar DBS Corporation DBS Corp Wholly-owned by ECC
EchoStar Satellite Broadcasting Corporation ESBC Wholly-owned by ECC
Dish Network Credit Corporation DNCC Wholly-owned by ECC
Dish, Ltd. Dish, Ltd. Wholly-owned by ESBC
EchoStar Satellite Corporation ESC Wholly-owned by Dish, Ltd.
Echosphere Corporation EchoCorp Wholly-owned by Dish, Ltd.
Houston Tracker Systems, Inc. HTS Wholly-owned by Dish, Ltd.
EchoStar International Corporation EIC Wholly-owned by Dish, Ltd.
Substantially all of EchoStar's operating activities are conducted by
subsidiaries of Dish, Ltd.
SIGNIFICANT RISKS AND UNCERTAINTIES
The commencement of 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.
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.
F-47
ECHOSTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The Company accounts for investments in 50% or less owned entities using
the equity method. At December 31, 1995 and 1996, these investments were not
material to the consolidated financial statements.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses for each
reporting period. Actual results could differ from those estimates.
FOREIGN CURRENCY TRANSACTION GAINS AND LOSSES
The functional currency of the Company's foreign subsidiaries is the
U.S. dollar because their sales and purchases are predominantly denominated
in that currency. Transactions denominated in currencies other than U.S.
dollars are recorded based on exchange rates at the time such transactions
arise. Subsequent changes in exchange rates result in transaction gains and
losses which are reflected in income as unrealized (based on period end
translation) or realized (upon settlement of the transaction). Net
transaction gains (losses) during the years ended December 1994, 1995 and
1996 were not material to the Company's results of operations.
CASH AND CASH EQUIVALENTS
The Company considers all liquid investments purchased with an original
maturity of ninety days or less to be cash equivalents. Cash equivalents as
of December 31, 1995 and 1996 consist of money market funds, corporate notes
and commercial paper; such balances are stated at cost which equates to
market value.
F-48
ECHOSTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
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:
Years Ended December 31,
--------------------------------------
1994 1995 1996
--------------------------------------
Cash paid for interest, net of amounts
capitalized . . . . . . . . . . . . . . . . . . . . . $ 436 $ 461 $ 3,007
Cash paid for income taxes . . . . . . . . . . . . . . 7,140 3,203 -
8% Series A Cumulative Preferred
Stock dividends . . . . . . . . . . . . . . . . . . . 939 1,204 1,204
Accrued satellite contract costs . . . . . . . . . . . - 15,000 -
Satellite launch payment for EchoStar
II applied to EchoStar I launch . . . . . . . . . . . - - 15,000
Exchange of note payable to stockholder,
and interest thereon, for 8% Series A
Cumulative Preferred Stock. . . . . . . . . . . . . . 15,052 - -
Issuance of Class A Common Stock to
acquire investment in DirectSat Corporation . . . . . 9,000 - -
Property and equipment acquired under
capital leases. . . . . . . . . . . . . . . . . . . . 934 - -
Note payable issued for deferred satellite
construction payments for EchoStar I. . . . . . . . . - 32,833 3,167
Note payable issued for deferred satellite
construction payments for EchoStar II . . . . . . . . - - 28,000
Employee Savings Plan Contribution and launch
bonuses funded by issuance of Class A
Common Stock. . . . . . . . . . . . . . . . . . . . . - 1,192 1,116
MARKETABLE INVESTMENT SECURITIES AND RESTRICTED CASH AND MARKETABLE INVESTMENT
SECURITIES
At December 31, 1995 and 1996, the Company has classified all marketable
investment securities as available-for-sale. Accordingly, these investments
are reflected at market value based on quoted market prices. Related
unrealized gains and losses are reported as a separate component of
stockholders' equity, net of related deferred income taxes of $146,000 and
$6,000 at December 31, 1995 and 1996, respectively. The specific
identification method is used to determine cost in computing realized gains
and losses.
F-49
ECHOSTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Marketable investment securities as of December 31, 1995 and 1996 are as
follows (in thousands):
DECEMBER 31, 1995 DECEMBER 31, 1996
------------------------------------ ------------------------------------
UNREALIZED UNREALIZED
HOLDING HOLDING
AMORTIZED GAIN MARKET AMORTIZED GAIN MARKET
COST (LOSS) VALUE COST (LOSS) VALUE
------------------------------------ ------------------------------------
Commercial paper . . . . . . $ 1,126 $ - $ 1,126 $16,065 $ - $16,065
Corporate notes. . . . . . . 12,353 (19) 12,334 - - -
Government bonds . . . . . . 2,038 - 2,038 2,540 - 2,540
Mutual funds . . . . . . . . 188 (16) 172 219 (17) 202
------------------------------------ ------------------------------------
$15,705 $(35) $15,670 $18,824 $(17) $18,807
------------------------------------ ------------------------------------
------------------------------------ ------------------------------------
Restricted Cash and Marketable Investment Securities in Escrow Accounts
as reflected in the accompanying consolidated balance sheets represent the
remaining net proceeds received from the 1994 Notes Offering, and a portion
of the proceeds from the 1996 Notes Offering, plus investment earnings, less
amounts expended to date in connection with the development, construction and
continued growth of the DISH Network. These proceeds are held in separate
escrow accounts (the "Dish Escrow Account" and the "ESBC Escrow Account") as
required by the respective indentures, and invested in certain permitted debt
and other marketable investment securities until disbursed for the express
purposes identified in the respective indentures.
Other Restricted Cash includes balances totaling $11.4 million and $5.7
million at December 31, 1995 and 1996, respectively, which were restricted to
satisfy certain covenants in the 1994 Notes Indenture regarding launch insurance
for EchoStar I and EchoStar II. In addition, as of each of December 31, 1995 and
1996, $15.0 million was held in escrow relating to a non-performing manufacturer
of DBS receivers (see Note 3). Also, as of December 31, 1996, $10.0 million was
on deposit in a separate escrow account established, pursuant to an additional
DBS receiver manufacturing agreement, to provide for EchoStar's future payment
obligations. The $15.0 million and $10.0 million deposits were both released
from these escrow accounts during May 1997.
The major components of Restricted Cash and Marketable Investment
Securities are as follows (in thousands):
DECEMBER 31, 1995 DECEMBER 31, 1996
------------------------------------ ------------------------------------
UNREALIZED UNREALIZED
HOLDING HOLDING
AMORTIZED GAIN MARKET AMORTIZED GAIN MARKET
COST (LOSS) VALUE COST (LOSS) VALUE
------------------------------------ ------------------------------------
Commercial paper . . . . . . $66,214 $ - $66,214 $77,569 $ - $77,569
Government bonds . . . . . . 32,904 420 33,324 368 - 368
Certificates of
deposit. . . . . . . . . . . - - - 1,100 - 1,100
Accrued interest . . . . . . 153 - 153 254 - 254
------------------------------------ ------------------------------------
$99,271 $420 $99,691 $79,291 $ - $79,291
------------------------------------ ------------------------------------
------------------------------------ ------------------------------------
INVENTORIES
Inventories are stated at the lower of cost or market value. Cost is
determined using the first-in, first-out method. Proprietary products are
manufactured by outside suppliers to the Company's specifications. EchoStar
also distributes non-proprietary products purchased from other manufacturers.
Manufactured inventories include materials, labor and manufacturing overhead.
Cost of other inventories includes parts, contract manufacturers' delivered
price, assembly and testing labor, and related overhead, including handling
and storage costs.
F-50
ECHOSTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO COSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Inventories consist of the following (in thousands):
DECEMBER 31,
---------------------
1995 1996
---------------------
EchoStar Receiver Systems . . . . . $ - $32,799
Consigned DBS receiver
components . . . . . . . . . . . - 23,525
DBS receiver components . . . . . . 9,615 15,736
Finished goods-C-band . . . . . . . 11,161 600
Finished goods-International . . . 9,297 3,491
Competitor DBS Receivers . . . . . 9,404 -
Spare parts . . . . . . . . . . . . 2,089 2,279
Reserve for excess and
obsolete inventory . . . . . . . (2,797) (5,663)
---------------------
$38,769 $72,767
---------------------
---------------------
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Cost includes interest capitalized
of $5.7 million, $25.8 million and $25.7 million during the years ended
December 31, 1994, 1995 and 1996, respectively. The costs of satellites under
construction are capitalized during the construction phase, assuming the
eventual successful launch and in-orbit operation of the satellite. If a
satellite were to fail during launch or while in-orbit, the resultant loss would
be charged to expense in the period such loss was realized. The amount of any
such loss would be reduced to the extent of insurance proceeds received as a
result of the launch or in-orbit failure. Depreciation is recorded on a
straight-line basis for financial reporting purposes. Repair and maintenance
costs are charged to expense when incurred. Renewals and betterments are
capitalized.
FCC AUTHORIZATIONS
FCC authorizations are recorded at cost and amortized using the
straight-line method over a period of 40 years. Such amortization commences
at the time the related satellite becomes operational; capitalized costs are
written off at the time efforts to provide services are abandoned. FCC
authorizations include interest capitalized of $1.3 million and $6.1 million
during the years ended December 31, 1995 and 1996, respectively. The merger
with DirectSat described in Note 1 was accounted for as a purchase.
DirectSat's assets were valued at $9.0 million by the Company at the time of
the merger and are included in FCC authorizations in the accompanying balance
sheets.
REVENUE RECOGNITION
Revenue from sales of DTH products is recognized upon shipment to customers.
Revenue from the provision of DISH Network service and C-band programming
service to subscribers is recognized as revenue in the period such programming
is provided.
SUBSCRIBER PROMOTION SUBSIDIES, SUBSCRIBER ACQUISITION COSTS, AND DISH NETWORK
PROMOTIONS-SUBSCRIPTION TELEVISION SERVICES AND PRODUCTS
Total transaction proceeds to EchoStar from DISH Network programming and
equipment sold as a package under EchoStar promotions are initially deferred
and recognized as revenue over the related service period (normally one
year), commencing upon authorization of each new subscriber. The excess of
EchoStar's aggregate cost of the equipment, programming and other expenses
for the initial prepaid subscription period for DISH Network service over
proceeds received ("subscriber promotion subsidies") is expensed upon
shipment of the equipment. Remaining costs, less programming costs and the
amount expensed upon shipment as per above, are capitalized and reflected in
the accompanying consolidated
F-51
ECHOSTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
balance sheets as subscriber acquisition costs. Such costs are amortized over
the related prepaid subscription term of the customer. Programming costs are
expensed as service is provided. Excluding expected incremental revenues from
premium and Pay-Per-View programming, the accounting followed results in revenue
recognition over the initial period of service equal to the sum of programming
costs and amortization of subscriber acquisition costs.
DISH Network programming and equipment not sold as a package under EchoStar
promotions are separately presented in the accompanying consolidated statements
of operations.
DEFERRED DEBT ISSUANCE COSTS AND DEBT DISCOUNT
Costs of completing the 1994 Notes Offering and 1996 Notes Offering were
deferred (Note 5) and are being amortized to interest expense over their
respective terms. The original issue discounts related to the 1994 Notes and the
1996 Notes (Note 6) are being accreted to interest expense so as to reflect a
constant rate of interest on the accreted balance of the 1994 Notes and the 1996
Notes.
DEFERRED PROGRAMMING REVENUE
Deferred programming revenue consists of prepayments received from
subscribers to DISH Network programming. Such amounts are recognized as revenue
in the period the programming is provided to the subscriber. Similarly, EchoStar
defers prepayments received from subscribers to C-band programming sold by
EchoStar as an authorized distributor.
LONG-TERM DEFERRED SIGNAL CARRIAGE REVENUE
Long-term deferred signal carriage revenue consists of advance payments from
certain programming providers for carriage of their programming content on the
DISH Network. Such amounts are deferred and recognized as revenue on a
straight-line basis over the related contract terms (up to ten years).
ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities consist of the following (in
thousands):
Deember 31,
-----------------
1995 1996
-----------------
Accrued expenses . . . . . . . . . . . . $ 3,850 $20,269
Accrued satellite contract costs . . . . 15,000 -
Accrued programming . . . . . . . . . . 4,979 9,463
Reserve for warranty costs . . . . . . . 1,013 763
Other . . . . . . . . . . . . . . . . . 1,472 -
-----------------
$26,314 $30,495
-----------------
-----------------
The Company's C-band proprietary products are under warranty against
defects in material and workmanship for a period of one year from the date of
original retail purchase. The reserve for warranty costs is based upon
historical units sold and expected repair costs. The Company does not have a
warranty reserve for its DBS products because the warranty is provided by the
contract manufacturer.
ADVERTISING COSTS
Advertising costs are expensed as incurred and totaled $2.3 million, $1.9
million and $16.5 million for the years ended December 31, 1994, 1995 and 1996,
respectively.
F-52
ECHOSTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RESEARCH AND DEVELOPMENT COSTS
Research and development costs, which are expensed as incurred, totaled $5.9
million, $5.0 million and $6.0 million for the years ended December 31, 1994,
1995 and 1996, respectively.
NET LOSS ATTRIBUTABLE TO COMMON SHARES
Net loss attributable to common shares is calculated based on the
weighted-average number of shares of common stock issued and outstanding for the
respective periods. Common stock equivalents (warrants and employee stock
options) are excluded as they are antidilutive. Net loss attributable to common
shares is also adjusted for cumulative dividends on the 8% Series A Cumulative
Preferred Stock.
RECLASSIFICATIONS
Certain amounts from the prior years consolidated financial statements have
been reclassified to conform with the 1996 presentation.
3. OTHER CURRENT ASSETS
Other current assets consist of the following (in thousands):
DECEMBER 31,
-----------------
1995 1996
-----------------
Deposit held by non-performing
manufacturer . . . . . . . . . . . . . . $10,000 $10,000
Other . . . . . . . . . . . . . . . . . . . 3,037 8,356
-----------------
$13,037 $18,356
-----------------
-----------------
EchoStar previously maintained agreements with two manufacturers for DBS
receivers. Only one of the manufacturers produced receivers acceptable to
EchoStar. EchoStar previously deposited $10.0 million with the non-performing
manufacturer and, as of December 31, 1996, had an additional $15.0 million on
deposit in an escrow account as security for EchoStar's payment obligations
under that contract. During 1996 EchoStar provided the non-performing
manufacturer notice of its intent to terminate the contract and filed suit
against that manufacturer.
EchoStar is currently dependent on one manufacturing source for its
receivers. The performing manufacturer presently manufactures receivers in
sufficient quantities to meet currently expected demand. If EchoStar's sole
manufacturer is unable for any reason to produce receivers in a quantity
sufficient to meet demand, EchoStar's liquidity and results of operations
would be adversely affected. Management believes, but can give no assurance,
that Echostar will be able to recover most, if not all, amounts deposited
with the non-performing manufacturer or held in escrow.
F-53
ECHOSTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following (in thousands):
DECEMBER 31,
LIFE -----------------
(IN YEARS) 1995 1996
---------- -----------------
EchoStar I . . . . . . . . . . . . . . 12 $ - $201,607
EchoStar II . . . . . . . . . . . . . 12 - 228,694
Furniture, fixtures and equipment. . . 2-12 35,127 72,945
Buildings and improvements . . . . . . 7-40 21,006 26,035
Tooling and other . . . . . . . . . . 2 2,039 3,253
Land . . . . . . . . . . . . . . . . . - 1,613 2,295
Vehicles . . . . . . . . . . . . . . . 7 1,310 1,323
Construction in progress . . . . . . . - 303,174 89,733
Total property and equipment . . . . . 364,269 625,885
Accumulated depreciation . . . . . . . (10,269) (35,264)
-------------------
Property and equipment, net . . . . . $354,000 $590,621
--------------------
--------------------
Construction in progress consists of the following (in thousands):
DECEMBER 31,
--------------------
1995 1996
--------------------
Progress amounts for satellite construction,
launch, launch insurance, and capitalized
interest:
EchoStar I . . . . . . . . . . . . . . . . . . $193,629 $ -
EchoStar II . . . . . . . . . . . . . . . . . 88,634 -
EchoStar III . . . . . . . . . . . . . . . . . 20,801 29,123
EchoStar IV . . . . . . . . . . . . . . . . . - 56,320
Other . . . . . . . . . . . . . . . . . . . . . 110 4,290
--------------------
$303,174 $89,733
--------------------
--------------------
Construction in progress for each of EchoStar III and EchoStar IV,
includes capitalized costs related to the construction, insurance and launch
of such satellites. EchoStar III is currently scheduled to launch during the
fall of 1997; EchoStar IV is currently scheduled to launch during the first
quarter of 1998.
5. OTHER NONCURRENT ASSETS
Other noncurrent assets consist of the following (in thousands):
DECEMBER 31,
--------------------
1995 1996
--------------------
Long-term notes receivable from DBSC and
accrued interest . . . . . . . . . . . . . . . . . $16,000 $49,382
Deferred debt issuance costs . . . . . . . . . . . . 10,622 21,284
SSET convertible subordinated debentures and
accrued interest . . . . . . . . . . . . . . . . . 9,610 3,649
Investment in DBSC . . . . . . . . . . . . . . . . . 4,111 4,044
DBSI convertible subordinated debentures . . . . . . 1,000 4,640
Other, net . . . . . . . . . . . . . . . . . . . . . 897 827
--------------------
$42,240 $83,826
--------------------
--------------------
In 1994, the Company purchased $8.75 million of SSET's 6.5% convertible
subordinated debentures. During 1996, EchoStar received $6.4 million of payments
from SSET ($5.2 million principal and $1.2 million interest) related to these
convertible debentures. As of December 31, 1996, the debentures, if converted,
would represent approximately 5% of SSET's common stock, based on the number of
shares of SSET common stock outstanding at December 31, 1996. Management
F-54
ECHOSTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. OTHER NONCURRENT ASSETS (CONTINUED)
estimates that the fair value of the SSET debentures approximates their
carrying value in the accompanying financial statements based on current
interest rates and the conversion features contained in the debentures. SSET
is a reporting company under the Securities Exchange Act of 1934 and is
engaged in the manufacture and sale of satellite telecommunications
equipment. In March 1994, the Company purchased an approximate 6% ownership
interest in the stock of Direct Broadcasting Satellite Corporation ("DBSC")
and certain of DBSC's notes and accounts receivable from SSET for $1.25
million.
In November 1994, the Company resolved a law suit brought by the Company
against DBSC regarding enforceability of the notes and accounts receivable.
Such receivables were exchanged for shares of DBSC common stock and the
Company purchased additional DBSC shares for $2,960,000 such that, together
with the shares of DBSC acquired from SSET, the Company owned approximately
40% of the outstanding common stock of DBSC. DBSC's principal assets include
an FCC conditional satellite construction permit and specific orbital slot
assignments for a total of 22 DBS frequencies.
In December 1995, the Company advanced DBSC $16.0 million in the form of a
note receivable to enable DBSC to make required payments under its satellite
construction contract (EchoStar III). Additionally, during 1996, the Company
made monthly advances to DBSC, in the form of additional notes receivable, to
enable DBSC to meet the commitments under its satellite construction
contract. Such advances made during 1996 aggregated $30.0 million. The $16.0
million note receivable from DBSC bears interest at 11.5% and the additional
$30.0 million of notes receivable from DBSC bears interest at 11.25%. These
notes receivable mature monthly, beginning December 29, 2003. Under the terms
of the promissory notes, equal installments of principal and interest are due
annually commencing December 1997. As of December 31, 1996, these notes
receivable totaled $49.4 million, including accrued interest of $3.4 million.
These notes are secured by all of DBSC's assets, as defined in the Security
Agreement. Management estimates that the fair value of these notes
approximates carrying value in the accompanying financial statements based on
current risk adjusted interest rates. On January 8, 1997, EchoStar
consummated the merger of DBSC with a wholly-owned subsidiary of EchoStar
("New DBSC"). EchoStar expects to issue approximately 658,000 shares of its
Class A Common Stock to acquire the remaining 60% of DBSC which it did not
previously own. This transaction was accounted for as a purchase and the
excess of the purchase price over the fair value of DBSC's tangible assets
was allocated to DBSC's FCC authorizations. DBSC's principal assets include
an FCC conditional construction permit and specific orbital slot assignments
for certain DBS frequencies. During 1997, upon consummation of the DBSC
merger, the aforementioned notes receivable were eliminated, on a
consolidated basis, in the related purchase accounting.
In 1995, the Company purchased $1.0 million of DBS Industries, Inc.'s
("DBSI") convertible subordinated debentures, which mature July 1, 1998. In
January and December 1996, the Company purchased an additional $3.0 million
(maturing January 12, 1999), and $640,000 (maturing December 12, 1999),
respectively, of DBSI's convertible subordinated debentures. If EchoStar were
to convert these debentures, it would own approximately 14% of DBSI's common
stock, based on the number of shares of DBSI common stock outstanding at
December 31, 1996. Each of the debentures bears interest at the prime rate
plus 2%, adjusted and payable quarterly (aggregate rate of 10.25% at December
31, 1996). DBSI, which is a reporting company under the Securities Exchange
Act of 1934, is engaged in the development of satellite and radio systems for
use in automating the control and distribution of gas and electric power by
utility companies. Management believes the fair value of the DBSI debentures
approximates carrying value in the accompanying financial statements based on
current interest rates and the conversion features contained in the
debentures.
6. LONG-TERM DEBT
1994 NOTES
On June 7, 1994, Dish, Ltd. issued the 1994 Notes which mature on June 1,
2004. The 1994 Notes issuance resulted in net proceeds to Dish, Ltd. of
$323.3 million (including amounts attributable to the issuance of the
Warrants (see Note 9) and after payment of underwriting discount and other
issuance costs aggregating approximately $12.6 million).
The 1994 Notes bear interest at a rate of 12 7/8%, computed on a
semi-annual bond equivalent basis. Interest on the 1994 Notes will not be
payable in cash prior to June 1, 1999, with the 1994 Notes accreting to a
principal value at stated maturity of $624.0 million by that date. Commencing
December 1, 1999, interest on the 1994 Notes will be payable in cash on
December 1 and June 1 of each year.
F-55
ECHOSTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. LONG-TERM DEBT (CONTINUED)
The 1994 Notes rank senior in right of payment to all subordinated
indebtedness of Dish, Ltd. and PARI PASSU in right of payment with all other
senior indebtedness of Dish, Ltd., subject to the terms of an Intercreditor
Agreement between Dish, Ltd., certain of its principal subsidiaries, and
certain creditors thereof. The 1994 Notes are secured by liens on certain
assets of Dish, Ltd., including EchoStar I and EchoStar II and all other
components of the EchoStar DBS System owned by Dish, Ltd. and its
subsidiaries. The 1994 Notes are further guaranteed by each material direct
subsidiary of Dish, Ltd. (see Note 12). Although the 1994 Notes are titled
"Senior," Dish, Ltd. has not issued, and does not have any current
arrangements to issue, any significant indebtedness to which the 1994 Notes
would be senior; however, the 1996 Notes are effectively subordinated to the
1994 Notes and all other liabilities of Dish, Ltd. and its subsidiaries.
Furthermore, at December 31, 1995 and 1996, the 1994 Notes were effectively
subordinated to approximately $5.4 million and $5.1 million of mortgage
indebtedness, respectively, with respect to certain assets of Dish, Ltd.'s
subsidiaries, not including the EchoStar DBS System, and rank PARI PASSU with
the security interest of approximately $30.0 million of contractor financing.
Except under certain circumstances requiring prepayment premiums, and
in other limited circumstances, the 1994 Notes are not redeemable at Dish,
Ltd.'s option prior to June 1, 1999. Thereafter, the 1994 Notes will be
subject to redemption, at the option of Dish, Ltd., in whole or in part, at
redemption prices ranging from 104.828% during the year commencing June 1,
1999 to 100% of principal value at stated maturity on or after June 1, 2002
together with accrued and unpaid interest thereon to the redemption date. On
each of June 1, 2002 and June 1, 2003, Dish, Ltd. will be required to redeem
25% of the original aggregate principal amount of 1994 Notes at a redemption
price equal to 100% of principal value at stated maturity thereof, together
with accrued and unpaid interest thereon to the redemption date. The
remaining principal of the 1994 Notes matures on June 1, 2004.
In the event of a change of control and upon the occurrence of certain
other events, as described in the 1994 Notes Indenture, Dish, Ltd. will be
required to make an offer to each holder of 1994 Notes to repurchase all or
any part of such holder's 1994 Notes at a purchase price equal to 101% of the
accreted value thereof on the date of purchase, if prior to June 1, 1999, or
101% of the aggregate principal amount thereof, together with accrued and
unpaid interest thereon to the date of purchase, if on or after June 1, 1999.
The 1994 Notes Indenture contains restrictive covenants that, among
other things, impose limitations on Dish, Ltd. and its subsidiaries with
respect to their ability to: (i) incur additional indebtedness; (ii) issue
preferred stock; (iii) apply the proceeds of certain asset sales; (iv)
create, incur or assume liens; (v) create dividend and other payment
restrictions with respect to Dish, Ltd.'s subsidiaries; (vi) merge,
consolidate or sell assets; (vii) incur subordinated or junior debt; and
(viii) enter into transactions with affiliates. In addition, Dish, Ltd., may
pay dividends on its equity securities only if (1) no default is continuing
under the 1994 Notes Indenture; and (2) after giving effect to such dividend,
Dish, Ltd.'s ratio of total indebtedness to cash flow (calculated in
accordance with the 1994 Notes Indenture) would not exceed 4.0 to 1.0.
Moreover, the aggregate amount of such dividends generally may not exceed the
sum of 50% of Dish, Ltd.'s consolidated net income (calculated in accordance
with the 1994 Notes Indenture) from the date of issuance of the 1994 Notes,
plus 100% of the aggregate net proceeds to Dish, Ltd. from the issuance and
sale of certain equity interests of Dish, Ltd. (including common stock).
1996 NOTES
On March 25, 1996, ESBC completed the 1996 Notes Offering consisting
of $580.0 million aggregate principal amount at stated maturity of the 1996
Notes. The 1996 Notes Offering resulted in net proceeds to ESBC of
approximately $336.9 million (after payment of underwriting discount and
other issuance costs aggregating approximately $13.1 million). The 1996 Notes
bear interest at a rate of 13 1/8%, computed on a semi-annual bond equivalent
basis. Interest on the 1996 Notes will not be payable in cash prior to March
15, 2000, with the 1996 Notes accreting to a principal amount at stated
maturity of $580.0 million by that date. Commencing September 15, 2000,
interest on the 1996 Notes will be payable in cash on September 15 and March
15 of each year. The 1996 Notes mature on March 15, 2004.
The 1996 Notes rank PARI PASSU in right of payment with all senior
indebtedness of ESBC. The 1996 Notes are guaranteed on a subordinated basis by
ESBC's parent, EchoStar, and are secured by liens on certain assets of ESBC,
EchoStar and certain of EchoStar's subsidiaries, including all of the
outstanding capital stock of Dish, Ltd., which currently owns substantially all
F-56
ECHOSTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. LONG-TERM DEBT (CONTINUED)
of EchoStar's operating subsidiaries. Although the 1996 Notes are titled
"Senior,": (i) ESBC has not issued, and does not have any current
arrangements to issue, any significant indebtedness to which the 1996 Notes
would be senior; and (ii) the 1996 Notes are effectively subordinated to all
liabilities of ECC (except liabilities to general creditors) and its other
subsidiaries (except liabilities of ESBC), including liabilities to general
creditors. As of December 31, 1996, the liabilities of EchoStar and its
subsidiaries, exclusive of the 1996 Notes, aggregated approximately $694.0
million. In addition, net cash flows generated by the assets and operations
of ESBC's subsidiaries will be available to satisfy the obligations of the
1996 Notes only at any time after payment of all amounts due and payable at
such time under the 1994 Notes.
Except under certain circumstances requiring prepayment premiums, and
in other limited circumstances, the 1996 Notes are not redeemable at ESBC's
option prior to March 15, 2000. Thereafter, the 1996 Notes will be subject to
redemption, at the option of ESBC, in whole or in part, at redemption prices
ranging from 106.5625% during the year commencing March 15, 2000 to 100% on
or after March 15, 2003 of principal amount at stated maturity, together with
accrued and unpaid interest thereon to the redemption date. The entire
principal balance of the 1996 Notes will mature on March 15, 2004.
The 1996 Notes Indenture contains restrictive covenants that, among
other things, impose limitations on ESBC with respect to its ability to: (i)
incur additional indebtedness; (ii) issue preferred stock; (iii) apply the
proceeds of certain asset sales; (iv) create, incur or assume liens; (v)
create dividend and other payment restrictions with respect to ESBC's
subsidiaries; (vi) merge, consolidate or sell assets; (vii) incur
subordinated or junior debt; and (viii) enter into transactions with
affiliates. In addition, ESBC may pay dividends on its equity securities only
if (1) no default is continuing under the 1996 Notes Indenture; and (2) after
giving effect to such dividend, ESBC's ratio of total indebtedness to cash
flow (calculated in accordance with the 1996 Notes Indenture) would not
exceed 5.0 to 1.0. Moreover, the aggregate amount of such dividends generally
may not exceed the sum of 50% of ESBC's consolidated net income (calculated
in accordance with the 1996 Notes Indenture) from January 1, 1996, plus 100%
of the aggregate net cash proceeds received by ESBC and its subsidiaries from
the issue or sale of certain equity interests of EchoStar (including common
stock). The 1996 Notes Indenture permits ESBC to pay dividends and make other
distributions to EchoStar without restrictions.
In the event of a change of control, as described in the 1996
Notes Indenture, ESBC will be required to make an offer to each holder of
1996 Notes to repurchase all of such holder's 1996 Notes at a purchase price
equal to 101% of the accreted value thereof on the date of purchase, if prior
to March 15, 2000, or 101% of the aggregate principal amount at stated
maturity thereof, together with accrued and unpaid interest thereon to the
date of purchase, if on or after March 15, 2000.
F-57
ECHOSTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. LONG-TERM DEBT (CONTINUED)
OTHER LONG-TERM DEBT
In addition to the 1994 Notes and 1996 Notes, other long-term debt
consists of the following (in thousands, except monthly payment data):
DECEMBER 31,
--------------------------
1995 1996
--------------------------
8.25% note payable for deferred satellite
contract payments for EchoStar I due in equal
monthly installments of $722,027, including
interest, through February 2001..................... $32,833 $ 30,463
8.25% note payable for deferred satellite
contract payments for EchoStar II due in equal
monthly installments of $561,577, including
interest, through November 2001..................... - 27,161
8.0% mortgage note payable due in equal monthly
installments of $41,635, including interest,
through May 2008; secured by land and office
building with a net book value of approximately
$4.1 million........................................ 3,909 3,715
10.5% mortgage note payable due in equal
monthly installments of $9,442, including
interest, through November 1998; final payment
of $854,000 due November 1998, secured by land
and warehouse building with a net book value of
approximately $886,000.............................. 910 892
9.9375% mortgage note payable due in equal
quarterly principal installments of $10,625
plus interest through April 2009, secured by
land and office building with a net book value
of approximately $802,000........................... 574 531
--------------------------
Total long-term debt, excluding the
1994 Notes and 1996 Notes........................... 38,226 62,762
Less current portion................................ (4,782) (11,334)
--------------------------
Long-term debt, excluding current portion........... $33,444 $ 51,428
--------------------------
Future maturities of amounts outstanding under the Company's long-term
debt facilities as of December 31, 1996 are summarized as follows (in
thousands):
DEFERRED
SATELLITE
CONTRACT MORTGAGE
1994 NOTES 1996 NOTES PAYMENTS 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
---------------------------------------------------------
---------------------------------------------------------
F-58
ECHOSTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. LONG-TERM DEBT (CONTINUED)
The following table summarizes the book and fair values of the Company's debt
facilities at December 31, 1996 (dollars in thousands). Fair values for the
Company's 1994 Notes and 1996 Notes are based on quoted market prices. The fair
value of the Company's Deferred Satellite Contract Payments and mortgage notes
payable are estimated using discounted cash flow analyses. The interest rates
assumed in such discounted cash flow analyses reflect interest rates currently
being offered for loans with similar terms to borrowers of similar credit
quality.
BOOK VALUE FAIR VALUE
---------------------------
1994 Notes..................................... $437,127 $ 526,282
1996 Notes..................................... 386,165 435,986
Deferred satellite contract payments........... 57,624 56,471
Mortgage notes payable......................... 5,138 5,138
---------------------------
$886,054 $1,023,877
---------------------------
DEFERRED SATELLITE CONTRACT PAYMENTS
The majority of the purchase price for the satellites is required to be
paid in progress payments, with the remainder payable in the form of
non-contingent payments which are deferred until after the respective
satellites are in orbit (the "Deferred Payments"). Interest rates on the
Deferred Payments range between 7.75% and 8.25% (to be determined 90 days
prior to the launch of the each satellite) and payments are made over a
period of five years after the delivery and launch of each such satellite.
EchoStar utilized $36.0 million and $28.0 million of contractor financing for
EchoStar I and EchoStar II, respectively. The Deferred Payments with respect
to EchoStar I and EchoStar II are secured by substantially all assets of
Dish, Ltd. and its subsidiaries (subject to certain restrictions) and a
corporate guarantee of ECC. Contractor financing of $15.0 million also will
be used for each of EchoStar III and EchoStar IV. EchoStar will issue a
corporate guarantee with respect to the contractor financing for EchoStar III
and EchoStar IV.
BANK CREDIT FACILITY
From May 1994 to May 1996, certain of EchoStar's subsidiaries
maintained a revolving credit facility (the "Credit Facility") with a bank
for the purposes of funding working capital advances and meeting letter of
credit requirements associated with certain inventory purchases and satellite
construction payments. The Credit Facility expired in May 1996. EchoStar
currently does not intend to obtain a replacement credit facility.
F-59
ECHOSTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. INCOME TAXES
The components of the (provision for) benefit from income taxes are as
follows (in thousands):
YEARS ENDED DECEMBER 31,
--------------------------------
1994 1995 1996
--------------------------------
Current (provision) benefit:
Federal.............................. $(5,951) $1,350 $ 4,586
State................................ (853) (67) (49)
Foreign.............................. (925) (301) (209)
--------------------------------
(7,729) 982 4,328
Deferred benefit:
Federal.............................. 6,342 4,383 47,902
State................................ 988 380 2,463
--------------------------------
7,330 4,763 50,365
--------------------------------
Total benefit (provision)........ $ (399) $5,745 $54,693
--------------------------------
--------------------------------
As of December 31, 1996, the Company had net operating loss
carryforwards ("NOLs") for Federal income tax purposes of approximately $77.6
million. The NOLs expire beginning in year 2011. The use of the NOLs is
subject to statutory and regulatory limitations regarding changes in
ownership. SFAS No. 109 requires that the tax benefit of NOLs for financial
reporting purposes be recorded as an asset and that deferred tax assets and
liabilities are recorded for the estimated future tax effects of temporary
differences between the tax basis of assets and liabilities and amounts
reported in the consolidated balance sheets. To the extent that management
assesses the realization of deferred tax assets to be less than "more likely
than not," a valuation reserve is established.
The temporary differences which give rise to deferred tax assets
and liabilities as of December 31, 1995 and 1996 are as follows (in
thousands):
DECEMBER 31,
--------------------
1995 1996
--------------------
Current deferred tax assets:
Accrued royalties........................ $ - $ 3,029
Inventory reserves and cost methods...... 834 1,811
Accrued expenses and other............... 257 1,582
Allowance for doubtful accounts.......... 456 674
Reserve for warranty costs............... 385 284
--------------------
Total current deferred tax assets 1,932 7,380
Current deferred tax liabilities:
Unrealized holding gain on marketable
investment securities................... (153) (6)
Subscriber acquisition costs............. - (19,937)
--------------------
Total current deferred tax liabilities..... (153) (19,943)
--------------------
Net current deferred tax
assets (liabilities).................. 1,779 (12,563)
Noncurrent deferred tax assets:
Net operating loss carryforwards......... - 77,577
Amortization of original issue
discount on 1994 and 1996 Notes......... 15,439 34,914
Other.................................... 7 3,458
--------------------
Total noncurrent deferred tax assets....... 15,446 115,949
Noncurrent deferred tax liabilities:
Capitalized costs deducted for tax....... (2,351) (17,683)
Depreciation............................. (986) (18,927)
--------------------
Total noncurrent deferred tax liabilities.. (3,337) (36,610)
--------------------
Noncurrent net deferred tax assets..... 12,109 79,339
--------------------
Net deferred tax assets................ $13,888 $66,776
--------------------
--------------------
F-60
ECHOSTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. INCOME TAXES (CONTINUED)
No valuation reserve has been provided for the above deferred tax assets
because the Company currently believes it is more likely than not that these
assets will be realized. If future operating results differ materially and
adversely from the Company's current expectations, its judgment regarding the
need for a valuation allowance may change.
The actual tax provisions for 1994, 1995 and 1996 are reconciled to the
amounts computed by applying the statutory federal tax rate to income before
taxes as follows (dollars in thousands):
1994 1995 1996
----------------------- ----------------------- ------------ ----------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
----------------------- ----------------------- ------------ ----------
Statutory rate. . . . . . . . . . . . . . . . . . . . $(166) (34.0)% $6,031 35.0 % $54,488 35.0 %
State income taxes, net of federal benefit. . . . . . (88) (18.0) 203 1.2 2,864 1.8
Tax exempt interest income. . . . . . . . . . . . . . 60 12.3 10 0.1 - -
Research and development credits. . . . . . . . . . . 156 31.9 31 0.2 - -
Non-deductible interest expense . . . . . . . . . . . (258) (52.7) (293) (1.7) (2,099) (1.3)
Other . . . . . . . . . . . . . . . . . . . . . . . . (103) (21.1) (237) (1.5) (560) (0.4)
----------------------- ----------------------- ------------ ----------
Total (provision for) benefit from income taxes . . $(399) (81.6)% $5,745 33.3 % $54,693 35.1 %
----------------------- ----------------------- ------------ ----------
----------------------- ----------------------- ------------ ----------
8. EMPLOYEE BENEFIT PLAN
The Company sponsors a 401(k) Employee Savings Plan (the "401(k) Plan") for
eligible employees. Voluntary employee contributions to the 401(k) Plan may be
matched 50% by the Company, subject to a maximum annual contribution by the
Company of $1,000 per employee. The Company may also make an annual
discretionary contribution to the plan with approval by the Company's Board of
Directors, subject to the maximum deductible limit provided by the Internal
Revenue Code of 1986, as amended. The Company's total cash contributions to the
401(k) Plan totaled $170,000, $177,000 and $226,000 during 1994, 1995 and 1996,
respectively. Additionally, the Company contributed 55,000 shares of its Class A
Common Stock in each of 1995 and 1996 (fair value of approximately $1.1 million
and $935,000, respectively) to the 401(k) Plan as discretionary contributions.
9. STOCKHOLDERS' EQUITY
COMMON STOCK
The Class A, Class B and Class C Common Stock are equivalent in all
respects except voting rights. Holders of Class A and Class C Common Stock are
entitled to one vote per share and holders of Class B Common Stock are entitled
to ten votes per share. Each share of Class B and Class C Common Stock is
convertible, at the option of the holder, into one share of Class A Common
Stock. Upon a change in control of ECC, each holder of outstanding shares of
Class C Common Stock is entitled to ten votes for each share of Class C Common
Stock held. ECC's principal stockholder owns all outstanding Class B Common
Stock and all other stockholders own Class A Common Stock.
8% SERIES A CUMULATIVE PREFERRED STOCK
On May 6, 1994, the Company exchanged 1,616,681 shares of its 8% Series A
Cumulative Preferred Stock with its principal stockholder in consideration for
the cancellation of a note, plus accrued and unpaid interest thereon.
Approximately 5%, or 80,834 shares, of the 8% Series A Cumulative Preferred
Stock were subsequently transferred to another stockholder and officer of the
Company.
Each share of the 8% Series A Cumulative Preferred Stock is convertible, at
the option of the holder, into one share of Class A Common Stock, subject to
adjustment from time to time upon the occurrence of certain events, including,
among other things: (i) dividends or distributions on Class A Common Stock
payable in Class A Common Stock or certain other capital stock; (ii)
subdivisions, combinations or certain reclassifications of Class A Common Stock;
and (iii) issuance of Class A Common Stock or rights, warrants or options to
purchase Class A Common Stock at a price per share less than the liquidation
preference per share. In the event of the liquidation, dissolution or winding up
of EchoStar, the holders of 8% Series A Cumulative
F-61
ECHOSTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. STOCKHOLDERS' EQUITY (CONTINUED)
Preferred Stock would be entitled to receive an amount equal to approximately
$11.38 per share as of December 31, 1996.
The aggregate liquidation preference for all outstanding shares of 8%
Series A Cumulative Preferred Stock is limited to the principal amount
represented by the note, plus accrued and unpaid dividends thereon. Each share
of 8% Series A Cumulative Preferred Stock is entitled to receive dividends equal
to eight percent per annum of the initial liquidation preference for such share.
Each share of 8% Series A Cumulative Preferred Stock automatically converts into
shares of Class A Common Stock in the event they are transferred to any person
other than certain permitted transferees and is entitled to the equivalent of
ten votes for each share of Class A Common Stock into which it is convertible.
Except as otherwise required by law, holders of 8% Series A Cumulative Preferred
Stock vote together with the holders of Class A and Class B Common Stock as a
single class.
All accrued dividends payable to Mr. Ergen on his Dish, Ltd. 8% Series A
Cumulative Preferred Stock through the date of the Exchange ($1.4 million), and
all accrued dividends payable to the remaining holder of Dish, Ltd. 8% Series A
Cumulative Preferred Stock through the date of the Merger ($107,000), will
remain obligations of Dish, Ltd. (Note 1); however, no additional dividends will
accrue with respect to the Dish, Ltd. 8% Series A Cumulative Preferred Stock.
The 1994 Notes Indenture places significant restrictions on the payment of those
dividends. As of December 31, 1996, additional accrued dividends payable to
Mr. Ergen by ECC on the ECC 8% Series A Cumulative Preferred Stock totaled $1.7
million. Cumulative but unpaid dividends totaled approximately $2.1 million and
$3.3 million at December 31, 1995 and 1996 respectively, including amounts which
remain the obligation of Dish, Ltd.
WARRANTS
In conjunction with the 1994 Notes Offering, described in Note 6, the
Company issued 3,744,000 Warrants for the purchase of Dish, Ltd. Class A Common
Stock. Effective with the Merger (see Note 1), the Warrants became exercisable
for 2,808,000 shares of ECC's Class A Common Stock. The Warrants were valued at
$26.1 million.
Each Warrant entitles the registered holder thereof, at such holder's
option, to purchase one share of ECC Class A Common Stock at a purchase price of
$0.01 per share (the "Exercise Price"). The Exercise Price with respect to all
of the Warrants was paid in advance and, therefore, no additional amounts are
receivable by the Company upon exercise of the Warrants. As of December 31,
1996, Warrants to purchase approximately 2,000 shares of the Company's Class A
Common Stock (as adjusted for the Exchange Ratio) remain outstanding.
10. STOCK COMPENSATION PLANS
The Company has two stock-based compensation plans, which are described
below. The Company has elected to follow Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees," ("APB 25") and related
interpretations in accounting for its stock-based compensation plans. Under
APB 25, because the exercise price of the Company's employees stock options is
equal to the market price of the underlying stock on the date of the grant, no
compensation expense is recognized. In October 1995, the Financial Accounting
Standards Board issued SFAS No. 123, "Accounting and Disclosure of Stock-Based
Compensation," ("SFAS No. 123") which established an alternative method of
expense recognition for stock-based compensation awards to employees based on
fair values. The Company elected to not adopt SFAS No. 123 for expense
recognition purposes.
Pro forma information regarding net income and earnings per share is
required by SFAS No. 123 and has been determined as if the Company had accounted
for its stock-based compensation plans using the fair value method prescribed by
that statement. The fair value for these options was estimated at the date of
grant using a Black-Scholes option pricing model with the following
weighted-average assumptions for 1995 and 1996, respectively: risk-free interest
rate of 6.12% and 6.80% for 1995 and 1996, respectively; dividend yields of 0.0%
during each period; volatility factors of the expected market price of the
Company's Class A Common Stock of 62%, and a weighted-average expected life of
the options of six years.
F-62
ECHOSTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. STOCK COMPENSATION PLANS (CONTINUED)
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. All options
are initially assumed to vest. Compensation previously recognized is reversed to
the extent applicable to forfeitures of unvested options. The Company's pro
forma net loss attributable to common shares and pro forma loss per common and
common equivalent share were as follows:
DECEMBER 31,
---------------------
1995 1996
---------------------
Net loss attributable to common shares . . . . . . $(13,079) $(103,120)
Loss per common and common equivalent share. . . . $(0.37) $(2.54)
---------------------
---------------------
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect the
fair value estimate, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of its
stock-based compensation awards.
In April 1994, the Company adopted a stock incentive plan (the "Stock
Incentive Plan") to provide incentive to attract and retain officers, directors
and key employees. ECC assumed all outstanding options for the purchase of Dish,
Ltd. common stock effective with the Exchange and Merger and has reserved up to
10 million shares of its Class A Common Stock for granting awards under the
Stock Incentive Plan. Awards available under the Stock Incentive Plan include:
(i) common stock purchase options; (ii) stock appreciation rights;
(iii) restricted stock and restricted stock units; (iv) performance awards;
(v) dividend equivalents; and (vi) other stock-based awards. All options granted
through December 31, 1996 have included exercise prices not less than the fair
market value of the Shares at the date of grant and vest as determined by the
Company's Board of Directors, generally at the rate of 20% per year.
A summary of the Company's incentive stock option activity for the years
ended December 31, 1995 and 1996 is as follows:
1995 1996
--------------------------- ----------------------------
WEIGHTED- WEIGHTED-
AVERAGE AVERAGE
OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE
--------------------------- ----------------------------
Options outstanding at beginning of year 744,872 $ 9.33 1,117,133 $12.23
Granted. . . . . . . . . . . . . . . . . . . . . . . . . . . . 419,772 17.13 138,790 27.02
Exercised. . . . . . . . . . . . . . . . . . . . . . . . . . . (4,284) 9.33 (103,766) 10.24
Forfeited. . . . . . . . . . . . . . . . . . . . . . . . . . . (43,227) 10.55 (126,884) 13.27
----------------------------- ----------------------------
Options outstanding at end of year . . . . . . . . . . . . . . 1,117,133 $ 12.23 1,025,273 $14.27
----------------------------- ----------------------------
--------------------------- ----------------------------
Exercisable at end of year . . . . . . . . . . . . . . . . . . 142,474 $ 9.33 258,368 $11.31
----------------------------- ----------------------------
--------------------------- ----------------------------
Weighted-average fair value of options granted . . . . . . . . $ 9.86 $16.96
------------------ ---------------
------------------ ---------------
F-63
ECHOSTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. STOCK COMPENSATION PLANS (CONTINUED)
Exercise prices for options outstanding as of December 31, 1996 are as
follows:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------------- --------------------------------------
NUMBER WEIGHTED- NUMBER
OUTSTANDING AS OF AVERAGE WEIGHTED- EXERCISABLE AS OF WEIGHTED-
DECEMBER 31, REMAINING AVERAGE EXERCISE DECEMBER 31, AVERAGE EXERCISE
RANGE OF EXERCISE PRICES 1996 CONTRACTUAL LIFE PRICE 1996 PRICE
--------------------------------------------------- --------------------------------------
$9.333-$11.870 . . . . . . . 607,462 5.50 $ 9.48 203,757 $ 9.41
17.000- 20.250 . . . . . . . 279,021 6.71 18.48 54,611 18.51
26.690- 29.360 . . . . . . . 138,790 7.58 27.02 - -
--------------------------------------------------- --------------------------------------
$9.333-$29.360 . . . . . . . 1,025,273 6.11 $14.27 258,368 $11.31
--------------------------------------------------- --------------------------------------
--------------------------------------------------- --------------------------------------
In March 1994, the Company entered into an employment agreement with one of
its executive officers. The officer was granted an option, containing certain
conditions to vesting, to purchase 322,208 shares of Class A Common Stock of the
Company for $1.0 million at any time prior to December 31, 1999, subject to
certain limitations. One-half of this option became exercisable on December 31,
1994 and the remainder became exercisable on December 31, 1995. The option was
not granted pursuant to the Stock Incentive Plan. During 1996, this option was
fully exercised.
Effective March 1995, the Company granted an additional option to a key
employee to purchase 33,000 shares of EchoStar's Class A Common Stock, which
vests 50% in March 1996 and 50% in March 1997. The exercise price for each share
of Class A Common Stock is $11.87 per share. The option was not granted pursuant
to the Stock Incentive Plan. In December 1996, the vested portion of this option
was exercised and the unvested portion of the option was canceled.
11. OTHER COMMITMENTS AND CONTINGENCIES
SATELLITE CONTRACTS
EchoStar has contracted with Martin for the construction and delivery of
high powered DBS satellites and for related services. Martin constructed both
EchoStar I and EchoStar II and is in the construction phase on EchoStar III and
EchoStar IV. The construction contract for EchoStar III includes a per diem
penalty of $3,333, to a maximum of $100,000, if EchoStar III is not delivered by
July 31, 1997. Beginning September 1, 1997, additional delays in the delivery of
EchoStar III would result in additional per diem penalties of $33,333, up to a
maximum of $5.0 million in the aggregate. The contract for EchoStar IV includes
a per diem penalty of $50,000, to a maximum of $5.0 million in the aggregate, if
EchoStar IV is not delivered by February 15, 1998. The contract also contains a
provision whereby Martin is entitled to an early delivery incentive payment of
$50,000 for each day before February 15, 1998 the satellite is delivered to the
launch site of Baikonur, Kazakhstan, up to a maximum of $5.0 million in the
aggregate.
EchoStar has entered into a contract for launch services with Lockheed
Martin Commercial Launch Services, Inc. ("Lockheed") for the launch of EchoStar
III from Cape Canaveral Air Station, Florida during the fall of 1997, subject to
delay or acceleration in certain circumstances (the "Lockheed Contract"). The
Lockheed Contract provides for launch of the satellite utilizing an Atlas IIAS
launch vehicle. EchoStar has made an initial payment to Lockheed of $5.0 million
and the remaining price is payable in installments in accordance with the
payment schedule set forth in the Lockheed Contract, which requires that
substantially all payments be made to Lockheed prior to the launch.
EchoStar has contracted with Lockheed-Khrunichev-Energia-International,
Inc. ("LKE") for the launch of EchoStar IV in the first quarter of 1998 from the
Baikonur Cosmodrome in the Republic of Kazakhstan, a territory of the former
Soviet Union, utilizing a Proton launch vehicle (the "LKE Contract"). Either
party may request a delay in the launch period, subject to the payment of
penalties based on the length of the delay and the proximity of the request to
the launch date. EchoStar has paid LKE $20.0 million pursuant to the LKE
Contract. Additional payments to LKE are required in 1997.
F-64
ECHOSTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. OTHER COMMITMENTS AND CONTINGENCIES
In addition to the commitments described above, during 1997, EchoStar
expects to expend: (i) approximately $16.7 million for contractor financing
on EchoStar I, EchoStar II, and EchoStar III; (ii) approximately $118.7
million in connection with the launch and insurance of EchoStar III and
EchoStar IV; and (iii) approximately $50.0 million for construction of
EchoStar III and EchoStar IV. Funds for these expenditures are expected to
come from the 1996 Notes Escrow Account, the proceeds of the 1997 Offering,
and available cash and marketable investment securities. Beyond 1997,
EchoStar will expend approximately $88.6 million to repay contractor
financing debt related to EchoStar I, EchoStar II, EchoStar III, and EchoStar
IV. Additionally, EchoStar has committed to expend approximately an
additional $69.7 million to construct and launch EchoStar IV in 1998. The
construction contracts with Martin for the construction of EchoStar III and
EchoStar IV contain substantial termination penalties. The 1997 Offering is
expected to provide financing sufficient to fund the Company's commitments
for at least the next 12 months. In order to continue to build, launch and
support EchoStar III and EchoStar IV beyond the second quarter of 1998,
EchoStar may need additional capital. There can be no assurance that
additional capital will be available, or, if available, that it will be
available on terms acceptable to EchoStar.
The Company has filed applications with the Federal Communications
Commission ("FCC") for authorization to construct, launch and operate a domestic
fixed satellite service system ("FSS System") and a two satellite Ka-band
satellite system. No assurances can be given that the Company's applications
will be approved by the FCC or that, if approved, the Company will successfully
develop the FSS System or the Ka-band satellite system. The Company believes
that establishment of the FSS System or the Ka-band satellite system would
enhance its competitive position in the DTH industry. In the event the Company's
FSS or Ka-band satellite system applications are approved by the FCC, additional
debt or equity financing would be required. Financing alternatives related to
the FSS and Ka-band satellite systems are currently being pursued by the
Company. No assurances can be given that financing will be available, or that it
will be available on terms acceptable to the Company.
LEASES
Future minimum lease payments under noncancelable operating leases as of
December 31, 1996, are as follows (in thousands):
YEAR ENDING DECEMBER 31,
1997. . . . . . . . . . . . . . . . . . . . . . . . . . . $ 869
1998. . . . . . . . . . . . . . . . . . . . . . . . . . . 492
1999. . . . . . . . . . . . . . . . . . . . . . . . . . . 180
2000. . . . . . . . . . . . . . . . . . . . . . . . . . . 21
2001. . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Thereafter. . . . . . . . . . . . . . . . . . . . . . . . -
----------
Total minimum lease payments. . . . . . . . . . . . . . . . . . $1,564
----------
----------
Rental expense for operating leases aggregated $1.4 million, $1.2 million,
and $950,000 during the years ended December 31, 1994, 1995 and 1996,
respectively.
PURCHASE COMMITMENTS
The Company has entered into agreements with various manufacturers to
purchase DBS satellite receivers and related components manufactured to its
specifications. As of December 31, 1996, the remaining commitments total
approximately $82.9 million and the total of all outstanding purchase order
commitments with domestic and foreign suppliers was $85.9 million. All of the
purchases related to these commitments are expected to be made during 1997. The
Company expects to finance these purchases from available cash, the proceeds of
the 1997 Offering, and cash flows generated from sales of DISH Network
programming and related DBS inventory.
OTHER RISKS AND CONTINGENCIES
The Company is subject to various legal proceedings and claims which arise
in the ordinary course of its business. In the opinion of management, the amount
of ultimate liability with respect to these actions will not materially affect
the financial position or results of operations of the Company.
F-65
ECHOSTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
12. CONDENSED CONSOLIDATING FINANCIAL INFORMATION FOR SUBSIDIARY GUARANTORS
Presented below is condensed consolidating financial information for EchoStar
and its subsidiaries as of and for the years ended December 31, 1995 and 1996.
See Note 6 for a more complete description of the subsidiary guarantors of each
of the 1996 Notes and the 1994 Notes. Because the formations of EchoStar
(incorporated in 1995), DBS Corp (incorporated in 1996) and ESBC (incorporated
in 1996) were all accounted for as reorganizations of entities under common
control, the consolidated financial statements of Dish, Ltd. as of December 31,
1994 and for the year then ended also represent the financial statements of
EchoStar, DBS Corp and ESBC. Therefore, condensed consolidating financial
information for the subsidiary guarantors of the 1996 Notes and the 1994 Notes
for the year ended December 31, 1994 is not presented.
Condensed consolidating financial information is presented for the following
entities:
Consolidated Dish, Ltd. (referred to as "Dish") Consolidated DBS Corp (referred to as "DBS Corp")
ESBC Parent Company Only (referred to as "ESBC - PC") ECC Parent Company Only (referred to as "ECC - PC")
Consolidating and eliminating adjustments (referred to as "C&E") Other direct wholly owned subs of ECC (referred to as
"Other")
Consolidated ESBC (referred to as "ESBC") Consolidated ECC (referred to as "ECC")
DBS Corp Parent Company Only (referred to as "DBS Corp - PC")
CONDENSED CONSOLIDATING BALANCE SHEETS - AS OF DECEMBER 31, 1995 (IN MILLIONS)
ECC -
Dish PC Other C&E ECC
--------------------------------------------------
ASSETS
Current Assets:
Cash and cash equivalents. . . . . . . . . . . . . . . . . . . $ 14 $ 8 $ -- $ -- $ 22
Marketable investment securities . . . . . . . . . . . . . . . -- 15 -- -- 15
Trade accounts receivable, net . . . . . . . . . . . . . . . . 10 -- -- -- 10
Inventories. . . . . . . . . . . . . . . . . . . . . . . . . . 39 -- -- -- 39
Other current assets . . . . . . . . . . . . . . . . . . . . . 18 -- -- -- 18
--------------------------------------------------
Total current assets . . . . . . . . . . . . . . . . . . . . . . 81 23 -- -- 104
Investments in subsidiaries. . . . . . . . . . . . . . . . . . . -- 93 -- (93) --
Restricted cash and marketable investment securities . . . . . . 100 -- -- -- 100
Property and equipment, net. . . . . . . . . . . . . . . . . . . 333 -- 21 -- 354
Advances to affiliates, net. . . . . . . . . . . . . . . . . . . -- 21 -- (21) --
Other noncurrent assets. . . . . . . . . . . . . . . . . . . . . 45 20 -- -- 65
--------------------------------------------------
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . $559 $157 $ 21 $(114) $623
--------------------------------------------------
--------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Trade accounts payable . . . . . . . . . . . . . . . . . . . . $ 19 $ -- $ -- $ -- $ 19
Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . 1 -- -- -- 1
Accrued expenses and other current liabilities . . . . . . . . 26 -- -- -- 26
Current portion of long-term debt. . . . . . . . . . . . . . . 5 -- -- -- 5
--------------------------------------------------
Total current liabilities. . . . . . . . . . . . . . . . . . . . 51 -- -- -- 51
Advances from affiliates, net. . . . . . . . . . . . . . . . . . -- -- 21 (21) --
1994 Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . 382 -- -- -- 382
Mortgage and other notes payable, excluding current portion. . . 33 -- -- -- 33
--------------------------------------------------
Total long-term liabilities. . . . . . . . . . . . . . . . . . 415 -- 21 (21) 415
--------------------------------------------------
Total liabilities . . . . . . . . . . . . . . . . . . . . . 466 -- 21 (21) 466
Stockholders' equity (deficit) . . . . . . . . . . . . . . . . . 93 157 -- (93) 157
--------------------------------------------------
Total liabilities and stockholders' equity (deficit). . . . $559 $157 $ 21 $(114) $623
F-66
ECHOSTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
12. CONDENSED CONSOLIDATING FINANCIAL INFORMATION FOR SUBSIDIARY GUARANTORS
(CONTINUED)
CONDENSED CONSOLIDATING BALANCE SHEETS - AS OF DECEMBER 31, 1996 (IN MILLIONS)
ESBC - DBS Corp- DBS ECC
Dish PC C&E ESBC PC C&E Corp - PC Other C&E ECC
----------------------------------------------------------------------------------------------
ASSETS
Current Assets:
Cash and cash equivalents. . . . . $ 25 $ 14 $ -- $ 39 $ -- $ -- $ 39 $ -- $ -- $ -- $ 39
Marketable investment
securities . . . . . . . . . . . -- 19 -- 19 -- -- 19 -- -- -- 19
Trade accounts receivable,
net. . . . . . . . . . . . . . . 14 -- -- 14 -- -- 14 -- -- -- 14
Inventories. . . . . . . . . . . . 73 -- -- 73 -- -- 73 -- -- -- 73
Subscriber acquisition
costs, net . . . . . . . . . . . 68 -- -- 68 -- -- 68 -- -- -- 68
Other current assets . . . . . . . 19 -- -- 19 -- -- 19 1 3 -- 23
----------------------------------------------------------------------------------------------
Total current assets . . . . . . . . 199 33 -- 232 -- -- 232 1 3 -- 236
Investment in subsidiary.. . . . . . -- 3 (3) -- -- -- -- -- -- -- --
Restricted cash and
marketable investment
securities . . . . . . . . . . . . 32 47 -- 79 -- -- 79 -- -- -- 79
Property and equipment, net. . . . . 500 -- -- 500 29 -- 529 -- 62 -- 591
Advances to affiliates, net. . . . . -- 280 (135) 145 -- (76) 69 -- -- (69) --
Deferred tax assets. . . . . . . . . 74 5 -- 79 -- -- 79 -- 1 (1) 79
Other noncurrent assets. . . . . . . 26 12 -- 38 60 -- 98 70 -- (12) 156
----------------------------------------------------------------------------------------------
Total assets . . . . . . . . . . . $831 $380 $(138) $1,073 $ 89 $(76) $1,086 $ 71 $ 66 $ (82) $1,141
----------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Trade accounts payable . . . . . . $ 41 $ -- $ -- $ 41 $ -- $ -- $ 41 $ -- $ 1 $ (1) $ 41
Deferred revenue . . . . . . . . . 103 -- -- 103 -- -- 103 -- -- -- 103
Accrued expenses and
other current liabilities. . . . 29 -- -- 29 2 -- 31 1 -- (2) 30
Deferred tax liabilities . . . . . 13 -- -- 13 -- -- 13 -- -- -- 13
Current portion of long-
term debt. . . . . . . . . . . . 11 -- -- 11 -- -- 11 -- -- -- 11
----------------------------------------------------------------------------------------------
Total current liabilities. . . . . . 197 -- -- 197 2 -- 199 1 1 (3) 198
Long-term deferred signal
carriage revenue . . . . . . . . . 6 -- -- 6 -- -- 6 -- -- -- 6
Advances from affiliates, net. . . . 135 -- (135) -- 76 (76) -- 2 64 (66) --
Investment in subsidiaries . . . . . -- -- -- -- 6 (6) -- 7 -- (7) --
1994 Notes . . . . . . . . . . . . . 437 -- -- 437 -- -- 437 -- -- -- 437
1996 Notes . . . . . . . . . . . . . -- 386 -- 386 -- -- 386 -- -- -- 386
Mortgage and other notes
payable, excluding
current portion. . . . . . . . . . 52 -- -- 52 12 -- 64 -- -- (12) 52
Other long-term liabilities. . . . . 1 -- -- 1 -- -- 1 -- -- -- 1
----------------------------------------------------------------------------------------------
Total long-term liabilities. . . . 631 386 (135) 882 94 (82) 894 9 64 (85) 882
----------------------------------------------------------------------------------------------
Total liabilities. . . . . . . . 828 386 (135) 1,079 96 (82) 1,093 10 65 (88) 1,080
Stockholders' equity (deficit) . . . 3 (6) (3) (6) (7) 6 (7) 61 1 6 61
----------------------------------------------------------------------------------------------
Total liabilities and
stockholders' equity
(deficit) . . . . . . . . . . $831 $380 $(138) $1,073 $ 89 $(76) $1,086 $ 71 $ 66 $ (82) $1,141
----------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------
F-67
ECHOSTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED)
12. CONDENSED CONSOLIDATING FINANCIAL INFORMATION FOR SUBSIDIARY GUARANTORS
(CONTINUED)
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS - YEAR ENDED DECEMBER 31, 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-68
ECHOSTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED)
12. CONDENSED CONSOLIDATING FINANCIAL INFORMATION FOR SUBSIDIARY GUARANTORS
(CONTINUED)
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS - YEAR ENDED DECEMBER 31, 1996
(IN MILLIONS, EXCEPT PER SHARE DATA)
ESBC - DBS Corp- DBS ECC -
Dish PC C&E ESBC PC C&E Corp PC Other C&E ECC
-------------------------------------------------------------------------------------
REVENUE:
DTH products and technical services . . . $136 $ -- $ -- $136 $ -- $ -- $136 $ -- $ -- $ -- $136
DISH Network promotions -
subscription television services
and products. . . . . . . . . . . . . . 23 -- -- 23 -- -- 23 -- -- -- 23
DISH Network subscription television
services. . . . . . . . . . . . . . . . 38 -- -- 38 -- -- 38 -- -- -- 38
C-band programming. . . . . . . . . . . . 12 -- -- 12 -- -- 12 -- -- -- 12
Loan origination and participation income 1 -- -- 1 -- -- 1 -- 2 -- 3
-------------------------------------------------------------------------------------
Total revenue . . . . . . . . . . . . . . . 210 -- -- 210 -- -- 210 -- 2 -- 212
EXPENSES:
DTH products and technical services . . . 124 -- -- 124 -- -- 124 -- -- -- 124
DISH Network programming. . . . . . . . . 19 -- -- 19 -- -- 19 -- -- -- 19
C-band programming. . . . . . . . . . . . 11 -- -- 11 -- -- 11 -- -- -- 11
Selling, general and administrative . . . 87 -- -- 87 -- -- 87 -- 3 -- 90
Subscriber promotion subsidies. . . . . . 35 -- -- 35 -- -- 35 -- -- (1) 34
Amortization of subscriber acquisition
costs . . . . . . . . . . . . . . . . . 16 -- -- 16 -- -- 16 -- -- -- 16
Depreciation and amortization . . . . . . 27 -- -- 27 -- -- 27 -- -- -- 27
-------------------------------------------------------------------------------------
Total expenses. . . . . . . . . . . . . . . 319 -- -- 319 -- -- 319 -- 3 (1) 321
-------------------------------------------------------------------------------------
Operating income (loss) . . . . . . . . . . (109) -- -- (109) -- -- (109) -- (1) 1 (109)
Other Income (Expense):
Interest income . . . . . . . . . . . . . 4 10 -- 14 -- -- 14 1 -- -- 15
Interest expense, net of amounts
capitalized . . . . . . . . . . . . . . (37) (24) -- (61) (1) -- (62) -- -- -- (62)
Equity in losses of subsidiaries. . . . . -- (92) 92 -- (101) 101 -- (101) -- 101 --
-------------------------------------------------------------------------------------
Total other income (expense), net . . . . . (33) (106) 92 (47) (102) 101 (48) (100) -- 101 (47)
-------------------------------------------------------------------------------------
Income (loss) before income taxes . . . . . (142) (106) 92 (156) (102) 101 (157) (100) (1) 102 (156)
Income tax (provision) benefit, net . . . . 50 5 -- 55 -- -- 55 (1) 1 -- 55
-------------------------------------------------------------------------------------
Net income (loss) . . . . . . . . . . . . . $ (92) $(101) $92 $(101) $(102) $101 $(102) $(101) $ -- $102 $(101)
-------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------
Net loss attributable to common shares. . . -- -- -- -- -- -- -- -- -- -- $(102)
-------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------
Weighted-average common shares
outstanding . . . . . . . . . . . . . . . -- -- -- -- -- -- -- -- -- -- 41
-------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------
Loss per common and common equivalent
share . . . . . . . . . . . . . . . . . . -- -- -- -- -- -- -- -- -- --$(2.52)
-------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------
F-69
ECHOSTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED)
12. CONDENSED CONSOLIDATING FINANCIAL INFORMATION FOR SUBSIDIARY GUARANTORS
(CONTINUED)
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS - YEAR ENDED DECEMBER 31, 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-70
ECHOSTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. CONDENSED CONSOLIDATING FINANCIAL INFORMATION FOR SUBSIDIARY GUARANTORS
(CONTINUED)
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS - YEAR ENDED DECEMBER 31, 1996
(IN MILLIONS)
DBS
ESBC - Corp- DBS ECC -
Dish PC C&E ESBC PC C&E Corp PC
-----------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss). . . . . . . . . . . . . . . . . . . . $( 92) $(101) $ 92 $(101) $(102) $101 $(102) $(101)
Adjustments to reconcile net income (loss) to net cash
flows from operating activities:
Equity in (earnings) losses of subsidiaries. . . . . . -- 92 ( 92) -- 101 (101) -- 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 ( 2)
Changes in current assets and current liabilities,
net. . . . . . . . . . . . . . . . . . . . . . . . . 14 -- -- 14 1 -- 15 4
-----------------------------------------------------------------------
Net cash flows provided by (used in) operating activities ( 36) 10 3 ( 23) -- -- ( 23) 2
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of marketable investment securities. . . . . . -- (138) -- (138) -- -- (138) --
Sales of marketable investment securities. . . . . . . . -- 120 -- 120 -- -- 120 15
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) 22
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 . . . . . . . . . . . . . . . . . . . . . . . . . -- -- -- -- -- -- -- ( 3)
Long-term notes receivable from and investment in DBSC . -- -- -- -- -- -- -- ( 30)
Long-term note receivable from DBS Corp. . . . . . . . . -- -- -- -- -- -- -- ( 12)
Expenditures for satellite systems under construction. . (112) -- -- (112) ( 26) -- (138) --
Expenditures for FCC authorizations. . . . . . . . . . . -- -- -- -- ( 55) -- ( 55) --
Other. . . . . . . . . . . . . . . . . . . . . . . . . . -- -- -- -- -- -- -- ( 3)
-----------------------------------------------------------------------
Net cash flows used in investing activities. . . . . . . 54 (333) ( 3) (282) ( 12) -- (294) ( 11)
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. . . . . . . . . . . . . . . . . -- -- -- -- -- -- -- 2
-----------------------------------------------------------------------
Net cash flows provided by (used in) financing
activities . . . . . . . . . . . . . . . . . . . . . . ( 8) 337 -- 329 12 -- 341 2
-----------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents . . 10 14 -- 24 -- -- 24 ( 7)
Cash and cash equivalents, beginning of year . . . . . . 14 -- -- 14 -- -- 14 8
-----------------------------------------------------------------------
Cash and cash equivalents, end of year . . . . . . . . . $ 24 $ 14 $ -- $ 38 $ -- $ -- $ 38 $ 1
-----------------------------------------------------------------------
-----------------------------------------------------------------------
F-71
ECHOSTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. CONDENSED CONSOLIDATING FINANCIAL INFORMATION FOR SUBSIDIARY GUARANTORS
(CONTINUED)
Other C&E ECC
------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss). . . . . . . . . . . . . . . . . . . . $ -- $102 $(101)
Adjustments to reconcile net income (loss) to net cash
flows from operating activities:
Equity in (earnings) losses of subsidiaries. . . . . . -- (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 . . . . . . . . . . . . . . . . . . . . . . -- -- 8
Changes in current assets and current liabilities,
net. . . . . . . . . . . . . . . . . . . . . . . . . -- ( 8) 11
------------------------
Net cash flows provided by (used in) operating activities -- ( 7) ( 28)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of marketable investment securities. . . . . . -- -- (138)
Sales of marketable investment securities. . . . . . . . -- -- 135
Purchases of restricted marketable investment securities -- -- ( 21)
Funds released from restricted cash and marketable
investment securities - other. . . . . . . . . . . . . -- -- 16
Advances (to) from affiliates, net . . . . . . . . . . . 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)
Long-term notes receivable from and investment in DBSC . -- -- ( 30)(
Long-term note receivable from DBS Corp. . . . . . . . . -- 12 --
Expenditures for satellite systems under construction. . ( 33) -- (171)
Expenditures for FCC authorizations. . . . . . . . . . . -- -- ( 55)
Other. . . . . . . . . . . . . . . . . . . . . . . . . . -- 3 --
------------------------
Net cash flows used in investing activities. . . . . . . -- 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
------------------------
Net cash flows provided by (used in) financing
activities . . . . . . . . . . . . . . . . . . . . . . -- ( 12) 331
------------------------
Net increase (decrease) in cash and cash equivalents . . -- -- 17
Cash and cash equivalents, beginning of year . . . . . . -- -- 22
------------------------
Cash and cash equivalents, end of year . . . . . . . . . $ -- $ -- $ 39
------------------------
------------------------
F-72
ECHOSTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. OPERATIONS IN GEOGRAPHIC AREAS
The Company sells its products on a worldwide basis and has established
operations in Europe and the Pacific Rim. Information about the Company's
operations in different geographic areas is as follows (in thousands):
OTHER
UNITED STATES EUROPE INTERNATIONAL TOTAL
------------- ---------- ------------- ----------
AS OF AND FOR THE YEAR ENDED DECEMBER 31, 1994:
Total revenue. . . . . . . . . . . . . . . . . . . $ 137,233 $ 24,072 $ 29,678 $ 190,983
------------- ---------- ------------- ----------
------------- ---------- ------------- ----------
Export sales . . . . . . . . . . . . . . . . . . . $ 7,188
-------------
-------------
Operating income . . . . . . . . . . . . . . . . . $ 10,811 $ 1,244 $ 1,161 $ 13,216
------------- ---------- -------------
------------- ---------- -------------
Other income (expense), net. . . . . . . . . . . . (12,727)
----------
Net income before income taxes . . . . . . . . . . $ 489
----------
----------
Identifiable assets. . . . . . . . . . . . . . . . $ 77,172 $ 6,397 $ 2,359 $ 85,928
------------- ---------- -------------
------------- ---------- -------------
Corporate assets . . . . . . . . . . . . . . . . . 386,564
----------
Total assets . . . . . . . . . . . . . . . . . . . $ 472,492
----------
----------
AS OF AND FOR THE YEAR ENDED DECEMBER 31, 1995:
Total revenue. . . . . . . . . . . . . . . . . . . $ 110,629 $ 31,351 $ 21,910 $ 163,890
------------- ---------- ------------- ----------
------------- ---------- ------------- ----------
Export sales . . . . . . . . . . . . . . . . . . . $ 6,317
-------------
-------------
Operating income (loss). . . . . . . . . . . . . . $ (7,860) $ 146 $ (257) $ (7,971)
------------- ---------- -------------
------------- ---------- -------------
Other income (expense), net. . . . . . . . . . . . (9,260)
----------
Loss before income taxes . . . . . . . . . . . . . $ (17,231)
----------
----------
Identifiable assets. . . . . . . . . . . . . . . . $ 63,136 $ 10,088 $ 3,788 $ 77,012
------------- ---------- -------------
------------- ---------- -------------
Corporate assets . . . . . . . . . . . . . . . . . 546,079
----------
Total assets . . . . . . . . . . . . . . . . . . . $ 623,091
----------
----------
AS OF AND FOR THE YEAR ENDED DECEMBER 1996:
Total revenue. . . . . . . . . . . . . . . . . . . $ 173,919 $ 26,984 $ 10,508 $ 211,411
------------- ---------- ------------- ----------
------------- ---------- ------------- ----------
Export sales . . . . . . . . . . . . . . . . . . . $ 1,536
-------------
-------------
Operating loss . . . . . . . . . . . . . . . . . . $(107,175) $ (1,274) $ (896) $ (109,345)
------------- ---------- -------------
------------- ---------- -------------
Other income (expense), net. . . . . . . . . . . . (46,334)
----------
Loss before income taxes . . . . . . . . . . . . . $ (155,679)
----------
----------
Identifiable assets. . . . . . . . . . . . . . . . $ 836,596 $ 5,795 $ 1,871 $ 844,262
------------- ---------- -------------
------------- ---------- -------------
Corporate assets . . . . . . . . . . . . . . . . . 297,118
----------
Total assets . . . . . . . . . . . . . . . . . . . $1,141,380
----------
----------
F-73
ECHOSTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. VALUATION AND QUALIFYING ACCOUNTS
The Company's valuation and qualifying accounts as of December 31, 1994,
1995 and 1996 are as follows (in thousands):
BALANCE AT CHARGED TO
BEGINNING OF COSTS AND BALANCE AT
YEAR EXPENSES DEDUCTIONS END OF YEAR
-----------------------------------------------------------
YEAR ENDED DECEMBER 31, 1994:
Assets:
Allowance for doubtful accounts . . . . $ 346 $ 8 $ (168) $ 186
Loan loss reserve . . . . . . . . . . . 50 75 (30) 95
Reserve for inventory . . . . . . . . . 1,403 329 (147) 1,585
Liabilities:
Reserve for warranty costs. . . . . . . 1,350 508 (458) 1,400
Other reserves. . . . . . . . . . . . . 93 - - 93
YEAR ENDED DECEMBER 31, 1995:
Assets:
Allowance for doubtful accounts . . . . $ 186 $1,160 $ (240) $1,106
Loan loss reserve . . . . . . . . . . . 95 19 (36) 78
Reserve for inventory . . . . . . . . . 1,585 1,511 (299) 2,797
Liabilities:
Reserve for warranty costs. . . . . . . 1,400 562 (949) 1,013
Other reserves. . . . . . . . . . . . . 93 - (1) 92
YEAR ENDED DECEMBER 31, 1996:
Assets:
Allowance for doubtful accounts . . . . $1,106 $2,340 $(1,952) $1,494
Loan loss reserve . . . . . . . . . . . 78 660 (94) 644
Reserve for inventory . . . . . . . . . 2,797 4,304 (1,438) 5,663
Liabilities:
Reserve for warranty costs. . . . . . . 1,013 (250) - 763
Other reserves. . . . . . . . . . . . . 92 (92) - -
15. QUARTERLY FINANCIAL DATA (UNAUDITED)
The Company's quarterly results of operations are summarized as follows
(in thousands):
THREE MONTHS ENDED
-------------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------------------------------------------------------
YEAR ENDED DECEMBER 31, 1995:
Total revenue . . . . . . . . . . . . . . . . . . . $40,413 $39,252 $43,606 $40,619
Operating income (loss) . . . . . . . . . . . . . . (698) 768 341 (8,438)
Net loss. . . . . . . . . . . . . . . . . . . . . . (2,240) (1,787) (360) (7,099)
Loss per common and common equivalent share . . . . $ (0.08) $ (0.06) $ (0.02) $ (0.20)
YEAR ENDED DECEMBER 31, 1996:
Total revenue . . . . . . . . . . . . . . . . . . . $41,467 $73,524 $42,402 $54,018
Operating loss. . . . . . . . . . . . . . . . . . . (8,629) (14,057) (26,898) (59,761)
Net loss. . . . . . . . . . . . . . . . . . . . . . (7,221) (22,554) (26,518) (44,693)
Loss per common and common equivalent share . . . . $ (0.19) $ (0.57) $ (0.66) $ (1.10)
In the fourth quarter of 1995 and each quarter in 1996, the Company
incurred operating and net losses principally as a result of expenses incurred
related to development of the EchoStar DBS System.
F-74
ECHOSTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
16. PARENT COMPANY ONLY FINANCIAL INFORMATION
The following financial information reflects the parent company only
condensed statements of operations data, condensed balance sheet data, and
condensed cash flows data for ECC, reflecting the assumed consummation of the
Exchange and Merger retroactive to January 1, 1993. The Exchange and Merger
described in Note 1 was accounted for as a reorganization of entities under
common control.
YEARS ENDED DECEMBER 31,
----------------------------------
1994 1995 1996
----------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Equity in earnings (losses) of subsidiaries . . . . $ 90 $(12,361) $(100,853)
Other income. . . . . . . . . . . . . . . . . . . . - 1,321 1,117
----------------------------------
Net income (loss) before income taxes . . . . . . . 90 (11,040) (99,736)
Provision for income taxes. . . . . . . . . . . . . - (446) (1,250)
----------------------------------
Net income (loss) . . . . . . . . . . . . . . . . . $ 90 $(11,486) $(100,986)
----------------------------------
----------------------------------
Loss attributable to common shares . . . . . . . . . $ (849) $(12,690) $(102,190)
----------------------------------
----------------------------------
Weighted-average common shares outstanding . . . . . 32,442 35,562 40,548
----------------------------------
----------------------------------
Loss per common and common equivalent share . . . . . $(0.03) $ (0.36) $ (2.52)
----------------------------------
----------------------------------
F-75
ECHOSTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
16. PARENT COMPANY ONLY FINANCIAL INFORMATION (CONTINUED)
DECEMBER 31,
--------------------------
1995 1996
--------------------------
(IN THOUSANDS)
BALANCE SHEET DATA:
Current assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 7,802 $ 814
Marketable investment securities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,460 -
Advances to affiliates, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19,545 -
Other current assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 191 1,349
--------------------------
Total current assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42,998 2,163
Investments in subsidiaries:
Restricted. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92,613 -
Unrestricted. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 280 -
--------------------------
Total investments in subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92,893 -
Other noncurrent assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21,111 70,054
--------------------------
Total assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $157,002 $ 72,217
--------------------------
--------------------------
Current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 316 $ 1,304
Advances from affiliates, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 2,910
Investments in subsidiaries:
Restricted. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 6,731
Unrestricted. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 75
--------------------------
Total liabilities and investments in subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . 316 11,020
Stockholders' equity:
Preferred Stock, 20,000,000 shares authorized, 1,616,681 shares of 8% Series A Cumulative
Preferred Stock issued and outstanding, including accrued dividends of $2,143,000 and
$3,347,000, respectively. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17,195 18,399
Class A Common Stock, $.01 par value, 200,000,000 shares authorized, 10,535,003 and 11,115,582
shares issued and outstanding, respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . 105 111
Class B Common Stock, $.01 par value, 100,000,000 shares authorized, 29,804,401, shares issued
and outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 298 298
Class C Common Stock, $.01 par value, 100,000,000 shares authorized, none outstanding . . . . . . . - -
Common Stock Warrants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 714 16
Additional paid-in capital. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 151,674 158,113
Unrealized holding gain (loss) on available-for-sale securities, net. . . . . . . . . . . . . . . . 239 (11)
Accumulated deficit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (13,539) (115,729)
--------------------------
Total stockholders' equity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 156,686 61,197
--------------------------
Total liabilities and stockholders' equity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $157,002 $ 72,217
--------------------------
--------------------------
F-76
ECHOSTAR DBS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
16. PARENT COMPANY ONLY FINANCIAL INFORMATION (Continued)
YEARS ENDED DECEMBER 31,
-----------------------------------
1994 1995 1996
-----------------------------------
CASH FLOWS DATA:
Cash flows from operating activities:
Net income (loss)................................................. $ 90 $(11,486) $(100,986)
Adjustments:
Equity in (earnings) losses of subsidiaries..................... (90) 12,361 100,853
Provision for deferred taxes.................................... - - 56
Changes in:
Other current assets.......................................... - (191) 1,158
Current liabilities........................................... - 316 988
-----------------------------------
Net cash flows provided by operating activities................... - 1,000 2,069
Cash flows from investing activities:
Advances (to) from affiliates..................................... - (19,545) 22,167
(Purchases) sales of marketable investment securities, net........ - (15,475) 15,460
Increase in noncurrent assets..................................... - (21,111) (48,943)
-----------------------------------
Net cash flows used by investing activities....................... - (56,131) (11,316)
Cash flows from financing activities:
Stock options exercised........................................... - - 2,259
Net proceeds from IPO............................................. - 62,933 -
-----------------------------------
Net cash flows provided by financing activities................... - 62,933 2,259
-----------------------------------
Net increase (decrease) in cash and cash equivalents.............. - 7,802 (6,988)
Cash and cash equivalents, beginning of year...................... - - 7,802
-----------------------------------
Cash and cash equivalents, end of year............................ $ - $ 7,802 $ 814
-----------------------------------
-----------------------------------
F-77
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To EchoStar Satellite Broadcasting Corporation:
We have audited the accompanying consolidated balance sheets of EchoStar
Satellite Broadcasting Corporation (a Colorado corporation) and subsidiaries,
as described in Note 1, as of December 31, 1995 and 1996, and the related
consolidated statements of operations, stockholder's equity and cash flows
for each of the three years in the period ended December 31, 1996. These
financial statements are the responsibility of the Companies' management. Our
responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
EchoStar Satellite Broadcasting 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-78
ECHOSTAR SATELLITE BROADCASTING CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
DECEMBER 31,
------------------------
1995 1996
------------------------
ASSETS
Current Assets:
Cash and cash equivalents......................................... $ 13,949 $ 38,428
Marketable investment securities.................................. 210 18,807
Trade accounts receivable, net of allowance for uncollectible
accounts of $1,106 and $1,494, respectively...................... 9,115 13,483
Inventories....................................................... 38,769 72,767
Income tax refund receivable...................................... 3,870 4,830
Deferred tax assets............................................... 1,834 --
Subscriber acquisition costs, net................................. -- 68,129
Other current assets.............................................. 12,791 15,031
------------------------
Total current assets................................................ 80,538 231,475
Restricted Cash and Marketable Investment Securities:
1994 Notes escrow................................................. 73,291 --
1996 Notes escrow................................................. -- 47,491
Other............................................................. 26,400 31,450
Property and equipment, net......................................... 333,199 499,989
Advances to affiliates, net......................................... 1,320 144,893
Deferred tax assets................................................. 12,109 79,670
Other noncurrent assets............................................. 32,438 38,123
------------------------
Total assets................................................... $559,295 $ 1,073,091
------------------------
------------------------
LIABILITIES AND STOCKHOLDER'S EQUITY
Current Liabilities:
Trade accounts payable............................................ $ 19,063 $ 40,793
Deferred programming and product revenue - DISH Network-SM-
subscriber promotions........................................... -- 97,959
Deferred programming revenue - DISH Network-SM-................... -- 4,407
Deferred programming revenue - C-band............................. 584 734
Accrued expenses and other current liabilities.................... 26,314 29,180
Deferred tax liabilities.......................................... -- 12,674
Current portion of long-term debt................................. 4,782 11,334
------------------------
Total current liabilities........................................... 50,743 197,081
Long-term deferred signal carriage revenue......................... -- 5,949
1994 Notes.......................................................... 382,218 437,127
1996 Notes.......................................................... -- 386,165
Mortgage and other notes payable, excluding current portion......... 33,444 51,428
Other long-term liabilities......................................... -- 1,088
------------------------
Total liabilities.............................................. 466,405 1,078,838
COMMITMENTS AND CONTINGENCIES (NOTE 11)
Stockholder's Equity (Notes 2 and 9):
Preferred Stock, 20,000,000 and no shares authorized,
1,616,681 and no shares of 8% Series A Cumulative
Preferred Stock issued and outstanding, including
accrued dividends of $1,555,000 and $0,
respectively.................................................... 16,607 --
Class A Common Stock, $.01 par value, 200,000,000 and no
shares authorized, 6,470,599 and no shares issued and
outstanding, respectively....................................... 65 --
Class B Common Stock, $.01 par value, 100,000,000 and no
shares authorized, 29,804,401 and no shares issued and
outstanding, respectively....................................... 298 --
Common Stock, $.01 par value, none and 1,000 shares authorized,
issued and outstanding, respectively............................ -- --
Additional paid-in capital........................................ 89,495 108,838
Unrealized holding gains (losses) on available-for-sale
securities, net of deferred taxes............................... 251 ( 11)
Accumulated deficit............................................... (13,826) ( 114,574)
------------------------
Total stockholder's equity.......................................... 92,890 ( 5,747)
------------------------
Total liabilities and stockholder's equity..................... $559,295 $ 1,073,091
------------------------
------------------------
See accompanying Notes to Consolidated Financial Statements.
F-79
ECHOSTAR SATELLITE BROADCASTING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands)
YEARS ENDED DECEMBER 31,
-----------------------------------
1994 1995 1996
-----------------------------------
Revenue:
DTH products and technical services............................... $172,753 $146,910 $ 136,377
DISH Network-SM- promotions - subscription television
services and products............................................ -- -- 22,746
DISH Network-SM- subscription television services................. -- -- 37,898
C-band programming................................................ 14,540 15,232 11,921
Loan origination and participation income......................... 3,690 1,748 789
-----------------------------------
Total revenue....................................................... 190,983 163,890 209,731
Expenses:
DTH products and technical services............................... 133,635 116,758 123,505
DISH Network-SM- programming...................................... -- -- 19,079
C-band programming................................................ 11,670 13,520 10,510
Selling, general and administrative............................... 30,219 38,504 86,894
Subscriber promotion subsidies.................................... -- -- 35,239
Amortization of subscriber acquisition costs...................... -- -- 15,991
Depreciation and amortization..................................... 2,243 3,114 27,378
-----------------------------------
Total expenses...................................................... 177,767 171,896 318,596
-----------------------------------
Operating income (loss)............................................. 13,216 ( 8,006) (108,865)
Other Income (Expense):
Interest income................................................... 8,420 12,545 15,089
Interest expense, net of amounts capitalized...................... (21,408) (23,985) ( 61,487)
Minority interest in loss of consolidated joint venture and
other........................................................... 261 894 ( 345)
-----------------------------------
Total other income (expense)........................................ (12,727) (10,546) ( 46,743)
-----------------------------------
Net income (loss) before income taxes............................... 489 (18,552) (155,608)
Income tax (provision) benefit, net................................. ( 399) 6,191 54,860
-----------------------------------
Net income (loss)................................................... $ 90 $(12,361) $(100,748)
-----------------------------------
-----------------------------------
See accompanying Notes to Consolidated Financial Statements.
F-80
ECHOSTAR SATELLITE BROADCASTING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
(In thousands)
ACCUMULATED
DEFICIT
AND
SHARES OF UNREALIZED
COMMON COMMON ADDITIONAL HOLDING
STOCK PREFERRED COMMON STOCK PAID-IN GAINS
OUTSTANDING STOCK STOCK WARRANTS CAPITAL (LOSSES) TOTAL
-----------------------------------------------------------------------------------
(NOTES 1 AND 9)
Balance, December 31, 1993.................... 32,221 $ -- $ 322 $ -- $ 49,378 $ -- $ 49,700
Issuance of Class A Common Stock:
For acquisition of DirectSat, Inc. ....... 999 -- 11 -- 8,989 -- 9,000
For cash.................................. 324 -- 3 -- 3,830 -- 3,833
Issuance of 1,616,681 shares of 8%
Series A Cumulative Preferred Stock....... -- 15,052 -- -- -- -- 15,052
Issuance of Common Stock Warrants........... -- -- -- 26,133 -- -- 26,133
8% Series A Cumulative Preferred
Stock dividends........................... -- 939 -- -- -- ( 939) --
Net income.................................. -- -- -- -- -- 90 90
-----------------------------------------------------------------------------------
Balance, December 31, 1994.................... 33,544 15,991 336 26,133 62,197 ( 849) 103,808
8% Series A Cumulative Preferred
Stock dividends........................... -- 616 -- -- -- ( 616) --
Exercise of Common Stock Warrants........... 2,731 -- 26 (25,419) 25,393 -- --
Common Stock Warrants exchanged for
ECC Warrants.............................. -- -- -- ( 714) 714 -- --
Launch bonuses funded by isuance of
ECC's Class A Common Stock................ -- -- -- -- 1,192 -- 1,192
Unrealized holding gains on available-
for-sale securities, net.................. -- -- -- -- -- 251 251
Net loss.................................... -- -- -- -- -- ( 12,361) ( 12,361)
-----------------------------------------------------------------------------------
Balance, December 31, 1995.................... 36,275 16,607 362 -- 89,496 ( 13,575) 92,890
Issuance of Common Stock (Note 1)........... 1 -- -- -- 1 -- 1
Reorganization of entities under
common control (Note 1)................... (36,275) (16,607) (362) -- 16,969 -- --
Income tax benefit of deduction for
income tax purposes on exercise of
Class A Common Stock options.............. -- -- -- -- 2,372 -- 2,372
Unrealized holding losses on
available-for-sale securities, net........ -- -- -- -- -- ( 262) ( 262)
Net loss.................................... -- -- -- -- -- (100,748) (100,748)
-----------------------------------------------------------------------------------
Balance, December 31, 1996.................... 1 $ -- $ -- $ -- $108,838 $(114,585) $( 5,747)
-----------------------------------------------------------------------------------
-----------------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements.
F-81
ECHOSTAR SATELLITE BROADCASTING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
YEARS ENDED DECEMBER 31,
-----------------------------------
1994 1995 1996
-----------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ........................................................................ $ 90 $ (12,361) $(100,748)
Adjustments to reconcile net income (loss) to net cash flows from operating activities:
Depreciation and amortization ....................................................... 2,243 3,114 27,378
Amortization of subscriber acquisition costs ........................................ -- -- 15,991
Deferred income tax benefit ......................................................... (7,330) (4,825) (50,522)
Amortization of debt discount and deferred financing costs .......................... 20,662 23,528 61,695
Employee benefits funded by issuance of Class A Common Stock ........................ -- 1,192 --
Change in reserve for excess and obsolete inventory ................................. 502 1,212 2,866
Change in long-term deferred signal carriage revenue ............................... -- -- 5,949
Change in accrued interest on convertible subordinated debentures from SSET ......... (279) (860) (484)
Other, net .......................................................................... (37) 276 1,020
Changes in current assets and current liabilities, net (see Note 2) ...................... 8,354 (33,164) 13,560
-----------------------------------
Net cash flows provided by (used in) operating activities .................................. 24,205 (21,888) (23,295)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of marketable investment securities ............................................ (15,100) (3,004) (138,328)
Sales of marketable investment securities ................................................ 4,439 33,816 119,730
Purchases of restricted marketable investment securities ................................. (11,400) (15,000) (21,100)
Funds released from restricted cash and marketable investment securities - other ......... -- -- 16,050
Advances to affiliates, net .............................................................. -- -- (132,669)
Purchases of property and equipment ...................................................... (3,507) (4,048) (45,822)
Offering proceeds and investment earnings placed in escrow ............................... (329,831) (9,589) (193,972)
Funds released from escrow accounts ...................................................... 144,400 122,149 219,352
Investment in SSET ....................................................................... (8,750) -- --
Payments received on convertible subordinated debentures from SSET ....................... -- -- 6,445
Investment in DBSC ....................................................................... (4,210) 4,210 --
Expenditures for satellite systems under construction .................................... (115,752) (109,507) (112,075)
Expenditures for FCC authorizations ...................................................... (159) (458) (123)
Other .................................................................................... 1,305 -- --
-----------------------------------
Net cash flows provided by (used in) operating activities .................................. (338,565) 18,569 (282,512)
CASH FLOWS FROM FINANCING ACTIVITIES:
Minority investor investment in and loan to consolidated joint venture ................... 1,000 -- --
Net proceeds from issuance of 1994 Notes and Common Stock Warrants ....................... 323,325 -- --
Net proceeds from issuance of Class A Common Stock ....................................... 3,833 -- --
Proceeds from issuance of Common Stock ................................................... -- -- 1
Net proceeds from issuance of 1996 Notes ................................................. -- -- 336,916
Expenditures from escrow for offering costs .............................................. (837) -- --
Proceeds from refinancing of mortgage indebtedness ....................................... 4,200 -- --
Repayments of mortgage indebtedness and notes payable .................................... (3,435) (238) (6,631)
Loans from stockholder, net .............................................................. 4,000 -- --
Repayment of loans from stockholder ...................................................... (4,075) -- --
Dividends paid ........................................................................... (3,000) -- --
-----------------------------------
Net cash flows provided by (used in) financing activities .................................. 325,011 (238) 330,286
-----------------------------------
Net increase in cash and cash equivalents .................................................. 10,651 (3,557) 24,479
Cash and cash equivalents, beginning of year ............................................... 6,855 17,506 13,949
Cash and cash equivalents, end of year ..................................................... $ 17,506 $ 13,949 $ 38,428
-----------------------------------
-----------------------------------
See accompanying Notes to Consolidated Financial Statements.
F-82
ECHOSTAR SATELLITE BROADCASTING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND BUSINESS ACTIVITIES
PRINCIPAL BUSINESS
EchoStar Satellite Broadcasting Corporation and subsidiaries ("ESBC"), is
a wholly-owned subsidiary of EchoStar Communications Corporation ("ECC"), a
publicly traded company on the Nasdaq National Market. ESBC, through its
indirect subsidiaries 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. The Company's DBS service
(the "DISH Network-SM-") commenced operations in March 1996 after the
successful launch of its first satellite ("EchoStar I"). The Company launched
its second satellite ("EchoStar II") on September 10, 1996. EchoStar II
significantly increased the channel capacity and programming offerings of the
DISH Network-SM- when it became fully operational in November 1996. The
Company currently provides approximately 120 channels of near laser disc
quality digital video programming and over 30 channels of CD quality audio
programming to the entire continental United States ("CONUS"). In addition to
its DISH Network-SM- business, the Company is engaged in the design,
manufacture, distribution and installation of satellite direct-to-home
("DTH") products and domestic distribution of DTH programming.
The Company's primary business objective is to become one of the leading
providers of subscription television and other satellite-delivered services
in the United States. The Company had approximately 350,000 subscribers to
DISH Network-SM- programming as of December 31, 1996.
F-83
ECHOSTAR SATELLITE BROADCASTING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
1. ORGANIZATION AND BUSINESS ACTIVITIES - CONTINUED
ORGANIZATION AND LEGAL STRUCTURE
Certain companies principally owned and controlled by Mr. Charles W.
Ergen were reorganized in 1993 into Dish, Ltd., formerly known as EchoStar
Communications Corporation (together with its subsidiaries, "Dish, Ltd.").
The principal reorganized entities included EchoStar Satellite Corporation
("ESC"), which holds licenses for certain DBS frequencies and is the operator
of the DISH Network-SM-, and Echosphere Corporation and Houston Tracker
Systems, Inc. ("HTS"), which are primarily engaged in the design, assembly,
marketing and worldwide distribution of direct to home ("DTH") satellite
television products. The reorganized group also includes other less
significant domestic enterprises and several foreign entities involved in
related activities outside the United States.
During 1994, Dish, Ltd. merged one of its subsidiaries with DirectSat
Corporation ("DirectSat"), an approximately 80% owned subsidiary of SSE
Telecom, Inc. ("SSET") at that time. DirectSat stockholders received an
approximate 3% equity interest in Dish, Ltd. in exchange for all of
DirectSat's outstanding stock. DirectSat's principal assets are a conditional
satellite construction permit and frequency assignments for ten DBS
frequencies.
In June 1994, Dish, Ltd. completed an offering of 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").
In April 1995, a new company, EchoStar Communications Corporation (same
name as the original name of Dish, Ltd.), was formed to conduct an initial
public offering ("IPO") of its Class A Common Stock and to become the parent
of Dish, Ltd. as described below. The new company is described below as
"ECC." Elsewhere in these footnotes, unless otherwise indicated, "EchoStar"
or the "Company" refers to ECC and its subsidiaries, including Dish, Ltd. The
assets of ECC 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 its IPO, which resulted in net proceeds to
the Company of approximately $62.9 million. Concurrently, Charles W. Ergen,
President and Chief Executive Officer of both ECC and Dish, Ltd., exchanged
all of his then outstanding shares of Class B Common Stock and 8% Series A
Cumulative Preferred Stock of Dish, Ltd. for like shares of ECC (the
"Exchange") in the ratio of 0.75 shares of ECC for each share of Dish, Ltd.
capital stock (the "Exchange Ratio"). All employee stock options of Dish,
Ltd. were also assumed by ECC, adjusted for the Exchange Ratio. In December
1995, ECC merged Dish, Ltd. with a wholly-owned subsidiary of ECC (the
"Merger") and all outstanding shares of Dish, Ltd. Class A Common Stock and
8% Series A Cumulative Preferred Stock (other than those held by ECC) were
automatically converted into the right to receive like shares of ECC in
accordance with the Exchange Ratio. Also effective with the Merger, all
outstanding Warrants for the purchase of Dish, Ltd. Class A Common Stock
automatically became exercisable for shares of ECC's Class A Common Stock,
adjusted for the Exchange Ratio. As a result of the Exchange and Merger, ECC
owned all outstanding shares of Dish, Ltd. capital stock.
In March 1996, ESBC 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, ECC contributed all of the outstanding capital stock
of Dish, Ltd. to ESBC. This transaction was accounted for as a reorganization
of entities under common control whereby Dish, Ltd. was treated as the
predecessor to ESBC. ESBC is subject to all, and ECC is subject to
certain of, the terms and conditions of the
F-84
ECHOSTAR SATELLITE BROADCASTING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
1. ORGANIZATION AND BUSINESS ACTIVITIES - CONTINUED
Indenture related to the 1996 Notes (the "1996 Notes Indenture"). As a result
of the above transactions, ESBC is a wholly-owned direct subsidiary of
EchoStar; Dish, Ltd. is a wholly-owned, direct subsidiary of ESBC.
Substantially all of EchoStar's operating activities are conducted by
subsidiaries of Dish, Ltd.
The following summarizes the Company's organizational structure for
EchoStar and its significant subsidiaries as of December 31, 1996 as
described above:
Legal Entity Referred to Herein As Ownership
- ------------------------------------------------------------------------------------------------------------------
EchoStar Communications Corporation ECC Publicly owned
EchoStar Satellite Broadcasting Corporation ESBC Wholly-owned by ECC
Dish, Ltd. Dish, Ltd. Wholly-owned by ESBC
EchoStar Satellite Corporation ESC Wholly-owned by Dish, Ltd.
Echosphere Corporation EchoCorp Wholly-owned by Dish, Ltd.
Houston Tracker Systems, Inc. HTS Wholly-owned by Dish, Ltd.
EchoStar International Corporation EIC Wholly-owned by Dish, Ltd.
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.
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.
F-85
ECHOSTAR SATELLITE BROADCASTING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
Effective June 1993, the Company acquired a 51% joint venture interest in
FlexTracker Sdn. Bhd. ("FlexTracker"), a Malaysian limited liability company.
A Singapore electronics manufacturing company owned the 49% minority
interest. FlexTracker manufactured integrated and stand-alone receivers and
positioners exclusively for the Company. In December 1994, the Company
terminated the FlexTracker joint venture and effectively sold its interest in
the joint venture's net assets to the Singapore company for $1.8 million.
The Company's share of FlexTracker's losses for 1994 amounted to
approximately $1.3 million, and an additional loss of $492,000 was recognized
in 1994 upon the sale of the Company's interest in FlexTracker.
FlexTracker's financial statements were consolidated in the accompanying
consolidated financial statements from the date of acquisition through the
date of disposition.
The Company accounts for investments in 50% or less owned entities using
the equity method. At December 31, 1995 and 1996, these investments were not
material to the consolidated financial statements.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses for each
reporting period. Actual results could differ from those estimates.
FOREIGN CURRENCY TRANSACTION GAINS AND LOSSES
The functional currency of the Company's foreign subsidiaries is the U.S.
dollar because their sales and purchases are predominantly denominated in
that currency. Transactions denominated in currencies other than U.S. dollars
are recorded based on exchange rates at the time such transactions arise.
Subsequent changes in exchange rates result in transaction gains and losses
which are reflected in income as unrealized (based on period end translation)
or realized (upon settlement of the transaction). Net transaction gains
(losses) during 1994, 1995 and 1996 were not material to the Company's
results of operations.
CASH AND CASH EQUIVALENTS
The Company considers all liquid investments purchased with an original
maturity of ninety days or less to be cash equivalents. Cash equivalents as
of December 31, 1995 and 1996 consist of money market funds, corporate notes
and commercial paper; such balances are stated at cost which equates to
market value.
STATEMENTS OF CASH FLOWS DATA
The following summarizes the changes in the Company's current assets and
current liabilities:
YEARS ENDED DECEMBER 31,
-----------------------------------
1994 1995 1996
-----------------------------------
Trade accounts receivable ............................................................. $ 372 $ (1,536) $ (4,368)
Inventories ........................................................................... 3,049 (19,654) (36,864)
Income tax refund receivable .......................................................... -- (3,870) (960)
Subscriber acquisition costs .......................................................... -- -- (84,120)
Other current assets .................................................................. (183) (10,218) (2,240)
Trade accounts payable ................................................................ 2,648 4,111 21,730
Deferred revenue - DISH Network-SM- subscriber promotions ........................... -- -- 97,959
Deferred programming revenue .......................................................... 564 (1,009) 4,557
Accrued expenses and other current liabilities ........................................ 1,670 (988) 17,866
Other, net ............................................................................ 234 -- --
-----------------------------------
Net increase (decrease) in current assets and current liabilities ..................... $ 8,354 $ (33,164) $ 13,560
-----------------------------------
-----------------------------------
F-86
ECHOSTAR SATELLITE BROADCASTING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
The following presents the Company's supplemental cash flow statement
disclosure:
YEARS ENDED DECEMBER 31,
1994 1995 1996
-----------------------------------
Cash paid for interest, net of amounts capitalized. . . . . . . . . . . . . . . . . . . $ 436 $ 461 $ 3,007
Cash paid for income taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,140 3,203 --
8% Series A Cumulative Preferred Stock dividends. . . . . . . . . . . . . . . . . . . . 939 617 --
Accrued satellite contract costs. . . . . . . . . . . . . . . . . . . . . . . . . . . . -- 15,000 --
Satellite launch payment for EchoStar II applied to EchoStar I launch . . . . . . . . . -- -- 15,000
Exchange of note payable to stockholder, and interest thereon, for 8% Series A
Cumulative Preferred Stock. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,052 -- --
Issuance of Class A Common Stock to acquire investment in DirectSat Corporation . . . . 9,000 -- --
Property and equipment acquired under capital leases. . . . . . . . . . . . . . . . . . 934 -- --
Note payable issued for deferred satellite construction payments for EchoStar I . . . . -- 32,833 3,167
Note payable issued for deferred satellite construction payments for EchoStar II. . . . -- -- 28,000
Employee Savings Plan Contribution and launch bonuses funded by issuance of
Class A Common Stock. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- 1,192 --
MARKETABLE INVESTMENT SECURITIES AND RESTRICTED CASH AND MARKETABLE INVESTMENT
SECURITIES
At December 31, 1995 and 1996, the Company has classified all
marketable investment securities as available for sale. Accordingly, these
investments are reflected at market value based on quoted market prices. Related
unrealized gains and losses are reported as a separate component of
stockholders' equity, net of related deferred income taxes of $153,000 and
$6,000 at December 31, 1995 and 1996, respectively. The specific identification
method is used to determine cost in computing realized gains and losses. The
major components of marketable investment securities as of December 31, 1995 and
1996 are as follows (in thousands):
DECEMBER 31, 1995 DECEMBER 31, 1996
------------------------------------ -------------------------------------
UNREALIZED
AMORTIZED HOLDING MARKET AMORTIZED HOLDING MARKET
COST GAIN (LOSS) VALUE COST GAIN (LOSS) VALUE
------------------------------------ -------------------------------------
Commercial paper. . . . . . . . . . $ -- $ -- $ -- $16,065 $ -- $16,065
Government bonds. . . . . . . . . . 38 -- 38 2,540 -- 2,540
Mutual funds. . . . . . . . . . . . 188 (16) 172 219 (17) 202
------------------------------------ -------------------------------------
$ 226 $ (16) $ 210 $18,824 $ (17) $18,807
------------------------------------ -------------------------------------
------------------------------------ -------------------------------------
Restricted Cash and Marketable Investment Securities in Escrow
Accounts as reflected in the accompanying consolidated balance sheets represent
the remaining net proceeds received from the 1994 Notes Offering, and a portion
of the proceeds from the 1996 Notes Offering, plus interest earned, less amounts
expended to date in connection with the development, construction and continued
growth of the DISH Network-SM-. These proceeds are held in separate escrow
accounts (the "Dish Escrow Account" and the "ESBC Escrow Account") as required
by the respective indentures, and invested in certain permitted debt and other
marketable investment securities until disbursed for the express purposes
identified in the respective indentures.
Other Restricted Cash includes balances totaling $11.4 million and
$5.7 million at December 31, 1995 and 1996 respectively, which were restricted
to satisfy certain covenants in the 1994 Notes Indenture regarding launch
insurance for EchoStar I and EchoStar II. In addition, as of each of
December 31, 1995 and 1996, $15.0 million was held in escrow relating to a
non-performing manufacturer of DBS receivers (see Note 3). As of December 31,
1996, $10.0 million was on deposit in a separate escrow account established
pursuant to an additional DBS receiver manufacturing agreement, to provide for
EchoStar's future payment obligations. The major components of Restricted Cash
and Marketable Investment Securities are as follows (in thousands):
F-87
ECHOSTAR SATELLITE BROADCASTING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
DECEMBER 31, 1995 DECEMBER 31, 1996
------------------------------------ -------------------------------------
UNREALIZED UNREALIZED
AMORTIZED HOLDING MARKET AMORTIZED HOLDING MARKET
COST GAIN VALUE COST GAIN VALUE
------------------------------------ -------------------------------------
Commercial paper. . . . . . . . . . $66,214 $ -- $66,214 $77,569 $ -- $77,569
Government bonds. . . . . . . . . . 32,904 420 33,324 368 -- 368
Certificates of deposit . . . . . . -- -- -- 750 -- 750
Accrued interest. . . . . . . . . . 153 -- 153 254 -- 254
------------------------------------ -------------------------------------
$99,271 $420 $99,691 $78,941 $ -- $78,941
------------------------------------ -------------------------------------
------------------------------------ -------------------------------------
INVENTORIES
Inventories are stated at the lower of cost or market value. Cost is
determined using the first-in, first-out method. Proprietary products are
manufactured by outside suppliers to the Company's specifications. the Company
also distributes non-proprietary products purchased from other manufacturers.
Manufactured inventories include materials, labor and manufacturing overhead.
Cost of other inventories includes parts, contract manufacturers' delivered
price, assembly and testing labor, and related overhead, including handling and
storage costs. Inventories consist of the following (in thousands):
DECEMBER 31,
------------------------
1995 1996
------------------------
EchoStar Receiver Systems. . . . . . . . . . . . $ -- $ 32,799
Consigned DBS receiver components. . . . . . . . -- 23,525
DBS receiver components. . . . . . . . . . . . . 9,615 15,736
Finished goods - C-band. . . . . . . . . . . . . 11,161 600
Finished goods - International . . . . . . . . . 9,297 3,491
Competitor DBS Receivers . . . . . . . . . . . . 9,404 --
Spare parts. . . . . . . . . . . . . . . . . . . 2,089 2,279
Reserve for excess and obsolete inventory. . . . ( 2,797) ( 5,663)
------------------------
$ 38,769 $ 72,767
------------------------
------------------------
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Cost includes interest
capitalized of $5.7 million, $25.0 million and $19.8 million during the years
ended December 31, 1994, 1995 and 1996, respectively. The costs of satellites
under construction are capitalized during the construction phase, assuming the
eventual successful launch and in-orbit operation of the satellite. If a
satellite were to fail during launch or while in-orbit, the resultant loss would
be charged to expense in the period such loss was realized. The amount of any
such loss would be reduced to the extent of insurance proceeds received as a
result of the launch or in-orbit failure. Depreciation is recorded on a
straight-line basis for financial reporting purposes. Repair and maintenance
costs are charged to expense when incurred. Renewals and betterments are
capitalized.
FCC AUTHORIZATIONS
FCC authorizations are recorded at cost and amortized using the
straight-line method over a period of 40 years. Such amortization commences at
the time the related satellite becomes operational; capitalized costs are
written off at the time efforts to provide services are abandoned. FCC
authorizations include interest capitalized of $1.3 million and $1.1 million
during the years ended December 31, 1995 and 1996, respectively. The merger with
DirectSat described in Note 1 was accounted for as a purchase. DirectSat's
assets were valued at $9.0 million by the Company at the time of the merger and
are included in FCC authorizations (see Note 5).
F-88
ECHOSTAR SATELLITE BROADCASTING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
REVENUE RECOGNITION
Revenue from sales of DTH products is recognized upon shipment to
customers. Revenue from the provision of DISH Network-SM- service and C-band
programming service to subscribers is recognized as revenue in the period such
programming is provided.
SUBSCRIBER PROMOTION SUBSIDIES, SUBSCRIBER ACQUISITION COSTS, AND DISH
NETWORK-SM- PROMOTIONS - SUBSCRIPTION TELEVISION SERVICES AND PRODUCTS
Total transaction proceeds to the Company from DISH Network-SM- programming
and equipment sold as a package under EchoStar promotions are initially deferred
and recognized as revenue over the related service period (normally one year),
commencing upon authorization of each new subscriber. The excess of the
Company's aggregate cost of the equipment, programming and other expenses for
the initial prepaid subscription period for DISH Network-SM- service over
proceeds received is expensed upon shipment of the equipment. Remaining costs,
less programming costs and the amount expensed upon shipment as per above, are
capitalized and reflected in the accompanying balance sheets as subscriber
acquisition costs. Such costs are amortized over the related prepaid
subscription term of the customer. Programming costs are expensed as service is
provided. Excluding expected incremental revenues from premium and Pay-Per-View
programming, the accounting followed results in revenue recognition over the
initial period of service equal to the sum of programming costs and amortization
of subscriber acquisition costs.
DISH Network-SM- programming and equipment which were not sold as a package
under EchoStar promotions are separately presented in the accompanying
consolidated statements of operations.
DEFERRED DEBT ISSUANCE COSTS AND DEBT DISCOUNT
Costs of completing the 1994 Notes Offering and the 1996 Notes Offering
were deferred (Note 5) and are being amortized to interest expense over their
respective terms. The original issue discounts related to the 1994 Notes and the
1996 Notes (Note 6) are being accreted to interest expense so as to reflect a
constant rate of interest on the accreted balance of the 1994 Notes and the 1996
Notes.
DEFERRED PROGRAMMING REVENUE
Deferred programming revenue consists of prepayments received from
multiple-month subscriptions to DISH Network-SM- programming. Such amounts are
recognized as revenue in the period the programming is provided to the
subscriber. Similarly, the Company defers prepayments received from subscribers
to C-band programming sold by the Company as an authorized distributor.
LONG-TERM DEFERRED SIGNAL CARRIAGE REVENUE
Long-term deferred signal carriage revenue consists of advance payments
from certain programming providers for carriage of their programming content on
the DISH Network-SM-. Such amounts are deferred and recognized as revenue on a
straight-line basis over the related contract terms (up to ten years).
F-89
ECHOSTAR SATELLITE BROADCASTING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities consist of the following (in
thousands):
DECEMBER 31,
------------------------
1995 1996
------------------------
Accrued expenses . . . . . . . . . . . . . . . . $ 3,850 $18,954
Accrued satellite contract costs . . . . . . . . 15,000 --
Accrued programming. . . . . . . . . . . . . . . 4,979 9,463
Reserve for warranty costs . . . . . . . . . . . 1,013 763
Other. . . . . . . . . . . . . . . . . . . . . . 1,472 --
------------------------
$ 26,314 $29,180
------------------------
------------------------
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.
RECLASSIFICATIONS
Certain amounts from the prior years consolidated financial
statements have been reclassified to conform with the 1996 presentation.
3. OTHER CURRENT ASSETS
Other current assets consist of the following (in thousands):
DECEMBER 31,
------------------------
1995 1996
------------------------
Deposits held by non-performing manufacturer . . $10,000 $10,000
Other. . . . . . . . . . . . . . . . . . . . . . 2,791 5,031
------------------------
$12,791 $15,031
------------------------
------------------------
The Company has agreements with two manufacturers to supply DBS receivers
for the Company. To date, only one of the manufacturers has produced receivers
acceptable to the Company. The Company previously deposited $10.0 million with
the non-performing manufacturer and has an additional $15.0 million on deposit
in an escrow account as security for its payment obligations under that
contract. the Company has given the non-performing manufacturer notice of its
intent to terminate the contract and has filed suit against that manufacturer.
Consequently, the Company is currently dependent on one manufacturing source for
its receivers. Since the Company has given the non-performing manufacturer
notice of its intent to terminate the contract, the Company has not considered
amounts due under the contract in the Company's future purchase commitments. The
performing manufacturer presently manufactures receivers in sufficient
quantities to meet currently expected demand. If the Company's sole manufacturer
F-90
ECHOSTAR SATELLITE BROADCASTING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
3. OTHER CURRENT ASSETS - CONTINUED
is unable for any reason to produce receivers in a quantity sufficient to meet
demand, the Company's liquidity and results of operations would be adversely
affected. Management believes, but can give no assurance, that Echostar will be
able to recover most, if not all, amounts deposited with the non-performing
manufacturer or held in escrow.
4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following (in thousands):
LIFE DECEMBER 31,
--------------------------------------------------
(IN YEARS) 1995 1996
-----------------------------
EchoStar I. . . . . . . . . . . . . . . . . . 12 $ -- $ 201,607
EchoStar II . . . . . . . . . . . . . . . . . 12 -- 228,694
Furniture, fixtures and equipment . . . . . . 2-12 35,127 72,932
Buildings and improvements. . . . . . . . . . 7-40 21,006 21,649
Tooling and other . . . . . . . . . . . . . . 2 2,039 3,253
Land. . . . . . . . . . . . . . . . . . . . . -- 1,613 1,613
Vehicles. . . . . . . . . . . . . . . . . . . 7 1,310 1,323
Construction in progress. . . . . . . . . . . -- 282,373 4,137
-----------------------------
Total property and equipment. . . . . . . . . 343,468 535,208
Accumulated depreciation. . . . . . . . . . . (10,269) (35,219)
-----------------------------
Property and equipment, net . . . . . . . . . $ 333,199 $ 499,989
-----------------------------
-----------------------------
Construction in progress consists of the following (in thousands):
DECEMBER 31,
-----------------------------
1995 1996
-----------------------------
Progress amounts for satellite construction, launch, launch
insurance and capitalized interest:
EchoStar I . . . . . . . . . . . . . . . . . . . . . . $193,629 $ --
EchoStar II. . . . . . . . . . . . . . . . . . . . . . 88,634 --
Other. . . . . . . . . . . . . . . . . . . . . . . . . . 110 4,137
-----------------------------
$282,373 $ 4,137
-----------------------------
-----------------------------
5. OTHER NONCURRENT ASSETS
Other noncurrent assets consist of the following (in thousands):
DECEMBER 31,
-----------------------------
1995 1996
-----------------------------
Deferred debt issuance costs. . . . . . . . . . . . . . . . $10,622 $21,284
FCC authorizations. . . . . . . . . . . . . . . . . . . . . 11,309 12,351
SSET convertible subordinated debentures and accrued interest 9,610 3,649
Other, net. . . . . . . . . . . . . . . . . . . . . . . . . 897 839
-----------------------------
$32,438 $38,123
-----------------------------
-----------------------------
In 1994, the Company purchased $8.75 million of SSET's 6.5% convertible
subordinated debentures. During 1996, the Company received $6.4 million of
payments from SSET ($5.2 million principal and $1.2 million interest) related to
these convertible debentures. As of December 31, 1996, the debentures, if
converted, would represent approximately 5% of SSET's common stock, based on the
number of shares of SSET common stock outstanding at December 31, 1996.
Management estimates that the fair value of the SSET debentures approximates
their carrying value in the accompanying financial statements based on current
interest rates and the conversion features contained in the debentures. SSET is
a reporting company under the Securities Exchange Act of 1934 and is engaged in
the
F-91
ECHOSTAR SATELLITE BROADCASTING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
5. OTHER NONCURRENT ASSETS - CONTINUED
manufacture and sale of satellite telecommunications equipment. In March 1994,
SSET sold to the Company for $1.25 million an approximate 6% ownership interest
in the stock of Direct Broadcasting Satellite Corporation ("DBSC") and certain
notes and accounts receivable from DBSC.
6. LONG-TERM DEBT
1994 NOTES
On June 7, 1994, Dish, Ltd. issued the 1994 Notes which mature on June 1,
2004. The 1994 Notes issuance resulted in net proceeds to Dish, Ltd. of
$323.3 million (including amounts attributable to the issuance of the Warrants)
and after payment of underwriting discount and other issuance costs aggregating
approximately $12.6 million).
The 1994 Notes bear interest at a rate of 12 7/8%, computed on a
semi-annual bond equivalent basis. Interest on the 1994 Notes will not be
payable in cash prior to June 1, 1999, with the 1994 Notes accreting to a
principal value at stated maturity of $624.0 million by that date. Commencing
December 1, 1999, interest on the 1994 Notes will be payable in cash on
December 1 and June 1 of each year.
The 1994 Notes rank senior in right of payment to all subordinated
indebtedness of Dish, Ltd. and PARI PASSU in right of payment with all other
senior indebtedness of Dish, Ltd., subject to the terms of an Intercreditor
Agreement between Dish, Ltd., certain of its principal subsidiaries, and certain
creditors thereof. The 1994 Notes are secured by liens on certain assets of
Dish, Ltd., including EchoStar I and EchoStar II and all other components of the
EchoStar DBS System owned by Dish, Ltd. and its subsidiaries. The 1994 Notes are
further guaranteed by each material direct subsidiary of Dish, Ltd. (see
Note 12). Although the 1994 Notes are titled "Senior," Dish, Ltd. has not
issued, and does not have any current arrangements to issue, any significant
indebtedness to which the 1994 Notes would be senior; however, the 1996 Notes
sold in March 1996 by ESBC, are effectively subordinated to the 1994 Notes and
all other liabilities of Dish, Ltd. and its subsidiaries. Furthermore, at
December 31, 1995 and 1996, the 1994 Notes were effectively subordinated to
approximately $5.4 million and $5.1 million of mortgage indebtedness,
respectively, with respect to certain assets of Dish, Ltd.'s subsidiaries, not
including the EchoStar DBS System, and rank PARI PASSU with the security
interest of approximately $30.0 million of contractor financing.
Except under certain circumstances requiring prepayment premiums, and in
other limited circumstances, the 1994 Notes are not redeemable at Dish, Ltd.'s
option prior to June 1, 1999. Thereafter, the 1994 Notes will be subject to
redemption, at the option of Dish, Ltd., in whole or in part, at redemption
prices ranging from 104.828% during the year commencing June 1, 1999 to 100% of
principal value at stated maturity on or after June 1, 2002 together with
accrued and unpaid interest thereon to the redemption date. On each of June 1,
2002 and June 1, 2003, Dish, Ltd. will be required to redeem 25% of the original
aggregate principal amount of 1994 Notes at a redemption price equal to 100% of
principal value at stated maturity thereof, together with accrued and unpaid
interest thereon to the redemption date. The remaining principal of the 1994
Notes matures on June 1, 2004.
In the event of a change of control and upon the occurrence of certain
other events, as described in the 1994 Notes Indenture, Dish, Ltd. will be
required to make an offer to each holder of 1994 Notes to repurchase all or any
part of such holder's 1994 Notes at a purchase price equal to 101% of the
accreted value thereof on the date of purchase, if prior to June 1, 1999, or
101% of the aggregate principal amount thereof, together with accrued and unpaid
interest thereon to the date of purchase, if on or after June 1, 1999.
The 1994 Notes Indenture contains restrictive covenants that, among other
things, impose limitations on Dish, Ltd. and its subsidiaries with respect
to their ability to: (i) incur additional indebtedness; (ii) issue
preferred stock; (iii) apply the proceeds of certain asset sales; (iv)
create, incur or assume liens; (v) create dividend and other payment
restrictions with respect to Dish, Ltd.'s subsidiaries; (vi) merge,
consolidate or sell assets; (vii) incur subordinated or junior debt; and
(viii) enter into transactions with affiliates. In addition, Dish, Ltd.,
may pay dividends on its equity securities only if (1) no default is
continuing under the 1994 Notes Indenture; and (2) after giving effect
to such dividend, Dish, Ltd.'s ratio of total indebtedness to cash
flow
F-92
ECHOSTAR SATELLITE BROADCASTING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
6. LONG-TERM DEBT - CONTINUED
(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 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 the date of
issuance of the 1996 Notes, plus 100% of the aggregate net cash proceeds
received by ESBC and its subsidiaries from the issue or sale of certain equity
interests of EchoStar (including common stock).
In the event of a change of control, as described in the 1996 Notes
Indenture, ESBC will be required to make an offer to each holder of 1996 Notes
to repurchase all of such holder's 1996 Notes at a purchase price equal to 101%
of the accreted value thereof on the date of purchase, if prior to March 15,
2000, or 101% of the aggregate principal amount at stated maturity thereof,
together with accrued and unpaid interest thereon to the date of purchase, if on
or after March 15, 2000.
F-93
ECHOSTAR SATELLITE BROADCASTING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
6. LONG-TERM DEBT - CONTINUED
OTHER LONG-TERM DEBT
In addition to the 1994 Notes and 1996 Notes, other long-term debt consists
of the following (in thousands, except monthly payment data):
DECEMBER 31,
------------------
1995 1996
------------------
8.25% note payable for deferred satellite contract payments for EchoStar I
due in equal monthly installments of $722,027, including interest,
through February 2001. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 32,833 $ 30,463
8.25% note payable for deferred satellite contract payments for EchoStar II
due in equal monthly installments of $561,577, including interest,
through November 2001. . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- 27,161
8.0% mortgage note payable due in equal monthly installments of $41,635,
including interest, through May 2008; secured by land and office building
with a net book value of approximately $4.1 million. . . . . . . . . . . . . . 3,909 3,715
10.5% mortgage note payable due in equal monthly installments of $9,442,
including interest, through November 1998; final payment of $854,000 due
November 1998; secured by land and warehouse building with a net book value
of approximately $886,000. . . . . . . . . . . . . . . . . . . . . . . . . . . 910 892
9.9375% mortgage note payable due in equal quarterly principal installments
of $10,625 plus interest through April 2009; secured by land and office
building with a net book value of approximately $802,000 . . . . . . . . . . . 574 531
-----------------------
Total long-term debt, excluding the 1994 Notes and 1996 Notes. . . . . . . . . . . 38,226 62,762
Less current portion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (4,782) (11,334)
-----------------------
Long-term debt, excluding current portion. . . . . . . . . . . . . . . . . . . . . $ 33,444 $ 51,428
-----------------------
-----------------------
Future maturities of amounts outstanding under the Company's long-term debt
facilities as of December 31, 1996 are summarized as follows (in thousands):
DEFERRED
SATELLITE MORTGAGE
DISH ESBC CONTRACT NOTES
NOTES NOTES PAYMENTS PAYABLE TOTAL
---------------------------------------------------------
YEAR ENDING DECEMBER 31,
1997 . . . . . . . . . . . . $ -- $ -- $11,061 $ 273 $ 11,334
1998 . . . . . . . . . . . . -- -- 12,009 1,141 13,150
1999 . . . . . . . . . . . . -- -- 13,038 289 13,327
2000 . . . . . . . . . . . . -- -- 14,156 309 14,465
2001 . . . . . . . . . . . . -- -- 7,360 331 7,691
Thereafter . . . . . . . . . 624,000 580,000 -- 2,795 1,206,795
Unamortized discount (186,873) (193,835) -- -- (380,708)
---------------------------------------------------------
Total. . . . . . . . . . . . $437,127 $386,165 $57,624 $5,138 $ 886,054
---------------------------------------------------------
---------------------------------------------------------
The following table summarizes the book and fair values of the Company's debt
facilities at December 31, 1996 (dollars in thousands). Fair values for the
Company's 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
F-94
ECHOSTAR SATELLITE BROADCASTING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
6. LONG-TERM DEBT - CONTINUED
using discounted cash flow analyses. The interest rates assumed in such
discounted cash flow analyses reflect interest rates currently being offered for
loans with similar terms to borrowers of similar credit quality.
BOOK VALUE FAIR VALUE
----------------------------------------
1994 Notes . . . . . . . . . . . . $437,127 $ 526,282
1996 Notes . . . . . . . . . . . . 386,165 435,986
Deferred satellite contract
payments. . . . . . . . . . . . . 57,624 56,471
Mortgage notes payable . . . . . . 5,138 5,138
----------------------------------------
$886,054 $1,023,877
----------------------------------------
----------------------------------------
DEFERRED SATELLITE CONTRACT PAYMENTS
The majority of the purchase price for the satellites is required to be
paid in progress payments, with the remainder payable in the form of
non-contingent payments which are deferred until after the respective satellites
are in orbit (the "Deferred Payments"). Interest rates on the Deferred Payments
range between 7.75% and 8.25% (to be determined 90 days prior to the launch of
each satellite) and payments are made over a period of five years after the
delivery and launch of each such satellite. The Company utilized $36.0 million
and $28.0 million of contractor financing for EchoStar I and EchoStar II,
respectively. The deferred payments with respect to EchoStar I and EchoStar II
are secured by substantially all assets of Dish, Ltd. and its subsidiaries
(subject to certain restrictions) and a corporate guarantee of ECC.
BANK CREDIT FACILITY
From May 1994 to May 1996, certain of EchoStar's subsidiaries maintained a
revolving credit facility (the "Credit Facility") with a bank for the purposes
of funding working capital advances and meeting letter of credit requirements
associated with certain inventory purchases and satellite construction payments.
The Credit Facility expired in May 1996. EchoStar currently does not intend to
arrange a replacement credit facility.
7. INCOME TAXES
The components of the (provision for) benefit from income taxes are as
follows (in thousands):
YEAR ENDED DECEMBER 31,
----------------------------------
1994 1995 1996
----------------------------------
Current (provision) benefit:
Federal. . . . . . . . . . . . $(5,951) $1,711 $ 4,596
State... . . . . . . . . . . . (853) (44) (49)
Foreign. . . . . . . . . . . . (925) (301) (209)
-----------------------------------
(7,729) 1,366 4,338
-----------------------------------
Deferred benefit:
Federal. . . . . . . . . . . . 6,342 4,440 48,050
State. . . . . . . . . . . . . 988 385 2,472
-----------------------------------
7,330 4,825 50,522
-----------------------------------
Total (provision) benefit. . $ (399) $6,191 $54,860
-----------------------------------
-----------------------------------
As of December 31, 1996, the Company had net operating loss carryforwards
("NOLs") for Federal income tax purposes of approximately $77.9 million. The
NOLs expire beginning in year 2011. The use of the NOLs is subject to statutory
and regulatory limitations regarding changes in ownership. SFAS No. 109 requires
that the tax benefit of NOLs for financial reporting purposes be recorded as an
asset. To the extent that management assesses the realization of deferred tax
assets to be less than "more likely than not," a valuation reserve is
established.
F-95
ECHOSTAR SATELLITE BROADCASTING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
7. INCOME TAXES - CONTINUED
The temporary differences which give rise to deferred tax assets and
liabilities as of December 31, 1995 and 1996 are as follows (in thousands):
DECEMBER 31,
-----------------------
1995 1996
-----------------------
Current deferred tax assets:
Accrued royalties. . . . . . . . . . . . . . $ -- $ 3,029
Inventory reserves and cost methods. . . . . 834 1,811
Accrued expenses . . . . . . . . . . . . . . -- 1,414
Allowance for doubtful accounts. . . . . . . 456 674
Reserve for warranty costs . . . . . . . . . 385 284
Other. . . . . . . . . . . . . . . . . . . . 312 57
-----------------------
Total current deferred tax assets. . . . . . . . 1,987 7,269
Current deferred tax liabilities:
Unrealized holding gain on marketable
investment securities. . . . . . . . . . . . (153) (6)
Subscriber acquisition costs . . . . . . . . -- (19,937)
-----------------------
Total current deferred tax liabilities . . . . . (153) (19,943)
-----------------------
Net current deferred tax assets (liabilities) 1,834 (12,674)
Noncurrent deferred tax assets:
Net operating loss carryforwards . . . . . . -- 77,910
Amortization of original issue discount
on 1994 and 1996 Notes. . . . . . . . . . . 15,439 34,912
Other. . . . . . . . . . . . . . . . . . . . 7 3,458
-----------------------
Total noncurrent deferred tax assets . . . . . . 15,446 116,280
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 79,670
-----------------------
Net deferred tax assets. . . . . . . . . . $13,943 $66,996
-----------------------
-----------------------
No valuation reserve has been provided for the above deferred tax assets
because the Company currently believes it is more likely than not that these
assets will be realized. If future operating results differ materially and
adversely from the Company's current expectations, its judgment regarding the
need for a valuation allowance may change.
The actual tax provisions for 1994, 1995 and 1996 are reconciled to the
amounts computed by applying the statutory federal tax rate to income before
taxes as follows (dollars in thousands).
1994 1995 1996
------------------ ------------------ ------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
------------------ ------------------ ------------------
Statutory rate . . . . . . . . . . $(166) (34.0)% $6,493 35.0% $54,015 35.0%
State income taxes, net of
federal benefit . . . . . . . . . ( 88) (18.0) 222 1.2 2,839 1.8
Tax exempt interest income . . . . 60 12.3 10 0.1 -- --
Research and development credits . 156 31.9 31 0.2 -- --
Non-deductible interest expense. . (258) (52.7) (293) (1.7) (2,099) (1.4)
Other. . . . . . . . . . . . . . . (103) (21.1) (272) (1.4) 105 (0.2)
------------------ ------------------ ------------------
Total (provision for) benefit
from income taxes . . . . . . . $(399) (81.6)% $6,191 33.4% $54,860 35.2%
------------------ ------------------ ------------------
------------------ ------------------ ------------------
F-96
ECHOSTAR SATELLITE BROADCASTING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
8. EMPLOYEE BENEFIT PLAN
The Company sponsors a 401(k) Employee Savings Plan (the "401(k) Plan") for
eligible employees. Voluntary employee contributions to the 401(k) Plan may be
matched 50% by the Company, subject to a maximum annual contribution by the
Company of $1,000 per employee. The Company may also make an annual
discretionary contribution to the plan with approval by the Company's Board of
Directors, subject to the maximum deductible limit provided by the Internal
Revenue Code of 1986, as amended. The Company's total cash contributions to the
401(k) Plan totaled $170,000, $177,000 and $226,000 during 1994, 1995 and 1996,
respectively. Additionally, the Company contributed 55,000 shares of its Class A
Common Stock in each of 1995 and 1996 (fair value of approximately $1.1 million
and $935,000, respectively) to the 401(k) Plan as discretionary contributions.
9. STOCKHOLDER'S EQUITY
Effective March 10, 1994, the stockholders approved measures necessary to
increase the authorized capital stock of Dish, Ltd. to include 200 million
shares of Class A Common Stock, 100 million shares of Class B Common Stock, and
20 million shares of Series A Convertible Preferred Stock and determined to
split all outstanding shares of common stock on the basis of approximately 4,296
to 1.
All accrued dividends payable to Mr. Ergen on his Dish, Ltd. 8% Series A
Cumulative Preferred Stock through the date of the Exchange ($1.4 million), and
all accrued dividends payable to the remaining holder of Dish, Ltd. 8% Series A
Cumulative Preferred Stock through the date of the Merger ($107,000), will
remain obligations of Dish, Ltd. (Note 1); however, no additional dividends will
accrue with respect to the Dish, Ltd. 8% Series A Cumulative Preferred Stock.
The 1994 Notes Indenture places significant restrictions on the payment of those
dividends. Through December 31, 1996, additional accrued dividends payable to
Mr. Ergen by ECC on the ECC 8% Series A Cumulative Preferred Stock totaled $1.7
million.
10. STOCK COMPENSATION PLANS
The Company has two stock-based compensation plans, which are described
below. The Company has elected to follow Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees," ("APB 25") and related
interpretations in accounting for its stock-based compensation plans. Under APB
25, because the exercise price of the Company's employees stock options is equal
to the market price of the underlying stock on the date of the grant, no
compensation expense is recognized. In October 1995, the Financial Accounting
Standards Board issued SFAS No. 123, "Accounting and Disclosure of Stock-Based
Compensation," ("SFAS No. 123") which established an alternative method of
expense recognition for stock-based compensation awards to employees based on
fair values. The Company elected to not adopt SFAS No. 123 for expense
recognition purposes.
Pro forma information regarding net income and earnings per share is
required by SFAS No. 123 and has been determined as if the Company had accounted
for its stock-based compensation plans using the fair value method prescribed by
that statement. The fair value for these options was estimated at the date of
grant using a Black-Scholes option pricing model with the following
weighted-average assumptions for 1995 and 1996, respectively: risk-free
interest rate of 6.12% and 6.80% for 1995 and 1996, respectively; dividend
yields of 0.0% during each period; volatility factors of the expected market
price of the Company's common stock of 62%, and a weighted-average expected
life of the options of six years.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. All options
are initially assumed to vest. Compensation previously recognized is reversed to
the extent applicable to forfeitures of unvested options. The Company's pro
forma net loss was $12.8 million and $101.7 million for the years ended December
31, 1995 and 1996, respectively.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
characteristics significantly different from those of
F-97
ECHOSTAR SATELLITE BROADCASTING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
10. STOCK COMPENSATION PLANS - CONTINUED
traded options, and because changes in the subjective input assumptions can
materially affect the fair value estimate, in management's opinion, the existing
models do not necessarily provide a reliable single measure of the fair value of
its stock-based compensation awards.
In April 1994, the Company adopted a stock incentive plan (the "Stock
Incentive Plan") to provide incentive to attract and retain officers, directors
and key employees. ECC assumed all outstanding options for the purchase of Dish,
Ltd. common stock effective with the Exchange and Merger and has reserved up to
10 million shares of its Class A Common Stock for granting awards under the
Stock Incentive Plan. Awards available under the Stock Incentive Plan include:
(i) common stock purchase options; (ii) stock appreciation rights; (iii)
restricted stock and restricted stock units; (iv) performance awards; (v)
dividend equivalents; and (vi) other stock-based awards. All options granted
through December 31, 1996 have included exercise prices not less than the fair
market value of the Shares at the date of grant and vest as determined by the
Company's Board of Directors, generally at the rate of 20% per year.
A summary of the Company's incentive stock option activity for the years
ended December 31, 1995 and 1996 is as follows:
1995 1996
-------------------------------------------------------------
WEIGHTED WEIGHTED
-AVERAGE -AVERAGE
OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE
-------------------------------------------------------------
Options outstanding at beginning of year. . . . . 744,872 $ 9.33 1,117,133 $12.23
Granted . . . . . . . . . . . . . . . . . . . . . 419,772 17.13 138,790 27.02
Exercised . . . . . . . . . . . . . . . . . . . . ( 4,284) 9.33 (103,766) 10.24
Forfeited . . . . . . . . . . . . . . . . . . . . (43,227) 10.55 (126,884) 13.27
------------------------------------------------------------
Options outstanding at end of year. . . . . . . . 1,117,133 $12.23 1,025,273 14.27
------------------------------------------------------------
------------------------------------------------------------
Exercisable at end of year. . . . . . . . . . . . 142,474 $ 9.33 258,368 $11.31
------------------------------------------------------------
------------------------------------------------------------
Weighted-average fair value of options granted. . $ 9.86 $16.96
Exercise prices for options outstanding as December 31, 1996 are as
follows:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------------------------------------------------
NUMBER WEIGHTED - NUMBER
OUTSTANDING AVERAGE EXERCISABLE
AS OF REMAINING WEIGHTED- AS OF WEIGHTED-
RANGE OF DECEMBER 31, CONTRACTUAL AVERAGE DECEMBER 31, AVERAGE
EXERCISE PRICES 1996 LIFE EXERCISE PRICE 1996 EXERCISE PRICE
- --------------------------------------------------------------------------------------------------------------
$ 9.333 - $11.870 607,462 5.50 $ 9.48 203,757 $ 9.41
17.000 - 20.250 279,021 6.71 18.48 54,611 18.51
26.690 - 29.360 138,790 7.58 27.02 -- --
- --------------------------------------------------------------------------------------------------------------
$ 9.333 - $29.360 1,025,273 6.11 $ 14.27 258,368 $ 11.31
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
In March 1994, the Company entered into an employment agreement with one of
its executive officers. The officer was granted an option, containing certain
conditions to vesting, to purchase 322,208 shares of Class A Common Stock of the
Company for $1.0 million at any time prior to December 31, 1999, subject to
certain limitations. One-half of this option became exercisable on December 31,
1994 and the remainder became exercisable on December 31, 1995. The option was
not granted pursuant to the Stock Incentive Plan. During 1996, this option was
fully exercised.
Effective March 1995, the Company granted an additional option to a key
employee to purchase 33,000 shares of Class A Common Stock, which vests 50% in
March 1996 and 50% in March 1997. The exercise price for each share of Class A
Common Stock is $11.87 per share. The option was not granted pursuant to the
Stock Incentive Plan. In December 1996, the vested portion of this option was
exercised and the unvested portion of the option was canceled.
F-98
ECHOSTAR SATELLITE BROADCASTING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
11. OTHER COMMITMENTS AND CONTINGENCIES
SATELLITE CONTRACTS
The Company has contracted with Martin for the construction and delivery of
high powered DBS satellites and for related services. Martin constructed both
EchoStar I and EchoStar II. In 1997 EchoStar expects to expend: (i)
approximately $16.7 million for contractor financing on EchoStar I, EchoStar II,
and EchoStar III; (ii) approximately $118.7 million in connection with the
launch and insurance of EchoStar III and EchoStar IV; and (iii) approximately
$50.0 million for construction of EchoStar III and EchoStar IV. Funds for these
expenditures are expected to come from the 1996 Notes Escrow Account and
available cash and marketable investment securities. Beyond 1997, EchoStar will
expend approximately $88.6 million to repay contractor financing debt related to
EchoStar I, EchoStar II, EchoStar III, and EchoStar IV. Additionally, EchoStar
has committed to expend approximately an additional $69.7 million to construct
and launch EchoStar IV in 1998. In order to continue to build, launch and
support EchoStar III and EchoStar IV beyond the first quarter of 1997, EchoStar
will need additional capital. Even if EchoStar terminates the construction
contracts with Lockheed Martin for the construction of EchoStar III and
EchoStar IV, EchoStar will still need additional capital as a result of
termination penalties contained in the contracts. There can be no assurances
that additional capital will be available, or, if available, that it will be
available on terms acceptable to EchoStar.
The Company has filed applications with the Federal Communications
Commission ("FCC") for authorization to construct, launch and operate a domestic
fixed satellite service system ("FSS System") and a two satellite Ka-band
satellite system. No assurances can be given that the Company's applications
will be approved by the FCC or that, if approved, the Company will successfully
develop the FSS System or the Ka-band satellite system. The Company believes
that establishment of the FSS System or the Ka-band satellite system would
enhance its competitive position in the DTH industry. In the event the Company's
FSS or Ka-band satellite system applications are approved by the FCC, additional
debt or equity financing would be required. Financing alternatives related to
the FSS and Ka-band satellite systems are currently being pursued by the
Company. No assurances can be given that financing will be available, or that it
will be available on terms acceptable to the Company.
LEASES
Future minimum lease payments under noncancelable operating leases as of
December 31, 1996, are as follows (in thousands):
Year ending December 31,
1997 . . . . . . . . . . . . . . . . . . . . . . . . $ 869
1998 . . . . . . . . . . . . . . . . . . . . . . . . 492
1999 . . . . . . . . . . . . . . . . . . . . . . . . 180
2000 . . . . . . . . . . . . . . . . . . . . . . . . 21
2001 . . . . . . . . . . . . . . . . . . . . . . . . 2
Thereafter . . . . . . . . . . . . . . . . . . . . . --
--------
Total minimum lease payments . . . . . . . . . . . . $1,564
--------
--------
Rental expense for operating leases aggregated $1.4 million, $1.2 million,
and $950,000 during the years ended December 31, 1994, 1995 and 1996,
respectively.
PURCHASE COMMITMENTS
The Company has entered into agreements with various manufacturers to
purchase DBS satellite receivers and related components manufactured based on
Dish, Ltd. supplied specifications and necessary to receive DBS programming
offered by the Company. As of December 31, 1996, the remaining commitments total
approximately $82.9 million and the total of all outstanding purchase order
commitments with domestic and foreign suppliers was $85.9 million. All of the
purchases related to these commitments are expected to be made during 1997. The
Company
F-99
ECHOSTAR SATELLITE BROADCASTING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
11. OTHER COMMITMENTS AND CONTINGENCIES - CONTINUED
expects to finance these purchases from available cash and cash flows generated
from sales of DISH Network-SM- 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 subsidiary guarantors of the 1996 Notes and the
1994 Notes for the year ended December 31, 1994 is not presented.
Condensed consolidating financial information is presented for the
following entities:
Consolidated Dish, Ltd. (referred to as "Dish") Consolidated DBS Corp (referred to as "DBS Corp")
ESBC Parent Company Only (referred to as "ESBC - PC") ECC Parent Company Only (referred to as "ECC - PC")
Consolidating and eliminating adjustments (referred to as "C&E") Other direct wholly owned subs of ECC (referred to as "Other")
Consolidated ESBC (referred to as "ESBC") Consolidated ECC (referred to as "ECC")
DBS Corp Parent Company Only (referred to as "DBS Corp - PC")
F-100
ECHOSTAR SATELLITE BROADCASTING CORPORATION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
12. CONDENSED CONSOLIDATING FINANCIAL INFORMATION FOR SUBSIDIARY GUARANTORS -
CONTINUED
CONDENSED CONSOLIDATING BALANCE SHEETS - AS OF DECEMBER 31, 1995 (IN
MILLIONS)
ECC -
Dish PC Other C&E ECC
--------------------------------------------------
