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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to ________________.
Commission file number 0-26176
ECHOSTAR COMMUNICATIONS CORPORATION
(Exact name of registrant as specified in its charter)
NEVADA 88-0336997
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
5701 S. SANTA FE DRIVE
LITTLETON, COLORADO 80120
(Address of principal executive offices) (Zip code)
(303) 723-1000
(Registrant's telephone number, including area code)
NOT APPLICABLE
(Former name, former address and former fiscal year, if changed since last
report)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES X NO
----- -----
AS OF JULY 31, 1998, THE REGISTRANT'S OUTSTANDING COMMON STOCK CONSISTED OF
15,205,794 SHARES OF CLASS A COMMON STOCK AND 29,804,401 SHARES OF CLASS B
COMMON STOCK.
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TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -
December 31, 1997 and June 30, 1998 (Unaudited). . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Condensed Consolidated Statements of Operations for the
three and six months ended June 30, 1997 and 1998 (Unaudited). . . . . . . . . . . . . . . . . . . . . 2
Condensed Consolidated Statements of Cash Flows for the
six months ended June 30, 1997 and 1998 (Unaudited). . . . . . . . . . . . . . . . . . . . . . . . . . 3
Notes to Condensed Consolidated Financial Statements (Unaudited) . . . . . . . . . . . . . . . . . . . . 4
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. . . . . . . . . . 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk . . . . . . . . . . . . . . . . . . . . . . . None
PART II - OTHER INFORMATION
Item 1. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Item 2. Changes in Securities and Use of Proceeds. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . None
Item 3. Defaults Upon Senior Securities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . None
Item 4. Submission of Matters to a Vote of Security Holders. . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Item 5. Other Information. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . None
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
DISH NETWORK-SM- IS A SERVICE MARK OF ECHOSTAR COMMUNICATIONS CORPORATION.
ECHOSTAR COMMUNICATIONS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
DECEMBER 31, JUNE 30,
1997 1998
---- ----
ASSETS (Unaudited)
Current Assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . $145,207 $259,571
Marketable investment securities. . . . . . . . . . . . . . . . . . . 275,307 131,289
Trade accounts receivable, net of allowance for
uncollectible accounts of $1,347 and $3,272,
respectively. . . . . . . . . . . . . . . . . . . . . . . . . . . . 66,074 95,072
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22,993 53,540
Subscriber acquisition costs, net . . . . . . . . . . . . . . . . . . 18,869 1,964
Other current assets. . . . . . . . . . . . . . . . . . . . . . . . . 15,655 16,090
----------------------------
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . 544,105 557,526
Restricted Cash and Marketable Investment Securities:
Satellite escrow. . . . . . . . . . . . . . . . . . . . . . . . . . . 73,233 24,284
Interest escrow . . . . . . . . . . . . . . . . . . . . . . . . . . . 112,284 90,599
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,245 2,245
----------------------------
Total restricted cash and marketable investment securities . . . . . . . . 187,762 117,128
Property and equipment, net. . . . . . . . . . . . . . . . . . . . . . . . 874,859 990,395
FCC authorizations, net. . . . . . . . . . . . . . . . . . . . . . . . . . 99,388 103,682
Other noncurrent assets. . . . . . . . . . . . . . . . . . . . . . . . . . 99,532 94,519
----------------------------
Total assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,805,646 $1,863,250
----------------------------
----------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Trade accounts payable. . . . . . . . . . . . . . . . . . . . . . . . $67,701 $100,677
Deferred revenue. . . . . . . . . . . . . . . . . . . . . . . . . . . 122,707 109,430
Accrued expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . 102,287 158,408
Current portion of long-term debt . . . . . . . . . . . . . . . . . . 17,885 20,707
----------------------------
Total current liabilities. . . . . . . . . . . . . . . . . . . . . . . . . 310,580 389,222
Long-term obligations, net of current portion:
1994 Notes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 499,863 534,330
1996 Notes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 438,512 467,005
1997 Notes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 375,000 375,000
Mortgages and other notes payable, net of
current portion . . . . . . . . . . . . . . . . . . . . . . . . . . 51,846 53,807
Long-term deferred satellite services revenue
and other long-term liabilities . . . . . . . . . . . . . . . . . . 19,642 25,801
----------------------------
Total long-term obligations, net of current portion. . . . . . . . . . . . 1,384,863 1,455,943
----------------------------
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . 1,695,443 1,845,165
12 1/8% Series B Senior Redeemable Exchangeable
Preferred Stock, $.01 par value, 900,000 shares
authorized; 200,000 and 212,239 shares issued and
outstanding, respectively; subject to mandatory
redemption on July 1, 2004 at a price of $1,000 per
share plus all accumulated and unpaid dividends . . . . . . . . . . 199,164 212,200
Commitments and Contingencies (Note 7)
Stockholders' Equity (Deficit):
Preferred Stock (Note 6). . . . . . . . . . . . . . . . . . . . . . . 121,132 125,216
Class A Common Stock, $.01 par value, 200,000,000 shares
authorized, 15,005,670 and 15,202,475 shares issued
and outstanding, respectively . . . . . . . . . . . . . . . . . . . 150 152
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 . . . . . . . . . . . . . . . . . . . . . . . . 12 12
Additional paid-in capital. . . . . . . . . . . . . . . . . . . . . . 226,462 229,926
Accumulated other comprehensive loss (Note 2) . . . . . . . . . . . . (19) -
Accumulated deficit . . . . . . . . . . . . . . . . . . . . . . . . . (436,996) (549,719)
----------------------------
Total stockholders' equity (deficit) . . . . . . . . . . . . . . . . . . . (88,961) (194,115)
----------------------------
Total liabilities and stockholders' equity (deficit). . . . . . . . $1,805,646 $1,863,250
----------------------------
----------------------------
See accompanying Notes to Condensed Consolidated Financial Statements.
1
ECHOSTAR COMMUNICATIONS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
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1997 1998 1997 1998
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REVENUE:
DISH Network:
Subscription television services ................... $ 62,858 $ 151,527 $ 110,908 $ 280,068
Other .............................................. 12,698 3,508 21,392 10,143
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Total DISH Network ................................... 75,556 155,035 132,300 290,211
DTH equipment sales and integration services ......... 13,713 80,445 16,067 147,839
Satellite services ................................... 2,045 5,774 4,210 10,369
C-band and other ..................................... 7,377 4,584 15,638 11,858
------------------------- -------------------------
Total revenue ............................................. 98,691 245,838 168,215 460,277
COSTS AND EXPENSES:
DISH Network Operating Expenses:
Subscriber-related expenses ........................ 31,505 69,388 54,575 133,197
Customer service center and other .................. 5,964 14,380 12,435 26,115
Satellite and transmission ......................... 3,452 5,460 6,234 10,712
------------------------- -------------------------
Total DISH Network operating expenses ................ 40,921 89,228 73,244 170,024
Cost of sales - DTH equipment and integration ........ 12,213 53,895 14,699 101,402
services
Cost of sales - C-band and other ..................... 5,127 3,282 11,135 9,224
Marketing:
Subscriber promotion subsidies ..................... 17,871 58,205 31,013 102,170
Advertising and other .............................. 4,038 9,339 7,318 17,592
------------------------- -------------------------
Total marketing expenses ............................. 21,909 67,544 38,331 119,762
General and administrative ........................... 15,542 23,488 31,648 43,182
Amortization of subscriber acquisition costs ......... 33,268 5,886 61,418 16,905
Depreciation and amortization ........................ 12,732 18,759 25,357 37,187
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Total costs and expenses .................................. 141,712 262,082 255,832 497,686
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Operating loss ............................................ (43,021) (16,244) (87,617) (37,409)
Other Income (Expense):
Interest income ...................................... 1,571 7,898 3,343 16,832
Interest expense, net of amounts capitalized ......... (22,197) (36,546) (42,043) (73,920)
Other ................................................ (117) (713) (294) (823)
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Total other income (expense) .............................. (20,743) (29,361) (38,994) (57,911)
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Loss before income taxes .................................. (63,764) (45,605) (126,611) (95,320)
Income tax provision, net ................................. (25) (112) (44) (283)
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Net loss .................................................. (63,789) (45,717) (126,655) (95,603)
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------------------------- -------------------------
8% Series A Cumulative Preferred Stock dividends .......... (301) (301) (602) (602)
12 1/8 % Series B Senior Redeemable Exchangeable
Preferred Stock dividends payable in-kind ............... - (6,615) - (13,036)
Accretion of 6 3/4 % Series C Cumulative Convertible
Preferred Stock.......................................... - (1,761) - (3,482)
------------------------- -------------------------
Numerator for basic and diluted loss per share - loss
attributable to common shareholders ..................... $ (64,090) $ (54,394) $(127,257) $(112,723)
------------------------- -------------------------
------------------------- -------------------------
Denominator for basic and diluted loss per share -
weighted-average common shares outstanding .............. 41,604 44,937 41,265 44,874
------------------------- -------------------------
------------------------- -------------------------
Basic and diluted loss per share .......................... $ (1.54) $ (1.21) $ (3.08) $ (2.51)
------------------------- -------------------------
------------------------- -------------------------
See accompanying Notes to Condensed Consolidated Financial Statements.
2
ECHOSTAR COMMUNICATIONS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
SIX MONTHS ENDED JUNE 30,
------------------------
1997 1998
------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ........................................................................................ $(126,655) $ (95,603)
Adjustments to reconcile net loss to net cash flows from operating activities:
Depreciation and amortization .............................................................. 25,357 37,187
Amortization of subscriber acquisition costs ............................................... 61,418 16,905
Amortization of debt discount and deferred financing costs ................................. 38,731 56,387
Change in reserve for excess and obsolete inventory ........................................ 1,987 17
Change in long-term deferred satellite services revenue and other long-term liabilities .... 5,905 6,159
Other, net ................................................................................. (311) 2,245
Changes in current assets and current liabilities, net ..................................... (15,623) (3,864)
------------------------
Net cash flows from operating activities ........................................................ (9,191) 19,433
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of marketable investment securities ................................................... (4,706) (253,412)
Sales of marketable investment securities ....................................................... 18,561 397,440
Purchases of restricted marketable investment securities ........................................ (1,645) -
Funds released from escrow and restricted cash and marketable investment securities ............. 72,975 74,735
Offering proceeds and investment earnings placed in escrow ...................................... (221,654) (4,081)
Purchases of property and equipment ............................................................. (67,104) (110,149)
Issuance of note receivable ..................................................................... - (6,200)
Payments received on note receivable ............................................................ - 3,170
Other ........................................................................................... (1,107) 393
------------------------
Net cash flows from investing activities ........................................................ (204,680) 101,896
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of 1997 Notes ........................................................ 362,500 -
Repayments of mortgage indebtedness and notes payable ........................................... (5,551) (8,167)
Net proceeds from Class A Common Stock options exercised and Class A Common Stock issued to
Employee Stock Purchase Plan .................................................................. 543 1,202
------------------------
Net cash flows from financing activities ........................................................ 357,492 (6,965)
------------------------
Net increase in cash and cash equivalents ....................................................... 143,621 114,364
Cash and cash equivalents, beginning of period .................................................. 39,231 145,207
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Cash and cash equivalents, end of period ........................................................ $ 182,852 $ 259,571
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------------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Capitalized interest ....................................................................... $ 16,632 $ 17,868
Accrued capital expenditures ............................................................... 32,950 16,050
Satellite vendor financing ................................................................. - 12,950
8% Series A Cumulative Preferred Stock dividends ........................................... 602 602
12 1/8 % Series B Senior Redeemable Exchangeable Preferred Stock dividends payable in-kind . - 13,036
Accretion of 6 3/4 % Series C Cumulative Convertible Preferred Stock ....................... - 3,482
The purchase price of DBSC was allocated as follows in the related purchase accounting:
EchoStar III satellite under construction ............................................. 51,241 -
FCC authorizations .................................................................... 16,651 -
Notes receivable from DBSC, including accrued interest of $3,382 ...................... (49,382) -
Investment in DBSC .................................................................... (4,044) -
Accounts payable and accrued expenses ................................................. (1,974) -
Other notes payable ................................................................... (500) -
Common stock and additional paid-in capital ........................................... (11,992) -
See accompanying Notes to Condensed Consolidated Financial Statements.
3
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. ORGANIZATION AND BUSINESS ACTIVITIES
PRINCIPAL BUSINESS
The operations of EchoStar Communications Corporation ("ECC," and together
with its subsidiaries, "EchoStar" or the "Company") include three interrelated
business units:
- THE DISH NETWORK - a direct broadcast satellite ("DBS") subscription
television service in the United States. As of June 30, 1998,
EchoStar had approximately 1.4 million DISH Network subscribers.
- ECHOSTAR TECHNOLOGIES CORPORATION ("TECHNOLOGY") - the design,
manufacture, distribution and sale of DBS set-top boxes, antennae and
other digital equipment for the DISH Network ("EchoStar Receiver
Systems"), and the design, manufacture and distribution of similar
equipment for direct-to-home ("DTH") projects of others
internationally, together with the provision of uplink center design,
construction oversight and other project integration services for
international DTH ventures.
- SATELLITE SERVICES - the turn-key delivery of video, audio and data
services to business television customers and other satellite users.
These services include satellite uplink services, satellite
transponder space usage, and other services.
Since 1994, EchoStar has deployed substantial resources to develop the
"EchoStar DBS System." The EchoStar DBS System consists of EchoStar's
FCC-allocated DBS spectrum, DBS satellites ("EchoStar I," "EchoStar II,"
"EchoStar III," and "EchoStar IV"), digital satellite receivers, digital
broadcast operations center, customer service facilities, and other assets
utilized in its operations. EchoStar's principal business strategy is to
continue developing its subscription television service in the U.S. to provide
consumers with a fully competitive alternative to cable television service.
2. SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles and
with the instructions to Form 10-Q and Article 10 of Regulation S-X for interim
financial information. Accordingly, these statements do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring adjustments) considered necessary
for a fair presentation have been included. All significant intercompany
accounts and transactions have been eliminated in consolidation. Operating
results for the three and six months ended June 30, 1998 are not necessarily
indicative of the results that may be expected for the year ending December 31,
1998. For further information, refer to the consolidated financial statements
and footnotes thereto included in EchoStar's Annual Report on Form 10-K for the
year ended December 31, 1997. Certain prior year amounts have been reclassified
to conform with the current year presentation.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses for each reporting
period. Actual results could differ from those estimates.
4
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS- CONTINUED
(UNAUDITED)
BASIC AND DILUTED LOSS PER SHARE
As of June 30, 1997 and 1998, options to purchase approximately 1,423,000
and 1,685,000 shares of Class A Common Stock were outstanding, respectively.
Common stock equivalents (employee stock options and warrants) are excluded from
the calculation of diluted loss per share as they are antidilutive. Securities
which are convertible into shares of Class A Common Stock (8% Series A
Cumulative Preferred Stock and 6 3/4% Series C Cumulative Convertible Preferred
Stock) also are excluded from the calculation of diluted loss per share as they
are antidilutive. As of June 30, 1997 and 1998, approximately 1,617,000 shares
of Class A Common Stock were issuable upon conversion of the 8% Series A
Cumulative Preferred Stock. In addition, as of June 30, 1998, approximately
4,715,000 shares of Class A Common Stock were issuable upon conversion of the 6
3/4% Series C Cumulative Convertible Preferred Stock.
COMPREHENSIVE INCOME
EchoStar adopted Statement of Financial Accounting Standards ("FAS") No.
130, "Reporting Comprehensive Income" ("FAS No. 130") effective as of the first
quarter of 1998. FAS No. 130 establishes new rules for the reporting and
display of comprehensive income and its components, however it has no impact on
the Company's net income or stockholders' equity. The components of
comprehensive loss, net of tax, are as follows (in thousands):
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
-------------------------- --------------------------
1997 1998 1997 1998
-------------------------- --------------------------
(Unaudited) (Unaudited)
Net loss......................................... $(63,789) $(45,717) $(126,655) $(95,603)
Change in unrealized gain (loss) on
available-for-sales securities................. 1 - - 19
-------- -------- --------- --------
Comprehensive loss............................... $(63,788) $(45,717) $(126,655) $(95,584)
-------- -------- --------- --------
-------- -------- --------- --------
Accumulated other comprehensive income presented on the accompanying
condensed consolidated balance sheets consists of the accumulated net unrealized
gain-on-available for sale securities, net of deferred taxes.
3. INVENTORIES
Inventories consist of the following (in thousands):
DECEMBER 31, JUNE 30,
1997 1998
------------------------
(Unaudited)
EchoStar Receiver Systems........................ $ 7,649 $25,967
DBS receiver components.......................... 12,506 24,254
Consigned DBS receiver components................ 3,122 4,135
Finished goods - analog DTH equipment............ 2,116 1,959
Spare parts and other............................ 1,440 1,082
Reserve for excess and obsolete inventory........ (3,840) (3,857)
--------------------
$ 22,993 $53,540
--------------------
--------------------
5
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS- CONTINUED
(UNAUDITED)
4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following (in thousands):
LIFE DECEMBER 31, JUNE 30,
(IN YEARS) 1997 1998
--------- -----------------------
(Unaudited)
EchoStar I........................ 12 $ 201,607 $ 201,607
EchoStar II....................... 12 228,694 228,694
EchoStar III...................... 12 - 234,083
Furniture, fixtures and equipment. 2-12 92,264 108,546
Buildings and improvements........ 7-40 28,101 41,356
Land.............................. - 6,356 6,670
Tooling and other................. 2 4,336 5,182
Vehicles.......................... 7 1,320 1,290
Construction in progress.......... - 398,142 285,690
------------------------
Total property and equipment. 960,820 1,113,118
Accumulated depreciation.......... (85,961) (122,723)
------------------------
Property and equipment, net....... $ 874,859 $ 990,395
------------------------
------------------------
Construction in progress consists of the following (in thousands):
DECEMBER 31, JUNE 30,
1997 1998
--------------------------
(Unaudited)
Progress amounts for satellite construction, launch,
launch insurance and capitalized interest:
EchoStar III................................ $234,083 $ -
EchoStar IV................................. 119,853 208,450
Other............................................ 44,206 77,240
-----------------------
$398,142 $285,690
-----------------------
-----------------------
EchoStar III, which was launched in October 1997, commenced commercial
operation in January 1998. EchoStar IV, which was launched in May 1998, is
expected to commence commercial operation in the third quarter of 1998.
5. ACCRUED EXPENSES
Accrued expenses consist of the following (in thousands):
DECEMBER 31, JUNE 30,
1997 1998
------------------------
(Unaudited)
Accrued expenses.............................. $ 31,415 $ 46,488
Accrued royalties and copyright............... 21,573 37,975
Accrued programming........................... 20,018 25,516
Accrued marketing expenses.................... 4,660 24,375
Accrued interest.............................. 24,621 24,054
---------------------
$ 102,287 $158,408
---------------------
---------------------
6
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS- CONTINUED
(UNAUDITED)
6. PREFERRED STOCK
Preferred Stock consists of the following (in thousands, except share data):
DECEMBER 31, JUNE 30,
1997 1998
-----------------------
(Unaudited)
Preferred Stock, 20,000,000 shares authorized
(inclusive of 900,000 shares designated as Series
B Preferred Stock):
8% Series A Cumulative Preferred Stock,
1,616,681 shares issued and outstanding,
including cumulative accrued dividends of
$4,551 and $5,153, respectively.............. $ 19,603 $ 20,205
6 3/4% Series C Cumulative Convertible
Preferred Stock, 2,300,000 shares issued and
outstanding.................................. 101,529 105,011
---------------------
Total Preferred Stock.......................... $ 121,132 $ 125,216
---------------------
---------------------
7. COMMITMENTS AND CONTINGENCIES
During February 1997, EchoStar and The News Corporation Limited ("News")
announced an agreement (the "News Agreement") pursuant to which, among other
things, News agreed to acquire approximately 50% of the outstanding capital
stock of EchoStar. News also agreed to make available for use by EchoStar the
DBS permit for 28 frequencies at 110DEG. West Longitude purchased by MCI
Communications Corporation 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.
In May 1997, EchoStar filed a Complaint 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. EchoStar also 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.
In June 1997, News filed an answer and counterclaims seeking unspecified
damages. News' answer denies all of the material allegations in the First
Amended Complaint and asserts numerous defenses, including bad faith, misconduct
and failure to disclose material information on the part of EchoStar and its
Chairman and Chief Executive Officer, Charles W. Ergen. The counterclaims, in
which News is joined by its subsidiary American Sky Broadcasting, L.L.C., assert
that EchoStar and Ergen breached their agreements with News and failed to act
and negotiate with News in good faith. EchoStar has responded to News' answer
and denied the allegations in their counterclaims. EchoStar also has asserted
various affirmative defenses. EchoStar is vigorously defending against the
counterclaims. The case has been set for trial commencing March 1999, 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 subject to various other legal proceedings and claims which
arise in the ordinary course of its business. In the opinion of management, the
amount of ultimate liability with respect to those actions will not materially
affect the financial position or results of operations of EchoStar.
7
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS- CONTINUED
(UNAUDITED)
In November 1998 and 1999, certain meteoroid events will occur as the
earth's orbit passes through the particulate trail of Comet 55P (Tempel-Tuttle).
These meteoroid events pose a potential threat to all in-orbit geosynchronous
satellites, including EchoStar's DBS satellites. EchoStar is presently
evaluating the potential effects that these meteoroid events may have on its DBS
satellites. At this time, EchoStar has not finally determined the impact, if
any, these meteoroid events could have on EchoStar's DBS satellites. However,
many of the most sophisticated satellite operators have assessed the risk of
satellite damage as very small.
8. SUBSEQUENT EVENTS
EchoStar IV was launched on May 8, 1998 from the Baikonur Cosmodrome,
Kazakhstan and was originally expected to provide video, audio and data
services to the continental United States, Alaska and Hawaii from the 119
DEG. West Longitude ("WL") orbital location. Following launch and deployment
of EchoStar IV, EchoStar I was expected to be relocated from its current
position at 119 DEG. WL to the 148 DEG. WL orbital location. As a result of
anomalies described below, EchoStar IV has instead been moved to the 148 DEG.
WL orbital location where it is expected to provide local, educational,
foreign language and other niche service to customers in the Western United
States. EchoStar I and EchoStar II will remain at 119 DEG. WL and will
continue to provide DISH Network service without interruption or change.
As previously announced, the south solar array on EchoStar IV did not
properly deploy, resulting in a reduction of power available to operate the
satellite. While final evaluations have not been completed, it now appears
likely that this anomaly will limit EchoStar to operation of a maximum of 22
transponders on the satellite. The number of available transponders will
decrease over time, but based on existing data approximately 16 transponders
should be available for the full planned 12 year life of the satellite absent
additional failures.
An unrelated anomaly discovered subsequent to June 30, 1998 has resulted in
the failure of four primary transponders (transponders 5, 6, 9 and 10), and two
spare transponders on the satellite. The cause of this anomaly has not yet been
established. EchoStar recently received notification from the manufacturer of
the satellite, Lockheed Martin, that several transponders, in addition to those
which have failed, are not recommended for use until the root cause of the
anomaly has been determined and corrective procedures, if possible, are
implemented to avoid further failures.
While EchoStar IV is equipped with 32 transponders, EchoStar is only
licensed by the Federal Communications Commission ("FCC") to use 24 of the total
of 32 frequencies at the 148 DEG. WL orbital location, including frequencies 5,
6, 9 and 10, which correspond to the failed transponders. Consequently, while
power continues to be available to operate 22 transponders on the satellite, to
fully utilize the remaining available capacity of the satellite, EchoStar will
need to file an application with the FCC to obtain authorization to operate
transponders which correspond to frequencies which are not currently assigned to
EchoStar by the FCC.
EchoStar will also need to obtain FCC approval to operate EchoStar IV at
148 DEG. WL on a permanent basis. FCC rules require that DBS satellites
positioned at 148 DEG. WL also provide service to Alaska and Hawaii. In
April 1998, EchoStar received a waiver from the FCC with respect to this
obligation because EchoStar planned to provide DBS service to those states
via EchoStar IV from the 119 DEG. WL orbital location. As a result of moving
EchoStar IV to the 148 DEG. WL orbital location, EchoStar will not be able to
provide DBS service to Alaska and Hawaii from 119 DEG. WL and probably will
not be able to fulfill its original obligation to provide DBS service to
Alaska and Hawaii from 148 DEG. WL. Consequently, EchoStar will probably need
to obtain a waiver of its obligation to provide service to Alaska and Hawaii
in connection with its application to operate EchoStar IV at 148 DEG. WL on a
permanent basis.
While the FCC has typically shown flexibility when satellite failures
occur, there can be no assurance that EchoStar's request will be granted.
Further, it is likely that EchoStar will encounter opposition from certain
parties, including those attempting to enforce the obligation to serve Alaska
and Hawaii. To minimize potential opposition, EchoStar intends to enter into
an agreement with a third-party to provide DTH programming services to Alaska
and Hawaii on an interim basis on an FSS satellite. EchoStar also intends to
construct and launch
8
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS- CONTINUED
(UNAUDITED)
a replacement satellite at 119 DEG. WL which would provide service to Alaska and
Hawaii. If the FCC were to deny EchoStar's request, EchoStar's ability to
provide DBS service from EchoStar IV would be significantly reduced.
EchoStar will file an insurance claim with respect to EchoStar IV in the
near future. The Company expects to use insurance proceeds, together with other
funds, to launch a new DBS satellite to its 119 DEG. WL orbital location in
approximately three years or less. EchoStar also expects to file an insurance
claim with respect to EchoStar III, which was launched October 5, 1997. Certain
of EchoStar III's electric power converters ("EPC") are operating at
temperatures slightly outside of engineering specifications. The high EPC
temperatures may require certain transponders on EchoStar III to be turned off
for several weeks during summer and winter solstice seasons to avoid
overheating.
Based on information currently available, management has evaluated the
potential financial statement impact of these satellite anomalies in accordance
with its stated accounting policies. The Company has not completed its
assessment of the impairment of these satellites, but currently believes
insurance proceeds will be sufficient to offset any write-downs of its satellite
assets that are required because of lost transmission capacity caused by these
anomalies. However, no assurance can be provided as to the ultimate amount that
may be received from these insurance claims. EchoStar will continue to evaluate
the operating performance of EchoStar III and EchoStar IV and may modify its
loss assessment as new events or circumstances develop. EchoStar does not
maintain insurance for lost profit opportunity.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
ALL STATEMENTS CONTAINED HEREIN, AS WELL AS STATEMENTS MADE IN PRESS
RELEASES AND ORAL STATEMENTS THAT MAY BE MADE BY ECHOSTAR OR BY OFFICERS,
DIRECTORS OR EMPLOYEES OF ECHOSTAR ACTING ON ITS BEHALF, THAT ARE NOT STATEMENTS
OF HISTORICAL FACT CONSTITUTE "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF
THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. SUCH FORWARD-LOOKING
STATEMENTS INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES AND OTHER FACTORS THAT
COULD CAUSE THE ACTUAL RESULTS OF ECHOSTAR TO BE MATERIALLY DIFFERENT FROM
HISTORICAL RESULTS OR FROM ANY FUTURE RESULTS EXPRESSED OR IMPLIED BY SUCH
FORWARD-LOOKING STATEMENTS. AMONG THE FACTORS THAT COULD CAUSE ACTUAL RESULTS
TO DIFFER MATERIALLY ARE THE FOLLOWING: A TOTAL OR PARTIAL LOSS OF A SATELLITE
DUE TO OPERATIONAL FAILURES, SPACE DEBRIS OR OTHERWISE; A DECREASE IN SALES OF
DIGITAL EQUIPMENT AND RELATED SERVICES TO INTERNATIONAL DIRECT-TO-HOME ("DTH")
SERVICE PROVIDERS; A DECREASE IN DISH NETWORK SUBSCRIBER GROWTH; AN INCREASE IN
SUBSCRIBER ACQUISITION COSTS AND SUBSCRIBER PROMOTION SUBSIDIES; AN UNEXPECTED
PRODUCT SHORTAGE; IMPEDIMENTS TO THE RETRANSMISSION OF LOCAL OR DISTANT
BROADCAST NETWORK SIGNALS; LOWER THAN EXPECTED DEMAND FOR ECHOSTAR'S DELIVERY OF
LOCAL BROADCAST NETWORK SIGNALS; AN UNEXPECTED BUSINESS INTERRUPTION DUE TO THE
FAILURE OF THIRD-PARTIES TO REMEDIATE YEAR 2000 ISSUES; THE INABILITY OF
ECHOSTAR TO RETAIN NECESSARY AUTHORIZATIONS FROM THE FEDERAL COMMUNICATIONS
COMMISSION ("FCC"); AN INCREASE IN COMPETITION FROM CABLE, DIRECT BROADCAST
SATELLITE ("DBS"), OTHER SATELLITE SYSTEM OPERATORS, AND OTHER PROVIDERS OF
SUBSCRIPTION TELEVISION SERVICES; THE INTRODUCTION OF NEW TECHNOLOGIES AND
COMPETITORS INTO THE SUBSCRIPTION TELEVISION BUSINESS; THE OUTCOME OF ANY
LITIGATION IN WHICH ECHOSTAR MAY BE INVOLVED; GENERAL BUSINESS AND ECONOMIC
CONDITIONS; AND OTHER RISK FACTORS DESCRIBED FROM TIME TO TIME IN ECHOSTAR'S
REPORTS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ("SEC"). IN ADDITION
TO STATEMENTS THAT EXPLICITLY DESCRIBE SUCH RISKS AND UNCERTAINTIES, READERS ARE
URGED TO CONSIDER STATEMENTS THAT INCLUDE THE TERMS "BELIEVES," "BELIEF,"
"EXPECTS," "PLANS," "ANTICIPATES," "INTENDS" OR THE LIKE TO BE UNCERTAIN AND
FORWARD-LOOKING. ALL CAUTIONARY STATEMENTS MADE HEREIN SHOULD BE READ AS BEING
APPLICABLE TO ALL FORWARD-LOOKING STATEMENTS WHEREVER THEY APPEAR. IN THIS
CONNECTION, INVESTORS SHOULD CONSIDER THE RISKS DESCRIBED HEREIN.
OVERVIEW
The operations of EchoStar Communications Corporation ("ECC," and
together with its subsidiaries, "EchoStar" or the "Company") include three
interrelated business units:
- THE DISH NETWORK - a DBS subscription television service in the
United States. As of June 30, 1998, EchoStar had approximately
1.4 million DISH Network subscribers.
- ECHOSTAR TECHNOLOGIES CORPORATION ("TECHNOLOGY") - the design,
manufacture, distribution and sale of DBS set-top boxes, antennae
and other digital equipment for the DISH Network ("EchoStar
Receiver Systems"), and the design, manufacture and distribution
of similar equipment for direct-to-home ("DTH") projects of
others internationally, together with the provision of uplink
center design, construction oversight and other project
integration services for international DTH ventures.
- SATELLITE SERVICES - the turn-key delivery of video, audio and
data services to business television customers and other
satellite users. These services include satellite uplink
services, satellite transponder space usage, and other services.
Since 1994, EchoStar has deployed substantial resources to develop the
"EchoStar DBS System." The EchoStar DBS System consists of EchoStar's
FCC-allocated DBS spectrum, DBS satellites ("EchoStar I," "EchoStar II,"
"EchoStar III," and "EchoStar IV"), digital satellite receivers, digital
broadcast operations center, customer service facilities, and other assets
utilized in its operations. EchoStar's principal business strategy is to
continue developing its subscription television service in the U.S. to provide
consumers with a fully competitive alternative to cable television service.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - CONTINUED
RECENT DEVELOPMENTS
SATELLITE ANOMALIES
EchoStar IV was launched on May 8, 1998 from the Baikonur Cosmodrome,
Kazakhstan and was originally expected to provide video, audio and data services
to the continental United States, Alaska and Hawaii from the 119 DEG. West
Longitude ("WL") orbital location. Following launch and deployment of EchoStar
IV, EchoStar I was expected to be relocated from its current position at 119
DEG. WL to the 148 DEG. WL orbital location. As a result of anomalies described
below, EchoStar IV has instead been moved to the 148 DEG. WL orbital location
where it is expected to provide local, educational, foreign language and other
niche service to customers in the Western United States. EchoStar I and
EchoStar II will remain at 119 DEG. WL and will continue to provide DISH Network
service without interruption or change.
As previously announced, the south solar array on EchoStar IV did
not properly deploy, resulting in a reduction of power available to operate
the satellite. While final evaluations have not been completed, it now
appears likely that this anomaly will limit EchoStar to operation of a
maximum of 22 transponders on the satellite. The number of available
transponders will decrease over time, but based on existing data
approximately 16 transponders should be available for the full planned 12
year life of the satellite absent additional failures.
An unrelated anomaly discovered subsequent to June 30, 1998 has
resulted in the failure of four primary transponders (transponders 5, 6, 9 and
10), and two spare transponders on the satellite. The cause of this anomaly has
not yet been established. EchoStar recently received notification from the
manufacturer of the satellite, Lockheed Martin, that several transponders, in
addition to those which have failed, are not recommended for use until the root
cause of the anomaly has been determined and corrective procedures, if possible,
are implemented to avoid further failures.
While EchoStar IV is equipped with 32 transponders, EchoStar is only
licensed by the Federal Communications Commission ("FCC") to use 24 of the total
of 32 frequencies at the 148 DEG. WL orbital location, including frequencies 5,
6, 9 and 10, which correspond to the failed transponders. Consequently, while
power continues to be available to operate 22 transponders on the satellite, to
fully utilize the remaining available capacity of the satellite, EchoStar will
need to file an application with the FCC to obtain authorization to operate
transponders which correspond to frequencies which are not currently assigned to
EchoStar by the FCC.
EchoStar will also need to obtain FCC approval to operate EchoStar
IV at 148 DEG. WL on a permanent basis. FCC rules require that DBS
satellites positioned at 148 DEG. WL also provide service to Alaska and
Hawaii. In April 1998, EchoStar received a waiver from the FCC with respect
to this obligation because EchoStar planned to provide DBS service to those
states via EchoStar IV from the 119 DEG. WL orbital location. As a result of
moving EchoStar IV to the 148 DEG. WL orbital location, EchoStar will not be
able to provide DBS service to Alaska and Hawaii from 119 DEG. WL and
probably will not be able to fulfill its original obligation to provide DBS
service to Alaska and Hawaii from 148 DEG. WL. Consequently, EchoStar will
probably need to obtain a waiver of its obligation to provide service to
Alaska and Hawaii in connection with its application to operate EchoStar IV
at 148 DEG. WL on a permanent basis.
While the FCC has typically shown flexibility when satellite
failures occur, there can be no assurance that EchoStar's request will be
granted. Further, it is likely that EchoStar will encounter opposition from
certain parties, including those attempting to enforce the obligation to
serve Alaska and Hawaii. To minimize potential opposition, EchoStar intends
to enter into an agreement with a third-party to provide DTH programming
services to Alaska and Hawaii on an interim basis on an FSS satellite.
EchoStar also intends to construct and launch a replacement satellite at 119
DEG. WL which would provide service to Alaska and Hawaii. If the FCC were to
deny EchoStar's request, EchoStar's ability to provide DBS service from
EchoStar IV would be significantly reduced.
EchoStar will file an insurance claim with respect to EchoStar IV in
the near future. The Company expects to use insurance proceeds, together with
other funds, to launch a new DBS satellite to its 119 DEG. WL orbital location
in approximately three years or less. EchoStar also expects to file an
insurance claim with respect to EchoStar III,
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - CONTINUED
which was launched October 5, 1997. Certain of EchoStar III's electric power
converters ("EPC") are operating at temperatures slightly outside of engineering
specifications. The high EPC temperatures may require certain transponders on
EchoStar III to be turned off for several weeks during summer and winter
solstice seasons to avoid overheating.
Based on information currently available, management has evaluated the
potential financial statement impact of these satellite anomalies in accordance
with its stated accounting policies. The Company has not completed its
assessment of the impairment of these satellites, but currently believes
insurance proceeds will be sufficient to offset any write-downs of its satellite
assets that are required because of lost transmission capacity caused by these
anomalies. However, no assurance can be provided as to the ultimate amount that
may be received from these insurance claims. EchoStar will continue to evaluate
the operating performance of EchoStar III and EchoStar IV and may modify its
loss assessment as new events or circumstances develop. EchoStar does not
maintain insurance for lost profit opportunity.
PRIMETIME 24
Section 119 of the Satellite Home Viewer Act ("SHVA") authorizes
EchoStar to sell satellite delivered network signals (ABC, NBC, CBS Fox, etc.)
to EchoStar subscribers, but only if those subscribers qualify as "unserved"
households as that term is defined in the SHVA. Historically, EchoStar obtained
broadcast network signals for distribution to its subscribers through PrimeTime
24, Joint Venture ("PrimeTime 24"). PrimeTime 24 also distributes network
signals to certain of EchoStar's competitors in the satellite industry.
Recently, a federal court in Florida issued a nationwide injunction in
CBS INC., FOX BROADCASTING CO., ET. AL. V. PRIMETIME 24, JOINT VENTURE, NO.
96-3650-CIV-NESBITT (S.D. FLA. JULY 10, 1998), severely restricting the ability
of PrimeTime 24 and its distributors to sell Fox and CBS programming, and
requiring the disconnection of significant numbers of existing PrimeTime 24
subscribers nationwide by early October 1998. The order also imposed other
obligations on PrimeTime 24 and its distributors with respect to future sales of
Fox and CBS programming nationwide. Additionally, in a federal court suit in
North Carolina, ABC, INC., V. PRIMETIME 24, JOINT VENTURE, NO. 1:97CV00090
(M.D.N.C. JULY 16, 1998), a judge recently granted summary judgement to ABC
severely restricting the ability of PrimeTime 24 to sell ABC programming in
Raleigh-Durham.
As a result of: (a) these rulings; (b) EchoStar's determination to
sell local network channels back into the area from which they originate; (c)
1997 adjustments to copyright royalties payable in connection with delivery of
network signals by satellite; and (d) a number of other regulatory, political,
legal, contractual and business factors, during July 1998, EchoStar ceased
delivering PrimeTime 24 programming, and began uplinking and distributing
network signals directly. EchoStar has also implemented Section 119 compliance
procedures which will materially restrict the market for the sale of network
signals by EchoStar. It is also possible that some or all of the networks,
and/or their affiliates, will bring copyright infringement actions against
EchoStar, similar to those described above, in the near future. In the event of
a decision adverse to EchoStar in any such litigation, significant damage awards
and additional material restrictions on the sale of network signals by EchoStar
could result. Among other things, EchoStar may be required to terminate
delivery of network signals to a material portion of its subscriber base. The
compliance program implemented by EchoStar, and any further restrictions on sale
of network channels imposed in the future, may result in decreases in subscriber
activations and subscription television services revenue and an increase in
subscriber churn.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1998 COMPARED TO THE THREE MONTHS ENDED JUNE 30,
1997.
REVENUE. Total revenue for the three months ended June 30, 1998 was
$246 million, an increase of $147 million or 149%, as compared to total revenue
for the three months ended June 30, 1997 of $99 million. The increase in total
revenue was primarily attributable to DISH Network subscriber growth combined
with increased revenue from EchoStar's Technology business unit. EchoStar
expects that its revenues will continue to increase as
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - CONTINUED
the number of DISH Network subscribers increases. Consistent with the increases
in total revenue and the number of DISH Network subscribers during the three
months ended June 30, 1998, EchoStar experienced a corresponding increase in
trade accounts receivable at June 30, 1998.
DISH Network subscription television services revenue totaled $152
million for the three months ended June 30, 1998, an increase of $89 million, or
141% compared to the same period in 1997. This increase was directly
attributable to the increase in the number of DISH Network subscribers. The
average number of DISH Network subscribers during the three months ended June
30, 1998 increased approximately 160%, as compared to the same period in 1997.
Monthly revenue per subscriber approximated $39 during each of the three-month
periods ended June 30, 1998 and 1997. DISH Network subscription television
services revenue principally consists of revenue from basic, premium and
pay-per-view subscription television services. DISH Network subscription
television services revenue will continue to increase to the extent EchoStar is
successful in increasing the number of DISH Network subscribers.
For the three months ended June 30, 1998, DTH equipment sales and
integration services totaled $80 million, an increase of $66 million compared to
the three months ended June 30, 1997. DTH equipment sales consist of sales of
digital set-top boxes and other digital satellite broadcasting equipment by
EchoStar to international DTH service operators. EchoStar currently has
agreements to provide equipment to DTH service operators in Spain and Canada.
Sales pursuant to these agreements totaled $74 million for the three months
ended June 30, 1998, an increase of $62 million, as compared to $12 million for
the three months ended June 30, 1997. Revenue for the three months ended June
30, 1998 primarily related to sales of digital set-top boxes and other equipment
while revenue for the same period in 1997 resulted from the provision of
integration services. The increase in DTH equipment sales and integration
services revenue was primarily attributable to an increase in the volume of
set-top boxes sold.
A substantial portion of EchoStar's Technology revenues have resulted
from sales to two DTH providers. As a result, EchoStar's Technology business
currently is economically dependent on these two DTH providers. EchoStar's
future revenue from the sale of DTH equipment and integration services in
international markets depends largely on the success of these DTH operators and
continued demand for EchoStar's digital set-top boxes. Due to several factors,
EchoStar expects that its DTH equipment and integration services revenue may
decline during the third and fourth quarters of 1998 by as much as 30% to 40% as
compared to such revenue reported during the first and second quarters of 1998.
These factors include an expected decrease in demand resulting from the
fulfillment of initial stock orders combined with a decrease in the sales price
of digital set-top boxes due to increased competition from other providers of
DTH equipment. Further, during July 1998 Telefonica S.A. ("Telefonica"), one of
the two DTH service providers described above, announced its intention to merge
with Sogecable ("Canal Plus Satellite"), one of its primary competitors. In
addition to providing competitive DTH services in Spain, the Canal Plus system
in Spain has more set-top boxes in the field than Telefonica, and its
conditional access and compression systems are not compatible with the equipment
manufactured by EchoStar for Telefonica. EchoStar can not yet determine the
possible impact that such a merger might have on future sales to Telefonica.
EchoStar has binding purchase orders from Telefonica for additional 1998 and
1999 deliveries of DTH equipment. While EchoStar continues to actively pursue
additional distribution and integration service opportunities, no assurance can
be given that any such additional negotiations will be successful.
Satellite services revenue totaled $6 million for the three months
ended June 30, 1998, an increase of $4 million as compared to the same period in
1997. These revenues include, among other things, fees charged to content
providers for signal carriage and revenues earned from business television
("BTV") customers. The increase in satellite services revenue was primarily
attributable to increased BTV revenue.
DISH NETWORK OPERATING EXPENSES. DISH Network operating expenses
totaled $89 million for the three months ended June 30, 1998, an increase of $48
million as compared to the same period in 1997. The increase in DISH Network
operating expenses was consistent with, and primarily attributable to, the
increase in the number of DISH Network subscribers. For the three months ended
June 30, 1998, DISH Network operating expenses represented 59% of subscription
television services revenue compared to 65% of subscription television revenue
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - CONTINUED
during the corresponding period in 1997. While EchoStar expects DISH Network
operating expenses as a percentage of subscription television services revenue
to approximate this level in future periods, there can be no assurance that this
expense to revenue ratio will not increase.
Subscriber-related expenses totaled $69 million for the three months
ended June 30, 1998, an increase of $37 million compared to the same period in
1997. Such expenses, which include programming expenses, copyright royalties,
residuals payable to retailers and distributors, and billing, lockbox and other
variable subscriber expenses, totaled 46% of subscription television services
revenues for the three months ended June 30, 1998, compared to 50% of
subscription television services revenues for the three months ended June 30,
1997. The decrease in subscriber-related expenses as a percentage of
subscription television services revenue resulted primarily from a decrease in
programming expenses, which resulted from a change in product mix combined with
price discounts received from certain content providers.
Customer service center and other expenses principally consist of
costs incurred in the operation of EchoStar's DISH Network customer service
center, such as personnel and telephone expenses, as well as subscriber
equipment installation and other operating expenses. Customer service center
and other expenses totaled $14 million for the three months ended June 30, 1998,
an increase of $8 million as compared to the three months ended June 30, 1997.
The increase in customer service center and other expenses resulted from
increased personnel expenses to support the growth of the DISH Network.
Customer service center and other expenses totaled 9% of subscription television
services revenue during each of the three-month periods ended June 30, 1998 and
1997. While EchoStar expects customer service center and other expenses as a
percentage of subscription television services revenue to approximate this level
for the remainder of 1998, there can be no assurance that this expense to
revenue ratio will not increase.
Satellite and transmission expenses include expenses associated with
the operation of EchoStar's digital broadcast center, contracted satellite
tracking, telemetry and control ("TT&C") services, and in-orbit insurance on
EchoStar's DBS satellites. Satellite and transmission expenses increased $2
million during the three months ended June 30, 1998, as compared to the same
period during 1997. This increase resulted from higher TT&C services expenses
and other digital broadcast center operating expenses due to an increase in the
number of operational EchoStar satellites. EchoStar expects DISH Network
operating expenses to continue to increase in the future as subscribers are
added. However, as its DISH Network subscriber base continues to expand,
EchoStar expects that such costs as a percentage of DISH Network revenue may
decline.
COST OF SALES - DTH EQUIPMENT AND INTEGRATION SERVICES. Cost of sales
- - DTH equipment and integration services totaled $54 million for the three
months ended June 30, 1998, an increase of $42 million, as compared to the three
months ended June 30, 1997. This increase is consistent with the increase in
DTH equipment revenue. Cost of sales - DTH equipment and integration services
principally includes costs associated with digital set-top boxes and related
components sold to international DTH operators.
MARKETING EXPENSES. Marketing expenses totaled $68 million for the
three months ended June 30, 1998, an increase of $46 million as compared to the
same period in 1997. The increase in marketing expenses was primarily
attributable to an increase in subscriber promotion subsidies. Subscriber
promotion subsidies include the excess of transaction costs over transaction
proceeds at the time of sale of EchoStar Receiver Systems, activation allowances
paid to retailers, and other promotional incentives. EchoStar recognizes
subscriber promotion subsidies as incurred. These expenses totaled $58 million
for the three months ended June 30, 1998, an increase of $40 million over the
same period in 1997. This increase resulted from increased subscriber
activations and the immediate recognition of all subscriber promotion subsidies
incurred in 1998, whereas during the three-month period ended June 30, 1997, a
portion of such expenses were initially deferred and amortized over the related
prepaid subscription term (generally one year). This accelerated expense
recognition resulted from the introduction of the "1997 Promotion" in June 1997.
The 1997 Promotion maintained the suggested retail price for a standard EchoStar
Receiver System at $199, but eliminated the requirement for the coincident
purchase of an extended subscription commitment. For the three months ended
June 30, 1998, EchoStar's subscriber acquisition costs, inclusive
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - CONTINUED
of acquisition marketing expenses, totaled $66 million (approximately $280 per
new subscriber activation). Comparatively, EchoStar's subscriber acquisition
costs, inclusive of acquisition marketing expenses and deferred subscriber
acquisition costs, totaled $43 million (in excess of $300 per new subscriber
activation) during the same period in 1997. The decrease in EchoStar's
subscriber acquisition costs, on a per new subscriber activation basis,
principally resulted from decreases in the manufactured cost of EchoStar
Receiver Systems. EchoStar expects that its subscriber acquisition costs, on a
per new subscriber activation basis, may increase during the remainder of 1998
as a result of increased competition for DBS subscribers. Advertising and other
expenses totaled $9 million for the three months ended June 30, 1998, an
increase of $5 million over the same period in 1997, as a result of increased
marketing activity.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
("G&A") expenses totaled $23 million for the three-month period ended June 30,
1998, an increase of $7 million as compared to the same period in 1997. The
increase in G&A expenses was principally attributable to increased personnel
expenses to support the growth of the DISH Network. G&A expenses as a
percentage of total revenue decreased to 10% for the three months ended June 30,
1998 compared to 16% for the corresponding period in 1997. While EchoStar
expects that G&A expenses as a percentage of total revenue will approximate this
level for the remainder of 1998, there can be no assurance that this expense to
revenue ratio will not increase.
EARNINGS BEFORE INTEREST, TAXES, DEPRECIATION AND AMORTIZATION
("EBITDA"). EBITDA for the three months ended June 30, 1998 improved to $8
million compared to $3 million for the same period in 1997. This improvement in
EBITDA principally resulted from increases in Technology (i.e., DTH equipment
sales and integration services) and DISH Network revenues. Due to expected
increases in new subscriber activations, increased marketing activity and a
decrease in Technology revenue (as previously described), EchoStar expects that
EBITDA results during the third and fourth quarters of 1998 may decline. To the
extent that new subscriber activations exceed expectations or subscriber
acquisition costs materially increase, EchoStar's EBITDA results may be
negatively impacted in the near-term because subscriber acquisition costs are
expensed as incurred.
EchoStar expects to begin production of its next generation of
digital set-top boxes during the third quarter of 1998. While there can be no
assurance, EchoStar expects that the introduction of these digital set-top
boxes may result in manufacturing cost reductions, thereby reducing subscriber
acquisition costs. Previous delays in the design of this new digital set-top
box will have a negative impact on EBITDA during the third quarter of 1998. In
the event EchoStar experiences further delays in the production of its next
generation digital set-top boxes, its inventory of digital set-top boxes, and
consequently, its future new subscriber activations, subscriber acquisition
costs and EBITDA results may be negatively impacted. While further delays are
not expected, new product introductions often involve schedule risks that can
not be anticipated or precisely quantified.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expenses
for the three months ended June 30, 1998 (including amortization of subscriber
acquisition costs of $6 million) aggregated $25 million, a decrease of $21
million as compared to the corresponding period in 1997. The decrease in
depreciation and amortization expenses principally resulted from the decrease in
amortization of subscriber acquisition costs (decrease of $27 million),
partially offset by an increase in depreciation related to the commencement of
operation of EchoStar III and other depreciable assets placed in service during
1998. Beginning in October 1997, net subscriber acquisition costs are expensed
as incurred. Consequently, no additional subscriber acquisition costs are being
deferred. The unamortized balance of such costs is expected to be fully
amortized by September 1998.
OTHER INCOME AND EXPENSE. Other expense, net totaled $29 million for
the three months ended June 30, 1998, an increase of $8 million as compared to
the same period in 1997. The increase in other expense resulted primarily from
interest expense associated with EchoStar's 12 1/2% Senior Secured Notes due
2002 (the "1997 Notes"), which were issued in June of 1997, and increases in
interest expense associated with increased accreted balances on EchoStar's 12
7/8% Senior Secured Discount Notes due 2004 (the "1994 Notes") and EchoStar's 13
1/8% Senior Secured Discount Notes due 2004 (the "1996 Notes").
15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - CONTINUED
SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 1997.
REVENUE. Total revenue for the six months ended June 30, 1998 was
$460 million, an increase of $292 million as compared to total revenue for the
six months ended June 30, 1997 of $168 million. The increase in total revenue
was primarily attributable to DISH Network subscriber growth combined with
increased revenue from EchoStar's Technology business unit.
DISH Network subscription television services revenue totaled $280
million for the six months ended June 30, 1998, an increase of $169 million, or
153%, compared to the same period in 1997. This increase was directly
attributable to the increase in the number of DISH Network subscribers. The
average number of DISH Network subscribers during the six months ended June 30,
1998 increased approximately 154% as compared to the same period in 1997.
For the six months ended June 30, 1998, DTH equipment sales and
integration services totaled $148 million, an increase of $132 million compared
to the six months ended June 30, 1997. The increase in DTH equipment sales and
integration services revenue was primarily attributable to an increase in the
volume of set-top boxes sold. DTH equipment and integration services revenue
for the six months ended June 30, 1998 principally resulted from sales of
digital set-top boxes and other equipment while revenue for the same period in
1997 related to the provision of integration services.
Satellite services revenue totaled $10 million for the six months
ended June 30, 1998, an increase of $6 million as compared to the same period in
1997. The increase in satellite services revenue was primarily attributable to
increased BTV revenue.
DISH NETWORK OPERATING EXPENSES. DISH Network operating expenses
totaled $170 million for the six months ended June 30, 1998, an increase of $97
million as compared to the same period in 1997. The increase in DISH Network
operating expenses was consistent with, and primarily attributable to, the
increase in the number of DISH Network subscribers. For the six months ended
June 30, 1998, DISH Network operating expenses represented 61% of subscription
television services revenue compared to 66% of subscription television revenue
during the corresponding period in 1997.
Subscriber-related expenses totaled $133 million for the six months
ended June 30, 1998, an increase of $78 million compared to the same period in
1997. Subscriber-related expenses totaled 48% of subscription television
services revenues for the six months ended June 30, 1998, compared to 49% during
the six months ended June 30, 1997.
Customer service center and other expenses totaled $26 million for the
six months ended June 30, 1998, an increase of $14 million as compared to the
six months ended June 30, 1997. The increase in customer service center and
other expenses resulted from increased personnel expenses to support the growth
of the DISH Network. Customer service center and other expenses totaled 9% of
subscription television services revenue during the six months ended June 30,
1998, compared to 11% of subscription television services revenue during the
same period of the prior year.
Satellite and transmission expenses increased $5 million during the
six months ended June 30, 1998, as compared to the same period during 1997. This
increase resulted from higher TT&C services expenses and other digital broadcast
center operating expenses due to an increase in the number of EchoStar's
operational DBS satellites.
COST OF SALES - DTH EQUIPMENT AND INTEGRATION SERVICES. Cost of sales
- - DTH equipment and integration services totaled $101 million for the six months
ended June 30, 1998, an increase of $86 million, as compared to the six months
ended June 30, 1997. This increase is consistent with the increase in DTH
equipment revenue.
16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - CONTINUED
MARKETING EXPENSES. Marketing expenses totaled $120 million for the
six months ended June 30, 1998, an increase of $82 million as compared to the
same period in 1997. The increase in marketing expenses was primarily
attributable to the increase in subscriber promotion subsidies. These expenses
totaled $102 million for the six months ended June 30, 1998, an increase of $71
million over the same period in 1997. The increase in subscriber promotion
subsidies resulted from increased subscriber activations and the introduction of
the 1997 Promotion in June 1997. Advertising and other expenses totaled $18
million for the six months ended June 30, 1998, an increase of $11 million over
the same period in 1997, as a result of increased marketing activity.
GENERAL AND ADMINISTRATIVE EXPENSES. G&A expenses totaled $43 million
for the six-month period ended June 30, 1998, an increase of $11 million as
compared to the same period in 1997. The increase in G&A expenses was
principally attributable to increased personnel expenses to support the growth
of the DISH Network. G&A expenses as a percentage of total revenue decreased to
9% for the six months ended June 30, 1998 compared to 19% for the corresponding
period in 1997.
EARNINGS BEFORE INTEREST, TAXES, DEPRECIATION AND AMORTIZATION.
EBITDA for the six months ended June 30, 1998 improved to $17 million compared
to negative EBITDA of $1 million during the same period in 1997. This
improvement in EBITDA principally resulted from increases in Technology and DISH
Network revenues.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expenses
for the six months ended June 30, 1998 (including amortization of subscriber
acquisition costs of $17 million) aggregated $54 million, a decrease of $33
million as compared to the corresponding period in 1997. The decrease in
depreciation and amortization expenses principally resulted from the decrease in
amortization of subscriber acquisition costs (decrease of $44 million),
partially offset by an increase in depreciation related to the commencement of
operation of EchoStar III and other depreciable assets placed in service during
1998.
OTHER INCOME AND EXPENSE. Other expense, net totaled $58 million for
the six months ended June 30, 1998, an increase of $19 million as compared to
the same period in 1997. The increase in other expense resulted primarily from
interest expense associated with the 1997 Notes, and increases in interest
expense associated with increased accreted balances on the 1994 Notes and the
1996 Notes.
LIQUIDITY AND CAPITAL RESOURCES
During the six months ended June 30, 1998, net cash flows provided by
operations totaled $19 million compared to net cash flows used in operations of
$9 million for the same period in 1997. Capital expenditures totaled $110
million and $67 million during those same periods. EchoStar's capital
expenditures during the first six months of 1998 principally related to the
ongoing construction and launch of EchoStar IV, the expansion of EchoStar's
digital broadcast operations center, and building improvements to EchoStar's new
corporate headquarters. Capital expenditures related to the construction and
launch of EchoStar IV were funded primarily from the Satellite Escrow. While
EchoStar expects its capital expenditures to decline during the remainder of
1998, there can be no assurance that these expenditures will not increase.
EchoStar expects that its future working capital, capital expenditure
(excluding additional satellite expenditures) and debt service requirements will
be satisfied from existing cash and investment balances and from cash generated
from operations. EchoStar's ability to generate positive future operating and
net cash flows is dependent upon its ability to continue to rapidly expand its
DISH Network subscriber base, and to a lesser extent on its ability to grow its
Technology and Satellite Services businesses. The amount of capital required to
fund EchoStar's remaining 1998 working capital and capital expenditure needs
will vary dependent upon the level of EchoStar's success relative to its goals.
There can be no assurance that EchoStar will be successful in achieving its
goals. EchoStar's working capital requirements could increase materially in the
event of increased subscriber acquisition costs, or in the event of a general
economic downturn, among other factors.
17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - CONTINUED
FUTURE CAPITAL REQUIREMENTS
As a result of the anomalies experienced by EchoStar III and EchoStar
IV (as previously described), and in order to fully-exploit certain of its
remaining FCC-allocated DBS frequencies, EchoStar will be required to deploy
additional DBS satellites. Further, EchoStar has applications pending with, or
licenses granted by, the FCC for a two satellite FSS Ku-band satellite system, a
two satellite FSS Ka-band satellite system, a two satellite extended Ku-band
satellite system, and a six satellite low earth orbit ("LEO") satellite system.
EchoStar does not expect insurance proceeds received from claims filed on
EchoStar III and EchoStar IV to be sufficient to deploy additional DBS
satellites and to exploit its other FCC-allocated spectrum. Therefore, EchoStar
will need to raise additional capital to fund the construction and launch of
additional satellites. Further, there may be 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,
subscriber growth in excess of that currently expected, 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.
IMPACT OF YEAR 2000 ISSUE
EchoStar has assessed and continues to assess the impact of the Year
2000 Issue on its computer systems and operations. The Year 2000 Issue exists
because many computer systems and applications currently use two-digit date
fields to designate a year. Thus, as the century date approaches, date
sensitive systems may recognize the year 2000 as 1900 or not at all. The
inability to recognize or properly treat the Year 2000 may cause computer
systems to process critical financial and operational information incorrectly.
EchoStar is currently engaged in the remediation and testing of its
critical computer systems to ensure Year 2000 compliance thereof. In connection
with this effort, EchoStar has segregated its computer systems and corresponding
Year 2000 compliance risk into three categories: internal financial and
administrative systems, service-delivery systems, and third-party systems. With
respect to EchoStar's internal financial and administrative systems, the Company
has completed the identification, modification (as necessary) and testing of all
such systems. As a result, EchoStar currently believes that its internal
financial and administrative systems are Year 2000 compliant. EchoStar
currently is completing a similar effort with respect to its service-delivery
systems and expects all such systems to be fully Year 2000 compliant by the end
of 1998. The Company also is currently assessing its vulnerability to
unexpected business interruptions due to the failure of external third-parties
to remediate their Year 2000 compliance issues. In connection with this
assessment, the Company is in the process of communicating with all of its
significant third-party business partners, suppliers and vendors to determine
the extent to which EchoStar is vulnerable to those third parties' failure to
remediate their own Year 2000 issues.
EchoStar believes its costs to successfully mitigate the Year 2000
Issue will not be material to its operations. If EchoStar's Plan is not
successful or is not completed in a timely manner, the Year 2000 Issue could
significantly disrupt EchoStar's ability to transact business with its customers
and suppliers, and could have a material impact on its operations. There can be
no assurance that the systems of other companies with which EchoStar's systems
interact also will be timely converted, or that any such failure to convert by
another company would not have an adverse effect on EchoStar's business or its
operations.
18
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
During February 1997, EchoStar and The News Corporation Limited
("News") announced an agreement (the "News Agreement") pursuant to which, among
other things, News agreed to acquire approximately 50% of the outstanding
capital stock of EchoStar. News also agreed to make available for use by
EchoStar the DBS permit for 28 frequencies at 110 DEG. West Longitude purchased
by MCI Communications Corporation 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.
In May 1997, EchoStar filed a Complaint 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. EchoStar also 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.
In June 1997, News filed an answer and counterclaims seeking
unspecified damages. News' answer denies all of the material allegations in the
First Amended Complaint and asserts numerous defenses, including bad faith,
misconduct and failure to disclose material information on the part of EchoStar
and its Chairman and Chief Executive Officer, Charles W. Ergen. The
counterclaims, in which News is joined by its subsidiary American Sky
Broadcasting, L.L.C., assert that EchoStar and Ergen breached their agreements
with News and failed to act and negotiate with News in good faith. EchoStar has
responded to News' answer and denied the allegations in their counterclaims.
EchoStar also has asserted various affirmative defenses. EchoStar is vigorously
defending against the counterclaims. The case has been set for trial commencing
March 1999, 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 subject to various other legal proceedings and claims
which arise in the ordinary course of its business. In the opinion of
management, the amount of ultimate liability with respect to those actions will
not materially affect the financial position or results of operations of
EchoStar.
19
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The following matters were voted upon at the annual meeting of
shareholders of EchoStar Communications Corporation held on May 22, 1998:
a. The election of Charles W. Ergen, James DeFranco, David K.
Moskowitz, Raymond L. Friedlob and O. Nolan Daines as directors
to serve until the 1999 annual meeting of shareholders, and
b. The ratification of the appointment of Arthur Andersen LLP as
independent auditors for the Company for the year ending December
31, 1998.
The director nominees were elected and the appointment of Arthur
Andersen as independent auditors was approved. The voting results were as
follows:
Votes
-------------------------------------
Proposal For Against Withheld
-------- ----------- ----------- -----------
ELECTION AS DIRECTOR:
Charles W. Ergen 325,153,643 - 17,800
James DeFranco 325,152,554 - 18,889
David K. Moskowitz 325,153,573 - 17,870
Raymond L. Friedlob 325,153,483 - 17,960
O. Nolan Daines 325,152,672 - 18,771
RATIFICATION OF THE APPOINTMENT OF
ARTHUR ANDERSEN LLP AS INDEPENDENT
AUDITORS FOR THE COMPANY FOR THE YEAR
ENDING DECEMBER 31, 1998 325,162,133 2,340 6,970
20
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS.
10.1* Agreement to form NagraStar LLC, dated as of June 23, 1998,
by and between Kudelski S.A., EchoStar Communications
Corporation and EchoStar Satellite Corporation.
27+ Financial Data Schedule.
- --------------------------------
* Certain provisions have been omitted and filed separately with
the Securities and Exchange Commission pursuant to a request for
confidential treatment. A confirming electronic copy is being
filed herewith.
+ Filed herewith.
(b) REPORTS ON FORM 8-K.
No reports on Form 8-K were filed during the second quarter of 1998.
21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ECHOSTAR COMMUNICATIONS CORPORATION
By: /s/ DAVID K. MOSKOWITZ
----------------------------------------------------------------
David K. Moskowitz
Senior Vice President, General Counsel, Secretary and Director
By: /s/ JOHN R. HAGER
----------------------------------------------------------------
John R. Hager
Vice President - Controller
(PRINCIPAL ACCOUNTING OFFICER)
Date: August 6, 1998
EXHIBIT 10.1
AGREEMENT TO FORM
NAGRASTAR LLC
BY AND BETWEEN
ECHOSTAR COMMUNICATIONS CORPORATION,
ECHOSTAR SATELLITE CORPORATION
AND
KUDELSKI S.A.
SUMMARY OF CONTENTS
AGREEMENT TO FORM NAGRASTAR LLC
Article I -- Definitions
Article II -- Purpose and Scope
Article III -- Entity Formation
Article IV -- Representations and Warranties
Article V -- Closing and Conditions Thereof
Article VI -- Personnel
Article VII -- Commitments to NagraStar
Article VIII -- Termination
Article IX -- Miscellaneous
FURTHER AGREEMENTS ATTACHED AS APPENDICES
A NagraStar Articles of Organization
B NagraStar Operating Agreement
C Agreements between Kudelski and EchoStar
C-1 Residual Agreement
C-2 Escrow Agreement
D Agreements between Kudelski and NagraStar
D-1 Software License Agreement
D-2 Service Agreement
D-3 Smart Card Purchase Agreement
E Agreements between NagraStar and EchoStar
E-1 Software License Agreement
E-2 Service Agreement
E-3 Smart Card Purchase Agreement
ii
AGREEMENT TO FORM NAGRASTAR LLC
THIS AGREEMENT TO FORM NAGRASTAR LLC ("Agreement"), made and entered
into as of the twenty-third day of June, 1998, by and between Kudelski S.A.
(hereinafter referred to as "Kudelski"), incorporated under the laws of
Switzerland with principal place of business at 1033 Cheseaux Switzerland,
and EchoStar Communications Corporation, a Nevada corporation with its
principal place of business at 5701 S. Santa Fe Drive, Littleton, Colorado
80120 USA (hereinafter referred to as "ECC") and EchoStar Satellite
Corporation, a Colorado corporation with its principal place of business at
5701 S. Santa Fe Drive, Littleton, Colorado 80120 USA (hereinafter referred
to as "EchoStar").
INTRODUCTION
A. ECC, EchoStar, and Kudelski have Pre-Existing Contracts for the
provision of certain services and products by Kudelski to ECC and EchoStar.
B. The parties desire to restructure their rights, duties, and obligations
under the Pre-existing Contracts, in the manner set forth in this Agreement.
C. Kudelski desires that upon completion of the transactions contemplated
by this Agreement: (i) Kudelski will be a party to certain agreements with
NagraStar and EchoStar; and (ii) except for all duties and obligations with
respect to indemnification and warranty, the Pre-existing Contracts shall
terminate and be null and void and Kudelski shall have no rights, duties, or
obligations under the Pre-existing Contracts.
D. ECC and EchoStar desire that upon completion of the transactions
contemplated by this Agreement: (i) EchoStar will be a party to certain
agreements with NagraStar and Kudelski; and (ii) except for all rights with
respect to indemnification and warranty, the Pre-existing Contracts shall
terminate and be null and void and ECC and EchoStar shall have no rights,
duties, or obligations under the Pre-existing Contracts.
NOW, THEREFORE, in consideration of the mutual agreements hereinafter
set forth, the Parties represent, warrant, covenant and agree as follows:
ARTICLE I
DEFINITIONS
For purposes of this Agreement, where written with an initial capital
letter, the following terms, words and phrases shall have the following
meanings:
1.1 AFFILIATE. The term "Affiliate" shall mean any person or entity directly
or indirectly controlling, controlled by or under common control with, a
specified person or entity.
-1-
1.2 ANCILLARY AGREEMENT(S). The term "Ancillary Agreement(s)" shall mean the
EchoStar Agreements, the Kudelski Agreements, the Escrow Agreement, and the
Residual Agreement.
1.3 CLOSING. The term "Closing" shall mean the actions taken to effect the
transactions contemplated herein, all as more specifically described in
Article V hereof.
1.4 CLOSING DATE. The term "Closing Date" shall mean the date and time at
which the Closing is held.
1.5 ECHOSTAR AGREEMENT(S). The term "EchoStar Agreement(s)" shall mean the
following agreements, by and between EchoStar and NagraStar, to be agreed
upon by EchoStar and Kudelski prior to the Closing Date: the EchoStar
Software License Agreement (Appendix E-1 to this Agreement), the EchoStar
Service and Development Agreement (Appendix E-2), and the EchoStar Smart
Card Purchase Agreement (Appendix E-3).
1.6 [CONFIDENTIAL MATERIAL REDACTED]
1.7 [CONFIDENTIAL MATERIAL REDACTED]
1.8 [CONFIDENTIAL MATERIAL REDACTED]
1.9 [CONFIDENTIAL MATERIAL REDACTED]
1.10 KUDELSKI AGREEMENT(S). The term "Kudelski Agreement(s)" shall mean the
following agreements by and between Kudelski and NagraStar, to be agreed
upon by Kudelski and EchoStar prior to the Closing Date: the Kudelski
Software License Agreement (Appendix D-1 to this Agreement), the Kudelski
Service and Development Agreement (Appendix D-2), and the Kudelski Smart
Card Purchase Agreement (Appendix D-3).
-2-
1.11 [CONFIDENTIAL MATERIAL REDACTED]
1.12 [CONFIDENTIAL MATERIAL REDACTED]
1.13 [CONFIDENTIAL MATERIAL REDACTED]
1.14 NAGRASTAR. The term "NagraStar" shall mean that certain limited liability
company formed by the Parties pursuant to Section 3.1 hereof, which shall
be named "NagraStar LLC".
1.15 OPERATING AGREEMENT. The term "Operating Agreement" shall mean those
policies, practices and procedures which shall govern the operation of
NagraStar, to be agreed upon by EchoStar and Kudelski prior to the Closing
Date and which at Closing shall be attached hereto as Appendix B.
1.16 PARTY, PARTIES. The terms "Party" or "Parties" shall mean Kudelski and/or
EchoStar as the context requires.
1.17 PRE-EXISTING CONTRACTS. The term "Pre-existing Contracts" shall mean:
(a) the Digital NASP Offer for EchoStar, by and between EchoStar and
the Nagra Kudelski Group, dated February 2, 1995; (b) the Information
Management System Offer for EchoStar, by and between ECC and the Nagra
Kudelski Group, dated April 7, 1995; and (c) the Nagravision Offer for
Support of EchoStar Operations, by and between Kudelski, and either
EchoStar or ECC (the agreement is not clear on the precise party), dated
February 5, 1997.
1.18 PRODUCT(S). The term "Products" shall mean the Smart Cards, the decoder
conditional access task, uplink datastream management systems, and any
other products or services within the scope of NagraStar's general purpose,
which the Parties may agree that NagraStar shall design, manufacture, or
distribute in accordance with Section 2.2 hereof.
1.19 [CONFIDENTIAL MATERIAL REDACTED]
-3-
[CONFIDENTIAL MATERIAL REDACTED]
1.20 SUBSIDIARY. The term "Subsidiary" shall mean any corporation more than
fifty percent (50%) of whose outstanding shares or stock representing the
right to vote (except by reason of the occurrence of a contingency) for the
election of directors or members of a similar managing body are owned or
controlled, directly or indirectly, by a specified party.
ARTICLE II
PURPOSE AND SCOPE
2.1 GENERAL PURPOSE AND INITIAL SCOPE. Subject to and upon the terms and
conditions hereinafter set out, the Parties shall take all necessary steps
required to cause the formation of a limited liability company, pursuant to
the Colorado Limited Liability Company Act, to be named "NagraStar LLC".
The purpose and initial scope of NagraStar, notwithstanding the generality
of the purposes enumerated in the Articles of Organization of NagraStar,
shall be as set forth in the Operating Agreement.
2.2 FUTURE SCOPE. In general, the future scope of the Company shall be as set
forth in the Operating Agreement.
ARTICLE III
ENTITY FORMATION
3.1 FORMATION. The Parties have agreed upon the form of NagraStar's Articles
of Organization and shall ensure that such Articles have been filed with
the appropriate authorities of the State of Colorado. Such Articles of
Organization shall, at Closing, be substantially in the form of the
attached Appendix A. In addition, the Parties shall adopt the Operating
Agreement of NagraStar, which shall be attached hereto at Closing as
Appendix B. No change shall be made in or to said Articles of Organization
or said Operating Agreement prior to the Closing Date, except with the
prior written consent of the Parties.
3.2 [CONFIDENTIAL MATERIAL REDACTED]
3.3 [CONFIDENTIAL MATERIAL REDACTED]
-4-
[CONFIDENTIAL MATERIAL REDACTED]
ARTICLE IV
[CONFIDENTIAL MATERIAL REDACTED]
-5-
[CONFIDENTIAL MATERIAL REDACTED]
-6-
[CONFIDENTIAL MATERIAL REDACTED]
ARTICLE V
CLOSING AND CONDITIONS THEREOF
5.1 DETERMINATION OF CLOSING DATE. The Closing of the transactions provided
for in this Agreement shall take place at 2:00 p.m. on June 23, 1998, at
EchoStar's main offices in Littleton, Colorado, or at such other time and
place as may be mutually agreed upon by the Parties.
5.2 EVENTS OF CLOSING. Subject to the fulfillment of the requirements of each
party set forth herein which are to be fulfilled on or before the Closing
Date, EchoStar and Kudelski shall take such action and execute and deliver
such certificates, documents and instruments as may be reasonably required
by counsel for either Party to complete the transactions contemplated by
this Agreement in accordance with its purpose and intent including, but not
limited to, the payment by each Party of the consideration for, and the
issuance of their respective certificates representing membership interests
in NagraStar as provided for in Section 3.2 hereof.
5.3 CONDUCT OF BUSINESS PENDING CLOSING. Between the date hereof and the
Closing Date, except as otherwise consented to or approved in writing by
the other parties or provided for herein, each party shall: (a) conduct its
business with respect to the technology to be made available to NagraStar
pursuant to the Kudelski Agreements solely in a manner consistent with the
intent and purpose of this Agreement and shall promptly notify the other
parties in the event it has knowledge of any facts which would adversely
affect its ability to fulfill its obligations hereunder; and (b) comply
with all applicable laws and regulations.
-7-
5.4 CONDITIONS PRECEDENT TO EACH PARTY'S OBLIGATIONS. All obligations of the
parties hereunder are subject to the fulfillment, prior to or at the
Closing, of each of the following conditions:
a Each party shall have obtained all requisite internal corporate
approvals and all consents which may be required from its shareholders
and/or board of directors in order to fully perform its obligations
hereunder;
b The representations, warranties and covenants of the parties contained
in this Agreement shall be true and correct in all material respects
at the Closing Date;
c Each party shall have performed and complied with all agreements and
conditions required by this Agreement to be performed or complied with
by it prior to or at Closing;
d Each party shall have been furnished with a certificate of the
appropriate officers of the other parties hereto, dated the Closing
Date, certifying to the best of their knowledge, in such detail as the
receiving Party may reasonably request, the fulfillment of the
conditions set forth in this Section 5.4;
e All of the agreements and other documents to be concluded and/or
delivered by the parties prior to the Closing Date and attached hereto
as appendices shall have been mutually agreed upon and shall have been
executed at Closing;
f Each party shall have been furnished with an opinion satisfactory to
it of counsel for the other parties hereto dated the Closing Date, and
addressed to the receiving party, to the effect that:
i The party is a corporation duly organized, validly existing and
in good standing under the laws of the jurisdiction in which it
was organized and incorporated.
ii The execution, delivery and performance by such party of this
Agreement, and the sale, transfer, conveyance, assignment and
deliveries contemplated hereby, have been duly authorized by all
requisite corporate action; this Agreement constitutes the valid
and binding obligation of such party, enforceable in accordance
with its terms (subject to limitations as to enforceability which
might result from bankruptcy, insolvency or other similar laws
affecting creditors' rights generally); and all other actions
and proceedings required by law or by the provisions of this
Agreement to be taken by such party prior to the Closing Date in
connection with this Agreement have been duly and validly taken.
-8-
iii Such Party's contribution to the share capital of NagraStar under
this Agreement does not require as of the Closing Date any action
by the stockholders of such Party and does not violate any of the
provisions of such Party's Articles of Incorporation, Statutes,
or By-laws;
g It shall have received from its counsel approval with respect to all
legal matters in connection with this Agreement, including
specifically assurances satisfactory to it that nothing contained
herein shall constitute a violation of any indenture agreement
pursuant to which it has issued publicly held bonds or any credit or
loan agreement, and there shall have been furnished to its counsel by
the other parties such corporate and other records and information as
they may reasonably have requested for such purposes;
h It shall have received from the other parties prior to the Closing
Date a list of all actions, suits or proceedings which are pending,
against or with respect to, or which may have a material adverse
effect upon, the technology to be made available to NagraStar pursuant
to the Kudelski Agreements; and no material suit, action or other
proceeding shall be pending before any court or governmental agency in
which it is sought to restrain or prohibit or to obtain damages or
other relief in connection with this Agreement or the consummation of
the transactions contemplated hereby;
i All authorizations, consents, waivers, approvals or other action
required in connection with the execution, delivery and performance of
this Agreement by the other parties and the consummation by the other
parties of the transactions contemplated hereby, shall have been duly
obtained and shall be in form and substance satisfactory to the
receiving party's counsel;
j All filings with any governmental department, agency or
instrumentality which are reasonably required in connection with the
transactions contemplated by this Agreement, and all required
governmental consents and approvals, including the expiration of any
notice periods or extensions thereof without objection by any
governmental department or agency to the transactions contemplated by
this Agreement, will have been at Closing completed or obtained by the
parties together or by the party obligated to complete such filing or
obtain such consent and written evidence thereof shall have been
delivered to such party; and
k Each party shall have conducted its business pending Closing strictly
in accordance with Section 5.3 hereof. No party hereto shall be
obligated, in the event it is advised by its counsel in accordance
with Subsection (g) above that any term of this Agreement constitutes
a violation of any of any indenture, credit or loan agreements, to
seek consents or waivers from any trustee or third party lender under
such agreements, and such party shall be entitled to terminate this
Agreement pursuant to Section 5.5 hereof.
-9-
5.5 FAILURE TO CLOSE. In the event that any of the above conditions precedent
have not been fulfilled as of the scheduled date of Closing, the Closing
shall be postponed; provided, however, that if the Closing does not, for
any reason, occur within sixty days of execution of this Agreement, unless
otherwise agreed upon by the Parties in writing, any party may, upon
written notice to the other parties, terminate this Agreement and no party
shall be liable for damages to the other parties or have the right to
request specific performance of this Agreement or any of the above
conditions of Closing. Further, the Pre-existing Contracts shall continue
in full force and effect.
5.6 [CONFIDENTIAL MATERIAL REDACTED]
ARTICLE VI
PERSONNEL
-10-
6.1 INITIAL PERSONNEL. Prior to the Closing Date and to the extent possible,
the Parties shall identify in the Operating Agreement those employees of
each Party if any, whose employment shall be initially transferred from the
Party to NagraStar. In addition, the Parties shall, to the extent
possible, make available those persons, if any, who, although remaining in
the employ of the Parties, shall become available to render services to
NagraStar. The Parties shall be reimbursed for the services rendered to
NagraStar by employees described in the preceding sentence in accordance
with the Operating Agreement.
6.2 BENEFIT PROGRAM. The benefits available to employees of NagraStar shall be
as set forth in the Operating Agreement.
ARTICLE VII
[CONFIDENTIAL MATERIAL REDACTED]
ARTICLE VIII
[CONFIDENTIAL MATERIAL REDACTED]
ARTICLE IX
MISCELLANEOUS
-11-
9.1 NOTICES. The parties choose the following addresses as the addresses at
which they will accept service of all documents and notices relating to
this Agreement:
As to EchoStar and ECC: EchoStar Satellite Corporation
5701 S. Santa Fe Drive
Littleton, CO 80120
USA
Attn: David Moskowitz
Fax: (303) 723-1699
As to Kudelski: Kudelski SA
1033 Cheseaux
SWITZERLAND
Attn: Nicolas Goetschmann
Fax: 41 21/732 0300
Any notice to be given by a party to the other parties pursuant to this
Agreement shall be given in writing in the English language by prepaid
registered post, by facsimile or shall be delivered by hand (delivery by
hand must be acknowledged by written receipt from a duly authorized person
at the office of the addressee), provided that:
a any notice given by prepaid registered post shall be deemed to have
been received by the addressee, in the absence of proof to the
contrary, 14 days after the date of postage;
b any notice delivered by hand during normal business hours shall be
deemed to have been received by the addressee, in the absence of proof
to the contrary, at the time of delivery; and
c any notice given by facsimile shall be deemed to have been received by
the addressee, in the absence of proof to the contrary, immediately
upon the issuance by the transmitting facsimile machine, of a report
confirming correct transmission of all the pages of the document
containing the notice or upon receipt by the transmitting facsimile
machine, at the end of the notice being transmitted, of the automatic
answer-back of the receiving facsimile machine.
9.2 [CONFIDENTIAL MATERIAL REDACTED]
9.3 ASSIGNMENT. This Agreement shall not be assigned by any party, except upon
the prior written consent of the other parties.
-12-
9.4 CONFIDENTIALITY. The parties agree that this Agreement is confidential and
no party shall disclose any of the commercial, business, technical,
operational, or legal details of this Agreement (the "Confidential
Information") in any manner, including but not limited to press releases or
other publicity of any nature without the prior written approval of the
other parties. The obligations imposed upon the parties herein shall
survive termination of this Agreement indefinitely, but shall not apply to
Confidential Information which is:
a or becomes generally available to the public through no wrongful act
of the party receiving the Confidential Information (the "Receiving
Party");
b already lawfully in the possession of the Receiving Party and not
subject to an existing agreement of confidentiality between the
parties;
c received from a third party without restriction and without breach of
this Agreement;
d independently developed by the Receiving Party; or
e released pursuant to the requirements imposed on the party by U.S. or
Swiss securities laws, or the binding order of a government agency or
court, so long as prior to any such release the releasing party
provides the other parties with the greatest notice permitted under
the circumstances, so that the party disclosing the Confidential
Information may seek a protective order or other appropriate remedy.
In any such event, the releasing party will disclose only such
Confidential Information as is legally required and will exercise
reasonable efforts to obtain confidential treatment for any
Confidential Information being disclosed.
9.5 FURTHER ASSURANCES. The parties agree to execute such other instruments
and documents and to take such other action as may be necessary to effect
the purposes of this Agreement.
9.6 AMENDMENT. Any and all agreements by the parties to amend, change, extend,
review or discharge this Agreement, in whole or in part, shall be binding
on the parties only if such agreements are in writing and executed by the
party agreeing to be bound thereby.
9.7 HEADINGS, SECTIONS, ETC. The various headings in this Agreement are
inserted for convenience only and shall not affect the meaning or
interpretation of this Agreement or any Section or provision hereof.
References in this Agreement to any Section are to such Section of this
Agreement.
9.8 SUCCESSORS. All covenants, stipulations and promises in this Agreement
shall be binding upon and inure to the benefit of the parties and their
respective successors, assigns and legal representatives.
-13-
9.9 COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original, and all of
which shall constitute together one and the same agreement. The parties
may each execute this Agreement by signing any such counterpart.
9.10 GOVERNING LAW; ARBITRATION. This Agreement, and the performances of the
parties hereunder, shall be governed by the laws of the State of New York
without giving effect to the principles of conflicts of laws that would
otherwise provide for the application of the substantive law of another
jurisdiction. Should any dispute between the parties arise, the parties
agree that the sole jurisdiction and venue for the resolution of any such
dispute shall be English language binding arbitration conducted in the New
York City metropolitan area in accordance with the Commercial Rules of the
American Arbitration Association, which rules shall include the right to
seek appropriate injunctive relief in such arbitration and are deemed to be
incorporated by reference into this clause. Unless the arbitrators
determine otherwise, the losing party in any arbitration shall pay the
costs of the prevailing party.
9.11 CONSTRUCTION. Wherever possible, each provision of this Agreement and each
related document shall be interpreted in such manner as to be effective and
valid under applicable law, but if any provision of this Agreement, or any
related document, shall be prohibited by or invalid under applicable law,
such provision shall be ineffective only to the extent of such prohibition
or invalidity without invalidating the remainder of such provision or the
remaining provisions of this Agreement or such related documents.
9.12 WAIVERS. No failure on the part of any party to exercise and no delay in
exercising, any right or remedy hereunder shall operate as a waiver
thereof; nor shall any single or partial exercise or any right or remedy
hereunder preclude any other or further exercise thereof or the exercise of
any other right or remedy granted hereby or by any related document or at
law or in equity.
9.13 COMMITMENTS FROM SUBSIDIARIES. The parties agree that they will cause
their Subsidiaries to act in a manner as to effect the purposes, provisions
and obligations of such party under this Agreement.
9.14 ENTIRE AGREEMENT. This Agreement, including the appendices attached
hereto, constitute and express the entire agreement of the parties to all
the matters herein referred to, all previous discussions, promises,
representations and understandings relative thereto, including all
Pre-existing Contracts between the parties are herein merged and
superseded.
9.15 BROKERS. The parties acknowledge and agree that all negotiations relative
to this Agreement and to the transactions contemplated hereby have been
carried on without the intervention of any broker or finder, and no such
person or entity has any valid claim against it for a brokerage commission
or other like payment. Each party shall hold the other parties and
NagraStar harmless from any claim in respect thereto arising out of its
respective actions or
-14-
conduct, but shall not be responsible for such claims arising with respect
to the conduct of the other parties and NagraStar.
9.16 SURVIVAL. Any provision of this Agreement which logically would be
expected to survive termination or expiration, shall survive for a time
period reasonable under the circumstances, whether or not specifically
provided in the Agreement.
9.17 [CONFIDENTIAL MATERIAL REDACTED]
-15-
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first above written.
ECHOSTAR SATELLITE CORPORATION KUDELSKI S.A.
By: By:
Title: Title:
Date: Date:
By signing below EchoStar Communications Corporation hereby acknowledges
its acceptance of the provisions of Section 5.6 of this Agreement.
ECHOSTAR COMMUNICATIONS CORPORATION
By:
Title:
Date:
-16-
[Appendix A]
ARTICLES OF ORGANIZATION
NAGRASTAR LLC
I, the undersigned natural person of the age of eighteen years or more,
acting as organizer of a limited liability company under the Colorado Limited
Liability Company Act, adopt the following Articles of Organization for such
limited liability company:
FIRST: The name of the limited liability company is "NagraStar LLC".
SECOND: The principal place of business of the company is 90 Inverness Circle
East, Englewood, Colorado 80112.
THIRD: The street address of the initial registered office of the limited
liability company is NagraStar LLC, Legal Department, 5701 S. Santa Fe Drive,
Littleton, Colorado 80120.
The mailing address of the initial registered office of the limited liability
company is NagraStar LLC, Legal Department, 5701 S. Santa Fe, Littleton,
Colorado 80120. The name of its proposed registered agent in Colorado at
that address is David Moskowitz.
FOURTH: The management of the company is vested in the members.
FIFTH: The names and the business addresses of the members are:
EchoStar Satellite Corporation Kudelski SA
90 Inverness Circle East 1033 Cheseaux
Englewood, Colorado 80112 SWITZERLAND
SIXTH: The name and address of the organizer is:
Nicholas R. Sayeedi
90 Inverness Circle East
Englewood, Colorado 80112
/s/ NICHOLAS R. SAYEEDI Date: 12-31-97
- -------------------------------
Nicholas R. Sayeedi
I, David Moskowitz, hereby consent to the appointment as initial
registered agent for NagraStar LLC.
/s/ DAVID K. MOSKOWITZ Date: 12-31-97
- -------------------------------
David Moskowitz
[A] 1
[APPENDIX B]
OPERATING AGREEMENT
OF
NAGRASTAR LLC
This Operating Agreement is made and entered into as of the twenty-third
day of June, 1998 by and among NagraStar LLC, a Colorado limited liability
company organized under the Colorado Limited Liability Act (the "Company"),
EchoStar Satellite Corporation, a Colorado corporation with principal office
at 5701 S. Santa Fe Drive, Littleton, Colorado 80120 ("EchoStar"), and
Kudelski SA, a Swiss corporation with principal office at 1033 Cheseaux,
Switzerland ("Kudelski").
Certain terms used in this Operating Agreement are defined in Article 11.
The parties agree as follows:
ARTICLE 1. FORMATION OF COMPANY
1.1. RECOGNITION OF ORGANIZATION OF COMPANY. The Company was organized as a
Colorado limited liability company upon the filing of the Articles of
Organization by the Colorado Secretary of State, effective as of the date of
the Articles of Organization.
1.2. NAME. The name of the Company is "NagraStar LLC".
1.3. PLACES OF BUSINESS. The Company may locate its business at such place
or places as the Members may from time to time deem advisable. The Company's
principal place of business shall initially be located at 90 Inverness Circle
East, Englewood, Colorado 80112, with a second office located in Cheseaux,
Switzerland.
1.4. REGISTERED OFFICES AND REGISTERED AGENTS. The Company's initial
registered office in the State of Colorado shall be at the office of its
registered agent at 5701 S. Santa Fe Drive, Littleton, Colorado 80120, and
the name of its initial registered agent at such address shall be David
Moskowitz. The registered office or registered agent, or both, in the State
of Colorado may be changed from time to time by filing the address of the new
registered office or the name of the new registered agent, as the case may
be, with the Colorado Secretary of State pursuant to the Colorado Act. The
Company shall appoint registered agents and maintain registered offices in
other jurisdictions as may be required by law.
ARTICLE 2. PURPOSES OF COMPANY
2.1 GENERAL PURPOSE AND INITIAL SCOPE. The purpose and initial scope of the
Company shall be: (i) to support EchoStar's satellite broadcast operations
through the ongoing maintenance and development of software and hardware for
all software and hardware systems provided to EchoStar and its Affiliates by
Kudelski and its Affiliates as of the date of this Operating Agreement, by
entering
[B] 1
into the Kudelski Agreements, the EchoStar Agreements, and the Escrow
Agreement; and (ii) to pursue the development and enhancement of existing and
future uplink datastream management systems and other systems to accommodate
the future needs of EchoStar and its Affiliates in cooperation with Kudelski.
2.2 [CONFIDENTIAL MATERIAL REDACTED]
ARTICLE 3. RIGHTS, DUTIES, AND AUTHORITY OF MEMBERS
3.1. MANAGEMENT. The business and affairs of the Company shall be managed
by its Members, who, together with the CEO, shall establish the priorities of
the Company. Each Member shall be entitled to participate in that
management, and shall be a Co-CEO of the Company. Except for cases in which
a Member is expressly permitted by this Operating Agreement or by
non-waivable provisions of applicable law to act alone, no action shall be
taken by any Member on behalf of the Company unless the action: (a) is
authorized by this Operating Agreement; (b) has been authorized by both
Members acting in agreement; or (c) is inherent in or reasonably implied by
authority granted by this Operating Agreement or by the Members acting
together.
3.2. CERTAIN AUTHORITY OF MEMBERS. Except as otherwise provided in this
Operating Agreement, no Member shall have, or delegate to any person, the
authority to do any of the following without unanimous consent of the Members:
(a) Perform any act in contravention of this Operating Agreement;
(b) Knowingly perform any act that would cause the Company to conduct
business in a state or other foreign jurisdiction which has not enacted
legislation permitting the Company to transact business in the state as a
foreign limited liability company with limited liability for its Members; or
(c) Cause the Company to admit any additional Members.
3.3. FURTHER RESTRICTIONS. Except as authorized pursuant to this Operating
Agreement (including the authority granted to the COO and CTO under Article 4)
or by written authorization of both Members, no attorney-in-fact, employee,
or other agent of the Company shall have any power or authority to bind the
Company in any way, to pledge its credit or to render it liable monetarily
for any purpose. Without limiting the generality of the foregoing, no debt
shall be contracted or liability incurred by or on behalf of the Company
except as provided in this Operating Agreement or as determined by the
[B] 2
Members, or, to the extent permitted under the Colorado Act, by agents or
employees of the Company expressly authorized by the Members to contract such
debt or incur such liability.
3.4. CONFLICTING INTEREST TRANSACTIONS.
(a) As used in this Section 3.4, "conflicting interest transaction"
means any of the following:
(1) A loan or other assistance by the Company to a Member or to a
Related Entity, other than loans provided in accordance with the provisions
of Section 5.3;
(2) A guaranty by the Company of an obligation of a Member or of
an obligation of a Related Entity; or
(3) A contract or transaction between the Company and a Member or
between the Company and a Related Entity.
(b) As used in this Section 3.4, "Related Entity" means, with respect
to a Member, an Entity that is an Affiliate of the Member or has a financial
interest therein.
(c) No conflicting interest transaction shall be void or voidable or be
enjoined, set aside, or give rise to an award of damages or other sanctions
in a proceeding by the Company or by any Member, directly or by or in the
right of the Company, solely because the conflicting interest transaction
involves a Member or a Related Entity or solely because the Member
participates in vote of the Members with respect to such conflicting interest
transaction, or solely because the Member's vote is counted for such purpose,
if:
(1) The material facts as to the Member's relationship or interest
and as to the conflicting interest transaction are disclosed or are known to
the other Member and the Members in good faith authorize, approve, or ratify
the conflicting interest transaction; or
(2) The conflicting interest transaction is fair as to the Company
as of the time it is undertaken by, or becomes binding upon, the Company.
3.5. [CONFIDENTIAL MATERIAL REDACTED]
3.6. [CONFIDENTIAL MATERIAL REDACTED]
[B] 3
[CONFIDENTIAL MATERIAL REDACTED]
3.7. COMPENSATION OF MEMBERS. No Member shall be entitled to compensation
for services rendered to the Company except as may be determined from time to
time by agreement of the Members.
3.8. RIGHT TO RELY ON CERTIFICATES OF MEMBERS. Any Person dealing with the
Company may rely, without duty of further inquiry, upon a certificate signed
by any Member as to:
(a) The identity of the Member;
(b) The existence or nonexistence of any fact or facts which constitute
a condition precedent to acts by any Member or which are in any other manner
germane to the business or affairs of the Company; or
(c) The identity and authority of Persons who are authorized to act
for, or to execute or deliver any instrument or document on behalf of, the
Company, and the scope of such authority.
3.9. MEMBER'S LIABILITY.
(a) No Member shall be liable under any judgment, decree, or order of a
court, or in any other manner, for any debt, obligation, or liability of the
Company.
(b) No Member shall be liable to the Company or to any Member for any
loss or damage sustained by the Company or by any Member, unless the loss or
damage is the result of fraud, deceit, gross negligence, willful misconduct,
breach of this Operating Agreement or a wrongful taking by the Member. It is
expressly recognized that no Member guarantees, in any way, the return of any
Member's Capital Contribution, a profit for any Member from the operations of
the Company, or any distribution from the Company.
3.10. MEMBERS HAVE NO EXCLUSIVE DUTY TO COMPANY. No Member shall be required
to manage the Company as a sole and exclusive function. Any Member may have
other business interests and may engage in other activities in addition to
those relating to the Company. Neither the Company nor any Member shall have
any right, by virtue of this Operating Agreement, to share or participate in
such other interests or activities of any Member or to the income or proceeds
derived therefrom.
3.11. COMPANY DOCUMENTS.
(a) The Recordkeeper shall maintain and preserve, until at least five
years after the dissolution of the Company and longer if necessary and
appropriate in connection with the winding up of its
[B] 4
business and affairs, all accounts, books, and other Company documents which
are reasonably necessary as a record of its business and affairs, in which
shall be entered fully and accurately all transactions and other matters
relating to the Company's business in such detail and completeness as is
customary and usual for businesses of the type engaged in by the Company.
Such documents shall be maintained at the principal executive office of the
Company.
(b) Without limiting the generality of Section 3.11(a), the
Recordkeeper shall maintain and preserve the following:
(1) A current list of the full name and last-known business,
residence, or mailing address of each Member, both past and present;
(2) A copy of the Articles of Organization and all amendments
thereto, together with executed copies of any powers of attorney pursuant to
which any amendment has been executed;
(3) A copy of this Operating Agreement, including Schedule A, as
in effect from time to time,
(4) Copies of all writings, if any, other than this Operating
Agreement, which obligate a Member to contribute cash, property or services
to the Company, and copies of all writings compromising the obligation of any
member to contribute cash, property, or services to the Company;
(5) Minutes of every meeting of the Members and copies of all
written consents by which Members take action;
(6) Copies of the Company's U.S. and foreign federal, state, and
local income tax returns and reports, if any, for the three most recent years;
(7) Copies of all financial statements of the Company for the
three most recent years; and
(8) Records and accounts of all operations and expenditures of the
Company.
(c) Upon request, each Member shall have the right to inspect and copy
such Company documents, at the requesting Member's expense; provided,
however, that access to any such documents may be restricted as the Members
determine in order to preserve intellectual property of the Company from
misuse.
(d) The initial Recordkeeper shall be Jason Kiser. The Members may by
agreement appoint a new Recordkeeper at any time. If a new Recordkeeper is
appointed by the Members, the former Recordkeeper shall transfer to the new
Recordkeeper all Company items set forth under this Article 3, together with
all other Company documents and data in the possession of, or under the
control of the former Recordkeeper. If the Members cannot agree on a
Recordkeeper at any time, each Member
[B] 5
may designate a separate Recordkeeper who shall have access to all records of
the Company specified in this Article 3.
3.12. ECONOMIC PRIORITY. Except as may be provided in this Operating
Agreement, no Member shall have priority over any other Member, whether as to
Net Profits, Net Losses, distributions, or other economic matters; provided,
however, that this Section 3.12 shall not apply to loans (as distinguished
from Capital Contributions) which a Member has made to the Company.
ARTICLE 4. [CONFIDENTIAL MATERIAL REDACTED]
[B] 6
[CONFIDENTIAL MATERIAL REDACTED]
[B] 7
[CONFIDENTIAL MATERIAL REDACTED]
[B] 8
[CONFIDENTIAL MATERIAL REDACTED]
ARTICLE 5. [CONFIDENTIAL MATERIAL REDACTED]
[B] 9
[CONFIDENTIAL MATERIAL REDACTED]
[B] 10
[CONFIDENTIAL MATERIAL REDACTED]
ARTICLE 6. [CONFIDENTIAL MATERIAL REDACTED]
[B] 11
[CONFIDENTIAL MATERIAL REDACTED]
[B] 12
[CONFIDENTIAL MATERIAL REDACTED]
[B] 13
[CONFIDENTIAL MATERIAL REDACTED]
ARTICLE 7. ADMINISTRATIVE
7.1. BUDGET. The operating budget for the first twelve months of the
Company's operation is attached as Schedule B to this Operating Agreement. A
thirty-six (36) month budget shall be prepared annually by the COO in
consultation with the Financial Review Committee and submitted to the Members
for approval together with a business plan for the corresponding time period.
If the Members cannot agree on the budget for any specified year, the total
budget for such year shall be the previous year's budget as adjusted by the
use of a Budget Escalator in the following manner: the index to be used shall
be the U.S. Department of Labor's Bureau of Labor Statistics Consumer Price
[B] 14
Index, Wage Rate, All Urban Consumers, U.S. City Average, 1997 = 100
(hereinafter referred to as the "CPI"). The base index shall be that
published nearest to the date hereof. The increase hereunder shall be
proportional to the increase in the CPI as above, over the base index,
provided however, that in no case shall any year's budget exceed the
projected revenues for the Company in such year.
7.2. [CONFIDENTIAL MATERIAL REDACTED]
7.3. [CONFIDENTIAL MATERIAL REDACTED]
7.4. FACILITIES, EQUIPMENT, AND PERSONNEL. The Members agree to procure and
make available to the Company during the term of this Operating Agreement,
for good and valuable consideration to be agreed upon by the parties, such
office equipment and facilities (including land, buildings, office equipment,
tools and fixtures) as may be necessary for the development and support
engineering of the Products, and such personnel, including payroll,
accounting, legal, and human resources professionals, as may be necessary for
the Company to properly function. The Company shall provide its own computer
equipment, software, and related accessories.
7.5. [CONFIDENTIAL MATERIAL REDACTED]
7.6. [CONFIDENTIAL MATERIAL REDACTED]
[B] 15
ARTICLE 8. RESTRICTIONS ON TRANSFERABILITY; ACQUISITION OF CONTROL
8.1. GENERAL. Except as provided in this Article 8, no Member shall have
the right to transfer or encumber any part of the Member's Membership
Interest, and any purported transfer or encumbrance (including the granting
of a security interest) of all or part of a Membership Interest, whether
voluntarily or involuntarily, shall be void. Each Member hereby acknowledges
the reasonableness of the restrictions on sale and gift of Membership
Interests imposed by this Operating Agreement, in view of the Company
purposes and the relationship of the Members, and agrees that such
restrictions shall be specifically enforceable. Special provisions relating
to security interests and other encumbrances are set forth in Section 8.2.
8.2. [CONFIDENTIAL MATERIAL REDACTED]
8.3 [CONFIDENTIAL MATERIAL REDACTED]
8.4 [CONFIDENTIAL MATERIAL REDACTED]
[B] 16
[CONFIDENTIAL MATERIAL REDACTED]
ARTICLE 9. [CONFIDENTIAL MATERIAL REDACTED]
[B] 17
[CONFIDENTIAL MATERIAL REDACTED]
[B] 18
[CONFIDENTIAL MATERIAL REDACTED]
ARTICLE 10. [CONFIDENTIAL MATERIAL REDACTED]
[B] 19
[CONFIDENTIAL MATERIAL REDACTED]
[B] 20
[CONFIDENTIAL MATERIAL REDACTED]
[B] 21
[CONFIDENTIAL MATERIAL REDACTED]
ARTICLE 11. DEFINITIONS
The following terms used in this Operating Agreement have the meanings
ascribed to them in this Article 11:
11.1. "Articles of Organization" means the Articles of Organization of the
Company as filed with the Secretary of State of Colorado, as the same may be
amended from time to time.
11.2. "Affiliate" means, with respect to any Person (such Person being
referred to in this Section 11.2 as the "Target Person"), (a) any Person
directly or indirectly controlling, controlled by, or under common control
with the Target Person, (b) any Person owning, of record or beneficially,
ten percent or more of the outstanding voting interests of the Target Person,
unless another Person owns, beneficially, a larger percentage of the
outstanding voting interests of the Target Person, (c) any
[B] 22
Person who is a director, officer, partner, or trustee of, or is in a similar
capacity with respect to, the Target Person, or (d) any Person who is a
director, officer, partner, or trustee of, or is in a similar capacity with
respect to, or is holder of ten percent or more of the voting interests of,
any Person described in clauses (a) through (c) of this sentence. For
purposes of this definition, the term "controls," "is controlled by," or "is
under common control with" shall refer to the possession, directly or
indirectly, of the power to direct or cause the direction of the management
and policies of the Target Person, whether through the ownership of voting
securities, by contract, or otherwise.
11.3. "Capital Account" of a Member, as of any given date, means the Capital
Contribution to the Company by the Member as adjusted to the date in question
pursuant to Article 5.
11.4. "Capital Contribution" means any contribution, whenever made, by a
Member to the capital of the Company, whether in cash or property. Whether a
payment of cash or a transfer of property is a contribution to the capital of
the Company, and, therefore, a Capital Contribution, shall be determined by
agreement of the Members.
11.5. "Capital Interest" means the proportion that a Member's positive
Capital Account balance, if any, bears to the aggregate Capital Accounts of
all Members whose Capital Accounts have positive balances, as such proportion
may change from time to time. Negative Capital Account balances are
disregarded in the determination of "Capital Interests."
11.6. "CEO" or "Co-CEO" means one of the two Members.
11.7. "Code" means the U.S. Internal Revenue Code of 1986 or corresponding
provisions of superseding Federal revenue laws.
11.8. "Colorado Act" means the Colorado Limited Liability Company Act or any
act that supersedes the Colorado Limited Liability Company Act, as the same
may be amended from time to time.
11.9. "Company" is defined in the first paragraph of this Operating
Agreement.
11.10. "Control" of a company means the ability to appoint a majority of the
directors on its governing board or the ability to exercise similar operating
control through other means.
11.11. "COO" means the Company's Chief Operating Officer, as appointed
pursuant to Section 4.2 hereof.
11.12. "CTO" means the Company's Chief Technical Officer, as appointed
pursuant to Section 4.3 hereof.
11.13. "Deficit Capital Account" means, with respect to any Member, the
deficit balance, if any, in the Member's Capital Account as of the end of the
taxable year, after giving effect to the following adjustments:
[B] 23
(a) Credit to such Capital Account of all amounts which the Member is
treated as being obligated to restore under Section 1.704-1(b)(2)(ii)(c) of
the Treasury Regulations, as well as any addition thereto pursuant to the
next to last sentence of Sections 1.704-2(g)(1) and (i)(5) of the Treasury
Regulations, after taking into account thereunder any changes during such
year in partnership minimum gain (as determined in accordance with
Section 1.704-2(d) of the Treasury Regulations) and in the minimum gain
attributable to any partner nonrecourse debt (as determined under
Section 1.704-2(i)(3) of the Treasury Regulations); and
(b) Debit to such Capital Account the items described in
Sections 1.704-1(b)(2)(ii)(d)(4), (5) and (6) of the Treasury Regulations.
This definition of Deficit Capital Account is intended to comply with the
provision of Treasury Regulations Sections 1.704-1(b)(2)(ii)(d) and 1.704-2,
and is to be interpreted consistently with those provisions.
11.14. "Depreciation" means, with respect to each asset, for each fiscal
year, an amount equal to the depreciation, amortization, or other cost
recovery deduction allowable with respect to the asset for such fiscal year;
provided, however, that, if the Gross Asset Value of the asset differs from
its adjusted basis for Federal income tax purposes at the beginning of such
fiscal year, "Depreciation" shall be an amount which bears the same ratio to
such beginning Gross Asset Value as the Federal income tax depreciation,
amortization, or other cost recovery deduction for such fiscal year bears to
such beginning adjusted tax basis; and provided, further, that, if the
adjusted basis for Federal income tax purposes of an asset at the beginning
of such fiscal year is zero, "Depreciation" shall be determined with
reference to such beginning Gross Asset Value using any reasonable method
selected by the Members.
11.15. "EchoStar Agreement(s)" means the following agreements of even date
herewith, by and between EchoStar and the Company: the EchoStar Software
License Agreement, the EchoStar Service and Development Agreement, and the
EchoStar Smart Card Purchase Agreement.
11.16. [CONFIDENTIAL MATERIAL REDACTED]
11.17. [CONFIDENTIAL MATERIAL REDACTED]
11.18. [CONFIDENTIAL MATERIAL REDACTED]
11.19 "Effective Date" means July 1, 1998.
[B] 24
11.20. "Entity" means a corporation, partnership, limited liability company,
trust, or any other legally recognized person other than a human being.
11.21. [CONFIDENTIAL MATERIAL REDACTED]
11.22. "Financial Review Committee means a committee which shall provide
advice, review, and approval of the Company financial operating issues and
budgets. The committee shall consist of four persons, with each Member
having the right to appoint, remove, replace, and appoint temporary
substitutes or proxies for two members of the committee.
11.23. "Fiscal Year" means the Company's fiscal year, which shall be the
calendar year.
11.24. "Gross Asset Value" means, with respect to any asset, the asset's
adjusted basis for Federal income tax purposes; provided, however, that:
(a) The initial Gross Asset Value of an asset contributed by a Member
to the Company shall be the gross fair market value of the asset at the time
of such contribution, as determined by the Members; provided, however, that
the initial Gross Asset Values of the assets (other than cash) contributed to
the Company pursuant to Section 5.2 hereof shall be as set forth in Schedule A.
(b) The Gross Asset Values of all assets shall be adjusted to equal
their respective gross fair market values, as determined by the Members, as
of the following times: (1) the acquisition of an interest (as that term is
used in Regulations Section 1.704-1(b)(2)(iv)(f)(5)(i)) by a Member in
exchange for more than a de minimis contribution of property (including
money); (2) the distribution by the Company to a Member of more than a de
minimis amount of property as consideration for a Membership Interest; and
(3) the liquidation of the Company within the meaning of Regulations
Section 1.704-1(b)(2)(ii)(g); provided, however, that adjustments pursuant to
clauses (1) and (2) of this Section 11.24(b) shall be made only if the
Members reasonably determine that such adjustments are necessary or
appropriate to reflect the relative economic interests of the Members in the
Company;
(c) The Gross Asset Value of an asset distributed to a Member shall be
adjusted to equal the gross fair market value of the asset on the date of
distribution as determined by the Members, and
(d) The Gross Asset Values of assets shall be increased (or decreased)
to reflect any adjustments to the adjusted basis of such assets pursuant to
Code Section 734(b) or Code Section 743(b), but only to the extent that such
adjustments are taken into account in determining Capital Accounts pursuant
to Regulation Section 1.704-1(b)(2)(iv)(m), Section 11.31(d) (relating to the
definition of Net Profits and Net Losses), and Section 5.4; provided,
however, that Gross Asset Values shall not be adjusted pursuant to this
definition to the extent the Members determine that an adjustment pursuant to
Section 11.24(b) is necessary or appropriate in connection with a transaction
that would otherwise result in an adjustment pursuant to this Section 11.24(d).
If the Gross Asset
[B] 25
Value of an asset has been determined or adjusted pursuant to Section 11.24(a),
11.24(b), or 11.24(d), then such Gross Asset Value shall thereafter be
adjusted by the Depreciation taken into account with respect to such asset
for purposes of computing Net Profits and Net Losses.
11.25. "Kudelski Agreement(s)" means the following agreements of even date
herewith by and between Kudelski and the Company: the Kudelski Software
License Agreement, the Kudelski Service and Development Agreement, and the
Kudelski Smart Card Purchase Agreement.
11.26. [CONFIDENTIAL MATERIAL REDACTED]
11.27. [CONFIDENTIAL MATERIAL REDACTED]
11.28. [CONFIDENTIAL MATERIAL REDACTED]
11.29. "Member" means EchoStar or Kudelski.
11.30. "Membership Interest" means a Member's entire interest in the
Company, and such other rights and privileges that the Member may enjoy by
virtue of being a Member.
11.31. "Net Profits" and "Net Losses" means for each taxable year of the
Company an amount equal to the Company's net taxable income or loss for such
year as determined for Federal income tax purposes (including separately
stated items) in accordance with the accounting method and rules used by the
Company and in accordance with Section 703 of the Code, subject to the
following provisions:
(a) Any item of income, gain, loss, or deduction allocated to Members
pursuant to Section 6.3 shall not be taken into account in computing Net
Profits or Net Losses;
(b) Any income of the Company that is exempt from Federal income tax
and is not otherwise taken into account in computing Net Profits and Net
Losses pursuant to this definition shall be added to such net taxable income
or loss;
(c) Any expenditure of the Company described in Section 705(a)(2)(B) of
the Code and not otherwise taken into account in computing Net Profits and
Net Losses shall be subtracted from such net taxable income or loss;
(d) In the event the Gross Asset Value of an asset is adjusted pursuant
to Section 11.24(b) or 11.24(c), the amount of such adjustment shall be taken
into account, as gain or loss from the disposition of such asset, in
computing Net Profits or Net Losses;
[B] 26
(e) Gain or loss resulting from the disposition of an asset with
respect to which gain or loss is recognized for Federal income tax purposes
shall be computed with reference to the Gross Asset Value of the asset,
notwithstanding that the adjusted tax basis of the asset differs from its
Gross Asset Value;
(f) In lieu of the depreciation, amortization, and other cost recovery
deductions taken into account in computing such taxable income or loss, there
shall be taken into account, in computing Net Profits or Net Losses,
Depreciation for such fiscal year; and
(g) To the extent an adjustment to the adjusted tax basis of an asset
pursuant to Section 734(b) of the Code or Section 743(b) of the Code is
required pursuant to Section 1.704-1(b)(2)(iv)(m)(4) of the Treasury
Regulations to be taken into account in determining Capital Accounts as a
result of a distribution other than in liquidation of a Membership Interest,
the amount of such adjustment shall be treated as an item of gain (if the
adjustment decreases the basis of the asset) from the disposition of the
asset and shall be taken into account for purposes of computing Net Profits
or Net Losses.
11.32. "Operating Agreement" means this Operating Agreement, as amended from
time to time.
11.33. "Person" means a human being or an Entity and shall include the
heirs, executors, administrators, legal representatives, successors, and
assigns of a "Person" where the context permits or requires.
11.34. "Products" shall mean the Smart Cards and uplink datastream
management systems obtained from Kudelski, as well as any other products or
services within the scope of the Company's general purpose, which the Members
may agree that the Company shall design, manufacture, or distribute pursuant
to Section 2.2 hereof.
11.35. "Recordkeeper" means the Person appointed by the Members, pursuant to
Section 3.11, to keep the books and records of the Company and to perform the
other duties specified in this Operating Agreement as duties of the
Recordkeeper.
11.36. "Sale" and its derivatives means transfer for consideration.
11.37. "Schedule A" means Schedule A to this Operating Agreement reflecting
matters such as Members' identities and share of Net Profits and Net Losses,
which schedule bears the most recent date and is signed by the Members.
Schedule A is prima facie evidence of the agreement of the parties hereto
with respect to the matters reflected therein, but it is recognized that,
through inadvertence or otherwise, Schedule A may not be modified from time
to time as required to reflect the parties' agreement, or as circumstances,
change, and, accordingly, any party to this Operating Agreement may, by a
preponderance of the evidence, show that Schedule A is not an accurate
reflection of the parties' agreement.
[B] 27
11.38. "Securities Acts" means the Securities Act of 1933, the Colorado
Securities Act, or the securities laws of any other state or country.
11.39. [CONFIDENTIAL MATERIAL REDACTED]
11.40. [CONFIDENTIAL MATERIAL REDACTED]
11.41. [CONFIDENTIAL MATERIAL REDACTED]
11.42. "Subsidiary" means any corporation more than fifty percent (50%) of
whose outstanding shares or stock representing the right to vote (except by
reason of the occurrence of a contingency) for the election of directors or
Members of a similar managing body are owned or controlled, directly or
indirectly, by a specified party.
11.43. "Swiss Office" means a Company facility located in Switzerland,
selected by Kudelski pursuant to Section 7.5.
11.44. "Technical Review Committee" means a committee which shall provide
advice, review, and approval of the Company product and technical direction.
The committee shall consist of six persons, with each Member having the right
to appoint, remove, replace, and appoint temporary substitutes or proxies for
three members of the committee.
11.45. "Transfer" includes sale, bequest, assignment, and all other modes of
transfer including the creation of a security interest or encumbrance.
11.46. "Treasury Regulations" shall include temporary and final regulations
promulgated under the Code that are in effect as of the date of the filing of
the Articles of Organization and the corresponding sections of any
regulations subsequently promulgated that amend or supersede such
regulations. The term "Treasury Regulations" shall also include regulations
that have been proposed by the Internal Revenue Service under the Code at or
prior to the date of the filing of the Articles of Organization, and have not
been withdrawn at or prior to such date, as well as the corresponding
provisions of any regulations subsequently promulgated that, amend or
supersede such proposed regulations.
[B] 28
11.47. "Upgrades" are enhancements, modifications, updates, bug fixes, and
direct extensions to software.
11.48. [CONFIDENTIAL MATERIAL REDACTED]
11.49. "U.S. Office" means the Company's main facility located in the Denver,
Colorado metropolitan area, selected by EchoStar pursuant to Section 7.5.
ARTICLE 12. MISCELLANEOUS PROVISIONS
12.1. NOTICES. The parties choose the following addresses as the addresses
at which they will accept service of all documents and notices relating to
this Operating Agreement:
As to EchoStar: EchoStar Satellite Corporation
5701 S. Santa Fe Drive
Littleton, CO 80120
USA
Attn: David Moskowitz
Fax: (303) 723-1699
As to Kudelski: Kudelski SA
1033 Cheseaux
SWITZERLAND
Attn: Nicolas Goetschmann
Fax: 41 21/732 0300
As to the Company: NagraStar LLC
90 Inverness Circle East
Englewood, CO 80112
USA
Attn: Joe Ferguson and Xavier Carrel
Fax: (303) 706-5719
With a copy to: Kudelski SA
1033 Cheseaux
SWITZERLAND
Attn: Nicolas Goetschmann
Fax: 41 21/732 0300
[B] 29
Any notice to be given by a party to the other parties pursuant to this
Operating Agreement shall be given in writing in the English language by
prepaid registered post, by facsimile or shall be delivered by hand (delivery
by hand must be acknowledged by written receipt from a duly authorized person
at the office of the addressee), provided that:
(a) any notice given by prepaid registered post shall be deemed to have
been received by the addressee, in the absence of proof to the contrary,
14 days after the date of postage;
(b) any notice delivered by hand during normal business hours shall be
deemed to have been received by the addressee, in the absence of proof to the
contrary, at the time of delivery; and
(c) any notice given by facsimile shall be deemed to have been received
by the addressee, in the absence of proof to the contrary, immediately upon
the issuance by the transmitting facsimile machine, of a report confirming
correct transmission of all the pages of the document containing the notice
or upon receipt by the transmitting facsimile machine, at the end of the
notice being transmitted, of the automatic answer-back of the receiving
facsimile machine.
12.2. GOVERNING LAW; ARBITRATION. This Operating Agreement, and the
performances of the parties hereunder, shall be governed by the laws of the
State of New York without giving effect to the principles of conflicts of
laws that would otherwise provide for the application of the substantive law
of another jurisdiction. Should any dispute among the parties arise, the
parties agree that the sole jurisdiction and venue for the resolution of any
such dispute shall be English language binding arbitration conducted in the
New York City metropolitan area, in accordance with the Commercial Rules of
the American Arbitration Association, which rules shall include the right to
seek appropriate injunctive relief in such arbitration and are deemed to be
incorporated by reference into this clause. Unless the arbitrators determine
otherwise, the losing party in any arbitration shall pay the costs of the
prevailing party.
12.3. [CONFIDENTIAL MATERIAL REDACTED]
[B] 30
[CONFIDENTIAL MATERIAL REDACTED]
12.4. AMENDMENTS. This Operating Agreement and the Articles of Organization
may be amended from time to time by a writing executed by the Members.
12.5. EXECUTION OF ADDITIONAL INSTRUMENTS. Each Member hereby agrees to
execute such other and further statements of interest and holdings,
designations, powers of attorney, and other instruments necessary or
appropriate to comply with any laws, rules or regulations.
12.6. HEADINGS AND PRONOUNS. Headings and captions contained in this
Operating Agreement are solely for the convenience of the parties and are not
to be considered in interpreting or construing this Operating Agreement or
the parties' rights, remedies, and obligations hereunder. The words
"herein," "hereof," and "hereunder," when used in this Operating Agreement,
refer to this Operating Agreement in its entirety. The word "include" and
its derivatives mean by way of example and not by way of exclusion or
limitation. Words in the singular include the plural and words in the plural
include the singular, according to the requirements of the context. Words
importing a gender include all genders.
12.7. WAIVERS. No party shall be deemed to have waived any right or remedy
under or with respect to this Operating Agreement unless such waiver is
expressed in a writing signed by such party. No waiver of any right or
remedy under or with respect to this Operating Agreement by a party on any
occasion or in any circumstance shall be deemed to be a waiver of any other
right or remedy on that occasion or in that circumstance nor a waiver of the
same or of any other right or remedy on any other occasion or in any other
circumstance.
12.8. RIGHTS AND REMEDIES CUMULATIVE. The rights and remedies provided by
this Operating Agreement, the EchoStar Agreements, and the Kudelski
Agreements are cumulative and the use of any one right or remedy by any party
shall not preclude or waive the right to use any or all other remedies. Said
rights and remedies are given in addition to any other rights the parties may
have by law, statute, ordinance or otherwise.
12.9. SEVERABILITY. If any provision in this Operating Agreement is held to
be invalid or unenforceable on any occasion or in any circumstance, such
holding shall not be deemed to render the provision invalid or unenforceable
on any other occasion or in any other circumstance nor to render any other
provision hereof invalid or unenforceable, and to that extent the provisions
of this Operating Agreement are severable; provided, however, that this
provision shall not preclude a court
[B] 31
of competent jurisdiction from refusing so to sever any provision if
severance would be inequitable to one or more of the parties.
12.10. ASSIGNMENT. This Operating Agreement may not be assigned, in whole
or in part, by any party without the prior written consent of the other
parties, which consent may be withheld for any reason.
12.11. NO THIRD PARTY BENEFICIARIES; NO RIGHTS IN CREDITORS. This Operating
Agreement creates no rights benefitting third Persons and no third Person
shall have any right to enforce any provision hereof, except as may be
specifically provided herein. Without limiting the generality of the
preceding sentence, none of the provisions of this Operating Agreement shall
be for the benefit of or enforceable by any creditor of the Company.
12.12. INVESTMENT REPRESENTATIONS. The Members understand, acknowledge, and
agree:
(a) that no Membership Interest has been registered under the
Securities Acts because of the Company's reliance upon exemptions from the
registrations requirements of the Securities Acts;
(b) that the Company has relied upon the fact that the Membership
Interests are to be held by each Member for investment; and
(c) that exemption from registrations under the Securities Acts would
not be available if the Membership Interests were acquired by a Member with a
view to distribution. Accordingly, each Member hereby confirms to the
Company that the Member is acquiring the Membership Interest for the Member's
own account, for investment, and not with a view to the resale or
distribution thereof. Each Member agrees not to hypothecate or transfer or
offer to hypothecate or transfer any portion of the Membership Interests
unless there is an effective registration or other qualification relating
thereto under the Securities Act of 1933 and under all applicable state
securities laws or unless the holder of Membership Interests delivers to the
Company an opinion of counsel, reasonably satisfactory to the remaining
Members, that such registration or other qualification under such Act and
applicable state securities laws is not required in connection with such
hypothecation, transfer, or offer. Each Member understands that the Company
is under no obligation to register any Membership Interest or to assist the
Member in complying with any exemption from registration under the Securities
Acts if the Member should, at a later date, wish to dispose of the Membership
Interest. Furthermore, each Member realizes that the Membership Interests
are unlikely to qualify for disposition under Rule 144 of the Securities and
Exchange Commission unless the Member is not an "affiliate" of the Company
and the Membership Interest has been beneficially owned and fully paid for by
the Member for at least one year. Prior to acquiring any Membership
Interests, each Member has made an investigation of the Company and its
business and has had made available to the Member all information with
respect thereto which the Member needed to make an informed decision to
acquire the Membership Interest. Each Member considers itself to be a Person
possessing experience and sophistication as an investor which are adequate
for the evaluation of the merits and risks of the Member's investment in the
Membership Interest.
[B] 32
12.13. OTHER REPRESENTATIONS AND WARRANTIES. As of the date the Member
becomes a Member, each Member represents and warrants that:
(a) DUE INCORPORATION OR FORMATION; AUTHORIZATION OF AGREEMENT. The
Member is duly existing as an Entity and in good standing under the laws of
the jurisdiction of its formation and has the power and authority, as an
Entity, to own its property and carry on its business as owned and carried on
at the date hereof and as contemplated hereby. The Member is duly licensed
or qualified to do business and in good standing in each of the jurisdictions
in which the failure to be so licensed or qualified would have a material
adverse effect on its financial condition or its ability to perform its
obligations hereunder. The Member has the power and authority as an Entity to
execute and deliver this Operating Agreement and to perform its obligations
hereunder, and its execution, delivery, and performance of this Operating
Agreement has been duly authorized by all necessary action.
(b) VALID OBLIGATION. This Operating Agreement constitutes the legal,
valid, and binding obligation of the Member.
(c) NO CONFLICT WITH RESTRICTIONS; NO DEFAULT. Neither the execution,
delivery, and performance of this Operating Agreement nor the consummation by
the Member of the transactions contemplated hereby
(1) shall conflict with, violate, or result in a breach of any of
the terms, conditions, or provisions of any law, regulation, order, writ,
injunction, decree, determination, or award of any court, any governmental
department, board, agency, or instrumentality, domestic or foreign, or any
arbitrator, applicable to the Member or any of its Affiliates;
(2) shall conflict with, violate, result in a breach of, or
constitute a default under any of the terms, conditions, or provisions of the
articles of incorporation, bylaws, partnership agreement or operating
agreement (if any) of the Member or any of its Affiliates or of any material
agreement or instrument to which the Member or any of its Affiliates is a
party or by which the Member, or any of its Affiliates is or may be bound or
to which any of its material properties or assets is subject;
(3) shall conflict with, violate, result in a breach of,
constitute a default under (whether with notice or lapse of time or both),
accelerate or permit the acceleration of the performance required by, give to
others any material interests or rights, or require any consent,
authorization, or approval under any indenture, mortgage, lease agreement, or
instrument to which the Member or any of its Affiliates is a party or by
which the Member or any of its Affiliates is or may be bound; or
(4) shall result in the creation or imposition of any lien upon
any of the material properties or assets of the Member or any of its
Affiliates.
(d) GOVERNMENT AUTHORIZATIONS. Any registration, declaration, or
filing with, or consent, approval, license, permit, or other authorization or
order by, any government or regulatory authority, domestic or foreign, that
is required in connection with the valid execution, delivery, acceptance, and
[B] 33
performance by the Member under this Operating Agreement or the consummation
by the Member of any transaction contemplated hereby has been completed,
made, or obtained on or before the effective date of this Operating Agreement.
(e) LITIGATION. Except as disclosed in EchoStar's annual, quarterly,
or current reports filed pursuant to the U.S. Securities Exchange Act of
1934, there are no actions, suits, proceedings, or investigations pending or,
to the knowledge of the Member or any of its Affiliates, threatened against
or affecting the Member or any of its Affiliates or any of their properties,
assets, or businesses in any court or before or by any governmental
department, board, agency, or instrumentality, domestic or foreign, or any
arbitrator which could, if adversely determined (or, in the case of an
investigation, could lead to any action, suit, or proceeding, which if
adversely determined could) reasonably be expected to materially impair the
Member's ability to perform its obligations under this Operating Agreement or
to have a material adverse effect on the consolidated financial condition of
the Member; and the Member or any of its Affiliates has not received any
currently effective notice of any default, and the Member or any of its
Affiliates is not in default, under any applicable order, writ, injunction,
decree, permit, determination, or award of any court, any governmental
department, board, agency, or instrumentality, domestic or foreign, or any
arbitrator which could reasonably be expected to materially impair the
Member's ability to perform its obligations under this Operating Agreement or
to have a material adverse effect on the consolidated financial condition of
the Member.
(f) INVESTMENT COMPANY ACT; PUBLIC UTILITY HOLDING COMPANY ACT.
Neither the Member nor any of its Affiliates is, nor shall the Company as a
result of the Member holding an interest be, an "investment company" as
defined in, or subject to regulation under, the U.S. Investment Company Act
of 1940. Neither the Member nor any of its Affiliates is, nor shall the
Company as a result of the Member holding an interest be, a "holding
company," "an affiliate of a holding company," or a "subsidiary of a holding
company," as defined in, or subject to regulation under, the U.S. Public
Utility Holding Company Act of 1935.
(g) CONFIDENTIALITY.
(1) Except as contemplated hereby or required by a court of
competent authority, each Member shall keep confidential and shall not
disclose to others and shall use its reasonable efforts to prevent its
Affiliates and any of its, or its Affiliates', present or former employees,
agents, and representatives from disclosing to others without the prior
written consent of the Members any information which
(A) pertains to this Operating Agreement, any negotiations
pertaining thereto, any of the transactions contemplated hereby, or the
business of the Company; or
(B) pertains to written or oral confidential or proprietary
information of any Member or the Company or which any Member has labeled as
confidential or proprietary; provided, however, that the Company may disclose
to its Affiliates' employees, agents, and representatives any information
made available to the Member.
[B] 34
(2) No Member shall use, and each Member shall use its best
efforts to prevent any Affiliate of the Member from using, any information
which
(A) pertains to this Operating Agreement, any negotiations
pertaining hereto, any of the transactions contemplated hereby, or the
business of the Company; or
(B) pertains to the confidential or proprietary information
of any Member or the Company or which any Member has labeled in writing as
confidential or proprietary, except in connection with the transactions
contemplated hereby.
12.14. COUNTERPARTS. This Operating Agreement may be executed in
counterparts, each of which shall be deemed an original but all of which
shall constitute one and the same instrument.
12.15. WAIVER OF ACTION FOR PARTITION. Each Member irrevocably waives any
right that it may have to maintain any action for partition with respect to
the property of the Company; provided, however, that this provision shall not
apply to any asset that is distributed in kind to any Member.
[B] 35
CERTIFICATE
The undersigned, being NagraStar LLC and all of the initial Members of
NagraStar LLC, hereby agree, acknowledge, and certify that the foregoing
Operating Agreement constitutes the Operating Agreement of NagraStar LLC
adopted by the Members as of the date first stated in the Operating Agreement.
NAGRASTAR LLC
By:
A Member
Initial Members:
ECHOSTAR SATELLITE CORPORATION
By:
Its:
KUDELSKI SA
By:
Its:
[B] 36
SCHEDULE A
TO
NAGRASTAR LLC
OPERATING AGREEMENT
[CONFIDENTIAL MATERIAL REDACTED]
[B] 37
SCHEDULE B
TO
NAGRASTAR LLC
OPERATING AGREEMENT
[B] 38
SCHEDULE C
TO
NAGRASTAR LLC
OPERATING AGREEMENT
[CONFIDENTIAL MATERIAL REDACTED]
[B] 39
[APPENDIX C-1]
[CONFIDENTIAL MATERIAL REDACTED]
[C-1] 1
[APPENDIX C-2]
[CONFIDENTIAL MATERIAL REDACTED]
[C-2] 1
[APPENDIX D-1]
[CONFIDENTIAL MATERIAL REDACTED]
[D-1] 1
[APPENDIX D-2]
[CONFIDENTIAL MATERIAL REDACTED]
[D-2] 1
[APPENDIX D-3]
[CONFIDENTIAL MATERIAL REDACTED]
[D-3] 1
[APPENDIX E-1]
[CONFIDENTIAL MATERIAL REDACTED]
[E-1] 1
[APPENDIX E-2]
[CONFIDENTIAL MATERIAL REDACTED]
[E-2] 1
[APPENDIX E-3]
[CONFIDENTIAL MATERIAL REDACTED]
[E-3] 1
5
1,000
6-MOS
DEC-31-1998
JAN-01-1998
JUN-30-1998
259,571
131,289
98,344
3,272
53,540
557,526
1,113,118
122,723
1,863,250
389,222
1,430,142
212,200
125,216
450
(319,781)
1,863,250
449,908
460,277
280,650
497,686
57,911
4,925
73,920
(95,320)
283
(95,603)
0
0
0
(95,603)
(2.51)
(2.51)
Includes sales of programming.
Includes costs of programming.
Net of amounts capitalized.
