AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 9, 1999.
Registration No. 333-71345
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
ECHOSTAR DBS CORPORATION
AFFILIATE GUARANTORS LISTED ON SCHEDULE ATTACHED HERETO
(Exact name of Registrant as specified in its charter)
COLORADO 5064 84-1328967
(STATE OF REGISTRANT'S (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
DAVID K. MOSKOWITZ, ESQ.
5701 SOUTH SANTA FE DRIVE SENIOR VICE PRESIDENT, GENERAL
LITTLETON, COLORADO 80120 COUNSEL AND SECRETARY
(303) 723-1000 ECHOSTAR DBS CORPORATION
5701 SOUTH SANTA FE DRIVE
LITTLETON, COLORADO 80120
(303) 723-1000
(ADDRESS, INCLUDING ZIP CODE, AND (NAME, ADDRESS, INCLUDING ZIP CODE,
TELEPHONE NUMBER, INCLUDING AREA CODE, AND TELEPHONE NUMBER, INCLUDING AREA
OF REGISTRANT'S PRINCIPAL EXECUTIVE CODE, OF AGENT FOR SERVICE)
OFFICE)
WITH A COPY TO:
DAVID W. AMBROSIA, ESQ.
WINTHROP, STIMSON, PUTNAM & ROBERTS
ONE BATTERY PARK PLAZA
NEW YORK, NY 10004
(212) 858-1000
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO THE
PUBLIC: As soon as practicable after this Registration Statement becomes
effective.
----------------------------
THE REGISTRANTS HEREBY AMEND THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANTS SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
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- --------------------------------------------------------------------------------
SCHEDULE OF ADDITIONAL REGISTRANT GUARANTORS
PRIMARY STANDARD I.R.S.
EXACT NAME OF GUARANTOR REGISTRANTS AS SPECIFIED STATE OF INDUSTRIAL CLASSIFICATION EMPLOYER IDENTIFICATION
IN THEIR RESPECTIVE CHARTERS FORMATION NUMBER NUMBER
DIRECTSAT CORPORATION DELAWARE 5064 54-1547458
ECHO ACCEPTANCE CORPORATION COLORADO 5064 84-1082359
ECHOSPHERE CORPORATION COLORADO 5064 84-0833457
DISH INSTALLATION NETWORK CORPORATION COLORADO 5064 84-1195952
ECHOSTAR TECHNOLOGIES CORPORATION TEXAS 5064 76-0033570
HT VENTURES, INC. COLORADO 5064 84-1239150
ECHOSTAR INTERNATIONAL CORPORATION COLORADO 5064 84-1258859
SATELLITE SOURCE, INC. COLORADO 5064 84-1045974
ECHOSTAR SATELLITE CORPORATION COLORADO 5064 84-1114039
HOUSTON TRACKER SYSTEMS, INC. COLORADO 5064 84-1462072
ECHOSTAR NORTH AMERICA CORPORATION COLORADO 5064 84-1282886
SKY VISTA CORPORATION COLORADO 5064 84-1469204
ECHOSTAR INDONESIA, INC. COLORADO 5064 84-1253832
DIRECT BROADCASTING SATELLITE CORPORATION COLORADO 5064 84-1328968
ECHOSTAR SATELLITE BROADCASTING CORPORATION COLORADO 5064 84-1337871
DISH, LTD. NEVADA 5064 88-0312499
ECHOSTAR SPACE CORPORATION COLORADO 5064 84-1307367
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an
offer to sell these securities and we are not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
SUBJECT TO COMPLETION, DATED FEBRUARY 9, 19999
PROSPECTUS
ECHOSTAR DBS CORPORATION
OFFER TO EXCHANGE
$375,000,000 OF ITS 9 1/4% SENIOR NOTES DUE 2006
WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT
FOR ALL OUTSTANDING 9 1/4% SENIOR NOTES DUE 2006
AND
$1,625,000,000 OF ITS 9 3/8% SENIOR NOTES DUE 2009
WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT
FOR ALL OUTSTANDING 9 3/8% SENIOR NOTES DUE 2009
The exchange offer will expire at 5:00 p.m., New York City time, on
, 1999, unless extended.
THE EXCHANGE NOTES
- - The exchange notes are substantially identical to the old notes that we
issued on January 25, 1999, except for certain transfer restrictions,
registration rights and liquidated damages provisions relating to the old
notes. Sometimes we refer to the notes to be issued in the exchange offer
as the "exchange notes" and the notes issued on January 25, 1999, as the
"old notes."
- - We will pay interest on the old notes and the exchange notes semi-annually
in arrears on each February 1 and August 1, commencing August 1, 1999.
- - The old notes and the exchange notes are general senior unsecured
obligations of the Company. They will rank equally in right of payment to
each other and to all our existing and future senior unsecured obligations
and they will rank senior in right of payment to all our existing and
future junior obligations. The old notes and the exchange notes are
effectively junior to our secured obligations to the extent of the
collateral securing those obligations, including any borrowings under our
future secured credit facilities.
- - The old notes and the exchange notes are guaranteed on a senior unsecured
basis by substantially all of our subsidiaries and certain of our
affiliates.
MATERIAL TERMS OF THE EXCHANGE OFFER
- - The exchange offer will expire at 5:00 p.m., New York City time, on
, 1999, unless extended.
- - You will receive an equal principal amount of exchange notes for all old
notes that you validly tender and do not validly withdraw.
- - The exchange will not be a taxable exchange for U.S. federal income tax
purposes.
- - We will not receive any proceeds from the exchange offer.
- - You may withdraw tenders of old notes at any time before the expiration of
the exchange offer.
CONSIDER CAREFULLY THE "RISK FACTORS" BEGINNING ON PAGE 21 OF THIS PROSPECTUS.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED THE EXCHANGE NOTES TO BE DISTRIBUTED IN THE EXCHANGE
OFFER, NOR HAVE ANY OF THESE ORGANIZATIONS DETERMINED THAT THIS PROSPECTUS IS
ACCURATE OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this prospectus is , 1999.
TABLE OF CONTENTS
Page
----
Prospectus Summary. . . . . . . . . . . . . . . . . . . . . . . . . . . . .3
The EchoStar Organization . . . . . . . . . . . . . . . . . . . . . . . . .19
Risk Factors. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .21
Use of Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .37
Capitalization. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .48
Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . .50
Management's Discussion and Analysis of Financial Condition and
Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . .53
Business. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .65
Management. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .94
Certain Relationships and Related Transactions. . . . . . . . . . . . . . .100
Security Ownership of Certain Beneficial Owners and Management. . . . . . .101
Description of the Notes. . . . . . . . . . . . . . . . . . . . . . . . . .104
Certain United States Federal Income Tax Considerations . . . . . . . . . .150
United States ERISA Considerations. . . . . . . . . . . . . . . . . . . . .153
Plan of Distribution. . . . . . . . . . . . . . . . . . . . . . . . . . . .154
Legal Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .155
Experts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .155
Where You Can Find More Information . . . . . . . . . . . . . . . . . . . .155
Index to Financial Statements . . . . . . . . . . . . . . . . . . . . . . .F-1
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS DOCUMENT OR THAT WE
HAVE REFERRED YOU TO. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH
INFORMATION THAT IS DIFFERENT. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO
SELL, OR SOLICITATION OF AN OFFER TO BUY, TO ANY PERSON IN ANY JURISDICTION IN
WHICH SUCH AN OFFER TO SELL OR SOLICITATION WOULD BE UNLAWFUL. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE OF THIS PROSPECTUS.
2
PROSPECTUS SUMMARY
THIS SUMMARY DOES NOT CONTAIN ALL OF THE INFORMATION THAT MAY BE
IMPORTANT TO YOU. YOU SHOULD READ THE ENTIRE PROSPECTUS, INCLUDING THE
COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS AND THE NOTES THERETO
APPEARING ELSEWHERE IN THIS PROSPECTUS. "WE" AND THE "COMPANY" AS USED IN
THIS PROSPECTUS REFER TO ECHOSTAR DBS CORPORATION, A COLORADO CORPORATION,
OUR AFFILIATE DIRECT BROADCASTING SATELLITE CORPORATION, A COLORADO
CORPORATION, AND OUR SUBSIDIARIES. IN THIS PROSPECTUS, WE REFER TO "OUR
PARENT COMPANY," ECHOSTAR COMMUNICATIONS CORPORATION, A NEVADA CORPORATION,
OR, IF THE CONTEXT REQUIRES, TOGETHER WITH ITS SUBSIDIARIES, AS "ECC." "OLD
NOTES" REFERS TO OUR 9 1/4% SENIOR NOTES DUE 2006 AND OUR 9 3/8% SENIOR NOTES
DUE 2009 THAT WERE ISSUED ON JANUARY 25, 1999, AND "EXCHANGE NOTES" REFERS TO
OUR 9 1/4% SENIOR NOTES DUE 2006 AND OUR 9 3/8% SENIOR NOTES DUE 2009 OFFERED
PURSUANT TO THIS PROSPECTUS. FOR THE SAKE OF SIMPLICITY AND CONVENIENCE, WE
REFER TO THE EXCHANGE NOTES AND THE OLD NOTES TOGETHER AS THE "NOTES" WHEN
THE TERMS AND PROVISIONS UNDER DISCUSSION ARE IDENTICAL.
THE EXCHANGE OFFER
We completed on January 25, 1999 a private offering of $2,000,000,000
principal amount of old notes consisting of $375,000,000 9 1/4% Senior Notes
due 2006 and $1,625,000,000 9 3/8% Senior Notes due 2009. We entered into
registration rights agreements with the initial purchasers in the private
offering in which we agreed to deliver to you this prospectus and to complete
the exchange offer within 210 days of the issuance of the old notes. You are
entitled to exchange your old notes for registered exchange notes with
substantially identical terms. If the exchange offer is not completed by
August 23, 1999, and in certain other circumstances we must pay to you
liquidated damages, in addition to interest that would otherwise accrue on
the old notes, described below under "Description of the Notes." You should
read the discussion under the headings "-- Summary Description of the Notes"
and "Description of the Notes" for further information regarding the exchange
notes.
We believe that you may resell the exchange notes without complying with
the registration and prospectus delivery provisions of the Securities Act if
certain conditions are satisfied. You should read the discussion under the
headings "--Summary of the Terms of Exchange Offer" and "The Exchange Offer" for
further information regarding the exchange offer and resale of the notes.
THE COMPANY
We are a leading provider of direct broadcast satellite programming
services in the United States, a significant international supplier of digital
satellite receiver systems and a provider of other satellite services. We
commenced our subscription satellite television service, the DISH Network, in
March 1996, after the successful launch of our first satellite (EchoStar I) in
December 1995. Since that time, we have launched three additional satellites
(EchoStar II, EchoStar III and EchoStar IV) and we now have more operational
direct broadcast satellites than any other direct broadcast satellite operator
in the United States. As of December 31, 1998, our DISH Network had more than
1.9 million subscribers, an increase of approximately 900,000 subscribers during
the past 12 months. We added approximately 330,000 subscribers during the fourth
quarter of 1998, which we estimate represents almost 40% of all new satellite
subscribers in the United States during that period. Average monthly programming
revenue during the third quarter of 1998 was approximately $40 per subscriber.
The introduction of direct broadcast satellite receivers is widely regarded
as the most successful introduction of a consumer electronics product in United
States history, surpassing the rollout of color televisions, VCRs and compact
disc players. As of December 31, 1998, approximately 9 million United States
households subscribed to direct broadcast satellite and other digital
direct-to-home satellite
3
services. We believe that there is still significant unsatisfied demand for high
quality, reasonably priced television programming.
We have more United States-licensed direct broadcast satellite frequencies
than any other direct broadcast satellite competitor, including 21 frequencies
at an orbital slot (119 degrees west longitude) that is capable of providing
direct broadcast satellite service to the entire "lower 48" continental United
States. From that orbital slot, we provide consumers in the continental United
States with a choice of approximately 200 channels of digital television
programming and CD quality audio programming. DISH Network subscribers can
choose from a variety of programming packages that we believe have a better
price-to-value relationship than packages currently offered by most subscription
television providers, particularly cable TV operators.
In November 1998, we announced an agreement with The News Corporation
Limited, its ASkyB subsidiary and MCI WorldCom, Inc. to purchase MCI's
authorization for 28 additional direct broadcast satellite frequencies at the
110 degree orbital slot, together with two satellites (EchoStar V and EchoStar
VI) that are to be delivered in-orbit and other related assets and rights.
Assuming we complete this acquisition and successfully launch EchoStar V and
EchoStar VI, we expect that the DISH Network will be able to expand its current
offering of more than 200 channels to approximately 500 video and audio channels
broadcast nationwide. Subscribers can receive DISH Network programming through a
single 18-inch dish. EchoStar V and EchoStar VI are currently scheduled to be
launched during 1999.
DISH Network programming is available to any subscriber who purchases or
leases an 18-inch satellite dish, an EchoStar digital satellite receiver, a
user-friendly remote control and related components that together constitute an
EchoStar receiver system. EchoStar receiver systems are fully compatible with
MPEG-II, the world digital standard for computers and consumer electronics
products, and provide image and sound quality superior to current analog cable
TV service.
EchoStar receiver systems are designed and engineered by our ETC business
unit. ETC has contracted for the manufacture of EchoStar receiver systems with
third parties in accordance with ETC specifications. Our satellite receivers
have won numerous awards from dealers, retailers and industry trade
publications. In addition to supplying EchoStar receiver systems for the DISH
Network, ETC supplies similar receiver systems to international satellite TV
service providers. Currently, ETC has two major customers, subsidiaries of the
national telephone companies in Spain (Telefonica) and Canada (Bell Canada).
Additionally, we design "turn-key" satellite systems for third parties. As part
of the agreement with MCI and News Corporation, News Corporation agreed to
purchase at least 500,000 digital satellite receivers. News Corporation has
interests in several major international satellite TV service providers. ETC is
actively soliciting additional business to supply receiver systems to several
satellite TV projects in various stages of development around the world,
although we cannot assure you that those efforts will succeed.
Our Satellite Services business unit primarily leases capacity on our
satellites to customers on either a monthly (full-time) or hourly (part-time)
basis. Full-time customers tend to be international services that broadcast
foreign language programming to DISH Network subscribers. Part-time customers
are typically Fortune 1000 companies that use our satellite network for business
television service to communicate with employees, customers and suppliers
located around the United States. In addition, we are developing a wide range of
Internet and high-speed data services that we expect to offer to consumers
beginning in 1999.
Our primary objective is to continue to expand our DISH Network subscriber
base, as well as to develop as an integrated, full-service satellite company. To
achieve this objective, we seek to:
4
- - LEVERAGE OUR SIGNIFICANT SHARE OF DIRECT BROADCAST SATELLITE SPECTRUM. We
currently have FCC licenses from the U.S. Federal Communications
Commission, or "FCC," for more direct broadcast satellite capacity than any
other domestic satellite TV service provider, with four high-power
satellites currently in orbit. We will continue to expand our digital video
and audio programming offerings with additional satellite-delivered
programming, high definition television offerings, sports, movies, foreign
language, business, educational and other niche programming. We also plan
to introduce Internet and high-speed data services during 1999. By
expanding our local and other programming services and by introducing
Internet and high-speed data services, we believe that we will be able to
differentiate ourselves from other subscription TV service providers that
do not have the channel capacity to offer similar services or cannot expand
their capacity in a cost effective manner. Completion of the transactions
under the agreement with News Corporation and MCI should further enhance
our ability to add programming and strengthen our product offering.
- - ENHANCE OUR POSITION AS A PROVIDER OF VALUE-ORIENTED PROGRAMMING AND
RECEIVER SYSTEMS. We employ a "value-based" strategy with respect to
pricing decisions for DISH Network programming and EchoStar receiver
systems. We believe that the DISH Network offers consumers more video and
audio programming for less money than most other subscription TV services.
For example, our entry level "America's Top 40" programming package is
priced at $19.99 per month as compared to, on average, more than $30 per
month for comparable cable TV service (typically consisting of 54 analog
channels). Customers can add up to seven premium movie channels for an
additional $11 per month, or about the same amount that cable subscribers
typically pay for only one or two movie channels. Our fourth quarter 1998
promotion, the DISH Network One-Rate Plan, provides a $249 rebate on the
purchase of certain EchoStar receiver systems if the subscriber commits to
a year's purchase of America's Top 100 CD programming and two premium
channel packages for a monthly fee of $48.98. Also in the fourth quarter of
1998, we announced a price guarantee to consumers, ensuring no price
increases for our most popular programming packages through March 2000. In
addition, we believe that our digital video receiver systems are produced
at a lower cost than those of most other manufacturers of similar
equipment. We have been able to leverage this advantage by acquiring DISH
Network subscribers at what we believe to be a substantially lower cost
than any of our direct broadcast satellite competitors while offering
consumers a wide array of features and functionality in EchoStar receiver
systems.
- - CONTINUE TO EXPAND DISTRIBUTION CHANNELS. We continue to strengthen our
sales and distribution channels, which include an independent dealer
network, consumer electronics retail and direct sales representatives. We
are approaching 18,000 points of sale across the United States, up from
approximately 12,000 points of sale 12 months ago. The majority of our
subscriber activations have come from our independent dealer network, which
consists primarily of local retailers who specialize in TV and home
entertainment systems. We intend to increase our distribution channels and
further expand our points of sale into more traditional consumer
electronics retailers (for example, our agreement with Sears to distribute
EchoStar receiver systems). Presently, we have agreements with four
manufacturers, SCI, VTech, JVC and Philips, to produce EchoStar receiver
systems.
- - DEVELOP ETC AND SATELLITE SERVICES BUSINESSES. We believe that ETC and
Satellite Services offer strategic opportunities for us in the future. ETC
has been able to leverage its research and development on EchoStar receiver
systems by selling similar products to international satellite TV service
providers. In addition, the design by ETC of receiver systems for
international customers has resulted in improvements in the design and
economies of scale in production of EchoStar receiver systems for the DISH
Network. ETC has generated significant revenue for us
5
during 1997 and 1998. Likewise, although Satellite Services is not yet a
fully developed business, we believe that providing Satellite Services to
business television and other customers can enhance DISH Network subscriber
growth by increasing visibility for the DISH Network, and because many
business television customers might also subscribe to DISH Network's other
programming service offerings.
- - EMPHASIZE ONE-STOP SHOPPING. We believe that providing outstanding service,
convenience and value are essential to developing long-term customer
relationships. We offer consumers a "one-stop shopping" service which
includes programming, installation, maintenance, reliable customer service
and satellite reception equipment. To enhance responsiveness to our
customers, we have established a single telephone number (1-800-333-DISH),
which customers can call 24 hours a day, seven days a week to order
EchoStar receiver systems, activate and modify programming services,
schedule installation and obtain technical support and warranty services.
We believe that we are the only direct broadcast satellite provider to
offer a comprehensive single-point customer service function.
We have evaluated and expect to continue to evaluate possible acquisition
transactions and the possible disposition of certain of our businesses on an
ongoing basis and at any given time we may be engaged in discussions or
negotiations with respect to possible acquisitions or dispositions within the
direct broadcast satellite field as well as other areas of opportunity.
Our principal offices are located at 5701 South Santa Fe Drive, Littleton,
Colorado 80120, and our telephone number is (303) 723-1000.
6
RECENT DEVELOPMENTS
AGREEMENT WITH NEWS CORPORATION AND MCI
The agreement with News Corporation and MCI was announced on November 30,
1998. Under this agreement, our parent company will acquire:
- - MCI's license to operate 28 direct broadcast satellite frequencies at the
110 degree orbital slot;
- - two Space Systems/ Loral-built satellites, to be delivered in-orbit and
currently expected to be launched during 1999;
- - a recently-constructed digital broadcast operations center located in
Gilbert, Arizona;
- - a worldwide license agreement to manufacture and distribute set-top boxes
internationally using NDS Limited's encryption/decoding technology;
- - a commitment by an affiliated entity of News Corporation to purchase from
ETC a minimum of 500,000 set-top boxes; and
- - a three-year no fee agreement for the DISH Network to rebroadcast FOX
Broadcasting Company owned-and-operated local station signals to their
respective markets.
The transferors will bear the costs of the construction, launch and insurance of
the two Space Systems/ Loral-built satellites, including launch insurance and
one year of in-orbit service insurance. MCI also agreed with our parent company
that MCI will have the non-exclusive right to bundle DISH Network service with
MCI's telephony service offerings on mutually agreeable terms. In addition, we
have agreed to carry the FOX News Channel on the DISH Network. We received
standard program launch support payments in exchange for carrying the
programming.
Beneficial interest in substantially all of the assets and rights to be
acquired by our parent company in this agreement will be transferred to us
promptly after closing.
If Class A common stock of our parent company (Nasdaq: DISH) trades between
$15.00 per share and $39.00 per share during the 20 business days prior to
closing the transaction with News Corporation and MCI, News Corporation will
receive 24,030,000 newly-issued shares of that Class A common stock and MCI will
receive 5,970,000 newly-issued shares of that Class A common stock, a total of
approximately 37% of fully-diluted equity and approximately 8.5% of the total
voting power of our parent company. If the average closing price of that Class A
common stock for the 20 business days preceding the closing of that transaction
exceeds $39 per share, the number of the newly-issued shares will be determined
by dividing $1.17 billion by such price. If the transaction had been
consummated on January 25, 1999, our parent company would have been required to
issue 24,258,760 shares of its Class A common stock, constituting approximately
31.8% of its fully-diluted equity and 7.0% of its total voting power.
The transaction with News Corporation and MCI must be approved by the FCC
as well as our parent company's shareholders. See "Business--Agreement with
News Corporation and MCI" and "Business--Government Regulation."
7
ECHOSTAR COMMUNICATIONS TENDER OFFERS
Our parent company announced on December 23, 1998 that it had commenced
cash tender offers for three series of outstanding debt securities of its
subsidiaries and announced on January 4, 1999 that it had commenced a cash
tender offer for one series of its own debt securities. The tender offers were
part of a plan to refinance most of its existing indebtedness at more favorable
interest rates and terms. The tender offers for the first three series of notes
were completed on January 25, 1999, concurrently with closing the offering of
the old notes. Holders of more than 99% of each issue of debt securities
tendered their notes, after having consented to certain amendments to the
indentures governing those notes that eliminated substantially all restrictive
covenants and amended certain other provisions. The tender offer for the fourth
series of notes was completed on February 2, 1999. Holders of more than 99% of
those notes tendered their notes after having consented to substantially similar
amendments to that indenture.
REORGANIZATION
In order to streamline the organization and operations of the EchoStar
group of companies, our parent company plans to implement a reorganization as
illustrated below under "The EchoStar Organization." Pursuant to the
reorganization plan, we will place, subject to FCC approval, ownership of all of
the group's direct broadcast satellites and related FCC licenses into EchoStar
Satellite Corporation, our wholly owned subsidiary. DirectSat Corporation and
Direct Broadcasting Satellite Corporation, the current owners of EchoStar II and
EchoStar III, will both be merged into EchoStar Satellite Corporation.
Dish, Ltd. and EchoStar Satellite Broadcasting Corporation will be merged into
us. We currently own EchoStar IV, which, like the other satellites and related
FCC licenses (including those acquired in the transaction with News Corporation
and MCI), will be transferred to EchoStar Satellite Corporation. Our companies
that currently hold FCC licenses have filed applications with the FCC to effect
these "pro forma" assignments of their licenses to EchoStar Satellite
Corporation. Consummation of the reorganization is contingent upon receipt of
those FCC approvals.
8
SUMMARY OF THE TERMS OF THE EXCHANGE OFFER
The exchange offer relates to the exchange of up to $375,000,000
aggregate principal amount of outstanding 9 1/4% Senior Notes due 2006 and
$1,625,000,000 aggregate principal amount of outstanding 9 3/8% Senior Notes
due 2009 for an equal aggregate principal amount of exchange notes. Each
series of exchange notes will be obligations of the Company entitled to the
benefits of the indenture governing such series of the outstanding old notes.
The form and terms of the exchange notes are identical in all material
respects to the form and terms of the outstanding old notes except that the
exchange notes have been registered under the Securities Act, and therefore
are not entitled to the benefits of the registration rights granted under the
registration rights agreements, executed as part of the offering of the
outstanding old notes. As a result of this registration, the exchange notes
will not bear legends restricting their transfer.
Registration Rights Agreements . . . You are entitled to exchange your old
notes for registered exchange notes with
substantially identical terms. The
exchange offer is intended to satisfy
these rights. After the exchange offer
is complete, you will no longer be
entitled to any exchange or registration
rights with respect to your old notes,
except in certain limited circumstances.
The Exchange Offer . . . . . . . . . We are offering to exchange $1,000
principal amount of our exchange notes
which have been registered under the
Securities Act for each $1,000 principal
amount of the applicable series of
outstanding old notes.
To be exchanged, an outstanding old note
must be properly tendered by you and
accepted by us. All outstanding old
notes that are validly tendered and not
validly withdrawn will be exchanged. The
following principal amounts of the old
notes are outstanding: $375,000,000
9 1/4% Senior Notes due 2006 and
$1,625,000,000 9 3/8% Senior Notes due
2009. We will issue registered notes on
or promptly after the expiration of the
exchange offer.
Resale of the Exchange Notes . . . . Based on an interpretation by the staff
of the SEC set forth in no-action
letters issued to third parties, we
believe that the exchange notes may be
offered for resale, resold and otherwise
transferred by you without compliance
with the registration and prospectus
delivery provisions of the Securities
Act if the following conditions are met:
- the exchange notes issued in the
exchange offer are being acquired by
you in the ordinary course of your
business;
- you are not participating, do not
intend to participate, and have no
arrangement or understanding with any
person to participate in the
distribution of the exchange notes
issued to you in the exchange offer;
- you are not a broker-dealer who
purchased such outstanding old notes
directly from us for resale pursuant
to Rule 144A
9
or any other available exemption
under the Securities Act; and
- you are not an "affiliate" of ours.
Each broker-dealer that is issued
exchange notes in the exchange offer for
its own account in exchange for old
notes which were acquired by such
broker-dealer as a result of
market-making or other trading
activities must acknowledge that it will
deliver a prospectus meeting the
requirements of the Securities Act, in
connection with any resale of the
exchange notes issued in the exchange
offer.
Expiration Date. . . . . . . . . . . The exchange offer will expire at 5:00
p.m., New York City time, ,
1999, unless we decide to extend the
expiration date.
Accrued Interest on the Exchange
Notes and the Outstanding Old
Notes. . . . . . . . . . . . . . . . The old notes and the exchange notes
will bear interest from January 25,
1999. Old notes that are accepted for
exchange will cease to accrue interest
from the date of completion of the
exchange offer. Consequently, if you
exchange your old notes for exchange
notes, you will receive the same
interest payment on August 1, 1999 (the
first interest payment date with respect
to the old notes and the exchange notes)
that you would have received had you not
accepted the exchange offer.
Termination of the Exchange
Offer. . . . . . . . . . . . . . . . We may terminate the exchange offer if
we determine that our ability to proceed
with the exchange offer could be
materially impaired due to any legal or
governmental action or new law or any
interpretation of the staff of the SEC.
We do not expect any of the foregoing
conditions to occur, although we cannot
assure you that such conditions will not
occur. Holders of outstanding old notes
will have certain rights against us
under the registration rights agreements
executed as part of the offering of the
outstanding old notes if we fail to
consummate the exchange offer.
Procedures for Tendering Outstanding
Old Notes. . . . . . . . . . . . . . If you wish to tender your old note for
exchange in the exchange offer, you must
transmit to U.S. Bank Trust National
Association, the exchange agent, on or
prior to the expiration date the
following items:
- either a properly completed and duly
executed letter of transmittal, which
accompanies this prospectus, or a
facsimile of the letter of
transmittal, including all other
documents required by the letter of
transmittal, at the address set forth
on the cover page of the letter of
transmittal; or
- a computer-generated message
transmitted by means of the Automated
Tender Offer Program system of The
Depository
10
Trust Company , or, "DTC," and
received by the exchange agent and
forming a part of a confirmation of
book-entry transfer in which you
acknowledge and agree to be bound by
the terms of the letter of
transmittal; and either
- a timely confirmation of book-entry
transfer of your outstanding old
notes into the exchange agent's
account at DTC pursuant to DTC's
procedure for book-entry transfers
described in this prospectus under
the heading "The Exchange Offer--How
to Tender" must be received by the
exchange agent on or prior to the
expiration date; or
- the documents necessary for
compliance with the guaranteed
delivery procedures described below.
By executing the letter of transmittal,
you will represent to us that, among
other things:
- the exchange notes are obtained in
the ordinary course of business of
the person receiving such exchange
notes whether or not you are such
person;
- neither you nor any such other person
has an arrangement or understanding
with any person to participate in the
distribution of such exchange notes;
and
- neither you nor any such other person
is our "affiliate," as defined in
Rule 405 under the Securities Act.
Special Procedures for Beneficial
Owners . . . . . . . . . . . . . . . If you are the beneficial owner of old
notes and your name does not appear on a
security position listing of DTC as the
holder of such old notes or if you are a
beneficial owner of registered old notes
that are registered in the name of a
broker, dealer, commercial bank, trust
company or other nominee and you wish to
tender such old notes or registered old
notes in the exchange offer, you should
promptly contact the person in whose
name your old notes are registered and
instruct such person to tender on your
behalf. If you wish to tender on your
own behalf, you must, prior to
completing and executing the letter of
transmittal and delivering your
outstanding old notes, either make
appropriate arrangements to register
ownership of the outstanding old notes
in your name or obtain a properly
completed bond power from the registered
holder. The transfer of record ownership
may take considerable time.
Guaranteed Delivery Procedure. . . . If you wish to tender your old notes and
time will not permit your required
documents to reach the exchange agent by
the expiration date, or the procedure
for book-entry transfer cannot be
completed on time or certificates for
registered old notes cannot be delivered
on time, you may tender your old notes
pursuant to the procedures described in
this prospectus under the
11
heading "The Exchange Offer--Guaranteed
Delivery Procedures."
Withdrawal Rights. . . . . . . . . . You may withdraw the tender of your old
notes at any time before 5:00 p.m., New
York City time, on , 1999,
the business day before the expiration
date, unless your old notes were
previously accepted for exchange.
Acceptance of Outstanding and
Delivery of Exchange
Notes. . . . . . . . . . . . . . . . Subject to certain conditions (as
summarized above in "-- Termination of
the Exchange Offer" and described more
fully under the "The Exchange Offer"),
we will accept for exchange any and all
old notes that you properly tender in
the exchange offer before 5:00 p.m., New
York City time, on the expiration date.
The exchange notes issued pursuant to
exchange offer will be delivered
promptly following the expiration date.
Certain U.S. Federal Income Tax
Consequences . . . . . . . . . . . . An exchange of old notes for exchange
notes will not be taxable to you. See
"Certain United States Federal Tax
Consequences--the Exchange Offer."
Use of Proceeds. . . . . . . . . . . We will not receive any proceeds from
the issuance of exchange notes pursuant
to the exchange offer. We will pay all
expenses incident to the exchange offer.
Exchange Agent . . . . . . . . . . . U.S. Bank Trust National Association is
serving as exchange agent in connection
with the exchange offer. The exchange
agent can be reached at Corporate Trust
Trustee Administration, 180 E. 5th
Street, St. Paul, Minnesota 55101. For
more information with respect to the
exchange offer, the telephone number for
the exchange agent is (651) 244-8162 and
the facsimile number for the exchange
agent is (651) 244-1537.
Consequences of Not Exchanging
Old Notes. . . . . . . . . . . . . . If you do not exchange your old notes in
the exchange offer, your old notes will
continue to be subject to the
restrictions on transfer set forth in
the legend on the certificate for your
old notes. In general, you may offer or
sell your old notes only if they are
registered under, offered or sold
pursuant to an exemption from, or
offered or sold in a transaction not
subject to, the Securities Act and
applicable state securities laws. We do
not currently intend to register the old
notes under the Securities Act. See
"The Exchange Offer."
12
SUMMARY DESCRIPTION OF THE NOTES
The exchange offer applies to $375,000,000 aggregate principal amount of
9 1/4% Senior Notes due 2006 and $1,625,000,000 aggregate principal amount of
9 3/8% Senior Notes due 2009. The form and terms of the exchange notes are
substantially identical to the form and terms of the old notes, except that the
exchange notes have been registered under the Securities Act, and therefore,
will not bear legends restricting the transfer thereof. Each series of the
exchange notes will evidence the same debt as the applicable series of old notes
and will be entitled to the benefits of the applicable indenture. See
"Description of the Notes" below. As used in this summary of the notes, the
"Company" refers to EchoStar DBS Corporation and not to its subsidiaries, and
"subsidiaries" refers to EchoStar DBS Corporation's direct and indirect
subsidiaries and Direct Broadcast Satellite Corporation, or, "DBSC," a
wholly-owned subsidiary of EchoStar Communications Corporation.
Securities Offered . . . . . . . . . $375.0 million aggregate principal
amount of 9 1/4% Senior Notes due 2006,
or the "Seven Year Notes."
$1.625 billion aggregate principal
amount of 9 3/8% Senior Notes due 2009,
or the "Ten Year Notes."
Maturity Date. . . . . . . . . . . . February 1, 2006 for the Seven Year
Notes; February 1, 2009 for the Ten Year
Notes.
Interest Payment Dates . . . . . . . Interest will accrue at the rate of
9 1/4% per annum on the Seven Year Notes
and 9 3/8% per annum on the Ten Year
Notes, and will be payable semi-annually
in cash on February 1 and August 1 of
each year, commencing August 1, 1999.
Ranking. . . . . . . . . . . . . . . The notes rank senior in right of
payment to all subordinated indebtedness
of the Company and PARI PASSU in right
of payment to each other and to all
senior indebtedness of the Company.
Although the notes are titled "Senior,"
the Company has not issued, and does not
have any plans to issue, any
indebtedness to which the notes would be
senior.
The notes and the Guarantees are
effectively junior to secured
obligations of the Company and its
subsidiaries to the extent of the
collateral securing those obligations,
including borrowings under the Company's
future secured credit facilities.
As of September 30, 1998, the long-term
indebtedness of the Company and its
subsidiaries aggregated approximately
$1.52 billion. On a pro forma basis,
after giving effect to issuance of the
notes and application of the net
proceeds therefrom and to the
reorganization, the Company's aggregate
consolidated indebtedness as of
September 30, 1998, for purposes of the
indentures relating to the notes, would
have been approximately 2.07 billion.
See "Description of the Notes" and
"Capitalization" below.
Optional Redemption of the
Seven Year Notes . . . . . . . . . . Except as set forth below, the Seven
Year Notes are not redeemable at the
Company's option prior to February 1,
2003. Thereafter, the Seven Year Notes
are subject to redemption, at the option
of the Company, in
13
whole or in part, at the redemption
prices set forth herein. In addition, at
any time prior to February 1, 2002, the
Company may redeem Seven Year Notes at a
redemption price equal to 109.250% of
the principal amount thereof, together
with accrued and unpaid interest thereon
to the redemption date, with the net
proceeds of one or more public or
private sales of certain equity
interests of the Company (other than
proceeds from a sale to any subsidiary
of the Company), provided that:
- at least 65% of the Seven Year Notes
remain outstanding immediately after the
occurrence of such redemption; and
- such redemption occurs within 120 days
of the date of the closing of any such
sale.
Optional Redemption of the
Ten Year Notes . . . . . . . . . . . Except as set forth below, the Ten Year
Notes are not redeemable at the
Company's option prior to February 1,
2004. Thereafter, the Ten Year Notes are
subject to redemption, at the option of
the Company, in whole or in part, at the
redemption prices set forth herein. In
addition, at any time prior to
February 1, 2002, the Company may redeem
Ten Year Notes at a redemption price
equal to 109.375% of the principal
amount thereof, together with accrued
and unpaid interest thereon to the
redemption date, with the net proceeds
of one or more public or private sales
of certain equity interests of the
Company (other than proceeds from a sale
to any subsidiary of the Company),
provided that: (1) at least 65% of the
Ten Year Notes remain outstanding
immediately after the occurrence of such
redemption; and (2) such redemption
occurs within 120 days of the date of
the closing of any such sale.
Change of Control. . . . . . . . . . Upon the occurrence of a Change of
Control (as defined herein), the Company
will be required to make an offer to
each holder of notes to repurchase all
or any part of such holder's notes at a
purchase price equal to 101% of the
principal amount thereof, together with
accrued and unpaid interest thereon to
the date of repurchase.
Offer to Purchase. . . . . . . . . . Upon the occurrence of certain events
described under "Description of the
Notes--Certain Covenants--Excess
Proceeds Offer," the Company will be
required to offer to repurchase a
specified amount of notes at a purchase
price equal to 101% of the principal
amount thereof, together with accrued
and unpaid interest thereon to the date
of repurchase.
Guarantees . . . . . . . . . . . . . The Ten Year Notes and the Seven Year
Notes are guaranteed by substantially
all of the Company's restricted
subsidiaries, on a senior basis, which
guarantee ranks PARI PASSU with all
senior unsecured indebtedness of such
restricted subsidiaries. EchoStar
Communications and the subsidiaries of
EchoStar Communications that are not
also subsidiaries of the Company (other
than DBSC) are not obligated under or
guaranteeing in any manner the Company's
obligations under the Ten Year Notes and
the Seven Year Notes. See "Description
of the Notes--Guarantees."
Certain Other Covenants. . . . . . . Each indenture restricts, among other
things, the payment of dividends,
14
the repurchase of stock and subordinated
indebtedness of the Company, the making
of certain other restricted payments (as
defined in the indentures), the
incurrence of certain indebtedness and
the issuance of preferred stock, certain
asset sales, the creation of certain
liens, certain mergers and
consolidations, and transactions with
affiliates (as defined in the
indentures).
Registration Rights; Liquidated
Damages. . . . . . . . . . . . . . . Pursuant to registration rights
agreements relating to each series of
notes among the Company, the guarantors
and the initial purchasers, the Company
and the guarantors agreed:
- to file an exchange offer
registration statement on or prior to
April 25, 1999, relating to an
exchange offer for the old notes and
guarantees (the exchange offer); and
- to use their best efforts to cause
the exchange offer registration
statement to be declared effective by
the SEC on or prior to July 24, 1999.
In certain circumstances, the Company
and the guarantors will be required to
provide a shelf registration statement
to cover resales of the notes and
guarantees by the holders thereof. If
the Company and the guarantors do not
comply with their obligations under a
registration rights agreement, they will
be required to pay liquidated damages to
holders of the notes under certain
circumstances. See "Description of the
Notes--Registration Rights; Liquidated
Damages." Our filing of the
registration statement of which this
prospectus is a part is intended to
satisfy the requirement to file the
exchange offer registration statement.
15
SUMMARY FINANCIAL DATA
The following summary financial data and the selected financial data
presented elsewhere in this prospectus for the five years ended December 31,
1997, are derived from the Combined and Consolidated Financial Statements of the
Company, audited by Arthur Andersen LLP, independent public accountants. The
following summary financial data with respect to the nine months ended
September 30, 1997 and 1998, are unaudited; however, in the opinion of
management, such data reflect all adjustments (consisting only of normal
recurring adjustments) necessary to fairly present the data for such interim
periods. Operating results for interim periods are not necessarily indicative of
the results that may be expected for a full year. The data set forth in this
table should be read in conjunction with "Management's Discussion and Analysis
of Financial Condition and Results of Operations," the Company's Combined and
Consolidated Financial Statements and the notes thereto, and other financial
information included elsewhere in this prospectus.
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
----------------------- -------------
1993 1994 1995 1996 1997 1997 1998
---- ---- ---- ---- ---- ---- ----
(IN THOUSANDS, EXCEPT RATIOS, SUBSCRIBERS
AND PER SUBSCRIBER DATA) (UNAUDITED)
STATEMENTS OF OPERATIONS DATA:
Revenue $ 211,563 $ 179,313 $ 148,520 $ 197,103 $ 475,902 $ 296,460 $ 696,944
Operating income (loss) 18,204 13,216 (8,006) (108,865) (224,336) (178,033) (55,994)
Net income (loss) (1) 12,272 90 (12,361) (101,676) (323,424) (248,937) (170,960)
AS OF SEPTEMBER 30, 1998
-------------------------
ACTUAL AS ADJUSTED
-------- ------------
(UNAUDITED)
BALANCE SHEET DATA:
Cash, cash equivalents and marketable investment securities (2) $ 44,300 $ 300,746
Total assets(3) 1,467,422 2,819,094
Long-term debt, net of current portion 1,517,786 2,049,547
Total stockholders' equity (deficit)(3) (464,722) 355,188
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
1993 1994 1995 1996 1997 1997 1998
---- ---- ---- ---- ---- ---- ----
(UNAUDITED)
Other Data:
DISH Network
subscribers............ -- -- -- 350,000 1,040,000 820,000 1,609,000
Average monthly revenue
per subscriber......... $-- $ -- $-- $35.50 $38.50 $39.10 $39.20
EBITDA (4)............. 19,881 15,459 (4,892) (65,496) (51,500) (44,488) 21,603
Net cash flows from:
Operating activities... 30,215 24,205 (21,888) (22,836) (7,549) (47,967) (40,068)
Investing activities... (20,910) (338,565) (1,431) (294,962) (306,079) (307,581) (19,309)
Financing activities... (6,199) 325,011 19,764 342,287 337,247 346,887 39,619
Ratio of earnings to
fixed charges (5)...... 18.0x -- -- -- -- -- --
Deficiency of earnings to
fixed charges (5)...... $-- $(5,206) $(44,315) $(188,347) $(366,447) $(276,734) $(192,359)
16
- -------------------
(1) Certain of the Company's subsidiaries operated under Subchapter S of the
Internal Revenue Code of 1986, as amended, and comparable provisions of
applicable state income tax laws, until December 31, 1993. The net income
for the year ended December 31, 1993, presented above is net of pro forma
income taxes of $7,846, determined as if the Company had been subject to
corporate federal and state income taxes for those years.
(2) Excludes restricted cash and marketable investment securities, which have
been reclassified and included in the As Adjusted amount.
(3) As adjusted to give effect to the offering of the old notes and the
application of the net proceeds thereof and the transaction with News
Corporation and MCI. Consummation of the acquisition under the agreement
with News Corporation and MCI is subject to receipt of regulatory approval
and approval of the shareholders of our parent company. There will be no
pro forma effect to the Company's Statement of Operations as a result of
the acquisition.
(4) The Company believes it is common practice in the telecommunications
industry for investment bankers and others to use various multiples of
current or projected EBITDA (earnings before interest, taxes, depreciation
and amortization) for purposes of estimating current or prospective
enterprise value and as one of many measures of operating performance.
Conceptually, EBITDA measures the amount of income generated each period
that could be used to service debt, because EBITDA is independent of the
actual leverage employed by the business; but EBITDA ignores funds needed
for capital expenditures and expansion. Some investment analysts track the
relationship of EBITDA to total debt as one measure of financial strength.
However, EBITDA does not purport to represent cash provided or used by
operating activities and should not be considered in isolation or as a
substitute for measures of performance prepared in accordance with
generally accepted accounting principles.
EBITDA differs significantly from cash flows from operating activities
reflected in the consolidated statement of cash flows. Cash from operating
activities is net of interest and taxes paid and is a more comprehensive
determination of periodic income on a cash (vs. accrual) basis, exclusive
of non-cash items of income and expenses such as depreciation and
amortization. In contrast, EBITDA is derived from accrual basis income and
is not reduced for cash invested in working capital. Consequently, EBITDA
is not affected by the timing of receivable collections or when accrued
expenses are paid. The Company is aware of no uniform standards for
determining EBITDA and believes presentations of EBITDA may not be
calculated consistently by different entities in the same or similar
businesses. However, the Company has consistently calculated the EBITDA
amounts shown above to equal "operating income (loss)" plus depreciation
and amortization (including subscriber acquisition costs amortization of
$16 million and $121 million for the years ended December 31, 1996 and
1997, and $95 million and $19 million for the nine months ended
September 30, 1997 and 1998, respectively).
(5) For purposes of computing the ratio of earnings to fixed charges, and the
deficiency of earnings to fixed charges, earnings consist of earnings from
continuing operations before income taxes, plus fixed charges. Fixed
charges consist of interest incurred on all indebtedness and the imputed
interest component of rental expense under non-cancelable operating leases.
For the years ended December 31, 1994, 1995, 1996 and 1997 and the nine
months ended September 30, 1997 and 1998, earnings were insufficient to
cover the fixed charges. On a pro forma basis, using an assumed effective
annual interest rate of 9.6% and assuming that the tender offers by our
parent company had been consummated as of the beginning of the applicable
period, the Company's pro forma earnings would have been inadequate to
cover its pro forma fixed charges for the year ended December 31, 1997, by
$341 million and for the nine months ended September 30, 1998, by
$165 million.
17
SUMMARY SATELLITE DATA
ECHOSTAR I ECHOSTAR II ECHOSTAR III ECHOSTAR IV(1) ECHOSTAR V (2) ECHOSTAR VI
(2)
Orbital slot..... 119 degrees WL 119 degrees WL 61.5 degrees WL 148 degrees WL 110 degrees WL 110 degrees WL
Transponders..... 16 @ 24 MHz 16 @ 24 MHz 16/32 @ 24 MHz 10/20 @ 24 MHz 16/32 @ 24 MHz 16/32 @ 24
(3)(4) (3)(4) (3) MHz (3)
Approximate channel 128 channels 128 channels 128/256 channels 80/160 channels 160/256 channels 160/256 channels
capacity (5)..
Output power..... 130 watts 130 watts 230/120 watts 230/120 watts 220/110 watts 240/120 watts
Expected end of
commercial life
(6)........... 2011 2011 2012 2010 2014 2014
Coverage area.... Continental United States Eastern and Western and Continental United States,
and certain regions of Central United Central United Alaska, Hawaii, Puerto Rico and
Canada and Mexico States States certain regions of Canada and
Mexico
- ----------------
(1) Permanent authorization to operate EchoStar IV at the 148 degree orbital
slot has not yet been obtained; EchoStar IV currently operates under a
special temporary authorization.
(2) Use of EchoStar V and EchoStar VI and the frequencies at the 110 degree
orbital slot is contingent upon the closing of the acquisition under the
agreement with News Corporation and MCI and successful launch of EchoStar V
and EchoStar VI. Consummation of this transaction is subject to receipt of
regulatory approval.
(3) The transponders on each of these satellites can be independently switched
to provide a range from 16 transponders operating at 220 or 230 watts of
power each (240 watts in the case of EchoStar VI) to 32 transponders
operating at 110 or 120 watts of power each subject to note 4.
(4) Although EchoStar III has experienced an anomaly, the satellite has not
experienced any loss of capacity to date. See "Risk Factors--We May Be
Unable To Settle Certain Claims With Insurers" below. EchoStar IV was
designed to operate a total of 32 transponders in 120 watt mode, or 16
transponders in 230 watt mode. As a result of the failure of the solar
panels on EchoStar IV to properly deploy, EchoStar IV is currently capable
of sustaining a maximum of only 20 transponders. That number will decrease
over time, but based on existing data the Company expects that
approximately 16 transponders will probably be available over the entire
expected 12 year life of the satellite, absent additional failures.
(5) Our parent company's direct broadcast satellite licenses do not allow full
use of that channel capacity. They specifically cover: (i) 11 of the 16
transponders (a maximum of approximately 88 video channels) on EchoStar I;
(ii) 10 of the 16 transponders (a maximum of approximately 80 video
channels) on EchoStar II; (iii) 11 of the 16 transponders (a maximum of
approximately 88 video channels) on EchoStar III; (iv) 24 of the 32
frequencies at the 148 degree orbital slot, where EchoStar IV currently
operates under a special temporary authorization (in light of EchoStar IV's
technical constraints, its maximum temporarily authorized effective
capacity is 160 video channels); (v) a total of 29 transponders at the 110
degree orbital slot to be operated on EchoStar V and EchoStar VI assuming
consummation of the acquisition under the agreement with News Corporation
and MCI and successful launch of the satellites (a maximum of approximately
290 video channels with two satellites operating in high power mode or 232
video channels with one satellite operating over all 29 frequencies in
low-power mode) (authorization has not yet been obtained). With digital
compression, each transponder or frequency can yield 8 or more video
channels (8 in low-power mode, 10 in high-power mode).
(6) We have estimated the expected end of commercial life of each satellite
based on each satellite's actual or expected launch date and the terms of
the construction and launch contracts. The minimum design life is 12 years.
The licenses are issued for ten year periods, and would, unless renewed by
the FCC, expire prior to the end of the minimum design life. See "Risk
Factors."
18
THE ECHOSTAR ORGANIZATION
The following chart illustrates the EchoStar group's present corporate
structure prior to completion of the planned reorganization and where
significant assets and rights are held. The notes are guaranteed by DBSC and
substantially all of our direct and indirect wholly owned restricted
subsidiaries. The following page sets forth a chart illustrating the EchoStar
group's corporate structure following consummation of the reorganization.
ECHOSTAR COMMUNICATIONS
CORPORATION
NASDAQ: DISH, DISHP
ISSUER OF THE
SERIES A AND SERIES C
PREFERRED STOCK
ISSUER OF THE SENIOR
PREFERRED EXCHANGE
NOTES
DIRECT BROADCASTING ECHOSTAR DBS ECHOSTAR DISH NETWORK
SATELLITE CORPORATION SPACE CORPORATION CREDIT CORPORATION
CORPORATION
ISSUER OF THE
NOTES AND THE - RESIDUAL RIGHTS RELATING - CONSUMER FINANCING OF
1997 NOTES TO LAUNCH CONTRACT FOR ECHOSTAR RECEIVER
ECHOSTAR III SYSTEMS
- ECHOSTAR III SATELLITE - ECHOSTAR IV SATELLITE
- 11 FREQUENCIES 61.5DEG. WL - 24 FREQUENCIES 148DEG. WL
- 11 FREQUENCIES 175DEG. WL
ECHOSTAR SATELLITE
BROADCASTING
CORPORATION
ISSUER OF THE
1996 NOTES
DISH, LTD.
ISSUER OF THE
1994 NOTES
ECHOSTAR TECHNOLOGIES ECHOSPHERE ECHOSTAR ECHOSTAR DirectSat
CORPORATION CORPORATION SATELLITE INTERNATIONAL Corporation
CORPORATION CORPORATION
- - U.S. DISTRIBUTION - U.S. DISTRIBUTION OF - DISH NETWORK AND - INTERNATIONAL - EchoStar II
OF ECHOSTAR DIRECT-TO-HOME SATELLITE SATELLITE SERVICES DISTRIBUTION OF satellite
RECEIVER SYSTEMS TV PRODUCTS AND ECHOSTAR - ECHOSTAR I SATELLITE DIRECT-TO-HOME - 10 frequencies
FOR DISH NETWORK AND RECEIVER SYSTEMS FOR THE - 11 FREQUENCIES 119 CENTS WL SATELLITE TV 119DEG. WL
DIRECT-TO-HOME DISH NETWORK TO SATELLITE - PROGRAMMING CONTRACTS PRODUCTS - 11 frequencies
SATELLITE TV PRODUCTS TV RETAILERS - DIGITAL BROADCAST CENTER 175DEG. WL
TO ECHOSPHERE - THREE CUSTOMER SERVICE - 1 frequency 110
AND OTHER DISTRIBUTORS CENTERS DEG. WL
- - INTERNATIONAL
DISTRIBUTION OF
SATELLITE TV PRODUCTS
- - RESEARCH AND DEVELOPMENT
OF DIRECT BROADCAST
SATELLITE STAND-ALONE AND
INTEGRATED PRODUCTS
19
The following chart illustrates the EchoStar group's expected corporate
structure and where significant assets and rights are, or are expected to be,
held following the planned reorganization.
ECHOSTAR COMMUNICATIONS
CORPORATION
NASDAQ: DISH, DISHP
- ISSUER OF SERIES C PREFERRED
STOCK
ECHOSTAR DBS DISH NETWORK
CORPORATION CREDIT CORPORATION
- ISSUER OF THE NOTES - CONSUMER FINANCING OF
ECHOSTAR RECEIVER
SYSTEMS
ECHOSTAR ECHOSPHERE ECHOSTAR ECHOSTAR
TECHNOLOGIES CORPORATION SATELLITE INTERNATIONAL
CORPORATION CORPORATION CORPORATION
- - U.S. DISTRIBUTION OF - U.S. DISTRIBUTION OF - DISH NETWORK AND SATELLITE - INTERNATIONAL
ECHOSTAR RECEIVER DIRECT-TO-HOME SERVICES DISTRIBUTION
SYSTEMS FOR DISH NETWORK SATELLITE TV PRODUCTS - ECHOSTAR I SATELLITE OF DIRECT-TO-HOME
AND DIRECT-TO-HOME AND ECHOSTAR RECEIVER - ECHOSTAR II SATELLITE SATELLITE
SATELLITE TV PRODUCTS SYSTEMS FOR THE DISH - ECHOSTAR III SATELLITE TV PRODUCTS
TO ECHOSPHERE AND OTHER NETWORK TO SATELLITE - ECHOSTAR IV SATELLITE
DISTRIBUTORS TV RETAILERS - CONTRACTS FOR ECHOSTAR V
- - INTERNATIONAL DISTRIBUTION AND ECHOSTAR VI *
OF SATELLITE TV PRODUCTS - 11 FREQUENCIES 61.5DEG. WL
- - RESEARCH AND DEVELOPMENT - 29 FREQUENCIES 110DEG. WL
OF DIRECT BROADCAST SATELLITE - 21 FREQUENCIES 119DEG. WL
STAND-ALONE AND INTEGRATED - 24 FREQUENCIES 148DEG. WL
PRODUCTS - 22 FREQUENCIES 175DEG. WL
- - NEWS CORPORATION AFFILIATE - PROGRAMMING CONTRACTS
TECHNOLOGY LICENSE AND 500,000 - DIGITAL BROADCAST CENTER
UNIT BOX ORDER** - ARIZONA DIGITAL BROADCAST
CENTER*
- THREE CUSTOMER SERVICE
CENTERS
- ----------------
- - Subject to FCC approval and consummation of the transcation iwth News
Corporation and MCI.
- - - Subject to consummation of the transcation with News Corporation and MCI.
20
RISK FACTORS
You should carefully consider all of the information contained in this
prospectus, which may be generally applicable to the old notes as well as to the
exchange notes, before deciding whether to tender your old notes and, in
particular, the following factors:
YOUR OLD NOTES WILL BE SUBJECT TO RESTRICTIONS ON TRANSFER AND THE TRADING
MARKET FOR YOUR OLD NOTES MAY BE LIMITED IF YOU DO NOT TENDER. If you do not
exchange your old notes for the exchange notes, you will continue to be subject
to the restrictions on transfer of your old notes described in the legend on
your old notes. The restrictions on transfer of your old notes arise because we
issued the old notes pursuant to exemptions from, or in transactions not subject
to, the registration requirements of the Securities Act and applicable state
securities laws. In general, you may only offer or sell the old notes if they
are registered under the Securities Act and applicable state securities laws, or
they are offered and sold pursuant to an exemption from such requirements. We
do not intend to register the old notes under the Securities Act. In addition,
if you exchange your old notes in the exchange offer for the purpose of
participating in a distribution of the exchange notes, you may be deemed to have
received restricted securities and, if so, you will be required to comply with
the registration and prospectus delivery requirements of the Securities Act in
connection with any resale transaction. To the extent old notes are tendered
and accepted in the exchange offer, the trading market, if any, for the old
notes would be adversely affected. See "The Exchange Offer" below.
YOU ARE RESPONSIBLE FOR COMPLIANCE WITH EXCHANGE OFFER PROCEDURES. We will
issue the exchange notes in exchange for your old notes only after we have
timely received your old notes, along with a properly completed and duly
executed letter of transmittal and all other required documents. Therefore, if
you want to tender your old notes in exchange for exchange notes, you should
allow sufficient time to ensure timely delivery. Neither the exchange agent nor
we are under any duty to notify you of defects or irregularities with respect to
the tender of your old notes for exchange. The exchange offer will expire at
5:00 p.m. New York City time on , 1999, or on a later extended
date and time as we may decide.
The exchange notes and any old notes having the same maturity which remain
outstanding after consummation of the exchange offer will vote together as a
single class for purposes of determining whether holders of the requisite
percentage thereof have taken certain actions or exercised certain rights under
the related indenture.
YOU MAY PARTICIPATE IN THE EXCHANGE OFFER ONLY UNDER CERTAIN CONDITIONS.
Based on interpretations by staff of the SEC, as set forth in no-action letters
issued to third parties, we believe that you may offer for resale, resell and
otherwise transfer the exchange notes without compliance with the registration
and prospectus delivery provisions of the Securities Act, subject to certain
limitations. These limitations include the following:
- - you are not an "affiliate" of ours within the meaning of Rule 405 under the
Securities Act,
- - you acquire your exchange notes in the ordinary course of your business and
- - you have no arrangement with any person to participate in the distribution
of such exchange notes.
However, we have not submitted a no-action letter to the SEC regarding this
exchange offer and we cannot assure you that the SEC would make a similar
determination with respect to the exchange offer as in such other circumstances.
If you are an affiliate of the Company, are engaged in or intend to engage in
21
or have any arrangement or understanding with respect to a distribution of the
exchange notes to be acquired pursuant to the exchange offer, you
- may not rely on the applicable interpretations of the staff of the SEC
and
- must comply with the registration and prospectus delivery requirements
of the Securities Act in connection with any resale transaction.
Each broker-dealer that receives exchange notes for its own account pursuant to
the exchange offer must acknowledge that it will deliver a prospectus meeting
the requirements under the Securities Act in connection with any resale of such
exchange notes. The letter of transmittal states that by so acknowledging and
delivering a prospectus, a broker-dealer will not be deemed to admit that it is
an "underwriter" within the meaning of the Securities Act. This prospectus, as
it may be amended or supplemented from time to time, may be used by a
broker-dealer in connection with resales of exchange notes where the old notes
exchanged for such exchange notes were acquired by such broker-dealer as a
result of market-making activities or other trading activities. We have agreed
to use our best efforts to make this prospectus available to any participating
broker-dealer for use in connection with any such resale. See "Plan of
Distribution" below. However, to comply with the securities laws of certain
jurisdictions, if applicable, the exchange notes may not be offered or sold
unless they have been registered or qualified for sale in such jurisdictions or
an exemption from registration or qualification is available.
RESTRICTIVE COVENANTS MAY LIMIT OUR ABILITY TO OPERATE OUR BUSINESS. The
indentures relating to each series of notes contain restrictive covenants that,
among other things, limit our ability and the ability of our subsidiaries to:
- - incur additional indebtedness;
- - issue preferred stock;
- - sell assets;
- - create, incur or assume liens;
- - create dividend and other payment restrictions with respect to our
subsidiaries;
- - merge, consolidate or sell assets;
- - enter into transactions with affiliates; and
- - pay dividends.
These restrictions may inhibit our ability to manage our business and to
react to changing market conditions. See "Description of the Notes" below.
WE HAVE SUBSTANTIAL INDEBTEDNESS AND WE ARE DEPENDENT ON OUR SUBSIDIARIES'
EARNINGS. Our Company is highly leveraged, which makes us vulnerable to changes
in general economic conditions. We have substantial debt service requirements.
The indenture for each series of notes restricts our ability and our
subsidiaries' ability to incur additional debt. Thus it is, and will continue to
be, difficult for us and our subsidiaries to obtain additional debt if required
or desired in order to implement our business strategy. Since substantially all
of our operations are conducted through our subsidiaries, our ability to service
our debt obligations, including our obligations under the notes, is dependent
upon the earnings of our subsidiaries and the payment of funds by our
subsidiaries to us in the form of loans, dividends or other payments. Some of
our subsidiaries may become parties to other agreements that severely restrict
their
22
ability to obtain additional debt financing for working capital, capital
expenditures and general corporate purposes. As of September 30, 1998, we had
outstanding long-term debt (including both the current and long-term portion) of
approximately $1.5 billion. On a pro forma basis, after giving effect to
issuance of the notes and application of the net proceeds therefrom and to the
reorganization, the Company's aggregate consolidated indebtedness as of
September 30, 1998, for purposes of the indentures would have been approximately
$2 billion. Although the notes are titled "Senior," we have not issued, and do
not have any plans to issue, any indebtedness to which the notes would be
senior. Our ability to meet our payment obligations will depend on the success
of our business strategy, which is subject to uncertainties and contingencies
beyond our control.
OUR INDUSTRY IS HIGHLY COMPETITIVE. The subscription television industry
is highly competitive. We face competition from companies offering video, audio,
data, programming and entertainment services, including cable operators and
other satellite operators. Many of these competitors have substantially greater
financial, marketing and other resources than we have. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources" below.
WE FACE COMPETITION FROM DIRECT BROADCAST SATELLITE AND OTHER SATELLITE
SYSTEM OPERATORS. We compete with companies offering programming through
various satellite broadcasting systems. The most popular satellite TV services
are direct broadcast satellites like ours, which because of their high power,
can transmit programming to small 18-inch satellite dishes. One competitor,
DIRECTV, Inc., has launched three direct broadcast satellites and has 27
frequencies at the 101 degree orbital slot that are capable of full coverage of
the "lower 48" continental United States. DIRECTV and USSB, which operates five
more frequencies on one of DIRECTV's satellites, currently offer more than 200
channels of combined video and audio programming. DIRECTV and USSB are in an
advantageous position with regard to market entry, programming (particularly in
light of DIRECTV's exclusive sports programming) and, possibly, volume discounts
for programming offers. DIRECTV's parent recently announced an agreement whereby
it would acquire the business and assets of USSB in a transaction expected to be
completed in mid-1999. In addition to the 5 USSB frequencies at the 101 degree
orbital slot, this combination would give DIRECTV access to three additional
frequencies controlled by USSB at the 110 degree orbital slot, which is also a
very favorable position for coverage of the United States.
Two other popular types of satellite TV service are medium power, Ku-band
fixed satellite services, that are received on satellite dishes approximately 3
feet in diameter, and low power, C-band services, which is an older technology
received on satellite dishes that are usually 6 feet in diameter or larger. We
also face competition from PrimeStar, Inc. PrimeStar currently leases a medium
power satellite at the 85 degree orbital slot and as of November 30, 1998, had
approximately 2.3 million subscribers. It has also applied for FCC
authorization to acquire control over TCI Satellite Entertainment, Inc., a
company that has an authorization for 11 direct broadcast satellite frequencies
at the 119 degree orbital slot and has launched a satellite to that location.
DIRECTV's parent recently announced an agreement whereby it would acquire both
PrimeStar's existing medium power business and its rights to acquire TCI's
direct broadcast satellite assets, subject in each case to regulatory approvals
and customary conditions. In addition, two other satellite companies in the
U.S., including a subsidiary of Loral Space and Communications Limited, have
conditional permits for a comparatively small number of direct broadcast
satellite assignments that can be used to provide service to portions of the
United States.
The FCC has proposed to allocate additional expansion spectrum for direct
broadcast satellite services, and has separately indicated that it may apply to
the International Telecommunication Union for allocation of additional direct
broadcast satellite orbital slots capable of providing service to the United
States. The FCC already has permitted a company, Televisa International, LLC, to
provide satellite TV service in the United States through a Mexican licensed
satellite from an orbital slot with full coverage of
23
the "lower 48" continental United States. We cannot be sure that these and other
recent developments will not create significant additional competition in the
market for subscription television services. See "Business--Competition--Other
Satellite System Operators."
WE FACE COMPETITION FROM CABLE TELEVISION AND OTHER LAND-BASED SYSTEMS. We
encounter substantial competition in the subscription television market from
cable television and other land-based systems. Cable television operators have a
large, established customer base, and many cable operators have significant
investments in, and access to, programming. Cable television service is
currently available to more than 90% of the approximately 98 million U.S.
television households, and approximately 67% of total U.S. households currently
subscribe to cable. Cable television operators currently have an advantage
relative to us by providing local programming as well as by providing service to
multiple television sets within the same household. Cable operators may also
obtain a competitive advantage through bundling their analog video service with
expanded digital video services delivered terrestrially or via satellite,
synchronous high speed data transmission, and telephone service on upgraded
cable systems. For example, some cable companies now offer high speed Internet
access over their upgraded fiber optic systems, and AT&T recently announced that
it would provide telephone service over Time Warner's cable system. As a result
of these and other factors, there can be no assurance that we will be able to
continue to expand our subscriber base or compete effectively against cable
television operators. See "Business--Competition--Cable Television."
New and advanced local multi-point distribution services are still in the
development stage. In addition, digital video compression over existing
telephone lines, and digital "wireless cable" are being implemented and
supported by entities such as regional telephone companies which are likely to
have greater resources than we have. When fully deployed, these new technologies
could have a material adverse effect on the demand for direct broadcast
satellite services. Moreover, mergers, joint ventures, and alliances among
franchise, wireless or private cable television operators, regional Bell
operating companies and others may result in providers capable of offering
bundled cable television and telecommunications services in competition with us.
For instance, AT&T is in the process of acquiring cable operator TCI, subject to
certain approvals. There can be no assurance that we will be able to compete
successfully with existing competitors or new entrants in the market for
subscription television services. See "Business--Competition--Telephone
Companies."
WE EXPECT OPERATING LOSSES THROUGH AT LEAST 2000. Due to the substantial
expenditures required to complete construction, launch and deployment of our
direct broadcast satellite system and introduction of our DISH Network service
to consumers, we have sustained significant losses in recent periods. Our
operating losses were $109 million, $224 million and $56 million for the years
ended December 31, 1996 and 1997, and the nine months ended September 30, 1998,
respectively. We had net losses of $102 million, $323 million and $171 million
during those same periods. Improvements in our results of operations are largely
dependent upon our ability to increase our customer base while maintaining our
price structure, controlling subscriber turnover (the rate at which subscribers
terminate service), and effectively managing our costs. No assurance can be
given that we will be effective with regard to these matters. In addition, we
incur significant acquisition costs to obtain DISH Network subscribers. The high
cost of obtaining new subscribers magnifies the negative effects of subscriber
turnover. See "--We May Be Unable To Manage Rapidly Expanding Operations" and
"--Increased Subscriber Turnover Could Affect Our Financial Performance." We
anticipate that we will continue to experience operating losses through at least
2000. There can be no assurance that such operating losses will not continue
beyond 2000. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Liquidity and Capital Resources."
WE MAY NEED ADDITIONAL CAPITAL. We may require additional funds to acquire
DISH Network subscribers. In addition, we have conditional licenses or
applications pending with the FCC for a two satellite Ku-band system, a two
24
satellite Ka-band system, a two satellite extended Ku-band system and a six
satellite low earth orbit satellite system. We will need to raise additional
funds for the foregoing purposes. Further, a number of factors, some of which
are beyond our control or ability to predict, could require us to raise
additional capital. These factors include higher than expected subscriber
acquisition costs, a defect in or the loss of any satellite or an increase in
the cost of acquiring subscribers due to additional competition, among other
things. We cannot assure you that we will be able to raise additional capital
at the time necessary or on satisfactory terms. The inability to raise
sufficient capital would have a material adverse effect on our business. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
WE MAY BE UNABLE TO PURCHASE NOTES TENDERED UPON A CHANGE OF CONTROL. We
cannot assure you that we will have sufficient funds to repurchase the notes
upon a change of control as defined in the "Description of the Notes." If we
have insufficient funds to redeem all notes tendered for purchase upon the
occurrence of a change of control and we are unable to raise additional capital
there could be an event of default under the indentures governing the notes. We
cannot assure you that additional capital would be available on acceptable
terms, or at all.
WE MAY BE UNABLE TO SETTLE CERTAIN CLAIMS WITH INSURERS. During
October 1998, EchoStar III experienced an anomaly which, together with previous
anomalies to date, has resulted in the failure of 3 traveling-wave-tube
amplifiers, or, "TWTAs," and the loss of use of a total of 6 TWTAs. The
satellite is equipped with a total of 44 TWTAs. Only 11 TWTAs are necessary to
fully utilize our 11 frequencies at the 61.5 degree orbital slot, where the
satellite is located. Although there has been no interruption of service for our
customers and no interruption of service is presently expected, we are working
with Lockheed Martin to investigate the cause and potential implications of the
anomalies. Lockheed Martin has informally advised us that the anomaly may result
in the loss of additional transponders in the future, which are used to transmit
programming.
As a result of the anomaly related to the TWTAs, we have instructed our
broker to notify our insurance carriers of an occurrence under the terms of the
EchoStar III launch insurance policy. The EchoStar III launch insurance policy
provides for insurance of $219.3 million covering the period from launch of the
satellite (October 5, 1997) plus 365 days. Under that policy, we have until
March 1999 to file a claim for either a constructive total or partial loss. It
may be several weeks before all of the data required in connection with the
filing of a claim can be accumulated. Pending completion of the anomaly
investigation, we have transitioned to a 60 day, $200 million in-orbit insurance
policy on EchoStar III at standard industry rates which was renewed through
February 2, 1999. However, the policy contains an exclusion for future TWTA
losses based on similar anomalies. As a result of the exclusion, and in the
event that comprehensive coverage for the TWTA anomalies is ultimately denied
under the launch insurance policy, we could potentially experience uninsured
losses of capacity on EchoStar III in the future, up to and including a total
loss of capacity. Although we cannot assure you, we expect that we will be able
to procure in-orbit insurance on more traditional terms in the future if the
anomaly investigation is satisfactorily concluded and no further failures occur.
EchoStar IV is currently able to use a maximum of only 20 transponders as a
result of a solar array anomaly. The number of available transponders will
decrease over time. EchoStar IV has also experienced TWTA anomalies comparable
to those that occurred to EchoStar III which have resulted in the failure of
three TWTAs and the loss of use of a total of six TWTAs. Based on existing data,
we expect that approximately 16 transponders will probably be available over the
entire expected 12 year life of the satellite, absent significant additional
TWTA anomalies or other failures. In September 1998, we filed a $219.3 million
insurance claim for a total loss under the launch insurance policy related to
EchoStar IV. However, if we receive $219.3 million, for a total loss on the
satellite, the insurers would obtain the sole right to the benefits of salvage
from EchoStar IV under the terms of the launch insurance policy.
25
Although we believe we have suffered a total loss of EchoStar IV in accordance
with that definition in the launch insurance policy, we presently intend to
negotiate a settlement with the insurers that will compensate us for the reduced
satellite transmission capacity and allow us to retain title to the asset. We
cannot assure you that we will receive the amount claimed or, if we receive the
full amount of the claim, that we will retain title to Echostar IV with its
reduced capacity.
WE RELY ON KEY PERSONNEL. We believe that our future success will depend
to a significant extent upon the performance of Charles W. Ergen, Chairman,
Chief Executive Officer and President of our parent company. The loss of
Mr. Ergen could have an adverse effect on our business. We do not maintain "key
man" insurance. Although all of our executives, other than executive officers,
have executed agreements limiting their ability to work for or consult with
competitors if they leave the Company, the Company does not have any employment
agreements with any executive officer of the Company.
WE DEPEND ON OTHERS TO PRODUCE PROGRAMMING. We are dependent on third
parties to provide us with programming services. Our programming agreements have
remaining terms ranging from one to ten years and contain various renewal and
cancellation provisions. We may not be able to renew these agreements on
favorable terms or at all, or these agreements may be cancelled prior to
expiration of their original term. In the event that any such agreements are not
renewed or are cancelled, we cannot assure you that we would be able to obtain
substitute programming, or that such substitute programming would be comparable
in quality or cost to our existing programming. Our competitors currently offer
much of the same programming that we do. Our ability to compete successfully
will depend on our ability to continue to obtain desirable programming and
attractively offer it to our customers at competitive prices. See
"Business--Programming."
WE DEPEND ON THE CABLE ACT FOR ACCESS TO OTHERS' PROGRAMMING. Pursuant to
the Cable Television Consumer Protection and Competition Act of 1992 and the
FCC's rules, programming developed by cable-affiliated programmers generally
must be offered to all multi-channel video programming distributors on equal
terms and conditions. The Cable Act and the FCC's rules also prohibit some types
of exclusive programming contracts. We purchase a substantial percentage of our
programming from cable-affiliated programmers. Certain of the restrictions on
cable-affiliated programmers will expire in 2002 unless extended by the FCC. As
a result, any change in the Cable Act and the FCC's rules that permits the cable
industry or programmers to discriminate against competing businesses, such as
ours, in the sale of programming could adversely affect our ability to acquire
programming at all or to acquire programming on a cost-effective basis. In
addition, the need to obtain certain retransmission consents and copyright
licenses may limit our strategy to provide local programming in multiple
markets. See "Business--Government Regulation--Satellite Home Viewer Act and
Retransmission Consent."
CABLE COMPETITORS MAY BLOCK OUR ACCESS TO POPULAR PROGRAMMING. On May 19,
1998, we filed a complaint against Comcast, a major cable provider, seeking
access to the sports programming controlled by Comcast in the Philadelphia area.
On January 22, 1999, the FCC denied this complaint, partly on the basis that
Comcast's programming is delivered terrestrially and therefore is not subject to
program access prohibitions. We cannot be certain whether or not other TV
service providers who control production or distribution of their own
programming would switch to terrestrial transmission of their programming and
seek to rely on the FCC's denial of our complaint against Comcast in order to
deny us access to their programming. We also cannot be certain whether or not
these companies would seek to acquire sports franchises and exclusively
distribute the corresponding programming, which could possibly limit our access
to popular sports programming.
OUR BUSINESS RELIES ON THE INTELLECTUAL PROPERTY OF OTHERS AND WE MAY
INADVERTENTLY INFRINGE THEIR PATENTS AND PROPRIETARY RIGHTS. Our ability to
obtain patents and other intellectual property rights
26
is material to our business. Many of our competitors have, and may obtain in the
future, patents that cover or affect products or services directly or indirectly
related to those that we offer. We cannot assure you that we are aware of all
patents that our products may potentially infringe. In addition, patent
applications in the United States are confidential until a patent is issued and,
accordingly, we cannot evaluate the extent to which our products may infringe
claims contained in pending patent applications. In general, if a court
determines that one or more of our products infringes on patents held by others,
we would be required to cease developing or marketing those products, to obtain
licenses to develop and market those products from the holders of the patents or
to redesign those products in such a way as to avoid infringing the patent
claims. We cannot estimate the extent to which we may be required in the future
to obtain licenses with respect to patents held by others and the availability
and cost of any such licenses. Various parties have contacted us, claiming
patent and other intellectual property rights with respect to components within
our direct broadcast satellite system. We cannot be certain that we would be
able to obtain such licenses on commercially reasonable terms or, if we were
unable to obtain such licenses, that we would be able to redesign our products
to avoid infringement. See "Business--Legal Proceedings" below.
WE USE ONLY ONE DIGITAL BROADCAST CENTER. We will continue to rely upon a
single digital broadcast center located in Cheyenne, Wyoming for key operations
for programming signals, such as reception, encryption and compression. If a
natural or other disaster damaged the digital broadcast center, we cannot assure
you that we would be able to continue to provide programming services to our
customers.
WE DEPEND PRIMARILY ON A SINGLE RECEIVER MANUFACTURER. EchoStar receiver
systems are currently manufactured primarily by SCI Technology, Inc., a
high-volume contract electronics manufacturer. VTech recently began
manufacturing some EchoStar receiver systems for us. JVC manufactures other
consumer electronics products incorporating our receiver systems. If SCI is
unable for any reason to produce receivers in a quantity sufficient to meet our
requirements, our ability to add additional DISH Network subscribers and grow
our Technology business unit would be materially impaired. Likewise, our results
of operations would be adversely affected.
WE HAVE FEWER DISTRIBUTION CHANNELS THAN OUR LARGEST DIRECT BROADCAST
SATELLITE COMPETITOR. We do not currently have manufacturing agreements or
arrangements with consumer products manufacturers other than JVC and Philips. As
a result, our receivers, and consequently our programming services, are less
well known to consumers than those of our largest satellite broadcast
competitor, and, due in part to the lack of product recognition, our receiver
systems are carried for sale in fewer retail outlets (approximately 18,000) than
our largest direct satellite broadcast competitor (approximately 30,000).
WE DEPEND ON ANOTHER COMPANY FOR BILLING SERVICES. Our contract with our
current subscriber management and billing system service provider will expire in
March 1999. Because our new subscriber management and billing system contract
will expire prior to the date that our new system is expected to be operational,
we will be required to renew or extend the existing contract for that interim
period. We presently expect that the terms of this interim contract could be
significantly less favorable than the present contract. Accordingly, we expect
that the DISH Network's operating expenses could increase during the second
quarter of 1999 and these increased costs could continue until we are able to
either implement a new subscriber management and billing system or we are able
to negotiate an extended contract in the event that we abandon our proposed new
system. Our business could be materially harmed if the existing contract is not
renewed, and the new billing system does not operate as expected.
THE FAILURE TO CONSUMMATE THE ACQUISITION FROM NEWS CORPORATION AND MCI MAY
ADVERSELY AFFECT OUR EXPANSION PLANS. The transaction to acquire satellites
from News Corporation and
27
transmission frequencies from MCI is subject to regulatory approval and other
conditions. If this transaction is not consummated, then we may not be able to
secure access to the 110 degree orbital slot on favorable terms or at all, which
would have an adverse effect on our ability to expand our business. It is also
possible that the stay of the News Corporation litigation may expire. We may be
required to dismiss the News Corporation litigation with prejudice even if this
transaction is not consummated. See "Business--Legal Proceedings."
IMPEDIMENTS TO RETRANSMISSION OF LOCAL BROADCAST SIGNALS; OUR LOCAL
PROGRAMMING STRATEGY FACES UNCERTAINTY. We offer programming telecast by local
affiliates of national television networks to several major population centers
within the continental United States. In order to retransmit network station
programming, satellite TV companies usually must have a copyright license and
also obtain the retransmission consent of the network station. Although we have
entered into a retransmission consent agreement covering FOX Network owned and
operated stations in connection with the agreement with News Corporation and
MCI, we cannot be certain whether we will obtain retransmission consents if they
are required from any local affiliate. Although we believe that the Satellite
Home Viewer Act allows us to retransmit the programs of a local network station
to its local market via satellite (a view that is opposed by several other
parties), we also believe that the compulsory copyright license under the
Satellite Home Viewer Act and the retransmission consent rules of the
Communications Act may not be sufficient to permit us to implement our strategy
to retransmit such programming in the most efficient and comprehensive manner
and that new legislation may be necessary for that purpose. Our inability to
retransmit local programming could have an adverse effect on our strategy to
compete with cable companies, which provide local programming.
TV NETWORKS OPPOSE OUR STRATEGY OF DELIVERING DISTANT NETWORK SIGNALS. The
national networks and local affiliate stations have sued PrimeTime 24, a
satellite company whose signal feeds our parent company had one time delivered,
challenging PrimeTime 24's methods of selling network programming until recently
to consumers based upon infringement of copyright. The United States District
Court for the Southern District of Florida entered a nationwide injunction
preventing PrimeTime 24 from selling its programming to consumers unless the
programming was sold according to certain stipulations in the injunction, which
is soon set to become effective. The injunction covers PrimeTime 24's
"distributors" as well. Certain plaintiffs in the Florida litigation informed
our parent company that they considered our parent company a "distributor" for
purposes of that injunction. A federal district court in North Carolina has also
issued an injunction against PrimeTime 24 prohibiting certain distant signal
retransmissions to homes delineated by a contour in the Raleigh area. Other
copyright litigation against PrimeTime 24 is pending.
As a result of several regulatory, political, legal, contractual and
business factors, during July 1998, we began uplinking and distributing network
TV signals directly. CBS and other broadcast networks have informed us that they
believe our method of providing distant network programming violates the
Satellite Home Viewer Act and hence infringes their copyright.
On October 19, 1998, our parent company filed a declaratory judgment action
in the United States District Court for the District of Colorado against the
four major networks. Our parent company has asked the court to enter a judgment
declaring that our method of providing distant network programming does not
violate the Satellite Home Viewer Act and hence does not infringe the networks'
copyrights.
On November 5, 1998, the NBC, CBS, ABC and FOX networks, together with
their affiliate groups, filed a complaint in federal district court in Miami
against our parent company and some of its subsidiaries, alleging copyright
infringement. The plaintiffs in that action have also requested the issuance of
a preliminary injunction against us. If the case is decided against us,
significant damage awards and
28
additional material restrictions on our sale of network signals could result.
For example, we could be required to stop providing distant network signals to a
material portion of our subscribers. If we are unable for either legal or
commercial reasons to deliver network programming to our subscribers, it could
result in a less attractive service, decreases in subscriber activations and
subscription television services revenue and an increase in subscriber turnover.
The Satellite Home Viewer Act permits satellite retransmission of distant
network signals only to "unserved households." The determination of whether a
household qualifies as "unserved" for the purpose of being eligible to receive a
distant network signal depends, in part, on whether that household can receive a
signal of "Grade B intensity" as defined by the FCC. On November 17, 1998, the
FCC released a notice of proposed rule making concerning the term "Grade B
intensity" as used in the Satellite Home Viewer Act. The notice of proposed
rule making requested comment, or made tentative proposals on, possible rules
regarding Grade B intensity for purposes of the Satellite Home Viewer Act. On
February 2, 1999, the FCC released its report and order in that proceeding.
Although the FCC declined to change the values of Grade B intensity, it adopted
a method for measuring it at particular households. The FCC also endorsed a
method for predicting "Grade B intensity" at particular households. We cannot be
sure whether these methods are favorable to us or what, if any, weight the
courts will give to the FCC's decision. We also cannot be certain whether the
application of these methods by the courts will result in termination of distant
signal delivery to a material portion of our subscribers and decreases in future
subscriber activations.
THE REGULATORY REGIME WE OPERATE UNDER COULD CHANGE ADVERSELY. The FCC
imposes different rules for "subscription" and "broadcast" services. We believe
that, because we offer a subscription programming service, we are not subject to
many of the regulatory obligations imposed upon broadcast licensees. However,
we cannot be certain whether the FCC will not find in the future that we should
be treated as a broadcast licensee with respect to our current and future
operations, and certain parties have requested that we be treated as a
broadcaster. If the FCC determined that we are, in fact, a broadcast licensee,
we could be required to comply with all regulatory obligations imposed upon
broadcast licensees, which are generally subject to more burdensome regulation
than subscription service providers like us.
Direct broadcast satellite operators like us currently are not subject to
the "must carry" requirements of the Cable Act that require cable operators and
broadcasters to carry certain programming. The cable industry and the
broadcasters have argued that direct broadcast satellite operators should be
subject to these requirements, and the broadcasters also have argued that
satellite companies should not be allowed to distribute local network signals
unless they become subject to such requirements. If the "must carry"
requirements of the Cable Act are revised to include direct broadcast satellite
operators, or if new legislation or regulation of a similar nature is
promulgated, our plans to provide local programming may be adversely affected,
and such must carry requirements could cause the displacement of possibly more
attractive programming. Additionally, the FCC recently imposed public interest
requirements on direct broadcast satellite licensees, such as us, to set aside
four percent of channel capacity exclusively for noncommercial programming at
below-cost rates, which could also displace programming for which we could be
paid commercial rates.
The FCC has commenced a rulemaking which seeks to streamline and revise its
rules governing direct broadcast satellite. This rulemaking concerns many new
possible direct broadcast satellite rules. There can be no assurance about the
content and effect of any new direct broadcast satellite rules ultimately
promulgated by the FCC.
FOREIGN OWNERSHIP RESTRICTIONS COULD AFFECT OUR BUSINESS PLAN. The
Communications Act, and the FCC's implementing regulations, provide that, when
subsidiaries of a holding company hold certain
29
types of FCC licenses, foreign nationals or their representatives may not own or
vote in excess of 25% of the total equity of the holding company, considered on
a fully-diluted basis, except upon an FCC public interest determination.
Although the FCC's International Bureau has ruled that these limitations do not
apply to providers of subscription direct broadcast satellite service like us,
the ruling has been challenged and the question remains open. Furthermore, the
limitations will apply to our licenses for fixed satellite service if we hold
ourselves out as a common carrier or if the FCC decides to treat us as such a
carrier. The FCC has noted that we have proposed to operate one of our
authorized fixed satellite service systems on a common carrier as well as a
non-common carrier basis.
We believe that our foreign ownership is under 5%. The pending transaction
with New Corporation, however, would result in the issuance to an Australian
corporation of stock in excess of these limitations if they apply, and a
separate FCC determination that such ownership is consistent with the public
interest might be required in order to avoid a violation of the Communications
Act or the FCC's rules.
OUR BUSINESS DEPENDS SUBSTANTIALLY ON FCC LICENSES THAT CAN EXPIRE OR BE
REVOKED OR MODIFIED. We have licenses to operate EchoStar I and EchoStar II at
the 119 degree orbital slot, which both expire in 2006, and a license to operate
EchoStar III at the 61.5 degree orbital slot, which expires in 2008. Also, we
have filed with the FCC an application for a license to operate EchoStar IV as
well as a request for a waiver of the requirement of serving Alaska and Hawaii
from the 148 degree orbital slot. The state of Hawaii has requested the
imposition of several conditions on these requested authorizations, and we have
opposed many of these conditions. We cannot be sure that the FCC will grant
these requests or that it will not impose onerous conditions. We are currently
operating EchoStar IV at the 148 degree orbital slot under special temporary
authorization, which is currently set to expire on February 21, 1999. Some of
our pending and future requests to the FCC for extensions, waivers and approvals
have been, and are expected to continue to be, opposed by third parties.
In connection with the transaction with News Corporation and MCI, we filed
an application with the FCC to transfer MCI's licenses to our parent company for
our use. Several parties have opposed the application on various grounds
arguing, for example, that alien ownership limitations and other broadcast
qualification requirements apply, requesting program access conditions with
respect to News Corporation's programming, and requesting conditions in
connection with service to Alaska and Hawaii, including requesting service to
Hawaii from the 110 degree orbital slot as well as from the 148 degree orbital
slot, with respect to which some of our affiliates have filed a still pending
request for a wavier of the obligation to serve Alaska and Hawaii. We cannot be
sure how the FCC or other regulatory authorities would rule on any of these
oppositions or requests. We do not know whether MCI's planned system is capable
of providing service to Hawaii of the type that the state of Hawaii requested,
including, for example, use of 18-24 inch satellite dishes, and it is likely
that this system will not be capable of providing such service. Furthermore, the
FCC has not yet approved some of the telemetry, tracking and control operations
of the planned MCI system that we agreed to acquire, or a pending request for
the FCC's permission to modify the system. MCI's authorization itself is subject
to pending challenges before the FCC. Our plan to use our authorized
frequencies at the 119 degree orbital slot and our requested frequencies at the
110 degree orbital slot for a single consumer satellite dish may be subject to
additional regulatory requirements. We cannot be certain how the FCC will decide
on these matters.
The FCC had imposed a one-time rule, applicable only to the January 1996
direct broadcast satellite auction, which effectively prevented direct broadcast
satellite operators from using channels at more than one orbital slot with full
coverage of the continental United States. If the FCC reimposed this rule, we
would not be able to preserve both our requested authorization at the 110 degree
orbital slot and our existing licenses at the 119 degree orbital slot. We
cannot be sure how the FCC will rule in this matter.
30
The telemetry, tracking and control operations of EchoStar I are in an area
of the spectrum called the "C-band." Although the FCC granted us conditional
authority to use these frequencies for telemetry, tracking and control, in
January 1996 a foreign government raised an objection to EchoStar I's use of
these frequencies. We cannot be certain whether that objection will subsequently
require us to relinquish the use of such C-band frequencies for telemetry,
tracking and control purposes. Further, EchoStar II's telemetry, tracking and
control operations are in the "extended" C-band. Our authorization to use these
frequencies was set to expire on January 1, 1999. Although we have timely
applied for extension of that authorization to 2006, we cannot be sure that the
FCC will grant our request. If we lose the ability to use these frequencies for
controlling either satellite, we would lose the satellite.
All of our authorizations for satellite systems that are not yet
operational, including the licenses that we expect to get from MCI, are subject
to construction and progress obligations, milestones, reporting and other
requirements. The FCC has, in fact, indicated that it may revoke, terminate,
condition or decline to extend or renew such authorizations if we fail to comply
with applicable Communications Act requirements. If we fail to file adequate
reports or to demonstrate progress in the construction of our satellite systems,
the FCC has stated that it may cancel our authorizations for those systems. We
have not filed, or timely filed, all required reports or other filings, and some
of our construction permits have expired, in connection with our authorized
systems with the FCC. We cannot be certain whether or not the FCC would cancel
our authorizations.
WE MAY BE UNABLE TO MANAGE RAPIDLY EXPANDING OPERATIONS. To manage our
growth effectively, we must continue to develop our internal and external sales
force, installation capability, customer service operations, and information
systems, and maintain our relationships with third party vendors. We will also
need to continue to expand, train and manage our employee base, and our
management personnel will be required to assume even greater levels of
responsibility. If we are unable to manage our growth effectively, our business
and results of operations could be materially adversely affected.
INCREASED SUBSCRIBER TURNOVER COULD AFFECT OUR FINANCIAL PERFORMANCE. From
January 1, 1997, our monthly subscriber turnover, which represents the number of
subscriber disconnects during the period divided by the weighted-average number
of subscribers during the period, has averaged less than 1.25%. If subscriber
turnover increases, our financial condition and results of operations would be
adversely affected because we subsidize the cost of EchoStar receiver systems.
OUR PLANNED SATELLITE LAUNCHES ARE SUBJECT TO RISKS. Launch services are
provided in very few countries and locations around the world, and we have a
limited choice of launch services providers. If a foreign launch services
provider is used for EchoStar V or EchoStar VI, the satellite manufacturer will
be required to obtain from the United States government a technical data
exchange license and a satellite export license for that satellite. We could
also be subject to other restrictions by the United States government because of
policy towards the countries where launch services providers are based. We
cannot be certain that these licenses will be obtained on time or at all, or
that any delay in getting these licenses will not have a materially adverse
effect on our business. Satellites are subject to significant risks, including
launch failure, which may result in incorrect orbital placement or improper
commercial operation. Approximately 15% of all commercial geostationary
satellite launches have resulted in a total or constructive total loss. The
failure rate varies by launch vehicle and satellite manufacturer.
OUR SATELLITES HAVE MINIMUM DESIGN LIVES OF 12 YEARS, BUT COULD FAIL BEFORE
THEN. Each of our satellites has a limited useful life. A number of factors
affect the useful lives of the satellites, including the quality of their
construction, the durability of their component parts, the longevity of their
station-keeping on orbit and the efficiency of the launch vehicle used. The
minimum design life of each of EchoStar I, EchoStar II, EchoStar III and
EchoStar IV is 12 years. We can provide no assurance,
31
however, as to the useful lives of the satellites. Our operating results would
be adversely affected if the useful life of any of these satellites were
significantly shorter than 12 years. The satellite construction contracts for
our satellites contain no warranties in the event of a failure of EchoStar I,
EchoStar II, EchoStar III or EchoStar IV following launch. Additionally, a move
of any of these satellites, either temporarily or permanently, to another
orbital location, could decrease the orbital life of the satellite by up to six
months per movement.
In the event of a failure or loss of any of EchoStar I, EchoStar II, or
EchoStar III, we may relocate EchoStar IV and use the satellite as a replacement
for the failed or lost satellite. Such a relocation would require prior FCC
approval and, among other things, a showing to the FCC that EchoStar IV would
not cause additional interference compared to EchoStar I, EchoStar II, or
EchoStar III. If we choose to use EchoStar IV in this manner, there can be no
assurance that such use would not adversely affect our ability to meet the
operation deadlines associated with our permits. Failure to meet such deadlines
could result in the loss of such permits and would have an adverse effect on our
operations.
ELECTROSTATIC STORM AND SPACE DEBRIS COULD CAUSE DAMAGE TO, OR LOSS OF, OUR
SATELLITES. The loss, damage or destruction of any of our satellites as a
result of electrostatic storm or collision with space debris would have a
material adverse effect on our business. Our insurance policies include coverage
for any resulting physical damage. See "-- Insurance Coverage Of Satellites Is
Limited."
SATELLITE PROGRAMMING SIGNALS HAVE BEEN PIRATED, WHICH COULD CAUSE US TO
LOSE SUBSCRIBERS AND REVENUE. The delivery of subscription programming requires
the use of encryption technology. Signal theft or "piracy" of C-band services,
cable television and European direct broadcast satellite services has been
widely reported. We recently received reports that our encryption system has
been compromised. If our encryption technology is compromised in a manner that
is not promptly corrected, our revenue and our ability to contract for video and
audio services provided by programmers could be adversely affected. Published
reports indicate that the DIRECTV and USSB encryption systems have been
compromised. A Canadian court has ruled that pirating of DIRECTV programming is
not illegal in Canada. This ruling may encourage the attempted piracy of our
programming in Canada, resulting in lost revenue for us and increased piracy of
DIRECTV programming. Piracy of DIRECTV programming could result in increased
sales of DIRECTV receivers at the expense of loss of potential DISH Network
subscribers. We can take a number of different corrective measures to limit the
amount of damage that would be sustained by a breach of our conditional access
system including, as a last resort, complete replacement of the access control
system. Any security breach could result in a material reduction of DISH Network
revenue until repaired.
COMPLEX TECHNOLOGY USED IN OUR BUSINESS COULD FAIL OR BECOME OBSOLETE. Our
direct broadcast satellite system is highly complex. New applications and
adaptations of existing and new technology, including compression, conditional
access, on screen guides and other matters, and significant software
development, are integral to our direct broadcast satellite system. As a result
of the introduction of such new applications and adaptations from time to time,
our direct broadcast satellite system may, at times, not function as expected.
Technology in the satellite television industry is in a rapid and
continuing state of change as new technologies develop. The integration and
implementation of the digital compression technology used in connection with our
direct broadcast satellite system is undergoing rapid change. We cannot assure
you that we and our suppliers will be able to keep pace with technological
developments. In addition, delays in the delivery of components or other
unforeseen problems in our direct broadcast satellite system may occur that
could adversely affect performance or operation of our direct broadcast
satellite system and could have an adverse effect on our business. Further, in
the event that a competitive satellite receiver
32
technology becomes commonly accepted as the standard for satellite receivers in
the United States, we would be at a significant technological disadvantage. See
"Business--Programming."
WE ARE CONTROLLED BY ONE PRINCIPAL STOCKHOLDER. We are a wholly owned
subsidiary of EchoStar Communications Corporation. Although Charles W. Ergen,
the Chairman, Chief Executive Officer and President of EchoStar Communications,
currently owns approximately 63% of the total equity securities of EchoStar
Communications (assuming exercise of employee stock options), he currently
possesses approximately 94% of the total voting power. If the transaction with
News Corporation and MCI is completed, Mr. Ergen will control 86% of the total
voting power. Thus, Mr. Ergen will continue to have the ability to elect a
majority of the directors of EchoStar Communications and to control all other
matters requiring the approval of its stockholders. In addition, pursuant to a
voting agreement among Mr. Ergen, News Corporation and MCI, News Corporation and
MCI have agreed to vote their shares after consummation of their transaction
with EchoStar Communications in accordance with the recommendation of the Board
of Directors of EchoStar Communications for five years. See "Security Ownership
of Certain Beneficial Owners and Management." For Mr. Ergen's total voting power
in EchoStar Communications to be reduced to below 51%, his percentage ownership
of the equity securities of EchoStar Communications would have to be reduced to
below 10%.
INSURANCE COVERAGE OF SATELLITES IS LIMITED. We procured in-orbit
insurance for EchoStar I, EchoStar II and EchoStar III. The insurance policy
with respect to in-orbit operation contains standard commercial satellite
insurance provisions, including a material change in underwriting information
clause requiring us to notify our insurers of any material change in the written
underwriting information provided to the insurers or any change in any material
fact or circumstance concerning our satellite insured under the policy. Such
notification permits insurers to renegotiate the terms and conditions if the
result is a material change in risk of loss or insurable interest. A change in
the health status of an insured satellite or any loss occurring after risk has
attached does not entitle the insurers to renegotiate the policy terms. The
in-orbit insurance policy for EchoStar I and EchoStar II has a one-year policy
period with a one-year extension provision. The policy period will continue
until June 25, 1999. The in-orbit coverage for EchoStar III was for sixty days
until February 2, 1999. There can be no assurance that such renewals will be
possible or can be at rates or on terms favorable to us. For example, if
EchoStar I, EchoStar II, EchoStar III or other similar satellites experience
anomalies while in orbit, the cost to renew in-orbit insurance could increase
significantly or coverage exclusions for similar anomalies could be required.
See "Business--Insurance."
Our satellite insurance contains customary exclusions and does not apply to
loss or damage caused by acts of war or civil insurrection, anti-satellite
devices, nuclear radiation or radioactive contamination or certain willful or
intentional acts designed to cause loss or failure of a satellite. There may be
circumstances in which insurance will not fully reimburse the Company for any
loss. In addition, insurance will not reimburse the Company for business
interruption, loss of business and similar losses that might arise from delay in
the launch of any EchoStar satellite.
STATES MAY TAX OUR SERVICES AND REDUCE OUR NET INCOME. In addition to
being subject to FCC regulation, operators of satellite TV systems in the United
States may be affected by imposition of state or local sales taxes on
satellite-delivered programming. According to the Satellite Broadcasting and
Communications Association, several states, including Maryland, Missouri, North
Dakota, New York and Washington, have either adopted or proposed such taxes.
Other states are in various stages of considering proposals that would tax
providers of satellite-delivered programming and other communications providers.
The adoption of state imposed sales taxes could have adverse consequences to our
business. However, the 1996 Act exempts direct-to-home satellite service from
the collection, or remittance, or both, of any tax or fee imposed by any local
taxing jurisdiction on such services.
33
WE MAY BE IN DEFAULT ON CERTAIN OBLIGATIONS. We used satellite vendor
financing in connection with the purchase of each of our current satellites.
Under the terms of that financing, a portion of the purchase price for the
satellites was deferred until after the satellites were in orbit. As of
September 30, 1998, we had $18.9 million in principal amount outstanding of
these deferred payments relating to EchoStar I, $18.7 million relating to
EchoStar II, $12.1 million relating to EchoStar III and $13.0 million relating
to EchoStar IV. The outstanding deferred payments relating to EchoStar I and
EchoStar II are secured by substantially all of the assets of Dish, Ltd. (one of
our wholly-owned subsidiaries) and its subsidiaries (subject to certain
restrictions) and are guaranteed by our parent company. The consummation of the
offering of the old notes and the exchange notes and the reorganization might
result in breaches of certain covenants in favor of the holders of these
outstanding deferred payments, in particular the holders of outstanding deferred
payments relating to EchoStar I and EchoStar II. We believe that, if there is a
breach of such covenants, we may be liable to the holders of such outstanding
deferred payments for damages, if any, arising out of such breach, including
possibly the obligation to repay such outstanding deferred payments prior to
their scheduled maturity together with the economic equivalent of interest
through the scheduled maturity date.
WE MAY BE VULNERABLE TO RISKS ASSOCIATED WITH ACQUISITIONS. We have made a
number of acquisitions and will continue to review future acquisition
opportunities. We can provide no assurance that acquisition candidates will
continue to be available on terms and conditions acceptable to us. Acquisitions,
including the transaction with News Corporation and MCI, involve numerous risks,
including, among other things, difficulties and expenses incurred in connection
with the acquisition and the subsequent assimilation of the operations of the
acquired company, adverse consequences of conforming the acquired company's
accounting policies to ours, the difficulty in operating acquired businesses,
the diversion of management's attention from other business concerns and the
potential loss of key employees of acquired companies. There can be no assurance
that any acquisition, including the transaction with News Corporation and MCI,
will be successfully integrated into our on-going operations or that estimated
cost savings will be achieved. In addition, in the event that the operations of
an acquired business do not meet expectations, we may be required to restructure
the acquired business or write-off the value of some or all of the assets of the
acquired business.
WE MAY BECOME LIABLE IN A PENDING FEE DISPUTE. In connection with the News
Corporation litigation that arose in 1997, our parent company has a contingent
fee arrangement with its lawyers, which provides for the lawyers to be paid a
percentage of any net recovery obtained in its dispute with News Corporation.
Although they have not been specific, the lawyers have asserted that they may be
entitled to receive payments in excess of $80 million to $100 million under this
fee arrangement in connection with the settlement of the dispute with News
Corporation. Our parent company intends to vigorously contest the lawyers'
interpretation of the fee arrangement, which it believes significantly
overstates the magnitude of its liability thereunder.
If the lawyers and our parent company are unable to resolve this fee
dispute under the fee arrangement, the fee dispute would be resolved under
arbitration. We cannot be certain about the outcome of negotiations or
arbitration regarding this fee dispute. As the holder of the assets acquired in
the transaction with News Corporation and MCI, we will be required to pay any
fee that is payable under the fee arrangement.
UNDER FRAUDULENT CONVEYANCE STATUTES, A COURT MAY VOID OR SUBORDINATE OUR
OBLIGATIONS UNDER THE NOTES OR OUR SUBSIDIARY GUARANTORS' OBLIGATIONS UNDER
THEIR GUARANTEES. We have used a portion of the net proceeds of the old notes
to make a distribution to our parent company for repaying a series of debt
securities of our parent company. See "Use of Proceeds." It is possible that
our creditors may challenge the incurrence of indebtedness represented by the
notes as a fraudulent conveyance under relevant federal and state statutes and,
under certain circumstances (including a finding that we were
34
insolvent at the time the old notes were issued), a court could hold that our
obligations on the notes may be voided or are subordinate to our other
obligations. Our obligations under the notes are guaranteed, jointly and
severally, by DBSC and certain of our subsidiary guarantors. It is possible that
the creditors of a subsidiary guarantor may challenge its guarantee as a
fraudulent conveyance and the same result could apply with respect to the
subsidiary guarantor. In addition, it is possible that the amount for which a
subsidiary guarantor is liable under its guarantee may be limited. The measure
of insolvency for purposes of the foregoing may vary depending on the law of the
jurisdiction that is being applied. Generally, however, a company would be
considered insolvent if the sum of its debts is greater than all of its property
at a fair valuation or if the present fair saleable value of its property is
less than the amount that will be required to pay its probable liability on its
existing debts as they become absolute and mature. The indenture provides that
the obligations of the subsidiary guarantors under the subsidiary guarantees are
limited to amounts that will not result in the subsidiary guarantees being a
fraudulent conveyance under the applicable law. See "Description of the
Notes--Guarantees" below.
FAILURE OF YEAR 2000 COMPLIANCE INITIATIVES COULD ADVERSELY AFFECT US. An
issue exists for all companies that rely on computers as the year 2000
approaches. This issue involves computer programs and applications that were
written using two digits rather than four to identify the applicable year, and
could result in system failures or miscalculations. We have undertaken an
assessment to determine the extent of any necessary remediation, and the
anticipated costs thereof, to make our material equipment, systems and
applications year 2000 compliant. Costs in connection with any modifications to
make our systems compliant are not expected to be material. However, if such
modifications are not completed successfully or are not completed in a timely
manner, the year 2000 issue may have a material adverse impact on our
operations. Exposure could arise also from the impact on non-compliance by
certain software or equipment vendors and others with whom we conduct business.
We cannot estimate the potential adverse impact that may result from
non-compliance with the year 2000 issue by the software and equipment vendors
and others with whom we conduct business.
ACTUAL RESULTS OF OUR OPERATIONS MAY DIFFER FROM THOSE CONTAINED IN
FORWARD-LOOKING STATEMENTS. All statements contained in this prospectus, as well
as statements made in press releases and oral statements that may be made by our
parent company or by officers, directors or employees 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.
These forward-looking statements involve known and unknown risks, uncertainties
and other factors that could cause our actual results of operations to be
materially different from historical results or from any future results
expressed or implied by the 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 service providers;
- - a decrease in DISH Network subscriber growth;
- - an increase in subscriber acquisition costs;
- - impediments to the retransmission of local or distant broadcast network
signals;
- - lower than expected demand for our delivery of local broadcast network
signals;
- - an unexpected business interruption due to the failure of third-parties to
remediate year 2000 issues;
- - our inability to retain or obtain necessary authorizations from the FCC;
- - an increase in competition from cable, direct broadcast satellite, other
satellite system operators and other providers of subscription television
services;
35
- - the introduction of new technologies and competitors into the subscription
television business;
- - a merger of existing direct broadcast satellite competitors;
- - a change in the regulations governing the subscription television service
industry;
- - the outcome of any litigation in which we or our parent company may be
involved;
- - failure to consummate the transaction with News Corporation and MCI whereby
our parent company would issue equity securities in exchange for two
satellites that have not yet been completed or the failure of such
satellites to be successfully launched or to become operational or a delay
in such launch or operation;
- - general business and economic conditions; and
- - other risk factors described from time to time in reports filed with the
SEC by us or our parent company.
In addition to statements that explicitly describe such risks and uncertainties,
you 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 in this prospectus
should be read as being applicable to all forward-looking statements wherever
they appear. In this connection, you should consider the risks described in this
prospectus.
THE ABSENCE OF A PUBLIC MARKET COULD REDUCE LIQUIDITY OF YOUR INVESTMENT IN
THE NOTES. The exchange notes are being offered to the holders of the old notes.
The old notes were offered and sold in January 1999 to a limited number of
institutional investors and are eligible for trading in the Portal Market.
The exchange notes will constitute a new issue of securities, for which
there is no established trading market. If a trading market does not develop or
is not maintained, you may experience difficulty in reselling the exchange notes
or may be unable to sell them at all. If a market for the exchange notes
develops, any such market may be discontinued at any time and the exchange notes
could trade at prices that may be lower than their initial price, depending on
many factors, including prevailing interest rates, the markets for companies
offering similar services and our financial performance. The initial purchasers
of the old notes have made a market in the old notes. Although there is
currently no market for the exchange notes, the initial purchasers have advised
us that they currently intend to make a market in the exchange notes. However,
they are not obligated to do so, and any such market-making with respect to the
old notes and the exchange notes may be discontinued at any time without notice.
In addition, such market-making activity will be subject to the limits imposed
by the Securities Act and the Securities Exchange Act of 1934, as amended and
may be limited during the exchange offer and the pendency of any shelf
registration statement. See "Description of the Notes--Registration Rights;
Liquidated Damages" below. Accordingly, we cannot assure you that a market for
the old notes and the exchange notes will develop or, if developed, will be
liquid. We do not intend to apply for listing of any of the notes on any
securities exchange or for quotation through the Nasdaq National Market or any
other securities quotation service.
36
USE OF PROCEEDS
There will be no cash proceeds to the Company from the exchange offer. The
gross proceeds to the Company from the old notes offering were approximately
$2.0 billion, with net proceeds to the Company of approximately $1.8 billion. We
used a portion of the net proceeds from the old notes offering to repurchase the
1994, 1996 and 1997 Notes, to fund a distribution to our parent company for a
repurchase of its Senior Preferred Exchange Notes and to repay our parent
company's loans to DBSC. We will use the remaining portion to fund subscriber
acquisition and marketing expenses as well as general corporate purposes.
Although the estimates set forth under "Uses" below represent our best estimate
of the intended use of the proceeds from the offering of the old notes, the
specific amounts allocated to each use may change depending on such factors as
unanticipated costs or requirements necessary for development and operation of
our direct broadcast satellite system.
(IN THOUSANDS)
--------------
SOURCES:
Net proceeds from the old notes offering(1)................................. $ 1,787,850
Cash contribution to the Company from ECC................................... 200,000
--------
$ 1,987,850
---------
---------
USES:
Repurchase of 1994 Notes(2)................................................. $ 597,749
Repurchase of 1996 Notes(2)................................................. 502,300
Repurchase of 1997 Notes, including accrued interest(2)..................... 378,125
Distribution to ECC for repurchase of Senior Preferred Exchange Notes(3).... 269,657
Repayment of ECC's Loans to DBSC and accrued interest....................... 60,156
Excess cash................................................................. 179,863
--------
Total Uses............................................................ $ 1,987,850
---------
---------
- -----------
(1) Net proceeds from the offering are net of approximately $212.2 million of
estimated transaction costs, including discounts, commissions, expenses and
the excess of the tender price over the approximate accreted value or
principal amount, as applicable, of the 1994 Notes, the 1996 Notes and the
1997 Notes.
(2) Represents the approximate accreted value of the 1994 Notes and the 1996
Notes and the principal amount of the 1997 Notes plus accrued interest as
of January 25, 1999, the closing date of our parent company's tender
offers.
(3) Represents the proceeds required by our parent company to repurchase the
Senior Preferred exchange notes pursuant to our parent company's tender
offers. In addition, on February 8, 1999, our parent company used a
portion of its existing cash to repurchase all of its outstanding shares of
Series A Cumulative Preferred Stock. Charles W. Ergen, President and Chief
Executive Officer of our parent company, owned 1,535,847 shares of that
Series A preferred stock and 80,834 shares were owned by James DeFranco,
Executive Vice President of our parent company. The Series A Preferred
Stock was convertible into our parent company's Class A common stock, was
entitled to cumulative dividends at the rate of 8% per annum and was not
redeemable by the holders or our parent company. The repurchase price was
based on the closing price of our parent company's Class A common stock on
or about the date of closing. Based on the closing price of our parent
company's Class A common stock for the 20 trading days ended February 5,
1999, of $52.611, the total repurchase price was approximately $90.9
million, including cumulative accrued dividends of $5.9 million. The above
sources and uses of proceeds exclude the repurchase of the Series A
preferred stock.
37
THE EXCHANGE OFFER
PURPOSE OF THE EXCHANGE OFFER
The sole purpose of the exchange offer is to fulfill the obligations of the
Company and the guarantors with respect to the registration of the old notes.
The old notes were originally issued and sold on January 25, 1999. Those
sales were not registered under the Securities Act, in reliance upon the
exemption provided in section 4(2) of the Securities Act and Rule 144A and
Regulation S promulgated under the Securities Act. In connection with the sale
of the old notes, the Company agreed to file with the SEC an exchange offer
registration statement relating to the exchange offer. Under the exchange offer
registration statement, exchange notes, consisting of another series of senior
notes of the Company and containing substantially identical terms to the old
notes, except as set forth in this prospectus, would be offered in exchange for
old notes.
The Company and the guarantors will file with the SEC a shelf registration
statement to cover resales of the old notes by the holders who satisfy certain
conditions relating to the provision of information in connection with the shelf
registration statement under the following conditions:
(1) the applicable exchange offer is not permitted by applicable law or
SEC policy; or
(2) any holder of transfer restricted securities notifies the Company
within the specific time period that:
- it is prohibited by law or SEC policy from participating in the
exchange offer;
- it may not resell the exchange notes acquired by it in the
exchange offer to the public without delivering a prospectus and
this prospectus is not appropriate or available for such resales;
or
- it is a broker-dealer and owns old notes acquired directly from
the Company or an affiliate of the Company.
"Transfer restricted securities" means each old note until the earliest of:
- the date on which an old note has been exchanged in the exchange
offer and is entitled to be resold to the public by its holder
without complying with prospectus delivery requirements;
- the date on which an old note is disposed of by a broker-dealer
pursuant to the "Plan of Distribution" described by the exchange
offer registration statement, including delivery of the
prospectus contained in that exchange offer registration
statement;
- the date on which an old note has been effectively registered
under the Securities Act and disposed of in accordance with the
shelf registration statement; or
- the date on which an old note may be distributed to the public
pursuant to Rule 144(k) under the Securities Act. See
"Description of the Notes--Registration Rights; Liquidated
Damages."
38
You will be required to make certain representations to the Company (as
described in the registration rights agreement) in order to participate in the
exchange offer and, if you wish to have your old notes included in the shelf
registration statement, you will be required to deliver information to be used
in connection with the shelf registration statement and to provide comments on
the shelf registration statement within the time periods set forth in the
registration rights agreement. You must comply with these procedures in order
to benefit from the provisions regarding liquidated damages set forth below.
TERMS OF THE EXCHANGE
The Company hereby offers to exchange, upon the terms and subject to the
conditions set forth herein and in the letter of transmittal accompanying this
prospectus, $1,000 in principal amount of exchange notes for each $1,000 in
principal amount of old notes. The terms of the exchange notes are
substantially identical to the terms of the old notes for which they may be
exchanged pursuant to this exchange offer, except that the exchange notes will
generally be freely transferable by you, and you will not be entitled to certain
registration rights and certain liquidated damages provisions which are
applicable to the old notes under the registration rights agreement. Each
series of exchange notes will evidence the same debt as the corresponding old
notes and will be entitled to the benefits of its respective indenture. See
"Description of the Notes" below.
The exchange offer is not being made to, nor will we accept surrenders for
exchange from, holders of outstanding old notes in any jurisdiction in which
this exchange offer or the acceptance thereof would not be in compliance with
the securities or blue sky laws of such jurisdiction.
The exchange offer is not conditioned upon any minimum aggregate principal
amount of old notes being tendered or accepted for exchange.
Based on our view of interpretations set forth in no-action letters issued
by the staff of the SEC to third parties, we believe that exchange notes issued
pursuant to the exchange offer in exchange for the old notes may be offered for
resale, resold and otherwise transferred by you, unless you are one of the
following:
- an "affiliate" of the Company,
- a broker-dealer who acquired old notes directly from the Company or
- a broker-dealer who acquired old notes as a result of market-making or
other trading activities
without compliance with the registration and prospectus delivery provisions of
the Securities Act, provided that
- such exchange notes are acquired in the ordinary course of your
business; and
- you are not engaged in, and do not intend to engage in, and have no
arrangement or understanding with any person to participate in, a
distribution of such Exchange Notes.
If our belief is inaccurate and you transfer any Note issued to you in the
exchange offer without delivering a prospectus meeting the requirement of the
Securities Act or without an exemption from registration of your old notes from
such requirements, you may incur liability under the Securities Act. We do not
assume or indemnify you against such liability.
39
If you are a broker-dealer that resells exchange notes that were received
by you for your own account pursuant to the exchange offer and if you
participate in a distribution of the exchange notes, you may be deemed to be an
"underwriter" within the meaning of the Securities Act and any profit on any
such resale of exchange notes and any commissions or concessions received by you
may be deemed to be underwriting compensation under the Securities Act. If you
are a broker-dealer who acquires old notes as a result of market-making or other
trading activities, you may use this prospectus, as supplemented or amended, in
connection with resales of the exchange notes. We have agreed that, for a
period of one year after the exchange offer is consummated, we will make this
prospectus available to any broker-dealer for use in connection with any such
resale. If you tender old notes in the exchange offer for the purpose of
participating in a distribution of the exchange notes or if you cannot rely upon
such interpretations, you must comply with the registration and prospectus
delivery requirements of the Securities Act in connection with a secondary
resale transaction.
If you are tendering old notes, you will not be required to pay brokerage
commissions or fees or, subject to the instructions in the letter of
transmittal, transfer taxes with respect to the exchange of the old notes
pursuant to the exchange offer. The exchange notes will bear interest from
January 25, 1999. If your old notes are accepted for exchange, you will be
deemed to have waived the right to have interest accrue, or to receive any
payment in respect of interest, on the old notes from January 25, 1999, to the
date of the issuance of the exchange notes. Interest on the exchange notes is
payable semiannually in arrears on February 1 and August 1 of each year,
commencing August 1, 1999, accruing from January 25, 1999.
EXPIRATION DATE; EXTENSIONS; TERMINATION; AMENDMENTS
The exchange offer expires on the expiration date, which is 5:00 p.m.,
Eastern time, on unless we in our sole discretion extend
the period during which the exchange offer is open, in which event the term
"expiration date" means the latest time and date on which the exchange offer, as
so extended, expires. We reserve the right to extend the exchange offer at any
time and from time to time prior to the expiration date by giving written notice
to U.S. Bank Trust National Association, which is the exchange agent, and by
timely public announcement communicated by no later than 5:00 p.m. on the next
business day following the expiration date, unless otherwise required by
applicable law or regulation, by making a release to the Dow Jones News Service.
During any extension of the exchange offer, all old notes previously tendered
pursuant to the exchange offer will remain subject to the exchange offer.
The initial exchange date will be the first business day following the
expiration date. We expressly reserve the right to do the following:
- terminate the exchange offer and not accept for exchange any old notes
for any reason, including if any of the events set forth below under
"--Conditions to the Exchange Offer" have occurred and have not been
waived by us and
- amend the terms of the exchange offer in any manner, whether before or
after any tender of the old notes.
If any such termination or amendment occurs, we will notify the exchange agent
in writing and will either issue a press release or give written notice to you
as a holder of the old notes as promptly as practicable. Unless we terminate
the exchange offer prior to 5:00 p.m., Eastern time, on the expiration date, we
will exchange the exchange notes for old notes on the exchange date.
This prospectus and the related letter of transmittal and other relevant
materials will be mailed by us to you as a record holder of old notes and these
items will be furnished to brokers, banks and similar
40
persons whose names, or the names of whose nominees, appear on the lists of
holders for subsequent transmittal to beneficial owners of old notes.
HOW TO TENDER
If you tender to us any of your old notes pursuant to one of the procedures
set forth below, that tender will constitute an agreement between you and us in
accordance with the terms and subject to the conditions set forth herein and in
the letter of transmittal.
GENERAL PROCEDURES
You may tender old notes by
- properly completing and signing the letter of transmittal or a
facsimile of it (all references in this prospectus to the "letter of
transmittal" are deemed to include a facsimile of the letter) and
delivering it, together with the certificate or certificates
representing the old notes that you are tendering and any required
signature guarantees (or a timely confirmation of a book-entry
transfer pursuant to the procedure described below), to the exchange
agent at its address set forth on the back cover of this prospectus on
or prior to the expiration date or
- complying with the guaranteed delivery procedures described below.
Your signature does not need to be guaranteed if your old notes are
registered in your name, the exchange notes will registered in your name and you
sign the letter of transmittal. In any other case, the tendered old notes must
be endorsed or accompanied by written instruments of transfer in form
satisfactory to us and duly executed by the registered holder and the signature
on the endorsement or instrument of transfer must be guaranteed by an "eligible
institution," such as a bank, broker, dealer, credit union, savings association,
clearing agency or other institution that is a member of a recognized signature
guarantee medallion program within the meaning of Rule 17Ad-15 under the
Exchange Act. If the exchange notes or old notes not exchanged are to be
delivered to an address other than that of the registered holder appearing on
the note register for the old notes, the signature on the letter of transmittal
must be guaranteed by such an "eligible institution."
If your old notes are registered in the name of a broker, dealer,
commercial bank, trust company or other nominee and you wish to tender old
notes, you should contact the registered holder promptly and instruct such
holder to tender old notes on your behalf. If you wish to tender your old notes
yourself, you must, prior to completing and executing the letter of transmittal
and delivering your old notes, either make appropriate arrangements to register
ownership of the old notes in your name or follow the procedures described in
the immediately preceding paragraph. Transferring record ownership from someone
else's name to your name may take considerable time.
BOOK-ENTRY TRANSFER
The exchange agent will make a request to establish an account with respect
to the old notes at The Depository Trust Company, or "DTC," for purposes of the
exchange offer. The exchange agent will do so within two business days after
receipt of this prospectus, and any financial institution that is a participant
in DTC's systems may make book-entry delivery of old notes by causing DTC to
transfer such old notes into the exchange agent's account at DTC in accordance
with DTC's procedures for transfer. However, although you may deliver old notes
through book-entry transfer at DTC, the letter of transmittal, with any required
signature guarantees and any other required documents, must, in any case,
41
be transmitted to and received by the exchange agent at the address specified on
the back cover of this prospectus on or prior to the expiration date or the
guaranteed delivery procedures described below must be complied with.
THE METHOD OF DELIVERY OF OLD NOTES AND ALL OTHER DOCUMENTS IS AT YOUR
ELECTION AND RISK. IF YOU SEND YOUR OLD NOTES AND YOUR DOCUMENT BY MAIL, WE
RECOMMEND THAT YOU USE REGISTERED MAIL, RETURN RECEIPT REQUESTED, YOU OBTAIN
PROPER INSURANCE, AND YOU MAIL THESE ITEMS SUFFICIENTLY IN ADVANCE OF THE
EXPIRATION DATE TO PERMIT DELIVERY TO THE EXCHANGE AGENT ON OR BEFORE THE
EXPIRATION DATE.
Unless an exemption applies under the applicable law and regulations
concerning "backup withholding" of federal income tax, the exchange agent will
be required to withhold, and will withhold 31% of the gross proceeds otherwise
payable to you pursuant to the exchange offer if you do not provide your
taxpayer identification number (social security number or employer
identification number, as applicable) and certify that such number is correct.
You should complete and sign the main signature form and the Substitute Form W-9
included as part of the letter of transmittal, so as to provide the information
and certification necessary to avoid backup withholding, unless an applicable
exemption exists and is proven in a manner satisfactory to us and the exchange
agent.
GUARANTEED DELIVERY PROCEDURES
If you desire to accept the exchange offer and time will not permit a
letter of transmittal or old notes to reach the exchange agent before the
expiration date, you may tender your old notes if the exchange agent has
received at its office listed on the letter of transmittal on or prior to the
expiration date a letter, telegram or facsimile transmission from an eligible
institution setting forth the following information:
- your name and address;
- the principal amount of the old notes being tendered;
- the names in which the old notes are registered and,
- if possible, the certificate numbers of the old notes to be tendered.
The eligible institution's correspondence to the exchange agent must state that
the tender is being made thereby and guarantee that within three New York Stock
Exchange trading days after the date of execution of such letter, telegram or
facsimile transmission by the eligible institution, the old notes, in proper
form for transfer, will be delivered by such eligible institution together with
a properly completed and duly executed letter of transmittal (and any other
required documents). Unless old notes being tendered by the above-described
method (or a timely book-entry confirmation) are deposited with the exchange
agent within the time period set forth above (accompanied or preceded by a
properly completed letter of transmittal and any other required documents), we
may, at our option, reject the tender. Copies of a notice of guaranteed delivery
that may be used by eligible institutions for the purposes described in this
paragraph are available from the exchange agent.
Your tender will be deemed to have been received as of the date when the
exchange agent receives your properly completed and duly signed letter of
transmittal, accompanied by the old notes (or a timely book-entry confirmation).
We will issue exchange notes in exchange for old notes tendered pursuant to a
Notice of Guaranteed Delivery or letter, telegram or facsimile transmission to
similar effect
42
(as provided above) by an eligible institution only against deposit of the
letter of transmittal (and any other required documents) and the tendered old
notes (or a timely book-entry confirmation).
All questions as to the validity, form, eligibility (including time of
receipt) and acceptance for exchange of your tender of old notes will be
determined by us, whose determination will be final and binding. We reserve the
absolute right to reject any or all of your tenders that are not in proper form
or the acceptances for exchange of which may, in the opinion of our counsel, be
unlawful. We also reserve the absolute right to waive any of the conditions of
the exchange offer or any defect or irregularities in tenders of any particular
holder whether or not similar defects or irregularities are waived in your case.
Neither we, the exchange agent nor any other person will be under any duty to
give you notification of any defects or irregularities in tenders nor shall any
of us incur any liability for failure to give you any such notification. Our
interpretation of the terms and conditions of the exchange offer (including the
letter of transmittal and its instructions) will be final and binding.
TERMS AND CONDITIONS OF THE LETTER OF TRANSMITTAL
The letter of transmittal contains, among other things, the following terms
and conditions, which are part of the exchange offer:
- By tendering old notes for exchange, you exchange, assign and transfer
the old notes to us and irrevocably constitute and appoint the
exchange agent as your agent and attorney-in-fact to cause the old
notes to be assigned, transferred and exchanged.
- You represent and warrant that you have full power and authority to
tender, exchange, assign and transfer the old notes and to acquire
exchange notes issuable upon the exchange of such tendered old notes,
and that, when the same are accepted for exchange, we will acquire
good and unencumbered title to the tendered old notes, free and clear
of all liens, restrictions, charges and encumbrances and not subject
to any adverse claim.
- You also warrant that you will, upon request, execute and deliver any
additional documents deemed by us to be necessary or desirable to
complete the exchange, assignment and transfer of tendered old notes.
You further agree that acceptance of any tendered old notes by us and
the issuance of exchange notes in exchange therefor shall constitute
performance in full by us our obligations under the registration
rights agreement and that we shall have no further obligations or
liabilities thereunder (except in certain limited circumstances).
- All authority conferred by you will survive your death or incapacity
and every obligation of you shall be binding upon your heirs, legal
representatives, successors, assigns, executors and administrators.
By tendering old notes and executing the letter of transmittal, you certify
that the following:
- you are not our "affiliate";
- you are that it is not a broker-dealer that owns old notes acquired
directly from us or our an Affiliate;
- you are acquiring the exchange notes offered hereby in the ordinary
course of your business and that you have no arrangement with any
person to participate in the distribution of such exchange notes or
43
If you cannot certify the foregoing, you may certify that you are an affiliate
of us or of the initial purchasers of the old notes, and you will comply with
the registration and prospectus delivery requirements of the Securities Act to
the extent applicable to you.
WITHDRAWAL RIGHTS
If you tender old notes pursuant to the exchange offer, you may withdraw
them at any time prior to the expiration date.
For your withdrawal to be effective, your written or facsimile transmission
notice of withdrawal must be timely received by the exchange agent at its
address set forth on the back cover of this prospectus prior to the expiration
date. Any such notice of withdrawal must specify the following:
- The person named in the letter of transmittal as having tendered old
notes to be withdrawn,
- The certificate numbers of old notes to be withdrawn;
- The principal amount of old notes to be withdrawn;
- A statement that you are withdrawing your election to have such old
notes exchanged;
- and the name of the registered holder of such old notes (which may be
a person or entity other than you, such as your broker-dealer).
Your notice of withdrawal must be signed in the same manner as the original
signature of the letter of transmittal (including any required signature
guarantees) or be accompanied by evidence satisfactory to us that you now hold
beneficial ownership of the old notes being withdrawn. The exchange agent will
return the properly withdrawn old notes promptly following receipt of notice of
withdrawal. We will determine all questions as to the validity of notices of
withdrawals, including time of receipt, and such determination will be final and
binding on all parties.
ACCEPTANCE OF OLD NOTES FOR EXCHANGE; DELIVERY OF EXCHANGE NOTES
Upon the terms and subject to the conditions of the exchange offer, the
acceptance for exchange of old notes validly tendered and not withdrawn and the
issuance of the exchange notes will be made on the exchange date. The exchange
agent will act as agent for the tendering holders of old notes for the purposes
of receiving exchange notes from us and causing the old notes to be assigned,
transferred and exchanged. Upon the terms and subject to conditions of the
exchange offer, the exchange agent will deliver exchange notes to be issued in
exchange for accepted old notes promptly after acceptance of the tendered old
notes. If your old notes are not accepted for exchange by us, they will be
returned without expense to you (or in the case of old notes tendered by
book-entry transfer into the exchange agent's account at DTC pursuant to the
procedures described above, such non-exchanged old notes will be credited to an
account maintained with DTC) promptly following the expiration date or, if we
terminates the exchange offer prior to the expiration date, promptly after the
exchange offer is so terminated.
CONDITIONS TO THE EXCHANGE OFFER
Notwithstanding any other provision of the exchange offer, or any extension
of the exchange offer, we will not be required to issue exchange notes in
respect of any properly tendered old notes that we have not previously accepted
and we may terminate the exchange offer (by oral or written notice to
44
the exchange agent and by timely public announcement communicated no later than
5:00 p.m. on the next business day following the expiration date, unless
otherwise required by applicable law or regulation, by making a release to the
Dow Jones News Service) or, at our option, we may modify or otherwise amend the
exchange offer, in the following circumstances:
- Any action or proceeding is threatened, instituted or pending before,
or any injunction, order or decree has been issued by, any court or
governmental agency or other governmental, regulatory or
administrative agency or commission for any of the following purposes:
- seeking to restrain or prohibit the making or consummation of the
exchange offer or any other transaction contemplated by the
exchange offer;
- assessing or seeking any damages as a result thereof, or
- resulting in a material delay in our ability to accept for
exchange some or all of the old notes pursuant to the exchange
offer; or
- any statute, rule, regulation, order or injunction is sought,
proposed, introduced, enacted, promulgated or deemed applicable to the
exchange offer or any of the transactions contemplated by the exchange
offer by any government or governmental authority, domestic or
foreign, or any action has been taken, proposed or threatened, by any
government, governmental authority, agency or court, domestic or
foreign, that in our sole judgment, might directly or indirectly
result in any of the consequences referred to above or, in our sole
judgment, might result in the holders of exchange notes having
obligations with respect to resales and transfers of exchange notes
that are greater than those described in the interpretations of the
staff of the SEC referred to on the cover page of this prospectus, or
would otherwise make it inadvisable to proceed with the exchange
offer; or
- a material adverse change has occurred in our business, condition
(financial or otherwise), operations or prospects.
The foregoing conditions are for our sole benefit and may be asserted by us
with respect to all or any portion of the exchange offer regardless of the
circumstances (including any action or inaction by us) giving rise to such
condition or may be waived by us in whole or in part at any time or from time to
time in our discretion. Our failure at any time to exercise any of the
foregoing rights will not be deemed a waiver of any such right, and each right
will be deemed an ongoing right that may be asserted at any time or from time to
time. In addition, we have reserved the right, notwithstanding the satisfaction
of each of the foregoing conditions, to terminate or amend the exchange offer.
Any determination by us concerning the fulfillment or nonfulfillment of any
conditions will be final and binding upon all parties.
In addition, we will not accept for exchange any old notes tendered, and no
exchange notes will be issued in exchange for any such old notes, if at that
time any stop order is threatened or in effect with respect to the registration
statement of which this prospectus constitutes a part or if qualification of the
indentures is required under the Trust Indenture Act of 1939, as amended (the
"Trust Indenture Act").
45
EXCHANGE AGENT
U.S. Bank Trust National Association has been appointed as the exchange
agent for the exchange offer. Letters of transmittal must be addressed to the
exchange agent at:
U.S. Bank Trust National Association
180 East Fifth Street
St. Paul, Minnesota 55101
Telephone: (651) 244-8162
Facsimile: (651) 244-1537
Attention: Corporate Trust Trustee Administration
Delivery to an address other than as set forth above, or transmission of
instructions via a facsimile number other than the one set forth above, will not
constitute a valid delivery.
SOLICITATION OF TENDERS; EXPENSES
We have not retained any dealer-manager or similar agent in connection with
the exchange offer and will not make any payments to brokers, dealers or others
for soliciting acceptances of the exchange offer. We will, however, pay the
exchange agent reasonable and customary fees for its services and will reimburse
it for reasonable out-of-pocket expenses. We will also pay brokerage houses and
other custodians, nominees and fiduciaries the reasonable out-of-pocket expenses
incurred by them in forwarding tenders for their customers. The expenses to be
incurred in connection with the exchange offer, including the fees and expenses
of the exchange agent and printing, accounting, investment banking and legal
fees, will be paid by us and are estimated to be approximately $250,000.
NO PERSON HAS BEEN AUTHORIZED TO GIVE YOU ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS TO YOU IN CONNECTION WITH THE EXCHANGE OFFER OTHER THAN THOSE
CONTAINED IN THIS PROSPECTUS. IF GIVEN OR MADE TO YOU, SUCH INFORMATION OR
REPRESENTATIONS SHOULD NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY US.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY EXCHANGE MADE HEREUNDER SHALL,
UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN
OUR AFFAIRS SINCE THE RESPECTIVE DATES AS OF WHICH INFORMATION IS GIVEN HEREIN.
THE EXCHANGE OFFER IS NOT BEING MADE TO (NOR WILL TENDERS BE ACCEPTED FROM OR ON
BEHALF OF) HOLDERS OF OLD NOTES IN ANY JURISDICTION IN WHICH THE MAKING OF THE
EXCHANGE OFFER OR THE ACCEPTANCE THEREOF WOULD NOT BE IN COMPLIANCE WITH THE
LAWS OF THAT JURISDICTION. HOWEVER, WE MAY, AT OUR DISCRETION, TAKE SUCH ACTION
AS WE MAY DEEM NECESSARY TO MAKE THE EXCHANGE OFFER IN ANY SUCH JURISDICTION AND
EXTEND THE EXCHANGE OFFER TO HOLDERS OF OLD NOTES IN SUCH JURISDICTION. IN ANY
JURISDICTION WHERE THE SECURITIES LAWS OR BLUE SKY LAWS REQUIRE THE EXCHANGE
OFFER TO BE MADE BY A LICENSED BROKER OR DEALER, THE EXCHANGE OFFER IS BEING
MADE ON BEHALF OF US BY ONE OR MORE REGISTERED BROKERS OR DEALERS THAT ARE
LICENSED UNDER THE LAWS OF THAT JURISDICTION.
DISSENTER AND APPRAISAL RIGHTS
HOLDERS OF OLD NOTES WILL NOT HAVE DISSENTERS' RIGHTS OR APPRAISAL RIGHTS
IN CONNECTION WITH THE EXCHANGE OFFER.
FEDERAL INCOME TAX CONSEQUENCES
The exchange of old notes for exchange notes by you will not be a taxable
exchange for federal income tax purposes, and you should not recognize any
taxable gain or loss or any interest income as a result of the exchange. See
"Certain United States Federal Income Tax Considerations" below.
46
OTHER
Your participation in the exchange offer is voluntary and you should
carefully consider whether to accept the terms and conditions of it. You are
urged to consult your financial and tax advisors in making your own decisions on
what action to take with respect to the exchange offer.
As a result of the making of, and upon acceptance for exchange of all
validly tendered old notes pursuant to the terms of this exchange offer, we will
have fulfilled obligations contained in the terms of the old notes and the
registration rights agreements. If you do not tender your old notes in the
exchange offer, you will continue to hold such old notes and you will be
entitled to all the rights and limitations applicable thereto under the
indenture, except for any such rights under the registration rights agreements
which by their terms terminate or cease to have further effect as a result of
the making of this exchange offer. See "Description of the Notes" below. All
untendered old notes will continue to be subject to the restriction on transfer
set forth in the indenture. To the extent that old notes are tendered and
accepted in the exchange offer, the trading market, if any, for any remaining
old notes could be adversely affected. See "Risk Factors-- Consequences of Not
Exchanging Notes."
We may in the future seek to acquire untendered old notes in the open
market or privately negotiated transactions, through subsequent exchange offers
or otherwise. We have no present plan to acquire any old notes that are not
tendered in the Exchange Offer.
47
CAPITALIZATION
The following table sets forth: (i) the combined and consolidated
capitalization of the Company, on a historical basis as of September 30, 1998,
and (ii) the combined and consolidated capitalization of the Company on an
adjusted basis assuming consummation of the acquisition under the agreement with
News Corporation and MCI and giving effect to the offering of the old notes and
the application of the net proceeds thereof. The historical information in this
table is derived from the Combined and Consolidated Financial Statements of the
Company, and should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the Company's
Combined and Consolidated Financial Statements and the notes thereto included
elsewhere in this prospectus.
AS OF SEPTEMBER 10, 1998
ACTUAL AS ADJUSTED
------ -----------
(IN THOUSANDS)
(UNAUDITED)
Cash, cash equivalents, and marketable investment securities $ 44,300 $ 300,746
Restricted cash and marketable investment securities 76,583 -- (1)
Total cash, cash equivalents, and marketable investment securities 120,883 300,746(2)
------------
Total assets $ 1,467,422 $ 2,819,094(2)
------------
------------
Long-term debt (net of current portion):
Mortgages and notes payable $ 49,547 $ 49,547
Notes payable to ECC, including accrued interest 58,497 --
1994 Notes 552,776 --
1996 Notes 481,966 --
1997 Notes 375,000 --
9 1/4% Senior Notes due 2006 -- 375,000
9 3/8% Senior Notes due 2009 -- 1,625,000
Total long-term debt 1,517,786 2,049,547
Stockholder's equity (deficit):
Common Stock, $.01 par value, 3,000 shares authorized, issued and
outstanding -- --
Additional paid-in capital 145,164 1,515,164(3)
Accumulated deficit (609,886) (1,159,976)(4)
Total stockholder's equity (deficit) (464,722) 355,188
------------ ---------------
Total capitalization $ 1,053,064 $ 2,404,735
------------ ---------------
------------ ---------------
- -----------
(1) Restrictions on cash held in escrow under the terms of indentures were
removed upon the prepayment of the applicable notes. The restricted cash
balances as of September 30, 1998 have been reclassified and included in
the "as adjusted" amount of cash, cash equivalents and marketable
investment securities.
(2) The increase in the Company's total assets includes the increase in cash
available to the Company for working capital of approximately $179.9
million as a result of the offering of the old notes (see "Use of
48
Proceeds"), plus $1.17 billion of assets to be acquired by ECC pursuant to
the acquisition under the agreement with News Corporation and MCI and
contributed to the Company.
The increase in the Company's additional paid-in capital consists of $200
million in cash to be contributed to the Company by ECC and additional
assets valued at $1.17 billion, to be acquired by ECC in the acquisition
under the agreement with News Corporation and MCI and contributed to the
Company.
(4) The increase in accumulated deficit results from (a) a distribution of the
offering proceeds to ECC of approximately $269.9 million to retire the
Senior Preferred Exchange Notes, including related costs of that tender
offer, (b) interest expense of approximately $51.1 million from September
30, 1998 through January 25, 1999, the date of consummation of the tender
offers and debt to be repurchased and paid, and (c) the estimated
extraordinary loss of approximately $229.1 million the Company expects to
report in 1999 upon the early retirement of the 1994 Notes, the 1996 Notes
and the 1997 Notes.
49
SELECTED FINANCIAL DATA
The following selected financial data as of, and for each of the five years
ended December 31, 1997, have been derived from, and are qualified by reference
to, the Company's Combined and Consolidated Financial Statements which have been
audited by Arthur Andersen LLP, independent public accountants. The following
selected financial data at September 30, 1998, and for the nine months ended
September 30, 1997 and 1998, are unaudited; however, in the opinion of
management, such data reflect all adjustments (consisting only of normal
recurring adjustments) necessary to fairly present the data for such interim
periods. This data should be read in conjunction with the Company's Combined
and Consolidated Financial Statements and related notes thereto, and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this prospectus.
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
----------------------- -------------
1993 1994 1995 1996 1997 1997 1998
---- ---- ---- ---- ---- ---- ----
(IN THOUSANDS, EXCEPT RATIOS, SUBSCRIBERS AND PER SUBSCRIBER DATA) (UNAUDITED)
STATEMENTS OF OPERATIONS
DATA:
Revenue:
DISH Network $ -- $ -- $ -- $ 57,888 $ 341,808 $ 225,928 $ 470,636
DTH equipment sales
and integration
services -- -- 35,816 77,390 90,263 37,410 190,787
Satellite services -- -- -- 5,822 11,135 7,879 15,805
C-band and other 211,563 179,313 112,704 56,003 32,696 25,243 19,716
-------- --------- --------- --------- -------- --------- ----------
Total revenue 211,563 179,313 148,520 197,103 475,902 296,460 696,944
Costs and Expenses:
DISH Network
operating expenses -- -- -- 42,409 193,170 130,078 274,083
Cost of sales--DTH
equipment and
integration
services -- -- 30,404 75,984 60,918 25,998 131,050
Cost of Sales--C-band
and other 161,447 133,635 84,846 42,345 23,909 16,337 12,555
Marketing expenses 3,497 2,346 1,786 53,168 183,345 122,652 190,817
General and
administrative 26,738 27,873 36,376 48,693 66,060 45,883 66,836
Depreciation and
amortization 1,677 2,243 3,114 43,369 172,836 133,545 77,597
-------- --------- --------- --------- -------- --------- ----------
Total costs and
expenses 193,359 166,097 156,526 305,968 700,238 474,493 752,938
-------- --------- --------- --------- -------- --------- ----------
Operating income
(loss) $ 18,204 $ 13,216 $ (8,006) $ (108,865) $(224,336) $ (178,033) $ (55,994)
-------- --------- --------- --------- -------- --------- ----------
-------- --------- --------- --------- -------- --------- ----------
Net income (loss)(1) $ 12,272 $ 90 $ (12,361) $ (101,676) $(323,424) $ (248,937) $ (170,960)
-------- --------- --------- --------- -------- --------- ----------
-------- --------- --------- --------- -------- --------- ----------
50
AS OF SEPTEMBER 30, 1998
------------------------
AS OF DECEMBER 31, (UNAUDITED)
------------------
1993 1994 1995 1996 1997 ACTUAL AS ADJUSTED (3)
---- ---- ---- ---- ---- ------ --------------
BALANCE SHEET DATA:
Cash, cash
equivalents and
marketable
investment
securities (2) $ 27,232 $ 48,544 $ 14,161 $ 57,247 $ 65,965 $ 44,300 $ 300,746
Total assets 106,476 472,492 559,297 1,085,545 1,431,774 1,467,422 2,819,094
Long-term
obligations, net
of current
portion:
9 1/4% Senior Notes due
2006 -- -- -- -- -- -- 375,000
9 3/8% Senior Notes due
2009 -- -- -- -- -- -- 1,625,000
1994 Notes -- 334,206 382,218 437,127 499,863 552,776 --
1996 Notes -- -- -- 386,165 438,512 481,966 --
1997 Notes -- -- -- -- 375,000 375,000 --
Mortgages and other
notes payable,
net of current
portion 4,702 5,393 33,444 51,428 51,846 49,547 49,547
Notes payable to ECC,
including
accumulated
interest -- -- -- 12,000 54,597 58,497 --
Note payable to
stockholder 14,725 -- -- -- -- -- --
Other long-term
obligations -- -- -- 7,037 19,500 27,954 27,954
Total stockholder's
equity (deficit) 49,700 103,808 92,892 (6,673) (313,770) (464,722) 355,188
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
----------------------- -------------
1993 1994 1995 1996 1997 1997 1998
---- ---- ---- ---- ---- ---- ----
(UNAUDITED)
OTHER DATA:
DISH Network
subscribers -- -- -- 350,000 1,040,000 820,000 1,609,000
Average monthly
revenue per
subscriber $ -- $ -- $ -- $ 35.50 $ 38.50 $ 39.10 $ 39.20
EBITDA (4) 19,881 15,459 (4,892) (65,496) (51,500) (44,488) 21,603
Net cash flows from:
Operating
activities 30,215 24,205 (21,888) (22,836) (7,549) (47,967) (40,068)
Investing activities (20,910) (338,565) (1,431) (294,962) (306,079) (307,581) (19,309)
Financing activities (6,199) 325,011 19,764 342,287 337,247 346,887 39,619
Ratio of earnings to
fixed charges (5) 18.0x -- -- -- -- -- --
Deficiency of
earnings to fixed
charges (5) $ -- $ (5,206) $ (44,315) $ (188,347) $ (366,447) $ (276,734) $ (192,359)
- -----------
(1) Certain of the Company's subsidiaries operated under Subchapter S of the
Internal Revenue Code of 1986, as amended, and comparable provisions of
applicable state income tax laws, until December 31, 1993. The net income
for 1993 presented above is net of pro forma income taxes of $7,846,
determined as if the Company had been subject to corporate federal and
state income taxes for those years.
(2) Excludes restricted cash and marketable investment securities.
(3) Gives effect to the offering of the old notes and the application of the
net proceeds thereof and is pro forma for the acquisition under the
agreement with News Corporation and MCI. Consummation of the acquisition
under the agreement with News Corporation and MCI is subject to receipt of
regulatory approval and approval of
51
ECC's shareholders. There is no pro forma effect to the Company's
Statements of Operations as a result of the acquisition.
(4) The Company believes it is common practice in the telecommunications
industry for investment bankers and others to use various multiples of
current or projected EBITDA (earnings before interest, taxes, depreciation
and amortization) for purposes of estimating current or prospective
enterprise value and as one of many measures of operating performance.
Conceptually, EBITDA measures the amount of income generated each period
that could be used to service debt, because EBITDA is independent of the
actual leverage employed by the business; but EBITDA ignores funds needed
for capital expenditures and expansion. Some investment analysts track the
relationship of EBITDA to total debt as one measure of financial strength.
However, EBITDA does not purport to represent cash provided or used by
operating activities and should not be considered in isolation or as a
substitute for measures of performance prepared in accordance with
generally accepted accounting principles.
EBITDA differs significantly from cash flows from operating activities
reflected in the consolidated statement of cash flows. Cash from operating
activities is net of interest and taxes paid and is a more comprehensive
determination of periodic income on a cash (vs. accrual) basis, exclusive
of non-cash items of income and expenses such as depreciation and
amortization. In contrast, EBITDA is derived from accrual basis income and
is not reduced for cash invested in working capital. Consequently, EBITDA
is not affected by the timing of receivable collections or when accrued
expenses are paid. The Company is aware of no uniform standards for
determining EBITDA and believes presentations of EBITDA may not be
calculated consistently by different entities in the same or similar
businesses. However, the Company has consistently calculated the EBITDA
amounts shown above to equal "operating income (loss)" plus depreciation
and amortization (including subscriber acquisition costs amortization of
$16 million and $121 million for the years ended December 31, 1996 and
1997, and $95 million and $19 million for the nine months ended
September 30, 1997 and 1998, respectively).
(5) For purposes of computing the ratio of earnings to fixed charges, and the
deficiency of earnings to fixed charges, earnings consist of earnings from
continuing operations before income taxes, plus fixed charges. Fixed
charges consist of interest incurred on all indebtedness and the imputed
interest component of rental expense under non-cancelable operating leases.
For the years ended December 31, 1994, 1995, 1996 and 1997 and the nine
months ended September 30, 1997 and 1998, earnings were insufficient to
cover the fixed charges. On a pro forma basis using an assumed effective
interest rate of 9.6% and assuming that the tender offers had been
consummated as of the beginning of the applicable period, the Company's pro
forma earnings would have been inadequate to cover its pro forma fixed
charges for the year ended December 31, 1997, by $341 million and for the
nine months ended September 30, 1998, by $165 million.
52
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The operations of the Company include three interrelated business units:
(i) the DISH Network; (ii) Technology; and (iii) Satellite Services. The
Company's principal business strategy is to continue to develop its subscription
television service in the United States to provide consumers with a competitive
alternative to cable television service.
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1998, COMPARED TO THE NINE MONTHS ENDED
SEPTEMBER 30, 1997.
REVENUE. Total revenue for the nine months ended September 30, 1998, was
$697 million, an increase of $401 million compared to total revenue for the nine
months ended September 30, 1997, of $296 million. The increase in total revenue
was primarily attributable to DISH Network subscriber growth combined with
increased revenue from the Company's technology business unit (Technology). The
Company expects that its revenues will continue to increase as the number of
DISH Network subscribers increases. Consistent with the increases in total
revenues and the number of DISH Network subscribers during the three months
ended September 30, 1998, the Company experienced a corresponding increase in
trade accounts receivable at September 30, 1998.
DISH Network subscription television services revenue totaled $460 million
for the nine months ended September 30, 1998, an increase of $267 million or
138%, 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 nine months ended
September 30, 1998, increased approximately 137% as compared to the same period
in 1997. Monthly revenue per subscriber approximated $39.20 and $39.10 during
the nine months ended September 30, 1998, and 1997, respectively. 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 will continue to increase to the extent the
Company is successful in increasing the number of DISH Network subscribers and
maintaining or increasing revenue per subscriber.
For the nine months ended September 30, 1998, direct-to-home ("DTH")
equipment sales and integration services totaled $191 million, an increase of
$154 million compared to the nine months ended September 30, 1997. DTH equipment
sales consist of sales of digital set-top boxes and other digital satellite
broadcasting equipment by the Company to international DTH service operators.
The Company currently has agreements to provide equipment to DTH service
operators in Spain and Canada. The increase in DTH equipment sales and
integration services revenue was primarily attributable to an increase in the
volume of set-top boxes sold.
Substantially all of the Company's Technology revenues have resulted from
sales to two international DTH providers. As a result, the Company's Technology
business currently is economically dependent on these two DTH providers. The
Company'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 the Company's digital set-top boxes. Due to several
factors, the Company expects that its DTH equipment and integration services
revenue could decline during 1999 as compared to 1998 revenue for similar
periods. 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. During July 1998, 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. Although the Company has
binding purchase orders
53
from Telefonica for additional 1998 and 1999 deliveries of DTH equipment, the
Company cannot yet predict what impact, if any, consummation of this merger
might have on its future sales to Telefonica. However, in October 1998,
Telefonica announced that the merger negotiations had been suspended. Although
the Company continues to actively pursue additional distribution and integration
service opportunities internationally, no assurance can be given that any such
additional negotiations will be successful.
Satellite services revenue totaled $16 million for the nine months ended
September 30, 1998, an increase of $8 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
$274 million for the nine months ended September 30, 1998, an increase of
$144 million or 111%, 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. DISH Network operating
expenses represented 60% and 67% of subscription television services revenue
during the nine months ended September 30, 1998 and 1997, respectively. Although
the Company expects DISH Network operating expenses as a percentage of
subscription television services revenue to decline modestly from 1998 levels in
future periods, there can be no assurance that this expense to revenue ratio
will not increase.
Subscriber-related expenses totaled $211 million for the nine months ended
September 30, 1998, an increase of $114 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 nine months ended September 30, 1998, compared to 50% during
the nine months ended September 30, 1997. The decrease in subscriber-related
expenses as a percentage of subscription television services revenue resulted
primarily from a decrease in programming expenses on a per subscriber basis,
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 the Company's DISH Network customer service
centers, such as personnel and telephone expenses, as well as subscriber
equipment installation and other operating expenses. Customer service center and
other expenses totaled $46 million for the nine months ended September 30, 1998,
an increase of $23 million as compared to the nine months ended September 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 10% of subscription television
services revenue during the nine months ended September 30, 1998, compared to
12% of subscription television services revenue during the same period of the
prior year. Although the Company expects customer service center and other
expenses as a percentage of subscription television services revenue to remain
near 1998 levels in the future, 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 the Company's digital broadcast center, contracted satellite
telemetry, tracking & control ("TT&C") services, and satellite in-orbit
insurance. Satellite and transmission expenses increased $8 million during the
nine months ended September 30, 1998, as compared to the same period during
1997. This increase resulted from higher satellite and other digital broadcast
center operating expenses due to an increase in the number of operational
satellites. The Company expects satellite and transmission expenses to continue
54
to increase in the future as additional satellites are launched. However, as our
DISH Network subscriber base continues to expand, the Company 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 $131 million for the nine months
ended September 30, 1998, an increase of $105 million, as compared to the nine
months ended September 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. As a percentage of DTH equipment
revenue, cost of sales has averaged 69% for the nine months ended September 30,
1998. The Company expects that cost of sales will increase as a percentage of
DTH equipment revenue in the future due to increased competition from other
providers of DTH equipment.
MARKETING EXPENSES. Marketing expenses totaled $191 million for the nine
months ended September 30, 1998, an increase of $68 million or 56%, compared to
the same period in 1997. The increase in marketing expenses was primarily
attributable to the 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. The Company recognizes
subscriber promotion subsidies as incurred. These expenses totaled $165 million
for the nine months ended September 30, 1998, an increase of $66 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 nine-month period ended September 30, 1997,
a portion of such expenses were initially deferred and amortized over the
related prepaid subscription term (generally one year). Advertising and other
expenses totaled $26 million for the nine months ended September 30, 1998, an
increase of $2 million over the same period in 1997.
For the nine months ended September 30, 1998, the Company's subscriber
acquisition costs, inclusive of acquisition marketing expenses, totaled
$180 million (approximately $260 per new subscriber activation). Comparatively,
the Company's subscriber acquisition costs, inclusive of acquisition marketing
expenses and deferred subscriber acquisition costs, totaled $195 million (in
excess of $350 per new subscriber activation) during the same period in 1997.
The decrease in the Company's subscriber acquisition costs, on a per new
subscriber activation basis, principally resulted from decreases in the
manufactured cost of EchoStar receiver systems. The Company expects that its
subscriber acquisition costs, on a per new subscriber activation basis, will
increase in the near-term as a result of increased competition for direct
broadcast satellite ("DBS") subscribers.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative (G&A)
expenses totaled $67 million for the nine months ended September 30, 1998, an
increase of $21 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 nine months ended September 30, 1998 compared
to 15% for the corresponding period in 1997. Although the Company expects that
G&A expenses as a percentage of total revenue will continue to approximate 1998
levels or decline modestly in the future, there can be no assurance that this
expense to revenue ratio will not increase.
EARNINGS BEFORE INTEREST, TAXES, DEPRECIATION AND AMORTIZATION. EBITDA for
the nine months ended September 30, 1998 improved to $22 million compared to
negative EBITDA of $44 million during the same period in 1997. This improvement
in EBITDA principally resulted from increases in Technology and DISH Network
revenues. The Company believes its ability to repay or refinance its
55
existing debt will be significantly influenced by its ability to continue to
improve reported EBITDA. However, EBITDA does not purport to represent cash
provided by or used by operating activities and should not be considered in
isolation or as a substitute for measures of performance prepared in accordance
with generally accepted accounting principles.
During the fourth quarter of 1998, the Company introduced the DISH Network
One-Rate Plan. Under the DISH Network One-Rate Plan, consumers are eligible to
receive a $249 rebate on the purchase of certain EchoStar receiver systems.
Consequently, subscribers who qualify to participate in the DISH Network
One-Rate Plan have a materially higher acquisition cost than other DISH Network
subscribers. The rebate is contingent upon the subscriber's one-year commitment
to subscribe to the America's Top 100 CD programming package and two premium
channel packages, committing the subscriber to a monthly programming payment of
at least $48.98. The consumer must pay the entire sales price of the system at
the time of purchase, but is not required to prepay for the programming. After
receiving the subscriber's first full programming payment (equal to $97.96 for
two months of programming), the Company issues a $249 rebate to the subscriber.
Although subscriber acquisition costs are materially higher under the DISH
Network One-Rate Plan, management believes that these customers represent lower
credit risk and therefore may be marginally less likely to churn than other DISH
Network subscribers. Although there can be no assurance as to the ultimate
duration of the DISH Network One-Rate Plan, it will continue through at least
March 1999.
The Company's subscriber acquisition costs, both in aggregate and on a per
subscriber basis, will increase in direct relation to the participation rate in
the DISH Network One-Rate Plan. The Company presently expects fewer than
one-third of its fourth quarter 1998 subscriber activations to result from the
DISH Network One-Rate Plan, and is expected to cause increased operating losses
in the near term. However, future consumer participation levels could be
significantly higher. To the extent that actual consumer participation levels
exceed present expectations and subscriber acquisition costs materially
increase, the Company's EBITDA results will be negatively impacted in the
near-term because subscriber acquisition costs are expensed as incurred.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expenses for
the nine months ended September 30, 1998, (including amortization of subscriber
acquisition costs of $19 million) aggregated $78 million, a $56 million decrease
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 $76 million), partially offset by an
increase in depreciation related to the commencement of operation of EchoStar
III, EchoStar IV and other depreciable assets placed in service during 1998.
OTHER INCOME AND EXPENSE. Other expense, net totaled $115 million for
the nine months ended September 30, 1998, an increase of $44 million as
compared to the same period in 1997. The increase in other expense resulted
primarily from interest expense associated with the Company's 12 1/2% Senior
Secured Notes due 2002 (the "1997 Notes") and increases in interest expense
associated with increased accreted balances on its 12 1/2% Senior Secured
Discount Notes due 2004 (the "1994 Notes") and its 13 7/8% Senior Secured
Discount Notes due 2004 (the "1996 Notes").
YEAR ENDED DECEMBER 31, 1997, COMPARED TO THE YEAR ENDED DECEMBER 31, 1996.
REVENUE. Total revenue in 1997 was $476 million, an increase of 141%, or
$279 million, as compared to total revenue of $197 million in 1996. The increase
in total revenue in 1997 was primarily attributable to the operation of the DISH
Network during the entirety of 1997, combined with DISH Network subscriber
growth.
56
DISH Network subscription television services revenue totaled $299 million
during 1997, an increase of $249 million compared to 1996. This increase was
directly attributable to the operation of the DISH Network during the entirety
of 1997, combined with the increase in the number of DISH Network subscribers.
Average monthly revenue per subscriber approximated $38.50 during 1997 compared
to approximately $35.50 in 1996. The increase in monthly revenue per subscriber
was primarily due to additional channels added upon commencement of operations
of EchoStar II.
Other DISH Network revenue totaled $43 million in 1997, an increase of
$35 million compared to 1996. Other DISH Network revenue primarily consists of
incremental revenues over advertised subscription rates realized from the 1996
Promotion (a marketing promotion whereby consumers were able to purchase a
standard EchoStar receiver system for $199, conditioned upon the consumer's
prepaid one-year subscription to a programming package for approximately $300),
as well as installation revenue and loan origination and participation income.
In 1997, the Company recognized incremental revenues related to the 1996
Promotion of approximately $39 million, an increase of $34 million over 1996.
During 1997, DTH equipment sales and integration services totaled
$90 million. The Company currently has agreements for the sale of digital
satellite broadcasting equipment using its proprietary technology to two
international DTH service operators. The Company realized revenues of
$74 million related to these agreements during 1997. Of this amount, $59 million
related to sales of digital set-top boxes and other DTH equipment while
$15 million resulted from the provision of integration services (revenue from
uplink center design, construction oversight, and other project integration
services). DBS accessory sales totaled $10 million during 1997, an $8 million
increase compared to 1996.
DTH equipment sales and integration services revenue totaled $77 million
during 1996. These revenues consisted primarily of sales of EchoStar receiver
systems and related accessories prior to the August 1996 nationwide rollout of
the 1996 Promotion.
Satellite services revenue totaled $11 million during 1997, an increase of
$5 million, or 91%, compared to 1996. The increase in satellite services revenue
was primarily attributable to an increase in the number of content providers,
increased usage by the Company's BTV customers, and an entire year of operation
in 1997.
C-band and other revenue totaled $33 million for 1997, a decrease of
$23 million compared to $56 million in 1996. Other revenue principally related
to domestic and international sales of C-band products and net domestic C-band
programming revenues. This decrease resulted from the world-wide decrease in
demand for C-band products and services. Effective January 1, 1998, ECC ceased
operation of its C-band programming business.
DISH NETWORK OPERATING EXPENSES. DISH Network operating expenses totaled
$193 million during 1997, an increase of $151 million as compared to 1996. The
increase in DISH Network operating expenses was primarily attributable to
operation of the DISH Network during the entirety of 1997 and the increase in
the number of DISH Network subscribers.
Subscriber-related expenses totaled $144 million in 1997, an increase of
$121 million compared to 1996. Such expenses totaled 48% of subscription
television services revenues, compared to 46% of subscription television
services revenues during 1996.
Satellite and transmission expenses increased $8 million in 1997 compared
to 1996 primarily as a result of the operation of the DISH Network (including
EchoStar II) during the entirety of 1997.
57
Customer service center and other operating expenses totaled $35 million in
1997, an increase of $22 million as compared to 1996. The increase in customer
service center and other operating expenses was directly attributable to the
operation of the DISH Network during the entirety of 1997, combined with the
increase in the number of DISH Network subscribers.
COST OF SALES--DTH EQUIPMENT AND INTEGRATION SERVICES. Cost of sales--DTH
equipment and integration services totaled $61 million during 1997, a decrease
of $15 million, or 20%, as compared to 1996. During 1997, cost of sales--DTH
equipment and integration services principally represented costs associated with
set-top boxes and related components sold to international DTH operators. For
1996, cost of sales--DTH equipment and integration services totaled $76 million
and represented costs of EchoStar receiver systems sold prior to the August 1996
rollout of the 1996 Promotion.
COST OF SALES--C-BAND AND OTHER. Cost of sales--C-band and other totaled
$24 million during 1997, a decrease of $18 million compared to 1996. This
decrease was consistent with the decrease in related revenues and resulted from
the world-wide decrease in the demand for C-band products and services.
MARKETING EXPENSES. Marketing expenses totaled $183 million for 1997, an
increase of $130 million as compared to 1996. The increase in marketing expenses
was primarily attributable to the increase in subscriber promotion subsidies.
These costs totaled $149 million during 1997, an increase of $114 million over
1996. This increase resulted from the commencement of the 1997 Promotion (a
marketing promotion that 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) and the increase in
the number of EchoStar receiver systems sold during 1997. Advertising and other
expenses increased $17 million to $35 million during 1997 as a result of
increased marketing activity and operation of the DISH Network during the
entirety of 1997.
GENERAL AND ADMINISTRATIVE EXPENSES. G&A expenses totaled $66 million for
1997, an increase of $17 million as compared to 1996. 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 14% during 1997 as compared to 25% during 1996.
EARNINGS BEFORE INTEREST, TAXES, DEPRECIATION AND AMORTIZATION. EBITDA was
negative $52 million for 1997, as compared to negative EBITDA of $65 million for
1996. This improvement in EBITDA resulted from the factors affecting revenue and
expenses discussed above. EBITDA does not purport to represent cash provided by
or used by operating activities and should not be considered in isolation or as
a substitute for measures of performance prepared in accordance with generally
accepted accounting principles.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expenses for
1997 (including amortization of subscriber acquisition costs of $121 million)
aggregated $173 million in 1997, an increase of $130 million, as compared to
1996. The increase in depreciation and amortization expenses principally
resulted from amortization of subscriber acquisition costs (increase of
$105 million) and depreciation of EchoStar II (placed in service during the
fourth quarter of 1996).
OTHER INCOME AND EXPENSE. Other expense, net totaled $99 million during
1997, an increase of $51 million as compared to 1996. The increase in other
expense resulted primarily from interest expense associated with the 1997 Notes,
which were issued in June 1997, and increases in interest expense associated the
1994 Notes and the 1996 Notes due to higher accreted balances thereon. These
increases in interest expense were partially offset by increases in capitalized
interest. Capitalized interest (primarily related to satellite construction)
totaled $43 million during 1997, compared to $32 million during 1996.
58
INCOME TAX BENEFIT. The $55 million decrease in the income tax benefit
during 1997 principally resulted from ECC's decision to increase its valuation
allowance sufficient to fully offset net deferred tax assets arising during the
year. Realization of these assets is dependent on ECC generating sufficient
taxable income prior to the expiration of the net operating loss carryforwards.
ECC's net deferred tax assets ($67 million at each of December 31, 1996 and
1997) principally relate to temporary differences for amortization of original
issue discount on the 1994 Notes and 1996 Notes, net operating loss
carryforwards, and various accrued expenses which are not deductible until paid.
If future operating results differ materially and adversely from ECC's current
expectations, its judgment regarding the magnitude of its valuation allowance
may change.
YEAR ENDED DECEMBER 31, 1996, COMPARED TO THE YEAR ENDED DECEMBER 31, 1995.
REVENUE. Total revenue for 1996 was $197 million, an increase of
$48 million as compared to total revenue during 1995 of $149 million. This
increase resulted from the introduction of the DISH Network and was partially
offset by decreased sales of domestic and international C-band equipment and
decreased C-band programming revenues.
The DISH Network commenced operation in March 1996. During 1996, DISH
Network subscription television services revenues totaled $50 million and Other
DISH Network revenue approximated $8 million, of which approximately $5 million
related to incremental revenue realized on sales made pursuant to the 1996
Promotion.
During 1996, DTH equipment sales and integration services revenues
principally resulted from sales of EchoStar receiver systems and related
accessories prior to the August 1996 nationwide rollout of the 1996 Promotion.
DTH equipment sales and integration services revenue for 1996 totaled
$77 million, an increase of $41 million over 1995 revenues of $36 million.
During 1995, DTH equipment sales and integration services revenue primarily
related to sales of a competitor's DBS satellite receivers and related
accessories ("Competitor DBS Receivers"). All Competitor DBS Receivers were
manufactured and supplied by a third-party manufacturer.
C-band and other revenue totaled $56 million for 1996, a decrease of
$57 million compared to $113 million in 1995. Other revenue principally related
to domestic and international sales of C-band products and net domestic C-band
programming revenues. This decrease resulted from the world-wide decrease in
demand for C-band products and services.
DISH NETWORK OPERATING EXPENSES. DISH Network operating expenses totaled
$42 million for 1996 and represented 85% of subscription television services
revenue.
COST OF SALES--DTH EQUIPMENT AND INTEGRATION SERVICES. For 1996, cost of
sales--DTH equipment and integration services totaled $76 million and
represented costs of EchoStar receiver systems sold prior to the August 1996
rollout of the 1996 Promotion. For 1995, cost of sales--DTH equipment and
integration services totaled $30 million and primarily represented costs of
sales associated with Competitor DBS Receivers.
COST OF SALES--C-BAND AND OTHER. Cost of sales--C-band and other totaled
$42 million during 1996, a decrease of $43 million compared to 1995. This
decrease was consistent with the decrease in related revenues and resulted from
the decline in the world-wide demand for C-band products and services.
MARKETING EXPENSES. Marketing expenses totaled $53 million for 1996, an
increase of $51 million as compared to $2 million in 1995. The increase in
marketing expenses was primarily
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attributable to the increase in subscriber promotion subsidies. These costs
totaled $35 million in 1996. During 1996, advertising and other expenses totaled
$18 million, an increase of $16 million compared to 1995, as a result of
increased marketing activity associated with the introduction of the DISH
Network.
GENERAL AND ADMINISTRATIVE EXPENSES. G&A expenses totaled $49 million
during 1996, an increase of $13 million as compared to $36 million in 1995. The
increase in G&A expenses was principally attributable to increased personnel
expenses to support the introduction and growth of the DISH Network.
EARNINGS BEFORE INTEREST, TAXES, DEPRECIATION AND AMORTIZATION. EBITDA was
negative $65 million for 1996 as compared to negative EBITDA of $5 million
during 1995. This deterioration in EBITDA resulted from the introduction of the
DISH Network in March 1996, combined with the decrease in C-band revenues
discussed above. EBITDA does not purport to represent cash provided by or used
by operating activities and should not be considered in isolation or as a
substitute for measures of performance prepared in accordance with generally
accepted accounting principles.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expenses for
1996 (including amortization of subscriber acquisition costs of $16 million)
aggregated $43 million, an increase of $40 million, as compared to $3 million in
1995. The increase in depreciation and amortization expenses principally
resulted from amortization of subscriber acquisition costs and depreciation of
EchoStar I and EchoStar II.
OTHER INCOME AND EXPENSE. Other expense, net totaled $48 million for 1996,
an increase of $37 million, as compared to $11 million in 1995. The increase in
other expense resulted primarily from interest expense associated with the 1996
Notes, which were issued in March 1996, and increases in interest expenses
associated with the 1994 Notes (resulting from a higher accreted balance
thereon). These increases in interest expense were partially offset by increases
in capitalized interest. Capitalized interest (principally attributable to
satellite construction) totaled $32 million during 1996, compared to $26 million
during 1995.
INCOME TAX BENEFIT. The increase in the income tax benefit of $49 million
principally resulted from the increase in the net loss during 1996.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1998, the Company's unrestricted cash, cash equivalents
and marketable investment securities totaled $44 million, compared to
$66 million as of December 31, 1997. During the nine months ended September 30,
1998 and 1997, net cash flows used in operations totaled $40 million and
$48 million, respectively. Capital expenditures totaled $134 million and
$175 million during those same periods. The Company's capital expenditures
during the first nine months of 1998 principally related to the ongoing
construction and launch of EchoStar IV, the expansion of the Company's digital
broadcast operations center, and building improvements to the Company's new
corporate headquarters.
The Company's working capital and capital expenditure requirements were
substantial during the three-year period ended December 31, 1997. Such
expenditures principally related to the ongoing development of our direct
broadcast satellite system and the related commercial introduction of DISH
Network service in March 1996. Capital expenditures, including expenditures for
satellite systems under construction, totaled $134 million, $215 million and
$222 million during 1995, 1996 and 1997, respectively.
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During 1995, 1996 and 1997, net cash flows used in operations totaled
$22 million, $23 million, and $8 million, respectively. The Company expects that
its future working capital, capital expenditure and debt service requirements
will be satisfied from existing cash and investment balances, cash generated
from operations and advances from ECC. The Company'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 its ability to
grow its Technology and Satellite Services businesses. There can be no assurance
that the Company will be successful in achieving its goals. The amount of
capital required to fund the Company's 1999 working capital and capital
expenditure needs will vary, dependent upon the level of success the Company
experiences relative to its goals. The Company's working capital and capital
expenditure requirements could increase materially in the event of increased
competition for subscription television customers, significant launch delays or
failures, or in the event of a general economic downturn, among other factors.
During 1995 and 1996, the Company's capital expenditure and working capital
requirements were funded principally from the proceeds of three offerings. In
June 1994, the Company consummated an offering (the "1994 Notes Offering") of
the 1994 Notes and 3,744,000 Warrants (representing 2,808,000 shares of ECC's
Class A common stock). The 1994 Notes Offering resulted in net proceeds of
approximately $323 million. In June 1995, ECC completed an initial public
offering (the "IPO") of 4 million shares of its Class A common stock, resulting
in net proceeds of approximately $63 million. During March 1996, EchoStar
Satellite Broadcasting Corporation ("ESBC"), a wholly owned subsidiary of ECC,
consummated an offering (the "1996 Notes Offering") of the 1996 Notes, resulting
in aggregate net proceeds of approximately $337 million. As of December 31,
1997, substantially all of the proceeds of the 1994 Notes Offering, the IPO and
the 1996 Notes Offering had been used to fund the construction and development
of our direct broadcasting satellite system. During 1997 the Company's working
capital and capital expenditure requirements were funded principally by advances
received from ECC.
On June 25, 1997 the Company consummated an offering (the "1997 Notes
Offering") of the 1997 Notes. The 1997 Notes Offering resulted in net proceeds
of $363 million. Interest accrues on the 1997 Notes at a rate of 12 1/2% and is
payable in cash semi-annually on January 1 and July 1 of each year, with the
first interest payment due January 1, 1998. Of the net proceeds from the 1997
Notes Offering, $109 million were placed in an escrow account (the "Interest
Escrow") to fund semi-annual interest payments through January 1, 2000.
Additionally, $112 million of the net proceeds of the 1997 Notes Offering were
placed in a separate escrow account (the "Satellite Escrow") to fund the
construction, launch and insurance of EchoStar IV. The 1997 Notes mature on
July 1, 2002.
On October 2, 1997, ECC consummated an offering (the "Series B Preferred
Offering") of 12 1/8% Series B Senior Redeemable Exchangeable Preferred Stock
due 2004, par value $0.01 per share (including any additional shares of such
stock issued from time to time in lieu of cash dividends, the "Series B
Preferred Stock"). The Series B Preferred Offering resulted in net proceeds
to ECC of $193 million. Each share of Series B Preferred Stock had a
liquidation preference of $1,000 per share. Dividends on the Series B
Preferred Stock were payable quarterly in arrears, commencing on January 1,
1998. The Series B Preferred Stock was exchanged into 121/8% Senior Preferred
Exchange Notes due 2004 (the "Senior Preferred Exchange Notes") on January 4,
1999.
On December 23, 1998, the Company commenced tender offers to purchase for
cash all of the outstanding 1994 Notes, 1996 Notes and 1997 Notes. On January 4,
1999, ECC commenced a similar tender offer for the Senior Preferred Exchange
Notes. The Company has been advised by the depositary for the tender offers that
as of the date hereof it has received tenders and consents from holders of more
than 99% of the aggregate outstanding principal amount of each such series of
notes to eliminate substantially all restrictive covenants as well as to amend
certain provisions contained in the related
61
indentures governing the 1994 Notes, the 1996 Notes, the 1997 Notes and the
Senior Preferred Exchange Notes.
Each of the indentures relating to the 1994 Notes, the 1996 Notes and the
1997 Notes contained restrictive covenants that impose significant restrictions
on the Company's thereunder, including with respect to the ability of such
Company's to incur indebtedness and pay dividends or make distributions.
Following consummation of the tender offers and related consent solicitations,
substantially all of such restrictions have been removed, and each such Company
is permitted under such indentures to distribute cash to the Company to, among
other things, service the interest and principal payment requirements on the
Notes. Because less than all of the 1994 Notes, the 1996 Notes and the 1997
Notes were tendered in the tender offers, prior to consummation of the
reorganization described previously, each of Dish, ESBC and the Company will
have continuing obligations under any of their securities not purchased in the
tender offers. Following consummation of such reorganization, any such remaining
debt securities will constitute obligations of the Company and will rank PARI
PASSU with the notes.
SUBSCRIBER ACQUISITION COSTS
As previously described, the Company subsidizes the cost of EchoStar
receiver systems in order to stimulate DISH Network subscriber growth.
Consequently, the Company's subscriber acquisition costs are significant. During
the nine months ended September 30, 1998, the Company's aggregate subscriber
acquisition costs (subscriber promotion subsidies and acquisition marketing
expenses) approximated $260 per new subscriber activation. The Company expects
that its future subscriber acquisition costs will increase as a result of the
DISH Network One-Rate Plan. Under that plan, consumers are eligible to receive a
rebate on the purchase of certain EchoStar receiver systems. Consequently,
subscribers who qualify to participate in the DISH Network One-Rate Plan have a
materially higher acquisition cost than other DISH Network subscribers. Although
there can be no assurance as to the ultimate duration of the DISH Network
One-Rate Plan, it will continue through at least March 1999.
FUTURE CAPITAL REQUIREMENTS
As of September 30, 1998, the Company had approximately $1.5 billion of
outstanding long-term debt substantially all of which will be retired upon
consummation of the tender offers. The notes will have semi-annual cash interest
requirements aggregating approximately $94 million. There will be no scheduled
principal payment or sinking fund requirements prior to maturity of the Notes.
The Company utilized $91 million of satellite vendor financing for the Company's
first four satellites. As of September 30, 1998, approximately $63 million of
such satellite vendor financing was outstanding. The satellite vendor financing
bears interest at 8.25% and is payable in equal monthly installments over five
years following launch of the respective satellites. Satellite vendor financing
of $13 million was used for EchoStar IV. The terms of the EchoStar IV satellite
vendor financing are similar to that associated with the other satellite vendor
financing.
As a result of the transaction with News Corporation and MCI, the Company
expects to incur approximately $125 million during 1999 and 2000 in one-time
expenses associated with repositioning subscriber satellite dishes (toward the
110 degree orbital slot). In addition, the Company expects to expend
approximately $35 million during 1999 for capital expenditures related to
digital encoders required by the Cheyenne digital broadcast center to
accommodate the expansion to approximately 500 video and audio channels.
As a result of the anomalies experienced by EchoStar III and EchoStar IV
(see "Notes to Combined and Consolidated Financial Statements"), and in order to
fully exploit certain of its remaining FCC-allocated DBS frequencies, the
Company intends to deploy one or more additional DBS satellites.
62
If the transaction with News Corporation and MCI is consummated, it would
provide for the deployment of two additional DBS satellites at the 110 degree
orbital slot. The deployment of an additional DBS satellite to the 119 degree
orbital slot location would enable the Company to re-deploy either EchoStar I or
EchoStar II to the 61.5 degrees WL orbital location or the 148 degree orbital
slot orbital location in the event of further significant deterioration in the
operational capacity of either EchoStar III or EchoStar IV. The Company is also
evaluating other contingency plans. All of these possible deployments are
subject to several FCC approvals. There can be no assurance that net insurance
proceeds will be sufficient to fully cover the costs to deploy replacement DBS
satellites.
In addition to its DBS business plan, ECC has licenses, or applications
pending with the FCC, for a two satellite fixed satellite services ("FSS")
Ku-band satellite system, a two satellite FSS Ka-band satellite system, and a
proposed modification thereof and a low earth orbit mobile-satellite service
g-satellite system. ECC would need to raise additional capital for the foregoing
purposes. Further, there may be a number of factors, some of which are beyond
ECC's control or ability to predict, that could require ECC to raise additional
capital. These factors include unexpected increases in operating costs and
expenses, a defect in or the loss of any satellite, or an increase in the cost
of acquiring subscribers due to additional competition, among other things.
There can be no assurance that additional debt, equity or other financing, if
required, will be available on terms acceptable to the Company, or at all.
If cash generated from the Company's operations is not sufficient to meet
the debt service requirements of the Notes, the Company would be required to
obtain cash from other financing sources. There can be no assurance that such
financing would be available on terms acceptable to the Company, or if
available, that the proceeds of such financing would be sufficient to enable the
Company to meet all of its obligations. In the event that less than 100% of the
1994 Notes, 1996 Notes or 1997 Notes are tendered and subsequently retired with
proceeds from the offering, the Company will be required to retire those Notes
when they mature, and the indentures governing the 1994, 1996 and 1997 Notes
will remain outstanding (although with substantially all of the restrictive
covenants having been eliminated) until such time. There can be no assurance
that the Company will have sufficient cash to retire those notes.
YEAR 2000 READINESS DISCLOSURE
The Company 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.
The Company is currently engaged in the remediation and testing of its
critical computer systems to ensure year 2000 compliance thereof. In connection
with this effort, the Company 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 the Company's internal financial and administrative
systems, the Company has substantially completed the identification,
modification (as necessary) and testing of all such systems. Although there can
be no assurance, the Company currently believes that its internal financial and
administrative systems are year 2000 compliant. The Company currently is
completing a similar effort with respect to its service-delivery systems and
although there can be no assurance, the Company expects all such systems to be
fully year 2000 compliant by the middle of 1999. 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
63
which the Company is vulnerable to those third parties' failure to remediate
their own year 2000 issues. The Company is not aware of any material
non-compliance with respect to year 2000 compliance by its significant
third-party business partners, suppliers and vendors.
Although there can be no assurance, the Company believes its costs to
successfully mitigate the year 2000 issue will not be material to its
operations. If the Company's plan is not successful or is not completed in a
timely manner, the year 2000 issue could significantly disrupt the Company'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 the Company'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 the Company's business or its operations.
64
BUSINESS
GENERAL
The Company is a wholly owned subsidiary of EchoStar Communications.
EchoStar Communication's common stock is publicly traded on the Nasdaq National
Market. Substantially all of the Company's operations are conducted by its
subsidiaries. The Company operates three business units:
- - THE DISH NETWORK--a direct broadcast satellite subscription television
service in the United States. As of December 31, 1998, the Company had
approximately 1.9 million DISH Network subscribers.
- - ETC--engaged in the design, distribution and sale of direct broadcast
satellite set-top boxes, antennas and other digital equipment for the DISH
Network, such as EchoStar receiver systems, and the design and distribution
of similar equipment for direct-to-home satellite TV projects of others
internationally, together with the provision of uplink center design,
construction oversight, and other project integration services for
international direct-to-home satellite TV ventures.
- - SATELLITE SERVICES--engaged in the turn-key delivery of video, audio and
data services to business television customers and other satellite users.
These services may include satellite uplink services, satellite transponder
space usage billing, customer service, and other services.
BUSINESS OVERVIEW AND STRATEGY
Since 1994, the Company has deployed substantial resources to develop the
EchoStar digital broadcast satellite system and the DISH Network. The EchoStar
digital broadcast satellite system consists of the Company's FCC-allocated
orbital spectrum, four operational direct broadcast satellites, digital
satellite receivers, a digital broadcast operations center, customer service
facilities, and other assets used in its operations. Our primary objective is to
continue to expand our DISH Network subscriber base, as well as to develop as an
integrated, full-service satellite company.
The Company's future success in the subscription television industry is
dependent upon its ability to acquire and retain DISH Network subscribers, among
other factors. Beginning in 1996, the Company made a strategic decision to
reduce the price charged to consumers for EchoStar receiver systems in order to
stimulate subscriber growth. Accordingly, since August 1996, the Company has
been selling its EchoStar receiver systems to DISH Network subscribers below its
manufactured cost. The Company's marketing programs and pricing strategies have
significantly increased the affordability of EchoStar receiver systems for
consumers. The primary purposes of these marketing promotions are to rapidly
build a subscriber base, to expand retail distribution of the Company's
products, and to build consumer awareness of the DISH Network brand. These
programs are consistent with and emphasize the Company's long-term business
strategy which focuses on generating the majority of its future revenue through
the sale of DISH Network programming to a large subscriber base. These programs,
however, have resulted in, and will continue to result in, the Company incurring
significant costs to acquire subscribers. The Company believes such costs will
be fully recouped from future programming revenues expected to be generated from
customers obtained as a result of these programs.
The Company also employs a "value-based" strategy with respect to
programming packages available on the DISH Network. For example, the DISH
Network's entry level "America's Top 40" programming package is priced at $19.99
per month, compared to, on average, over $30 per month for comparable cable
television service (typically consisting of 54 analog channels). The DISH
Network's "America's Top 100 CD" programming package (priced at $28.99 per
month) also compares favorably to
65
similar cable television programming. The rate for a similar cable television
system offering, consisting of an expanded basic cable package and a digital
music service, typically exceeds $40 per month. Similarly, the DISH Network
offers up to seven premium movie channels, for only $10.99 per month or about
the same amount that cable subscribers typically pay for one or two movie
channels.
The Company is also seeking to broaden its product offering to include
services such as Internet and high-speed data services. For example, the Company
has entered into an agreement with WebTV, which is wholly owned by Microsoft
Corporation, to provide Internet TV via satellite. The service will integrate
the DISH Network's digital satellite television programming with the Internet TV
services from WebTV Networks, including digital video recording, advanced
electronic program guide, broadband data delivery and video games. The Company
believes that broadening its product offering will allow it to increase both its
subscriber base and average revenue per subscriber.
AGREEMENT WITH NEWS CORPORATION AND MCI.
On November 30, 1998, our parent company, News Corporation and MCI
announced a transaction that provides for:
- the assignment to our parent company of the license held by MCI to
operate a high-powered direct broadcast satellite business at the 110
degree orbital slot consisting of 28 frequencies that can transmit to
the entire continental United States;
- in-orbit delivery of two Space Systems/Loral-built satellites,
currently expected to be launched in 1999;
- a recently-constructed digital broadcast operations center located in
Gilbert, Arizona;
- a worldwide license agreement to manufacture and distribute set-top
boxes internationally using NDS Limited's encryption/decoding
technology;
- a commitment by an affiliated entity of News Corporation to purchase
from ETC a minimum of 500,000 of its set-top boxes; and
- a three-year retransmission consent agreement for DISH Network to
rebroadcast FOX Network owned-and-operated local station signals to
their respective markets.
News Corporation will bear the costs of the construction, launch and insurance
of the two Space Systems/Loral-built satellites, including launch insurance and
one year of in-orbit insurance. We and MCI also agreed that MCI will have the
non-exclusive right to bundle DISH Network service with MCI's telephony service
offerings on mutually agreeable terms. In addition, the FOX News Channel is now
carried on the DISH Network. We received standard program launch support
payments in exchange for carrying the programming.
By combining the capacity of the newly acquired satellites at the 110
degree orbital slot and our current satellites at the 119 degree orbital slot
(which is subject to FCC approval which has been applied for), we expect that
the DISH Network will have the capacity to provide more than 500 channels of
programming, Internet and high-speed data services and high definition
television nationwide through a single 18 inch dish, and would be positioned to
become a one-dish solution for satellite-delivered local programming channels in
major markets across the country. We also expect to be able to serve Alaska,
Hawaii, Puerto Rico and the United States territories in the Caribbean from the
110 degree orbital slot.
66
In connection with this agreement, the litigation between our parent
company and News Corporation described below under "Business--Legal Proceedings"
will be stayed and dismissed with prejudice upon closing or if the transaction
is terminated for reasons other than the breach by, or failure to fulfill a
condition within the control of, News Corporation or MCI, or in certain other
limited circumstances.
The transaction with News Corporation and MCI is subject to receipt of
regulatory approvals and the approval of the shareholders of our parent company.
See "Business--Government Regulation" and "Risk Factors--Our Business Depends
Substantially On FCC Licenses That Can Expire Or Be Revoked Or Modified." The
Board of Directors of our parent company has approved the transaction. Although
the FCC has not yet provided approval for transferring the licenses, the Federal
Trade Commission and the United States Department of Justice provided "early
termination" of Hart-Scott-Rodino antitrust review of the agreement on December
16, 1998. The FCC has placed the agreement on public notice. Comments on, or
petitions to deny, the transaction were required to be filed by January 14,
1999. The U.S. Department of Justice has filed comments requesting prompt grant
of our application for approval by the FCC. Several parties have opposed the
application on various grounds or have requested conditions, arguing, for
example, that foreign ownership limitations and other broadcast qualification
requirements apply, requesting program access conditions with respect to News
Corporation's programming, and requesting conditions in connection with service
to Alaska and Hawaii. One of these requests is for service to Hawaii from the
110 degree orbital slot as well as from the 148 degree orbital slot. Our parent
company has filed a request for a waiver from the FCC of the obligation to serve
Alaska and Hawaii. We cannot be sure how the FCC would rule on any of these
oppositions or requests. The entire FCC formal pleading cycle was completed
February 4, 1999, with FCC approval of the transaction possible shortly
thereafter. To our knowledge, no other regulatory approvals are necessary in
order to consummate the transaction. The transaction must also be approved by
the shareholders of our parent company. Charles W. Ergen, Chairman, President
and Chief Executive Officer of our parent company and its controlling
shareholder, has agreed to vote in favor of the transaction.
DISH NETWORK
Since commencing operation in March 1996, the DISH Network has grown to
more than 1.9 million subscribers, including 330,000 new subscribers in the
fourth quarter of 1998, and has become a leading provider of direct broadcast
satellite programming services in the United States. "Direct broadcast
satellite" describes a high power satellite broadcast service in a portion of
the Ku frequency band that, by international agreement, contemplates wide
orbital spacing among satellites, generally permitting higher powered
transmissions than other satellite services and allowing reception with a small,
pizza-sized satellite dish. Although the concept of direct broadcast satellite
was introduced in 1982, it did not become commercially viable until a few years
ago because available technology did not allow for the power required to
transmit to small dishes and digital compression technology had not been
adequately developed. Today, the Company believes that direct broadcast
satellite provides the most cost-efficient national point to multi-point
transport of video, audio and data services.
The Company has four operational direct broadcast satellites (EchoStar I,
EchoStar II, EchoStar III and EchoStar IV) that operate in geostationary orbit.
Orbital positions, or "slots," are designated by their longitude and comprise
both a physical location and an assignment of spectrum in the applicable
frequency band, divided into 32 frequency channels, each with a useable
bandwidth of 24 MHz. Using digital compression technology, each frequency
channel can be converted into eight or more digital channels of programming. The
Company is currently using approximately 50 frequencies, including 21 frequency
channels at an orbital slot capable of providing nationwide digital broadcast
satellite service. See "-- Government Regulation--Digital Broadcast Satellite
Rules."
67
DIGITAL BROADCAST SATELLITE AND RELATED COMPONENTS
As an operator of a digital satellite television service, the Company
enters into agreements with programmers, who deliver their programming content
to the Company's digital broadcast operations center via commercial satellite,
fiber optics or microwave transmissions. The Company generally monitors such
signals for quality, and may add promotional messages, public service
programming or other system-specific content. The signals are then digitized,
compressed, encrypted and combined with other programming sharing a given
transponder and other necessary data stream, such as conditional access
information. Each signal is then uplinked, or transmitted, to one of the
Company's direct broadcast satellites, which receives and transmits the signal
to consumers.
In order to receive DISH Network programming, a subscriber must be equipped
with:
- - a satellite reception dish;
- - a low noise block converter and related equipment;
- - an integrated receiver/decoder, sometimes referred to as the "satellite
receiver" or "set-top box", which receives the data stream from each
broadcasting transponder, separates it into separate digital programming
signals, decrypts and decompresses those signals that the subscriber is
authorized to receive, and converts such digital signals into analog radio
frequency signals; and
- - a television set, to view and listen to the programming contained in the
analog signals.
A subscriber's set-top box is generally connected to the DISH Network's
authorization center through a telephone line to report the purchase of
pay-per-view movies and events.
The EchoStar digital broadcast satellite system integrates digital video
and audio compression. Authorization information for subscription programming is
stored on microchips placed on a credit card-sized access, or "smart card." The
smart card, which can easily be updated or replaced periodically at low cost,
provides a simple and effective method to adjust a subscriber's level of
programming services. If the receiver's smart card is authorized for a
particular channel, the data is decrypted and passed on for video and audio
decompression.
PROGRAMMING. The Company currently provides more than 200 channels of
digital television programming and CD-quality audio programming to the entire
"lower 48" continental United States. The Company also has in-orbit capacity
through EchoStar III and EchoStar IV to provide more than 200 channels from its
FCC-licensed orbital slots that are not capable of providing full coverage of
the entire United States. Assuming consummation of the transaction with News
Corporation and MCI and successful deployment of two new direct broadcast
satellites (EchoStar V and EchoStar VI), the Company expects to have the ability
to provide more than 500 channels of digital video and audio programming
broadcast nationwide, which subscribers could receive through a single dish. To
attract subscribers, the Company has sought to exploit the cost advantage that
direct broadcast satellite has over cable operators by offering the most popular
programming (including "basic" channels such as ESPN, CNN, USA Network,
Discovery, MTV and two channels each of Nickelodeon and The Disney Channel) at
affordable prices, by emphasizing a strong commitment to customer service, and
by emphasizing the quality difference between a digital and analog signal. As
part of the transaction with News Corporation and MCI, on January 7, 1999, DISH
Network commenced broadcasting the FOX News Channel, enhancing the Company's
popular programming line-up. The DISH Network also offers multichannel premium
services for separate purchase (such as HBO, STARZ!, Encore, Cinemax, Showtime
and The Movie
68
Channel), at prices that vary depending upon the number and selection of
services purchased. The DISH Network also offers 12 channels of pay-per-view
programming.
LOCAL STRATEGY. The Company believes that in order for the DISH Network to
be a competitive alternative to cable television service, it must, among other
things, develop a method to seamlessly provide local broadcast network channels
to consumers. Subject to eligibility conditions, the Company currently offers
satellite delivery of local network affiliates to some of the largest markets in
the continental United States. The Company is presently retransmitting the
network affiliates' signals from Atlanta, Boston, Chicago, Dallas/Ft. Worth,
Denver, Los Angeles, Miami, New York, Phoenix, Pittsburgh, Salt Lake City, San
Francisco and Washington, D.C., to "unserved households" (as defined by
applicable laws and regulations) in the local areas from which those channels
originate. See "--Government Regulation." A second 18-inch satellite dish is
presently necessary to receive the Company's network affiliates programming in
most markets. Thus, the Company's ability to successfully implement its local
strategy is dependent, among other things, upon consumer acceptance of the
installation of a second satellite dish in order to receive local programming.
The Company's ability to successfully implement a one-dish solution to local
programming would be enhanced by the transaction with News Corporation and MCI
(subject to FCC approval) and changes to existing legislation covering the
retransmission of local signals, among other factors.
ECHOSTAR RECEIVER SYSTEMS. DISH Network programming is available to
consumers in the continental United States who purchase or lease an EchoStar
receiver system. A typical EchoStar receiver system includes an 18-inch
satellite dish, an EchoStar digital satellite receiver (which processes and
descrambles signals for television viewing), a user-friendly remote control, and
related components. Subscribers can receive local broadcast signals, either
through a standard television antenna (a traditional rooftop or set-top
antenna), by subscribing to basic cable or, in certain areas of the United
States, directly from the DISH Network. EchoStar receiver systems are available
in a variety of models. The standard EchoStar receiver system incorporates
infrared remote control technology, an on-screen program guide, and the ability
to switch between DISH Network and local programming signals using the remote
control. In addition to the standard model features, the mid-level model
features UHF remote control technology (which allows subscribers to control
their EchoStar receiver system from up to 150 feet away through walls), and a
high-speed data port. The Company's latest premium model includes enhanced
features such as on-screen caller identification capability, event timers to
automatically tune into or record selected programming and one-touch VCR
recording using EchoStar's "IR Blaster" technology.
Although EchoStar receiver systems are internally designed and engineered,
ETC does not manufacture EchoStar receiver systems. Rather, the Company has
contracted for the manufacture of EchoStar receiver systems with a high-volume
contract electronics manufacturer. SCI currently is the Company's primary
manufacturer of EchoStar receiver systems. During 1998, VTech also began
manufacturing the Company's digital set-top boxes. JVC also manufactures limited
quantities of other consumer electronics products that incorporate EchoStar
receiver system technology. The Company also has a contract for the manufacture
of EchoStar receiver systems with Phillips.
INSTALLATION. Currently, a majority of EchoStar receiver system
installations are performed by third parties. A wholly owned subsidiary of the
Company offers installation services from its 18 offices located throughout the
continental United States.
CUSTOMER SERVICE CENTER. The Company currently maintains customer service
centers in Thornton, Colorado, Littleton, Colorado and McKeesport, Pennsylvania.
The Company outsources handling of customer service calls on an overflow basis,
but presently expects that it will be able to field 100% of its customer service
calls through its owned and operated facilities by April 1999. Potential and
existing subscribers can call a single telephone number to receive assistance
for hardware, programming,
69
installation and technical support. The Company intends to expand its customer
service operations as its DISH Network subscriber base demands.
DIGITAL BROADCAST OPERATIONS CENTER. The Company's digital broadcast
operations center is located in Cheyenne, Wyoming. Assuming consummation of the
transaction with News Corporation and MCI, our parent company will acquire a
second digital broadcast operations center located in Gilbert, Arizona, which
the Company plans to operate when needed at a later date. The digital broadcast
operations center uses fiber optic lines and downlink antennas to receive
programming and other data at the center. The digital broadcast operations
center uplinks programming content to the Company's satellites via large uplink
antennas. The digital broadcast operations center also maintains a number of
large uplink antennas and other equipment necessary to modulate and demodulate
the programming and data signals. All compression and encryption of the DISH
Network's programming signals are performed by equipment at the Company's
digital broadcast operations center.
CONDITIONAL ACCESS SYSTEM. The Company has contracted with NagraStar LLC,
a 50% owned joint venture. NagraStar has contracted with its other 50% owner for
the provision of access control systems, including "smart cards" used with each
EchoStar receiver system. The smart cards contain the authorization codes
necessary to receive DISH Network programming. The access control system is
central to the security network that prevents unauthorized viewing of
programming. Access control systems of other digital broadcast satellite
providers have been commercially pirated. The Company recently received data
that suggests that a portion of its access control system has been compromised.
The Company is presently evaluating the data to determine the corrective
measures that are necessary. Though there can be no assurance, the Company does
not believe that the compromise will materially affect its results of
operations.
SUBSCRIBER MANAGEMENT. The Company presently uses third-party software to
perform subscriber management and billing functions related to its DISH Network
business. The Company is developing a new proprietary subscriber management
system that, when operational, will replace the system presently in use. The
Company expects to migrate all of its DISH Network Subscribers to the new
subscriber management and billing system beginning in July 1999. The proprietary
system is designed specifically to manage digital broadcast satellite
subscribers as compared to the Company's existing, third party
developed-and-operated subscriber management system, which is oriented toward
cable television subscribers. If the Company is successful in developing such a
proprietary subscriber management system, the Company believes that this will
potentially represent a source of revenue for the Company in the future. See
"Risk Factors--Increased Subscriber Turnover Could Affect Our Financial
Performance."
DIRECT BROADCAST SATELLITE SALES AND MARKETING
The Company presently uses approximately 18,000 independent distributors,
retail stores and consumer electronics retailers to market and distribute
EchoStar receiver systems and DISH Network programming services to its target
markets. The majority of our subscriber activations have come from our
independent dealer network, which consists of local retailers who specialize in
TV and home entertainment systems. The Company intends to enhance consumer
awareness of its product relative to other providers of direct-to-home satellite
services by forming alliances with nationally recognized distributors of other
consumer electronics products. The Company entered into a strategic alliance
with JVC pursuant to which JVC distributes EchoStar receiver systems under the
JVC label through certain of its nationwide retailers. During February 1998, the
Company also executed agreements with Philips and VTech pursuant to which those
entities will distribute privately labeled receiver systems, incorporating the
Company's proprietary technology, through certain of their nationwide retailers.
The Company believes, but can give no assurance, that these additional
distribution channels will further enhance the Company's ability to attract
subscribers to the DISH Network.
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Through the Company's direct sales efforts, customers can call a single
telephone number (1-800-333-DISH) 24 hours a day, seven days a week, to order
EchoStar receiver systems, activate programming services, schedule installation
and obtain technical support. The Company believes that it is the only direct
broadcast satellite provider to offer a comprehensive single-point customer
service function. The Company also is expanding into other less-traditional
means of distribution such as alliances with electric and other utilities,
multi-level marketing firms, and other non-consumer electronic retail
businesses.
The Company offers a residual (commission) program that it believes is
competitive with that offered by other direct broadcast satellite operators. The
program pays qualified distributors and retailers an activation allowance, along
with a monthly fixed residual for programming services provided over the period
that the respective DISH Network subscriber remains active. Thus, residuals may
be earned by distributors and retailers over an extended period.
The Company's marketing strategy includes national and regional broadcast
and print advertising promoting the benefits of the DISH Network. The Company
has comprehensive dealer guides describing all aspects of the DISH Network and
its integrated product lines (programming, hardware and installation), which are
provided to distributors at nationwide educational seminars. The Company expects
to continue to offer a high level of retail support and to provide comprehensive
point-of-sale literature, product displays, demonstration kiosks and signage for
retail outlets. The Company also provides a promotional channel as well as a
programming subscription for in-store viewing. The Company's mobile sales and
marketing team visits retail outlets on a regular basis to reinforce training
and ensure point-of-sale needs are quickly fulfilled. The Company also provides
retailers and distributors with a DISH Network merchandise catalog so that they
may add to their promotional materials. Additionally, one channel of programming
on the DISH Network provides information about additional services and
promotions periodically offered by the DISH Network. That channel is geared
towards educating retailers, satellite dealers, and current and potential
subscribers.
The Company's marketing programs and pricing strategies have significantly
increased the affordability of EchoStar receiver systems for consumers. In
August 1996, the Company lowered the suggested retail price for a standard
EchoStar receiver system to $199 (as compared to an average retail price in
March 1996 of $499), conditioned upon the consumer's one-year prepaid
subscription to the DISH Network's America's Top 50 CD programming package for
$300. During 1997, the Company further reduced the "up-front" costs to consumers
by maintaining the suggested retail price for a standard EchoStar receiver
system at $199 and eliminating any related prepaid subscription commitments. In
October 1998, the Company introduced the DISH Network One-Rate Plan pursuant to
which consumers are eligible to receive a $249 rebate on the purchase of certain
EchoStar receiver systems. This rebate is contingent upon the subscriber's
one-year commitment to subscribe to the America's Top 100 CD programming package
and two premium channel packages, committing the subscriber to a monthly
programming payment of approximately $49.
The primary purposes of these promotions are to rapidly build a subscriber
base, to expand retail distribution of the Company's products, and to build
consumer awareness of the DISH Network brand. These promotions are consistent
with and emphasize the Company's long-term business strategy that focuses on
generating the majority of its future revenue through the sale of DISH Network
programming to a large subscriber base.
These promotions have resulted in, and will continue to result in, the
Company incurring significant costs to acquire subscribers. However, the
Company believes that these costs will be fully recouped, provided that
subscriber turnover rates (currently less than 1.25% per month, on average)
remain under control. The Company believes that several factors contribute to
low customer attrition. DISH Network reception equipment cannot be utilized with
competitors' systems. Consequently,
71
subscribers cannot seamlessly migrate to alternative direct broadcast satellite
providers. Further, based on high direct broadcast satellite industry consumer
satisfaction ratings, feedback from consumers and dealers, and low DISH Network
subscriber turnover rates, the Company anticipates high customer retention rates
leading to an expected average minimum subscriber life of at least five years.
Further, a majority of DISH Network subscribers purchase premium and
pay-per-view programming in addition to their America's Top 40 or America's Top
100 CD subscription. These incremental revenues reduce the length of time
necessary to recoup the average cost of acquiring new subscribers.
The Company's present marketing strategy is based on current competitive
conditions; those conditions may change and any such changes could adversely
affect the Company. Future changes in marketing strategy may include additional
promotions geared toward further increasing the affordability of EchoStar
receiver systems and related accessories which, among other things, could
increase the Company's cost of acquiring new subscribers.
SATELLITES
EchoStar I and EchoStar II each are Lockheed Martin Series 7000 satellites
equipped with 16 Ku-band transponders. Each transponder operates at 130 watts of
power. EchoStar III and EchoStar IV are Lockheed Martin Series A2100AX
satellites equipped with 32 transponders that operate at approximately 120 watts
per channel, switchable to 16 transponders operating at over 230 watts per
channel. Each transponder is capable of transmitting multiple digital video,
audio and data channels. The Company's satellites have a minimum design life of
12 years.
During October 1998, Lockheed Martin advised the Company that EchoStar III
had experienced an anomaly that has resulted in the failure of three TWTAs and
the loss of use of a total of six TWTAs. The satellite is equipped with a total
of 44 TWTAs. Only 11 TWTAs are necessary to fully utilize DBSC's 11 frequencies
at 61.5 degrees WL, where the satellite is located. Although there has been no
interruption of service for our customers and no interruption of service is
expected, we are presently working with Lockheed Martin to investigate the cause
and potential implications of the anomalies. Lockheed Martin has informally
advised us that it is possible the anomaly may result in the loss of additional
TWTAs in the future.
As a result of the anomaly related to the TWTAs, we have instructed our
broker to notify our insurance carriers of an occurrence under the terms of the
EchoStar III launch insurance policy. The EchoStar III launch insurance policy
provides for insurance of $219.3 million covering the period from launch of the
satellite (October 5, 1997) plus 365 days. Under that policy, we have until
March 1999 to file a claim for either a constructive total or partial loss. It
may be several weeks before all of the data required in connection with the
filing of a claim can be accumulated. Pending completion of the anomaly
investigation, we have transitioned to a 60-day, $200 million in-orbit insurance
policy on EchoStar III at standard industry rates which was renewed through
February 2, 1999 and which we expect to renew on an interim basis. However, the
policy contains an exclusion for future TWTA losses based on similar anomalies.
As a result of the exclusion, and in the event that comprehensive coverage for
the TWTA anomalies is ultimately denied under the launch insurance policy, we
could potentially experience uninsured losses of capacity on EchoStar III in the
future, up to and including a total loss of capacity. Although there can be no
assurance, we expect that in-orbit insurance can be procured on more traditional
terms in the future if the anomaly investigation is satisfactorily concluded and
no further failures occur in the interim.
EchoStar IV is currently able to use a maximum of only 20 transponders as a
result of a solar array anomaly. The number of available transponders will
decrease over time. EchoStar IV has also experienced the failure of three TWTAs
and the loss of use of a total of six TWTAs comparable to those
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that occurred to EchoStar III. Based on existing data, we expect that
approximately 16 transponders will probably be available over the entire 12 year
design life of the satellite, absent significant additional TWTA anomalies or
other failures. In September 1998, we filed a $219.3 million insurance claim for
a total loss (as defined in the launch insurance policy) related to EchoStar IV.
However, if we received $219.3 million for a total loss on the satellite, the
insurers would obtain the sole right to the benefits of salvage from EchoStar IV
under the terms of the launch insurance policy. Although we believe we have
suffered a total loss of EchoStar IV in accordance with that definition in the
launch insurance policy, we presently intend to negotiate a settlement with the
insurers that will compensate us for the reduced satellite transmission capacity
and allow us to retain title to the asset.
The Company will acquire two additional direct broadcast satellites if the
transaction with News Corporation and MCI is consummated. EchoStar V and
EchoStar VI each are high power Space Systems/Loral Series FS-1300 satellites.
EchoStar V is equipped with 32 Ku-band transponders that will operate at
approximately 110 watts per channel, switchable to 16 transponders operating at
approximately 220 watts per channel. EchoStar VI is also equipped with 32
Ku-band transponders that will operate at approximately 120 watts per channel,
switchable to 16 transponders operating at approximately 240 watts per channel.
Each transponder is capable of transmitting multiple digital video, audio and
data channels. EchoStar V and EchoStar VI each have a minimum design life of
12 years.
The satellite purchase agreement for EchoStar V and EchoStar VI, the cost
of which is borne by News Corporation and the rights to which will be assigned
to the Company, requires Space Systems/Loral to deliver the satellites in orbit
for a purchase price of approximately $165 million and $175 million,
respectively. Such purchase price will be payable by MCI. Subject to certain
exceptions, the satellite purchase agreement with Space Systems/Loral requires
delivery of EchoStar V by August 31, 1999, and EchoStar VI in the fourth quarter
of 1999. The satellite purchase agreement requires Space Systems/Loral to pay
for liquidated damages of $500,000 for the first day and $100,000 per day
thereafter, capped at $2,000,000, if EchoStar V is not delivered on time. The
agreement provides that no damages will be payable by Space Systems/Loral for
late delivery of EchoStar VI. In addition, the agreement for the transaction
with News Corporation and MCI provides for launch insurance and one year of
in-orbit insurance protection for EchoStar V and EchoStar VI, respectively.
SATELLITE LAUNCHES
We expect to launch EchoStar V during the third quarter of 1999 on an Atlas
IIAS launch vehicle. We expect to launch EchoStar VI during the fourth quarter
of 1999 on a Proton K/Block DM four stage launch vehicle. Although there can be
no assurance, the Company is trying to obtain earlier launch dates for both
satellites.
MARKET FOR DIGITAL SATELLITE SERVICES
THE MARKET. The introduction of direct broadcast satellite receivers is
widely regarded as the most successful introduction of a consumer electronics
product in United States history. As of December 31, 1998, approximately
9 million United States households subscribed to direct broadcast satellite and
other digital direct-to-home satellite services. This installed base represents
a greater than 300% increase from the approximately 2 million direct broadcast
satellite subscribers as of the end of 1995. Independent market research
projects that the market for direct broadcast satellite and other digital
direct-to-home satellite services will grow to more than 18 million subscribers
in 2003, representing an annual cumulative growth rate of approximately 15%. The
Company believes that the market for digital satellite products and services
will continue to grow because there is significant unsatisfied demand for high
quality, reasonably priced television programming. The FCC estimates that
approximately 66% of all new subscribers to multi-channel television services
choose direct broadcast satellite over other
73
alternatives. Of the approximately 98 million television households in the
United States, it is estimated that more than 60 million subscribers pay an
average of $40 per month for multi-channel programming services.
The Company targets potential subscribers who are likely to be attracted by
specific DISH Network programming services. Potential subscribers include:
- - existing cable subscribers who desire a greater variety of programming,
improved video and audio quality, better customer service and fewer
transmission interruptions;
- - households not passed by cable or that are currently underserved by cable;
- - households headed by persons of foreign nationality living in the United
States who demand international, cultural and niche programming typically
not provided by cable television;
- - the mobile, commercial and institutional markets;
- - businesses; and
- - C-band subscribers who may desire to migrate to digital services.
The Company has procured in-orbit insurance for EchoStar I and EchoStar II
through June 25, 1999, with a one-year extension provision and for EchoStar III
through February 2, 1999. There can be no assurance that renewals will be
possible or can be at rates or on terms favorable to us. For example, if
EchoStar I, EchoStar II, EchoStar III or other similar satellites experience
anomalies while in orbit, the cost to renew in-orbit insurance could increase
significantly or coverage exclusions for similar anomalies could be required.
Further, although the Company has in-orbit coverage for 365 days after launch of
EchoStar IV, there can be no assurance that the Company will be able to obtain
in-orbit insurance for EchoStar IV thereafter. The in-orbit insurance policy
for EchoStar I, EchoStar II and EchoStar III and the launch insurance policy for
EchoStar IV include standard commercial satellite insurance provisions,
including a material change in underwriting information clause requiring us to
notify our insurers of any material change in the written underwriting
information provided to the insurers or any change in any material fact or
circumstance concerning our satellites insured under the policy. Such
notification permits insurers to renegotiate the terms and conditions if the
result is a material change in risk of loss or insurable interest. A change in
the health status of an insured satellite or any loss occurring after risk has
attached does not entitle the insurers to renegotiate the policy terms.
The satellite insurance policies for EchoStar I, EchoStar II, EchoStar III
and EchoStar IV contain customary exclusions, including:
- - acts of war or similar actions;
- - loss or damage caused by anti-satellite devices;
- - insurrection and similar acts;
- - governmental confiscation;
- - nuclear reaction or radioactive contamination;
74
- - willful or intentional acts of the Company or its contractors designed to
cause loss or failure of a satellite;
- - claims for lost revenue and incidental and consequential damages; and
- - third-party claims against the Company.
If, following launch, any Company satellite does not perform to
specifications, there may be circumstances in which insurance will not fully
reimburse the Company for any loss. In addition, satellite insurance will not
reimburse the Company for business interruption, loss of business and similar
losses that might arise from delay in the launch of any Company satellite.
COMPETITION
Each of the businesses in which the Company operates is highly competitive.
The Company's existing and potential competitors include a wide range of
companies offering video, audio, data, programming and entertainment services.
The Company also faces competition from companies offering products and services
that perform similar functions, including companies that offer cable television
products and services, wireless cable products and services, direct-to-home
satellite products and services, as well as direct broadcast satellite and other
satellite programming, and companies developing new technologies. Many of the
Company's competitors have substantially greater financial and marketing
resources than the Company. The Company expects that quality and variety of
programming, quality of picture and service, and cost will be the key bases of
competition.
Advances in communications technology, as well as changes in the
marketplace and the regulatory and legislative environment, are constantly
occurring. Moreover, mergers, joint ventures, and alliances among franchise,
wireless or private cable television operators, regional Bell operating
companies and others may result in providers capable of offering bundled cable
television and telecommunications services in competition with the Company. The
Company cannot predict the effect that ongoing or future developments might have
on the video programming distribution industry generally or the Company
specifically.
CABLE TELEVISION. Cable television service is currently available to the
vast majority of United States television households. The United States cable
television industry currently serves over 65 million subscribers. As an
established provider of subscription television services, cable television is a
formidable competitor in the overall market for television households. Cable
television systems generally offer 30 to 80 analog channels of video
programming. Cable television operators currently have an advantage relative to
the Company with regard to the provision of local programming as well as the
provision of service to multiple television sets within the same household. Many
cable television operators are in the process of upgrading their distribution
systems to expand their existing channel capacity for purposes of providing
digital product offerings similar to those offered by direct broadcast satellite
providers. In addition, such expanded capacity may be used to provide
interactive and other new services.
Many of the largest cable systems in the United States have announced plans
to offer access to telephony services through their existing cable equipment,
and have entered into agreements with major telephony providers to further these
efforts. In some cases, certain cable systems have actually commenced commercial
offerings of such services, the expansion of which could have a negative impact
on the demand for direct broadcast satellite services. If such trials are
successful, many consumers may find cable service to be more attractive than
direct broadcast satellite for the reception of programming.
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Because reception of direct broadcast satellite signals requires line of
sight to the satellite, it may not be possible for some households served by
cable to receive direct broadcast satellite signals. Additionally, the initial
cost required to receive DISH Network programming may reduce the demand for
EchoStar receiver systems, because EchoStar receiver systems must be purchased,
whereas cable and certain of the Company's satellite competitors lease their
equipment to the consumer with little if any initial hardware payment required.
The compulsory copyright license granted to satellite providers by the Satellite
Home Viewer Act is narrower in scope than the compulsory license granted to
cable operators, thus creating another competitive advantage for cable
operators. Further, cable operators pay substantially lower royalty rates for
the retransmission of distant network and superstation signals than the rates
paid by satellite TV companies, thereby enjoying a competitive advantage.
In addition, PrimeStar has announced that, subject to FCC approval of its
pending application to acquire TSAT, which controls a direct broadcast satellite
license to operate over 11 frequencies at the 119 degree orbital slot, it
currently intends to provide digital programming from Tempo's direct broadcast
satellite launched to that location in March 1997. TSAT's direct broadcast
satellite would allow PrimeStar to provide at least 65 digital video channels to
subscribers, possibly complementing the offering of local cable systems.
PrimeStar's complementary direct broadcast satellite service could make cable an
even more powerful competitor to the DISH Network. Although our parent company
has opposed PrimeStar's FCC application on the grounds that it is
anti-competitive, we cannot be sure whether this application will soon be
granted.
OTHER DIRECT BROADCAST SATELLITE AND DIRECT-TO-HOME SATELLITE SYSTEM
OPERATORS. In addition to the Company, several other companies have direct
broadcast satellite licenses and are positioned to compete with the Company for
home satellite subscribers. For example, DIRECTV operates three direct broadcast
satellite satellites and has 27 channel assignments at an orbital slot that
provides coverage to the entire continental United States. USSB owns and
operates an additional five transponders on DIRECTV's first satellite and offers
a programming service separate from, and complementary to, DIRECTV's service.
DIRECTV and USSB together offer more than 200 channels of combined direct
broadcast satellite video programming. The Company currently offers more than
150 channels of digital video programming. As of November 30, 1998, DIRECTV had
approximately 4.3 million subscribers, approximately one-half of whom also
subscribed to USSB programming. In December 1998, DIRECTV's parent executed a
definitive merger agreement to acquire the business and assets of USSB in a
transaction expected to be completed in mid-1999, subject to obtaining
regulatory and shareholder approvals. In addition to the five USSB frequencies
at the 101 degree orbital slot, this transaction would give DIRECTV access to
the three frequencies that USSB controls at the 110 degree orbital slot, which
DIRECTV might use to provide popular Hispanic programming.
We also face competition from PrimeStar, which, apart from its proposed
acquisition of TCI Satellite, currently leases a medium power satellite at the
85 degree orbital slot and, as of November 30, 1998, had approximately 2.3
million subscribers. In January 1999, DIRECTV's parent announced an agreement
to purchase the satellite television business of PrimeStar, both its existing
medium power business and its rights to acquire TCI's direct broadcast satellite
assets, subject in each case to regulatory approvals and customary conditions.
In addition, two other satellite companies, including a subsidiary of Loral,
have conditional permits for a comparatively small number of direct broadcast
satellite assignments that can be used to provide service to portions of the
United States.
There are a number of additional frequencies over which programming can be
delivered via geostationary satellite, including medium and high powered
Ka-band, Ku-band, and extended Ku-band, as well as proposed non-geostationary
satellite systems that would operate over these frequencies. These satellite
frequency bands and systems can be used to provide us with additional
competition.
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TELEPHONE COMPANIES. Certain telecommunications carriers, including long
distance telephone companies, could become significant competitors in the
future, as they have expressed an interest in, and in some instances made
substantial investments to become, subscription television and information
providers. For instance, AT&T is in the process of acquiring cable operator TCI.
Other telephone companies are also actively engaged in the video programming
distribution business.
VHF/UHF BROADCASTERS. Most areas of the United States are covered by
traditional terrestrial VHF/UHF television broadcasts that typically include
three to ten channels. These broadcasters are often low to medium power
operators with a limited coverage area and provide local, network and syndicated
programming. The local content nature of the programming may be important to the
consumer, and VHF/UHF programming is typically free of charge. The FCC has
allocated additional digital spectrum to licensed broadcasters. At least during
a transition period, each existing television station will be able to retain its
present analog frequencies and also transmit programming on a digital channel
that may permit multiple programming services per channel.
GOVERNMENT REGULATION
The following summary of regulatory developments and legislation does not
purport to describe all present and proposed government regulation and
legislation affecting the video programming distribution industry. Other
existing government regulations are currently the subject of judicial or
administrative proceedings, legislative hearings or administrative proposals
that could change, in varying degrees, the manner in which this industry
operates. Neither the outcome of these proceedings nor their impact upon the
industry or the Company can be predicted at this time. This section sets forth a
brief description of regulatory issues pertaining to operations of the Company.
Authorizations and permits issued by the FCC and foreign or international
regulatory agencies performing similar functions are required for the
construction, launch and operation of satellites and other components of the
EchoStar direct broadcast satellite system, and the sale of satellite receivers
and other products of the Company in certain countries. In addition, as the
operator of a privately owned United States satellite system, the Company is
subject to the regulatory authority of the FCC and the Radio Regulations
promulgated by the International Telecommunications Union, or "ITU." The
Company also requires import and general destination export licenses issued by
the United States Department of Commerce for the delivery of its manufactured
products to overseas destinations. Finally, United States export control
regulations and prior approval requirements apply to the delivery of satellites
to be launched by launch services providers based outside the United States and
to providing related technical information to such providers.
FCC PERMITS AND LICENSES. As the operator of a direct broadcast satellite
system, our parent company is subject to FCC jurisdiction and review primarily
for:
- - assignment of frequencies and orbital slots;
- - compliance with the terms and conditions of such assignments and
authorizations, including required timetables for construction and
operation of satellites;
- - authorization of individual satellites (I.E., meeting minimum financial,
legal and technical standards) and earth stations;
- - avoiding interference with other radio frequency emitters;
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- - compliance with rules the FCC has established specifically for holders of a
direct broadcast satellite, other satellite and earth station
authorizations, including construction milestones and due diligence
requirements; and
- - compliance with applicable provisions of the Communications Act.
Our parent company's FCC authorizations are conditioned on satisfaction of
ongoing due diligence, construction, reporting and related obligations. Our
parent company cannot be sure that it will be able to comply with the FCC's due
diligence obligations or that the FCC will determine that it has complied with
such due diligence obligations, and the FCC also has declared that it will
carefully monitor the reports required to be filed by satellite service
permitees. Failure of our parent company to file adequate reports or to
demonstrate timely progress in the construction of its satellite service systems
may result in the cancellation of its authorizations. Our parent company has not
filed, or not timely filed, all required reports or filings with the FCC, and
there is a risk that the filed reports may be found by the FCC not to comply
fully with its due diligence requirements.
Our parent company's permits and extension requests have been and may
continue to be contested in FCC proceedings and in court by several companies
with interests adverse to our parent company, including Dominion, PrimeStar,
Tempo, DIRECTV, GE American Communications, Inc. and others.
The licenses that the FCC issues for an operational direct broadcast
satellite system to use frequencies at a specified orbital slot are for a term
of ten years (less than the useful life of a healthy direct broadcast
satellite). At the expiration of the initial license term, the FCC may renew the
satellite operator's license or authorize the operator to operate for a period
of time on special temporary authority, but there can be no assurance that the
FCC will take such actions. In the event the FCC declines to renew the
operator's license, the operator would be required to cease operations and the
frequencies would revert to the FCC. Special temporary authorizations granted by
the FCC are for a period of 180 days or less, and are subject to several other
conditions. Our parent company also requires FCC authorization to operate earth
stations, including the earth stations necessary to uplink programming to its
satellites.
Our parent company has licenses to operate EchoStar I and EchoStar II at
the 119 degree orbital slot, both set to expire in 2006; a license to operate
EchoStar III at the 61.5 degree orbital slot, set to expire in 2008 (and a
special temporary authorization to operate certain additional frequencies on
that satellite, currently set to expire on March 15, 1999 or earlier); and an
authorization for 24 frequencies at the 148 degree orbital slot. Under that
authorization, our parent company must, among other things, have its entire
system at the 148 degree orbital slot operational by December 20, 2002. EchoStar
IV cannot operate over all of these 24 authorized frequencies, and we cannot be
sure that it will meet this milestone.
Our parent company has also filed with the FCC a modification application
to operate EchoStar IV at the 148 degree orbital slot. The state of Hawaii has
requested conditions to that authorization and our parent company has opposed
several of those requested conditions. The FCC has not yet acted on our parent
company's application, and our parent company currently operates EchoStar IV at
the 148 degree orbital slot under a special temporary authorization, currently
set to expire February 21, 1999.
Our parent company has requested FCC approval for the assignment to it of
all FCC authorizations involved in the transaction with News Corporation and
MCI, in which our parent company proposes to operate EchoStar V and EchoStar VI.
The FCC has placed these applications on public notice. The comment cycle ended
February 4, 1999. The U.S. Department of Justice has filed comments in support
of the application. Several parties have opposed the application on various
grounds or have requested conditions, including, without limitation, arguing
that alien ownership limitations and other
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broadcast qualification requirements apply, requesting program access conditions
with respect to News Corporation's programming, and requesting conditions in
connection with service to Alaska and Hawaii, including requesting service to
Hawaii from the 110 degree orbital slot as well as from the 148 degree orbital
slot. ECC has filed a still pending request for a waiver of the obligation to
serve Alaska and Hawaii. We cannot be sure how the FCC would rule on any of
these oppositions or requests. Although our parent company has requested
expedited action on the applications, we cannot be sure that the FCC will grant
them or that it will grant them expeditiously. In a 1995 rulemaking, the FCC had
imposed a one-time rule, applicable only to the January 1996 direct broadcast
satellite auction, which effectively prevented direct broadcast satellite
operators from using channels at more than one orbital slot providing coverage
to the entire continental United States. If the FCC reimposed this rule, our
parent company would not be able to preserve both its requested authorization at
the 110 degree orbital slot and its existing licenses at the 119 degree orbital
slot. Although our parent company has vigorously argued in its application that
the FCC need not and should not reimpose that rule, we cannot be sure how the
FCC will rule in that regard. Furthermore, MCI's authorization is subject to
still pending challenges before the full FCC, and we cannot be sure how the FCC
will rule on these challenges. Moreover, our plan to use our authorized
frequencies at the 119 degree orbital slot and our requested frequencies at the
110 degree orbital slot in conjunction with a single consumer dish may be
subject to additional regulatory requirements, and may require a modification of
the ITU Region 2 Plan for the broadcasting-satellite service (see below).
Furthermore, still pending before the FCC is a May 1997 application for minor
modifications to MCI's authorization. These and possibly other modifications
must be approved prior to the deployment of satellites at that location, and we
cannot be sure that the FCC will approve them or that it will do so timely.
Moreover, MCI has not yet received FCC authorization in connection with certain
types of telemetry, tracking and control operations of its proposed system.
The two satellites being manufactured for MCI (EchoStar V and EchoStar VI)
for use at the 110 degree orbital slot are equipped with spot beams to provide
service to Alaska and Hawaii. The state of Hawaii has requested service using
18-24 inch dishes. The satellites probably will not be capable of providing
service to substantial portions of Hawaii and Alaska with a dish that small,
particularly areas with heavy and consistent precipitation. The state of Hawaii
has requested the FCC to condition the transfer of control of the licenses to
our parent company on provision of service to 18-24 inch dishes.
EchoStar I uses the C-Band frequencies for its telemetry, tracking and
control operations. The FCC granted our parent company conditional authority to
use these frequencies, stating that the required coordination process with
Canada and Mexico had been completed. In January 1996, however, the FCC received
a communication from an official of the Ministry of Communications and
Transportation of Mexico stating that EchoStar I's telemetry, tracking and
control operations could cause unacceptable interference to Mexican satellites.
Although our parent company believes that it is unlikely that the FCC will
subsequently require us to relinquish the use of such C-band frequencies for
telemetry, tracking and control purposes, such relinquishment could result in
the inability to control EchoStar I and the total loss of the satellite unless
the satellite could be moved to another orbital slot with FCC approval.
EchoStar II has its telemetry, tracking and control operations in the "extended"
C-Band. In 1996, the FCC's International Bureau granted DirectSat conditional
authority to use these frequencies subject to the condition of no harmful
interference until January 1, 1999, at which time the FCC indicated it would
review the suitability of those frequencies for telemetry, tracking and control
operations. Our parent company has timely filed a request to extend the
authorization to November 2006. There can be no assurance that the FCC will
extend that authorization. The FCC's refusal to extend such authorization could
result in the inability to control EchoStar II and a total loss of the satellite
unless the satellite could be moved to another orbital slot with FCC approval.
Moreover, the FCC has recently released a notice of proposed rulemaking
proposing uses of those frequencies that may inhibit future satellite
operations, and has frozen the acceptance of earth station applications in that
band, which may inhibit DirectSat's future telemetry, tracking and control
operations.
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Among other regulatory requirements, all of our direct broadcast systems
are required to conform to the ITU broadcasting satellite service plan. Any
operations that are not consistent with this plan (including, among other
things, our digital transmissions) can only be authorized on a non-interference
basis pending successful modification of the plan or the agreement of all
affected administrations to the non-conforming operations. Accordingly, unless
and until the plan is modified to include the technical parameters of a direct
broadcast satellite applicant's operations, non-standard satellites must not
cause harmful electrical interference to, and are not entitled to any protection
from, interference caused by other assignments that are in conformance with the
plan. To our knowledge, the U.S. government has filed with the ITU modification
requests with respect to EchoStar I, II and III. The ITU has requested certain
technical information in order to process the requested modifications and we
have cooperated, and continue to cooperate, with the FCC in the preparation of
its responses to any ITU requests. We cannot predict when the ITU will act upon
these requests for modification or if they will be granted.
Our parent company also has conditional authorizations for several other
satellites that are not operational. ESC has a conditional permit for 10
unspecified western frequencies. That permit was set to expire on August 15,
1995. Although ESC filed a timely extension request, the FCC has deferred a
decision on that request pending the FCC's analysis of ESC's due diligence for
that permit. Further, the FCC has not yet assigned frequencies to ESC with
respect to that permit because in 1992 it held that ESC had not completed
contracting for its western assignments--the first prong of the required
diligence--and asked ESC to submit amended contract documentation. Although ESC
has submitted such documentation, the FCC has not yet ruled on this matter, and
we cannot be sure that the FCC will rule in our favor.
DirectSat has a conditional permit for 1 frequency at the 110 degree
orbital slot and 11 frequencies at the 175 degree orbital slot, which is set to
expire on August 15, 1999. That expiration date is pursuant to an extension
granted by the FCC's International Bureau in 1996. That extension was subject to
the condition that DirectSat make significant progress toward construction and
operation of its direct broadcast satellite system substantially in compliance
with the timetable submitted pursuant to Amendment No. 7 of its satellite
construction contract, dated June 17, 1995, or with a more expedited timetable.
The FCC's International Bureau also urged DirectSat to expedite construction and
launch of additional satellites for its direct broadcast satellite system.
PrimeStar has filed a still pending application for review requesting that the
FCC reverse the FCC's International Bureau's grant of an extension.
DBSC has a conditional permit for 11 frequencies at the 175 degree orbital
slot, which was set to expire on November 30, 1998. That expiration date was
pursuant to an extension granted by the FCC's International Bureau in 1995,
which was subject to the condition that the FCC may cancel the permit if DBSC
fails to progress toward operation of its system in accordance with the
timetable DBSC has submitted to the FCC. That extension also is subject to a
still pending challenge by PrimeStar.
All of ESC, DirectSat and DBSC have timely filed requests for extension of
these permits with respect to their western assignments to December 2002, but we
cannot be sure how the FCC will act with respect to these requests.
In 1997 ECC was granted a license for a two-satellite Ka-band system at the
83 degree orbital slot and the 121 degree orbital slot. That license was based
on an orbital plan agreed upon by applicants in our processing round, which is
subject to a challenge. In October 1997, the FCC released service rules
applicable to Ka-band licensees. Among other things, the rules impose various
technical requirements and restrictions, including the obligation to protect or
coordinate with certain types of services and power control requirements. The
FCC also imposed implementation milestones, including, for licensees without
intersatellite links, commencement of construction within one year of grant,
commencement of construction of a second satellite within two years of grant,
launch of first satellite within five years of
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grant, and launch of all satellites by the dates required by the ITU--generally
six years from filing of the ITU "Appendix 4" information (which was filed in
November 1995), with the possibility of a three-year extension. Although our
parent company has proposed a system that uses intersatellite links, our parent
company is considering a modification of that proposed system (subject to FCC
approval) that would not include intersatellite links. We cannot be sure whether
such a modification request, if filed, would be granted or what milestones the
FCC would deem applicable to such a modified proposed system. Further, the FCC
prohibited trafficking in "bare" Ka-band licenses. The FCC also imposed the same
annual reporting requirements that also apply to Ku-band licensees. We cannot be
sure that these new rules will not adversely affect our plans with respect to
our licensed Ka-band system.
In November 1996, our parent company was granted the ESC lisence in the
form of a conditional authorization for two Ku-band satellites to be located at
the 83 degree orbital slot and the 121 degree orbital slot, subject, among other
things, to submitting additional proof of its financial qualifications. Our
parent company also has applied for authority to modify this system to add
C-band capabilities to one satellite. In December 1996, PrimeStar and GE
Americom separately filed petitions for reconsideration of the ESC license,
seeking the reassignment of one satellite to a different orbital slot on the
grounds that the satellite in dispute will interfere with the GE Americom
satellite used by PrimeStar for its medium-power Ku-band service. If the FCC
granted these petitions or entertained any future request to locate another
satellite at the 83 degree orbital slot in lieu of our authorized satellite, the
satellite in dispute may be reassigned to another orbital slot; also, it may
become subject to significant limitations on its power. Although ESC, an
indirect, wholly owned subsidiary of our parent company, has submitted proof of
its financial qualifications, PrimeStar and GE Americom have challenged it, and
in March 1997 separately filed petitions to cancel the ESC license on the
grounds that the supplemental financial information provided by ESC is not
adequate. If the FCC granted these petitions, ESC would lose the ESC license.
Finally, PrimeStar and GE Americom have opposed ESC's C-band modification
application by separately filing petitions to deny ESC's application on similar
grounds set forth in their petitions outlined above, and PanAmSat is seeking to
use the location assigned to that satellite for its own conflicting C-band
operations. If the FCC granted these petitions, ESC would not obtain the
requested authorization to add C-band capabilities to one of its satellites. We
cannot be sure as to how the FCC will rule with respect to any of these
challenges. Although we have not finalized a business plan that incorporates use
of this spectrum and are not relying on this spectrum for the generation of
future revenues, if the FCC ruled against us, a potential future business
opportunity would be lost.
An 80% owned subsidiary of our parent company, E-Sat, Inc., has received
conditional authority to construct, launch and operate a six-satellite, little
low earth orbit mobile-satellite service system. Although primary applications
for the system are unrelated to direct broadcast satellite, it is possible that
the system could serve as a path for wireless communication with our direct
broadcast satellite customers, particularly for periodic polling of units for
pay-per-view purchases and relatively rapid feedback on viewer pay-per-view buy
rates and preferences. This project is in an early stage of development and we
cannot be sure that we will be able to successfully capitalize on any resulting
business opportunity. Our parent company has entered into an agreement with the
20% owner of E-Sat that, among other things, gives that party an option to
increase its ownership, subject to FCC approval. E-Sat and its assets are not
part of or subject to any guarantee granted in connection with the Notes.
If we successfully construct and launch Ku-band, extended Ku-band, Ka-band
and/or low earth orbit satellites, those satellites might be used to complement
the DISH Network, or for a variety of other uses. It is possible that the
Ku-band and Ka-band orbital locations requested by us and others could permit
construction of satellites with sufficient power to allow reception of satellite
signals by relatively small dishes. As these projects are in the early stages of
development and are currently being challenged by several companies with
interests adverse to ours, there can be no assurance that the FCC will sustain
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these licenses, or grant the pending applications, or that we will be able to
successfully capitalize on any resulting business opportunities.
DIRECT BROADCAST SATELLITE RULES. Once the FCC grants a conditional
construction permit, the permittee must proceed with due diligence in
constructing the system. The FCC has adopted specific milestones that must be
met in order to retain the permit, unless the FCC determines that an extension
or waiver is appropriate, and permittees must file semi-annual reports on the
status of their due diligence efforts. The due diligence milestones require
holders of conditional permits to complete contracting for construction of their
systems within one year of grant of the permit (with no unresolved contingencies
that could preclude substantial construction of the satellites), and to place
all satellites in operation within six years of grant. In addition, holders of
permits received after January 19, 1996 must complete construction of the first
satellite in their system within four years of grant of the permit. The FCC also
may impose other conditions on the grant of the permit. The holders of new
direct broadcast satellite authorizations issued on or after January 19, 1996
must also provide direct broadcast satellite service to Alaska and Hawaii where
the service is technically feasible from the acquired orbital slots, which
includes the 148 degree orbital slot. EchoStar IV cannot satisfy this
requirement from the 148 degree orbital slot, and accordingly we requested a
waiver of the requirement. The state of Hawaii has requested many conditions to
such a waiver, and we have opposed several of these conditions. Those holding
direct broadcast satellite permits as of January 1996 must either provide direct
broadcast satellite service to Hawaii or Alaska from at least one of their
orbital slots or relinquish their western assignments. Subject to applicable
regulations governing non-direct broadcast satellite operations, a licensee may
make unrestricted use of its assigned frequencies for non-direct broadcast
satellite purposes during the first five years of the ten-year license term.
After the first five years, the licensee may continue to provide non-direct
broadcast satellite service so long as at least half of its total capacity at a
given orbital slot is used each day to provide direct broadcast satellite
service. Further, the FCC has commenced a rulemaking that seeks to streamline
and revise its rules governing direct broadcast satellites. This rulemaking
concerns many new possible direct broadcast satellite rules. We cannot be sure
about the content and effect of any new direct broadcast satellite rules
ultimately promulgated by the FCC.
Failure to comply with applicable Communications Act requirements and FCC
rules, regulations, policies, and orders may result in the FCC's revoking,
conditioning, or declining to review or extend an authorization.
CERTAIN OTHER COMMUNICATIONS ACT PROVISIONS. As a distributor of
television programming, we are also affected by numerous laws and regulations,
including the Communications Act.
We believe that we remain free to set prices and serve customers according
to our business judgment, without rate regulation or the statutory obligation
under Title II of the Communications Act to avoid undue discrimination among
customers. Even if, under a future interpretation of the 1996 Act, we were
classified as a telecommunications carrier subject to Title II, we believe that
such reclassification would not likely increase substantially the regulatory
burdens imposed on us or have an adverse impact on our direct broadcast
satellite operations, although there can be no assurance in this regard.
We believe that, because we are engaged in a subscription programming
service, we are not subject to many of the regulatory obligations imposed upon
broadcast licensees. However, there can be no assurances that the FCC will not
find in the future that we should be treated as a broadcast licensee with
respect to our current and future operations and certain parties have requested
such treatment. If the FCC determined that we are a broadcast licensee, we could
be required to comply with all regulatory obligations imposed upon broadcast
licensees.
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The Communications Act, and the FCC's implementing regulations, provide
that, when subsidiaries of a holding company hold certain types of FCC licenses,
foreign nationals or their representatives may not own in excess of 25% of the
total equity of the holding company, considered on a fully-diluted basis, except
upon an FCC public interest determination. Although the FCC's International
Bureau has ruled that these limitations do not apply to providers of
subscription direct broadcast satellite services, the ruling has been challenged
and the question remains open. Furthermore, the limitations will apply to our
fixed satellite service authorizations if we hold ourselves out as a common
carrier or if the FCC decides to treat us as such a carrier. The FCC has noted
that we propose to operate one of our proposed satellite systems on a common
carrier as well as a non-common carrier basis.
A recent survey of our parent company's equity owners discloses that our
parent company's foreign ownership was under 5%, well below these limitations,
if they applied. However, the transaction with News Corporation and MCI would
result in the issuance to an Australian corporation of stock in excess of the
alien ownership limitations if they applied. Our parent company filed a petition
for a declaratory ruling that it is in the public interest to waive any
applicable limitations to allow this issuance. Under currently effective
precedent, such a waiver is only needed to the extent we propose to conduct
common carrier operations with our authorized Ka-band system. After coordination
with the FCC staff and in the interest of expediting consideration of our
application before the full FCC, our parent company withdrew the petition. We
may need to refile that petition for consideration by the FCC's International
Bureau under delegated authority, and there is no assurance that such a
petition, to the extent necessary, will be granted, or that it will be granted
expeditiously, or that conditions would not be imposed on such a grant, which
conditions may not be favorable to us.
The Communications Act requires prior FCC approval of transfers of control
over, or assignment of Title III licenses. Our parent company plans to implement
a reorganization. Pursuant to the reorganization, and subject to FCC approval
when required, our parent company will place ownership of all of our direct
broadcast satellites and related FCC authorizations and licenses into ESC.
DirectSat and DBSC, the current owners of EchoStar II and EchoStar III, will
both be merged into ESC. Dish, Ltd. and EchoStar Satellite Broadcasting
Corporation will be merged into us. We currently own EchoStar IV, which, like
the other satellites and related FCC authorizations for frequencies, will be
transferred to ESC. Our parent company's subsidiaries that currently hold FCC
authorizations have filed applications with the FCC to effect these "pro forma"
assignment of their licenses to ESC.
THE TELECOM ACT OF 1996. The 1996 Act clarifies that the FCC has exclusive
jurisdiction over direct-to-home satellite services and that criminal penalties
may be imposed for piracy of direct-to-home satellite services. The 1996 Act
also offers direct broadcast satellite operators relief from private and local
government-imposed restrictions on the placement of receiving antennas. In some
instances, direct broadcast satellite operators have been unable to serve areas
due to laws, zoning ordinances, homeowner association rules, or restrictive
property covenants banning the installation of antennas on or near homes. The
FCC recently promulgated rules designed to implement Congress' intent by
prohibiting any restriction, including zoning, land use or building regulation,
or any private covenant, homeowners' association rule or similar restriction on
property within the exclusive use or control of the antenna user when the user
has a direct or indirect ownership interest in the property, to the extent it
impairs the installation, maintenance or use of a direct broadcast satellite
receiving antenna that is one meter or less in diameter or diagonal measurement,
except where such restriction is necessary to accomplish a clearly defined
safety objective or to preserve a recognized historic district. Local
governments and associations may apply to the FCC for a waiver of this rule
based on local concerns of a highly specialized or unusual nature. In November
1998, the FCC extended these rules to allow renters to install antennas within
their leaseholds, I.E., homes, gardens, patios, terraces and balconies. The FCC
declined to extend the rules to permit the installation of antennas on common
property or on property to which a viewer was not permitted access, such as the
locked roof of an apartment building. This November order is being
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appealed by several groups, including those representing building owners. The
1996 Act also preempted local (but not state) governments from imposing taxes or
fees on direct-to-home satellite services, including direct broadcast satellite.
Finally, the 1996 Act required that multichannel video programming distributors
such as direct broadcast satellite operators fully scramble or block channels
providing indecent or sexually explicit adult programming. If a multi-channel
video programming distributor cannot fully scramble or block such programming,
it must restrict transmission to those hours of the day when children are
unlikely to view the programming (as determined by the FCC), although this
"hours of the day" restriction was recently declared unlawful by a federal
court. On March 24, 1997, the United States Supreme Court let stand a lower
court ruling that allows enforcement of this provision pending a constitutional
challenge. In response to this ruling, the FCC declared that its rules
implementing the scrambling provision would become effective on May 18, 1997.
THE CABLE ACT. In addition to regulating pricing practices and competition
within the franchise cable television industry, the Cable Act was intended to
establish and support existing and new multi-channel video services, such as
wireless cable and direct broadcast satellite, to provide subscription
television services. We have benefited from the programming access provisions of
the Cable Act and implementing rules, in that we have been able to gain access
to previously unavailable programming services and, in some circumstances, have
obtained certain programming services at reduced cost. Any amendment to, or
interpretation of, the Cable Act or the FCC's rules that would permit cable
companies or entities affiliated with cable companies to discriminate against
competitors such as us in making programming available (or to discriminate in
the terms and conditions of such availability) could adversely affect our
ability to acquire programming on a cost-effective basis. Certain of the
restrictions on cable-affiliated programmers will expire in 2002 unless the FCC
extends such restrictions.
On May 19, 1998, we filed a complaint against Comcast, a major cable
provider, seeking access to the sports programming controlled by Comcast in the
Philadelphia area. On January 22, 1999, the FCC denied this complaint, partly
on the basis that Comcast's programming is delivered terrestrially and therefore
is not subject to the program access prohibitions. We cannot be certain whether
or not other cable operators that control production or distribution of their
own programming would switch to terrestrial transmission of their programming
and seek to rely on the FCC's denial of our complaint against Comcast in order
to deny us access to their programming. We also cannot be certain whether or not
these companies would seek to acquire sports franchises and exclusively
distribute the corresponding programming, which could possibly limit our access
to popular sports programming.
Pursuant to the Cable Act, the FCC recently imposed public interest
requirements upon direct broadcast satellite licensees that include the
obligation to set aside four percent of the licensee's channel capacity
exclusively for non-commercial programming of an educational or informational
nature provided by national educational programming suppliers. Among other
constraints, the FCC defined relatively narrowly the type of suppliers for which
this capacity must be reserved and required that the capacity be made available
at substantially below cost rates. The FCC also applied to direct broadcast
satellite service providers the requirement of providing reasonable access to
time at favored low rates, and equal opportunity, for certain qualified
candidates for office.
Although direct broadcast satellite operators like us currently are not
subject to the "must carry" requirements of the Cable Act, the cable industry
and broadcast interests have argued that direct broadcast satellite operators
should be subject to these requirements, and the broadcasters also argue that
satellite companies should not be allowed to provide local-into-local network
service unless they also become subject to these requirements. In the event the
"must carry" requirements of the Cable Act are revised to include direct
broadcast satellite operators, or to the extent that new legislation of a
similar nature is enacted, our plans to provide local programming will be
adversely affected, and such must-carry requirements could cause the
displacement of possibly more attractive programming.
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CERTAIN OTHER RULEMAKINGS. The FCC recently proposed to allocate
additional "expansion" spectrum for direct broadcast satellite operators
starting in 2007. DIRECTV has filed an application for a satellite system using
those expansion frequencies.
Foreign satellite systems also are potential providers of direct broadcast
satellite service within the U.S. In May 1996, in its DISCO II proceeding, the
FCC proposed permitting non-U.S. satellite systems to serve the U.S. if the home
country of the foreign-licensed satellite offers open "effective competitive
opportunities" in the same satellite service to U.S. licensed satellites. In the
February 1997 World Trade Organization Agreement, the U.S. offer contained an
exemption from market opening commitments for, among other things, direct
broadcast satellite and direct-to-home satellite services. In November 1997, the
FCC released new rules whereby it maintained the effective competitive
opportunities test with respect to foreign-licensed satellites seeking to
provide direct broadcast satellite and direct-to-home satellite services in the
United States; the FCC also established a strong presumption in favor of
authorizing foreign-licensed satellites to provide services other than direct
broadcast satellite and direct-to-home satellite in the United States.
The FCC has proposed allowing non-geostationary orbit fixed satellite
service to operate on a co-primary basis in the Ku-band. If the proposal is
adopted, these satellite operations could provide global high-speed data
services, thereby facilitating additional competition to satellite and other
services. The FCC has also requested comment on a request to allow a terrestrial
service proposed by Northpoint to retransmit local television signals and
provide data services to direct broadcast satellite subscribers. Both of these
proposed operations, if authorized and implemented, may cause interference in
the direct broadcast satellite spectrum.
LOCAL NETWORK SIGNALS. Our ability to transmit local programming via
satellite into the markets from which the programming is generated may attract
incremental subscribers who would not otherwise be willing to purchase satellite
systems. Although we have commenced providing local network service to eligible
subscribers in various metropolitan centers, subject to certain conditions, our
ability to provide such a service is limited as detailed below.
SATELLITE HOME VIEWER ACT AND RETRANSMISSION CONSENT. In order to
retransmit network station programming, satellite companies must obtain the
retransmission consent of the station concerned, except for direct to home
retransmissions to "unserved households," as this term is defined in the
Satellite Home Viewer Act, and must also have a copyright license. Although we
have entered into an agreement with FOX Network providing for consent to certain
retransmissions of all FOX Network-owned and operated stations as part of the
transaction with News Corporation and MCI, there can be no assurance that this
transaction will close or that we will obtain the retransmission consents to the
extent necessary of any other network station.
The Satellite Home Viewer Act establishes a "statutory" (or compulsory)
copyright license that generally allows a direct broadcast satellite operator,
for a statutorily-established fee, to retransmit local network signals to
subscribers for private home viewing so long as that retransmission is limited
to those persons in "unserved households." An "unserved household," with
respect to a particular television network, is defined as one that cannot
receive an over-the-air network signal of "grade B" intensity (a standard of
signal intensity as defined by the FCC) of a primary network station affiliated
with that network through the use of a conventional outdoor rooftop antenna and
has not, within the 90 days prior to subscribing to the direct broadcast
satellite service, subscribed to a cable service that provides the signal of an
affiliate of that network. Although we believe the Satellite Home Viewer Act
could be read to allow us to retransmit this programming to certain local
markets via satellite (a view opposed by several parties), we also believe that
the compulsory copyright license under the Satellite Home Viewer Act may not be
sufficient to permit us to implement our strategy to retransmit such programming
in the most
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efficient and comprehensive manner. On August 28, 1997, a Copyright Arbitration
Royalty Panel, or "CARP," appointed to recommend royalties for satellite
retransmission of network-affiliated television and superstation signals
pursuant to the compulsory license of Section 119 of the Copyright Act,
delivered its report to the Librarian of Congress. In the CARP's recommendation,
the CARP held it has no jurisdiction to set royalties for local satellite
retransmissions of the signals of network television stations, on the ground
that the compulsory license of the Copyright Act does not extend to such
retransmissions. Our parent company petitioned the Librarian to modify the CARP
report. The CARP also recommended setting at zero the royalty rate for local
retransmissions of superstation signals.
The final ruling of the Librarian of Congress, reviewing the panel's
recommendation, was published in the Federal Register on October 28, 1997. With
respect to "local-into-local" retransmissions, the Librarian affirmed the zero
rate recommended by the panel for satellite retransmission of a superstation
signal within the station's local market--a recommendation that we had
supported. The Librarian modified the panel's recommendation, by also
establishing a zero rate for secondary transmissions of a network station's
signal to "unserved households" within the station's local market. The Librarian
also reviewed the panel's recommendation on the meaning of "unserved households"
(i.e., whether the statutory license covers retransmissions to a household in a
network station's local market receiving a signal of Grade B intensity from that
station but not from any other affiliate of the same network and satisfying all
other elements of the "unserved household" definition). The panel had determined
that the statutory license does not cover such retransmissions and the panel did
not have jurisdiction to recommend a rate for them. The Librarian decided that
the law is silent on the issue, and accordingly, he cannot unequivocally say
that the panel's decision is arbitrary or contrary to law. Nonetheless, the
Librarian determined that the Copyright Office retains the authority to conduct
a rulemaking proceeding despite the panel's determination, on the permissibility
of secondary transmissions of a network station's signal to households within
that station's local market that are served by that station but unserved by any
other station affiliated with the same network under the "unserved household"
provisions of the satellite compulsory license.
On December 23, 1997, our parent company petitioned the Copyright Office to
issue a rule confirming that a satellite carrier's local retransmission of
network signals of the respective local network affiliates is permissible under
the statutory license provided by the Satellite Home Viewer Act and related
copyright law. On January 26, 1998, the Copyright Office initiated a rulemaking
proceeding to determine whether the copyright law permits such
"local-into-local" retransmissions. Our parent company's petition and subsequent
comments have been opposed by, among others, certain sports leagues,
representatives of the cable industry, several television networks and their
broadcast affiliates, and the Motion Picture Association of America. Our parent
company's position was supported by the staffs of the San Francisco Regional
Office and the Bureau of Economics of the Federal Trade Commission. There can be
no assurance that the rulemaking will result in an outcome favorable to us.
Further, although we are continuing our efforts to secure passage of legislation
that will clarify and extend the scope of the compulsory license with respect to
local network signals, to protect against the possibility the Copyright Office
will not conduct a rulemaking proceeding or that any such rulemaking may not
provide a favorable result to us, there can be no assurance that we will be
successful in this effort. If a court or administrative agency rejected the
interpretation of "unserved household" supported by us, and legislation does not
pass that clarifies and extends the scope of the compulsory license, we may have
to engage in the relatively cumbersome process of obtaining copyright licenses
from all individual copyright holders instead. In the absence of the legislation
sought by us or a favorable outcome in the rulemaking, and failing successful
negotiation of individual copyright licenses and retransmission consent
agreements to the extent necessary, there can be no assurance that we would be
successful in any copyright infringement or FCC litigation with copyright owners
or broadcasters regarding the legality of certain local-into-local network
retransmissions.
86
DISTANT SIGNALS. The national networks and local affiliate stations have
recently sued PrimeTime 24, a satellite company whose programming feeds we had
until recently delivered, challenging, based upon infringement of copyright,
PrimeTime 24's methods of selling network programming to consumers. The U.S.
District Court for the Southern District of Florida entered a nationwide
injunction preventing PrimeTime 24 from selling its programming to consumers
unless the programming was sold according to certain stipulations in the
injunction. The injunction covers PrimeTime 24's "distributors" as well. The
plaintiff in the Florida litigation informed us that it considered us a
"distributor" for purposes of that injunction. A federal district court in North
Carolina has also issued an injunction against PrimeTime 24 prohibiting certain
distant signal retransmission to homes delineated by a contour in the Raleigh
area.
As a result of:
- - these rulings;
- - our determination to sell local network channels back into the area from
which they originate;
- - 1997 adjustments to copyright royalties payable in connection with delivery
of network signals by satellite; and
- - a number of other regulatory, political, legal, contractual and business
factors, during July 1998.
we ceased delivering PrimeTime 24 programming, and began uplinking and
distributing network signals directly. We have also implemented Section 119
compliance procedures which will materially restrict the market for the sale of
network signals by us. CBS and other broadcast networks have informed us that
they believe our method of providing distant network programming violates the
Satellite Home Viewer Act and hence infringes their copyright.
On October 19, 1998, our parent company filed a declaratory judgment action
in the United States District Court for the District of Colorado against the
four major networks. In the future, our parent company may attempt to certify a
class including the networks as well as any and all owned and operated stations
and any independent affiliates. Our parent company asked the court to enter a
judgment declaring that our method of providing distant network programming does
not violate the Satellite Home Viewer Act and hence does not infringe the
networks' copyrights.
Certain national television broadcast networks and their local affiliates
have threatened to file counterclaims or separate lawsuits against us for both
the retransmission of local-into-local and distant-into-local signals. On
November 5, 1998, the CBS, ABC, NBC and FOX networks and their affiliate groups,
acting on prior threats, filed a complaint alleging, among other things,
copyright infringement against our parent company in the federal district court
in Miami. The plaintiffs in that action have also requested the issuance of a
preliminary injunction against our parent company. In the event of a decision
adverse to us in any such litigation, significant damage awards and additional
material restrictions on the sale of network signals by us could result. Among
other things, we could be required to terminate delivery of distant network
signals to a material portion of its subscriber base. Further restrictions on
the sale of network channels imposed in the future could result in decreases in
subscriber activations and subscription television services revenue and an
increase in subscriber turnover.
The Satellite Home Viewer Act permits satellite retransmission of distant
network signals only to "unserved households." The determination of whether a
household qualifies as "unserved" for the purpose of being eligible to receive a
distant network signal depends, in part, on whether that household can receive a
signal of "Grade B intensity" as defined by the FCC. On November 17, 1998, in
response to petitions for rulemaking filed by our parent company and the
National Rural Telecommunications Cooperative, the FCC released a notice of
proposed rulemaking concerning the term "Grade B intensity" as used in the
Satellite Home Viewer Act. The notice of proposed rulemaking requested comment
and/or made tentative proposals, on among other things:
87
- - the extent of the FCC's authority in connection with the definition,
prediction, and measurement of Grade B intensity;
- - changing the definition of Grade B intensity so that truly unserved
households can be better identified;
- - endorsing or developing a methodology for accurately predicting whether an
individual household is able to receive a signal of Grade B intensity; and
- - developing an easy-to-use and inexpensive method for testing the strength
of a broadcast network signal at an individual household.
The FCC also noted that it does not "appear to have the statutory authority to
prevent most of PrimeTime 24's subscribers from losing their network service
under the Miami injunction. The evidence in the Miami and Raleigh court cases
strongly suggests that many, if not most, of those subscribers do not live in
"unserved households" under any interpretation of that term." The notice of
proposed rulemaking was the subject of extensive comments by, among others, the
satellite industry (including us), the networks and broadcast affiliates, and
several sports leagues. On February 2, 1999, the FCC released its report and
order on the proceeding. Although the FCC declined to change the values of
Grade B intensity, it adopted a method for measuring it at particular
households. The FCC also endorsed a method for predicting "Grade B intensity" at
particular households. We cannot be sure whether these methods are favorable to
us or what, if any, weight the courts will give to the FCC's decision. We also
cannot be certain whether the application of these methods by the courts will
result in termination of distant signal delivery to a material portion of our
subscribers and decreases in future subscriber activations.
In addition, in its August 28, 1997 report, the CARP recommended that the
royalty rate for satellite retransmissions of distant network-affiliated station
and distant superstation signals be set at 27 cents per subscriber per month--a
substantial increase compared to the previously applicable rates, which ranged
from 6 to 17.5 cents. The Satellite Broadcasting & Communications Association,
of which we are a member, requested modifications to the CARP report.
The final ruling of the Librarian of Congress, reviewing the panel's
recommendation, was published in the Federal Register on October 28, 1997. The
Librarian, among other things, affirmed the panel's recommendation of a 27 cent
per subscriber per month royalty rate for retransmissions of distant
superstation and network station signals. While judicial review of this ruling
is pending, the new rate became effective on January 1, 1998.
EXPORT REGULATION. From time to time, the Company requires import licenses
and general destination export licenses to receive and deliver components of
direct-to-home satellite TV systems. In addition, the delivery of satellites and
related technical information for the purpose of launch by a non-U.S. launch
services provider is subject to strict export control and prior approval
requirements. We have contemplated the possibility of satellite launches by such
non-U.S. providers, and cannot be sure that the requisite approvals will be
received.
TECHNOLOGY
The Company's Technology business principally consists of the design,
engineering, manufacturing and sale of digital direct-to-home satellite TV
equipment (such as digital set-top boxes, antennas and other related
accessories). The Company's Technology business also provides uplink center
design, construction oversight and other integration services to other
direct-to-home satellite TV providers.
88
The Company's Technology business resulted from the development of the DISH
Network, and the Company's revenues are, and are expected to continue to be,
derived principally from subscription fees for DISH Network programming.
Although there can be no assurance, the Company believes that revenue from its
Technology business may increase in the future. Further, the Technology business
is expected to continue to support and create revenue opportunities for the DISH
Network. For example, the design of digital set-top boxes for international
direct-to-home satellite TV customers is performed by the same employees who
design EchoStar receiver systems. Consequently, international Technology
projects may result in improvements in design and economies of scale in the
production of EchoStar receiver systems for the DISH Network.
Currently, the Company has two agreements with international direct-to-home
satellite TV providers (one in Canada and one in Spain) for the provision of
digital set-top boxes. A substantial portion of the Company's Technology revenue
in 1997 and 1998 resulted from sales to these two direct-to-home satellite TV
providers. As a result, the Company's Technology business currently is
economically dependent upon these two direct-to-home satellite TV providers. As
part of the transaction with News Corporation and MCI, ETC received a minimum
order from a subsidiary of News Corporation for 500,000 set-top boxes. Although
the Company continues to actively pursue other similar distribution and
integration service opportunities, no assurance can be given that any such
additional negotiations will be successful. The Company's future revenue from
the sale of direct-to-home satellite TV equipment and integration services in
international markets depends largely on the success of the direct-to-home
satellite TV operator in that country, which, in turn, depends on other factors,
such as the level of consumer acceptance of direct-to-home satellite TV products
and the intensity of competition for international subscription television
subscribers. No assurance can be given regarding the level of expected future
revenues that may be generated from the Company's alliances with foreign
direct-to-home satellite TV operators.
COMPETITION
The Company's Technology products and services compete with those of a
substantial number of foreign and domestic companies, many with greater
resources, financial or otherwise, than the Company. The rapid technological
changes occurring in these markets are expected to lead to the entry of new
competitors. ETC's ability to anticipate these technological changes and to
introduce enhanced products on a timely basis will be a significant factor in
its ability to expand and remain competitive. Existing competitors' actions and
new entrants may have a material adverse impact on ETC's sales. The Company
believes that its competitive position in its Technology business results from
its knowledge and experience in the direct broadcast satellite and
direct-to-home satellite TV industries, its technological leadership and new
product development capabilities, and the likely need for compatibility of new
technologies with currently installed systems. There can be no assurance,
however, that competitors will not be able to develop systems compatible with
ETC's proprietary technology or that ETC will be able to introduce new products
and technologies on a timely basis.
SATELLITE SERVICES
Satellite Services primarily consist of the turn-key delivery of video,
audio and data, primarily from the Company's satellites, to customers for
business television, educational and other applications. Satellite Services was
initially established to address the markets that fall outside of the typical
DISH Network residential market. Included within Satellite Services are the
following functions:
- - business television services;
- - broadcast and interactive data services;
89
- - educational services; and
- - satellite transmission and other services.
The Company's business television services include the uplink and delivery of
organizationally specific programming content to EchoStar receiver systems that
are specifically authorized for reception of those services. The Company bills
for these services based on the amount of satellite transmission time used by
its business television customers. The Company currently delivers broadcast and
interactive data services and expects to expand such services during 1999. These
services focus on the delivery of data signals to authorized subscribers. The
Company presently offers certain agricultural and financial data services and
expects to expand both the number and variety of data services it offers.
Transmission and other satellite services consists of the uplink and
transmission of services for corporate and international customers, including
the lease of excess direct broadcast satellite capacity to third-parties.
COMPETITION
Our Satellite Services business faces competition from a number of other
companies and technologies. Many of these competitors have substantially greater
financial and other resources than the Company. Satellite Services competitors
include, among others, other satellite system operators, cable television system
operators, Internet service providers, and telephone companies. The Company
believes that the ability of its Satellite Services business to compete will be
based on its knowledge and experience in the direct-to-home satellite TV and
direct broadcast satellite industry, its technological leadership and new
product capabilities, the quality of its video, audio and data transmissions,
the quality of service provided, and cost. There can be no assurance that our
Satellite Services business will be able to successfully compete with existing
and new providers of similar services.
PATENTS AND TRADEMARKS
The Company uses a number of trademarks for its products and services,
including "EchoStar," "DISH Network," "DISH Network," "America's Top 40,"
"America's Top 50 CD," and others. Certain of these trademarks are registered by
the Company, and those trademarks that are not registered are generally
protected by common law and state unfair competition laws. Although the Company
believes that these trademarks are not essential to the Company's business, the
Company has taken affirmative legal steps to protect its trademarks in the past
and intends to actively protect these trademarks in the future.
The Company is the assignee of certain patents for products and product
components manufactured and sold by the Company, none of which the Company
considers to be significant to its continuing operations. In addition, the
Company has obtained and, although no assurances can be given, expects to
obtain, licenses for certain patents necessary to the manufacture and sale by
the Company and others of direct broadcast satellite receivers and related
components. The Company has been notified that certain features of the EchoStar
receiver system allegedly infringe on patents held by others, and that royalties
are therefore required to be paid. The Company is investigating allegations of
infringement and, if appropriate, intends to vigorously defend against any suit
filed by the parties. There can be no assurance that the Company will be able to
successfully defend any suit, if brought, or that the Company will be able to
obtain a license for any patent that might be required. See "Business--Legal
Proceedings."
EMPLOYEES
The Company had 3,815 employees at December 31, 1998, of which 3,750 worked
in the Company's domestic operations and 65 of which worked in the Company's
international operations. The
90
Company is not a party to any collective bargaining agreement and considers its
relations with its employees to be good.
PROPERTIES
The following table sets forth certain information concerning the Company's
material properties:
APPROXIMATE
SQUARE OWNED OR
DESCRIPTION/USE LOCATION FOOTAGE LEASED
- --------------- -------- ------- --------
Corporate headquarters............................. Littleton, Colorado 156,000 Owned
EchoStar Technologies Corporation office
and distribution center........................... Englewood, Colorado 155,000 Owned
Office and distribution center..................... Sacramento, California 78,500 Owned
Digital Broadcast Operations Center................ Cheyenne, Wyoming 55,000 Owned
Customer Service Center............................ Thornton, Colorado 55,000 Owned
Customer Service Center............................ McKeesport, Pennsylvania 100,000 Leased
European headquarters and warehouse................ Almelo, The Netherlands 53,800 Owned
Warehouse and distribution center.................. Denver, Colorado 132,800 Leased
LEGAL PROCEEDINGS
THE NEWS CORPORATION LIMITED
During February 1997, our parent company and News Corporation announced an
agreement pursuant to which, among other things, News Corporation agreed to
acquire approximately 50% of the outstanding capital stock of our parent
company. News Corporation also agreed to make available for use by our parent
company the direct broadcast satellite permit for 28 frequencies at the 110
degree orbital slot purchased by MCI for more than $682 million following a 1996
FCC auction. During late April 1997, substantial disagreements arose between the
parties regarding their obligations under this agreement. Those substantial
disagreements led the parties to litigation.
In mid-1997, our parent company filed a complaint seeking specific
performance of this agreement and damages, including lost profits. News
Corporation filed an answer and counterclaims seeking unspecified damages,
denying all of the material allegations and asserting numerous defenses.
Discovery commenced in July 1997, and the case was set for trial commencing
March 1999.
In connection with the pending transaction with News Corporation and MCI,
the litigation between our parent company and News Corporation will be stayed
and will be dismissed with prejudice upon closing or if the transaction is
terminated for reasons other than the breach by, or failure to fill a condition
within the control of, News Corporation or MCI.
WIC PREMIUM TELEVISION LTD.
On July 28, 1998, a lawsuit was filed by WIC Premium Television Ltd. (WIC),
an Alberta corporation, in the Federal Court of Canada Trial Division, against
certain defendants which include: General Instrument Corporation, HBO, Warner
Communications, Inc., John Doe, Showtime, USSB, the Company and two of the
Company's wholly owned subsidiaries, Dish, Ltd. (Dish) and Echosphere
Corporation (Echosphere). The lawsuit seeks, among other things, an interim and
permanent injunction prohibiting the defendants from activating receivers in
Canada and from infringing any copyrights held by WIC. It is too early to
determine whether or when any other lawsuits and/or claims will be filed. It is
also
91
too early to make an assessment of the probable outcome of the litigation or to
determine the extent of any potential liability or damages.
On September 28, 1998, WIC filed another lawsuit in the Court of Queen's
Bench of Alberta Judicial District of Edmonton against certain defendants, which
also include the Company, Dish, and Echosphere. WIC is a company authorized to
broadcast certain copyrighted work, such as movies and concerts, to residents of
Canada. WIC alleges that the defendants engaged in, promoted, and/or allowed
satellite dish equipment from the United States to be sold in Canada and to
Canadian residents and that some of the defendants allowed and profited from
Canadian residents purchasing and viewing subscription television programming
that is only authorized for viewing in the United States. The lawsuit seeks,
among other things, interim and permanent injunction prohibiting the defendants
from importing hardware into Canada and from activating receivers in Canada and
damages in excess of the equivalent of US $175 million. It is too early to
determine whether or when any other lawsuits and/or claims will be filed. It is
also too early to make an assessment of the probable outcome of the litigation
or to determine the extent of any potential liability or damages. The Company
intends to vigorously defend itself in these lawsuits.
BROADCAST NETWORK PROGRAMMING
Section 119 of the Satellite Home Viewer Act, or "SHVA," authorizes the
Company to substitute satellite-delivered network signals to the Company
subscribers, but only if those subscribers qualify as "unserved" households,
defined in the SHVA, those that, among other things, "cannot receive, through
the use of a conventional outdoor rooftop receiving antenna, an over-the-air
signal of grade B intensity (as defined by the FCC) of a primary network station
affiliated with that network." Historically, the Company obtained distant
broadcast network signals for distribution to its subscribers through PrimeTime
24, Joint Venture. PrimeTime 24 also distributes network signals to certain of
the Company's competitors in the satellite industry.
The national networks and local affiliate stations have recently challenged
PrimeTime 24's methods of selling network programming (national and local) to
consumers based upon infringement of copyright. The United States District Court
for the Southern District of Florida entered a nationwide injunction preventing
PrimeTime 24 from selling its programming to consumers unless the programming
was sold according to certain stipulations in the injunction. The injunction
covers "distributors" as well. The plaintiff in the Florida litigation informed
us that it considered us a "distributor" for purposes of that injunction. A
federal district court in North Carolina has also issued an injunction against
PrimeTime 24 prohibiting certain distant signal retransmissions to homes
delineated by a contour in the Raleigh area. Other copyright litigation against
PrimeTime 24 is pending.
As a result of:
- - these rulings;
- - our determination to sell local network channels back into the area from
which they originate;
- - 1997 adjustments to copyright royalties payable in connection with delivery
of network signals by satellite; and
- - a number of other regulatory, political, legal, contractual and business
factors, during July 1998,
we ceased delivering PrimeTime 24 programming, and began uplinking and
distributing network signals directly.
92
We have also implemented Section 119 compliance procedures which will materially
restrict the market for the sale of network signals by us. CBS and other
broadcast networks have informed us that they believe our method of providing
distant network programming violates the SHVA and hence infringes their
copyright.
On October 19, 1998, our parent company filed a declaratory judgment action
in the United States District Court for the District of Colorado against the
four major networks. In the future, our parent company may attempt to certify a
class including the networks as well as any and all owned and operated stations
and any independent affiliates. Our parent company has asked the court to enter
a judgment declaring that our method of providing distant network programming
does not violate the SHVA and hence does not infringe the networks' copyrights.
Certain national television broadcast networks (and their local affiliates)
have threatened to file counter-claims or separate lawsuits against us for both
the retransmission of local-into-local and distant-into-local signals. On
November 5, 1998, several broadcast parties, acting on prior threats filed a
complaint alleging, among other things, copyright infringement against our
parent company in federal district court in Miami. The plaintiffs in that action
have also requested the issuance of a preliminary injunction against our parent
company. In the event of a decision adverse to us in any such litigation,
significant damage awards and additional material restrictions on the sale of
network signals by us could result. Among other things, ECC could be required to
terminate delivery of network signals to a material portion of our subscriber
base. Further restrictions on the sale of network channels imposed in the future
could result in decreases in subscriber activations and subscription television
services revenue and an increase in subscriber turnover.
The determination of whether a household qualifies as "unserved" for the
purpose of being eligible to receive a distant network signal by satellite under
the SHVA depends, among other things, on whether that household can receive a
signal of "Grade B intensity" as defined by the FCC.
The Company is subject to various other legal proceedings and claims which
arise in the ordinary course of its business. In the opinion of management, the
amount of ultimate liability with respect to those actions will not materially
affect the financial position or results of operations of the Company.
93
MANAGEMENT
DIRECTORS AND OFFICERS
The Company is a wholly owned subsidiary of ECC. The following table sets
forth information concerning certain officers and directors of ECC and the
Company:
NAME AGE POSITION
- ---- --- --------
Charles W. Ergen........................................ 45 Chairman, Chief Executive Officer, President and
Director of ECC and the Company
O. Nolan Daines......................................... 39 Director of ECC
Raymond L. Friedlob .................................... 54 Director of ECC
James DeFranco ......................................... 45 Executive Vice President and Director of ECC and
the Company
David K. Moskowitz...................................... 40 Senior Vice President, General Counsel, Secretary
and Director of ECC and the Company
Michael T. Dugan........................................ 49 President, EchoStar Technologies Corporation
Steven B. Schaver....................................... 44 Chief Financial Officer and Chief Operating
Officer of ECC and Chief Financial Officer of the
Company
CHARLES W. ERGEN. Mr. Ergen has been Chairman of the Board of Directors,
President and Chief Executive Officer of ECC since its formation and, during the
past five years, has held various executive officer and director positions with
ECC's subsidiaries. Mr. Ergen, along with his spouse and James DeFranco, was a
co-founder of ECC in 1980.
O. NOLAN DAINES. In 1993, Mr. Daines founded DiviCom, Inc. DiviCom is a
global provider of standards-based MPEG-II encoding product systems for digital
video broadcasting. DiviCom's product lines include audio/video/data encoding
and networking systems, as well as integration consulting and implementation
services. Prior to founding DiviCom, Mr. Daines served as Executive Director of
Engineering and System Architecture at Compression Labs Inc., where he led the
development of digital video products and communications systems. In March 1998,
Mr. Daines was appointed to ECC's Board of Directors.
RAYMOND L. FRIEDLOB. Mr. Friedlob has been a director of ECC and a member
of its Audit and Executive Compensation Committees since October 1995.
Mr. Friedlob is presently a member of the law firm of Friedlob Sanderson Raskin
Paulson & Tourtillott, LLC. Prior to 1995, Mr. Friedlob was a partner of
Raskin & Friedlob, where he had practiced since 1970. Mr. Friedlob specializes
in federal securities law, corporate law, leveraged acquisitions, mergers and
taxation.
JAMES DEFRANCO. Mr. DeFranco, currently the Executive Vice President of
ECC, has been a Vice President and a Director of ECC since its formation and,
during the past five years, has held various executive officer and director
positions with ECC's subsidiaries. Mr. DeFranco, along with Mr. Ergen and
Mr. Ergen's spouse, was a co-founder of ECC in 1980.
DAVID K. MOSKOWITZ. Mr. Moskowitz is the Senior Vice President, Secretary
and General Counsel of ECC. In March 1998, Mr. Moskowitz was appointed to ECC's
Board of Directors to fill the vacancy created by the resignation of Mr. R.
Scott Zimmer. During the past five years, Mr. Moskowitz
94
also has held various executive officer and director positions with ECC's
subsidiaries. Mr. Moskowitz joined ECC in March 1990 and is responsible for all
legal and regulatory affairs of ECC and its subsidiaries.
MICHAEL T. DUGAN. Mr. Dugan is the President of the Consumer Products
Division of ECC. In that capacity, Mr. Dugan is responsible for all engineering
and manufacturing operations at ECC. Mr. Dugan has been with ECC since 1990.
STEVEN B. SCHAVER. Mr. Schaver was named the Chief Financial Officer of
ECC in February 1996. In November 1996, Mr. Schaver also was named Chief
Operating Officer. From November 1993 to February 1996, Mr. Schaver was the Vice
President of ECC's European and African operations. From July 1992 to
November 1993, Mr. Schaver was the Director of Sales and Marketing for ECC's
largest Spanish customer, Internacional de Telecomunicaciones, S.A. in Madrid,
Spain. Prior to July 1992 and since joining ECC in 1984, he has held various
positions with subsidiaries of ECC, including Vice President of European
operations. Prior to joining ECC Mr. Schaver was a Banking Officer with
Continental Illinois National Bank.
The Board of Directors of ECC currently has an Audit Committee and an
Executive Compensation Committee, both of which were established in
October 1995. The present members of the Audit and Executive Compensation
Committees are Messrs. Daines and Friedlob. The principal functions of the Audit
Committee are: (i) to recommend to the Board of Directors the selection of
independent public accountants; (ii) review management's plan for engaging ECC's
independent public accountants during the year to perform non-audit services and
consider what effect these services will have on the independence of the
accountants; (iii) review the annual financial statements and other financial
reports which require approval by the Board of Directors; (iv) review the
adequacy of ECC's system of internal accounting controls; and (v) review the
scope of the independent public accountants' audit plans and the results of the
audit. The principal function of the Executive Compensation Committee is to
award grants under and administer ECC's Stock Incentive Plan.
EXECUTIVE COMPENSATION
Executive Officers are compensated by certain subsidiaries of ECC. The
following table sets forth the cash and non-cash compensation for the fiscal
years ended December 31, 1998, 1997 and 1996 for the Named Executive Officers.
95
SUMMARY COMPENSATION TABLE
LONG TERM
COMPENSATION
AWARDS
----------
SECURITIES
UNDERLYING
OTHER ANNUAL OPTIONS ALL OTHER
YEAR SALARY BONUS COMPENSATION(1) (#) COMPENSATION(2)
---- ------ ----- ------------ ---------- ---------------
Charles W. Ergen................ 1998 $ 248,082 $ -- $ -- $ 30,000 $ 8,545
Chairman, President and Chief 1997 190,000 -- -- 30,000 13,044
Executive Officer 1996 190,000 -- -- 17,300 140,680
James DeFranco.................. 1998 $ 178,860 $ -- $ -- $ 30,000 $ 3,030
Executive Vice President and 1997 160,000 -- -- 30,000 13,094
Director 1996 160,000 -- -- -- 48,990
Michael T. Dugan................ 1998 $ 209,231 $ -- $ -- $ 15,000 $ 1,270
President, EchoStar Technologies 1997 160,000 -- -- 138,820 13,094
Corporation 1996 149,615 -- -- 18,735 12,882
David K. Moskowitz.............. 1998 $ 187,311 $ -- $ -- $ 30,000 $ 1,270
Senior Vice President, Secretary, 1997 157,692 -- -- 30,000 12,918
General Counsel and Director 1996 142,692 10,000 -- 7,495 12,994
Steven B. Schaver............... 1998 $ 183,081 $ -- $ 15,074 $ 39,090 $ 800
Chief Operating Officer and Chief 1997 158,462 -- 15,416 59,410 11,984
Financial Officer 1996 142,498 11,787 14,340 -- 12,516
(1) With respect to Mr. Schaver, "Other Annual Compensation" includes housing
and car allowances related to his overseas assignments. Although each Named
Executive Officer enjoys certain other perquisites, such perquisites do not
exceed the lesser of $50,000 or 10% of each Officer's salary and bonus.
(2) "All Other Compensation" consists of amounts contributed to the
Corporation's 401(k) Plan on behalf of the Named Executive Officers. With
respect to Mr. Ergen and Mr. DeFranco for 1996, "All Other Compensation"
also includes payments made in connection with a tax indemnification
agreement between ECC and such individuals.
The following table provides information concerning grants of options to
purchase shares of Class A common stock of ECC made in 1998 to the Named
Executive Officers:
OPTION GRANTS IN LAST FISCAL YEAR
-------------------------------------------------------------------------------
NUMBER OF PERCENT OF
SECURITIES TOTAL OPTIONS
UNDERLYING GRANTED TO EXERCISE GRANT DATE
OPTIONS GRANTED EMPLOYEES PRICE PER PRESENT
NAME (#) IN 1998 SHARE ($/SH) EXPIRATION DATE VALUE(3)
- ----------------------------- --------------- ------------- ------------ --------------- ----------
Charles W. Ergen............. 30,000(1) 4.33% $18.29 April 15, 2006 $318,198
James DeFranco............... 30,000(1) 4.33% $17.00 April 15, 2006 325,251
Michael T. Dugan............. 15,000(1) 2.17% $17.00 April 15, 2006 162,625
David K. Moskowitz........... 30,000(1) 4.33% $17.00 April 15, 2006 325,251
Steven B. Schaver............ 30,000(1) 4.33% $17.00 April 15, 2006 325,251
Steven B. Schaver............ 9,090(2) 1.31% $22.00 March 31, 2008 131,268
- -----------
(1) In February 1998, ECC adopted the 1998 Executive Incentive Plan that
provided, among other things, the Named Executive Officers with options to
purchase up to 30,000 shares of Class A common stock, depending upon ECC's
achievement of certain financial and other goals. These options are subject
to cancellation to the extent ECC does not
96
achieve these financial and other goals. Assuming ECC achieves these
financial and other goals, 33 1/3% of these options will vest on April 15,
1999, and the remainder will vest 33 1/3% in each year thereafter. All
options expire five years from the date on which each portion of the option
first becomes exercisable, subject to early termination in certain
circumstances.
(2) In March 1998, ECC granted options to Mr. Schaver and other key employees
to purchase shares of Class A common stock. These options will vest 20% one
year following the date of the grant and continue to vest 20% each year
thereafter through 2003. These options expire five years from the date on
which each portion of the option first becomes exercisable, subject to
early termination in certain circumstances.
(3) Option values reflect Black-Scholes model output for options. The
Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, because option valuation models require
the input of highly subjective assumptions (including the expected stock
price characteristics) significantly different from those of traded
options, and because changes in the subjective input assumptions can
materially affect the fair value estimate, in management's opinion, the
existing models do not necessarily provide a reliable single measure of the
fair value of its stock- based compensation awards. The assumptions used in
the model were expected volatility of 67%, risk free rate of return of
5.64%, dividend yield of 0%, and time to exercise of six years.
The following table provides information as of December 31, 1998,
concerning unexercised options to purchase shares of Class A Common Stock:
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR END OPTION VALUES
NUMBER OF NUMBER OF SECURITIES
SHARES ACQUIRED UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
ON EXERCISE VALUE OPTIONS AT IN-THE-MONEY OPTIONS AT
(#) RECEIVED ($) DECEMBER 31, 1998 (#) DECEMBER 31, 1998 ($)(1)
--------------- ------------ -------------------------- ----------------------------
EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
----------- ------------- ----------- -------------
Charles W. Ergen.......... -- $ -- 64,489 80,814 $2,344,164 $2,548,098
James DeFranco............ -- -- 47,340 67,279 1,748,148 2,176,592
Michael T. Dugan.......... 17,000 496,163 64,361 137,180 2,074,513 4,361,525
David K. Moskowitz........ -- -- 68,679 80,432 2,483,365 2,605,698
Steven B. Schaver......... -- -- 34,395 98,058 1,170,798 3,064,854
- -----------
(1) The dollar value of each exercisable and unexercisable option was
calculated by multiplying the number of shares of Class A Common Stock
underlying the option by the difference between the exercise price of the
option and the closing price (as quoted in the Nasdaq National Market) of a
share of Class A Common Stock on December 31, 1998.
EXECUTIVE COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION.
Prior to October 1995, ECC did not have an Executive Compensation Committee, and
its Board of Directors determined all matters concerning executive compensation.
During 1998, the Executive Compensation Committee consisted of Messrs. Daines
and Friedlob. Mr. Friedlob is a partner in the law firm of Friedlob, Sanderson,
Raskin, Paulson & Tourtillot, LLC, which billed ECC approximately $210,000 in
fees related to securities offerings in 1997.
DIRECTOR COMPENSATION. Directors of ECC who are not also Executive
Officers of ECC receive $500 for each meeting of the Board of Directors attended
and are reimbursed for reasonable travel expenses related to attendance at Board
meetings. Directors of ECC who are employees are not compensated for their
services as Directors. Directors of ECC are elected annually by the shareholders
of ECC. Directors who are not also employees of ECC are granted options under
the 1995 Non-employee
97
Director Stock Option Plan (the "Director Plan") to acquire 1,000 Class A Shares
of ECC upon election to the Board. Mr. Friedlob was granted an option to acquire
1,000 Class A Shares of ECC on December 22, 1995, pursuant to the Director Plan.
These options were 100% vested upon issuance and had an exercise price of $20.25
per share and a term of five years. These options were repriced to $17.00 per
share during July 1997. Additionally, in February 1997, Mr. Friedlob was granted
an option to acquire 5,000 shares of Class A Common Stock. These options were
100% vested upon issuance and have an exercise price of $17.00 and a term of
five years. In March 1998, upon appointment to ECC's Board of Directors,
Mr. Daines was granted an option to acquire 1,000 shares of ECC's Class A common
stock. These options were 100% vested upon issuance, have an exercise price of
$22.00, and a term of five years.
STOCK INCENTIVE PLAN. ECC adopted the Incentive Plan to provide incentives
to attract and retain Executive Officers and other key employees. ECC's
Executive Compensation Committee administers the Incentive Plan. Key employees
are eligible to receive awards under the Incentive Plan, at the Committee's
discretion.
Awards available under the Incentive Plan include: (i) common stock
purchase options; (ii) stock appreciation rights; (iii) restricted stock and
restricted stock units; (iv) performance awards; (v) dividend equivalents;
and (vi) other stock-based awards. ECC has reserved up to 10 million Class A
shares for granting awards under the Incentive Plan. Under the terms of the
Incentive Plan, the Executive Compensation Committee retains discretion,
subject to plan limits, to modify the terms of outstanding awards and to
reprice awards.
Pursuant to the Incentive Plan, ECC has granted options to its Executive
Officers and other key employees for the purchase of a total of 3,136,042 shares
of Class A common stock. Options to purchase 1,871,442 shares of Class A common
stock were outstanding as of December 31, 1998. These options generally vest at
the rate of 20% per year, commencing one year from the date of grant and 20%
thereafter on each anniversary of the date of the grant. The exercise prices of
these options, which have always been equal to or greater than the fair market
value at the date of grant, have ranged from $9.33 to $29.36 per share of ECC's
Class A common stock. Certain of these stock options were repriced as described
below.
Effective July 1, 1997, the Executive Compensation Committee voted to
reprice all outstanding options with an exercise price greater than $17.00 per
Class A share to $17.00 per Class A share. The price to which the options were
repriced exceeded the fair market value of a Class A share of the date of
repricing. The market value of Class A shares on the date of repricing was
$15.25 per Class A share. The Executive Compensation Committee and the Board of
Directors indicated that they would not typically consider reducing the exercise
price of previously granted options. However, the Executive Compensation
Committee and the Board of Directors recognized that certain events beyond the
reasonable control of the employees of ECC (including particularly the failed
transaction with The News Corporation Limited in 1997) had significantly reduced
the incentive those options were intended to create. It is the expectation of
the Executive Compensation Committee and the Board of Directors that by reducing
the exercise price of these options to $17.00, the intended incentive will be
restored in part.
LAUNCH BONUS PLAN. Effective May 8, 1998, in connection with the launch of
EchoStar IV, ECC granted a performance award of ten shares of Class A common
stock to all full-time employees with more than 90 days of service. The total
number of shares granted relative to the performance award approximated 16,600
shares.
401(k) PLAN. In 1983, ECC adopted a defined-contribution tax-qualified
401(k) Plan. ECC's employees become eligible for participation in the 401(k)
Plan upon completing six months of service
98
with ECC and reaching age 21. Participants in the 401(k) Plan may contribute
between 1% and 15% of their compensation in each contribution period. ECC may
make a 50% matching contribution up to a maximum of $1,000 per participant per
calendar year. ECC may also make an annual discretionary profit sharing or
employer stock contribution to the 401(k) Plan with the approval of the Board of
Directors.
Participants in the 401(k) Plan are immediately vested in their voluntary
contributions, plus actual earnings thereon. The balance of the vesting in
401(k) Plan participants' accounts is based on years of service. A participant
becomes 10% vested after one year of service, 20% vested after two years of
service, 30% vested after three years of service, 40% vested after four years of
service, 60% vested after five years of service, 80% vested after six years of
service, and 100% vested after seven years of service.
In March 1998, ECC contributed 80,000 shares of its Class A common stock to
the 401(k) Plan as a discretionary employer stock contribution. These shares,
which were allocated to individual participant 401(k) Plan accounts in
proportion to their 1997 eligible compensation, are subject to the seven-year
vesting schedule previously described. Shares of Class A common stock allocated
to the 401(k) Plan accounts of the Named Executive Officers pursuant to the 1997
discretionary employer stock contribution were as follows: (i) Charles W. Ergen,
539 shares; (ii) Michael T. Dugan, 539 shares (iii) James DeFranco, 539 shares;
(iv) Steven B. Schaver, 534 shares; (v) David K. Moskowitz, 531 shares and
(vi) all Officers and Directors as a group, 4,247 shares.
99
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
As of December 31, 1998, accrued dividends on the Series A Preferred Stock
payable to Messrs. Ergen and DeFranco aggregated approximately $5.5 million and
$288,000, respectively.
During 1997, the law firm of Friedlob, Sanderson, Raskin, Paulson &
Tourtillott, LLC billed ECC approximately $210,000 in fees related to certain of
the Company's 1997 securities offerings. Mr. Friedlob, a member of ECC's Board
of Directors, is a partner of that law firm.
O. Nolan Daines, who was recently appointed to ECC's Board of Directors,
also is the founder of DiviCom. During 1998, ECC purchased approximately
$15 million of equipment for its Digital Broadcast Operations Center and for
certain of its other project integration services for international
DIRECT-TO-HOME SATELLITE TV ventures from DiviCom.
The Company will distribute approximately $269.7 million of the net
proceeds of the offering OF old notes to ECC to repurchase the Senior
Preferred Exchange Notes pursuant to the Tender Offers. In addition, ECC
contributed cash or cash equivalents of $200 million to the Company as common
equity. See "Use of Proceeds."
In addition, the Company repaid a $12 million demand note payable to ECC in
October 1997. Also, during 1995 and 1996, ECC advanced the Company $46 million
in the form of notes payable to enable the Company to make required payments
under its EchoStar III construction contract. The notes payable bear interest at
11.25%, which has been added to principal. The Company will use approximately
$60.2 million of the net proceeds of the old notes to repay such notes payable
together with accrued interest.
100
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, to the best knowledge of EchoStar, the
beneficial ownership of EchoStar's voting securities as of December 31, 1998
(giving effect to the February 8, 1999 retirement of all outstanding shares of
EchoStar's Series A preferred stock) by: (i) each person known by EchoStar to be
the beneficial owner of more than five percent of any class of EchoStar's voting
shares; (ii) each Director of EchoStar; (iii) the five highest compensated
persons acting as an Executive Officer of EchoStar (the "Named Executive
Officers"); and (iv) all Directors and Executive Officers as a group. Unless
otherwise indicated, each person listed in the following table (alone or with
family members) has sole voting and dispositive power over the shares listed
opposite such person's name.
PERCENTAGE PRO FORMA PRO FORMA
NUMBER OF OF NUMBER OF PERCENTAGE
NAME(1) SHARES CLASS SHARES (2) OF CLASS (2)
- --------------------------------------------------------------- --------------------------------------------------------------
CLASS A COMMON STOCK (3):
Charles W. Ergen (4), (5), (17), (18), (19) . . . . . . . . 30,052,731 62.1% 30,052,731 41.4%
The News Corporation Limited (6). . . . . . . . . . . . . . - - 19,431,267 26.8%
MCI WorldCom, Inc. (6). . . . . . . . . . . . . . . . . . . - - 4,827,493 6.7%
FMR Corp. (7) . . . . . . . . . . . . . . . . . . . . . . . 2,337,034 4.8% 2,337,034 3.2%
Wellington Management Company, LLP (8). . . . . . . . . . . 1,837,100 3.8% 1,837,100 2.5%
AMVESCAP, PLC (9) . . . . . . . . . . . . . . . . . . . . . 1,760,750 3.6% 1,760,750 2.4%
James DeFranco (10), (17),(18). . . . . . . . . . . . . . . 1,156,345 2.4% 1,156,345 1.6%
David K. Moskowitz (11), (17), (18) . . . . . . . . . . . . 84,140 84,140
Michael T. Dugan (12),(17),(18) . . . . . . . . . . . . . . 73,979 73,979
Steven B. Schaver (13), (17), (18). . . . . . . . . . . . . 49,677 49,677
0. Nolan Daines (14), (18). . . . . . . . . . . . . . . . . 5,000 5,000
Raymond L. Friedlob (15), (18). . . . . . . . . . . . . . . 6,000 6,000
All Directors and Executive Officers as a Group . . . . . .
(11 persons) (16), (17), (18) . . . . . . . . . . . . . . . 31,458,347 65.0% 31,458,347 43.3%
NUMBER OF PERCENTAGE
SHARES OF CLASS
---------- ----------
CLASS B COMMON STOCK:
Charles W. Ergen. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29,804,401 100.0%
All Directors and Executive Officers as a Group (11 persons). . . . . . . . 29,804,401 100.0%
- --------------------
* Less than 1%.
(1) Except as otherwise noted, the address of each such person is
5701 Santa Fe Drive, Littleton, Colorado 80120.
(2) Gives effect to the transaction with News Corporation and MCI. Also
include shares of Class A Common Stock (Class A Shares) issuable upon
conversion of Mr. Ergen's shares of Class B Common Stock (Class B
Shares).
(3) The following table sets forth to the best knowledge of EchoStar, the
actual ownership of EchoStar's Class A Shares (including options
exercisable within 60 days) as of December 31, 1998 by each person
known by EchoStar to be the beneficial owner of more than five percent
of any class of EchoStar's voting shares; (ii) each Director or
nominee of EchoStar; (iii) each Named Executive Officer; and (iv) all
Directors and Executive Officers as a group:
101
NUMBER OF PERCENTAGE OF
NAME SHARES CLASS
- ------------------------------------------------------------------------- ------------ -------------
CLASS A COMMON STOCK
FMR Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,337,034 14.4%
Wellington Management Company, LLP. . . . . . . . . . . . . . . . . . 1,837,100 11.3%
AMVESCAP, PLC . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,760,750 10.8%
James DeFranco. . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,156,345 7.1%
Charles W. Ergen. . . . . . . . . . . . . . . . . . . . . . . . . . . 248,329 1.5%
David K. Moskowitz. . . . . . . . . . . . . . . . . . . . . . . . . . 84,140 *
Michael T. Dugan. . . . . . . . . . . . . . . . . . . . . . . . . . . 73,979 *
Steven B. Schaver . . . . . . . . . . . . . . . . . . . . . . . . . . 49,677 *
O. Nolan Daines . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,000 *
Raymond L. Friedlob . . . . . . . . . . . . . . . . . . . . . . . . . 6,000 *
All Directors and Executive Officers as a Group (11 persons). . . . . 1,653,946 10.2%
(4) Includes: (i) 1,915 Class A Shares held in EchoStar's 401(k) Employee
Savings Plan (the 401(k) Plan); (ii) the right to acquire 70,489 Class A
Shares within 60 days upon the exercise of employee stock options; and
(iii) 29,804,401 Class A Shares issuable upon conversion of Mr. Ergen's
Class B Shares;
(5) The percentage of total voting power held by Mr. Ergen is 93.5%, after
giving effect to the exercise of the employee stock options and would be
approximately 85.5% after also giving effect to the transaction with News
Corporation and MCI.
(6) The exact number of Class A Shares issuable to News Corporation and MCI in
connection with the acquisition will not be determinable until consummation
of that transaction. The number of Class A Shares that will be issued is
subject to adjustment if the 20 day average closing price of EchoStar's
Class A Shares is less than $15.00 or greater than $39.00. The 20 day
average closing price of EchoStar's Class A Shares as of January 21, 1999
was $48.23. The following table illustrates, at various prices, the number
of Class A Shares issuable to News Corporation and MCI.
NEWS CORPORATION MCI
-------------------------------- -------------------------------
AVERAGE SHARE PERCENTAGE PERCENTAGE
PRICE SHARES OF CLASS (2) SHARES OF CLASS (2)
- -------------- -------------- -------------- -------------- --------------
$10.00 36,045,000 38.6% 8,955,006 9.6%
$15.00 24,030,000 30.7% 5,970,000 7.6%
$39.00 24,030,000 30.7% 5,970,000 7.6%
$40.00 23,429,250 30.2% 5,820,750 7.5%
$45.00 20,826,000 28.0% 5,174,000 7.0%
$50.00 18,743,400 26.1% 4,656,600 6.5%
$55.00 17,039,455 24.5% 4,233,273 6.1%
$60.00 15,619,500 23.0% 3,880,500 5.7%
(7) The address of FMR Corp. is 82 Devonshire Street, Boston, Massachusetts
02109.
(8) The address of Wellington Management Company, LLP is 75 State Street,
Boston, Massachusetts 02109.
(9) The address of AMVESCAP, PLC is 1315 Peachtree Street, N.W., Atlanta,
Georgia 30309.
(10) Includes: (i) 1,915 Class A Shares held in the 401(k) Plan; (ii) the
right to acquire 53,340 Class A Shares within 60 days upon the exercise
of employee stock options; (iii) 751 Class A Shares held as custodian
for his minor children; and (iv) 375,000 Class A Shares controlled by
Mr. DeFranco as general partner of a partnership.
102
(11) Includes: (i) 1,813 Class A Shares held in the 401(k) Plan; (ii) the
right to acquire 74,679 Class A Shares within 60 days upon the exercise
of employee stock options; (iii) 166 Class A Shares held as custodian
for his minor children; (iv) 3,000 Class A Shares owned by Mr.
Moskowitz's spouse; and (v) 1,023 Class A Shares held as trustee for Mr.
Ergen's children.
(12) Includes: (i) 1,853 Class A Shares held in the 401(k) Plan and (ii) the
right to acquire 72,125 Class A Shares within 60 days upon the exercise
of employee stock options.
(13) Includes: (i) 1,684 Class A Shares held in the 401 (k) Plan and (ii) the
right to acquire 47,962 Class A Shares within 60 days upon the exercise
of employee stock options.
(14) Includes the right to acquire 1,000 Class A Shares within 60 days upon
the exercise of employee stock options.
(15) Includes the right to acquire 6,000 Class A Shares within 60 days upon
the exercise of employee stock options.
(16) Includes: (i) 14,486 Class A Shares held in the 401(k) Plan; (ii) the
right to acquire 351,395 Class A Shares within 60 days upon the exercise
of employee stock options; 375,000 Class A Shares held in a partnership;
(iv) 29,804,401 Class A Shares issuable upon conversion of Class B
Shares; (v) 101,023 Class A Shares held in the name of, or in trust for,
minor children and other family members; and (vi) 3,947 Class A Shares
owned by or jointly with family members.
(17) Includes 164,508 Class A Shares over which Mr. Ergen has voting power as
trustee for the 401(k) Plan. These shares also are beneficially owned
through investment power by each individual 401(k) Plan participant.
The Class A Shares individually owned by each of the Named Executives
through their participation in the 401(k) Plan are included in each
respective Named Executive's information above.
(18) Beneficial ownership percentage was calculated assuming exercise or
conversion of all Class B Shares, warrants and employee stock options
exercisable within 60 days (collectively, the "Derivative Securities")
into Class A Shares by all holders of such Derivative Securities.
Assuming exercise or conversion of Derivative Securities by such person,
and only by such person, the beneficial ownership of Class A Shares
would be as follows: Mr. Ergen, 66.5%; Mr. DeFranco, 7.4%; less than
one percent for Mr. Moskowitz, Mr. Dugan, Mr. Schaver, Mr. Daines and
Mr. Friedlob; and all Officers and Directors as a group, 67.3%.
(19) In connection with the acquisition under the agreement with News
Corporation and MCI, Mr. Ergen entered into a voting agreement with News
Corporation and MCI pursuant to which News Corporation and MCI have
agreed to vote their shares of EchoStar stock in the manner recommended
by the Board of Directors of EchoStar. Mr. Ergen disclaims beneficial
ownership of the Class A Shares to be issued to News Corporation and
MCI.
103
DESCRIPTION OF THE NOTES
The Seven Year Notes and the Ten Year Notes (collectively, the "Notes")
were each issued pursuant to an indenture by and among the Company, the
Guarantors and U.S. Bank Trust National Association, as Trustee. The terms of
the exchange notes are substantially identical to the terms of the old notes.
However, the exchange notes are not subject to transfer restrictions or
registration rights unless held by certain broker-dealers, affiliates of the
Company or certain other persons.
The following summary of certain provisions of: (i) each indenture; and
(ii) the registration rights agreements, by and among the Company, the
Guarantors and the Initial Purchasers relating to each series of Notes, does not
purport to be complete and is qualified in its entirety by reference to the
applicable indenture and the registration rights agreements.
You can find the definitions of certain capitalized terms used in this
section under the subheading "--Certain Definitions." For purposes of this
section, references to the "Company" include only EchoStar DBS Corporation and
not its Subsidiaries, and references to "ECC" shall mean ECC together with each
Wholly Owned Subsidiary of ECC that beneficially owns 100% of the Equity
Interests of the Company, but only so long as ECC beneficially owns 100% of the
Equity Interests of such Subsidiary.
The terms of the Notes include those stated in the applicable indenture and
those made part of each indenture by reference to the Trust Indenture Act of
1939, as amended (the "TIA"). The Notes are subject to all such terms, and
holders of Notes are referred to the applicable indenture and the Trust
Indenture Act for a statement thereof. A copy of each indenture may be obtained
from the Company or the initial purchasers.
The following description is a summary of the material provisions of the
each Indenture. It does not restate each indenture in its entirety. We urge you
to read the applicable indenture because it, and not this description, defines
your rights as a holder of the Notes.
BRIEF DESCRIPTION OF THE NOTES AND THE GUARANTEES
The following summary of certain provisions of: (i) the indentures; and
(ii) the registration rights agreements, by and among the Company, the
guarantors and the initial purchasers, does not purport to be complete and is
qualified in its entirety by reference to the indentures and the registration
rights agreements. All material elements of the indentures and the registration
rights agreements are set forth below. The definitions of certain terms used in
the following summary are set forth below under "--Certain Definitions." In the
following summary, "EchoStar" refers solely to EchoStar Communications
Corporation and does not include any direct or indirect subsidiaries of
EchoStar. Unless the context otherwise requires, all references herein to the
"Notes" shall include the old notes and the exchange notes.
THE NOTES
The Notes are:
- - general unsecured obligations of the Company;
- - ranked equally in right of payment to each other;
- - ranked equally in right of payment with all existing and future senior debt
of the Company;
- - ranked senior in right of payment to all other existing and future
subordinated debt of the Company;
104
- - effectively junior to (i) all liabilities (including trade payables) of the
Company's Subsidiaries (if any) that are Unrestricted Subsidiaries (and
thus not Guarantors) or that are otherwise not Guarantors and of ETC or any
Subsidiary of the Company which constitutes a Non-Core Asset in the event
ETC or such Subsidiary is released from its Guarantee pursuant to the
covenant entitled "Certain Covenants--Dispositions of ETC and Non-Core
Assets," (ii) all liabilities (including trade payables) of any Subsidiary
Guarantor if such Guarantor's Guarantee is subordinated or avoided by a
court of competent jurisdiction (see "Risk Factors--Under Fraudulent
Conveyance Statutes, A Court May Void Or Subordinate Our Obligations Under
The Notes Or Our Subsidiary Guarantors' Obligations Under Their
Guarantees") and (iii) all secured obligations, to the extent of the
collateral securing such obligations, including any borrowings under any
future secured credit facilities of the Company; and
- - unconditionally guaranteed by the Guarantors.
The Notes are issued in fully registered form only, without coupons, in
denominations of $1,000 and integral multiples thereof. Any Ten Year Notes that
remain outstanding after the completion of the Ten Year Note Exchange Offer,
together with the Ten Year Exchange Notes issued in connection with the Ten Year
Note Exchange Offer, will be treated as a single class of securities for all
purposes under the Ten Year Note Indenture, including, without limitation,
waivers, amendments, redemptions, Change of Control Offers and Excess Proceeds
Offers. Any Seven Year Notes that remain outstanding after completion of the
Seven Year Note Exchange Offer, together with the Seven Year Exchange Notes
(together with the Ten Year Exchange Notes, the Exchange Notes) issued in
connection with the Seven Year Note Exchange Offer, will be treated as a single
class of securities for all purposes under the Seven Year Note Indenture,
including without limitation, waivers, amendments, redemptions, Change of
Control Offers and Excess Proceeds Offers. All references in this section to
"Notes" shall be deemed to refer collectively to the Notes and any Exchange
Notes, unless the context otherwise requires.
THE GUARANTEES
The Notes are guaranteed by the Guarantors, which currently include DBSC
and substantially all of the Company's direct and indirect Wholly Owned
Restricted Subsidiaries. The Guarantees of the Notes are:
- general unsecured obligations of each Guarantor;
- ranked equally in right of payment to all other Guarantees;
- ranked equally in right of payment with any existing and future senior
debt of the Guarantor;
- effectively junior to secured obligations, to the extent of the
collateral securing such obligations, including any secured guarantees
of the Company's obligations under any future credit facilities of the
Company; and
- ranked senior in right of payment to all other existing and future
subordinated debt of such Guarantor.
Assuming we had completed the offering and applied the proceeds as
intended, as of September 30, 1998, on a pro forma basis after giving effect to
the tender offers (assuming that all of the 1994 Notes, the 1996 Notes, the 1997
Notes were tendered in the tender offers) and to the reorganization, there would
have been
105
- no outstanding debt ranking ahead of the Notes or the Guarantees, as
the case may be,
- $70.6 million of outstanding debt ranking equally with the Notes and
the Guarantees, as the case may be, $45.4 million of which is secured
and
- no outstanding debt ranking behind the Notes or the Guarantees, as the
case may be.
The Indentures permit us and the Guarantors to incur additional Indebtedness,
including secured and unsecured Indebtedness that ranks PARI PASSU with the
Notes. Any secured Indebtedness will, as to the collateral securing such
Indebtedness, be effectively senior to the Notes to the extent of such
collateral.
As of the date of the Indentures, all of the Company's Subsidiaries are
"Restricted Subsidiaries" other than E-Sat, Inc., EchoStar Real Estate
Corporation, EchoStar International (Mauritius) Ltd., EchoStar Manufacturing and
Distribution Private Ltd. and Satrec Mauritius Ltd., which are "Unrestricted
Subsidiaries." Under certain circumstances, we are permitted to designate
certain of our Subsidiaries as additional "Unrestricted Subsidiaries."
Unrestricted Subsidiaries are not subject to many of the restrictive covenants
in the Indenture. Unrestricted Subsidiaries will not guarantee the Notes.
ECC and its Subsidiaries (other than DBSC, which is expected to be merged
into a Subsidiary of the Company upon approval by the FCC, and other than the
Company and substantially all of its Subsidiaries) will not guarantee or
otherwise be obligated in respect of the Notes.
GENERAL
The Notes rank PARI PASSU in right of payment to each other, and with all
senior indebtedness of the Company, except to the extent of any collateral
securing such senior indebtedness, which is effectively senior to the Notes to
the extent of such collateral. Each Guarantee ranks PARI PASSU in right of
payment with the other Guarantees, and with all senior indebtedness of the
Guarantor issuing such Guarantee, except to the extent of any collateral
securing such senior indebtedness, which is effectively senior to the Guarantees
to the extent of such collateral. Although the Notes are titled "Senior,"
neither the Company nor any Guarantor has issued, and neither has any plans to
issue, any indebtedness to which the Notes or the Guarantees, as the case may
be, would be senior. On a pro forma basis, after giving effect to the offering
of the Notes and to the application of the net proceeds therefrom as intended
(assuming that all of the 1994 Notes, the 1996 Notes, the 1997 Notes and the
Senior Preferred Exchange Notes were tendered in the Tender Offers), and to the
reorganization, the Company's aggregate consolidated Indebtedness as of
September 30, 1998, for purposes of the Indentures, would have been
approximately $2.07 billion.
PRINCIPAL, MATURITY AND INTEREST
The Ten Year Notes were issued in an aggregate principal amount of
$1.625 billion. The Ten Year Notes will mature on February 1, 2009. The Seven
Year Notes were issued in an aggregate principal amount of $375.0 million. The
Seven Year Notes will mature on February 1, 2006.
Interest on the Notes accrues at the rate per annum set forth on the cover
page of this prospectus and will be payable semiannually in cash on each
February 1 and August 1, commencing August 1, 1999 to holders of record on the
immediately preceding January 15 and July 15, respectively. Interest on the
Notes will accrue from the most recent date to which interest has been paid or,
if no interest has been paid, from the date of issuance. Interest on the Notes
will be computed on the basis of a 360-day year of twelve 30-day months.
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The Notes will be payable both as to principal and interest at the office
or agency of the Company maintained for such purpose or, at the option of the
Company, payment of interest may be made by check mailed to the holders of the
Notes at their respective addresses set forth in the register of holders of
Notes. Until otherwise designated by the Company, the Company's office or agency
will be the office of the Trustee maintained for such purpose.
GUARANTEES
Each Guarantor jointly and severally guarantees the Company's obligations
under the Ten Year Notes and the Seven Year Notes, respectively. The obligations
of each Guarantor under its Guarantee is limited as necessary to prevent such
Guarantee from constituting a fraudulent conveyance or fraudulent transfer under
applicable law. See "Risk Factors--Under Fraudulent Conveyance Statutes, A Court
May Void Or Subordinate Our Obligations Under The Notes Or Our Subsidiary
Guarantors' Obligations Under Their Guarantees." Each Guarantor that makes a
payment or distribution under a Guarantee shall be entitled to a pro rata
contribution from each other Guarantor based on the net assets of each other
Guarantor.
Each Guarantor may consolidate with or merge into or sell its assets to the
Company or another Guarantor that is a Restricted Subsidiary of the Company, or
with or to other persons upon the terms and conditions set forth in the
Indentures. A Guarantor may not sell or otherwise dispose of all or
substantially all of its assets, or consolidate with or merge with or into
another person (whether or not such Guarantor is the surviving person) unless
certain conditions are met. See "--Certain Covenants--Merger, Consolidation, or
Sale of Assets."
The Guarantee of a Guarantor will be deemed automatically discharged and
released in accordance with the terms of the Indenture:
(1) in connection with any direct or indirect sale, conveyance or other
disposition of all of the capital stock or all or substantially all of the
assets of that Guarantor (including by way of merger or consolidation), if such
sale or disposition is made in compliance with the applicable provisions of the
Indenture (See "--Certain Covenants--Asset Sales");
(2) if a Guarantor is dissolved or liquidated in accordance with the
provisions of the Indenture;
(3) if the Company designates any such Guarantor as an Unrestricted
Subsidiary in compliance with the terms of the Indentures; or
(4) without limiting the generality of the foregoing, in the case of ETC
or any Guarantor which constitutes a Non-Core Asset, upon the sale or other
disposition of any Equity Interest of ETC or such Guarantor which constitutes a
Non-Core Asset, respectively. See "--Certain Covenants--Dispositions of ETC and
Non-Core Assets".
OPTIONAL REDEMPTION
THE TEN YEAR NOTES
Except as provided in the next paragraph, the Ten Year Notes are not
redeemable at the Company's option prior to February 1, 2004. Thereafter, the
Ten Year Notes are subject to redemption at the option of the Company, in whole
or in part, upon not less than 30 nor more than 60 days' notice, at the
redemption prices (expressed as percentages of principal amount) set forth
below, together with accrued
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and unpaid interest thereon to the applicable redemption date, if redeemed
during the 12-month period beginning on February 1 of the years indicated below:
YEAR PERCENTAGE
---- ----------
2004. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 104.688%
2005. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 103.516
2006. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 102.344
2007. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101.172
2008. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100.000
Notwithstanding the foregoing, at any time prior to February 1, 2002, the
Company may redeem up to 35% of the aggregate principal amount of the Ten Year
Notes outstanding at a redemption price equal to 109.375% of the principal
amount thereof on the repurchase date, together with accrued and unpaid interest
to such repurchase date, with the net cash proceeds of one or more public or
private sales (including sales to ECC, regardless of whether ECC obtained such
funds from an offering of Equity Interests or Indebtedness of ECC or otherwise)
of Equity Interests (other than Disqualified Stock) of the Company (other than
proceeds from a sale to any Subsidiary of the Company or any employee benefit
plan in which the Company or any of its Subsidiaries participates); PROVIDED
that:
- at least 65% in aggregate principal amount of the Ten Year Notes
originally issued remain outstanding immediately after the occurrence
of such redemption;
- such redemption occurs within 120 days of the date of the closing of
any such sale; and
- the sale of such Equity Interests is made in compliance with the terms
of the Indenture.
THE SEVEN YEAR NOTES
Except as provided in the next paragraph, the Seven Year Notes are not
redeemable at the Company's option prior to February 1, 2003. Thereafter, the
Seven Year Notes are subject to redemption at the option of the Company, in
whole or in part, upon not less than 30 nor more than 60 days' notice, at the
redemption prices (expressed as percentages of principal amount) set forth
below, together with accrued and unpaid interest thereon to the applicable
redemption date, if redeemed during the 12-month period beginning on February 1
of the years indicated below:
YEAR PERCENTAGE
2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . 104.625%
2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . 102.313
2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . 100.000
Notwithstanding the foregoing, at any time prior to February 1, 2002, the
Company may redeem up to 35% of the aggregate principal amount of the Seven Year
Notes outstanding at a redemption price equal to 109.250% of the principal
amount thereof on the repurchase date, together with accrued and unpaid interest
to such repurchase date, with the net cash proceeds of one or more public or
private sales (including sales to ECC, regardless of whether ECC obtained such
funds from an offering of Equity Interests or Indebtedness of ECC or otherwise)
of Equity Interests (other than Disqualified Stock) of the Company (other than
proceeds from a sale to any Subsidiary of the Company or any employee benefit
plan in which the Company or any of its Subsidiaries participates); PROVIDED
that:
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- - at least 65% in aggregate principal amount of the Seven Year Notes
originally issued remain outstanding immediately after the occurrence of
such redemption;
- - such redemption occurs within 120 days of the date of the closing of any
such sale; and
- - the sale of such Equity Interests is made in compliance with the terms of
the Indenture.
SELECTION AND NOTICE
If less than all of a series of Notes are to be redeemed at any time,
selection of Notes of the applicable series for redemption will be made by the
Trustee in compliance with the requirements of the principal national securities
exchange, if any, on which such Notes are listed or, if such Notes are not so
listed, on a pro rata basis, by lot or by such other method as the Trustee deems
fair and appropriate, PROVIDED that no Notes with a principal amount of $1,000
or less shall be redeemed in part. Notice of redemption shall be mailed by first
class mail at least 30 but not more than 60 days before the redemption date to
each holder of Notes to be redeemed at its registered address. If any Note is to
be redeemed in part only, the notice of redemption that relates to such Note
shall state the portion of the principal amount thereof to be redeemed. A new
Note of the same series in principal amount equal to the unredeemed portion
thereof will be issued in the name of the holder thereof upon cancellation of
the original Note. On and after the redemption date, if the Company does not
default in the payment of the redemption price, interest will cease to accrue on
Notes or portions thereof called for redemption.
OFFER TO PURCHASE UPON CHANGE OF CONTROL
Upon the occurrence of a Change of Control, the Company will be required to
make an offer (a "Change of Control Offer") to each holder of Notes to
repurchase all or any part (equal to $1,000 or an integral multiple thereof) of
such holder's Notes at a purchase price equal to 101% of the aggregate principal
amount thereof, together with accrued and unpaid interest thereon to the date of
repurchase (in either case, the "Change of Control Payment"). Within 15 days
following any Change of Control, the Company shall mail a notice to each holder
stating:
1. that the Change of Control Offer is being made pursuant to the
covenant entitled "Change of Control";
2. the purchase price and the purchase date, which shall be no earlier
than 30 days nor later than 40 days after the date such notice is
mailed (the "Change of Control Payment Date");
3. that any Notes not tendered will continue to accrue interest in
accordance with the terms of the Indenture;
4. that, unless the Company defaults in the payment of the Change of
Control Payment, all Notes accepted for payment pursuant to the Change
of Control Offer shall cease to accrue interest after the Change of
Control Payment Date;
5. that holders will be entitled to withdraw their election if the Paying
Agent receives, not later than the close of business on the second
Business Day preceding the Change of Control Payment Date, a telegram,
telex, facsimile transmission or letter setting forth the name of the
holder, the principal amount of Notes delivered for purchase, and a
statement that such holder is withdrawing his election to have such
Notes purchased;
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6. that holders whose Notes are being purchased only in part will be
issued new Notes equal in principal amount to the unpurchased portion
of the Notes surrendered, which unpurchased portion must be equal to
$1,000 in principal amount or an integral multiple thereof; and
7. any other information material to such holder's decision to tender
Notes.
The Company will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent such laws and regulations are applicable in connection with the
repurchase of the Notes in connection with a Change of Control. Due to the
highly leveraged structure of the Company and the terms of other indebtedness to
which the Company and its Subsidiaries are or may in the future be subject, the
Company may not be able to repurchase all of the Notes tendered for purchase
upon the occurrence of a Change of Control. If the Company fails to repurchase
all of the Notes tendered for purchase upon the occurrence of a Change of
Control, such failure will constitute an Event of Default. In addition, the
terms of other indebtedness to which the Company may be subject may prohibit the
Company from purchasing the Notes or offering to purchase the Notes, and a
Change of Control Offer or a Change of Control Payment could trigger a default
or event of default under the terms of such indebtedness. In the event that the
Company were unable to obtain the consent of the holders of any such other
indebtedness to make a Change of Control Offer or make the Change of Control
Payment or to repay such indebtedness, a Default or Event of Default may occur.
See "--Events of Default and Remedies."
Except as described above with respect to a Change of Control, the
Indentures do not contain provisions that permit the holders of the Notes to
require that the Company repurchase or redeem the Notes in the event of a
takeover, recapitalization or similar transaction.
CERTAIN COVENANTS
RESTRICTED PAYMENTS. The Indentures provide that neither the Company nor
any of its Restricted Subsidiaries may, directly or indirectly:
(a) declare or pay any dividend or make any distribution on account of any
Equity Interests of the Company other than dividends or distributions payable in
Equity Interests (other than Disqualified Stock) of the Company;
(b) purchase, redeem or otherwise acquire or retire for value any Equity
Interests of ECC, the Company or any of their respective Subsidiaries or
Affiliates, other than any such Equity Interests owned by the Company or any
Wholly Owned Restricted Subsidiary;
(c) purchase, redeem, defease or otherwise acquire or retire for value any
Indebtedness that is expressly subordinated in right of payment to the Notes or
the Guarantees, except in accordance with the scheduled mandatory redemption,
sinking fund or repayment provisions set forth in the original documentation
governing such Indebtedness;
(d) declare or pay any dividend or make any distribution on account of any
Equity Interests of any Restricted Subsidiary, other than
(x) to the Company or any Wholly Owned Restricted Subsidiary or
110
(y) to all holders of any class or series of Equity Interests of
such Restricted Subsidiary on a PRO RATA basis; PROVIDED that in the case
of this clause (y), such dividends or distributions may not be in the form
of Indebtedness or Disqualified Stock; or
(e) make any Restricted Investment (all such prohibited payments and other
actions set forth in clauses (a) through (e) being collectively referred to as
"Restricted Payments"),
unless, at the time of such Restricted Payment:
(i) no Default or Event of Default shall have occurred and be
continuing or would occur as a consequence thereof;
(ii) after giving effect to such Restricted Payment and the
incurrence of any Indebtedness the net proceeds of which are used to finance
such Restricted Payment, the Indebtedness to Cash Flow Ratio of the Company
would not have exceeded 8.0 to 1; and
(iii) such Restricted Payment, together with the aggregate of all
other Restricted Payments after the date of the Indenture, is less than the sum
of
(A) the difference of
(x) cumulative Consolidated Cash Flow of the Company
determined at the time of such Restricted Payment (or, in case such
Consolidated Cash Flow shall be a deficit, minus 100% of such deficit)
minus
(y) 120% of Consolidated Interest Expense of the Company,
each as determined for the period (taken as one accounting period) from
April 1, 1999 to the end of the Company's most recently ended fiscal
quarter for which internal financial statements are available at the time
of such Restricted Payment; plus
(B) an amount equal to 100% of the aggregate net cash proceeds
and, in the case of proceeds consisting of assets used in or constituting a
business permitted under the covenant described under " --Activities of the
Company," 100% of the fair market value of the aggregate net proceeds other
than cash received by the Company either from capital contributions from
ECC, or from the issue or sale (including an issue or sale to ECC) of
Equity Interests (other than Disqualified Stock) of the Company (other than
Equity Interests sold to any Subsidiary of the Company), since the date of
the Indenture, but, in the case of any net cash proceeds, only to the
extent such net cash proceeds are not used to redeem Notes pursuant to the
provision described in the second paragraph under "--Optional Redemption";
PROVIDED that the proceeds calculated for purposes of this clause (B) shall
exclude cash and non-cash property and assets received by the Company
pursuant to the covenants described under "--The 110 Acquisition" and
"--The ECC Equity Contribution;" plus
(C) in the event that any Unrestricted Subsidiary is designated
by the Company as a Restricted Subsidiary, an amount equal to the fair
market value of the net Investment of the Company or a Restricted
Subsidiary in such Subsidiary at the time of such designation PROVIDED,
HOWEVER, that the foregoing sum shall not exceed the amount of the
Investments made by the Company or any Restricted Subsidiary in any such
Unrestricted Subsidiary since the date of the Indenture, plus
(D) 100% of any cash dividends and other cash distributions
received by the Company and its Wholly Owned Restricted Subsidiaries from
an Unrestricted Subsidiary to the extent not included in Cumulative
Consolidated Cash Flow plus
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(E) , to the extent not included in clauses (A) through (D)
above, an amount equal to the net reduction in Investments of the Company
and its Restricted Subsidiaries since the Issue Date resulting from
payments in cash of interest on Indebtedness, dividends, or repayment of
loans or advances, or other transfers of property, in each case, to the
Company or to a Wholly Owned Restricted Subsidiary or from the net cash
proceeds from the sale, conveyance or other disposition of any such
Investment; PROVIDED, HOWEVER, that the foregoing sum shall not exceed,
with respect to any person in whom such Investment was made, the amount of
Investments previously made by the Company or any Restricted Subsidiary in
such person which were included in computations made pursuant to this
clause (iii).
The foregoing provisions will not prohibit the following (provided that
with respect to clauses (2), (3), (5), (6), (7), (8), (9), (12), (13) and
(14) below, no Default or Event of Default shall have occurred and be continuing
therein):
(1) the payment of any dividend within 60 days after the date of
declaration thereof, if at such date of declaration such payment would have
complied with the provisions of the Indenture;
(2) the redemption, repurchase, retirement or other acquisition of
any Equity Interests of the Company in exchange for, or out of the net proceeds
of the substantially concurrent capital contribution from ECC or from the
substantially concurrent issue or sale (including to ECC) of Equity Interests
(other than Disqualified Stock) of the Company (other than Equity Interests
issued or sold to any Subsidiary of the Company);
(3) Investments in an aggregate amount not to exceed $75 million
plus, to the extent not included in Consolidated Cash Flow, an amount equal to
the net reduction in such Investments resulting from payments in cash of
interest on Indebtedness, dividends or repayment of loans or advances, or other
transfers of property, in each case, to the Company or to a Wholly Owned
Restricted Subsidiary or from the net cash proceeds from the sale, conveyance or
other disposition of any such Investment; PROVIDED, HOWEVER, that the foregoing
sum shall not exceed, with respect to any person in whom such Investment was
made, the amount of Investments previously made by the Company or any Restricted
Subsidiary in such person pursuant to this clause (3);
(4) Investments to fund the financing activity of DNCC in the
ordinary course of its business in an amount not to exceed, as of the date of
determination, the sum of
(A) $35 million plus
(B) 40% of the aggregate cost to DNCC for each Satellite
Receiver purchased by DNCC and leased by DNCC to a retail consumer in
excess of 100,000 units;
(5) cash dividends or distributions to ECC to the extent required
for the purchase of employee stock options to purchase Capital Stock of ECC, or
Capital Stock of ECC issued pursuant to the exercise of employee stock options
to purchase Capital Stock of ECC, in an aggregate amount not to exceed
$2 million in any calendar year and in an aggregate amount not to exceed
$10 million since the date of the Indenture;
(6) a Permitted Refinancing (as defined below in "--Incurrence of
Indebtedness");
(7) Investments in an amount equal to 100% of the aggregate net
proceeds (whether or not in cash) received by the Company from capital
contributions from ECC or from the issue and sale (including a sale to ECC) of
Equity Interests (other than Disqualified Stock) of the Company (other than
112
Equity Interests issued or sold to a Subsidiary of the Company), on or after the
date of the Indenture; PROVIDED that such proceeds shall include only
$300 million in the case of assets contributed pursuant to the covenant
described under "--The 110 Acquisition" and shall include all of the cash
contributed pursuant to the covenant described under "--The ECC Equity
Contribution;" plus, to the extent not included in Consolidated Cash Flow, an
amount equal to the net reduction in such Investments resulting from payments in
cash of interest on Indebtedness, dividends, or repayment of loans or advances,
or other transfers of property, in each case, to the Company or to a Wholly
Owned Restricted Subsidiary or from the net cash proceeds from the sale,
conveyance, or other disposition of any such Investment; PROVIDED, HOWEVER, that
the foregoing sum shall not exceed, with respect to any person in whom such
Investment was made, the amount of Investments previously made by the Company or
any Restricted Subsidiary in such person pursuant to this clause (7) in each
case, PROVIDED that such Investments are in businesses of the type described
under "--Activities of the Company;"
(8) Investments in any Restricted Subsidiary which is a Guarantor
but which is not a Wholly Owned Restricted Subsidiary;
(9) Investments in NagraStar in an aggregate amount not to exceed
$25 million and in SkyVista in an aggregate amount not to exceed $10 million;
(10) cash dividends or other cash distributions to ECC in an amount
sufficient to enable ECC to
(A) repurchase its 12 1/8% Senior Exchange Notes,
(B) pay interest on any of its 12 1/8% Senior Exchange Notes
which remain outstanding following consummation of the Tender Offers and
(C) either
(x) redeem such 12 1/8% Senior Exchange Notes that remain
outstanding at the prices set forth in the indenture governing such notes;
or
(y) repurchase or defease such notes at any time prior to
such redemption; PROVIDED in each case, that ECC has irrevocably agreed,
for the benefit of the Holders of the Notes, to apply such cash pursuant to
the clause above under which such dividend or other distribution was made;
(11) cash dividends or distributions to ECC to the extent required
for the purchase of odd-lots of Equity Interests of ECC, in an amount not to
exceed $5 million in the aggregate;
(12) the making of any Restricted Payment (including the receipt of
any Investment) permitted under or resulting from any transaction permitted
under the covenant described under "--Dispositions of ETC and Non-Core Assets";
PROVIDED that all conditions to any such Restricted Payment set forth in such
covenant are satisfied; or
(13) Investments made as a result of the receipt of non-cash proceeds
from Asset Sales made in compliance with the covenant described under "--Asset
Sales."
Restricted Payments made pursuant to clauses (1), (2), (4), (7) (but only
to the extent that net proceeds received by the Company as set forth in such
clause (7) were included in the computations made in clause (iii)(B) of the
first paragraph of this covenant), (11) and (13) (but only to the extent such
113
Investments pursuant to clause (13) (a) were made as a result of the receipt of
non-cash proceeds from Asset Sales as set forth in the provision described in
clause (y) of the last paragraph under "--Asset Sales" and (b) are not
designated as Investments made pursuant to an applicable provision of the
immediately preceding paragraph of this covenant (other than clause (13)
thereof)) shall be included as Restricted Payments in any computation made
pursuant to clause (iii) of the first paragraph of this covenant. Restricted
Payments made pursuant to clauses (3), (5), (6), (7) (but only to the extent
that net proceeds received by the Company as set forth in such clause (7) were
not included in the computations made in clause (iii)(B) of the first paragraph
of this covenant), (8), (9), (10), (12) and (13) (but only to the extent such
Investments pursuant to clause (13) (a) were not made as a result of the receipt
of non-cash proceeds from Asset Sales as set forth in the provision described in
clause (y) of the last paragraph of "--Asset Sales" or (b) if made pursuant to
such clause (y), were designated as Investments made pursuant to an applicable
provision of the immediately preceding paragraph of this covenant (other than
clause (13) thereof)) shall not be included as Restricted Payments in any
computation made pursuant to clause (iii) of the first paragraph of this
covenant.
If the Company or any Restricted Subsidiary makes an Investment which was
included in computations made pursuant to this covenant and the person in which
such Investment was made subsequently becomes a Restricted Subsidiary that is a
Guarantor, to the extent such Investment resulted in a reduction in the amounts
calculated under clause (iii) of the first paragraph of or under any other
provision of this covenant, then such amount shall be increased by the amount of
such reduction.
Not later than five business days after January 1 and July 1 of each year
and ten days following a request from the Trustee, the Company shall deliver to
the Trustee an Officers' Certificate stating that each Restricted Payment made
in the six months preceding such January 1, July 1 or date of request, as the
case may be, is permitted and setting forth the basis upon which the
calculations required by the covenant "Restricted Payments" were computed, which
calculations shall be based upon the Company's latest available financial
statements.
INCURRENCE OF INDEBTEDNESS. The Indentures provide that the Company shall
not, and shall not permit any of its Restricted Subsidiaries to, directly or
indirectly, create, incur, issue, assume, guarantee or otherwise become directly
or indirectly liable with respect to (collectively, "incur") any Indebtedness
(including Acquired Debt); PROVIDED, HOWEVER, that, notwithstanding the
foregoing the Company and any Guarantor may incur Indebtedness (including
Acquired Debt), if, after giving effect to the incurrence of such Indebtedness
and the application of the net proceeds thereof on a pro forma basis, the
Indebtedness to Cash Flow Ratio of the Company would not have exceeded 8.0 to 1.
The foregoing limitation will not apply to any of the following incurrences
of Indebtedness:
(1) Indebtedness represented by the Notes, the Guarantees and the
Indenture;
(2) the incurrence by the Company or any Guarantor of Acquired
Subscriber Debt not to exceed $1,250 per Acquired Subscriber;
(3) the incurrence by the Company or any Guarantor of Deferred
Payments and letters of credit with respect thereto;
(4) Indebtedness of the Company or any Guarantor that ranks PARI
PASSU with or is subordinated to the Notes and the Guarantees in an aggregate
principal amount not to exceed $700 million at any one time outstanding, which
Indebtedness may be secured to the extent permitted under the covenant described
under "--Liens"; PROVIDED that up to $75 million at any one time outstanding of
such Indebtedness may be incurred by Restricted Subsidiaries that are not
Guarantors; PROVIDED further that
114
any Indebtedness incurred pursuant to this clause (4) that is incurred pursuant
to a Credit Agreement shall be incurred pursuant to a Credit Agreement under
which the Company is the sole primary obligor (and under which the Guarantors
(and no other Restricted Subsidiary) may guarantee the primary obligations of
the Company);
(5) Indebtedness between and among the Company and each of the
Guarantors;
(6) Acquired Debt of a person incurred prior to the date upon which
such person was acquired by the Company or any Guarantor (excluding Indebtedness
incurred by such entity other than in the ordinary course of its business in
connection with, or in contemplation of, such entity being so acquired) in an
amount not to exceed
(A) $30 million in the aggregate for all such persons other than
those described in the immediately following clause (B); and
(B) $5 million acquired in connection with the acquisition of
Media4;
(7) Existing Indebtedness;
(8) the incurrence of Purchase Money Indebtedness by the Company or
any Guarantor in an amount not to exceed the cost of construction, acquisition
or improvement of assets used in any business permitted under the covenant
"--Activities of the Company," being constructed, acquired or improved as well
as any launch costs and insurance premiums related to such assets;
(9) Hedging Obligations of the Company or any of its Restricted
Subsidiaries covering Indebtedness of the Company or such Restricted Subsidiary
to the extent the notional principal amount of such Hedging Obligation does not
exceed the principal amount of the Indebtedness to which such Hedging Obligation
relates; PROVIDED, HOWEVER, that such Hedging Obligations are entered into to
protect the Company and its Restricted Subsidiaries from fluctuation in interest
rates on Indebtedness incurred in accordance with the Indenture;
(10) Indebtedness of the Company or any Restricted Subsidiary in
respect of performance bonds or letters of credit of the Company or any
Restricted Subsidiary or surety bonds provided by the Company or any Restricted
Subsidiary incurred in the ordinary course of business and on ordinary business
terms in connection with the businesses permitted under the covenant
"--Activities of the Company";
(11) Indebtedness of the Company or any Guarantor the proceeds of
which are used solely to finance the construction and development of a call
center owned by the Company or a Guarantor in McKeesport, Pennsylvania or any
refinancing thereof; PROVIDED that the aggregate of all Indebtedness incurred
pursuant to this clause (xi) shall in no event exceed $10 million at any one
time outstanding;
(12) the incurrence by the Company or any Guarantor of Indebtedness
issued in exchange for, or the proceeds of which are used to extend, refinance,
renew, replace, substitute or refund in whole or in part Indebtedness referred
to in the first paragraph of this covenant or in clauses (1), (2), (3), (6),
(7) above ("Refinancing Indebtedness"); PROVIDED, HOWEVER, that:
(A) the principal amount of such Refinancing Indebtedness shall
not exceed the principal amount and accrued interest of the Indebtedness so
extended, refinanced, renewed, replaced, substituted or refunded and any
premiums payable and reasonable fees, expenses, commissions and costs in
connection therewith;
115
(B) the Refinancing Indebtedness shall have a final maturity
later than, and a Weighted Average Life to Maturity equal to or greater than,
the final maturity and Weighted Average Life to Maturity, respectively, of the
Indebtedness being extended, refinanced, renewed, replaced or refunded; and
(C) the Refinancing Indebtedness shall be subordinated in right
of payment to the Notes and the Guarantees, if at all, on terms at least as
favorable to the holders of Notes as those contained in the documentation
governing the Indebtedness being extended, refinanced, renewed, replaced or
refunded (a "Permitted Refinancing");
(13) the guarantee by the Company or any Guarantor of Indebtedness of
the Company or a Restricted Subsidiary that was permitted to be incurred by
another provision of this covenant; or
(14) Indebtedness under Capital Lease Obligations of the Company or
any Guarantor with respect to no more than two direct broadcast satellites at
any time.
For purposes of determining compliance with this covenant, in the event
that an item of Indebtedness meets the criteria of more than one of the
categories described in clauses (1) through (14) above or is permitted to be
incurred pursuant to the first paragraph of this covenant and also meets the
criteria of one or more of the categories described in clauses (1) through
(14) above, the Company shall, in its sole discretion, classify such item of
Indebtedness in any manner that complies with this covenant and may from time to
time reclassify such item of Indebtedness in any manner in which such item could
be incurred at the time of such reclassification. Accrual of interest and the
accretion of accreted value will not be deemed to be an incurrence of
Indebtedness for purposes of this covenant.
ASSET SALES. If the Company or any Restricted Subsidiary, in a single
transaction or a series of related transactions:
(a) sells, leases (in a manner that has the effect of a disposition),
conveys or otherwise disposes of any of its assets (including by way of a
sale-and-leaseback transaction), other than:
(1) sales or other dispositions of inventory in the ordinary course
of business;
(2) sales or other dispositions to the Company or a Wholly Owned
Restricted Subsidiary of the Company by the Company or any Restricted
Subsidiary;
(3) sales or other dispositions of accounts receivable to DNCC for
cash in an amount at least equal to the fair market value of such accounts
receivable;
(4) sales or other dispositions of rights to construct or launch
satellites; and
(5) sales or other dispositions permitted under "--Disposition of
ETC and Non-Core Assets" (PROVIDED that the sale, lease, conveyance or other
disposition of all or substantially all of the assets of the Company shall be
governed by the provisions of the Indenture described below under the caption
"--Merger, Consolidation, or Sale of Assets");
(b) issues or sells Equity Interests of any Restricted Subsidiary (other
than any issue or sale of Equity Interests of ETC or a Subsidiary which
constitutes a Non-Core Asset permitted under "--Disposition of ETC and Non-Core
Assets"),
in either case, which assets or Equity Interests:
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(1) have a fair market value in excess of $35 million (as determined
in good faith by the Board of Directors of the Company evidenced by a resolution
of the Board of Directors of the Company and set forth in an Officers'
Certificate delivered to the Trustee); or
(2) are sold or otherwise disposed of for net proceeds in excess of
$35 million (each of the foregoing, an "Asset Sale"), then:
(A) the Company or such Restricted Subsidiary, as the case may
be, must receive consideration at the time of such Asset Sale at least equal to
the fair market value (as determined in good faith by the Board of Directors of
the Company evidenced by a resolution of the Board of Directors of the Company
and set forth in an Officers' Certificate delivered to the Trustee not later
than the fifth business day following January 1 and July 1 of each year and ten
days following a request from the Trustee which certificate shall cover each
Asset Sale made in the six months preceding January 1, July 1 or date of
request, as the case may be) of the assets sold or otherwise disposed of; and
(B) at least 75% of the consideration therefor received by the
Company or such Restricted Subsidiary, as the case may be, must be in the form
of
(x) cash, Cash Equivalents or Marketable Securities,
(y) any asset which is promptly (and in no event later than
90 days after the date of transfer to the Company or a Restricted Subsidiary)
converted into cash; PROVIDED that to the extent that such conversion is at a
price that is less than the fair market value (as determined above) of such
asset at the time of the Asset Sale in which such asset was acquired, the
Company shall be deemed to have made a Restricted Payment in the amount by which
such fair market value exceeds the cash received upon conversion; or
(z) properties and capital assets (excluding Equity
Interests) to be used by the Company or any of its Restricted Subsidiaries in a
business permitted under the covenant described under "--Activities of the
Company";
PROVIDED, HOWEVER, that up to $20 million of assets in addition to assets
specified in clauses (x), (y) or (z) above at any one time may be considered to
be cash for purposes of this clause (B), PROVIDED that the provisions of the
next paragraph are complied with as such non-cash assets are converted to cash.
The amount of any liabilities of the Company or any Restricted Subsidiary that
are assumed by or on behalf of the transferee in connection with an Asset Sale
(and from which the Company or such Restricted Subsidiary are unconditionally
released) shall be deemed to be cash for the purpose of this clause (B).
The Indentures also provide that the Net Proceeds from such Asset Sale
shall be used only:
(1) to acquire assets used in, or stock or other ownership interests
in a person that upon the consummation of such Asset Sale becomes a Restricted
Subsidiary and will be engaged primarily in, the business of the Company as
described under "--Activities of the Company," to repurchase Notes or if the
Company sells any of its satellites after launch such that the Company or its
Restricted Subsidiaries own less than three in-orbit satellites, only to
purchase a replacement satellite; or
(2) as set forth in the next sentence. Any Net Proceeds from any
Asset Sale that are not applied or invested as provided in the preceding
sentence within 365 days after such Asset Sale shall constitute "Excess
Proceeds" and shall be applied to an offer to purchase Notes and other senior
Indebtedness of the Company if and when required under "--Excess Proceeds
Offer."
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Clause (B) of the second preceding paragraph shall not apply to all or such
portion of the consideration
(1) as is designated by the Company in an Asset Sale as being
subject to this paragraph; and
(2) with respect to which the aggregate fair market value at the
time of receipt of all consideration received by the Company or any Restricted
Subsidiary in all such Asset Sales so designated does not exceed the amount
contributed to the Company under the covenant described under "--ECC Equity
Contribution" plus, to the extent any such consideration did not satisfy clauses
(B)(x) or B(z) above, upon the exchange or repayment of such consideration for
or with assets which satisfy such clauses, an amount equal to the fair market
value of such consideration (evidenced by a resolution of the Board of Directors
of the Company and set forth in an Officers' Certificate delivered to the
Trustee as set forth in clause (A) above).
In addition, clause (B) above shall not apply to any Asset Sale
(x) where assets not related to the direct broadcast satellite
business are contributed to a joint venture between the Company or one of its
Restricted Subsidiaries and a third party that is not an Affiliate of ECC or any
of its Subsidiaries; PROVIDED that following the sale, lease, conveyance or
other disposition the Company or one of its Wholly Owned Restricted Subsidiaries
owns at least 50% of the voting and equity interest in such joint venture,
(y) to the extent the consideration therefor received by the
Company or a Restricted Subsidiary would constitute Indebtedness or Equity
Interests of a person that is not an Affiliate of ECC, the Company or one of
their respective Subsidiaries; PROVIDED that the acquisition of such
Indebtedness or Equity Interests is permitted under the provisions of the
covenant described under "--Restricted Payments" and
(z) where assets sold are satellites, uplink centers or call
centers, PROVIDED that, in the case of clause (z) the Company and its Restricted
Subsidiaries continue to own at least three satellites, one uplink center and
one call center.
LIENS. The Indentures provide that the Company shall not, and shall not
permit any Restricted Subsidiary to, directly or indirectly, create, incur,
assume or suffer to exist any Lien on any asset now owned or hereafter acquired,
or on any income or profits therefrom or assign or convey any right to receive
income therefrom, except Permitted Liens.
MAINTENANCE OF INSURANCE. The Indentures provide that at all times, the
Company or a Wholly Owned Restricted Subsidiary which is a Guarantor will
maintain and be the named beneficiary under Satellite Insurance with respect to
at least one-half of the satellites owned or leased by the Company or its
Subsidiaries (insured in an amount at least equal to the depreciated cost of
such satellites).
In the event that the Company or its Restricted Subsidiaries receive
proceeds from any Satellite Insurance covering any satellite owned by the
Company or any of its Restricted Subsidiaries, or in the event that the Company
or any of its Subsidiaries receives proceeds from any insurance maintained by
any satellite manufacturer or any launch provider covering any of such
satellites, all such proceeds (including any cash, Cash Equivalents or
Marketable Securities deemed to be proceeds of Satellite Insurance pursuant to
the respective definition thereof) shall be used only:
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(1) to purchase a replacement satellite if at such time the Company
or a Restricted Subsidiary then owns less than three satellites, PROVIDED that
if such replacement satellite is of lesser value compared to the insured
satellite, any insurance proceeds remaining after purchase of such replacement
satellite must be applied to the construction, launch and insurance of a
satellite of equal or greater value as compared to the insured satellite (or in
accordance with clause (3) below);
(2) for purposes permitted under the covenant entitled "--Activities
of the Company" if at such time the Company or a Restricted Subsidiary owns
three or more satellites (or in accordance with clause (3) below); or
(3) to the extent that such proceeds are not applied or
contractually committed to be applied as described in (1) or (2) above within
365 days of the receipt of such proceeds as "Excess Proceeds" to be applied to
an offer to purchase Notes as set forth under "--Excess Proceeds Offer."
ACTIVITIES OF THE COMPANY. The Indentures provide that neither the Company
nor any of its Restricted Subsidiaries may engage in any business other than
developing, owning, engaging in and dealing with all or any part of the business
of domestic and international media, entertainment, electronics or
communications, and reasonably related extensions thereof, including but not
limited to the purchase, ownership, operation, leasing and selling of, and
generally dealing in or with, one or more communications satellites and the
transponders thereon, and communications uplink centers, the acquisition,
transmission, broadcast, production and other provision of programming relating
thereto and the manufacturing, distribution and financing of equipment
(including consumer electronic equipment) relating thereto.
DISPOSITIONS OF ETC AND NON-CORE ASSETS. Notwithstanding the provisions of
the covenants described under "--Restricted Payments" and "--Asset Sales," in
the event that the 110 Acquisition has been consummated, the requirements set
forth under "--The 110 Acquisition" have been satisfied and the Indebtedness to
Cash Flow Ratio of the Company would not have exceeded 6.0 to 1 on a pro forma
basis after giving effect to the sale of all of the Company's Equity Interests
in or assets of ETC, then
(1) the payment of any dividend or distribution consisting of Equity
Interests or assets of ETC or the proceeds of a sale, conveyance or other
disposition of such Equity Interests or assets or the sale, conveyance or other
disposition of Equity Interests or assets of ETC or the proceeds of a sale,
conveyance or other disposition of such Equity Interests or assets shall not
constitute a Restricted Payment and
(2) the sale, conveyance or other disposition of the Equity
Interests or assets of ETC or the proceeds of a sale, conveyance or other
disposition of such Equity Interests or assets shall not constitute an Asset
Sale and
(3) upon delivery of an Officers' Certificate to the Trustee
evidencing satisfaction of the conditions to such release and a written request
to the Trustee requesting such a release, ETC shall be discharged and released
from its Guarantee and, PROVIDED that the Company designates ETC as an
Unrestricted Subsidiary, from all covenants and restrictions contained in the
Indenture; PROVIDED that no such payment, dividend, distribution, sale,
conveyance or other disposition of any kind (collectively, a "Payout") described
in clauses (1) and (2) above shall be permitted if at the time of such Payout
(1) after giving pro forma effect to such Payout, the Company would not have
been permitted under the covenant described under "--Restricted Payments" to
make a Restricted Payment in an amount equal to the total (the "ETC Amount Due")
of (x) the amount of all Investments (other than the contribution of
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(i) title to the headquarters building of ETC in Inverness,
Colorado and the tangible assets therein to the extent used by ETC as of the
date of the Indenture and
(ii) patents, trademarks and copyrights applied for or granted
as of the date of the Indenture to the extent used by ETC or result from the
business of ETC, in each case, to ETC) made in ETC by the Company or its
Restricted Subsidiaries since the date of the Indenture (which, in the case of
Investments in exchange for assets, shall be valued at the fair market value of
each such asset at the time each such Investment was made) minus
(y) the amount of the after-tax value of all cash returns
on such Investments paid to the Company or its Wholly Owned Restricted
Subsidiaries (or, in the case of a non-Wholly Owned Restricted Subsidiary, the
pro rata portion thereof attributable to the Company) minus
(z) $25 million and
(2) any contract, agreement or understanding between ETC and the Company or any
Restricted Subsidiary of the Company and any loan or advance to or guarantee
with, or for the benefit of, ETC issued or made by the Company or one of its
Restricted Subsidiaries, is on terms that are less favorable to the Company or
its Restricted Subsidiaries than those that would have been obtained in a
comparable transaction by the Company or such Restricted Subsidiaries with an
unrelated person, all as evidenced by a resolution of the Board of Directors of
the Company set forth in an Officers' Certificate delivered to the Trustee
certifying that each such contract, agreement, understanding, loan, advance and
guarantee has been approved by a majority of the members of such Board.
In the event that at the time of such Payout, the condition set forth in
clause (1) of the proviso of the preceding sentence cannot be satisfied, ETC may
seek to have a person other than the Company or one of its Restricted
Subsidiaries pay in cash an amount to the Company or its Restricted Subsidiaries
such that after taxes, such amount is greater than or equal to the ETC Amount
Due or the portion of the ETC Amount Due which would not have been permitted to
be made as a Restricted Payment by the Company; PROVIDED that such payment shall
be treated for purposes of this covenant as a cash return on the Investments
made in ETC and provided further that for all purposes under the Indenture, such
payment shall not be included in any calculation under clauses (iii)(A) through
(iii)(E) of the first paragraph of the covenant described under "--Restricted
Payments." To the extent that the ETC Amount Due or any portion thereof would
have been permitted to be made as a Restricted Payment by the Company and was
not paid by another person as permitted by the preceding sentence, the Company
shall be deemed to have made a Restricted Payment in the amount of such ETC
Amount Due or portion thereof, as the case may be. It shall be a condition to
any Payout pursuant to the first paragraph of this covenant that, commencing
with the quarter commencing July 1, 1999, the Company shall have caused ETC to
maintain, in accordance with GAAP, consolidated financial statements for ETC and
its Subsidiaries on a "stand-alone" basis.
Notwithstanding the provisions of the covenants described under "
- --Restricted Payments" and "--Asset Sales,"
(1) the payment of any dividend or distribution consisting of Equity
Interests or assets of any Non-Core Asset or the proceeds of a sale, conveyance
or other disposition of such Equity Interests or assets or the sale, conveyance
or other disposition of Equity Interests in or assets of any Non-Core Asset or
the proceeds of a sale, conveyance or other disposition of such Equity Interests
or assets shall not constitute a Restricted Payment and
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(2) the sale, conveyance or other disposition of the Equity
Interests or assets of any Non-Core Asset or the proceeds of a sale, conveyance
or other disposition of such Equity Interests or assets shall not constitute an
Asset Sale; and
(3) upon delivery of an Officers' Certificate to the Trustee
evidencing satisfaction of the conditions to such release and a written request
to the Trustee requesting such a release, any such Non-Core Asset that is a
Guarantor shall be discharged and released from its Guarantee and, provided the
Company designates such Non-Core Asset as an Unrestricted Subsidiary, from all
covenants and restrictions contained in the Indenture; PROVIDED that no Payout
of any Non-Core Asset shall be permitted such as described in clauses (1) and
(2) above if at the time of such Payout (1) after giving pro forma effect to
such Payout, the Company would not have been permitted under the covenant
described under "--Restricted Payments" to make a Restricted Payment in an
amount equal to the total (the "Non-Core Asset Amount Due") of
(x) the amount of all Investments made in such Non-Core Asset by
the Company or its Restricted Subsidiaries since the date of the Indenture
(which, in the case of Investments in exchange for assets, shall be valued at
the fair market value of each such asset at the time each such Investment was
made) minus
(y) the amount of the after-tax value of all cash returns on
such Investments paid to the Company or its Wholly Owned Restricted Subsidiaries
(or, in the case of a non-Wholly Owned Restricted Subsidiary, the pro rata
portion thereof attributable to the Company) minus
(z) $25 million in the aggregate for all such Payouts and $5
million for any single such Payout
and (2) any contract, agreement or understanding between or relating to a
Non-Core Asset and the Company or a Restricted Subsidiary of the Company and any
loan or advance to or guarantee with, or for the benefit of, a Restricted
Subsidiary which is a Non-Core Asset issued or made by the Company or one of its
Restricted Subsidiaries, is on terms that are less favorable to the Company or
its Restricted Subsidiaries than those that would have been obtained in a
comparable transaction by the Company or such Restricted Subsidiaries with an
unrelated person, all as evidenced by a resolution of the Board of Directors of
the Company set forth in an Officers' Certificate delivered to the Trustee
certifying that each such contract, agreement, understanding, loan, advance and
guarantee has been approved by a majority of such Board.
In the event that at the time of such Payout, the condition set forth in
clause (1) of the proviso of the preceding sentence cannot be satisfied, such
Restricted Subsidiary which is a Non-Core Asset may seek to have a person other
than the Company or one of its Restricted Subsidiaries pay in cash an amount to
the Company such that after taxes, such amount, is greater than or equal to the
Amount Due or the portion of the Non-Core Asset Amount Due which would not have
been permitted to be made as a Restricted Payment by the Company; PROVIDED that
such payment shall be treated for purposes of this covenant as a cash return on
the Investments made in a Non-Core Asset and provided further that for all
purposes under the Indenture, such payment shall not be included in any
calculation under clauses (iii)(A) through (iii)(E) of the first paragraph of
the covenant described under " --Restricted Payments." To the extent that the
Non-Core Asset Amount Due or any portion thereof would have been permitted to be
made as a Restricted Payment by the Company and was not paid by another person
as permitted by the preceding sentence, the Company shall be deemed to have made
a Restricted Payment in the amount of such Non-Core Asset Amount Due or portion
thereof, as the case may be.
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Promptly after any Payout pursuant to the terms of this covenant, the
Company shall deliver an Officers' Certificate to the Trustee setting forth the
Investments made by the Company or its Restricted Subsidiaries in ETC or a
Non-Core Asset, as the case may be, and certifying that the requirements of this
covenant have been satisfied in connection with the making of such Payout.
ECC EQUITY CONTRIBUTION. Concurrently with or within five business days of
the consummation of the Offering, ECC shall make a capital contribution to the
common equity of the Company in the form of cash, Cash Equivalents or Marketable
Securities in an aggregate amount no less than $200 million.
THE 110 ACQUISITION. The Indentures provide that upon consummation of the
110 Acquisition, all property and assets acquired in such transaction or the
right to receive such property and assets will be contributed as capital
contributions to the Company or one or more of the Guarantors that is a Wholly
Owned Restricted Subsidiary.
ADDITIONAL SUBSIDIARY GUARANTEES. The Indentures provide that if the
Company or any Guarantor transfers or causes to be transferred, in one or a
series of related transactions, property or assets (including, without
limitation, businesses, divisions, real property, assets or equipment) having a
fair market value (as determined in good faith by the Board of Directors of the
Company evidenced by a resolution of the Board of Directors of the Company and
set forth in an Officers' Certificate delivered to the Trustee no later than
five business days following January 1 and July 1 of each year or ten days
following a request from the Trustee, which certificate shall cover the six
months preceding January 1, July 1 or date of request, as the case may be)
exceeding the sum of $20 million in the aggregate for all such transfers after
the date of the Indentures minus the fair market value of Restricted
Subsidiaries acquired or created after the date of the Indentures that are not
Guarantors (fair market value being determined as of the time of such
acquisition) to Restricted Subsidiaries that are not Guarantors of the Notes,
the Company, shall, or shall cause each of such Subsidiaries to which any amount
exceeding such $20 million (less such fair market value) is transferred to:
(1) execute and deliver to the Trustee a supplemental indenture in
form and substance reasonably satisfactory to the Trustee pursuant to which such
Subsidiary shall unconditionally guarantee all of the Company's obligations
under the Notes on the terms set forth in the Indenture; and
(2) deliver to the Trustee an Opinion of Counsel reasonably
satisfactory to the Trustee that such supplemental indenture and Guarantee have
been duly authorized, executed and delivered by and are valid and binding
obligations of such Subsidiary or such owner, as the case may be; PROVIDED,
HOWEVER, that the foregoing provisions shall not apply to transfers of property
or assets (other than cash) by the Company or any Guarantor in exchange for
cash, Cash Equivalents or Marketable Securities in an amount equal to the fair
market value (as determined in good faith by the Board of Directors of the
Company evidenced by a resolution of the Board of Directors of the Company and
set forth in an Officers' Certificate delivered to the Trustee no later than
five business days following January 1 and July 1 of each year or ten days
following a request from the Trustee, which certificate shall cover the six
months preceding January 1, July 1 or date of request, as the case may be) of
such property or assets.
In addition, if
(1) the Company or any of its Restricted Subsidiaries acquires or
creates another Restricted Subsidiary or
(2) an Unrestricted Subsidiary of the Company is redesignated as a
Restricted Subsidiary or otherwise ceases to be an Unrestricted Subsidiary,
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such Subsidiary shall execute a supplemental indenture and deliver an opinion,
each as required in the preceding sentence; PROVIDED that no supplemental
indenture or opinion shall be required if the fair market value (as determined
in good faith by the Board of Directors of the Company and set forth in an
Officers' Certificate delivered to the Trustee no later than five business days
following January 1 and July 1 of each year or ten days following a request from
the Trustee, which certificate shall cover the six months preceding such
January 1, July 1 or date of request, as the case may be) of all such Restricted
Subsidiaries created, acquired or designated since the date of the Indenture
(fair market value being determined as of the time of creation, acquisition or
designation) does not exceed the sum of $20 million in the aggregate minus the
fair market value of the assets transferred to any Subsidiaries of the Company
which do not execute supplemental indentures pursuant to the preceding
sentences; PROVIDED FURTHER that to the extent a Restricted Subsidiary is
subject to the terms of any instrument governing Acquired Debt, as in effect at
the time of acquisition (except to the extent such Indebtedness was incurred in
connection with or in contemplation of such acquisition) which instrument or
restriction prohibits such Restricted Subsidiary from issuing a guarantee of the
Notes, such Restricted Subsidiary shall not be required to execute such a
supplemental indenture until it is permitted to issue such guarantee pursuant to
the terms of such Acquired Debt.
DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING SUBSIDIARIES. Each
Indenture provides that the Company shall not, and shall not permit any
Restricted Subsidiary of the Company to, directly or indirectly, create or
otherwise cause or suffer to exist or become effective any encumbrance or
restriction on the ability of any Restricted Subsidiary to:
(a) pay dividends or make any other distribution to the Company or
any of its Restricted Subsidiaries on its Capital Stock or with respect to any
other interest or participation in, or measured by, its profits, or pay any
Indebtedness owed to the Company or any of its Restricted Subsidiaries;
(b) make loans or advances to the Company or any of its Restricted
Subsidiaries; or
(c) transfer any of its properties or assets to the Company or any
of its Restricted Subsidiaries;
except for such encumbrances or restrictions existing under or by reasons
of:
(i) Existing Indebtedness and existing agreements as in effect
on the date of the Indenture;
(ii) applicable law or regulation;
(iii) any instrument governing Acquired Debt as in effect at the
time of acquisition (except to the extent such Indebtedness was incurred in
connection with, or in contemplation of, such acquisition), which encumbrance or
restriction is not applicable to any person, or the properties or assets of any
person, other than the person, or the property or assets of the person, so
acquired, provided that the Consolidated Cash Flow of such person shall not be
taken into account in determining whether such acquisition was permitted by the
terms of the Indenture; except to the extent that dividends or other
distributions are permitted notwithstanding such encumbrance or restriction and
could have been distributed;
(iv) by reason of customary non-assignment provisions in leases
entered into in the ordinary course of business and consistent with past
practices;
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(v) Refinancing Indebtedness (as defined in "--Incurrence of
Indebtedness"), PROVIDED that the restrictions contained in the agreements
governing such Refinancing Indebtedness are no more restrictive than those
contained in the agreements governing the Indebtedness being refinanced;
(vi) the Indenture and the Notes;
(vii) Permitted Liens; or
(viii) any agreement for the sale of any Subsidiary or
its assets that restricts distributions by that Subsidiary pending its sale;
provided that during the entire period in which such encumbrance or restriction
is effective, such sale (together with any other sales pending) would be
permitted under the terms of the Indenture.
ACCOUNTS RECEIVABLE SUBSIDIARY. Each Indenture provides that the Company:
(a) may, and may permit any of its Subsidiaries to, notwithstanding the
provisions of the covenant entitled "Restricted Payments," make Investments in
an Accounts Receivable Subsidiary:
(i) the proceeds of which are applied within five Business Days of
the making thereof solely to finance:
(A) the purchase of accounts receivable of the Company and its
Subsidiaries or
(B) payments required in connection with the termination of all
then existing arrangements relating to the sale of accounts receivable or
participation interests therein by an Accounts Receivable Subsidiary (provided
that the Accounts Receivable Subsidiary shall receive cash, Cash Equivalents and
accounts receivable having an aggregate fair market value not less than the
amount of such payments in exchange therefor) and
(ii) in the form of Accounts Receivable Subsidiary Notes to the
extent permitted by clause (b) below;
(b) shall not, and shall not permit any of its Subsidiaries to, sell
accounts receivable to an Accounts Receivable Subsidiary except for
consideration in an amount not less than that which would be obtained in an
arm's length transaction and solely in the form of cash or Cash Equivalents;
provided that an Accounts Receivable Subsidiary may pay the purchase price for
any such accounts receivable in the form of Accounts Receivable Subsidiary Notes
so long as, after giving effect to the issuance of any such Accounts Receivable
Subsidiary Notes, the aggregate principal amount of all Accounts Receivable
Subsidiary Notes outstanding shall not exceed 20% of the aggregate purchase
price paid for all outstanding accounts receivable purchased by an Accounts
Receivable Subsidiary since the date of the Indenture (and not written off or
required to be written off in accordance with the normal business practice of an
Accounts Receivable Subsidiary);
(c) shall not permit an Accounts Receivable Subsidiary to sell any
accounts receivable purchased from the Company or its Subsidiaries or
participation interests therein to any other person except on an arm's length
basis and solely for consideration in the form of cash or Cash Equivalents or
certificates representing undivided interests of a Receivables Trust; provided
an Accounts Receivable Subsidiary may not sell such certificates to any other
person except on an arm's length basis and solely for consideration in the form
of cash or Cash Equivalents;
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(d) shall not, and shall not permit any of its Subsidiaries to, enter into
any guarantee, subject any of their respective properties or assets (other than
the accounts receivable sold by them to an Accounts Receivable Subsidiary) to
the satisfaction of any liability or obligation or otherwise incur any liability
or obligation (contingent or otherwise), in each case, on behalf of an Accounts
Receivable Subsidiary or in connection with any sale of accounts receivable or
participation interests therein by or to an Accounts Receivable Subsidiary,
other than obligations relating to breaches of representations, warranties,
covenants and other agreements of the Company or any of its Subsidiaries with
respect to the accounts receivable sold by the Company or any of its
Subsidiaries to an Accounts Receivable Subsidiary or with respect to the
servicing thereof; PROVIDED that neither the Company nor any of its Subsidiaries
shall at any time guarantee or be otherwise liable for the collectibility of
accounts receivable sold by them;
(e) shall not permit an Accounts Receivable Subsidiary to engage in any
business or transaction other than the purchase and sale of accounts receivable
or participation interests therein of the Company and its Subsidiaries and
activities incidental thereto;
(f) shall not permit an Accounts Receivable Subsidiary to incur any
Indebtedness other than the Accounts Receivable Subsidiary Notes, Indebtedness
owed to the Company and Non-Recourse Indebtedness; PROVIDED that the aggregate
principal amount of all such Indebtedness of an Accounts Receivable Subsidiary
shall not exceed the book value of its total assets as determined in accordance
with GAAP;
(g) shall cause any Accounts Receivable Subsidiary to remit to the Company
or a Restricted Subsidiary of the Company on a monthly basis as a distribution
all available cash and Cash Equivalents not held in a collection account pledged
to acquirors of accounts receivable or participation interests therein, to the
extent not applied to
(i) pay interest or principal on the Accounts Receivable Subsidiary
Notes or any Indebtedness of such Accounts Receivable Subsidiary owed to the
Company,
(ii) pay or maintain reserves for reasonable operating expenses of
such Accounts Receivable Subsidiary or to satisfy reasonable minimum operating
capital requirements or
(iii) to finance the purchase of additional accounts receivable of the
Company and its Subsidiaries; and
(h) shall not, and shall not permit any of its Subsidiaries to, sell
accounts receivable to, or enter into any other transaction with or for the
benefit of, an Accounts Receivable Subsidiary
(i) if such Accounts Receivable Subsidiary pursuant to or within the
meaning of any Bankruptcy Law
(A) commences a voluntary case,
(B) consents to the entry of an order for relief against it in
an involuntary case,
(C) consents to the appointment of a Custodian of it or for all
or substantially all of its property,
(D) makes a general assignment for the benefit of its creditors,
or (E) generally is not paying its debts as they become due; or
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(ii) if a court of competent jurisdiction enters an order or decree
under any Bankruptcy Law that
(A) is for relief against such Accounts Receivable Subsidiary in
an involuntary case,
(B) appoints a Custodian of such Accounts Receivable Subsidiary
or for all or substantially all of the property of such Accounts Receivable
Subsidiary, or
(C) orders the liquidation of such Accounts Receivable
Subsidiary, and, with respect to clause (ii) hereof, the order or decree remains
unstayed and in effect for 60 consecutive days.
MERGER, CONSOLIDATION, OR SALE OF ASSETS. Each Indenture provides that the
Company may not consolidate or merge with or into (whether or not the Company is
the surviving entity), or sell, assign, transfer, lease, convey or otherwise
dispose of all or substantially all of its properties or assets in one or more
related transactions to, another person unless:
(a) the Company is the surviving person or the person formed by or
surviving any such consolidation or merger (if other than the Company) or to
which such sale, assignment, transfer, lease, conveyance or other disposition
shall have been made is a corporation organized or existing under the laws of
the United States, any state thereof or the District of Columbia;
(b) the person formed by or surviving any such consolidation or merger (if
other than the Company) or the person to which such sale, assignment, transfer,
lease, conveyance or other disposition will have been made assumes all the
obligations of the Company, pursuant to a supplemental indenture in form
reasonably satisfactory to the Trustee, under the Notes and the Indenture;
(c) immediately after such transaction, no Default or Event of Default
exists; and
(d) the Company or the person formed by or surviving any such
consolidation or merger (if other than the Company) or to which such sale,
assignment, transfer, lease, conveyance or other disposition will have been made
(i) will have Consolidated Net Worth immediately after the
transaction (but prior to any purchase accounting adjustments or accrual of
deferred tax liabilities resulting from the transaction) not less than the
Consolidated Net Worth of the Company immediately preceding the transaction; and
(ii) would, at the time of such transaction after giving pro forma
effect thereto as if such transaction had occurred at the beginning of the
applicable four-quarter period, be permitted to incur at least $1.00 of
additional Indebtedness pursuant to the Indebtedness to Cash Flow Ratio test set
forth in the covenant described under "--Incurrence of Indebtedness."
Notwithstanding the foregoing, the Company may merge with another person
if:
(a) the Company is the surviving person;
(b) the consideration issued or paid by the Company in such merger
consists solely of Equity Interests (other than Disqualified Stock) of the
Company or Equity Interests of ECC; and
(c) immediately after giving effect to such merger, the Company's
Indebtedness to Cash Flow Ratio does not exceed the Company's Indebtedness to
Cash Flow Ratio immediately prior to such merger.
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Each Guarantor (other than any Guarantor whose Guarantee is to be released
in accordance with the terms of the Guarantee and the Indenture and other than
ETC and any Non-Core Asset in connection with any transaction permitted under
"--Dispositions of ETC and Non-Core Assets") will not, and the Company will not
cause or permit any Guarantor to, consolidate or merge with or into (whether or
not such Guarantor is the surviving entity), or sell, assign, transfer, lease,
convey, or otherwise dispose of all or substantially all of its properties or
assets in one or more related transactions to, any person other than the Company
or a Guarantor unless:
(a) the Guarantor is the surviving person or the person formed by or
surviving any such consolidation or merger (if other than the Guarantor) or the
person to which such sale, assignment, transfer, lease, conveyance or other
disposition shall have been made is a corporation organized or existing under
the laws of the United States, any state thereof or the District of Columbia;
(b) the person formed by or surviving any such consolidation or merger (if
other than the Guarantor) or the person to which such sale, assignment,
transfer, lease, conveyance or other disposition shall have been made assumes
all the obligations of the Guarantor, pursuant to a supplemental indenture in
form reasonably satisfactory to the Trustee, under the Notes and the Indenture;
(c) immediately after such transaction, no Default or Event of Default
exists; and
(d) the Company will have Consolidated Net Worth immediately after the
transaction (after any purchase accounting adjustments or accrual of deferred
tax liabilities resulting from the transaction) not less than the Consolidated
Net Worth of the Company immediately preceding the transaction.
TRANSACTIONS WITH AFFILIATES. Each Indenture provides that the Company
shall not and shall not permit any Restricted Subsidiary to, sell, lease,
transfer or otherwise dispose of any of its properties or assets to, or purchase
any property or assets from, or enter into any contract, agreement,
understanding, loan, advance or guarantee with, or for the benefit of, any
Affiliate (including any Unrestricted Subsidiary) (each of the foregoing, an
"Affiliate Transaction"), unless:
(a) such Affiliate Transaction is on terms that are no less favorable to
the Company or its Restricted Subsidiaries than those that would have been
obtained in a comparable transaction by the Company or such Subsidiaries with an
unrelated person; and
(b) if such Affiliate Transaction involves aggregate payments in excess of
$15 million such Affiliate Transaction has been approved by a majority of the
disinterested members of the Board of Directors of the Company, and the Company
delivers to the Trustee no later than five business days following January 1 or
July 1 of each year or ten days following a request from the Trustee a
resolution of the Board of Directors of the Company set forth in an Officers'
Certificate certifying that such Affiliate Transaction has been so approved and
complies with clause (a) above;
PROVIDED, HOWEVER, that
(i) the payment of compensation to directors and management of ECC
and its Subsidiaries;
(ii) transactions between or among the Company and its Wholly Owned
Subsidiaries (other than Unrestricted Subsidiaries of the Company);
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(iii) any dividend, distribution, sale, conveyance or other
disposition of any assets of, or Equity Interests in, any Non-Core Assets or ETC
or the proceeds of a sale, conveyance or other disposition thereof, in
accordance with the provisions of the Indenture;
(iv) transactions permitted by the provisions of the Indenture
described above under clauses (1), (2), (5), (6), (8), (9), (10), (11) and (12)
of the second paragraph of the covenant described under "--Restricted Payments";
(v) so long as it complies with clause (a) above, the provision of
backhaul, uplink, transmission, billing, customer service, programming
acquisition and other ordinary course services by the Company or any of its
Restricted Subsidiaries to Satellite Communications Operating Corporation and to
Transponder Encryption Services Corporation on a basis consistent with past
practice; and
(vi) any transactions between the Company or any Restricted
Subsidiary of the Company and any Affiliate of the Company the Equity Interests
of which Affiliate are owned solely by the Company or one of its Restricted
Subsidiaries, on the one hand, and by persons who are not Affiliates of the
Company or Restricted Subsidiaries of the Company, on the other hand, shall, in
each case, not be deemed Affiliate Transactions.
REPORTS. Whether or not required by the rules and regulations of the SEC,
so long as any Notes are outstanding, the Company will file with the SEC and
furnish to the holders of Notes all quarterly and annual financial information
that would be required to be contained in a filing with the SEC on Forms 10-Q
and 10-K if the Company were required to file such forms, including a
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and, with respect to the annual information only, a report thereon
by the Company's certified public accountants.
PAYMENTS FOR CONSENT. The Company shall not, and shall not permit any of
its Subsidiaries to, directly or indirectly, pay or cause to be paid any
consideration, whether by way of interest, fee or otherwise, to any holder of a
Note for or as an inducement to any consent, waiver or amendment of any of the
terms or provisions of the Indenture or the Notes unless such consideration is
offered to be paid or agreed to be paid to all holders of the Notes that
consent, waive or agree to amend in the time frame set forth in the solicitation
documents relating to such consent, waiver or agreement.
EXCESS PROCEEDS OFFER. When the cumulative amount of Excess Proceeds that
have not been applied in accordance with the covenants entitled "Asset Sales"
and "Maintenance of Insurance" or this paragraph exceeds $17.5 million, the
Company will be obligated to make an offer to all holders of the Notes (an
"Excess Proceeds Offer") to purchase the maximum principal amount of Notes that
may be purchased out of such Excess Proceeds at an offer price in cash in an
amount equal to 101% of the principal amount thereof, together with accrued and
unpaid interest to the date fixed for the closing of such offer in accordance
with the procedures set forth in the Indenture. To the extent the Company or a
Restricted Subsidiary is required under the terms of Indebtedness of the Company
or such Restricted Subsidiary which is PARI PASSU with, or (in the case of any
secured Indebtedness) senior with respect to such collateral to, the Notes with
any proceeds which constitute Excess Proceeds under the Indentures, the Company
shall make a pro rata offer to the holders of all other pari passu Indebtedness
(including the Notes) with such proceeds. If the aggregate principal amount of
Notes and other pari passu Indebtedness surrendered by holders thereof exceeds
the amount of such Excess Proceeds, the Trustee shall select the Notes and other
pari passu Indebtedness to be purchased on a pro rata basis. To the extent that
the principal amount of Notes tendered pursuant to an Excess Proceeds Offer is
less than the amount of such Excess Proceeds, the Company may use any remaining
Excess Proceeds for general corporate purposes. Upon completion of an Excess
Proceeds Offer, the amount of Excess Proceeds shall be reset at zero.
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EVENTS OF DEFAULT AND REMEDIES
Each Indenture provides that each of the following constitutes an Event of
Default:
(a) default for 30 days in the payment when due of interest on the
Notes issued thereunder;
(b) default in payment when due of principal of the Notes issued
thereunder at maturity, upon repurchase, redemption or otherwise;
(c) failure to comply with the provisions described under "--Offer to
Purchase upon Change of Control," "--Certain Covenants--Maintenance of
Insurance," "--Certain Covenants--Transactions with Affiliates," or
"--Certain Covenants--Asset Sales";
(d) default under the provisions described under "--Certain
Covenants--Restricted Payments" or "--Certain Covenants--Incurrence of
Indebtedness" which default remains uncured for 30 days, or the breach of
any representation or warranty, or the making of any untrue statement, in
any certificate delivered by the Company pursuant to the Indenture;
(e) failure by the Company for 60 days after notice from the Trustee
or the holders of at least 25% in principal amount then outstanding of any
issue of Notes to comply with any of its other agreements in the Indenture
or the Notes of such issue;
(f) default under any mortgage, indenture or instrument under
which there may be issued or by which there may be secured or evidenced
any Indebtedness for money borrowed by the Company or any of its
Restricted Subsidiaries (or the payment of which is guaranteed by the
Company or any of its Restricted Subsidiaries), which default is caused
by a failure to pay when due principal or interest on such Indebtedness
within the grace period provided in such Indebtedness (a "Payment
Default"), and the principal amount of any such Indebtedness, together
with the principal amount of any other such Indebtedness under which
there has been a Payment Default, aggregates $20 million or more;
(g) default under any mortgage, indenture or instrument under
which there may be issued or by which there may be secured or evidenced
any Indebtedness for money borrowed by the Company or any of its
Restricted Subsidiaries (or the payment of which is guaranteed by the
Company or any of its Restricted Subsidiaries), which default results in
the acceleration of such Indebtedness prior to its express maturity and
the principal amount of any such Indebtedness, together with the
principal amount of any other such Indebtedness under which there has
been a Payment Default or the maturity of which has been so accelerated,
aggregates $20 million or more; provided that any acceleration (other
than an acceleration which is the result of a Payment Default under
clause (f) above) of Indebtedness under the Outstanding Deferred
Payments in aggregate principal amount not to exceed $50 million shall
be deemed not to constitute an acceleration pursuant to this clause (g);
(h) failure by the Company or any of its Restricted Subsidiaries
to pay final judgments (other than any judgment as to which a reputable
insurance company has accepted full liability) aggregating in excess of
$20 million, which judgments are not stayed within 60 days after their
entry;
(i) certain events of bankruptcy or insolvency with respect to
ECC, the Company or certain of the Company's Subsidiaries (including the
filing of a voluntary case, the consent to an
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order of relief in an involuntary case, the consent to the appointment
of a custodian, a general assignment for the benefit of creditors or an
order of a court for relief in an involuntary case, appointing a
custodian or ordering liquidation, which order remains unstayed for 60
days); and
(j) any Guarantee of the Notes shall be held in a judicial
proceeding to be unenforceable or invalid or shall cease for any reason
to be in full force and effect, or any Guarantors, or any person acting
on behalf of any Guarantor, shall deny or disaffirm its obligations
under its Guarantee of any Notes.
If any Event of Default occurs and is continuing, the Trustee or the
holders of at least 25% in principal amount then outstanding of any series of
Notes may declare all the Notes of such series to be due and payable
immediately (plus, in the case of an Event of Default that is the result of
an action by the Company or any of its Subsidiaries intended to avoid
restrictions on or premiums related to redemptions of the Notes contained in
the Indenture or the Notes, an amount of premium that would have been
applicable pursuant to the Notes or as set forth in the Indenture).
Notwithstanding the foregoing, in the case of an Event of Default arising
from the events of bankruptcy or insolvency with respect to the Company or
any of its Subsidiaries described in (i) above, all outstanding Notes will
become due and payable without further action or notice. Holders of the Notes
may not enforce the Indenture or the Notes except as provided in the
Indenture. Subject to certain limitations, holders of a majority in principal
amount of the then outstanding Notes may direct the Trustee in its exercise
of any trust or power. The Trustee may withhold from holders of the Notes
notice of any continuing Default or Event of Default (except a Default or
Event of Default relating to the payment of principal or interest) if it
determines that withholding notice is in such holders' interest.
The holders of a majority in aggregate principal amount then outstanding
of each series of Notes, by notice to the Trustee, may on behalf of the
holders of all of the Notes of such series waive any existing Default or
Event of Default and its consequences under its respective Indentures, except
a continuing Default or Event of Default in the payment of interest or
premium on, or principal of, such series of Notes.
The Company is required to deliver to the Trustee annually a statement
regarding compliance with the Indentures, and the Company is required upon
becoming aware of any Default or Event of Default to deliver to the Trustee a
statement specifying such Default or Event of Default.
All powers of the Trustee under the Indentures will be subject to
applicable provisions of the Communications Act, including without
limitation, the requirements of prior approval for DE FACTO or DE JURE
transfer of control or assignment of Title III licenses.
NO PERSONAL LIABILITY OF DIRECTORS, OWNERS, EMPLOYEES, INCORPORATOR AND
STOCKHOLDERS
No director, officer, employee, incorporator or stockholder of the
Company or any of its Affiliates, as such, shall have any liability for any
obligations of the Company or any of its Affiliates under the Notes or the
Indenture or for any claim based on, in respect of, or by reason of, such
obligations or their creation. Each holder of Notes by accepting a Note
waives and releases all such liability. The waiver and release are part of
the consideration for issuance of the Notes. Such waiver may not be effective
to waive liabilities under the federal securities laws and it is the view of
the SEC that such a waiver is against public policy.
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LEGAL DEFEASANCE AND COVENANT DEFEASANCE
Each Indenture provides that with respect to the Notes issued
thereunder, the Company may, at its option and at any time, elect to have all
obligations discharged with respect to the outstanding Notes of such issue
("Legal Defeasance"). Such Legal Defeasance means that the Company will be
deemed to have paid and discharged the entire indebtedness represented by the
outstanding Notes of such issue, except for:
(a) the rights of holders of outstanding Notes of such issue to
receive payments in respect of the principal of, premium, if any, and
interest on the Notes of such issue when such payments are due, or on the
redemption date, as the case may be;
(b) the Company's obligations with respect to the Notes concerning
issuing temporary Notes, registration of Notes, mutilated, destroyed, lost or
stolen Notes of such issue and the maintenance of an office or agency for
payment and money for security payments held in trust;
(c) the rights, powers, trust, duties and immunities of the
Trustee, and the Company's obligations in connection therewith; and
(d) the Legal Defeasance provisions of the Indenture. In addition,
the Indenture will provide that with respect to each issue of Notes, the
Company may, at its option and at any time, elect to have all obligations
released with respect to certain covenants that are described in the
Indenture ("Covenant Defeasance") and thereafter any omission to comply with
such obligations shall not constitute a Default or Event of Default with
respect to the Notes of such issue. In the event Covenant Defeasance occurs,
certain events (not including non-payment, bankruptcy, receivership,
rehabilitation and insolvency events) described under "--Events of Default
and Remedies" will no longer constitute an Event of Default with respect to
the Notes of such issue.
In order to exercise either Legal Defeasance or Covenant Defeasance:
each Indenture will provide that with respect to the Notes issued thereunder,
(i) the Company must irrevocably deposit with the Trustee, in
trust, for the benefit of the holders of the Notes of such issue, cash in
U.S. dollars, non-callable U.S. government obligations, or a combination
thereof, in such amounts as will be sufficient, in the opinion of a
nationally recognized firm of independent public accountants selected by the
Trustee, to pay the principal of, premium, if any, and interest on the
outstanding Notes of such issue on the stated maturity or on the applicable
optional redemption date, as the case may be;
(ii) in the case of Legal Defeasance, the Company shall have
delivered to the Trustee an Opinion of Counsel in the United States
reasonably acceptable to the Trustee confirming that
(A) the Company has received from, or there has been
published by, the Internal Revenue Service a ruling or
(B) since the date of the Indenture, there has been a change
in the applicable Federal income tax law, in each case to the effect that,
and based thereon such opinion of counsel shall confirm that, the holders of
the Notes of such issue will not recognize income, gain or loss for Federal
income tax purposes as a result of such Legal Defeasance, and will be subject
to Federal income tax in the same amount, in the same manner and at the same
times as would have been the case if such Legal Defeasance had not occurred;
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(iii) in the case of Covenant Defeasance, the Company shall have
delivered to the Trustee an Opinion of Counsel reasonably acceptable to such
Trustee confirming that the holders of the Notes of such issue will not
recognize income, gain or loss for Federal income tax purposes as a result of
such Covenant Defeasance and will be subject to Federal income tax on the
same amounts, in the same manner and at the same times as would have been the
case if such Covenant Defeasance had not occurred;
(iv) no Default or Event of Default shall have occurred and be
continuing on the date of such deposit or insofar as Events of Default from
bankruptcy or insolvency events are concerned, at any time in the period
ending on the 91st day after the date of deposit;
(v) such Legal Defeasance or Covenant Defeasance shall not
result in a breach or violation of, or constitute a default under, the
Indenture or any other material agreement or instrument to which the Company
or any of its Subsidiaries is a party or by which the Company or any of its
Subsidiaries is bound;
(vi) the Company shall have delivered to the Trustee an Officers'
Certificate stating that the deposit was not made by the Company with the
intent of preferring the holders of the Notes of such series over any other
creditors of the Company or with the intent of defeating, hindering, delaying
or defrauding any other creditors of the Company or others; and
(vii) the Company shall have delivered to the Trustee an Officers'
Certificate stating that all conditions precedent provided for or relating to
the Legal Defeasance or the Covenant Defeasance relating to such series of
Notes have been complied with.
AMENDMENT, SUPPLEMENT AND WAIVER
Except as provided in the next paragraph, each Indenture and the Notes
issued thereunder may be amended or supplemented with the consent of the
holders of at least a majority in principal amount of the Notes of such
series then outstanding (including consents obtained in connection with a
tender offer or exchange offer for Notes of such series), and any existing
default or compliance with any provision of the Indenture or the Notes of
such series may be waived with the consent of the holders of a majority in
principal amount of the then outstanding Notes of such series (including
consents obtained in connection with a tender offer or exchange offer for
Notes of such series).
Without the consent of each holder affected, however, an amendment or
waiver may not (with respect to any Note held by a non-consenting holder):
(a) reduce the aggregate principal amount of Notes whose holders must
consent to an amendment, supplement or waiver;
(b) reduce the principal of or change the fixed maturity of any Note
or alter the provisions with respect to the redemption of the Notes;
(c) reduce the rate of or change the time for payment of interest on
any Notes;
(d) waive a Default or Event of Default in the payment of principal
of or premium, if any, or interest on the Notes (except a rescission of
acceleration of the Notes of a series by the holders of at least a majority
in aggregate principal amount of the Notes of such series and a waiver of
the payment default that resulted from such acceleration);
(e) make any Note payable in money other than that stated in the
Notes;
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(f) make any change in the provisions of the Indenture relating to
waivers of past Defaults or the rights of holders of Notes to receive
payments of principal of or interest on the Notes;
(g) waive a redemption payment with respect to any Note; or
(h) make any change in the foregoing amendment and waiver provisions.
In addition, without the consent of at least 66 2/3% of the Notes of a
series then outstanding, an amendment or a waiver may not make any change to
the covenants in the Indenture entitled "Asset Sales," "Offer to Purchase
Upon a Change of Control" and "Excess Proceeds Offer" (including, in each
case, the related definitions) as such covenants apply to such series of
Notes.
Notwithstanding the foregoing, without the consent of any holder of
Notes, the Company, the Guarantors and the Trustee may amend or supplement
each Indenture, the Notes or the Guarantees to cure any ambiguity, defect or
inconsistency, to provide for uncertificated Notes or Guarantees in addition
to or in place of certificated Notes or the Guarantees, to provide for the
assumption of the Company's or a Guarantor's obligations to holders of the
Notes in the case of a merger or consolidation, to make any change that would
provide any additional rights or benefits to the holders of the Notes or the
Guarantees or that does not adversely affect the legal rights under the
Indenture of any such holder, or to comply with requirements of the SEC in
order to effect or maintain the qualification of the Indenture under the
Trust Indenture Act.
CONCERNING THE TRUSTEE
Each Indenture contains certain limitations on the rights of the
Trustee, if the Trustee becomes a creditor of the Company, to obtain payment
of claims in certain cases, or to realize on certain property received in
respect of any such claim as security or otherwise. The Trustee will be
permitted to engage in other transactions with the Company; however, if the
Trustee acquires any conflicting interest, it must eliminate such conflict
within 90 days, apply to the SEC for permission to continue as Trustee or
resign.
With respect to such series of Notes, the holders of a majority in
principal amount of the then outstanding Notes of such series will have the
right to direct the time, method and place of conducting any proceeding for
exercising any remedy available to the Trustee, subject to certain
exceptions. Each Indenture provides that in case an Event of Default shall
occur (which shall not be cured), the Trustee will be required, in the
exercise of its power, to use the degree of care of a prudent man in the
conduct of his own affairs. The Trustee will not be relieved from liabilities
for its own negligent action, its own negligent failure to act or its own
willful misconduct, except that:
(i) this sentence shall not limit the preceding sentence of this
paragraph;
(ii) the Trustee shall not be liable for any error of judgment made
in good faith, unless it is proved that the Trustee was negligent in
ascertaining the pertinent facts; and
(iii) the Trustee shall not be liable with respect to any action it
takes or omits to take in good faith in accordance with a direction received
by it pursuant to the first sentence of this paragraph. Subject to such
provisions, the Trustee will be under no obligation to exercise any of its
rights or powers under the Indenture at the request of any holder of Notes,
unless such holder shall have offered to the Trustee security and indemnity
satisfactory to it against any loss, liability or expense.
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BOOK-ENTRY, DELIVERY AND FORM
The exchange notes of each series will be represented by one or more
registered global notes without interest coupons (collectively, the "Global
Exchange Notes"). Upon issuance, the Global Exchange Notes will be deposited
with the Trustee, as custodian for The Depository Trust Company (DTC), in New
York, New York, and registered in the name of DTC or its nominee for credit
to the accounts of DTC's Direct and Indirect Participants (as defined below).
The Global Exchange Notes may be transferred, in whole and not in part,
only to another nominee of DTC or to a successor of DTC or its nominee in
certain limited circumstances. Beneficial interests in the Global Exchange
Notes may be exchanged for Notes in certificated form in certain limited
circumstances. See "--Transfer of Interests in Global Notes for Certificated
Notes." Such Certificated Notes may, unless the Global Exchange Note has
previously been exchanged for Certificated Notes, be exchanged for an
interest in the Global Exchange Note representing the principal amount of
exchange notes being transferred. In addition, transfer of beneficial
interests in any Global Exchange Notes will be subject to the applicable
rules and procedures of DTC and its Direct or Indirect Participants, which
may change from time to time.
DEPOSITARY PROCEDURES. DTC has advised the Company that DTC is a
limited-purpose trust company created to hold securities for its
participating organizations (collectively, the Direct Participants) and to
facilitate the clearance and settlement of transactions in those securities
between Direct Participants through electronic book-entry changes in accounts
of Participants. The Direct Participants include securities brokers and
dealers (including the Initial Purchasers), banks, trust companies, clearing
corporations and certain other organizations, including Euroclear and CEDEL.
Access to DTC's system is also available to other entities that clear through
or maintain a direct or indirect, custodial relationship with a Direct
Participant (collectively, the "Indirect Participants").
DTC has also advised the Company that, pursuant to DTC procedures, (i)
upon deposit of the Global Exchange Notes, DTC will credit the accounts of
Direct Participants with portions of the principal amount of Global Exchange
Notes that have been allocated to them by the Initial Purchasers, and (ii)
DTC will maintain records of the ownership interests of such Direct
Participants in the Global Exchange Notes and the transfer of ownership
interests by and between Direct Participants. DTC will not maintain records
of the ownership interests of, or the transfer of ownership interests by and
between, Indirect Participants or other owners of beneficial interests in the
Global Exchange Notes. Direct Participants and Indirect Participants must
maintain their own records of the ownership interests of, and the transfer of
ownership interests by and between, Indirect Participants and other owners of
beneficial interests in the Global Exchange Notes. The Company expects that
payments by Direct Participants to owners of beneficial interests in such
Global Exchange Notes held through such Direct Participants will be governed
by standing instructions and customary practices, as is now the case with
securities held for the accounts of customers registered in the name of
nominees for such customers. Such payments will be the responsibility of such
Direct Participants.
Investors in the Global Exchange Notes may hold their interests therein
directly through DTC if they are Direct Participants in DTC or indirectly
through organizations (including Euroclear and CEDEL) which are Direct
Participants in DTC. Euroclear and CEDEL will hold interests in the Global
Exchange Notes on behalf of their participants through customers' securities
accounts in their respective names on the books of their respective
depositaries, which are Morgan Guaranty Trust Company of New York, Brussels
office, as operator or Euroclear and Citibank, N.A., as depositary of CEDEL.
The depositaries, in turn, will hold such interests in the Global Exchange
Notes in customers' securities accounts in the depositaries' names on the
books of DTC. All ownership interests in any Global Exchange Notes,
including those of customers' securities accounts held through Euroclear or
CEDEL, may be subject to
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the procedures and requirements of DTC. Those interests held through
Euroclear and CEDEL in at also be subject to the procedures and requirements
of such systems.
The laws of some states require that certain persons take physical
delivery in definitive, certificated form, of securities that they own. This
may limit or curtail the ability to transfer beneficial interests in a Global
Exchange Note to such persons. Because DTC can act only on behalf of Direct
Participants, which in turn act on behalf of Indirect Participants and
others, the ability of a person having a beneficial interest in a Global
Exchange Note to pledge such interest to persons or entities that are not
Direct Participants in DTC, or to otherwise take actions in respect of such
interests, may be affected by the lack of physical certificates evidencing
such interests. For certain other restrictions on the transferability of the
Notes see "--Transfers of Interests in Global Notes for Certificated Notes."
Except as described in "--Transfers of Interests in Global Notes for
Certificated Notes", owners of beneficial interests in the Global Exchange
Notes will not have Notes registered in their names, will not receive
physical delivery of Notes in certificated form and will not be considered
the registered owners or holders thereof under the Indentures for any purpose.
Under the terms of each Indenture, the Company, the Guarantors and the
Trustee will treat the persons in whose names the Notes are registered
(including Notes represented by Global Exchange Notes) as the owners thereof
for the purpose of receiving payments and for any and all other purposes
whatsoever. Payments in respect of the principal, premium, Liquidated
Damages, if any, and interest on Global Exchange Notes registered in the name
of DTC or its nominee will be payable by the Trustee to DTC or its nominee as
the registered holder under each Indenture. Consequently, neither the
Company, the Trustee nor any agent of the Company or the Trustee has or will
have any responsibility or liability for (i) any aspect of DTC's records or
any Direct Participant's or Indirect Participant's records relating to or
payments made on account of beneficial ownership interests in the Global
Exchange Notes or for maintaining, supervising or reviewing any of DTC's
records or any Direct Participant's or Indirect Participant's records
relating to the beneficial ownership interests in any Global Exchange Note or
(ii) any other matter relating to the actions and practices of DTC or any of
its Direct Participants or Indirect Participants.
DTC has advised the Company that its current payment practice (for
payments of principal, interest and the like) with respect to securities such
as the Notes is to credit the accounts of the relevant Direct Participants
with such payment on the payment date in amounts proportionate to such Direct
Participant's respective ownership interests in the Global Exchange Notes as
shown on DTC's records. Payments by Direct Participants and Indirect
Participants to the beneficial owners of the Notes will be governed by
standing instructions and customary practices between them and will not be
the responsibility of DTC, the Trustee, the Company or the Guarantors.
Neither the Company, the Guarantors nor the Trustee will be liable for any
delay by DTC or its Direct Participants or Indirect Participants in
identifying the beneficial owners of the Notes, and the Company and the
Trustee may conclusively rely on and will be protected in relying on
instructions from DTC or its nominee as the registered owner of the Notes for
all purposes.
The Global Exchange Notes will trade in DTC's Same-Day Funds Settlement
System and, therefore, transfers between Direct Participants in DTC will be
effected in accordance with DTC's procedures, and will be settled in
immediately available funds. Transfers between Indirect Participants (other
than Indirect Participants who hold an interest in the Notes through
Euroclear or CEDEL) who hold an interest through a Direct Participant will be
effected in accordance with the procedures of such Direct Participant but
generally will settle in immediately available funds. Transfers between and
among Indirect Participants who hold interests in the Notes through Euroclear
and CEDEL will be effected in the ordinary way in accordance with their
respective rules and operating procedures.
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Subject to compliance with the transfer restrictions applicable to the
Notes described herein, cross-market transfers between Direct Participants in
DTC, on the one hand, and Indirect Participants who hold interests in the
exchange notes through Euroclear or CEDEL, on the other hand, will be
effected by Euroclear's or CEDEL's respective Nominee through DTC in
accordance with DTC's rules on behalf of Euroclear or CEDEL; HOWEVER,
delivery of instructions relating to crossmarket transactions must be made
directly to Euroclear or CEDEL, as the case may be, by the counterparty in
accordance with the rules and procedures of Euroclear or CEDEL and within
their established deadlines (Brussels time for Euroclear and UK time for
CEDEL). Indirect Participants who hold interest in the exchange notes through
Euroclear and CEDEL may not deliver instructions directly to Euroclear's or
CEDEL's Nominee. Euroclear or CEDEL will, if the transaction meets its
settlement requirements, deliver instructions to its respective Nominee to
deliver or receive interests on Euroclear's or CEDEL's behalf in the relevant
Global Exchange Note in DTC, and make or receive payment in accordance with
normal procedures for same-day fund settlement applicable to DTC.
Because of time zone differences, the securities accounts of an Indirect
Participant who holds an interest in the exchange notes through Euroclear or
CEDEL purchasing an interest in a Global Exchange Note from a Direct
Participant in DTC will be credited, and any such crediting will be reported
to Euroclear or CEDEL during the European business day immediately following
the settlement date of DTC in New York. Although recorded in DTC's accounting
records as of DTC's settlement date in New York, Euroclear and CEDEL
customers will not have access to the cash amount credited to their accounts
as a result of a sale of an interest in a Global Exchange Note to a DTC
Participant until the European business day for Euroclear or CEDEL
immediately following DTC's settlement date.
DTC has advised the Company that it will take any action permitted to be
taken by a holder of Notes only at the direction of one or more Direct
Participants to whose account interests in the Global Exchange Notes are
credited and only in respect of such portion of the aggregate principal
amount of the Notes of a series as to which such Direct Participant or Direct
Participants has or have given direction.
Although DTC, Euroclear and CEDEL have agreed to the foregoing
procedures to facilitate transfers of interests in the Global Exchange Notes
among Direct Participants, including Euroclear and CEDEL, they are under no
obligation to perform or to continue to perform such procedures, and such
procedures may be discontinued at any time. None of the Company, the
Guarantors, the Initial Purchasers or the Trustee shall have any
responsibility for the performance by DTC, Euroclear or CEDEL or their
respective Direct and Indirect Participants of their respective obligations
under the rules and procedures governing any of their operations.
The information in this section concerning DTC, Euroclear and CEDEL and
their book-entry systems has been obtained from sources that the Company
believes to be reliable, but the Company takes no responsibility for the
accuracy thereof.
TRANSFER OF INTERESTS IN GLOBAL EXCHANGE NOTES FOR CERTIFICATED NOTES
An entire Global Exchange Note may be exchanged for definitive Notes of a
series in registered, certificated form without interest coupons (Certificated
Notes) if (i) DTC (x) notifies the Company that it is unwilling or unable to
continue as depositary for the Global Exchange Notes and the Company thereupon
fails to appoint a successor depositary within 90 days or (y) has ceased to be a
clearing agency registered under the Exchange Act, (ii) the Company, at its
option, notifies the Trustee in writing that it elects to cause the issuance of
Certificated Notes or (iii) there shall have occurred and be continuing to occur
a Default or an Event of Default with respect to the Notes of such series. In
any such case, the Company will notify the Trustee in writing that, upon
surrender by the Direct and Indirect Participants of
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their interest in such Global Note, Certificated Notes will be issued to each
person that such Direct and Indirect Participants and DTC identify as being the
beneficial owner of the related Notes.
Beneficial interests in Global Notes held by any Direct or Indirect
Participant may be exchanged for Certificated Notes upon request to DTC, on
behalf of such Direct Participant (for itself or on behalf of an Indirect
Participant), to the Trustee in accordance with customary DTC procedures.
Certificated Notes delivered in exchange for any beneficial interest in any
Global Note will be registered in the names, and issued in any approved
denominations, requested by DTC on behalf of such Direct or Indirect
Participants (in accordance with DTC's customary procedures).
Neither the Company, the Guarantors nor the Trustee will be liable for any
delay by the holder of the Global Notes or DTC in identifying the beneficial
owners of Notes, and the Company and the Trustee may conclusively rely on, and
will be protected in relying on, instructions from the holder of the Global Note
or DTC for all purposes.
SAME DAY SETTLEMENT AND PAYMENT
Each Indenture requires that payments in respect of the Notes
represented by the Global Exchange Notes (including principal, premium, if
any, interest and Liquidated Damages, if any) be made by wire transfer of
immediately available same day funds to the accounts specified by the holder
of interests in such Global Exchange Notes. With respect to Certificated
Notes, the Company will make all payments of principal, premium, if any,
interest and Liquidated Damages, if any, by wire transfer of immediately
available same day funds to the accounts specified by the holders thereof or,
if no such account is specified, by mailing a check to each such holder's
registered address. The Company expects that secondary trading in the
Certificated Notes will also be settled in immediately available funds.
ADDITIONAL INFORMATION
Anyone who receives this prospectus may obtain a copy of the applicable
Indenture without charge by writing to the Company, 5701 South Sante Fe Drive,
Littleton, Colorado 80120, attention David K. Moskowitz, facsimile
(303) 723-1699.
REGISTRATION RIGHTS; LIQUIDATED DAMAGES
THE COMPANY AND THE GUARANTORS ARE MAKING THE EXCHANGE OFFER TO COMPLY WITH
THEIR OBLIGATIONS UNDER THE REGISTRATION RIGHTS AGREEMENTS TO REGISTER THE
EXCHANGE OF EXCHANGE NOTES FOR THE OLD NOTES. IN THE REGISTRATION RIGHTS
AGREEMENTS, THE COMPANY AND THE GUARANTORS ALSO AGREED UNDER CERTAIN
CIRCUMSTANCES TO FILE A SHELF REGISTRATION STATEMENT TO REGISTER THE RESALE OF
CERTAIN OLD NOTES AND EXCHANGE NOTES.
The Company, the guarantors and the initial purchasers entered into the
registration rights agreements on January 25, 1999. In the registration rights
agreement relating to each series of notes, the Company and guarantors agreed to
file the exchange offer registration statement relating to such issue with the
SEC within 90 days of the closing date of the initial sale of the notes to the
initial purchasers, and use their respective best efforts to have it then
declared effective at the earliest possible time. The Company and the guarantors
also agreed to use their best efforts to cause that exchange offer registration
statement to be effective continuously, to keep each exchange offer open for a
period of not less than 20 business days and cause each exchange offer to be
consummated no later than the 210th day after that closing date. Pursuant to
the exchange offer, certain holders of notes which constitute "transfer
restricted securities" will be allowed to exchange their transfer restricted
securities for registered exchange notes. To participate in an exchange offer,
each holder must represent that it is not an affiliate of the Company,
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it is not engaged in, and does not intend to engage in, and has no arrangement
or understanding with any person to participate in, a distribution of the
exchange notes that are issued in the exchange offer, and that it is acquiring
the exchange notes in such exchange offer in its ordinary course of business.
If: (i) the Company is not permitted to file the exchange offer
registration statement or permitted to consummate the exchange offer because
the exchange offer is not permitted by applicable law or SEC policy or (ii)
any holder of transfer restricted securities notifies the Company within the
specified time period that: (A) it is prohibited by law or SEC policy from
participating in the exchange offer; (B) it may not resell the exchange notes
acquired by it in the exchange offer to the public without delivering a
prospectus and the prospectus contained in the exchange offer registration
statement is not appropriate or available for such resales; or (C) that it is
a broker-dealer and owns old notes acquired directly from the Company or an
affiliate of the Company, the Company and the guarantors will file with the
SEC a shelf registration statement to cover resales of the old notes by the
holders thereof who satisfy certain conditions relating to the provisions of
information in connection with the shelf registration statement. The Company
and the guarantors will use their best efforts to cause the applicable
registration statement to be declared effective as promptly as possible by
the SEC. For purposes of the foregoing, "transfer restricted securities"
means each note until the earliest of: (i) the date on which such note has
been exchanged in the exchange offer and is entitled to be resold to the
public by the holder thereof without complying with the prospectus delivery
requirements of the Securities Act; (ii) the date on which such exchange note
is sold by a broker-dealer pursuant to the "Plan of Distribution" herein
(including delivery of this prospectus); (iii) the date on which such old
note has been effectively registered under the Securities Act and disposed of
in accordance with the shelf registration statement; or (iv) the date on
which such old note may be distributed to the public pursuant to Rule 144(k)
under the Securities Act.
Each registration rights agreement provides that the following events
will constitute a "registration default": (i) if the Company or the
guarantors fail to file an exchange offer registration statement with the SEC
on or prior to the 90th day after the closing date of the initial sale of the
notes to the initial purchasers, (ii) if the exchange offer registration
statement is not declared effective by the SEC on or prior to the 180th day
after that closing date, (iii) if the exchange offer is not consummated on or
before the 210th day after that closing date, (iv) if obligated to file the
shelf registration statement and the Company and the guarantors fail to file
the shelf registration statement with the SEC on or prior to the 90th day
after that closing date or the 30th day after such filing obligation arises,
(v) if obligated to file a shelf registration statement and the shelf
registration statement is not declared effective on or prior to the 90th day
after the obligation to file a shelf registration statement arises, or (vi)
if the exchange offer registration statement or the shelf registration
statement, as the case may be, is declared effective but thereafter ceases to
be effective or useable in connection with resales of the transfer restricted
securities, for such time of non-effectiveness or non-usability. If there is
a registration default, then the Company and the guarantors agree to pay to
each holder of transfer restricted securities affected thereby liquidated
damages in an amount equal to $0.05 per week per $1,000 in principal amount
of transfer restricted securities held by such holder for each week or
portion thereof that the registration default continues for the first 90-day
period immediately following the occurrence of that registration default. The
amount of the liquidated damages shall increase by an additional $0.05 per
week per $1,000 in principal amount of transfer restricted securities with
respect to each subsequent 90-day period until all registration defaults have
been cured or until the transfer restricted securities become freely
tradeable without registration under the Securities Act, up to a maximum
amount of liquidated damages of $0.30 per week per $1,000 in principal amount
of transfer restricted securities. The Company and the guarantors shall not
be required to pay liquidated damages for more than one of these registration
defaults at any given time. Following the cure of all of these registration
defaults, the accrual of liquidated damages will cease.
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All accrued liquidated damages are to be paid by the Company or the
guarantors to holders entitled thereto by wire transfer to the accounts
specified by them or by mailing checks to their registered address if no such
accounts have been specified.
Holders of notes are required to make certain representations to the
Company (as described in the registration rights agreements) in order to
participate in the exchange offer and are required to deliver information to
be used in connection with the shelf registration statement and to provide
comments on the shelf registration statement within the time periods set
forth in the registration rights agreements in order to have their notes
included in the shelf registration statement and benefit from the provisions
regarding liquidated damages set forth above.
CERTAIN DEFINITIONS
Set forth below are certain defined terms used in each Indenture.
Reference is made to the applicable Indenture for a full disclosure of all
such terms, as well as any other capitalized terms used herein for which no
definition is provided.
"ACCOUNTS RECEIVABLE SUBSIDIARY" means one Unrestricted Subsidiary of
the Company specifically designated as an Accounts Receivable Subsidiary for
the purpose of financing the accounts receivable of the Company, and provided
that any such designation shall not be deemed to prohibit the Company from
financing accounts receivable through any other entity, including, without
limitation, any other Unrestricted Subsidiary.
"ACCOUNTS RECEIVABLE SUBSIDIARY NOTES" means the notes to be issued by
the Accounts Receivable Subsidiary for the purchase of accounts receivable.
"ACQUIRED DEBT" means, with respect to any specified person,
Indebtedness of any other person existing at the time such other person
merges with or into or becomes a Subsidiary of such specified person, or
Indebtedness incurred by such person in connection with the acquisition of
assets, including Indebtedness incurred in connection with, or in
contemplation of, such other person merging with or into or becoming a
Subsidiary of such specified person or the acquisition of such assets, as the
case may be.
"ACQUIRED SUBSCRIBER" means a subscriber to a pay television service
provided by a pay television provider that is not an Affiliate of the Company
at the time the Company or one of its Restricted Subsidiaries purchases the
right to provide pay television service to such subscriber from such pay
television provider, whether directly or through the acquisition of the
entity providing pay television service to such subscriber.
"ACQUIRED SUBSCRIBER DEBT" means (i) Indebtedness the proceeds of which
are used to pay the purchase price for Acquired Subscribers or to acquire the
entity which has the right to provide pay television service to such Acquired
Subscribers or to acquire from such entity or an Affiliate of such entity
assets used or to be used in connection with such pay television business;
PROVIDED that such Indebtedness is incurred within three years after the date
of the acquisition of such Acquired Subscriber and (ii) Acquired Debt of any
such entity being acquired; PROVIDED that in no event shall the amount of
such Indebtedness and Acquired Debt for any Acquired Subscriber exceed the
sum of the actual purchase price (inclusive of such Acquired Debt) for such
Acquired Subscriber, such entity and such assets plus the cost of converting
such Acquired Subscriber to usage of a delivery format for pay television
service made available by the Company or any of its Restricted Subsidiaries.
"AFFILIATE" of any specified person means any other person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified person. For purposes of this
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definition, "control" (including, with correlative meanings, the terms
"controlling," "controlled by" and "under common control with"), as used with
respect to any person, shall mean the possession, directly or indirectly, of
the power to direct or cause the direction of the management or policies of
such person, whether through the ownership of voting securities, by agreement
or otherwise; PROVIDED, HOWEVER, that beneficial ownership of 10% or more of
the voting securities of a person shall be deemed to be control; PROVIDED
FURTHER that no individual, other than a director of ECC or the Company or an
officer of ECC or the Company with a policy making function, shall be deemed
an Affiliate of the Company or any of its Subsidiaries solely by reason of
such individual's employment, position or responsibilities by or with respect
to ECC, the Company or any of their respective Subsidiaries.
"CAPITAL LEASE OBLIGATION" means, as to any person, the obligations of
such person under a lease that are required to be classified and accounted
for as capital lease obligations under GAAP and, for purposes of this
definition, the amount of such obligations at the time any determination
thereof is to be made shall be the amount of the liability in respect of a
capital lease that would at such time be so required to be capitalized on a
balance sheet in accordance with GAAP.
"CAPITAL STOCK" means any and all shares, interests, participations,
rights or other equivalents (however designated) of corporate stock or
partnership or membership interests, whether common or preferred.
"CASH EQUIVALENTS" means: (a) United States dollars; (b) securities
issued or directly and fully guaranteed or insured by the United States
government or any agency or instrumentality thereof having maturities of not
more than six months from the date of acquisition; (c) certificates of
deposit and eurodollar time deposits with maturities of six months or less
from the date of acquisition, bankers' acceptances with maturities not
exceeding six months and overnight bank deposits, in each case with any
domestic commercial bank having capital and surplus in excess of $500
million; (d) repurchase obligations with a term of not more than seven days
for underlying securities of the types described in clauses (b) and (c)
entered into with any financial institution meeting the qualifications
specified in clause (c) above; (e) commercial paper rated P-1, A-1 or the
equivalent thereof by Moody's or S&P, respectively, and in each case maturing
within six months after the date of acquisition and (f) money market funds
offered by any domestic commercial or investment bank having capital and
surplus in excess of $500 million at least 95% of the assets of which
constitute Cash Equivalents of the kinds described in clauses (a) through (e)
of this definition.
"CHANGE OF CONTROL" means: (a) any transaction or series of transactions
(including, without limitation, a tender offer, merger or consolidation) the
result of which is that the Principal and his Related Parties or an entity
controlled by the Principal and his Related Parties (and not controlled by
any person other than the Principal or his Related Parties) (i) sell,
transfer or otherwise dispose of more than 50% of the total Equity Interests
in ECC beneficially owned (as defined in Rule 13(d)(3) under the Exchange Act
but without including any Equity Interests which may be deemed to be owned
solely by reason of the existence of any voting arrangements), by such
persons on the date of the Indenture (as adjusted for stock splits and
dividends and other distributions payable in Equity Interests), after giving
effect to the repurchase of the Series A Preferred Stock on or about the date
of the Indenture, or (ii) do not have the voting power to elect at least a
majority of the Board of Directors of ECC; (b) the first day on which a
majority of the members of the Board of Directors of ECC are not Continuing
Directors; or (c) any time that ECC shall cease to beneficially own 100% of
the Equity Interests of the Company.
"CONSOLIDATED CASH FLOW" means, with respect to any person for any
period, the Consolidated Net Income of such person for such period, plus, to
the extent deducted in computing Consolidated Net Income: (a) provision for
taxes based on income or profits; (b) Consolidated Interest Expense; (c)
depreciation and amortization (including amortization of goodwill and other
intangibles) of such
140
person for such period; and (d) any extraordinary loss and any net loss
realized in connection with any Asset Sale, in each case, on a consolidated
basis determined in accordance with GAAP, provided that Consolidated Cash
Flow shall not include interest income derived from the net proceeds of the
Offering.
"CONSOLIDATED INTEREST EXPENSE" means, with respect to any person for
any period, consolidated interest expense of such person for such period,
whether paid or accrued (including amortization of original issue discount
and deferred financing costs, non-cash interest payments and the interest
component of Capital Lease Obligations), on a consolidated basis determined
in accordance with GAAP; PROVIDED HOWEVER that with respect to the
calculation of the consolidated interest expense of the Company, the interest
expense of Unrestricted Subsidiaries shall be excluded.
"CONSOLIDATED NET INCOME" means, with respect to any person for any
period, the aggregate of the Net Income of such person and its Subsidiaries
for such period, on a consolidated basis, determined in accordance with GAAP;
PROVIDED, HOWEVER, that: (a) the Net Income of any person that is not a
Subsidiary or that is accounted for by the equity method of accounting shall
be included only to the extent of the amount of dividends or distributions
paid in cash to the referent person, in the case of a gain, or to the extent
of any contributions or other payments by the referent person, in the case of
a loss; (b) the Net Income of any person that is a Subsidiary that is not a
Wholly Owned Subsidiary (or, with respect to the calculation of the
Consolidated Net Income of the Company, a Wholly Owned Restricted Subsidiary)
shall be included only to the extent of the amount of dividends or
distributions paid in cash to the referent person; (c) the Net Income of any
person acquired in a pooling of interests transaction for any period prior to
the date of such acquisition shall be excluded; (d) the Net Income of any
Subsidiary of such person shall be excluded to the extent that the
declaration or payment of dividends or similar distributions is not at the
time permitted by operation of the terms of its charter or bylaws or any
other agreement, instrument, judgment, decree, order, statute, rule or
government regulation to which it is subject; and (e) the cumulative effect
of a change in accounting principles shall be excluded.
"CONSOLIDATED NET WORTH" means, with respect to any person, the sum of:
(a) the stockholders' equity of such person; plus (b) the amount reported on
such person's most recent balance sheet with respect to any series of
preferred stock (other than Disqualified Stock) that by its terms is not
entitled to the payment of dividends unless such dividends may be declared
and paid only out of net earnings in respect of the year of such declaration
and payment, but only to the extent of any cash received by such person upon
issuance of such preferred stock, less: (i) all write-ups (other than
write-ups resulting from foreign currency translations and write-ups of
tangible assets of a going concern business made within 12 months after the
acquisition of such business) subsequent to the date of the Indenture in the
book value of any asset owned by such person or a consolidated Subsidiary of
such person; and (ii) all unamortized debt discount and expense and
unamortized deferred charges, all of the foregoing determined in accordance
with GAAP.
"CONTINUING DIRECTOR" means, as of any date of determination, any member
of the Board of Directors of ECC who: (a) was a member of such Board of
Directors on the date of the Indenture; or (b) was nominated for election or
elected to such Board of Directors with the affirmative vote of a majority of
the Continuing Directors who were members of such Board at the time of such
nomination or election or was nominated for election or elected by the
Principal and his Related Parties.
"CREDIT AGREEMENT" means any one or more credit agreements (which may
include or consist of revolving credits) between the Company and one or more
banks or other financial institutions providing financing for the business of
the Company and the Company's Restricted Subsidiaries, provided that the
lenders party to the Credit Agreement may not be Affiliates of ECC, the
Company or their respective Subsidiaries and provided further that the
Guarantors may be guarantors under such agreements.
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"DBSC" means Direct Broadcasting Satellite Corporation, a Colorado
corporation.
"DEFAULT" means any event that is, or with the passage of time or the
giving of notice or both would be, an Event of Default.
"DEFERRED PAYMENTS" means Indebtedness to satellite construction or
launch contractors incurred after the date of the Indenture in connection
with the construction or launch of one or more satellites of the Company or
its Restricted Subsidiaries used by it in the businesses described in the
covenant "--Certain Covenants--Activities of the Company" in an amount not to
exceed at any one time outstanding in the aggregate $135 million.
"DNCC" means Dish Network Credit Corporation, a Colorado corporation.
"DISQUALIFIED STOCK" means any Capital Stock which, by its terms (or by
the terms of any security into which it is convertible or for which it is
exchangeable), or upon the happening of any event, matures or is mandatorily
redeemable, pursuant to a sinking fund obligation or otherwise, or redeemable
at the option of the holder thereof, in whole or in part, on or prior to date
on which the Notes mature; PROVIDED, HOWEVER, that any such Capital Stock may
require the Company of such Capital Stock to make an offer to purchase such
Capital Stock upon the occurrence of certain events if the terms of such
Capital Stock provide that such an offer may not be satisfied and the
purchase of such Capital Stock may not be consummated until the 91st day
after the Notes have been paid in full.
"ELIGIBLE INSTITUTION" means a commercial banking institution that has
combined capital and surplus of not less than $500 million or its equivalent in
foreign currency, whose debt is rated Investment Grade at the time as of which
any investment or rollover therein is made.
"EQUITY INTERESTS" means Capital Stock and all warrants, options or other
rights to acquire Capital Stock (but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock).
"ETC" means EchoStar Technologies Corporation, a Texas corporation.
"EXISTING INDEBTEDNESS" means the Notes and any other Indebtedness of the
Company and its Subsidiaries in existence on the date of the Indentures until
such amounts are repaid.
"GAAP" means United States generally accepted accounting principles set
forth in the opinions and pronouncements of the Accounting Principles Board of
the American Institute of Certified Public Accountants and statements and
pronouncements of the Financial Accounting Standards Board or in such other
statements by such other entity as may be approved by a significant segment of
the accounting profession of the U.S., which are applicable as of the date of
determination; PROVIDED that, except as otherwise specifically provided, all
calculations made for purposes of determining compliance with the terms of the
provisions of the Indenture shall utilize GAAP as in effect on the date of the
Indentures.
"GOVERNMENT SECURITIES" means direct obligations of, or obligations
guaranteed by, the United States of America for the payment of which guarantee
or obligations the full faith and credit of the United States is pledged.
"GUARANTEE" means a guarantee (other than by endorsement of negotiable
instruments for collection in the ordinary course of business), direct or
indirect, in any manner (including, without limitation, letters of credit and
reimbursement agreements in respect thereof), of all or any part of any
Indebtedness.
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"HEDGING OBLIGATIONS" means, with respect to any person, the obligations of
such person pursuant to any arrangement with any other person, whereby, directly
or indirectly, such person is entitled to receive from time to time periodic
payments calculated by applying either floating or a fixed rate of interest on a
stated notional amount in exchange for periodic payments made by such other
person calculated by applying a fixed or a floating rte of interest on the same
notional amount and shall include, without limitation, interest rate swaps,
caps, floors, collars and similar agreements designed to protect such person
against fluctuations in interest rates.
"INDEBTEDNESS" means, with respect to any person, any indebtedness of such
person, whether or not contingent, in respect of borrowed money or evidenced by
bonds, notes, debentures or similar instruments or letters of credit (or
reimbursement agreements in respect thereof) or representing the balance
deferred and unpaid of the purchase price of any property (including pursuant to
capital leases) or representing any Hedging Obligations, except any such balance
that constitutes an accrued expense or trade payable, if and to the extent any
of the foregoing (other than Hedging Obligations) would appear as a liability
upon a balance sheet of such person prepared in accordance with GAAP, and also
includes, to the extent not otherwise included, the amount of all obligations of
such person with respect to the redemption, repayment or other repurchase of any
Disqualified Stock or, with respect to any Subsidiary of such person, the
liquidation preference with respect to, any Preferred Equity Interests (but
excluding, in each case, any accrued dividends) as well as the guarantee of
items that would be included within this definition.
"INDEBTEDNESS TO CASH FLOW RATIO" means, with respect to any person, the
ratio of: (a) the Indebtedness of such person and its Subsidiaries (or, if such
person is the Company, of the Company and its Restricted Subsidiaries) as of the
end of the most recently ended fiscal quarter, plus the amount of any
Indebtedness incurred subsequent to the end of such fiscal quarter; to (b) such
person's Consolidated Cash Flow for the most recently ended four full fiscal
quarters for which internal financial statements are available immediately
preceding the date on which such event for which such calculation is being made
shall occur (the "Measurement Period"), PROVIDED, HOWEVER; that: (i) in making
such computation, Indebtedness shall include the total amount of funds
outstanding and available under any revolving credit facilities; and (ii) in the
event that such person or any of its Subsidiaries (or, if such person is the
Company, any of its Restricted Subsidiaries) consummates a material acquisition
or an Asset Sale or other disposition of assets subsequent to the commencement
of the Measurement Period but prior to the event for which the calculation of
the Indebtedness to Cash Flow Ratio is made, then the Indebtedness to Cash Flow
Ratio shall be calculated giving pro forma effect to such material acquisition
or Asset Sale or other disposition of assets, as if the same had occurred at the
beginning of the applicable period.
"INVESTMENT GRADE" means with respect to a security, that such security is
rated, by at least two nationally recognized statistical rating organizations,
in one of each such organization's four highest generic rating categories.
"INVESTMENTS" means, with respect to any person, all investments by such
person in other persons (including Affiliates) in the forms of loans
(including guarantees), advances or capital contributions (excluding
commission, travel and similar advances to officers and employees made in the
ordinary course of business), purchases or other acquisitions for
consideration of Indebtedness, Equity Interests or other securities and all
other items that are or would be classified as investments on a balance sheet
prepared in accordance with GAAP.
"LIEN" means, with respect to any asset, any mortgage, lien, pledge,
charge, security interest or encumbrance of any kind in respect of such
asset, whether or not filed, recorded or otherwise perfected under applicable
law (including any conditional sale or other title retention agreement, any
lease in the nature thereof, any option or other agreement to sell or give a
security interest in and any filing of or
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agreement to give any financing statement under the Uniform Commercial Code (or
equivalent status) of any jurisdiction).
"MARKETABLE SECURITIES" means: (a) Government Securities; (b) any
certificate of deposit maturing not more than 365 days after the date of
acquisition issued by, or time deposit of, an Eligible Institution;
(c) commercial paper maturing not more than 365 days after the date of
acquisition issued by a corporation (other than an Affiliate of the Company)
with an Investment Grade rating, at the time as of which any investment therein
is made, issued or offered by an Eligible Institution; (d) any bankers
acceptances or money market deposit accounts issued or offered by an Eligible
Institution; and (e) any fund investing exclusively in investments of the types
described in clauses (a) through (d) above.
"MAXIMUM SECURED AMOUNT" means at any time (i) in the event the Company at
such time has a rating or has received in writing an indicative rating on all
outstanding Notes of both "Ba3" from Moody's and "BB-" from S&P, an amount equal
to the greater of (x) the product of 1.25 times the Trailing Cash Flow Amount
and (y) $500 million and (ii) in the event the Company does not have both of
such ratings or indicative ratings at such time, $500 million.
"MEDIA 4" means Media4, Inc., a Georgia corporation.
"MOODY'S" means Moody's Investors Service, Inc.
"NAGRASTAR" means NagraStar LLC, a Colorado limited liability corporation.
"NET INCOME" means, with respect to any person, the net income (loss) of
such person, determined in accordance with GAAP, excluding, however, any gain
(but not loss), together with any related provision for taxes on such gain (but
not loss), realized in connection with any Asset Sale (including, without
limitation, dispositions pursuant to sale and leaseback transactions), and
excluding any extraordinary gain (but not loss), together with any related
provision for taxes on such extraordinary gain (but not loss) and excluding any
unusual gain (but not loss) relating to recovery of insurance proceeds on
satellites, together with any related provision for taxes on such extraordinary
gain (but not loss).
"NET PROCEEDS" means the aggregate cash proceeds received by the Company or
any of its Restricted Subsidiaries, as the case may be, in respect of any Asset
Sale, net of the direct costs relating to such Asset Sale (including, without
limitation, legal, accounting and investment banking fees, and sales
commissions) and any relocation expenses incurred as a result thereof, taxes
paid or payable as a result thereof (after taking into account any available tax
credits or deductions and any tax sharing arrangements), amounts required to be
applied to the repayment of Indebtedness secured by a Lien on the asset or
assets that are the subject of such Asset Sale and any reserve for adjustment in
respect of the sale price of such asset or assets. Net Proceeds shall exclude
any non-cash proceeds received from any Asset Sale, but shall include such
proceeds when and as converted by the Company or any Restricted Subsidiary to
cash.
"NON-CORE ASSETS" means: (1) all intangible authorizations, rights,
interests and other intangible assets related to all "western" DBS orbital
locations other than the 148 degree orbital slot (as the term "western" is used
by the FCC) held by the Company and/or any of its Subsidiaries at any time,
including without limitation the authorizations for 22 DBS frequencies at 175
degrees WL and ESC's permit for 11 unspecified western assignments; (2) all
intangible authorizations, rights, interests and other intangible assets related
to the FSS in the Ku-band, Ka-band and C-band held by the Company and/or any of
its Subsidiaries at any time, including without limitation the license of ESC
for a two satellite Ku-band system at 83 degrees and 121 degrees WL, the license
of ESC for a two satellite Ka-band system at 83 degrees WL and 121 degrees WL,
and the application of ESC to add C-band capabilities to a Ku-band
144
satellite authorized at 83 degrees WL; (3) all intangible authorizations,
rights, interests and other intangible assets related to the Mobile-Satellite
Service held by the Company and/or any of its Subsidiaries at any time,
including without limitation the license of E-SAT, Inc. for a low-earth orbit
MSS system, (4) all intangible authorizations, rights, interests and other
intangible assets related to local multi-point distribution service and (5) any
Subsidiary of the Company the assets of which consist solely of (i) any
combination of the foregoing and (ii) other assets to the extent permitted under
the provision described under the second paragraph of "--Certain
Covenants--Dispositions of ETC and Non-Core Assets."
"NON-RECOURSE INDEBTEDNESS" of any person means Indebtedness of such person
that: (i) is not guaranteed by any other person (except a Wholly Owned
Subsidiary of the referent person); (ii) is not recourse to and does not
obligate any other person (except a Wholly Owned Subsidiary of the referent
person) in any way; (iii) does not subject any property or assets of any other
person (except a Wholly Owned Subsidiary of the referent person), directly or
indirectly, contingently or otherwise, to the satisfaction thereof, and (iv) is
not required by GAAP to be reflected on the financial statements of any other
person (other than a Subsidiary of the referent person) prepared in accordance
with GAAP.
"OBLIGATIONS" means any principal, interest, penalties, fees,
indemnifications, reimbursements, damages and other liabilities payable under
the documentation governing any Indebtedness.
"PERMITTED INVESTMENTS" means: (a) Investments in the Company or in a
Wholly Owned Restricted Subsidiary of the Company that is a Guarantor, (b)
Investments in Cash Equivalents and Marketable Securities; and (c)
Investments by the Company or any Subsidiary of the Company in a person if,
as a result of such Investment: (i) such person becomes a Wholly Owned
Restricted Subsidiary of the Company and becomes a Guarantor, or (ii) such
person is merged, consolidated or amalgamated with or into, or transfers or
conveys substantially all of its assets to, or is liquidated into, the
Company or a Wholly Owned Restricted Subsidiary of the Company that is a
Guarantor; PROVIDED that if at any time a Restricted Subsidiary of the
Company shall cease to be a Subsidiary of the Company, the Company shall be
deemed to have made a Restricted Investment in the amount of its remaining
investment, if any, in such former Subsidiary.
"PERMITTED LIENS" means: (a) Liens securing the Notes and Liens securing
any Guarantee; (b) Liens securing the Deferred Payments; (c) Liens securing
any Indebtedness permitted under the covenant described under "--Certain
Covenants--Incurrence of Indebtedness"; PROVIDED that such Liens under this
clause (c) shall not secure Indebtedness in an amount exceeding the Maximum
Secured Amount at the time that such Lien is incurred; (d) Liens securing
Purchase Money Indebtedness, PROVIDED that such Indebtedness was permitted to
be incurred by the terms of the Indenture and such Liens do not extend to any
assets of the Company or its Restricted Subsidiaries other than the assets so
acquired; (e) Liens securing Indebtedness the proceeds of which are used to
develop, construct, launch or insure any satellites other than EchoStar I,
EchoStar II, EchoStar III, EchoStar IV or any permitted replacements of any
such satellites, PROVIDED that such Indebtedness was permitted to be incurred
by the terms of the Indenture and such Liens do not extend to any assets of
the Company or its Restricted Subsidiaries other than such satellites being
developed, constructed, launched or insured, and to the related licenses,
permits and construction, launch and TT&C contracts; (f) Liens on orbital
slots, licenses and other assets and rights of the Company, PROVIDED that
such orbital slots, licenses and other assets and rights relate solely to the
satellites referred to in clause (e) of this definition; (g) Liens on
property of a person existing at the time such person is merged into or
consolidated with the Company or any Restricted Subsidiary of the Company,
PROVIDED, that such Liens were not incurred in connection with, or in
contemplation of, such merger or consolidation, other than in the ordinary
course of business; (h) Liens on property of an Unrestricted Subsidiary at
the time that it is designated as a Restricted Subsidiary pursuant to the
definition of "Unrestricted Subsidiary," PROVIDED that such Liens were not
incurred in connection with, or
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contemplation of, such designation; (i) Liens on property existing at the time
of acquisition thereof by the Company or any Restricted Subsidiary of the
Company; PROVIDED that such Liens were not incurred in connection with, or in
contemplation of, such acquisition and do not extend to any assets of the
Company or any of its Restricted Subsidiaries other than the property so
acquired; (j) Liens to secure the performance of statutory obligations, surety
or appeal bonds or performance bonds, or landlords', carriers', warehousemen's,
mechanics', suppliers', materialmen's or other like Liens, in any case incurred
in the ordinary course of business and with respect to amounts not yet
delinquent or being contested in good faith by appropriate process of law, if a
reserve or other appropriate provision, if any, as is required by GAAP shall
have been made therefore; (k) Liens existing on the date of the Indentures;
(l) Liens for taxes, assessments or governmental charges or claims that are not
yet delinquent or that are being contested in good faith by appropriate
proceedings promptly instituted and diligently concluded; PROVIDED that any
reserve or other appropriate provision as shall be required in conformity with
GAAP shall have been made therefor; (m) Liens incurred in the ordinary course of
business of the Company or any Restricted Subsidiary of the Company (including,
without limitation, Liens securing Purchase Money Indebtedness) with respect to
obligations that do not exceed $10 million in principal amount in the aggregate
at any one time outstanding; (n) Liens securing Indebtedness in an amount not to
exceed $10 million incurred pursuant to clause (xi) of the second paragraph of
the covenant described under "Incurrence of Indebtedness;" (o) Liens on any
asset of the Company or a Guarantor securing Indebtedness in an amount not to
exceed $10 million; (p) Liens securing Indebtedness permitted under clause (12)
of the second paragraph of the provision described under "--Certain
Covenants--Incurrence of Indebtedness"; provided that such Liens shall not
extend to assets other than the assets that secure such Indebtedness being
refinanced; (q) any interest or title of a lessor under any Capital Lease
Obligation; PROVIDED that such Capital Lease Obligation is permitted under the
other provisions of the Indenture; (r) Liens not provided for in clauses
(a) through (q) above, securing Indebtedness incurred in compliance with the
terms of the Indentures provided that the Notes are secured by the assets
subject to such Liens on an equal and ratable basis or on a basis prior to such
Liens; PROVIDED that to the extent that such Lien secured Indebtedness that is
subordinated to the Notes, such Lien shall be subordinated to and be later in
priority than the Notes on the same basis and (s) extensions, renewals or
refundings of any Liens referred to in clauses (a) through (q) above, PROVIDED
that (i) any such extension, renewal or refunding does not extend to any assets
or secure any Indebtedness not securing or secured by the Liens being extended,
renewed or refinanced and (ii) any extension, renewal or refunding of a Lien
originally incurred pursuant to clause (c) above shall not secure Indebtedness
in an amount greater than the Maximum Secured Amount at the time of such
extension, renewal or refunding.
"PREFERRED EQUITY INTEREST", in any person, means an Equity Interest of any
class or classes (however designated) which is preferred as to the payment of
dividends or distributions, or as to the distribution of assets upon any
voluntary or involuntary liquidation or dissolution of such person, over Equity
Interests of any other class in such person.
"PRINCIPAL" means Charles W. Ergen.
"PURCHASE MONEY INDEBTEDNESS" means (i) indebtedness of the Company or any
Guarantor (including indebtedness that otherwise satisfies this clause (i) which
was incurred prior to the date the obligor thereunder became a Guarantor)
incurred (within 365 days of such purchase) to finance the purchase of any
assets (including the purchase of Equity Interests of persons that are not
Affiliates of the Company) of the Company or any Guarantor: (a) to the extent
the amount of Indebtedness thereunder does not exceed 100% of the purchase cost
of such assets; and (b) to the extent that no more than $20 million of such
Indebtedness at any one time outstanding is recourse to the Company or any of
its Restricted Subsidiaries or any of their respective assets, other than the
assets so purchased; or (ii) indebtedness of the Company or any Guarantor which
refinances indebtedness referred to in clause (i) of this definition, PROVIDED
that such refinancing satisfies subclauses (a) and (b) of such clause (i).
146
"RECEIVABLES TRUST" means a trust organized solely for the purpose of
securitizing the accounts receivable held by the Accounts Receivable Subsidiary
that (a) shall not engage in any business other than (i) the purchase of
accounts receivable or participation interests therein from the Accounts
Receivable Subsidiary and the servicing thereof, (ii) the issuance of and
distribution of payments with respect to the securities permitted to be issued
under clause (b) below and (iii) other activities incidental to the foregoing,
(b) shall not at any time incur Indebtedness or issue any securities, except
(i) certificates representing undivided interests in the trust issued to the
Accounts Receivable Subsidiary and (ii) debt securities issued in an arm's
length transaction for consideration solely in the form of cash and Cash
Equivalents, all of which (net of any issuance fees and expenses) shall promptly
be paid to the Accounts Receivable Subsidiary, and (c) shall distribute to the
Accounts Receivable Subsidiary as a distribution on the Accounts Receivable
Subsidiary's beneficial interest in the trust no less frequently than once every
six months all available cash and Cash Equivalents held by it, to the extent not
required for reasonable operating expenses or reserves therefor or to service
any securities issued pursuant to clause (b) above that are not held by the
Accounts Receivable Subsidiary.
"RECEIVER SUBSIDY" means a subsidy, rebate or other similar payment by
EchoStar or any of its Subsidiaries, in the ordinary course of business, to
subscribers, vendors or distributors, relating to an EchoStar Receiver System,
not to exceed the retail price of such EchoStar Receiver System, together with
the retail price of installation of such EchoStar Receiver System.
"RELATED PARTY" means, with respect to the Principal, (a) the spouse and
each immediate family member of the Principal and (b) each trust,
corporation, partnership or other entity of which the Principal beneficially
holds an 80% or more controlling interest.
"RESTRICTED INVESTMENT" means an Investment other than Permitted
Investments.
"RESTRICTED SUBSIDIARY" means any corporation, association or other
business entity of which more than 50% of the total voting power of shares of
Capital Stock entitled (without regard to the occurrence of any contingency)
to vote in the election of directors, managers or trustees thereof is at the
time owned or controlled, directly or indirectly, by the Company or one or
more Subsidiaries of the Company or a combination thereof, other than
Unrestricted Subsidiaries.
"S&P" means Standard & Poor's Rating Services.
"SATELLITE INSURANCE" means insurance providing coverage for a satellite
in an amount which is, together with cash, Cash Equivalents and Marketable
Securities segregated and reserved on the balance sheet of the Company, for
the duration of the insured period or until applied in accordance with the
covenant entitled "Maintenance of Insurance." For purposes of the Indenture,
the proceeds of any Satellite Insurance shall be deemed to include the amount
of cash, Cash Equivalents and Marketable Securities segregated and reserved
by the Company for purposes of the preceding sentence.
"SATELLITE RECEIVER" means any satellite receiver capable of receiving
programming from the EchoStar Dish Network.-SM-
"SERIES A CUMULATIVE PREFERRED STOCK" means the Series A Cumulative
Preferred Stock of ECC outstanding on the date of the Indentures.
"SKYVISTA" means SkyVista Corporation, a Colorado corporation.
"SUBSIDIARY" means, with respect to any person, any corporation,
association or other business entity of which more than 50% of the total
voting power of shares of Capital Stock entitled (without
147
regard to the occurrence of any contingency) to vote in the election of
directors, managers or trustees thereof is at the time owned or controlled,
directly or indirectly, by such person or one or more of the other
Subsidiaries of such person or a combination thereof. Notwithstanding the
foregoing, for purposes of the Indentures, until the consummation of the
Reorganization, DBSC shall be deemed to be a Subsidiary of the Company.
"TRAILING CASH FLOW AMOUNT" means the Consolidated Cash Flow of the
Company during the most recent four fiscal quarters of the Company for which
financial statements are available.
"UNRESTRICTED SUBSIDIARY" means; (A) E-Sat, Inc., EchoStar Real Estate
Corporation, EchoStar International (Mauritius) Ltd., EchoStar Manufacturing
and Distribution Pvt. Ltd. and Satrec Mauritius Ltd.; and (B) any Subsidiary
of the Company designated as an Unrestricted Subsidiary in a resolution of
the Board of Directors of the Company (a) no portion of the Indebtedness or
any other obligation (contingent or otherwise) of which, immediately after
such designation: (i) is guaranteed by the Company or any other Subsidiary of
the Company (other than another Unrestricted Subsidiary); (ii) is recourse to
or obligates the Company or any other Subsidiary of the Company (other than
another Unrestricted Subsidiary) in any way; or (iii) subjects any property
or asset of the Company or any other Subsidiary of the Company (other than
another Unrestricted Subsidiary), directly or indirectly, contingently or
otherwise, to satisfaction thereof; (b) with which neither the Company nor
any other Subsidiary of the Company (other than another Unrestricted
Subsidiary) has any contract, agreement, arrangement, understanding or is
subject to an obligation of any kind, written or oral, other than on terms no
less favorable to the Company or such other Subsidiary than those that might
be obtained at the time from persons who are not Affiliates of the Company;
and (c) with which neither the Company nor any other Subsidiary of the
Company (other than another Unrestricted Subsidiary) has any obligation: (i)
to subscribe for additional shares of Capital Stock or other equity interests
therein; or (ii) to maintain or preserve such Subsidiary's financial
condition or to cause such Subsidiary to achieve certain levels of operating
results; PROVIDED, HOWEVER, that none of the Company, ESC and Echosphere
Corporation may be designated as Unrestricted Subsidiaries. At any time after
the date of the Indentures that the Company designates an additional
Subsidiary (other than ETC or a Subsidiary that constitutes a Non-Core Asset)
as an Unrestricted Subsidiary, the Company will be deemed to have made a
Restricted Investment in an amount equal to the fair market value (as
determined in good faith by the Board of Directors of the Company evidenced
by a resolution of the Board of Directors of the Company and set forth in an
Officers' Certificate delivered to the Trustee no later than five business
days following January 1 and July 1 of each year and ten days following a
request from the Trustee, which certificate shall cover the six months
preceding such January 1, July 1 or date of request, as the case may be) of
such Subsidiary and to have incurred all Indebtedness of such Unrestricted
Subsidiary. An Unrestricted Subsidiary may be designated as a Restricted
Subsidiary of the Company if, at the time of such designation after giving
pro forma effect thereto, no Default or Event of Default shall have occurred
or be continuing.
"WEIGHTED AVERAGE LIFE TO MATURITY" means, when applied to any
Indebtedness at any date, the number of years obtained by dividing (a) the
then outstanding principal amount of such Indebtedness into (b) the total of
the product obtained by multiplying (i) the amount of each then remaining
installment, sinking fund, serial maturity or other required payments of
principal, including payment at final maturity, in respect thereof, by (ii)
the number of years (calculated to the nearest one-twelfth) that will elapse
between such date and the making of such payment.
"WHOLLY OWNED RESTRICTED SUBSIDIARY" means a Wholly Owned Subsidiary of
the Company that is a Restricted Subsidiary.
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"WHOLLY OWNED SUBSIDIARY" means, with respect to any person, any
Subsidiary all of the outstanding voting stock (other than directors'
qualifying shares) of which is owned by such person, directly or indirectly.
149
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
In this section we discuss the material United States federal income tax
consequences of participating in the exchange offer and owning and disposing
of exchange notes.
In this section we discuss only United States federal income tax
consequences to United States Holders (as defined below) that participate in
the exchange offer, and that hold old notes, and that will hold exchange
notes, as capital assets within the meaning of Section 1221 of the Internal
Revenue Code of 1986, as amended (the "Code"). We generally do not address
any tax considerations relevant to holders other than United States Holders
or to United States Holders that may be subject to special tax rules, such as
banks, insurance companies, dealers in securities, holders of 10% or more of
the voting stock of the Company, persons who "mark to market" their
securities, persons who have a "functional currency" other than the United
States dollar, or persons that will hold notes as a position in a "straddle"
for tax purposes or as part of a "synthetic security" or a "conversion
transaction" or other integrated investment consisting of notes and one or
more other investments.
The term "United States Holder" means a beneficial owner of an old note
or an exchange note that is:
* a citizen or resident of the United States;
* a corporation, partnership or other entity created or organized under
the laws of the United States, any state thereof or the District of
Columbia;
* a trust the administration of which is subject to the primary
supervision of a United States court and with respect to which one or
more United States persons have the authority to control all
substantial decisions; or
* an estate the income of which is subject to United States federal
income tax regardless of its source.
This section is based upon the Code, Treasury regulations promulgated
thereunder and rulings and judicial decisions now in effect. Those
authorities could change at any time, and any such change could be
retroactive. If that occurred, the tax consequences of participating in the
exchange offer and owning and disposing of exchange notes could differ from
the consequences described below.
THE EXCHANGE OFFER
If you exchange an old note for an exchange note in the exchange offer,
the exchange will not be a taxable transaction for United States federal
income tax purposes. Accordingly, you will not recognize any gain or loss
when you receive the exchange note, and you will be required to continue to
include interest on the exchange note in gross income as described below.
Your holding period for the exchange note will include your holding period
for the old note exchanged therefor, and your adjusted tax basis in the
exchange note will be the same as your adjusted tax basis in such old note,
in each case immediately before the exchange.
If the Internal Revenue Service ("IRS") disagreed and treated the
exchange of an old note for an exchange note in the exchange offer as a
taxable transaction, the United States federal income tax consequences to you
generally would be as described below under "Dispositions of Notes."
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INTEREST ON THE NOTES
Interest on the notes generally will be taxable to a holder as ordinary
income at the time it is received or accrued in accordance with the holder's
method of accounting for United States federal income tax purposes.
We are obligated to pay liquidated damages in the form of additional
interest in certain circumstances, as described under "Description of the
Notes--Registration Rights; Liquidated Damages" above. We believe, and
intend to take the position, that the possibility of payment of liquidated
damages should not cause the notes to be issued with original issue discount.
You should consult your own tax advisor regarding the possible payment of
liquidated damages.
MARKET DISCOUNT
If a holder purchased an old note for less than its stated redemption
price at maturity, the difference is treated as "market discount" for United
States federal income tax purposes if it exceeds a specified DE MINIMIS
amount. Under the market discount rules, when the holder disposes of the
exchange note received in exchange for such old note, the holder will have to
treat any gain as ordinary income to the extent that market discount has
accrued on the old note and the exchange note and the holder has not included
the market discount in income. In addition, if the holder incurred or
continued any indebtedness to purchase or carry the old note or exchange
note, the holder may have to defer the deduction of all or a portion of the
related interest expense until the exchange note matures or the holder
disposes of the exchange note.
Market discount will accrue ratably from the date the holder acquired
the old note to the date that the exchange note matures, unless the holder
elects to accrue it under a constant-yield method. A holder may elect to
include market discount in income currently as it accrues, either ratably or
under a constant-yield method. If the holder elects to do so, the rule
described above regarding deferral of interest deductions will not apply.
The election to include market discount in income currently applies to all
market discount obligations that the holder holds or acquires on or after the
first day of the first taxable year to which the election applies. The
holder may not revoke the election without the consent of the IRS.
AMORTIZABLE BOND PREMIUM
If a holder purchased an old note for more than its stated redemption
price at maturity, the holder will be treated as having purchased the old
note at a "premium" and may elect to amortize the premium over the remaining
term of the old note and the exchange note under a constant-yield method.
The amount amortized in any year will be treated as a reduction of the
holder's interest income from the exchange note. Premium on an old note and
an exchange note held by a United States Holder that does not make such an
election will decrease the gain or increase the loss otherwise recognized on
a disposition of the exchange note. The election to amortize premium under a
constant-yield method applies to all debt obligations that the holder holds
or acquires on or after the first day of the first taxable year to which the
election applies. The holder may not revoke the election without the consent
of the IRS.
DISPOSITIONS OF NOTES
Gain or loss recognized by a holder on a disposition (including a sale,
exchange or redemption) of an exchange note will generally equal the
difference between the amount realized by the holder on the disposition
(except to the extent that such amount realized is attributable to accrued
but unpaid interest
151
not previously included in income, which will be taxable as ordinary income)
and the holder's adjusted tax basis in the exchange note. A holder's
adjusted tax basis in an exchange note generally will equal the holder's cost
of the old note exchanged therefor, increased by any market discount that the
holder previously included in income. Except as described above with respect
to market discount, gain or loss recognized on a disposition of an exchange
note generally will be long-term capital gain or loss if, at the time of the
disposition, the exchange note has been held for more than one year. In
general, long-term capital gains of individuals are eligible for reduced
rates of United States federal income taxation. The deductibility of losses
is subject to limitations.
BACKUP WITHHOLDING AND INFORMATION REPORTING
In general, payments of interest on, and the proceeds from the sale,
redemption or other disposition of exchange notes (other than exchange notes
held by certain exempt persons, including most corporations and other persons
who, when required, demonstrate their exempt status) will be subject to
information reporting requirements. "Backup withholding" at a rate of 31%
may apply to such payments if the holder fails to furnish a correct taxpayer
identification number or otherwise fails to comply with all backup
withholding requirements.
The backup withholding tax is not an additional tax and may be credited
against a holder's regular United States federal income tax liability or
refunded by the IRS.
The payment of proceeds from the disposition of exchange notes to or
through the United States office of a broker will be subject to information
reporting and backup withholding rules unless the owner establishes an
exemption. Special rules may apply with respect to the payment of the
proceeds from the disposition of exchange notes to or through foreign offices
of certain brokers.
Treasury regulations that are generally effective for payments made
after December 31, 1999, subject to certain transition rules, modify in
certain respects the backup withholding and information reporting rules. In
general, these regulations do not significantly alter the substantive
requirements of these rules, but unify current procedures and forms and
clarify reliance standards. You should consult your own tax advisor
regarding these regulations.
THE FOREGOING DISCUSSION DOES NOT PURPORT TO BE COMPLETE, IS FOR GENERAL
INFORMATION PURPOSES ONLY, AND IS NOT TAX ADVICE. ACCORDINGLY, YOU SHOULD
CONSULT YOUR OWN TAX ADVISOR AS TO THE PARTICULAR TAX CONSEQUENCES TO YOU
RESULTING FROM PARTICIPATING IN THE EXCHANGE OFFER AND OWNING AND DISPOSING
OF EXCHANGE NOTES, INCLUDING THE APPLICABILITY AND EFFECT OF ANY STATE, LOCAL
OR FOREIGN INCOME TAX LAWS, AND ANY ESTATE, GIFT OR OTHER TAX LAWS, AND ANY
RECENT OR PROSPECTIVE CHANGES IN APPLICABLE TAX LAWS, AS WELL AS THE TAX
CONSEQUENCES OF NOT PARTICIPATING IN THE EXCHANGE OFFER.
152
UNITED STATES ERISA CONSIDERATIONS
ANY UNITED STATES EMPLOYEE BENEFIT PLAN THAT PROPOSES TO PURCHASE THE
NOTES SHOULD CONSULT WITH ITS COUNSEL WITH RESPECT TO THE POTENTIAL
CONSEQUENCES OF SUCH INVESTMENT UNDER THE FIDUCIARY RESPONSIBILITY PROVISIONS
OF THE UNITED STATES EMPLOYEE RETIREMENT INCOME SECURITY ACT OF 1974, AS
AMENDED ("ERISA") AND THE PROHIBITED TRANSACTION PROVISIONS OF ERISA AND THE
CODE.
ERISA and the Code impose certain requirements on employee benefit plans
and certain other retirement plans and arrangements, including individual
retirement accounts and annuities, that are subject to ERISA and/or the Code
(all of which are hereinafter referred to as "ERISA Plans") and on persons
who are fiduciaries with respect to such ERISA Plans. A person who exercises
discretionary authority or control with respect to the management or assets
of an ERISA Plan will be considered a fiduciary of the ERISA Plan under
ERISA. In accordance with ERISA's general fiduciary standards, before
investing in the Notes, an ERISA Plan fiduciary should determine whether such
an investment is permitted under the governing ERISA Plan instruments and is
appropriate for the ERISA Plan in view of its overall investment policy and
the composition and diversification of its portfolio. Other provisions of
ERISA and the Code prohibit certain transactions involving the assets of an
ERISA Plan and persons who have certain specified relationships to the ERISA
Plan ("parties in interest" within the meaning of ERISA or "disqualified
persons" within the meaning of the Code). Thus, an ERISA Plan fiduciary
considering an investment in the Notes should also consider whether such an
investment may constitute or give rise to a prohibited transaction under
ERISA or the Code and whether an administrative exemption may be applicable
to such investment.
The acquisition of the Notes by an ERISA Plan could be a prohibited
transaction if either ECC, an initial purchaser or any of their respective
affiliates (each, an "Offering Participant") are parties in interest or
disqualified persons with respect to the ERISA Plan. Any prohibited
transaction could be treated as exempt under ERISA and the Code if the Notes
were acquired pursuant to and in accordance with one or more "class
exemptions" issued by the United States Department of Labor ("DOL"), such as
Prohibited Transaction Class Exemption ("PTCE") 84-14 (an exemption for
certain transactions determined by an independent qualified professional
asset manager), PTCE 91-38 (an exemption for certain transactions involving
bank collective investment funds) or PTCE 90-1 (an exemption for certain
transactions involving insurance company pooled separate accounts). Prior to
acquiring the Notes in this offering, an ERISA Plan or fiduciary should
determine either that none of the Offering Participants is a party in
interest or disqualified person with respect to the ERISA Plan or that an
exemption from the prohibited transaction rules is available for such
acquisition.
An ERISA Plan fiduciary considering the purchase of the Notes should
consult its tax and/or legal advisors regarding ECC, the availability, if
any, of exemptive relief from any potential prohibited transaction and other
fiduciary issues and their potential consequences. Each purchaser acquiring
the Notes with the assets of an ERISA Plan with respect to which any Offering
Participant is a party in interest or a disqualified person shall be deemed
to have represented that a statutory or an administrative exemption from the
prohibited transaction rules under Section 406 of ERISA and Section 4975 of
the Code is applicable to such purchaser's acquisition of the Notes.
153
PLAN OF DISTRIBUTION
Based on interpretations by the Staff set forth in no-action letters
issued to third parties, including "Exxon Capital Holdings Corporation"
(available May 13, 1988), "Morgan Stanley & Co. Incorporated" (available June
5, 1991), "Mary Kay Cosmetics, Inc." (available June 5, 1991) and "Warnaco,
Inc." (available October 11, 1991), the Company believes that exchange notes
issued pursuant to the exchange offer in exchange for the old notes may be
offered for resale, resold and otherwise transferred by holders thereof
(other than any holder which is (i) an affiliate of the Company, (ii) a
broker-dealer who acquired old notes directly from the Company or an
affiliate thereof or (iii) a broker-dealer who acquired old notes as a result
of market-making or other trading activities) without compliance with the
registration and prospectus delivery provisions of the Securities Act,
provided that such exchange notes are acquired in the ordinary course of such
holders' business, and such holders are not engaged in, and do not intend to
engage in, and have no arrangement or understanding with any person to
participate in, a distribution of such exchange notes and that participating
broker-dealers receiving exchange notes in the exchange offer will be subject
to a prospectus delivery requirement with respect to resales of such exchange
notes. To date, the staff of the SEC has taken the position that
participating broker-dealers may fulfill their prospectus delivery
requirements with respect to transactions involving an exchange of securities
such as the exchange pursuant to the exchange offer (other than a resale of
an unsold allotment from the sale of the old notes to the initial purchasers)
with the prospectus contained in the registration statement relating to the
exchange offer. Pursuant to the registration rights agreements, the Company
has agreed to permit participating broker-dealers and other persons, if any,
subject to similar prospectus delivery requirements to use this prospectus in
connection with the resale of such exchange notes. The Company has agreed
that, for a period of one year after the consummation of the exchange offer,
it will make this prospectus, and any amendment or supplement to this
prospectus, available to any broker-dealer that requests such documents in
the letter of transmittal for the exchange offer. Each holder of the old
notes who wishes to exchange its old notes for exchange notes in the exchange
offer will be required to make certain representations to the company as set
forth in "The exchange offer." In addition, each holder who is a
broker-dealer and who receives exchange notes for its own account in exchange
for old notes that were acquired by it as a result of market-making
activities or other trading activities will be required to acknowledge that
it will deliver a prospectus in connection with any resale by it of such
exchange notes.
The Company will not receive any proceeds from any sale of exchange
notes by broker-dealers. exchange notes received by broker-dealers for their
own account pursuant to the exchange offer may be sold from time to time in
one or more transactions in the over-the-counter market, in negotiated
transactions, through the writing of options on the exchange notes or a
combination of such methods of resale, at market prices prevailing at the
time of resale, at prices related to such prevailing market prices or at
negotiated prices. Any such resale may be made directly to purchasers or to
or through brokers or dealers who may receive compensation in the form of
commissions or concessions from any such broker-dealer and/or the purchasers
of any such exchange notes. Any broker-dealer that resells exchange notes
that were received by it for its own account pursuant to the exchange offer
and any broker or dealer that participates in a distribution of such exchange
notes may be deemed to be an "underwriter" within the meaning of the
Securities Act and any profit on any such resale of exchange notes and any
commissions or concessions received by any such persons may be deemed to be
underwriting compensation under the Securities Act. The letter of
transmittal for the Exchange Offer states that by acknowledging that it will
deliver and by delivering a prospectus, a broker-dealer will not be deemed to
admit that it is an "underwriter" within the meaning of the Securities Act.
The Company has agreed to pay all expenses incidental to the exchange
offer other than commissions and concessions of any brokers or dealers and
will indemnify holders of the notes (including any broker-dealers) against
certain liabilities, including liabilities under the Securities Act, as set
forth in the registration rights agreements.
154
Following consummation of the exchange offer, we may, in our sole
discretion, commence one or more additional exchange offers to holders of old
notes who did not exchange their old notes for exchange notes in the exchange
offer, or terms that may differ from those contained in the registration
statement. This prospectus, as it may be amended or supplemented from time
to time, may be used by us in connection with any such additional exchange
offers. Such additional exchange offers will take place from time to time
until all outstanding old notes have been exchanged for exchange notes
pursuant to the terms and conditions herein.
LEGAL MATTERS
The validity of the exchange notes will be passed upon for us by
Winthrop, Stimson, Putnam & Roberts, New York, New York, as to matters of New
York law, and Friedlob Sanderson Raskin Paulson & Tourtillott, LLC, Denver,
Colorado, as to matters of Colorado law.
EXPERTS
The audited financial statements of the Company included in this
prospectus have been audited by Arthur Andersen LLP, independent public
accountants, as indicated in their report with respect thereto, and are
included herein in reliance upon the authority of such firm as experts in
giving such reports.
WHERE YOU CAN FIND MORE INFORMATION
ECC and the Company are subject to the informational requirements of the
Exchange Act and each of ECC, the Company, Dish and ESBC files reports, proxy
statements and other information with the SEC. The reports, proxy statements
and other information filed by the foregoing companies may be inspected and
copied at the public reference facilities maintained by the Commission at
Room 1024, 450 Fifth Street, N.W. Washington D.C. 20549, and at the
Commission's regional offices located at 7 World Trade Center, New York, New
York 10048, and 500 West Madison Street, Suite 1400, Chicago, Illinois 60661.
Copies of such material can be obtained at prescribed rates from the Public
Reference Section of the Commission at 450 Fifth Street, N.W., Washington,
D.C. 20549. ECC's Class A common stock is traded on the Nasdaq National
Market and reports and other information concerning ECC can also be inspected
at the Nasdaq National Market Exchange, 1735 K Street, N.W., Washington, D.C.
20546. Such material may also be accessed electronically by means of the
EDGAR database at the SEC's home page on the Internet at http://www.sec.gov.
We have filed with the SEC a Registration Statement on Form S-4 (the
"Registration Statement") with respect to our 9 1/4% Senior Notes due 2006
and our 9 3/8% Senior Notes due 2009. This prospectus, which is part of the
registration statement, omits certain information included in the
registration statement. Statements made in the prospectus as to the contents
of any contract, agreement or other document are not necessarily complete.
With respect to each such contract, agreement or other document filed as an
exhibit to the registration statement, we refer you to such exhibit for a
more complete description of the matter involved.
155
INDEX TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS
ECHOSTAR DBS CORPORATION AND AFFILIATES AND SUBSIDIARIES
PAGE
-----
Combined and Consolidated Financial Statements:
Report of Independent Public Accountants................................................................. F-2
Combined and Consolidated Balance Sheets at December 31, 1996 and 1997 and September 30, 1998............ F-3
Combined and Consolidated Statements of Operations for the years ended December 31, 1995, 1996 and 1997,
and for the nine months ended September 30, 1997 and 1998.............................................. F-4
Combined and Consolidated Statements of Stockholder's Equity for the years ended December 31, 1995, 1996
and 1997, and for the nine months ended September 30, 1998............................................. F-5
Combined and Consolidated Statements of Cash Flows for the years ended December 31, 1995, 1996 and 1997,
and for the nine months ended September 30, 1997 and 1998.............................................. F-6
Notes to Combined and Consolidated Financial Statements.................................................. F-7
F-1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To EchoStar DBS Corporation:
We have audited the accompanying combined and consolidated balance sheets of
EchoStar DBS Corporation (a Colorado corporation) and affiliates and
subsidiaries, as described in Note 1, as of December 31, 1996 and 1997, and the
related combined and consolidated statements of operations, changes in
stockholder's equity and cash flows for each of the three years in the period
ended December 31, 1997. These financial statements are the responsibility of
the Companies' management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the combined and consolidated financial position of
EchoStar DBS Corporation and affiliates and subsidiaries as of December 31, 1996
and 1997, and the combined and consolidated results of their operations and
their cash flows for each of the three years in the period ended December 31,
1997, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Denver, Colorado,
February 27, 1998.
F-2
ECHOSTAR DBS CORPORATION AND AFFILIATES AND SUBSIDIARIES
(A COMBINATION OF CERTAIN WHOLLY-OWNED SUBSIDIARIES OF
ECHOSTAR COMMUNICATIONS CORPORATION, AS DEFINED IN NOTE 1)
COMBINED AND CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
DECEMBER 31,
-------------------- SEPTEMBER 30,
1996 1997 1998
--------- --------- -------------
(UNAUDITED)
ASSETS
Current Assets:
Cash and cash equivalents................................................ $ 38,440 $ 62,059 $ 42,301
Marketable investment securities......................................... 18,807 3,906 1,999
Trade accounts receivable, net of allowance for uncollectible accounts of
$1,494, $1,347 and $3,530, respectively................................ 13,483 66,045 83,893
Inventories.............................................................. 72,767 22,993 81,974
Subscriber acquisition costs, net........................................ 68,129 18,819 --
Other current assets..................................................... 19,861 9,445 19,470
--------- --------- -------------
Total current assets....................................................... 231,487 183,267 229,637
Restricted Assets:
Insurance receivable (Note 4)............................................ -- -- 106,000
Satellite escrow......................................................... -- 73,233 8,410
Interest escrow.......................................................... -- 112,284 68,173
1996 Notes escrow........................................................ 47,491 -- --
Other restricted cash and marketable investment securities............... 31,450 2,245 --
--------- --------- -------------
Total restricted cash and marketable investment securities................. 78,941 187,762 182,583
Property and equipment, net................................................ 585,533 859,284 857,965
FCC authorizations, net.................................................... 72,500 99,220 103,937
Advances to affiliates, net................................................ 11,651 2,021 --
Deferred tax assets........................................................ 79,663 64,409 62,972
Other noncurrent assets.................................................... 25,770 35,811 30,328
--------- --------- -------------
Total assets......................................................... $1,085,545 $1,431,774 $ 1,467,422
--------- --------- -------------
--------- --------- -------------
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)
Current Liabilities:
Trade accounts payable................................................... $ 41,228 $ 69,036 $ 91,685
Deferred revenue......................................................... 104,095 122,215 113,048
Accrued expenses......................................................... 41,804 97,090 131,255
Advances from affiliates, net............................................ -- -- 29,352
Current portion of long-term debt........................................ 11,334 17,885 21,064
--------- --------- -------------
Total current liabilities.................................................. 198,461 306,226 386,404
Long-term obligations, net of current portion:
1994 Notes............................................................... 437,127 499,863 552,776
1996 Notes............................................................... 386,165 438,512 481,966
1997 Notes............................................................... -- 375,000 375,000
Mortgages and other notes payable, net of current portion................ 51,428 51,846 49,547
Notes payable to ECC, including accumulated interest..................... 12,000 54,597 58,497
Long-term deferred satellite services revenue and other long-term
liabilities............................................................ 7,037 19,500 27,954
--------- --------- -------------
Total long-term obligations, net of current portion........................ 893,757 1,439,318 1,545,740
--------- --------- -------------
Total liabilities.................................................... 1,092,218 1,745,544 1,932,144
Commitments and Contingencies (Note 10)
Stockholder's Equity (Deficit):
Common Stock, $.01 par value, 3,000 shares authorized, issued and
outstanding............................................................ -- -- --
Additional paid-in capital............................................... 108,841 125,164 145,164
Unrealized holding losses on available-for-sale securities, net of
deferred taxes......................................................... (12) (8) --
Accumulated deficit...................................................... (115,502) (438,926) (609,886)
--------- --------- -------------
Total stockholder's equity (deficit)....................................... (6,673) (313,770) (464,722)
--------- --------- -------------
Total liabilities and stockholder's equity (deficit)................. $1,085,545 $1,431,774 $ 1,467,422
--------- --------- -------------
--------- --------- -------------
See accompanying Notes to Combined and Consolidated Financial Statements.
F-3
ECHOSTAR DBS CORPORATION AND AFFILIATES AND SUBSIDIARIES
(A COMBINATION OF CERTAIN WHOLLY-OWNED SUBSIDIARIES
OF ECHOSTAR COMMUNICATIONS CORPORATION, AS DEFINED IN NOTE 1)
COMBINED AND CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------ ------------------------
1995 1996 1997 1997 1998
---------- ----------- ----------- ----------- -----------
(UNAUDITED)
REVENUE:
DISH Network:
Subscription television services..................... $ -- $ 49,650 $ 298,883 $ 192,986 $ 459,540
Other................................................ -- 8,238 42,925 32,942 11,096
---------- ----------- ----------- ----------- -----------
Total DISH Network..................................... -- 57,888 341,808 225,928 470,636
DTH equipment sales and integration services........... 35,816 77,390 90,263 37,410 190,787
Satellite services..................................... -- 5,822 11,135 7,879 15,805
C-band and other....................................... 112,704 56,003 32,696 25,243 19,716
---------- ----------- ----------- ----------- -----------
Total revenue............................................ 148,520 197,103 475,902 296,460 696,944
COSTS AND EXPENSES:
DISH Network Operating Expenses:
Subscriber-related expenses.......................... -- 22,840 143,529 97,262 210,717
Customer service center and other.................... -- 12,996 35,078 23,140 45,641
Satellite and transmission........................... -- 6,573 14,563 9,676 17,725
---------- ----------- ----------- ----------- -----------
Total DISH Network operating expenses.................. -- 42,409 193,170 130,078 274,083
Cost of sales--DTH equipment and integration
services............................................. 30,404 75,984 60,918 25,998 131,050
Cost of sales--C-band and other........................ 84,846 42,345 23,909 16,337 12,555
Marketing:
Subscriber promotion subsidies....................... -- 35,239 148,502 98,556 165,123
Advertising and other................................ 1,786 17,929 34,843 24,096 25,694
---------- ----------- ----------- ----------- -----------
Total marketing expenses............................... 1,786 53,168 183,345 122,652 190,817
General and administrative............................. 36,376 48,693 66,060 45,883 66,836
Amortization of subscriber acquisition costs........... -- 16,073 121,428 95,325 18,819
Depreciation and amortization.......................... 3,114 27,296 51,408 38,220 58,778
---------- ----------- ----------- ----------- -----------
Total costs and expenses................................. 156,526 305,968 700,238 474,493 752,938
---------- ----------- ----------- ----------- -----------
Operating loss........................................... (8,006) (108,865) (224,336) (178,033) (55,994)
Other Income (Expense):
Interest income........................................ 12,545 15,111 12,512 8,569 8,172
Interest expense, net of amounts capitalized........... (23,985) (62,430) (110,003) (79,056) (122,219)
Other.................................................. 894 (345) (1,451) (353) (699)
---------- ----------- ----------- ----------- -----------
Total other income (expense)............................. (10,546) (47,664) (98,942) (70,840) (114,746)
---------- ----------- ----------- ----------- -----------
Loss before income taxes................................. (18,552) (156,529) (323,278) (248,873) (170,740)
Income tax benefit (provision), net...................... 6,191 54,853 (146) (64) (220)
---------- ----------- ----------- ----------- -----------
Net loss................................................. $ (12,361) $ (101,676) $ (323,424) $ (248,937) $ (170,960)
---------- ----------- ----------- ----------- -----------
---------- ----------- ----------- ----------- -----------
See accompanying Notes to Combined and Consolidated Financial Statements.
F-4
ECHOSTAR DBS CORPORATION AND AFFILIATES AND SUBSIDIARIES
(A COMBINATION OF CERTAIN WHOLLY-OWNED SUBSIDIARIES OF
ECHOSTAR COMMUNICATIONS CORPORATION, AS DEFINED IN NOTE 1)
COMBINED AND CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
ACCUMULATED
DEFICIT AND
UNREALIZED
COMMON STOCK COMMON ADDITIONAL HOLDING
---------------------- PREFERRED STOCK PAID-IN GAINS
SHARES AMOUNT STOCK WARRANTS CAPITAL (LOSSES) TOTAL
--------- ----------- ----------- --------- ---------- ------------ -----------
(NOTES 1
AND 2)
Balance, December 31, 1994................ 33,544 $ 336 $ 15,991 $ 26,133 $ 62,197 $ (849) $ 103,808
Issuance of Common Stock................ 2 -- -- -- 2 -- 2
8% Series A Cumulative Preferred Stock
dividends (at $0.38 per share)........ -- -- 616 -- -- (616) --
Exercise of Common Stock Warrants....... 2,731 26 -- (25,419) 25,393 -- --
Common Stock Warrants exchanged for ECC
Warrants.............................. -- -- -- (714) 714 -- --
Launch bonuses funded by issuance of
ECC's Class A Common Stock............ -- -- -- -- 1,192 -- 1,192
Unrealized holding gains on
available-for-sale securities, net.... -- -- -- -- -- 251 251
Net loss................................ -- -- -- -- -- (12,361) (12,361)
--------- ----- ----------- --------- ---------- ------------ -----------
Balance, December 31, 1995................ 36,277 362 16,607 -- 89,498 (13,575) 92,892
Issuance of Common Stock (Note 1)....... 1 -- -- -- 2 -- 2
Reorganization of entities under common
control (Note 1)...................... (36,275) (362) (16,607) -- 16,969 -- --
Income tax benefit of deduction for
income tax purposes on exercise of
Class A Common Stock options.......... -- -- -- -- 2,372 -- 2,372
Unrealized holding losses on
available-for-sale securities, net.... -- -- -- -- -- (263) (263)
Net loss................................ -- -- -- -- -- (101,676) (101,676)
--------- ----- ----------- --------- ---------- ------------ -----------
Balance, December 31, 1996................ 3 -- -- -- 108,841 (115,514) (6,673)
Purchase price "pushed-down" to DBSC by
ECC (Note 1).......................... -- -- -- -- 16,323 -- 16,323
Unrealized holding gains on
available-for-sale securities, net.... -- -- -- -- -- 4 4
Net loss................................ -- -- -- -- -- (323,424) (323,424)
--------- ----- ----------- --------- ---------- ------------ -----------
Balance, December 31, 1997................ 3 -- -- -- 125,164 (438,934) (313,770)
Contribution of satellite asset
(unaudited) (Note 4).................. -- -- -- -- 20,000 -- 20,000
Unrealized holding gains on
available-for-sale securities, net
(unaudited)........................... -- -- -- -- -- 8 8
Net loss (unaudited).................... -- -- -- -- -- (170,960) (170,960)
--------- ----- ----------- --------- ---------- ------------ -----------
Balance, September 30, 1998 (unaudited)... 3 $ -- $ -- $ -- $ 145,164 $ (609,886) $ (464,722)
--------- ----- ----------- --------- ---------- ------------ -----------
--------- ----- ----------- --------- ---------- ------------ -----------
See accompanying Notes to Combined and Consolidated Financial Statements.
F-5
ECHOSTAR DBS CORPORATION AND AFFILIATES AND SUBSIDIARIES
(A COMBINATION OF CERTAIN WHOLLY-OWNED SUBSIDIARIES OF
ECHOSTAR COMMUNICATIONS CORPORATION, AS DEFINED IN NOTE 1)
COMBINED AND CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------- --------------------
1995 1996 1997 1997 1998
--------- --------- --------- --------- ---------
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss................................................... $ (12,361) $(101,676) $(323,424) $(248,937) $(170,960)
Adjustments to reconcile net loss to net cash flows from
operating activities:
Depreciation and amortization.......................... 3,114 27,296 51,408 38,220 58,778
Amortization of subscriber acquisition costs........... -- 16,073 121,428 95,325 18,819
Interest on notes payable to ECC added to principal.... -- -- 5,215 4,868 3,900
Deferred income tax benefit............................ (4,825) (50,515) (361) (365) --
Amortization of debt discount and deferred financing
costs................................................ 23,528 61,695 83,221 60,650 89,455
Change in reserve for excess and obsolete inventory.... 1,212 2,866 (1,823) 2,230 374
Change in long-term deferred satellite services revenue
and other long-term liabilities...................... -- 5,949 12,056 9,284 8,454
Other, net............................................. 608 536 403 -- --
Changes in current assets and current liabilities:
Trade accounts receivable, net....................... (1,536) (4,368) (52,562) (40,975) (17,848)
Inventories.......................................... (19,654) (36,864) 51,597 47,487 (59,355)
Subscriber acquisition costs......................... -- (84,202) (72,118) (70,395) --
Other current assets................................. (14,088) (3,118) 13,359 10,888 (8,592)
Trade accounts payable............................... 4,111 22,165 27,808 (4,501) 22,649
Deferred revenue..................................... (1,009) 103,511 18,120 1,650 (9,167)
Accrued expenses..................................... (988) 17,816 58,124 46,604 23,425
--------- --------- --------- --------- ---------
Net cash flows from operating activities................... (21,888) (22,836) (7,549) (47,967) (40,068)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of marketable investment securities.............. (3,004) (138,328) (36,586) (33,006) (3,969)
Sales of marketable investment securities.................. 33,816 119,730 51,513 20,573 5,868
Purchases of restricted marketable investment securities... (15,000) (21,100) (1,495) (1,495) --
Funds released from escrow and restricted cash and
marketable investment securities......................... 122,149 235,402 120,215 100,445 116,468
Offering proceeds and investment earnings placed in
escrow................................................... (9,589) (193,972) (227,561) (224,858) (5,269)
(Advances to) repayments from affiliates, net.............. -- (33,105) 9,976 7,231 --
Purchases of property and equipment........................ (133,555) (214,614) (221,750) (174,741) (133,807)
Payments received on convertible subordinated debentures
from SSET................................................ -- 6,445 834 -- 1,521
Proceeds from sale of investment in DBSC to ECC............ 4,210 -- -- -- --
Expenditures for FCC authorizations........................ (458) (55,420) -- -- --
Other...................................................... -- -- (1,225) (1,730) (121)
--------- --------- --------- --------- ---------
Net cash flows from investing activities................... (1,431) (294,962) (306,079) (307,581) (19,309)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of Common Stock..................... 2 2 -- -- --
Proceeds from (repayment of) note payable to ECC........... -- 12,000 (12,000) -- --
Net proceeds from issuance of 1996 Notes................... -- 336,916 -- -- --
Net proceeds from issuance of 1997 Notes................... -- -- 362,500 362,500 --
Advances from affiliates................................... 20,000 -- -- -- 51,689
Repayments of mortgage indebtedness and notes payable...... (238) (6,631) (13,253) (15,613) (12,070)
--------- --------- --------- --------- ---------
Net cash flows from financing activities................... 19,764 342,287 337,247 346,887 39,619
--------- --------- --------- --------- ---------
Net increase (decrease) in cash and cash equivalents....... (3,555) 24,489 23,619 (8,661) (19,758)
Cash and cash equivalents, beginning of year............... 17,506 13,951 38,440 38,440 62,059
--------- --------- --------- --------- ---------
Cash and cash equivalents, end of year..................... $ 13,951 $ 38,440 $ 62,059 $ 29,779 $ 42,301
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
See accompanying Notes to Combined and Consolidated Financial Statements.
F-6
ECHOSTAR DBS CORPORATION AND AFFILIATES AND SUBSIDIARIES
(A COMBINATION OF CERTAIN WHOLLY-OWNED SUBSIDIARIES OF ECHOSTAR COMMUNICATIONS
CORPORATION, AS DEFINED IN NOTE 1)
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF SEPTEMBER 30, 1998 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1997 AND SEPTEMBER 30, 1998 IS UNAUDITED)
1. ORGANIZATION AND BUSINESS ACTIVITIES
BASIS OF PRESENTATION
The accompanying combined and consolidated financial statements form
part of the Prospectus to exchange (the "Exchange Offer") the 9 1/4% Senior
Notes due 2006 (the "Old Seven Year Notes") and the 9 3/8% Senior Notes due
2009 (the "Old Ten Year Notes") that were issued in a transaction exempt from
registration under the Securities Act of 1933, as amended (collectively, the
"Old Notes") for publicly registered new 9 1/4% Senior Notes due 2006 (the
"Exchange Seven Year Notes") and the 9 3/8% Senior Notes due 2009 (the
"Exchange Ten Year Notes") with substantially identical terms (collectively
the "Exchange Notes" and together with the Old Notes, the "Notes"). The Old
Notes were issued by EchoStar DBS Corporation, a wholly-owned subsidiary of
EchoStar Communications Corporation ("ECC"), on January 25, 1999. Pending
approval from the Federal Communications Commission ("FCC") and successful
completion of the Tender Offers (as defined herein), ECC intends to merge two
of its direct wholly-owned subsidiaries, EchoStar Space Corporation ("Space")
and Direct Broadcasting Satellite Corporation ("DBSC"), into a subsidiary of
DBS Corp. The accompanying financial statements retroactively reflect the
consolidated historical results of DBS Corp combined with the historical
results of Space and DBSC. Substantially all of EchoStar's operating
activities are conducted by subsidiaries of DBS Corp. DBSC and Space's assets
consist principally of certain satellite and FCC authorization assets. There
are no significant operating activities conducted by either DBSC or Space.
(See Organizational History and Legal Structure below).
ECC is a publicly traded company on the Nasdaq National Market. As used
herein, "EchoStar" refers to ECC and its subsidiaries. For purposes of this
Prospectus, the "Company" refers to the consolidation of DBS Corp and its
subsidiaries and the combination with Space and DBSC.
DBS Corp was formed under Colorado law in January 1996 for the initial
purpose of participating in an FCC auction. On January 26, 1996, DBS Corp
submitted the winning bid of $52.3 million for 24 direct broadcast satellite
("DBS") frequencies at 148 DEG. West Longitude ("WL"). In June 1997, DBS Corp
completed an offering of 12 1/2% Senior Secured Notes due 2002 (the "1997
Notes"). Substantially all of the 1997 Notes were retired upon completion of
the Tender Offers (as defined herein). Prior to consummation of the 1997
Notes Offering, ECC contributed all of the outstanding capital stock (the
"Contribution") of EchoStar Satellite Broadcasting Corporation ("ESBC") to
DBS Corp. As a result of the Contribution, ESBC is a wholly-owned subsidiary
of DBS Corp. This transaction was accounted for as a reorganization of
entities under common control in which ESBC is treated as the predecessor of
DBS Corp. The accompanying financial statements retroactively reflect the
resulting structure and historical results of DBS Corp and its predecessors.
During 1994, EchoStar acquired approximately 40% of the outstanding common
stock of Direct Broadcasting Satellite Corporation ("Old DBSC"). Old DBSC's
principal assets included an FCC conditional satellite permit and specific
orbital slot assignments for a total of 22 DBS frequencies. Through December
1996, EchoStar advanced Old DBSC a total of $46 million in the form of notes
receivable to enable Old DBSC to make required payments under its satellite
(EchoStar III) construction contract. As of December 31, 1996, these notes
receivable totaled $49 million, including accrued interest of $3 million. On
January 8, 1997, EchoStar consummated the merger of Old DBSC with a wholly-owned
subsidiary of EchoStar, DBSC, as defined above. EchoStar issued approximately
650,000 shares of its Class A Common Stock to acquire the remaining 60% of Old
DBSC that it did not previously own. This transaction was accounted for as a
purchase and the excess of the purchase price over the fair value of Old DBSC's
tangible assets was allocated to Old DBSC's FCC authorizations (approximately
$16 million). Upon consummation of the merger, Old DBSC ceased to exist.
F-7
ECHOSTAR DBS CORPORATION AND AFFILIATES AND SUBSIDIARIES
(A COMBINATION OF CERTAIN WHOLLY-OWNED SUBSIDIARIES OF ECHOSTAR COMMUNICATIONS
CORPORATION, AS DEFINED IN NOTE 1)
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND BUSINESS ACTIVITIES (CONTINUED)
On December 23, 1998, EchoStar announced that it has commenced cash
tender offers (the "Tender Offers") to purchase any and all of the following
debt securities issued by its direct and indirect subsidiaries: the 1997
Notes; the 13 1/8% Senior Secured Discount Notes due 2004 (the "1996 Notes"),
issued by ESBC, and the 12 7/8% Senior Secured Discount Notes due 2004 (the
"1994 Notes"), issued by Dish, Ltd. The issues of notes described above are
referred to as "the Notes". The Tender Offers are part of a plan to refinance
existing indebtedness at more favorable interest rates and terms. The Tender
Offers expired at 12:00 midnight, Eastern Time on Friday, January 22, 1999,
unless extended.
EchoStar also has sent to all holders of ECC's issued and outstanding
12 1/8% Series B Senior Redeemable Exchangeable Preferred Stock due 2004 (the
"Series B Preferred") a notice to exchange all of the outstanding shares of
Series B Preferred into 12 1/8% Senior Exchange Notes (the "Exchange Notes") on
the terms and conditions set forth in the certificate of designation relating to
the Series B Preferred. The Exchange Notes were issued on January 4, 1999 and
EchoStar immediately commenced an offer to purchase any and all outstanding
Exchange Notes and solicited consents from the registered holders to amendments
to the indenture governing the Exchange Notes.
PRINCIPAL BUSINESS
The operations of EchoStar include three interrelated business units:
- THE DISH NETWORK--a direct broadcast satellite ("DBS") subscription
television service in the United States. As of September 30, 1998,
EchoStar had approximately 1.6 million DISH Network subscribers.
- ECHOSTAR TECHNOLOGIES CORPORATION ("TECHNOLOGY")--engaged in 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--engaged in the turn-key delivery of video, audio and
data services to business television customers and other satellite users.
These services may include satellite uplink services, satellite
transponder space usage, billing, customer service 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.
F-8
ECHOSTAR DBS CORPORATION AND AFFILIATES AND SUBSIDIARIES
(A COMBINATION OF CERTAIN WHOLLY-OWNED SUBSIDIARIES OF ECHOSTAR COMMUNICATIONS
CORPORATION, AS DEFINED IN NOTE 1)
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND BUSINESS ACTIVITIES (CONTINUED)
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.
ORGANIZATION AND LEGAL STRUCTURE
Certain companies principally owned and controlled by Mr. Charles W. Ergen
were reorganized in 1993 into Dish, Ltd. (together with its subsidiaries, "Dish,
Ltd."). In April 1995, ECC was formed to complete an initial public offering
(the "IPO") of its Class A Common Stock. Concurrently, Mr. Ergen exchanged all
of his then outstanding shares of Class B Common Stock and 8% Series A
Cumulative Preferred Stock of Dish, Ltd. for like shares of ECC (the
"Exchange"). In December 1995, ECC merged Dish, Ltd. with a wholly-owned
subsidiary of ECC (the "Merger").
The following table summarizes the organizational structure of EchoStar and
its principle subsidiaries as of December 31, 1997 and September 30, 1998:
REFERRED TO
LEGAL ENTITY HEREIN AS PARENT
- ------------------------------------------------------------------------------- ------------- -----------------
EchoStar Communications Corporation............................................ ECC Publicly owned
EchoStar DBS Corporation....................................................... DBS Corp ECC
EchoStar Space Corporation..................................................... Space ECC
Direct Broadcasting Satellite Corporation...................................... DBSC ECC
EchoStar Satellite Broadcasting Corporation.................................... ESBC DBS Corp
Dish, Ltd...................................................................... Dish, Ltd. ESBC
EchoStar Satellite Corporation................................................. ESC Dish, Ltd.
Echosphere Corporation......................................................... Echosphere Dish, Ltd.
Houston Tracker Systems, Inc., a Colorado Corporation formed in 1998........... HTS Dish, Ltd.
EchoStar Technologies Corporation (formerly HTS, a Texas Corporation).......... ETC Dish, Ltd.
DirectSat Corporation.......................................................... DirectSat Dish Ltd.
EchoStar International Corporation............................................. EIC Dish, Ltd.
SIGNIFICANT RISKS AND UNCERTAINTIES
COMPETITION. The subscription television industry is highly competitive.
EchoStar faces competition from companies offering video, audio, data,
programming and entertainment services. Many of these competitors have
substantially greater financial and marketing resources than EchoStar.
EchoStar's ability to effectively compete in the subscription television market
will depend on a number of factors, including competitive factors (such as the
introduction of new technologies or the entry of additional strong competitors),
the level of consumer demand for such services, the availability of EchoStar
Receiver Systems, and EchoStar's ability to obtain necessary regulatory changes
and approvals.
DEPENDENCE ON SINGLE RECEIVER MANUFACTURER. During 1997, EchoStar Receiver
Systems were manufactured exclusively by SCI Systems, Inc. ("SCI"), a
high-volume contract electronics
F-9
ECHOSTAR DBS CORPORATION AND AFFILIATES AND SUBSIDIARIES
(A COMBINATION OF CERTAIN WHOLLY-OWNED SUBSIDIARIES OF ECHOSTAR COMMUNICATIONS
CORPORATION, AS DEFINED IN NOTE 1)
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND BUSINESS ACTIVITIES (CONTINUED)
manufacturer. During February 1998, EchoStar executed two separate agreements
for the manufacture of digital set-top boxes in accordance with EchoStar's
specifications. There can be no assurance that either or both of Phillips
Electronics of North America Corporation or Vtech Communications Ltd. will be
able to successfully manufacture and deliver digital set-top boxes. EchoStar
currently is negotiating with additional brand-name consumer electronics
manufacturers to produce receivers for use with the DISH Network. No assurance
can be provided regarding the ultimate success of those negotiations. In the
event that EchoStar's manufacturers of digital set-top boxes are unable for any
reason to produce receivers in a quantity sufficient to meet its requirements,
EchoStar's ability to add additional subscribers, or its ability to satisfy
delivery obligations for receiver sales to international DTH providers, may be
materially impaired and its results of operations would be adversely affected.
TRANSACTIONS WITH MAJOR CUSTOMERS. Export sales to two customers,
ExpressVu, Inc. and Distribuidora de Television Digital S.A., together accounted
for approximately 16% and 24% of the Company's total revenue, during the year
ended December 31, 1997 and the nine months ended September 30, 1998,
respectively. Complete or partial loss of one or both of these customers could
have a material adverse effect on the Company's results of operations.
SUBSTANTIAL LEVERAGE. EchoStar is highly leveraged, which makes it
vulnerable to changes in general economic conditions. As of December 31, 1997,
EchoStar had outstanding long-term debt (including both the current and
long-term portion thereof) totaling approximately $1.4 billion. In addition,
EchoStar's long-term debt will increase by at least $266 million through March
2000, as interest on certain of its long-term debt accrues and is not payable in
cash. Substantially all of the assets of EchoStar and its subsidiaries are
pledged as collateral on its long-term debt. Further, the indentures associated
with EchoStar's long-term debt severely restrict its ability to incur additional
indebtedness. Thus, it may be difficult for EchoStar and its subsidiaries to
obtain additional debt financing if required or desired in order to implement
EchoStar's business strategy. Certain of EchoStar's subsidiaries also are
parties to other agreements which severely restrict their ability to obtain
additional debt financing for working capital, capital expenditures and general
corporate purposes.
EXPECTED OPERATING LOSSES. Due to the substantial expenditures required to
develop the EchoStar DBS System and introduce DISH Network service to consumers,
the Company has sustained significant losses in recent periods. The Company's
operating losses were $8 million, $109 million and $224 million for the years
ended December 31, 1995, 1996 and 1997, respectively. The Company had net losses
of $12 million, $102 million and $323 million during those same periods.
Improvement in the Company's results of operations is largely dependent upon the
Company's ability to expand its DISH Network subscription base, control
subscriber churn (i.e., the rate at which subscribers terminate service), and
effectively manage its operating and overhead costs. No assurance can be given
that the Company will be effective with regard to these matters. In addition,
the Company incurs significant costs to acquire DISH Network subscribers. The
high cost of obtaining new subscribers magnifies the negative effects of
subscriber churn. The Company anticipates that it will continue to experience
operating losses through at least 1999. There can be no assurance that such
operating losses will not continue beyond 1999 or
F-10
ECHOSTAR DBS CORPORATION AND AFFILIATES AND SUBSIDIARIES
(A COMBINATION OF CERTAIN WHOLLY-OWNED SUBSIDIARIES OF ECHOSTAR COMMUNICATIONS
CORPORATION, AS DEFINED IN NOTE 1)
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND BUSINESS ACTIVITIES (CONTINUED)
that the Company's operations will generate sufficient cash flows to pay its
obligations, including its obligations on its long-term debt, or to pay cash
dividends on its common stock.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF COMBINATION AND CONSOLIDATION
The accompanying financial statements present the combination of DBS Corp,
Space and DBSC, each direct wholly-owned subsidiaries of ECC. All significant
intercompany transactions between DBS Corp, Space and DBSC (consisting primarily
of capital advanced by DBS Corp to Space and DBSC) and between DBS Corp and its
subsidiaries have been eliminated. Advances to affiliates are recorded at cost
and represent the net amount of funds advanced to, or received from,
unconsolidated affiliates of DBS Corp.
The financial statements for 1995 present the consolidation of Dish, Ltd.
and its subsidiaries through the date of the Exchange and the consolidation of
ECC and its subsidiaries, thereafter. The Exchange and Merger was accounted for
as a reorganization of entities under common control and the historical cost
basis of assets and liabilities was not affected by the transaction. Effective
March 1994, the stockholders approved measures necessary to increase the
authorized capital stock of Dish, Ltd. to include 200 million shares of Class A
Common Stock, 100 million shares of Class B Common Stock, and 20 million shares
of Series A Convertible Preferred Stock and determined to split all outstanding
shares of common stock on the basis of approximately 4,296 to 1.
The Company accounts for investments in 50% or less owned entities using the
equity method. At December 31, 1996 and 1997, these investments were not
material to the Company's consolidated financial statements.
INTERIM FINANCIAL INFORMATION
The accompanying unaudited combined and consolidated financial statements as
of September 30, 1998 and for the nine months ended September 30, 1997 and 1998
have been prepared in accordance with generally accepted accounting principles
and with Article 10 of Regulation S-X for interim financial information. In the
opinion of management, all adjustments (consisting of normal recurring
adjustments) considered necessary for a fair presentation have been included in
the interim financial statements. All significant intercompany accounts and
transactions have been eliminated in consolidation. Operating results for the
nine months ended September 30, 1998 are not necessarily indicative of the
results that may be expected for the year ending December 31, 1998.
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.
F-11
ECHOSTAR DBS CORPORATION AND AFFILIATES AND SUBSIDIARIES
(A COMBINATION OF CERTAIN WHOLLY-OWNED SUBSIDIARIES OF ECHOSTAR COMMUNICATIONS
CORPORATION, AS DEFINED IN NOTE 1)
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FOREIGN CURRENCY TRANSACTION GAINS AND LOSSES
The functional currency of the Company's foreign subsidiaries is the U.S.
dollar because their sales and purchases are predominantly denominated in that
currency. Transactions denominated in currencies other than U.S. dollars are
recorded based on exchange rates at the time such transactions arise. Subsequent
changes in exchange rates result in transaction gains and losses which are
reflected in income as unrealized (based on period-end translation) or realized
(upon settlement of the transaction). Net transaction gains (losses) during
1995, 1996 and 1997 were not material to the Company's results of operations.
CASH AND CASH EQUIVALENTS
The Company considers all liquid investments purchased with an original
maturity of 90 days or less to be cash equivalents. Cash equivalents as of
December 31, 1996 and 1997 consist of money market funds, corporate notes and
commercial paper; such balances are stated at cost which equates to market
value.
F-12
ECHOSTAR DBS CORPORATION AND AFFILIATES AND SUBSIDIARIES
(A COMBINATION OF CERTAIN WHOLLY-OWNED SUBSIDIARIES OF ECHOSTAR COMMUNICATIONS
CORPORATION, AS DEFINED IN NOTE 1)
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
STATEMENTS OF CASH FLOWS DATA
The following presents the Company's supplemental cash flow statement
disclosure (in thousands):
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
-------------------------------- ---------------------
1995 1996 1997 1997 1998
--------- --------- ---------- ---------- ---------
(UNAUDITED)
Cash paid for interest................................... $ 461 $ 3,007 $ 5,953 $ 3,529 $ 28,116
Cash paid for income taxes............................... 3,203 383 209 -- --
Capitalized interest..................................... 25,763 31,818 43,169 27,861 21,619
8% Series A Cumulative Preferred Stock
dividends.............................................. 617 -- -- -- --
Accrued capital expenditures............................. 15,000 -- -- 1,000 --
Satellite launch payment for EchoStar II applied to
EchoStar I launch...................................... -- 15,000 -- -- --
Satellite vendor financing............................... 32,833 31,167 14,400 -- 12,950
Other notes payable...................................... -- -- 5,322 -- --
Contribution of satellite asset (Note 4)................. -- -- -- -- 20,000
The purchase price of DBSC was "pushed-down" by ECC to
DBSC as follows in the related purchase accounting:
Echo III satellite construction costs.................. -- -- 51,241 51,241 --
FCC authorizations..................................... -- -- 16,243 16,651 --
Notes payable to ECC, including accrued interest of
$3,382............................................... -- -- (49,382) (49,382) --
Trade accounts payable and accrued expenses............ -- -- (1,279) (1,687) --
Other notes payable.................................... -- -- (500) (500) --
Additional paid-in capital............................. -- -- (16,323) (16,323) --
MARKETABLE INVESTMENT SECURITIES AND RESTRICTED CASH AND MARKETABLE INVESTMENT
SECURITIES
As of December 31, 1996 and 1997, the Company has classified all marketable
investment securities as available-for-sale. Accordingly, these investments are
reflected at market value based on quoted market prices. Related unrealized
gains and losses are reported as a separate component of stockholder's equity,
net of related deferred income taxes. The specific identification method is used
to
F-13
ECHOSTAR DBS CORPORATION AND AFFILIATES AND SUBSIDIARIES
(A COMBINATION OF CERTAIN WHOLLY-OWNED SUBSIDIARIES OF ECHOSTAR COMMUNICATIONS
CORPORATION, AS DEFINED IN NOTE 1)
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
determine cost in computing realized gains and losses. The major components of
marketable investment securities as of December 31, 1996 and 1997 are as follows
(in thousands):
DECEMBER 31, 1996 DECEMBER 31, 1997
------------------------------------- -------------------------------------
UNREALIZED UNREALIZED
AMORTIZED HOLDING MARKET AMORTIZED HOLDING MARKET
COST LOSS VALUE COST GAIN VALUE
----------- ------------- --------- ----------- ------------- ---------
Commercial paper...................................... $ 16,065 $ -- $ 16,065 $ 3,898 $ 8 $ 3,906
Government bonds...................................... 2,540 -- 2,540 -- -- --
Mutual funds.......................................... 219 (17) 202 -- -- --
----------- ----- --------- ----------- ----- ---------
$ 18,824 $ (17) $ 18,807 $ 3,898 $ 8 $ 3,906
----------- ----- --------- ----------- ----- ---------
----------- ----- --------- ----------- ----- ---------
Restricted cash and marketable investment securities held in escrow
accounts, as reflected in the accompanying combined and consolidated balance
sheets, include cash restricted by the various indentures associated with
certain of the Company's debt financing transactions (see Note 5), plus
investment earnings thereon. Restricted cash and marketable investment
securities are invested in certain permitted debt and other marketable
investment securities until disbursed for the express purposes identified in the
applicable indenture.
As of December 31, 1996, other restricted cash included a total of $25
million held in two escrow accounts for the benefit of EchoStar Receiver System
manufacturers. These deposits were released from their respective escrow
accounts during May 1997. In addition, $6 million at December 31, 1996 was
restricted by an indenture to satisfy certain covenants pertaining to launch
insurance for EchoStar II. This covenant was satisfied during September 1997.
The major components of Restricted Cash and Marketable Investment Securities
are as follows (in thousands):
DECEMBER 31, 1996 DECEMBER 31, 1997
------------------------------------- -------------------------------------
UNREALIZED UNREALIZED
AMORTIZED HOLDING MARKET AMORTIZED HOLDING MARKET
COST GAIN VALUE COST LOSS VALUE
----------- ------------- --------- ---------- ------------- ----------
Commercial paper................................... $ 77,569 $ -- $ 77,569 $ 128,743 $ (9) $ 128,734
Corporate notes.................................... -- -- -- 38,093 -- 38,093
Government bonds................................... 368 -- 368 16,706 (11) 16,695
Certificates of deposit............................ 750 -- 750 2,245 -- 2,245
Accrued interest................................... 254 -- 254 1,995 -- 1,995
----------- ----- --------- ---------- ----- ----------
$ 78,941 $ -- $ 78,941 $ 187,782 $ (20) $ 187,762
----------- ----- --------- ---------- ----- ----------
----------- ----- --------- ---------- ----- ----------
Marketable investment securities and restricted cash and marketable
investment securities include debt securities of $176 million with contractual
maturities of one year or less and $11 million with contractual maturities of
between one and five years. Actual maturities may differ from contractual
maturities as a result of the Company's ability to sell these securities prior
to maturity.
F-14
ECHOSTAR DBS CORPORATION AND AFFILIATES AND SUBSIDIARIES
(A COMBINATION OF CERTAIN WHOLLY-OWNED SUBSIDIARIES OF ECHOSTAR COMMUNICATIONS
CORPORATION, AS DEFINED IN NOTE 1)
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair values for the Company's 1994 Notes, 1996 Notes, and 1997 Notes (as
defined, see Note 5) are based on quoted market prices. The fair values of the
Company's mortgages and other notes payable are estimated using discounted cash
flow analyses. The interest rates assumed in such discounted cash flow analyses
reflect interest rates currently being offered for loans with similar terms to
borrowers of similar credit quality. The following table summarizes the book and
fair values of the Company's debt facilities at December 31, 1997 (in
thousands):
BOOK VALUE FAIR VALUE
----------- ----------
1994 Notes........................................................... $ 499,863 $ 570,960
1996 Notes........................................................... 438,512 488,650
1997 Notes........................................................... 375,000 406,875
Mortgages and other notes payable.................................... 69,731 69,127
INVENTORIES
Inventories are stated at the lower of cost or market value. Cost is
determined using the first-in, first-out method. Proprietary products are
manufactured by outside suppliers to the Company's specifications. Manufactured
inventories include materials, labor and manufacturing overhead. Cost of other
inventories includes parts, contract manufacturers' delivered price, assembly
and testing labor, and related overhead, including handling and storage costs.
Inventories consist of the following (in thousands):
YEARS ENDED DECEMBER
31, SEPTEMBER 30,
-------------------- 1998
1996 1997 (UNAUDITED)
--------- --------- -------------
DBS receiver components.................................. $ 15,736 $ 12,506 $ 34,107
EchoStar Receiver Systems................................ 32,799 7,649 45,880
Consigned DBS receiver components........................ 23,525 3,122 2,749
Finished goods--analog DTH equipment..................... 4,091 2,116 2,505
Spare parts and other.................................... 2,279 1,440 947
Reserve for excess and obsolete inventory................ (5,663) (3,840) (4,214)
--------- --------- -------------
$ 72,767 $ 22,993 $ 81,974
--------- --------- -------------
--------- --------- -------------
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Cost includes interest
capitalized of $25 million, $26 million and $32 million during the years ended
December 31, 1995, 1996 and 1997, respectively, and $20 million and $16 million
during the nine-month periods ended September 30, 1997 and 1998, respectively.
The costs of satellites under construction are capitalized during the
construction phase, assuming the eventual successful launch and in-orbit
operation of the satellite. If a satellite were to fail
F-15
ECHOSTAR DBS CORPORATION AND AFFILIATES AND SUBSIDIARIES
(A COMBINATION OF CERTAIN WHOLLY-OWNED SUBSIDIARIES OF ECHOSTAR COMMUNICATIONS
CORPORATION, AS DEFINED IN NOTE 1)
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
during launch or while in-orbit, the resultant loss would be charged to expense
in the period such loss was incurred. The amount of any such loss would be
reduced to the extent of insurance proceeds received as a result of the launch
or in-orbit failure. Depreciation is recorded on a straight-line basis for
financial reporting purposes. Repair and maintenance costs are charged to
expense when incurred. Renewals and betterments are capitalized.
The Company reviews its long-lived assets and identifiable assets to be held
and used for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. For assets which
are held and used in operations, the asset would be impaired if the book value
of the asset exceeded the undiscounted future cash flows related to the asset.
For those assets which are to be disposed of, the assets would be impaired to
the extent the fair value does not exceed the book value. The Company considers
relevant cash flow, estimated future operating results, trends and other
available information including the fair value of frequency rights owned, in
assessing whether the carrying value of assets can be recovered.
FCC AUTHORIZATIONS
FCC authorizations are recorded at cost and amortized using the
straight-line method over a period of 40 years. Such amortization commences at
the time the related satellite becomes operational; capitalized costs are
written off at the time efforts to provide services are abandoned. FCC
authorizations include interest capitalized of $1 million, $6 million and $11
million during the years ended December 31, 1995, 1996 and 1997, respectively
and $8 million and $6 million during the nine-month periods ended September 30,
1997 and 1998, respectively.
REVENUE RECOGNITION
Revenue from the provision of DISH Network subscription television services
and satellite services is recognized as revenue in the period such services are
provided. Revenue from sales of digital set-top boxes and related accessories is
recognized upon shipment to customers. Revenue from the provision of integration
services is recognized as revenue in the period the services are performed.
SUBSCRIBER PROMOTION SUBSIDIES AND SUBSCRIBER ACQUISITION COSTS
During 1996, in order to stimulate subscriber growth, EchoStar made a
strategic decision to reduce the price charged to consumers for EchoStar
Receiver Systems. Accordingly, beginning in August 1996, EchoStar began selling
its EchoStar Receiver Systems below its manufactured cost (the "1996
Promotion"). The 1996 Promotion lowered the suggested retail price charged by
independent retailers for a standard EchoStar Receiver System to $199 (as
compared to the original average retail price prior to August 1996 of
approximately $499), conditioned upon the consumer's one-year prepaid
subscription to the DISH Network's America's Top 50 CD programming package for
approximately $300. The excess of EchoStar's aggregate costs (equipment,
programming and other) over proceeds received pursuant to the 1996 Promotion was
expensed ("subscriber promotion subsidies") upon shipment of the equipment.
Remaining costs were deferred ("subscriber acquisition costs") and amortized
over the term of the prepaid subscription (normally one year). Excluding
expected incremental subscriber revenues,
F-16
ECHOSTAR DBS CORPORATION AND AFFILIATES AND SUBSIDIARIES
(A COMBINATION OF CERTAIN WHOLLY-OWNED SUBSIDIARIES OF ECHOSTAR COMMUNICATIONS
CORPORATION, AS DEFINED IN NOTE 1)
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
such as from premium and Pay-Per-View services, this accounting treatment
results in revenue recognition over the initial prepaid period of service equal
to the sum of programming costs (which are recognized as service is provided)
and amortization of subscriber acquisition costs. During the period from August
1996 through May 1997, substantially all new subscriber activations resulted
from the 1996 Promotion.
The caption "DISH Network--Subscription Television Services" in the
accompanying statements of operations includes revenues from the 1996 Promotion
equal to the advertised subscription rates for related DISH Network services.
Incremental revenues realized from the 1996 Promotion are included in the
caption "DISH Network--Other" and amounted to approximately $5 million during
1996 and $39 million during 1997.
During June 1997, EchoStar introduced the "1997 Promotion." The 1997
Promotion maintained the suggested retail price for a standard EchoStar Receiver
System at $199, but eliminated the extended subscription commitment. Net
transaction costs associated with the 1997 Promotion are expensed as incurred
(reported as a component of subscriber promotion subsidies) in the accompanying
statements of operations. While some sales continue to be made under the terms
of the 1996 Promotion, the majority of new subscriber activations have resulted
from the 1997 Promotion since its introduction. As a result, beginning in
October 1997, net transaction costs resulting from the sale of EchoStar Receiver
Systems pursuant to the 1996 Promotion also are expensed as incurred.
Consequently, no additional subscriber acquisition costs will be deferred. The
unamortized balance of such costs ($19 million at December 31, 1997) was fully
amortized by September 1998.
DEFERRED DEBT ISSUANCE COSTS AND DEBT DISCOUNT
Costs of completing the 1994 Notes Offering, the 1996 Notes Offering and the
1997 Notes Offering (as defined, see Note 5) were deferred and are being
amortized to interest expense over their respective terms. The original issue
discounts related to the 1994 Notes and the 1996 Notes are being accreted to
interest expense so as to reflect a constant rate of interest on the accreted
balance of the 1994 Notes and the 1996 Notes.
DEFERRED REVENUE
Deferred revenue principally consists of prepayments received from
subscribers for DISH Network programming. Such amounts are recognized as revenue
in the period the programming is provided to the subscriber.
LONG-TERM DEFERRED SATELLITE SERVICES REVENUE
Long-term deferred satellite services revenue consists of advance payments
from certain content providers for carriage of their signal on the DISH Network.
Such amounts are deferred and recognized as revenue on a straight-line basis
over the related contract terms (up to ten years).
F-17
ECHOSTAR DBS CORPORATION AND AFFILIATES AND SUBSIDIARIES
(A COMBINATION OF CERTAIN WHOLLY-OWNED SUBSIDIARIES OF ECHOSTAR COMMUNICATIONS
CORPORATION, AS DEFINED IN NOTE 1)
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ACCRUED EXPENSES
Accrued expenses consist of the following (in thousands):
DECEMBER 31,
-------------------- SEPTEMBER 30,
1996 1997 1998
--------- --------- -------------
(UNAUDITED)
Accrued expenses......................................... $ 10,866 $ 34,940 $ 45,741
Accrued interest......................................... 1,108 24,385 12,239
Accrued programming...................................... 9,463 20,018 30,965
Accrued royalties........................................ 7,693 17,747 42,310
Deferred tax liabilities................................. 12,674 -- --
--------- --------- -------------
$ 41,804 $ 97,090 $ 131,255
--------- --------- -------------
--------- --------- -------------
ADVERTISING COSTS
Advertising costs, exclusive of subscriber promotion subsidies, are expensed
as incurred and totaled $2 million, $18 million and $35 million for the years
ended December 31, 1995, 1996 and 1997, respectively.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued FAS No. 130, "Reporting Comprehensive Income"
("FAS No. 130"), which establishes standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains and losses)
in a full set of general-purpose financial statements. The Company adopted 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 stockholder's equity.
The change in unrealized gain (loss) on available for sales securities is the
Company's only component of other comprehensive income and such amounts were
immaterial for the years ended December 31, 1995, 1996 and 1997. The components
of comprehensive loss, net of tax, are as follows (in thousands):
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------
1997 1998
----------- -----------
(UNAUDITED)
Net loss............................................................ $ (248,937) $ (170,960)
Change in unrealized gain (loss) on available-for-sale securities... 12 8
----------- -----------
Comprehensive loss.................................................. $ (248,925) $ (170,952)
----------- -----------
----------- -----------
In June 1997, the FASB issued FAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information" ("FAS No. 131") which establishes standards
for reporting information about
F-18
ECHOSTAR DBS CORPORATION AND AFFILIATES AND SUBSIDIARIES
(A COMBINATION OF CERTAIN WHOLLY-OWNED SUBSIDIARIES OF ECHOSTAR COMMUNICATIONS
CORPORATION, AS DEFINED IN NOTE 1)
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
operating segments in annual financial statements of public business enterprises
and requires that those enterprises report selected information about operating
segments in interim financial reports issued to shareholders and for related
disclosures about products and services, geographic areas, and major customers.
FAS No. 131 is effective for financial statements for periods beginning after
December 15, 1997. The adoption of FAS No. 131 may require additional disclosure
in the Company's financial statements.
RECLASSIFICATIONS
Certain amounts from the prior years combined and consolidated financial
statements have been reclassified to conform with the current year presentation.
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following (in thousands):
DECEMBER 31,
LIFE ---------------------- SEPTEMBER 30,
(IN YEARS) 1996 1997 1998
------------- ---------- ---------- -------------
(UNAUDITED)
EchoStar I..................................................... 12 $ 201,607 $ 201,607 $ 201,607
EchoStar II.................................................... 12 228,694 228,694 228,694
EchoStar III................................................... 12 -- -- 234,083
EchoStar IV (Note 4)........................................... 12 -- -- 104,636
Furniture, fixtures and equipment.............................. 2-12 72,932 92,170 155,208
Buildings and improvements..................................... 7-40 21,649 22,114 48,465
Tooling and other.............................................. 2 3,253 4,336 5,579
Land........................................................... -- 1,613 1,636 1,638
Vehicles....................................................... 7 1,323 1,321 1,288
Construction in progress....................................... -- 89,681 393,189 20,396
---------- ---------- -------------
Total property and equipment................................. 620,752 945,067 1,001,594
Accumulated depreciation....................................... (35,219) (85,783) (143,629)
---------- ---------- -------------
Property and equipment, net.................................. $ 585,533 $ 859,284 $ 857,965
---------- ---------- -------------
---------- ---------- -------------
F-19
ECHOSTAR DBS CORPORATION AND AFFILIATES AND SUBSIDIARIES
(A COMBINATION OF CERTAIN WHOLLY-OWNED SUBSIDIARIES OF ECHOSTAR COMMUNICATIONS
CORPORATION, AS DEFINED IN NOTE 1)
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. PROPERTY AND EQUIPMENT (CONTINUED)
Construction in progress consists of the following (in thousands):
DECEMBER 31,
--------------------- SEPTEMBER 30,
1996 1997 1998
--------- ---------- -------------
(UNAUDITED)
Progress amounts for satellite construction and capitalized interest:
EchoStar III.............................................................. $ 29,123 $ 234,083 $ --
EchoStar IV............................................................... 56,320 119,853 --
Other....................................................................... 4,238 39,253 20,396
--------- ---------- -------------
$ 89,681 $ 393,189 $ 20,396
--------- ---------- -------------
--------- ---------- -------------
EchoStar III, which was launched in October 1997, commenced commercial
operation in January 1998. EchoStar IV, which was launched in May 1998,
commenced commercial operation in August 1998.
4. ECHOSTAR IV DEVELOPMENTS (UNAUDITED)
As previously announced, the south solar array on EchoStar IV did not
properly deploy subsequent to the launch of the satellite on May 8, 1998. This
anomaly resulted in a reduction of power available to operate the satellite. In
addition, an unrelated anomaly discovered during the third quarter of 1998 has
resulted in the failure of six traveling-wave-tube amplifiers ("TWTAs"). The
satellite is equipped with a total of 44 TWTAs. Only 24 TWTAs are necessary to
fully utilize EchoStar's 24 frequencies at 148 DEG. West Longitude ("WL"), where
the satellite is located.
EchoStar is currently able to use a maximum of only 20 transponders as a
result of the solar array anomaly described above. The number of available
transponders will decrease over time, but based on existing data, EchoStar
expects that approximately 16 transponders will probably be available over the
entire expected 12 year life of the satellite, absent significant additional
TWTA failures. In September 1998, EchoStar filed a $219.3 million insurance
claim for a total constructive loss (as defined in the launch insurance policy)
related to EchoStar IV. However, if EchoStar were to receive $219.3 million for
a total constructive loss on the satellite, the insurers would obtain the sole
right to the benefits of salvage from EchoStar IV under the terms of the launch
insurance policy. While EchoStar believes it has suffered a total constructive
loss of EchoStar IV in accordance with that definition in the launch insurance
policy, EchoStar presently intends to negotiate a settlement with the insurers
that will compensate EchoStar for the reduced satellite transmission capacity
and allow EchoStar to retain title to the asset.
Space originally contracted for the launch of EchoStar IV. Accordingly, all
costs associated with the launch of EchoStar IV were recognized by Space. Funds
necessary to pay for the launch of EchoStar IV were advanced to Space by ECC
($20 million) and DBS Corp ($64 million). However, because DBS Corp is the named
insured under the terms of the EchoStar IV launch insurance policy, it will be
entitled to all proceeds from any insurance settlement. Consequently, in
September 1998, Space transferred its cost-basis in EchoStar IV to DBS Corp and
ECC in settlement of prior advances. ECC then made a $20 million capital
contribution of its basis in EchoStar IV to DBS Corp. As a result of
F-20
ECHOSTAR DBS CORPORATION AND AFFILIATES AND SUBSIDIARIES
(A COMBINATION OF CERTAIN WHOLLY-OWNED SUBSIDIARIES OF ECHOSTAR COMMUNICATIONS
CORPORATION, AS DEFINED IN NOTE 1)
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. ECHOSTAR IV DEVELOPMENTS (UNAUDITED) (CONTINUED)
these transactions (and prior to the impairment provision described below), all
costs associated with the construction, launch and insurance of EchoStar IV are
reflected on DBS Corp's balance sheet.
During the third quarter of 1998, EchoStar recorded a $106 million provision
for loss in connection with the estimated reduced operational capacity of
EchoStar IV. This loss provision represents EchoStar's present estimate of its
asset impairment attributable to lost transmission capacity on EchoStar IV
resulting from the anomalies described above. EchoStar also recorded a $106
million gain attributable to an anticipated insurance claim receivable. While
there can be no assurance as to the amount of the final insurance settlement,
EchoStar believes that it will receive insurance proceeds related to EchoStar IV
that will be sufficient to at least fully offset its asset impairment
attributable to the reduction in capacity sustained by EchoStar IV. While
EchoStar believes it has sustained a total constructive loss, insurers have
requested additional information and may contest the claim. To the extent that
it appears highly probable that EchoStar will receive insurance proceeds in
excess of the $106 million currently recorded and that no further provision for
loss is necessary, a gain will be recognized for the incremental amount in the
period that the amount of the final settlement can be reasonably estimated.
Likewise, if the satellite insurers obtain the right to salvage from EchoStar IV
by payment to EchoStar of the $219.3 million insured amount, EchoStar will
record an additional loss for the remaining carrying value of EchoStar IV.
Pursuant to the terms of one of its indentures, EchoStar is required to reinvest
all insurance proceeds received related to EchoStar IV in a replacement
satellite or, at EchoStar's option, offer to repurchase outstanding 12 1/2%
Senior Secured Notes due 2002 (the "1997 Notes"). EchoStar intends to procure a
replacement satellite on an accelerated basis.
5. LONG-TERM DEBT
1994 NOTES
In June 1994, Dish, Ltd. completed an offering of 12 7/8% Senior Secured
Discount Notes due June 1, 2004 (the "1994 Notes") and Common Stock Warrants
(the "Warrants") (collectively, the "1994 Notes Offering"). The 1994 Notes
Offering resulted in net proceeds to Dish, Ltd. of $323 million (including
amounts attributable to the issuance of the Warrants and after payment of
underwriting discounts and other issuance costs aggregating approximately $13
million).
The 1994 Notes bear interest at a rate of 12 7/8% computed on a semi-annual
bond equivalent basis. Interest on the 1994 Notes will not be payable in cash
prior to June 1, 1999, with the 1994 Notes accreting to a principal value at
stated maturity of $624 million by that date. Commencing December 1, 1999,
interest on the 1994 Notes will be payable in cash on December 1 and June 1 of
each year.
The 1994 Notes rank senior in right of payment to all subordinated
indebtedness of Dish, Ltd. and PARI PASSU in right of payment with all other
senior indebtedness of Dish, Ltd. The 1994 Notes are secured by liens on certain
assets of Dish, Ltd., including EchoStar I, EchoStar II and all other components
of the EchoStar DBS System owned by Dish, Ltd. and its subsidiaries. The 1994
Notes are further guaranteed by each material, direct subsidiary of Dish, Ltd.
Although the 1994 Notes are titled "Senior," Dish, Ltd. has not issued, and does
not have any current arrangements to issue, any significant indebtedness to
which the 1994 Notes would be senior. The 1996 Notes and the 1997 Notes are
effectively subordinated to the 1994 Notes and all other liabilities of Dish,
Ltd. and its subsidiaries.
F-21
ECHOSTAR DBS CORPORATION AND AFFILIATES AND SUBSIDIARIES
(A COMBINATION OF CERTAIN WHOLLY-OWNED SUBSIDIARIES OF ECHOSTAR COMMUNICATIONS
CORPORATION, AS DEFINED IN NOTE 1)
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. LONG-TERM DEBT (CONTINUED)
Furthermore, at December 31, 1997, the 1994 Notes were effectively subordinated
to approximately $9 million of mortgage indebtedness with respect to certain
assets of Dish, Ltd.'s subsidiaries, not including the EchoStar DBS System, and
rank PARI PASSU with the security interest of approximately $30 million of
satellite vendor financing.
Except under certain circumstances requiring prepayment premiums, and in
other limited circumstances, the 1994 Notes are not redeemable at Dish, Ltd.'s
option prior to June 1, 1999. Thereafter, the 1994 Notes will be subject to
redemption, at the option of Dish, Ltd., in whole or in part, at redemption
prices ranging from 104.828% during the year commencing June 1, 1999, to 100% of
principal value at stated maturity on or after June 1, 2002, together with
accrued and unpaid interest thereon to the redemption date. On each of June 1,
2002, and June 1, 2003, Dish, Ltd. will be required to redeem 25% of the
original aggregate principal amount of 1994 Notes at a redemption price equal to
100% of principal value at stated maturity thereof, together with accrued and
unpaid interest thereon to the redemption date. The remaining principal of the
1994 Notes matures on June 1, 2004.
In the event of a change of control and upon the occurrence of certain other
events, as described in the indenture related to the 1994 Notes (the "1994 Notes
Indenture"), Dish, Ltd. will be required to make an offer to each holder of 1994
Notes to repurchase all or any part of such holder's 1994 Notes at a purchase
price equal to 101% of the accreted value thereof on the date of purchase, if
prior to June 1, 1999, or 101% of the aggregate principal amount thereof,
together with accrued and unpaid interest thereon to the date of purchase, if on
or after June 1, 1999.
The 1994 Notes Indenture contains restrictive covenants that, among other
things, impose limitations on Dish, Ltd. and its subsidiaries with respect to
their ability to: (i) incur additional indebtedness; (ii) issue preferred stock;
(iii) apply the proceeds of certain asset sales; (iv) create, incur or assume
liens; (v) create dividend and other payment restrictions with respect to Dish,
Ltd.'s subsidiaries; (vi) merge, consolidate or sell assets; (vii) incur
subordinated or junior debt; and (viii) enter into transactions with affiliates.
In addition, Dish, Ltd., may pay dividends on its equity securities only if (1)
no default is continuing under the 1994 Notes Indenture; and (2) after giving
effect to such dividend, Dish, Ltd.'s ratio of total indebtedness to cash flow
(calculated in accordance with the 1994 Notes Indenture) would not exceed 4.0 to
1.0. Moreover, the aggregate amount of such dividends generally may not exceed
the sum of 50% of Dish, Ltd.'s consolidated net income (calculated in accordance
with the 1994 Notes Indenture) from April 1, 1994, plus 100% of the aggregate
net proceeds to Dish, Ltd. from the issuance and sale of certain equity
interests of Dish, Ltd. (including common stock).
1996 NOTES
In March 1996, ESBC, an indirect wholly-owned subsidiary of ECC, completed
an offering (the "1996 Notes Offering") of 13 1/8% Senior Secured Discount Notes
due 2004 (the "1996 Notes"). The 1996 Notes Offering resulted in net proceeds to
ESBC of approximately $337 million (after payment of underwriting discounts and
other issuance costs aggregating approximately $13 million). The 1996 Notes bear
interest at a rate of 13 1/8%, computed on a semi-annual bond equivalent basis.
Interest on the 1996 Notes will not be payable in cash prior to March 15, 2000,
with the 1996 Notes accreting to a
F-22
ECHOSTAR DBS CORPORATION AND AFFILIATES AND SUBSIDIARIES
(A COMBINATION OF CERTAIN WHOLLY-OWNED SUBSIDIARIES OF ECHOSTAR COMMUNICATIONS
CORPORATION, AS DEFINED IN NOTE 1)
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. LONG-TERM DEBT (CONTINUED)
principal amount at stated maturity of $580 million by that date. Commencing
September 15, 2000, interest on the 1996 Notes will be payable in cash on
September 15 and March 15 of each year. The 1996 Notes mature on March 15, 2004.
The 1996 Notes rank PARI PASSU in right of payment with all senior
indebtedness of ESBC. The 1996 Notes are guaranteed on a subordinated basis by
ECC, and are secured by liens on certain assets of ESBC, ECC and certain of
ECC's subsidiaries, including all of the outstanding capital stock of Dish,
Ltd., which currently owns substantially all of ECC's operating subsidiaries.
Although the 1996 Notes are titled "Senior:" (i) ESBC has not issued, and does
not have any current arrangements to issue, any significant indebtedness to
which the 1996 Notes would be senior; and (ii) the 1996 Notes are effectively
subordinated to all liabilities of ECC (except liabilities to general creditors)
and its other subsidiaries (except liabilities of ESBC and the 1997 Notes),
including liabilities to general creditors. As of December 31, 1997, EchoStar's
liabilities, exclusive of the 1996 Notes and the 1997 Notes, aggregated
approximately $882 million. Further, net cash flows generated by the assets and
operations of ESBC's subsidiaries will be available to satisfy the obligations
of the 1996 Notes only to the extent of allowable dividend payments by Dish,
Ltd. under the 1994 Notes Indenture.
Except under certain circumstances requiring prepayment premiums, and in
other limited circumstances, the 1996 Notes are not redeemable at ESBC's option
prior to March 15, 2000. Thereafter, the 1996 Notes will be subject to
redemption, at the option of ESBC, in whole or in part, at redemption prices
ranging from 106.5625% during the year commencing March 15, 2000, to 100% on or
after March 15, 2003 of principal amount at stated maturity, together with
accrued and unpaid interest thereon to the redemption date. The entire principal
balance of the 1996 Notes will mature on March 15, 2004.
The indenture related to the 1996 Notes (the "1996 Notes Indenture")
contains restrictive covenants that, among other things, impose limitations on
ESBC with respect to its ability to: (i) incur additional indebtedness; (ii)
issue preferred stock; (iii) sell assets and apply the proceeds thereof; (iv)
create, incur or assume liens; (v) create dividend and other payment
restrictions with respect to ESBC's subsidiaries; (vi) merge, consolidate or
sell substantially all of its assets; and (vii) enter into transactions with
affiliates. The 1996 Notes Indenture permits ESBC to pay dividends and make
other distributions to DBS Corp without restrictions.
In the event of a change of control, as described in the 1996 Notes
Indenture, ESBC will be required to make an offer to each holder of 1996 Notes
to repurchase all of such holder's 1996 Notes at a purchase price equal to 101%
of the accreted value thereof on the date of purchase, if prior to March 15,
2000, or 101% of the aggregate principal amount at stated maturity thereof,
together with accrued and unpaid interest thereon to the date of purchase, if on
or after March 15, 2000.
1997 NOTES
In June 1997, DBS Corp, consummated an offering (the "1997 Notes Offering")
of 12 1/2% Senior Secured Notes due 2002 (the "1997 Notes"). The 1997 Notes
Offering resulted in net proceeds to DBS Corp of approximately $363 million
(after payment of underwriting discounts and other issuance costs aggregating
approximately $12 million). Interest accrues on the 1997 Notes at a rate of
12 1/2% and is
F-23
ECHOSTAR DBS CORPORATION AND AFFILIATES AND SUBSIDIARIES
(A COMBINATION OF CERTAIN WHOLLY-OWNED SUBSIDIARIES OF ECHOSTAR COMMUNICATIONS
CORPORATION, AS DEFINED IN NOTE 1)
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. LONG-TERM DEBT (CONTINUED)
payable in cash semi-annually on January 1 and July 1 of each year, commencing
January 1, 1998. Approximately $109 million of the net proceeds of the 1997
Notes Offering were placed in the Interest Escrow to fund the first five
semi-annual interest payments (through January 1, 2000). Additionally,
approximately $112 million of the net proceeds of the 1997 Notes Offering were
placed in the Satellite Escrow to fund the construction, launch and insurance of
EchoStar IV. The 1997 Notes mature on July 1, 2002.
The 1997 Notes rank PARI PASSU in right of payment with all senior
indebtedness of DBS Corp. The 1997 Notes are guaranteed on a subordinated basis
by ECC (the "EchoStar Guarantee") and, contingent upon the occurrence of certain
events, will be guaranteed by ESBC, Dish, Ltd., and certain other subsidiaries
of DBS Corp and ECC. The 1997 Notes are secured by liens on the capital stock of
DBS Corp, EchoStar IV, and certain other assets of DBS Corp. Although the 1997
Notes are titled "Senior:" (i) DBS Corp has not issued, and does not have any
plans to issue, any indebtedness to which the 1997 Notes would be senior; and
(ii) the 1997 Notes are effectively subordinated to all liabilities of DBS
Corp's subsidiaries, including the 1994 Notes, the 1996 Notes, and liabilities
to general creditors (except to the extent that any subsidiary of DBS Corp may
guarantee the 1997 Notes) and the EchoStar Guarantee is subordinated to all
liabilities of ECC (except liabilities to general creditors). As of December 31,
1997, EchoStar's liabilities, exclusive of the 1997 Notes, aggregated
approximately $1.3 billion.
Except under certain circumstances requiring prepayment premiums, and in
other limited circumstances, the 1997 Notes are not redeemable at DBS Corp's
option prior to July 1, 2000. Thereafter, the 1997 Notes will be subject to
redemption, at the option of DBS Corp, in whole or in part, at redemption prices
decreasing from 106.25% during the year commencing July 1, 2000 to 100% on or
after July 1, 2002, together with accrued and unpaid interest thereon to the
redemption date.
The indenture related to the 1997 Notes (the "1997 Notes Indenture") and the
Certificate of Designation related to ECC's 12 1/8% Series B Senior Redeemable
Exchangeable Preferred Stock (the "Series B Preferred Stock") contain
restrictive covenants that, among other things, impose limitations on the
ability of DBS Corp to: (i) incur additional indebtedness; (ii) issue preferred
stock; (iii) apply the proceeds of certain asset sales; (iv) create, incur or
assume liens; (v) create dividend and other payment restrictions with respect to
DBS Corp's subsidiaries; (vi) merge, consolidate or sell assets; (vii) incur
subordinated or junior debt; and (viii) enter into transactions with affiliates.
In addition, DBS Corp may pay dividends on its equity securities only if: (1) no
default shall have occurred or is continuing under the 1997 Notes Indenture; and
(2) after giving effect to such dividend and the incurrence of any indebtedness
(the proceeds of which are used to finance the dividend), DBS Corps's ratio of
total indebtedness to cash flow (calculated in accordance with the 1997 Notes
Indenture) would not exceed 6.0 to 1.0. Moreover, the aggregate amount of such
dividends generally may not exceed the sum of the difference of cumulative
consolidated cash flow (calculated in accordance with the 1997 Notes Indenture)
minus 150% of consolidated interest expense of DBS Corp (calculated in
accordance with the 1997 Notes Indenture), in each case from July 1, 1997 plus
an amount equal to 100% of the aggregate net cash proceeds received by DBS Corp
and its subsidiaries from the issuance or sale of certain equity interests of
DBS Corp or EchoStar.
F-24
ECHOSTAR DBS CORPORATION AND AFFILIATES AND SUBSIDIARIES
(A COMBINATION OF CERTAIN WHOLLY-OWNED SUBSIDIARIES OF ECHOSTAR COMMUNICATIONS
CORPORATION, AS DEFINED IN NOTE 1)
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. LONG-TERM DEBT (CONTINUED)
In the event of a change of control, as defined in the 1997 Notes Indenture,
DBS Corp will be required to make an offer to repurchase all of the 1997 Notes
at a purchase price equal to 101% of the aggregate principal amount thereof,
together with accrued and unpaid interest thereon, to the date of repurchase.
MORTGAGES AND OTHER NOTES PAYABLE
Mortgages and other notes payable consists of the following (in thousands):
DECEMBER 31,
---------------------- SEPTEMBER 30,
1996 1997 1998
---------- ---------- -------------
(UNAUDITED)
8.25% note payable for satellite vendor financing for EchoStar I due in
equal monthly installments of $722, including interest, through February
2001..................................................................... $ 30,463 $ 24,073 $ 18,925
8.25% note payable for satellite vendor financing for EchoStar II due in
equal monthly installments of $562, including interest, through November
2001..................................................................... 27,161 22,489 18,724
8.25% note payable for satellite vendor financing for EchoStar III due in
equal monthly installments of $294, including interest, through October
2002..................................................................... -- 13,812 12,183
8.25% note payable for satellite vendor financing for EchoStar IV due in
equal monthly installments of $264, including interest, through May
2003..................................................................... -- -- 12,950
Mortgages and other unsecured notes payable due in installments through
April 2009 with interest rates ranging from 8% to 10.5%.................. 5,138 9,357 7,829
---------- ---------- -------------
Total...................................................................... 62,762 69,731 70,611
Less current portion....................................................... (11,334) (17,885) (21,064)
---------- ---------- -------------
Mortgages and other notes payable, net of current portion.................. $ 51,428 $ 51,846 $ 49,547
---------- ---------- -------------
---------- ---------- -------------
In addition to the above mortgages and other notes payable, as of December
31 1996, DBS Corp had a $12 million demand note payable to ECC. This note
payable was repaid in full during October 1997. Also, during 1995 and 1996, ECC
advanced DBSC $46 million in the form of notes payable to enable DBSC to make
required payments under its EchoStar III construction contract (Note 1). The
notes payable bear interest at 11.25%, which is being added to principal.
F-25
ECHOSTAR DBS CORPORATION AND AFFILIATES AND SUBSIDIARIES
(A COMBINATION OF CERTAIN WHOLLY-OWNED SUBSIDIARIES OF ECHOSTAR COMMUNICATIONS
CORPORATION, AS DEFINED IN NOTE 1)
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. LONG-TERM DEBT
Future maturities of amounts outstanding under the Company's long-term debt
facilities (excluding notes payable to ECC) as of December 31, 1997 are
summarized as follows (in thousands):
MORTGAGES
AND OTHER
1994 1996 1997 NOTES
NOTES NOTES NOTES PAYABLE TOTAL
----------- ----------- ---------- ----------- ------------
Year Ending December 31,
1998................................................... $ -- $ -- $ -- $ 17,885 $ 17,885
1999................................................... -- -- -- 17,791 17,791
2000................................................... -- -- -- 17,828 17,828
2001................................................... -- -- -- 10,861 10,861
2002................................................... 156,000 -- 375,000 2,927 533,927
Thereafter............................................. 468,000 580,000 -- 2,439 1,050,439
Unamortized discount................................... (124,137) (141,488) -- -- (265,625)
----------- ----------- ---------- ----------- ------------
Total.................................................... $ 499,863 $ 438,512 $ 375,000 $ 69,731 $ 1,383,106
----------- ----------- ---------- ----------- ------------
----------- ----------- ---------- ----------- ------------
SATELLITE VENDOR FINANCING
The purchase price for satellites is required to be paid in progress
payments, some of which are non-contingent payments deferred until after the
respective satellites are in orbit (satellite vendor financing). EchoStar
utilized $36 million, $28 million and $14 million of satellite vendor financing
for EchoStar I, EchoStar II and EchoStar III, respectively. The satellite vendor
financing with respect to EchoStar I and EchoStar II is secured by substantially
all assets of Dish, Ltd. and its subsidiaries (subject to certain restrictions)
and a corporate guarantee of ECC. The satellite vendor financing for EchoStar
III is secured by an ECC corporate guarantee. EchoStar also utilized $13 million
of satellite vendor financing, at a rate of 8.25%, for EchoStar IV. The EchoStar
IV satellite vendor financing is due over a period of five years and is secured
by an ECC corporate guarantee.
F-26
ECHOSTAR DBS CORPORATION AND AFFILIATES AND SUBSIDIARIES
(A COMBINATION OF CERTAIN WHOLLY-OWNED SUBSIDIARIES OF ECHOSTAR COMMUNICATIONS
CORPORATION, AS DEFINED IN NOTE 1)
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. INCOME TAXES
The components of the (provision for) benefit from income taxes are as
follows (in thousands):
YEARS ENDED DECEMBER 31,
---------------------------------
1995 1996 1997
--------- --------- -----------
Current (provision) benefit:
Federal................................................... $ 1,711 $ 4,596 $ (361)
State..................................................... (44) (49) (9)
Foreign................................................... (301) (209) (137)
--------- --------- -----------
1,366 4,338 (507)
Deferred benefit:
Federal................................................... 4,440 48,043 108,598
State..................................................... 385 2,472 8,082
Increase in valuation allowance........................... -- -- (116,319)
--------- --------- -----------
4,825 50,515 361
--------- --------- -----------
Total benefit (provision)............................... $ 6,191 $ 54,853 $ (146)
--------- --------- -----------
--------- --------- -----------
As of December 31, 1997, the Company had net operating loss carryforwards
("NOLs") for Federal income tax purposes of approximately $334 million. The NOLs
expire beginning in the year 2011. The use of the NOLs is subject to statutory
and regulatory limitations regarding changes in ownership. FAS No. 109,
"Accounting for Income Taxes", ("FAS No. 109") requires that the potential
future tax benefit of NOLs be recorded as an asset. FAS No. 109 also requires
that deferred tax assets and liabilities be recorded for the estimated future
tax effects of temporary differences between the tax basis and book value of
assets and liabilities. Deferred tax assets are offset by a valuation allowance
if deemed necessary.
In 1997, the Company increased its valuation allowance sufficient to fully
offset net deferred tax assets arising during the year. Realization of net
deferred tax assets is not assured and is principally dependent on generating
future taxable income prior to expiration of the NOLs. Management believes
existing net deferred tax assets in excess of the valuation allowance will, more
likely than not, be realized. The Company continuously reviews the adequacy of
its valuation allowance. Future decreases to the valuation allowance will be
made only as changed circumstances indicate that it is more likely that not the
additional benefits will be realized. Any future adjustments to the valuation
allowance will be recognized as a separate component of the Company's provision
for income taxes.
F-27
ECHOSTAR DBS CORPORATION AND AFFILIATES AND SUBSIDIARIES
(A COMBINATION OF CERTAIN WHOLLY-OWNED SUBSIDIARIES OF ECHOSTAR COMMUNICATIONS
CORPORATION, AS DEFINED IN NOTE 1)
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. INCOME TAXES (CONTINUED)
The temporary differences which give rise to deferred tax assets and
liabilities as of December 31, 1996 and 1997 are as follows (in thousands):
DECEMBER 31,
-----------------------
1996 1997
---------- -----------
Current deferred tax assets:
Accrued royalties...................................................................... $ 3,029 $ 6,506
Inventory reserves and cost methods.................................................... 1,811 1,180
Accrued expenses....................................................................... 1,414 6,391
Allowance for doubtful accounts........................................................ 674 517
Reserve for warranty costs............................................................. 284 270
Unrealized holding loss on marketable investment securities............................ -- 4
Other.................................................................................. 57 --
---------- -----------
Total current deferred tax assets........................................................ 7,269 14,868
Current deferred tax liabilities:
Subscriber acquisition costs and other................................................. (19,943) (6,846)
---------- -----------
Total current deferred tax liabilities................................................... (19,943) (6,846)
---------- -----------
Gross current deferred tax assets (liabilities).......................................... (12,674) 8,022
Valuation allowance...................................................................... -- (5,081)
---------- -----------
Net current deferred tax assets (liabilities)............................................ (12,674) 2,941
Noncurrent deferred tax assets:
General business and foreign tax credits............................................... -- 2,224
Net operating loss carryforwards....................................................... 77,910 122,515
Amortization of original issue discount on 1994 Notes and 1996 Notes................... 34,912 60,831
Other.................................................................................. 3,451 7,571
---------- -----------
Total noncurrent deferred tax assets..................................................... 116,273 193,141
Noncurrent deferred tax liabilities:
Capitalized costs deducted for tax..................................................... (17,683) --
Depreciation........................................................................... (18,927) (17,264)
Other.................................................................................. -- (230)
---------- -----------
Total noncurrent deferred tax liabilities................................................ (36,610) (17,494)
---------- -----------
Gross deferred tax assets................................................................ 79,663 175,647
---------- -----------
Valuation allowance...................................................................... -- (111,238)
---------- -----------
Net noncurrent deferred tax assets....................................................... 79,663 64,409
---------- -----------
Net deferred tax assets.................................................................. $ 66,989 $ 67,350
---------- -----------
---------- -----------
F-28
ECHOSTAR DBS CORPORATION AND AFFILIATES AND SUBSIDIARIES
(A COMBINATION OF CERTAIN WHOLLY-OWNED SUBSIDIARIES OF ECHOSTAR COMMUNICATIONS
CORPORATION, AS DEFINED IN NOTE 1)
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. INCOME TAXES (CONTINUED)
The actual tax benefit (provision) for 1995, 1996 and 1997 are reconciled to
the amounts computed by applying the statutory Federal tax rate to income before
taxes as follows:
YEARS ENDED DECEMBER 31,
-------------------------------
1995 1996 1997
--------- --------- ---------
Statutory rate......................................................... 35.0% 35.0% 35.0%
State income taxes, net of Federal benefit............................. 1.2 1.8 1.6
Tax exempt interest income............................................. 0.1 -- --
Research and development and foreign tax credits....................... 0.2 -- 0.7
Non-deductible interest expense........................................ (1.7) (1.4) (0.5)
Other.................................................................. (1.4) (0.4) (0.8)
Increase in valuation allowance........................................ -- -- (36.0)
--- --- ---------
Total benefit from income taxes........................................ 33.4% 35.0% --%
--- --- ---------
--- --- ---------
7. STOCK COMPENSATION PLANS
STOCK INCENTIVE PLAN
In April 1994, EchoStar adopted a stock incentive plan (the "Stock Incentive
Plan") to provide incentive to attract and retain officers, directors and key
employees. EchoStar has reserved up to 10 million shares of its Class A Common
Stock for granting awards under the Stock Incentive Plan. All stock options
granted through December 31, 1997 have included exercise prices not less than
the fair market value of EchoStar's Class A Common Stock at the date of grant,
and vest, as determined by EchoStar's Board of Directors, generally at the rate
of 20% per year.
A summary of EchoStar's incentive stock option activity for the years ended
December 31, 1995, 1996 and 1997 is as follows:
1995 1996 1997
----------------------- ----------------------- -----------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
---------- ----------- ---------- ----------- ---------- -----------
Options outstanding, beginning of year............ 744,872 $ 9.33 1,117,133 $ 12.23 1,025,273 $ 14.27
Granted........................................... 419,772 17.13 138,790 27.02 779,550 17.05
Repriced.......................................... -- -- -- -- 255,794 17.00
Exercised......................................... (4,284) 9.33 (103,766) 10.24 (98,158) 9.64
Forfeited......................................... (43,227) 10.55 (126,884) 13.27 (437,892) 19.46
---------- ----------- ---------- ----------- ---------- -----------
Options outstanding, end of year.................. 1,117,133 $ 12.23 1,025,273 $ 14.27 1,524,567 $ 14.99
---------- ----------- ---------- ----------- ---------- -----------
---------- ----------- ---------- ----------- ---------- -----------
Exercisable at end of year........................ 142,474 $ 9.33 258,368 $ 11.31 347,009 $ 12.15
---------- ----------- ---------- ----------- ---------- -----------
---------- ----------- ---------- ----------- ---------- -----------
F-29
ECHOSTAR DBS CORPORATION AND AFFILIATES AND SUBSIDIARIES
(A COMBINATION OF CERTAIN WHOLLY-OWNED SUBSIDIARIES OF ECHOSTAR COMMUNICATIONS
CORPORATION, AS DEFINED IN NOTE 1)
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. STOCK COMPENSATION PLANS (CONTINUED)
Exercise prices for options outstanding as of December 31, 1997 are as
follows:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------ ---------------------------
NUMBER WEIGHTED- NUMBER
OUTSTANDING AVERAGE WEIGHTED- EXERCISABLE WEIGHTED-
AS OF REMAINING AVERAGE AS OF AVERAGE
RANGE OF DECEMBER 31, CONTRACTUAL EXERCISE DECEMBER 31, EXERCISE
EXERCISE PRICES 1997 LIFE PRICE 1997 PRICE
- ------------------ ------------ --------------- ----------- ------------ -------------
$9.333--$11.870... 429,644 4.60 $ 9.53 226,771 $ 9.48
17.000-- 17.000... 1,053,683 7.11 17.00 117,990 17.00
18.290-- 26.688... 41,240 4.79 20.58 2,248 26.69
------------ --- ----------- ------------ ------
$9.333--$26.688... 1,524,567 6.34 $ 14.99 347,009 $ 12.15
------------ --- ----------- ------------ ------
------------ --- ----------- ------------ ------
On July 1, 1997, the Board of Directors approved a repricing of
substantially all outstanding options with an exercise price greater than $17.00
per share of Class A Common Stock to $17.00 per share. The Board of Directors
would not typically consider reducing the exercise price of previously granted
options. However, these options were repriced due to the occurrence of certain
events beyond the reasonable control of the employees of EchoStar which
significantly reduced the incentive these options were intended to create. The
fair market value of the Class A Common Stock was $15.25 on the date of the
repricing. Options to purchase approximately 256,000 shares of Class A Common
Stock were affected by this repricing.
ACCOUNTING FOR STOCK-BASED COMPENSATION
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees," ("APB 25") and related
interpretations in accounting for its stock-based compensation plans. Under APB
25, because the exercise price of EchoStar's employee stock options is equal to
the market price of the underlying stock on the date of the grant, no
compensation expense is recognized. In October 1995, the FASB issued FAS No.
123, "Accounting and Disclosure of Stock-Based Compensation," ("FAS No. 123")
which established an alternative method of expense recognition for stock-based
compensation awards to employees based on fair values. The Company elected to
not adopt FAS No. 123 for expense recognition purposes.
Pro forma information regarding net income is required by FAS No. 123 and
has been determined as if the Company had accounted for its stock-based
compensation plans using the fair value method prescribed by that statement. For
purposes of pro forma disclosures, the estimated fair value of the options is
amortized to expense over the options' vesting period. All options are initially
assumed to vest. Compensation previously recognized is reversed to the extent
applicable to forfeitures of unvested
F-30
ECHOSTAR DBS CORPORATION AND AFFILIATES AND SUBSIDIARIES
(A COMBINATION OF CERTAIN WHOLLY-OWNED SUBSIDIARIES OF ECHOSTAR COMMUNICATIONS
CORPORATION, AS DEFINED IN NOTE 1)
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. STOCK COMPENSATION PLANS (CONTINUED)
options. The fair value of each option grant was estimated at the date of the
grant using a Black-Scholes option pricing model with the following
weighted-average assumptions:
YEARS ENDED DECEMBER 31,
-------------------------------
1995 1996 1997
--------- --------- ---------
Risk-free interest rate..................................... 6.12% 6.80% 6.09%
Volatility factor........................................... 62% 62% 68%
Dividend yield.............................................. 0.00% 0.00% 0.00%
Expected term of options.................................... 6 years 6 years 6 years
Weighted-average fair value of options granted.............. $ 9.86 $ 16.96 $ 10.38
The Company's pro forma net loss was $13 million, $103 million and $325
million for the years ended December 31, 1995, 1996 and 1997, respectively.
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its stock-based compensation awards.
8. EMPLOYEE BENEFIT PLANS
EMPLOYEE STOCK PURCHASE PLAN
During 1997, the Board of Directors and shareholders of ECC approved an
employee stock purchase plan (the "ESPP"), effective beginning October 1, 1997.
Under the ESPP, EchoStar is authorized to issue a total of 100,000 shares of
ECC's Class A Common Stock. Substantially all full-time employees who have been
employed by EchoStar for at least one calendar quarter are eligible to
participate in the ESPP. Employee stock purchases are made through payroll
deductions. Under the terms of the ESPP, employees may not deduct an amount
which would permit such employee to purchase capital stock of EchoStar under all
stock purchase plans of EchoStar at a rate which would exceed $25,000 in fair
market value of capital stock in any one year. The purchase price of the stock
is 85% of the closing price of ECC's Class A Common Stock on the last business
day of each calendar quarter in which such shares of ECC's Class A Common Stock
are deemed sold to an employee under the ESPP. The ESPP shall terminate upon the
first to occur of (i) October 1, 2007 or (ii) the date on which the ESPP is
terminated by the Board of Directors. During the fourth quarter of 1997,
employees of the Company purchased 4,430 shares of ECC's Class A Common Stock
through the ESPP.
401(K) EMPLOYEE SAVINGS PLAN
EchoStar sponsors a 401(k) Employee Savings Plan (the "401(k) Plan") for
eligible employees. Voluntary employee contributions to the 401(k) Plan may be
matched 50% by EchoStar, subject to a maximum annual contribution by EchoStar of
$1,000 per employee. EchoStar also may make an annual
F-31
ECHOSTAR DBS CORPORATION AND AFFILIATES AND SUBSIDIARIES
(A COMBINATION OF CERTAIN WHOLLY-OWNED SUBSIDIARIES OF ECHOSTAR COMMUNICATIONS
CORPORATION, AS DEFINED IN NOTE 1)
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. EMPLOYEE BENEFIT PLANS (CONTINUED)
discretionary contribution to the plan with approval by EchoStar's Board of
Directors, subject to the maximum deductible limit provided by the Internal
Revenue Code of 1986, as amended. The Company's cash contributions to the 401(k)
Plan totaled $177,000, $226,000 and $329,000 during 1995, 1996 and 1997,
respectively. Additionally, the Company contributed 55,000 shares of EchoStar's
Class A Common Stock in 1995 and 1996, (fair value of $1 million and $935,000,
respectively) to the 401(k) Plan as discretionary contributions. During 1998,
the Company contributed 80,000 shares of EchoStar's Class A Common Stock (fair
value of approximately $2 million) to the 401(k) Plan related to its 1997
discretionary contribution.
9. C-BAND AND OTHER REVENUE
Effective January 1, 1998, the Company ceased operation of its C-band
programming business. Consequently, the net result of the Company's C-band
programming business is reported as "C-band and other revenue" in the
accompanying statements of operations. C-band and other revenue consists of the
following (in thousands):
YEARS ENDED DECEMBER 31,
---------------------------------
1995 1996 1997
---------- ---------- ---------
C-band equipment sales and other........................... $ 110,992 $ 54,592 $ 32,308
C-band programming sales................................... 15,232 11,921 7,100
C-band programming--cost of sales.......................... (13,520) (10,510) (6,712)
---------- ---------- ---------
C-band and other revenue, net............................ $ 112,704 $ 56,003 $ 32,696
---------- ---------- ---------
---------- ---------- ---------
10. OTHER COMMITMENTS AND CONTINGENCIES
As of December 31, 1997, Space had contracted with
Lockheed-Khrunichev-Energia-International, Inc. ("LKE") for the launch of
EchoStar IV from the Baikonur Cosmodrome in the Republic of Kazakhstan, a
territory of the former Soviet Union, utilizing a Proton launch vehicle (the
"LKE Contract"). EchoStar IV was launched in May 1998 and commenced commercial
operation in August 1998. As of December 31, 1997, the Company expected to
expend approximately $68 million during 1998 in connection with the construction
launch and insurance of EchoStar IV. Actual expenditures for these costs totaled
approximately $80 million through September 30, 1998. These expenditures have
been funded from the Satellite Escrow.
EchoStar has filed applications with the Federal Communications Commission
("FCC") for authorization to construct, launch and operate a two satellite FSS
(fixed satellite service) Ku-band system and a two satellite FSS Ka-band
satellite system. No assurance can be given that EchoStar's applications will be
approved by the FCC or that, if approved, EchoStar will be able to successfully
develop the FSS Ku-band or the Ka-band systems. EchoStar believes that
establishment of the FSS Ku-band system or the FSS Ka-band system would enhance
its competitive position in the DTH industry. In the event EchoStar's FSS
Ku-band or Ka-band system applications are approved by the FCC, additional debt
or equity financing would be required. No assurance can be given that such
financing will be available, or that it will be available on terms acceptable to
EchoStar.
F-32
ECHOSTAR DBS CORPORATION AND AFFILIATES AND SUBSIDIARIES
(A COMBINATION OF CERTAIN WHOLLY-OWNED SUBSIDIARIES OF ECHOSTAR COMMUNICATIONS
CORPORATION, AS DEFINED IN NOTE 1)
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. OTHER COMMITMENTS AND CONTINGENCIES (CONTINUED)
PURCHASE COMMITMENTS
As of December 31, 1997, the Company's purchase commitments totaled
approximately $87 million. The majority of these commitments relate to EchoStar
Receiver Systems and related components. All of the purchases related to these
commitments are expected to be made during 1998. The Company expects to finance
these purchases from existing unrestricted cash balances and future cash flows
generated from operations, if any.
THE NEWS CORPORATION LIMITED
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. WL 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.
In connection with the News and MCI/WorldCom Transaction (the "Pending 110
Acquisition") (Note 15), the litigation between EchoStar and News Corporation
will be stayed and will be dismissed with prejudice upon closing or if the
transaction is terminated for reasons other than the breach by, or failure to
fill a condition within the control of, News Corporation or MCI WorldCom Inc.
("MCI").
F-33
ECHOSTAR DBS CORPORATION AND AFFILIATES AND SUBSIDIARIES
(A COMBINATION OF CERTAIN WHOLLY-OWNED SUBSIDIARIES OF ECHOSTAR COMMUNICATIONS
CORPORATION, AS DEFINED IN NOTE 1)
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. OTHER COMMITMENTS AND CONTINGENCIES (CONTINUED)
WIC PREMIUM TELEVISION LTD.
On July 28, 1998, a lawsuit was filed by WIC Premium Television Ltd.
("WIC"), an Alberta corporation, in the Federal Court of Canada Trial Division,
against certain defendants which include: General Instrument Corporation, HBO,
Warner Communications, Inc., John Doe, Showtime, U.S. Satellite Broadcasting
Corporation ("USSB"), ECC and two of ECC's wholly-owned subsidiaries, Dish, Ltd.
("Dish") and Echosphere Corporation ("Echosphere"). The lawsuit seeks, among
other things, an interim and permanent injunction prohibiting the defendants
from activating receivers in Canada and from infringing any copyrights held by
WIC. It is too early to determine whether or when any other lawsuits and/or
claims will be filed. It is also too early to make an assessment of the probable
outcome of the litigation or to determine the extent of any potential liability
or damages.
On September 28, 1998, WIC filed another lawsuit in the Court of Queen's
Bench of Alberta Judicial District of Edmonton against certain defendants, which
also include ECC, Dish, and Echosphere. WIC is a company authorized to broadcast
certain copyrighted work, such as movies and concerts, to residents of Canada.
WIC alleges that the defendants engaged in, promoted, and/or allowed satellite
dish equipment from the United States to be sold in Canada and to Canadian
residents and that some of the defendants allowed and profited from Canadian
residents purchasing and viewing subscription television programming that is
only authorized for viewing in the United States. The lawsuit seeks, among other
things, interim and permanent injunction prohibiting the defendants from
importing hardware into Canada and from activating receivers in Canada and
damages in excess of the equivalent of US $175 million. It is too early to
determine whether or when any other lawsuits and/or claims will be filed. It is
also too early to make an assessment of the probable outcome of the litigation
or to determine the extent of any potential liability or damages.
BROADCAST NETWORK PROGRAMMING
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.
The national networks and local affiliate stations have recently challenged
PrimeTime 24's methods of selling network programming (national and local) to
consumers based upon infringement of copyright. The U.S. District Court for the
Southern District of Florida entered a nationwide injunction preventing
PrimeTime 24 from selling its programming to consumers unless the programming
was sold according to certain stipulations in the injunction. The Court also
purported to enjoin PrimeTime 24's "distributors" as well. The Plaintiff in the
Florida litigation informed EchoStar that it considered EchoStar a "distributor"
and has since threatened EchoStar with litigation.
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,
F-34
ECHOSTAR DBS CORPORATION AND AFFILIATES AND SUBSIDIARIES
(A COMBINATION OF CERTAIN WHOLLY-OWNED SUBSIDIARIES OF ECHOSTAR COMMUNICATIONS
CORPORATION, AS DEFINED IN NOTE 1)
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. OTHER COMMITMENTS AND CONTINGENCIES (CONTINUED)
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. CBS and other broadcast networks have informed EchoStar
that they believe EchoStar's method of providing distant network programming
violates the SHVA and hence infringes their copyright.
On October 19, 1998, EchoStar filed a declaratory judgment action in the
United States District Court for the District of Colorado against the four major
networks. In the future, EchoStar may attempt to certify a class including the
networks as well as any and all owned and operated stations and any independent
affiliates. EchoStar has asked the court to enter a judgment declaring that
EchoStar's method of providing distant network programming does not violate the
SHVA and hence does not infringe the networks' copyrights. The Company cannot be
sure that the court will rule in our favor in this regard. Furthermore, an
October 28, 1997, ruling of the Librarian of Congress substantially increased
the royalty rate for retransmission of distant network and superstation signals.
While judicial review of this ruling is pending, the rates are now effective.
Certain national television broadcast networks (and their local affiliates)
have threatened to file counter-claims or separate lawsuits against EchoStar for
both the retransmission of local-into-local and distant-into-local signals.
While to date EchoStar has not been served with a complaint, recent press
reports indicate that a lawsuit may have been filed in Miami by the networks and
their affiliates against EchoStar. 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 could be required to terminate delivery of network
signals to a material portion of its subscriber base. Further restrictions on
the sale of network channels imposed in the future could result in decreases in
subscriber activations and subscription television services revenue and an
increase in subscriber churn.
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.
METEOROID EVENTS
In November 1998 certain meteoroid events occurred as the earth's orbit
passed through the particulate trail of Comet 55P (Tempel-Tuttle). While there
can be no assurance, the Company believes that its DBS satellites did not incur
any significant damage as a result of these events. Similar meteoriod events are
expected to occur again in November 1999. These meteoroid events continue to
pose a potential threat to all in-orbit geosynchronous satellites, including
EchoStar's DBS satellites. While the probability that EchoStar's spacecraft will
be damaged by space debris is very small, that probability will increase by
several orders of magnitude during the November 1999 meteoroid events. EchoStar
is presently evaluating the potential effects that the November 1999 meteoroid
events may have on its DBS satellites. At this time, EchoStar has not finally
determined the impact, if any, these meteoroid events may have on EchoStar's DBS
satellites.
F-35
ECHOSTAR DBS CORPORATION AND AFFILIATES AND SUBSIDIARIES
(A COMBINATION OF CERTAIN WHOLLY-OWNED SUBSIDIARIES OF ECHOSTAR COMMUNICATIONS
CORPORATION, AS DEFINED IN NOTE 1)
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. COMBINING SUMMARY FINANCIAL STATEMENTS
The following pages present the consolidated and combining financial
information for DBS Corp and its affiliates and subsidiaries as of December 31,
1996 and 1997 and as of September 30, 1998, and for the three years ended
December 31, 1995, 1996 and 1997 and for the nine months ended September 30,
1997 and 1998. Consolidated and combining financial information is presented for
the following entities:
Consolidated DBS Corp (referred to as "DBS Corp")
Space Stand Alone Company (referred to as "Space")
DBSC Stand Alone Company (referred to as "DBSC")
Combined and Consolidated DBS Corp (referred to as "DBS Corp
and Affiliates and Subsidiaries")
F-36
ECHOSTAR DBS CORPORATION AND AFFILIATES AND SUBSIDIARIES
(A COMBINATION OF CERTAIN WHOLLY-OWNED SUBSIDIARIES OF ECHOSTAR COMMUNICATIONS
CORPORATION, AS DEFINED IN NOTE 1)
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. COMBINING SUMMARY FINANCIAL STATEMENTS (CONTINUED)
CONSOLIDATED AND COMBINING BALANCE SHEETS--AS OF DECEMBER 31, 1996 (IN MILLIONS)
DBS CORP AND
AFFILIATES
DBS AND
CORP SPACE DBSC SUBSIDIARIES
--------- ----------- ----------- -------------
ASSETS
Current Assets:
Cash and cash equivalents.............................................. $ 39 $ -- $ -- $ 39
Marketable investment securities....................................... 19 -- -- 19
Trade accounts receivable, net......................................... 14 -- -- 14
Inventories............................................................ 73 -- -- 73
Subscriber acquisition costs, net...................................... 68 -- -- 68
Other current assets................................................... 19 -- -- 19
--------- ----- ----- ------
Total current assets..................................................... 232 -- -- 232
Advances to affiliates, net.............................................. 69 (57) -- 12
Restricted cash and marketable investment securities..................... 79 -- -- 79
Property and equipment, net.............................................. 529 57 -- 586
FCC authorizations, net.................................................. 72 -- -- 72
Other noncurrent assets.................................................. 105 -- -- 105
--------- ----- ----- ------
Total assets......................................................... $ 1,086 $ -- $ -- $1,086
--------- ----- ----- ------
--------- ----- ----- ------
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)
Current Liabilities:
Trade accounts payable................................................. $ 41 $ -- $ -- $ 41
Deferred revenue....................................................... 104 -- -- 104
Accrued expenses....................................................... 43 -- -- 43
Advances from affiliates, net.......................................... -- -- -- --
Current portion of long-term debt...................................... 11 -- -- 11
--------- ----- ----- ------
Total current liabilities................................................ 199 -- -- 199
Long-term obligations, net of current portion:
Investment in subsidiaries............................................. -- -- -- --
1994 Notes............................................................. 437 -- -- 437
1996 Notes............................................................. 386 -- -- 386
Mortgages and other notes payable, net of current portion.............. 64 -- -- 64
Long-term deferred satellite services revenue and other long-term
liabilities.......................................................... 7 -- -- 7
--------- ----- ----- ------
Total long-term liabilities.............................................. 894 -- -- 894
--------- ----- ----- ------
--------- ----- ----- ------
Total liabilities.................................................... 1,093 -- -- 1,093
Stockholders' equity (deficit)........................................... (7) -- -- (7)
--------- ----- ----- ------
Total liabilities and stockholders' equity (deficit)................. $ 1,086 $ -- $ -- $1,086
--------- ----- ----- ------
--------- ----- ----- ------
F-37
ECHOSTAR DBS CORPORATION AND AFFILIATES AND SUBSIDIARIES
(A COMBINATION OF CERTAIN WHOLLY-OWNED SUBSIDIARIES OF ECHOSTAR COMMUNICATIONS
CORPORATION, AS DEFINED IN NOTE 1)
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. COMBINING SUMMARY FINANCIAL STATEMENTS (CONTINUED)
CONSOLIDATED AND COMBINING BALANCE SHEETS--AS OF DECEMBER 31, 1997 (IN MILLIONS)
DBS CORP AND
AFFILIATES
DBS AND
CORP SPACE DBSC SUBSIDIARIES
--------- ----------- ----------- -------------
ASSETS
Current Assets:
Cash and cash equivalents.............................................. $ 62 $ -- $ -- $ 62
Marketable investment securities....................................... 4 -- -- 4
Trade accounts receivable, net......................................... 66 -- -- 66
Inventories............................................................ 23 -- -- 23
Subscriber acquisition costs, net...................................... 19 -- -- 19
Other current assets................................................... 8 -- -- 8
--------- --- ----- ------
Total current assets..................................................... 182 -- -- 182
Advances to affiliates, net.............................................. 230 (198) (30) 2
Restricted cash and marketable investment securities..................... 188 -- -- 188
Property and equipment, net.............................................. 569 198 92 859
FCC authorizations, net.................................................. 81 -- 18 99
Other noncurrent assets.................................................. 101 -- -- 101
--------- --- ----- ------
Total assets......................................................... $ 1,351 $ -- $ 80 $1,431
--------- --- ----- ------
--------- --- ----- ------
Current Liabilities:
Trade accounts payable................................................. $ 68 $ -- $ -- $ 68
Deferred revenue....................................................... 122 -- -- 122
Accrued expenses....................................................... 97 -- -- 97
Advances from affiliates, net.......................................... -- -- -- --
Current portion of long-term debt...................................... 15 -- 3 18
--------- --- ----- ------
Total current liabilities................................................ 302 -- 3 305
1994 Notes............................................................. 500 -- -- 500
1996 Notes............................................................. 438 -- -- 438
1997 Notes............................................................. 375 -- -- 375
Mortgages and other notes payable, net of current portion.............. 41 -- 66 107
Long-term deferred satellite services revenue and other long-term
liabilities.......................................................... 20 -- -- 20
--------- --- ----- ------
Total long-term liabilities.............................................. 1,374 -- 66 1,440
--------- --- ----- ------
Total liabilities.................................................... 1,676 -- 69 1,745
Stockholders' equity (deficit)........................................... (325) -- 11 (314)
--------- --- ----- ------
--------- --- ----- ------
Total liabilities and stockholders' equity (deficit)................. $ 1,351 $ -- $ 80 $1,431
--------- --- ----- ------
--------- --- ----- ------
F-38
ECHOSTAR DBS CORPORATION AND AFFILIATES AND SUBSIDIARIES
(A COMBINATION OF CERTAIN WHOLLY-OWNED SUBSIDIARIES OF ECHOSTAR COMMUNICATIONS
CORPORATION, AS DEFINED IN NOTE 1)
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. COMBINING SUMMARY FINANCIAL STATEMENTS (CONTINUED)
CONSOLIDATED AND COMBINING BALANCE SHEETS--AS OF SEPTEMBER 30, 1998 (IN
MILLIONS)
DBS CORP AND
AFFILIATES
DBS AND
CORP SPACE DBSC SUBSIDIARIES
--------- ----------- ----------- -------------
(UNAUDITED)
ASSETS
Current Assets:
Cash and cash equivalents.............................................. $ 42 $ -- $ -- $ 42
Marketable investment securities....................................... 2 -- -- 2
Trade accounts receivable, net......................................... 84 -- -- 84
Inventories............................................................ 82 -- -- 82
Subscriber acquisition costs, net...................................... -- -- -- --
Other current assets................................................... 20 -- -- 20
--------- ----- ----- ------
Total current assets..................................................... 230 -- -- 230
Advances to affiliates, net.............................................. -- -- -- --
Restricted cash and marketable investment securities..................... 182 -- -- 182
Property and equipment, net.............................................. 639 99 120 858
FCC authorizations, net.................................................. 86 -- 18 104
Other noncurrent assets.................................................. 93 -- -- 93
--------- ----- ----- ------
Total assets......................................................... $ 1,230 $ 99 $ 138 $1,467
--------- ----- ----- ------
--------- ----- ----- ------
Current Liabilities:
Trade accounts payable................................................. $ 91 $ -- $ 1 $ 92
Deferred revenue....................................................... 113 -- -- 113
Accrued expenses....................................................... 131 -- -- 131
Advances from affiliates, net.......................................... (147) 109 67 29
Current portion of long-term debt...................................... 18 -- 3 21
--------- ----- ----- ------
Total current liabilities................................................ 206 109 71 386
1994 Notes............................................................. 553 -- -- 553
1996 Notes............................................................. 482 -- -- 482
1997 Notes............................................................. 375 -- -- 375
Mortgages and other notes payable, net of current portion.............. 40 -- 68 108
Long-term deferred satellite services revenue and other long-term
liabilities.......................................................... 28 -- -- 28
--------- ----- ----- ------
Total long-term liabilities.............................................. 1,478 -- 68 1,546
--------- ----- ----- ------
Total liabilities.................................................... 1,684 109 139 1,932
Stockholders' equity (deficit)........................................... (454) (10) (1) (465)
--------- ----- ----- ------
Total liabilities and stockholders' equity (deficit)................. $ 1,230 $ 99 $ 138 $1,467
--------- ----- ----- ------
--------- ----- ----- ------
F-39
ECHOSTAR DBS CORPORATION AND AFFILIATES AND SUBSIDIARIES
(A COMBINATION OF CERTAIN WHOLLY-OWNED SUBSIDIARIES OF ECHOSTAR COMMUNICATIONS
CORPORATION, AS DEFINED IN NOTE 1)
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. COMBINING SUMMARY FINANCIAL STATEMENTS (CONTINUED)
CONSOLIDATED AND COMBINING STATEMENTS OF OPERATIONS--YEAR ENDED DECEMBER 31,
1995 (IN MILLIONS)
DBS CORP AND
AFFILIATES
AND
DBS CORP SPACE DBSC SUBSIDIARIES
--------- ----------- ----------- -------------
REVENUE:
DTH equipment sales and integration services......................... $ 36 $ -- $ -- $ 36
C-band and other..................................................... 112 -- -- 112
----- ----- ----- -----
Total revenue.......................................................... 148 -- -- 148
COSTS AND EXPENSES:
Cost of sales--DTH equipment and integration services................ 30 -- -- 30
Cost of sales--C-band and other...................................... 85 -- -- 85
Advertising and other................................................ 2 -- -- 2
General and administrative........................................... 36 -- -- 36
Depreciation and amortization........................................ 3 -- -- 3
----- ----- ----- -----
Total costs and expenses............................................... 156 -- -- 156
----- ----- ----- -----
Operating loss......................................................... (8) -- -- (8)
Other Income (Expense):
Interest income...................................................... 13 -- -- 13
Interest expense, net of amounts capitalized......................... (24) -- -- (24)
Other................................................................ 1 -- -- 1
----- ----- ----- -----
Total other income (expense)........................................... (10) -- -- (10)
----- ----- ----- -----
Loss before income taxes............................................... (18) -- -- (18)
Income tax benefit (provision), net.................................... 6 -- -- 6
----- ----- ----- -----
Net loss............................................................... $ (12) $ -- $ -- $ (12)
----- ----- ----- -----
----- ----- ----- -----
F-40
ECHOSTAR DBS CORPORATION AND AFFILIATES AND SUBSIDIARIES
(A COMBINATION OF CERTAIN WHOLLY-OWNED SUBSIDIARIES OF
ECHOSTAR COMMUNICATIONS CORPORATION AS DEFINED IN NOTE 1)
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENT (CONTINUED)
11. COMBINING SUMMARY FINANCIAL STATEMENTS (CONTINUED)
CONSOLIDATED AND COMBINING STATEMENTS OF OPERATIONS--YEAR ENDED DECEMBER 31,
1996 (IN MILLIONS)
DBS CORP AND
AFFILIATES
DBS AND
CORP SPACE DBSC SUBSIDIARIES
--------- ----------- ----------- -------------
REVENUE:
DISH Network:
Subscription television services...................................... $ 50 $ -- $ -- $ 50
C-band and other...................................................... 8 -- -- 8
--------- --- --- -----
Total DISH Network...................................................... 58 -- -- 58
DTH equipment sales and integration services............................ 77 -- -- 77
Satellite services...................................................... 6 -- -- 6
Other................................................................... 56 -- -- 56
--------- --- --- -----
Total revenue............................................................. 197 -- -- 197
COSTS AND EXPENSES:
DISH Network Operating Expenses:
Subscriber-related expenses........................................... 23 -- -- 23
Customer service center and other..................................... 13 -- -- 13
Satellite and transmission............................................ 7 -- -- 7
--------- --- --- -----
Total DISH Network operating expenses................................... 43 -- -- 43
Cost of sales--DTH equipment and integration services................... 76 -- -- 76
Cost of sales--C-band and other......................................... 42 -- -- 42
Marketing:
Subscriber promotion subsidies........................................ 35 -- -- 35
Advertising and other................................................. 18 -- -- 18
--------- --- --- -----
Total marketing expenses................................................ 53 -- -- 53
General and administrative.............................................. 49 -- -- 49
Amortization of subscriber acquisition costs............................ 16 -- -- 16
Depreciation and amortization........................................... 27 -- -- 27
--------- --- --- -----
Total costs and expenses.................................................. 306 -- -- 306
--------- --- --- -----
Operating loss............................................................ (109) -- -- (109)
Other Income (Expense):
Interest income......................................................... 14 -- -- 14
Interest expense, net of amounts capitalized............................ (62) -- -- (62)
Other................................................................... -- -- -- --
--------- --- --- -----
Total other income (expense).............................................. (48) -- -- (48)
--------- --- --- -----
Loss before income taxes.................................................. (157) -- -- (157)
Income tax benefit (provision), net....................................... 55 -- -- 55
--------- --- --- -----
Net loss.................................................................. $ (102) $ -- $ -- $ (102)
--------- --- --- -----
--------- --- --- -----
F-41
ECHOSTAR DBS CORPORATION AND AFFILIATES AND SUBSIDIARIES
(A COMBINATION OF CERTAIN WHOLLY-OWNED SUBSIDIARIES OF
ECHOSTAR COMMUNICATIONS CORPORATION AS DEFINED IN NOTE 1)
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENT (CONTINUED)
11. COMBINING SUMMARY FINANCIAL STATEMENTS (CONTINUED)
CONSOLIDATED AND COMBINING STATEMENTS OF OPERATIONS--YEAR ENDED DECEMBER 31,
1997 (IN MILLIONS)
DBS CORP AND
AFFILIATES
DBS AND
CORP SPACE DBSC SUBSIDIARIES
--------- ----------- ----------- -------------
REVENUE:
DISH Network:
Subscription television services...................................... $ 299 $ -- $ -- $ 299
Other................................................................. 43 -- -- 43
--------- --- --- -----
Total DISH Network...................................................... 342 -- -- 342
DTH equipment sales and integration services............................ 90 -- -- 90
Satellite services...................................................... 11 -- -- 11
C-band and other........................................................ 33 -- -- 33
--------- --- --- -----
Total revenue............................................................. 476 -- -- 476
COSTS AND EXPENSES:
DISH Network Operating Expenses:
Subscriber-related expenses........................................... 144 -- -- 144
Customer service center and other..................................... 35 -- -- 35
Satellite and transmission............................................ 14 -- -- 14
--------- --- --- -----
Total DISH Network operating expenses................................... 193 -- -- 193
Cost of sales--DTH equipment and integration services................... 61 -- -- 61
Cost of sales--C-band and other......................................... 24 -- -- 24
Marketing:
Subscriber promotion subsidies........................................ 149 -- -- 149
Advertising and other................................................. 35 -- -- 35
--------- --- --- -----
Total marketing expenses................................................ 184 -- -- 184
General and administrative.............................................. 66 -- -- 66
Amortization of subscriber acquisition costs............................ 121 -- -- 121
Depreciation and amortization........................................... 51 -- -- 51
--------- --- --- -----
Total costs and expenses.................................................. 700 -- -- 700
--------- --- --- -----
Operating loss............................................................ (224) -- -- (224)
Other Income (Expense):
Interest income......................................................... 13 -- -- 13
Interest expense, net of amounts capitalized............................ (105) -- (5) (110)
Other................................................................... (2) -- -- (2)
--------- --- --- -----
Total other income (expense).............................................. (94) -- (5) (99)
--------- --- --- -----
Loss before income taxes.................................................. (318) -- (5) (323)
Income tax benefit (provision), net....................................... -- -- -- --
--------- --- --- -----
Net loss.................................................................. $ (318) $ -- $ (5) $ (323)
--------- --- --- -----
--------- --- --- -----
F-42
ECHOSTAR DBS CORPORATION AND AFFILIATES AND SUBSIDIARIES
(A COMBINATION OF CERTAIN WHOLLY-OWNED SUBSIDIARIES OF
ECHOSTAR COMMUNICATIONS CORPORATION AS DEFINED IN NOTE 1)
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENT (CONTINUED)
11. COMBINING SUMMARY FINANCIAL STATEMENTS (CONTINUED)
CONSOLIDATED AND COMBINING STATEMENTS OF OPERATIONS--NINE MONTHS ENDED
SEPTEMBER 30, 1997 (IN MILLIONS)
DBS CORP AND
AFFILIATES
DBS AND
CORP SPACE DBSC SUBSIDIARIES
--------- ----------- ----------- -------------
(UNAUDITED)
REVENUE:
DISH Network:
Subscription television services...................................... $ 193 $ -- $ -- $ 193
Other................................................................. 33 -- -- 33
--------- --- --- -----
Total DISH Network...................................................... 226 -- -- 226
DTH equipment sales and integration services............................ 37 -- -- 37
Satellite services...................................................... 8 -- -- 8
C-band and other........................................................ 25 -- -- 25
--------- --- --- -----
Total revenue............................................................. 296 -- -- 296
COSTS AND EXPENSES:
DISH Network Operating Expenses:
Subscriber-related expenses........................................... 97 -- -- 97
Customer service center and other..................................... 23 -- -- 23
Satellite and transmission............................................ 10 -- -- 10
--------- --- --- -----
Total DISH Network operating expenses................................... 130 -- -- 130
Cost of sales--DTH equipment and integration services................... 26 -- -- 26
Cost of sales--C-band and other......................................... 16 -- -- 16
Marketing:
Subscriber promotion subsidies........................................ 99 -- -- 99
Advertising and other................................................. 24 -- -- 24
--------- --- --- -----
Total marketing expenses................................................ 123 -- -- 123
General and administrative.............................................. 46 -- -- 46
Amortization of subscriber acquisition costs............................ 95 -- -- 95
Depreciation and amortization........................................... 38 -- -- 38
--------- --- --- -----
Total costs and expenses.................................................. 474 -- -- 474
--------- --- --- -----
Operating loss............................................................ (178) -- -- (178)
Other Income (Expense):
Interest income......................................................... 9 -- -- 9
Interest expense, net of amounts capitalized............................ (75) -- (5) (80)
Other................................................................... -- -- -- --
--------- --- --- -----
Total other income (expense).............................................. (66) -- (5) (71)
--------- --- --- -----
Loss before income taxes.................................................. (244) -- (5) (249)
Income tax benefit (provision), net....................................... -- -- -- --
--------- --- --- -----
Net loss.................................................................. $ (244) $ -- $ (5) $ (249)
--------- --- --- -----
--------- --- --- -----
F-43
ECHOSTAR DBS CORPORATION AND AFFILIATES AND SUBSIDIARIES
(A COMBINATION OF CERTAIN WHOLLY-OWNED SUBSIDIARIES OF
ECHOSTAR COMMUNICATIONS CORPORATION AS DEFINED IN NOTE 1)
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENT (CONTINUED)
11. COMBINING SUMMARY FINANCIAL STATEMENTS (CONTINUED)
CONSOLIDATED AND COMBINING STATEMENTS OF OPERATIONS--NINE MONTHS ENDED
SEPTEMBER 30, 1998 (IN MILLIONS)
DBS CORP AND
AFFILIATES
DBS AND
CORP SPACE DBSC SUBSIDIARIES
--------- ----------- ----------- -------------
(UNAUDITED)
REVENUE:
DISH Network:
Subscription television services...................................... $ 460 $ -- $ -- $ 460
Other................................................................. 11 -- -- 11
--------- --- --- -----
Total DISH Network...................................................... 471 -- -- 471
DTH equipment sales and integration services............................ 191 -- -- 191
Satellite services...................................................... 16 -- -- 16
C-band and other........................................................ 19 -- -- 19
--------- --- --- -----
Total revenue............................................................. 697 -- -- 697
COSTS AND EXPENSES:
DISH Network Operating Expenses:
Subscriber-related expenses........................................... 211 -- -- 211
Customer service center and other..................................... 46 -- -- 46
Satellite and transmission............................................ 17 -- -- 17
--------- --- --- -----
Total DISH Network operating expenses................................... 274 -- -- 274
Cost of sales--DTH equipment and integration services................... 131 -- -- 131
Cost of sales--C-band and other......................................... 12 -- -- 12
Marketing:
Subscriber promotion subsidies........................................ 165 -- -- 165
Advertising and other................................................. 26 -- -- 26
--------- --- --- -----
Total marketing expenses................................................ 191 -- -- 191
General and administrative.............................................. 67 -- -- 67
Amortization of subscriber acquisition costs............................ 19 -- -- 19
Depreciation and amortization........................................... 43 10 6 59
--------- --- --- -----
Total costs and expenses.................................................. 737 10 6 753
Operating loss............................................................ (40) (10) (6) (56)
Other Income (Expense):
Interest income......................................................... 8 -- -- 8
Interest expense, net of amounts capitalized............................ (117) -- (5) (122)
Other................................................................... (1) -- -- (1)
--------- --- --- -----
Total other income (expense).............................................. (110) -- (5) (115)
--------- --- --- -----
Loss before income taxes.................................................. (150) (10) (11) (171)
Income tax benefit (provision), net....................................... -- -- -- --
--------- --- --- -----
Net loss.................................................................. $ (150) $ (10) $ (11) $ (171)
--------- --- --- -----
--------- --- --- -----
F-44
ECHOSTAR DBS CORPORATION AND AFFILIATES AND SUBSIDIARIES
(A COMBINATION OF CERTAIN WHOLLY-OWNED SUBSIDIARIES OF
ECHOSTAR COMMUNICATIONS CORPORATION AS DEFINED IN NOTE 1)
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENT (CONTINUED)
11. COMBINING SUMMARY FINANCIAL STATEMENTS (CONTINUED)
CONSOLIDATED AND COMBINING STATEMENTS OF CASH FLOWS--YEAR ENDED DECEMBER 31,
1995 (IN MILLIONS)
DBS CORP AND
AFFILIATES AND
DBS CORP SPACE DBSC SUBSIDIARIES
------------- ----------- ----------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)...................................................... $ (12) $ -- $ -- $ (12)
Adjustments to reconcile net income (loss) to net cash flows from
operating activities:
Depreciation and amortization........................................ 3 -- -- 3
Deferred income tax benefit.......................................... (5) -- -- (5)
Amortization of debt discount and deferred financing costs........... 24 -- -- 24
Other, net........................................................... 1 -- -- 1
Changes in current assets and current liabilities, net............... (33) -- -- (33)
--- --- --- ---
Net cash flows from operating activities............................... (22) -- -- (22)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of marketable investment securities.......................... (3) -- -- (3)
Sales of marketable investment securities.............................. 34 -- -- 34
Purchases of restricted marketable investment securities............... (15) -- -- (15)
Purchases of property and equipment.................................... (114) (20) -- (134)
Offering proceeds and investment earnings placed in escrow............. (10) -- -- (10)
Funds released from escrow accounts.................................... 122 -- -- 122
Investment in DBSC..................................................... 5 -- -- 5
--- --- --- ---
Net cash flows from investing activities............................... 19 (20) -- (1)
CASH FLOWS FROM FINANCING ACTIVITIES:
Advances from affiliates............................................... -- 20 -- 20
Net proceeds from issuance of Common Stock............................. -- -- -- --
--- --- --- ---
Net cash flows from financing activities............................... -- 20 -- 20
--- --- --- ---
Net increase (decrease) in cash and cash equivalents................... (3) -- -- (3)
Cash and cash equivalents, beginning of year........................... 18 -- -- 18
--- --- --- ---
Cash and cash equivalents, end of year................................. $ 15 $ -- $ -- $ 15
--- --- --- ---
--- --- --- ---
F-45
ECHOSTAR DBS CORPORATION AND AFFILIATES AND SUBSIDIARIES
(A COMBINATION OF CERTAIN WHOLLY-OWNED SUBSIDIARIES OF
ECHOSTAR COMMUNICATIONS CORPORATION AS DEFINED IN NOTE 1)
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENT (CONTINUED)
11. COMBINING SUMMARY FINANCIAL STATEMENTS (CONTINUED)
CONSOLIDATED AND COMBINING STATEMENTS OF CASH FLOWS--YEAR ENDED DECEMBER 31,
1996 (IN MILLIONS)
DBS CORP AND
AFFILIATES
DBS AND
CORP SPACE DBSC SUBSIDIARIES
--------- ----------- ----------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)......................................................... $ (102) $ -- $ -- $ (102)
Adjustments to reconcile net income (loss) to net cash flows from
operating activities:
Depreciation and amortization........................................... 27 -- -- 27
Amortization of subscriber acquisition costs............................ 16 -- -- 16
Deferred income tax benefit............................................. (50) -- -- (50)
Amortization of debt discount and deferred financing costs.............. 61 -- -- 61
Other, net.............................................................. 10 -- -- 10
Changes in current assets and current liabilities, net.................. 15 -- -- 15
--------- --- --- -----
Net cash flows from operating activities.................................. (23) -- -- (23)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of marketable investment securities............................. (138) -- -- (138)
Sales of marketable investment securities................................. 120 -- -- 120
Purchases of restricted marketable investment securities.................. (21) -- -- (21)
Funds released from escrow and restricted cash and marketable investment
securities.............................................................. 236 -- -- 236
Advances to affiliates.................................................... (64) 31 -- (33)
Purchases of property and equipment....................................... (184) (31) -- (215)
Offering proceeds and investment earnings placed in escrow................ (194) -- -- (194)
Payments received on convertible subordinated debentures from SSET........ 6 -- -- 6
Expenditures for FCC authorizations....................................... (55) -- -- (55)
Other..................................................................... -- -- -- --
--------- --- --- -----
Net cash flows from investing activities.................................. (294) -- -- (294)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of 1996 Notes.................................. 337 -- -- 337
Proceeds from note payable to ECC......................................... 12 -- -- 12
Repayments of mortgage indebtedness and notes payable..................... (8) -- -- (8)
--------- --- --- -----
Net cash flows from financing activities.................................. 341 -- -- 341
--------- --- --- -----
Net increase (decrease) in cash and cash equivalents...................... 24 -- -- 24
Cash and cash equivalents, beginning of year.............................. 15 -- -- 15
--------- --- --- -----
Cash and cash equivalents, end of year.................................... $ 39 $ -- $ -- $ 39
--------- --- --- -----
--------- --- --- -----
F-46
ECHOSTAR DBS CORPORATION AND AFFILIATES AND SUBSIDIARIES
(A COMBINATION OF CERTAIN WHOLLY-OWNED SUBSIDIARIES OF
ECHOSTAR COMMUNICATIONS CORPORATION AS DEFINED IN NOTE 1)
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENT (CONTINUED)
11. COMBINING SUMMARY FINANCIAL STATEMENTS (CONTINUED)
CONSOLIDATED AND COMBINING STATEMENTS OF CASH FLOWS--YEAR ENDED DECEMBER 31,
1997 (IN MILLIONS)
DBS CORP AND
AFFILIATES
DBS AND
CORP SPACE DBSC SUBSIDIARIES
--------- ----------- ----------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)......................................................... $ (318) $ -- $ (5) $ (323)
Adjustments to reconcile net income (loss) to net cash flows from
operating activities:
Depreciation and amortization........................................... 51 -- -- 51
Amortization of subscriber acquisition costs............................ 121 -- -- 121
Interest on notes payable to ECC........................................ -- -- 5 5
Amortization of debt discount and deferred financing costs.............. 83 -- -- 83
Other, net.............................................................. 11 -- -- 11
Changes in current assets and current liabilities, net.................. 45 -- (1) 44
--------- --- --- -----
Net cash flows from operating activities.................................. (7) -- (1) (8)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of marketable investment securities............................. (37) -- -- (37)
Sales of marketable investment securities................................. 52 -- -- 52
Purchases of restricted marketable investment securities.................. (1) -- -- (1)
Funds released from escrow and restricted cash and marketable investment
securities.............................................................. 120 -- -- 120
Advances to affiliates.................................................... (135) 125 19 9
Purchases of property and equipment....................................... (79) (125) (18) (222)
Offering proceeds and investment earnings placed in escrow................ (228) -- -- (228)
--------- --- --- -----
Net cash flows from investing activities.................................. (308) -- 1 (307)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of Common Stock................................ -- -- -- --
Net proceeds from issuance of 1997 Notes.................................. 363 -- -- 363
Repayment of note payable to ECC.......................................... (12) -- -- (12)
Repayments of mortgage indebtedness and notes payable..................... (13) -- -- (13)
--------- --- --- -----
Net cash flows from financing activities.................................. 338 -- -- 338
--------- --- --- -----
Net increase (decrease) in cash and cash equivalents...................... 23 -- -- 23
Cash and cash equivalents, beginning of year.............................. 39 -- -- 39
--------- --- --- -----
Cash and cash equivalents, end of year.................................... $ 62 $ -- $ -- $ 62
--------- --- --- -----
--------- --- --- -----
F-47
ECHOSTAR DBS CORPORATION AND AFFILIATES AND SUBSIDIARIES
(A COMBINATION OF CERTAIN WHOLLY-OWNED SUBSIDIARIES OF
ECHOSTAR COMMUNICATIONS CORPORATION AS DEFINED IN NOTE 1)
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENT (CONTINUED)
11. COMBINING SUMMARY FINANCIAL STATEMENTS (CONTINUED)
CONSOLIDATED AND COMBINING STATEMENTS OF CASH FLOWS--NINE MONTHS ENDED
SEPTEMBER 30, 1997 (IN MILLIONS)
DBS CORP AND
AFFILIATES
DBS AND
CORP SPACE DBSC SUBSIDIARIES
--------- ----------- ----------- -------------
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)......................................................... $ (244) $ -- $ (5) $ (249)
Adjustments to reconcile net income (loss) to net cash flows from
operating activities:
Depreciation and amortization........................................... 38 -- -- 38
Amortization of subscriber acquisition costs............................ 95 -- -- 95
Interest on notes payable to ECC........................................ -- -- 5 5
Amortization of debt discount and deferred financing costs.............. 61 -- -- 61
Other, net.............................................................. 11 -- -- 11
Changes in current assets and current liabilities, net.................. (8) -- (1) (9)
--------- --- --- -----
Net cash flows from operating activities.................................. (47) -- (1) (48)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of marketable investment securities............................. (33) -- -- (33)
Sales of marketable investment securities................................. 21 -- -- 21
Purchases of restricted marketable investment securities.................. (1) -- -- (1)
Funds released from escrow and restricted cash and marketable investment
securities.............................................................. 100 -- -- 100
Advance to affiliates..................................................... (119) 109 18 8
Purchases of property and equipment....................................... (50) (109) (17) (176)
Offering proceeds and investment earnings placed in escrow................ (225) -- -- (225)
Other..................................................................... (2) -- -- (2)
--------- --- --- -----
Net cash flows from investing activities.................................. (309) -- 1 (308)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of Common Stock................................ -- -- -- --
Net proceeds from issuance of 1997 Notes.................................. 363 -- -- 363
Repayments of mortgage indebtedness and notes payable..................... (16) -- -- (16)
--------- --- --- -----
Net cash flows from financing activities.................................. 347 -- -- 347
--------- --- --- -----
Net increase (decrease) in cash and cash equivalents...................... (9) -- -- (9)
Cash and cash equivalents, beginning of year.............................. 39 -- -- 39
--------- --- --- -----
Cash and cash equivalents, end of year.................................... $ 30 $ -- $ -- $ 30
--------- --- --- -----
--------- --- --- -----
F-48
ECHOSTAR DBS CORPORATION AND AFFILIATES AND SUBSIDIARIES
(A COMBINATION OF CERTAIN WHOLLY-OWNED SUBSIDIARIES OF
ECHOSTAR COMMUNICATIONS CORPORATION AS DEFINED IN NOTE 1)
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENT (CONTINUED)
11. COMBINING SUMMARY FINANCIAL STATEMENTS (CONTINUED)
CONSOLIDATED AND COMBINING STATEMENTS OF CASH FLOWS--NINE MONTHS ENDED
SEPTEMBER 30, 1998 (IN MILLIONS)
DBS CORP AND
AFFILIATES
DBS AND
CORP SPACE DBSC SUBSIDIARIES
--------- ----------- ----------- -------------
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)......................................................... $ (150) $ (10) $ (11) $ (171)
Adjustments to reconcile net income (loss) to net cash flows from
operating activities:
Depreciation and amortization........................................... 43 10 6 59
Amortization of subscriber acquisition costs............................ 19 -- -- 19
Interest on notes payable to ECC........................................ -- -- 4 4
Amortization of debt discount and deferred financing costs.............. 89 -- -- 89
Other, net.............................................................. 8 -- -- 8
Changes in current assets and current liabilities, net.................. (48) -- -- (48)
--------- --- --- -----
Net cash flows from operating activities................................ (39) -- (1) (40)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of marketable investment securities............................. (4) -- -- (4)
Sales of marketable investment securities................................. 6 -- -- 6
Funds released from escrow and restricted cash and marketable investment
securities.............................................................. 116 -- -- 116
Purchases of property and equipment....................................... (134) -- -- (134)
Offering proceeds and investment earnings placed in escrow................ (5) -- -- (5)
Other..................................................................... 2 -- -- 2
--------- --- --- -----
Net cash flows from investing activities.................................. (19) -- -- (19)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of Common Stock................................ -- -- -- --
Advances from affiliates.................................................. 48 -- 3 51
Repayments of mortgage indebtedness and notes payable..................... (10) -- (2) (12)
--------- --- --- -----
Net cash flows from financing activities.................................. 38 -- 1 39
--------- --- --- -----
Net increase (decrease) in cash and cash equivalents...................... (20) -- -- (20)
Cash and cash equivalents, beginning of year.............................. 62 -- -- 62
--------- --- --- -----
Cash and cash equivalents, end of year.................................... $ 42 $ -- $ -- $ 42
--------- --- --- -----
--------- --- --- -----
F-49
ECHOSTAR DBS CORPORATION AND AFFILIATES AND SUBSIDIARIES
(A COMBINATION OF CERTAIN WHOLLY-OWNED SUBSIDIARIES OF
ECHOSTAR COMMUNICATIONS CORPORATION AS DEFINED IN NOTE 1)
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENT (CONTINUED)
12. OPERATIONS IN GEOGRAPHIC AREAS
The Company sells certain of its products on a worldwide basis and has
operations in Europe and the Pacific Rim. Information about the Company's
operations in different geographic areas as of December 31, 1995, 1996 and 1997
and for the years then ended, is as follows (in thousands):
UNITED OTHER
STATES EUROPE INTERNATIONAL TOTAL
------------ --------- ------------ ------------
1995
- ----
Total revenue............................................... $ 95,259 $ 31,351 $ 21,910 $ 148,520
------------ --------- ------------ ------------
------------ --------- ------------ ------------
Export sales................................................ $ 6,317
------------
------------
Operating income (loss)..................................... $ (7,895) $ 146 $ (257) $ (8,006)
------------ --------- ------------
------------ --------- ------------
Other income (expense), net................................. $ (10,546)
------------
------------
Net loss before income taxes................................ $ (18,552)
------------
------------
Identifiable assets......................................... $ 63,136 $ 10,088 $ 3,788 $ 77,012
------------ --------- ------------
------------ --------- ------------
Corporate assets............................................ $ 482,283
------------
------------
Total assets................................................ $ 559,295
------------
------------
1996
- ----
Total revenue............................................... $ 159,611 $ 26,984 $ 10,508 $ 197,103
------------ --------- ------------ ------------
------------ --------- ------------ ------------
Export sales................................................ $ 1,536
------------
------------
Operating loss.............................................. $ (106,695) $ (1,274) $ (896) $ (108,865)
------------ --------- ------------
------------ --------- ------------
Other income (expense), net................................. $ (47,664)
------------
------------
Net loss before income taxes................................ $ (156,529)
------------
------------
Identifiable assets......................................... $ 836,598 $ 5,795 $ 1,871 $ 844,264
------------ --------- ------------
------------ --------- ------------
Corporate assets............................................ $ 241,281
------------
------------
Total assets................................................ $ 1,085,545
------------
------------
1997
- ----
Total revenue............................................... $ 446,461 $ 20,592 $ 8,849 $ 475,902
------------ --------- ------------ ------------
------------ --------- ------------ ------------
Export sales................................................ $ 74,065
------------
------------
Operating loss.............................................. $ (222,710) $ (1,224) $ (402) $ (224,336)
------------ --------- ------------
------------ --------- ------------
Other income (expense), net................................. $ (98,942)
------------
------------
Net loss before income taxes................................ $ (323,278)
------------
------------
Identifiable assets......................................... $1,086,450 $ 5,696 $ 2,682 $ 1,094,828
------------ --------- ------------
------------ --------- ------------
Corporate assets............................................ $ 336,946
------------
------------
Total assets................................................ $ 1,431,774
------------
------------
F-50
ECHOSTAR DBS CORPORATION AND AFFILIATES AND SUBSIDIARIES
(A COMBINATION OF CERTAIN WHOLLY-OWNED SUBSIDIARIES OF
ECHOSTAR COMMUNICATIONS CORPORATION AS DEFINED IN NOTE 1)
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENT (CONTINUED)
13. VALUATION AND QUALIFYING ACCOUNTS
The Company's valuation and qualifying accounts as of December 31, 1995,
1996 and 1997 are as follows (in thousands):
BALANCE AT CHARGED TO
BEGINNING OF COSTS AND BALANCE AT
YEAR EXPENSES DEDUCTIONS END OF YEAR
------------- ----------- ----------- -----------
YEAR ENDED DECEMBER 31, 1995:
Assets:
Allowance for doubtful accounts........................... $ 186 $ 1,160 $ (240) $ 1,106
Loan loss reserve......................................... 95 19 (36) 78
Reserve for inventory..................................... 1,585 1,511 (299) 2,797
Liabilities:
Reserve for warranty costs and other...................... 1,493 562 (950) 1,105
YEAR ENDED DECEMBER 31, 1996:
Assets:
Allowance for doubtful accounts........................... $ 1,106 $ 2,340 $ (1,952) $ 1,494
Loan loss reserve......................................... 78 157 (94) 141
Reserve for inventory..................................... 2,797 4,304 (1,438) 5,663
Liabilities:
Reserve for warranty costs and other...................... 1,105 (342) -- 763
YEAR ENDED DECEMBER 31, 1997:
Assets:
Allowance for doubtful accounts........................... $ 1,494 $ 4,343 $ (4,490) $ 1,347
Loan loss reserve......................................... 141 7 (87) 61
Reserve for inventory..................................... 5,663 1,650 (3,473) 3,840
Liabilities:
Reserve for warranty costs and other...................... 763 -- (53) 710
14. QUARTERLY FINANCIAL DATA (UNAUDITED)
The Company's quarterly results of operations are summarized as follows (in
thousands):
THREE MONTHS ENDED
--------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
----------- --------- ------------ ------------
Year Ended December 31, 1996:
Total revenue................................................ $ 37,057 $ 68,478 $ 35,506 $ 56,062
Operating loss............................................... (8,991) (17,588) (27,601) (54,685)
Net loss..................................................... (7,787) (21,134) (26,769) (45,986)
Year Ended December 31, 1997:
Total revenue................................................ $ 68,967 $ 97,831 $ 129,662 $ 179,442
Operating loss............................................... (43,328) (43,503) (91,202) (46,303)
Net loss..................................................... (63,303) (66,067) (119,567) (74,487)
Certain revenue amounts reflected above have been reclassified to conform
with the 1997 presentation.
F-51
ECHOSTAR DBS CORPORATION AND AFFILIATES AND SUBSIDIARIES
(A COMBINATION OF CERTAIN WHOLLY-OWNED SUBSIDIARIES OF
ECHOSTAR COMMUNICATIONS CORPORATION AS DEFINED IN NOTE 1)
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENT (CONTINUED)
15. SUBSEQUENT EVENTS (UNAUDITED)
ECHOSTAR III DEVELOPMENTS
During July 1998, the Company announced that certain of the electronic power
converters ("EPC") on its third DBS satellite, EchoStar III, were operating at
higher than expected temperatures. In August 1998, Lockheed Martin, the
satellite manufacturer, notified the Company that it had re-qualified the EPC's
at the higher temperatures. As a result, the Company does not expect that this
anomaly will have a material impact on EchoStar III's transmission capacity.
During October 1998, Lockheed Martin advised the Company that EchoStar III
had experienced an anomaly which, to date, has resulted in the loss of six
TWTAs. The satellite is equipped with a total of 44 TWTAs. Only 11 TWTAs are
necessary to fully utilize the Company's 11 frequencies at 61.5 DEG. WL, where
the satellite is located. While there has been no interruption of service for
its customers and no interruption of service is expected, the Company is
presently working with Lockheed Martin to investigate the cause and potential
implications of the anomaly. Lockheed Martin has informally advised the Company
that it is possible the anomaly may result in the loss of additional
transponders in the future.
As a result of the anomaly related to the TWTAs, the Company has instructed
its broker to notify its insurance carriers of an occurrence under the terms of
the EchoStar III launch insurance policy. The EchoStar III launch insurance
policy provides for insurance of $219.3 million covering the period from launch
of the satellite (October 5, 1997) through October 5, 1998. Under that policy,
the Company has until early 1999 to file a claim for either a constructive total
or partial loss. It may be several months before all of the data required in
connection with the filing of a claim can be accumulated. Pending completion of
the anomaly investigation, the Company had transitioned to a 60-day, $200
million in-orbit insurance policy on EchoStar III at standard industry rates,
which was renewed to February 2, 1999. However, the policy contains an exclusion
for future TWTA losses based on similar anomalies. As a result of the exclusion,
and in the event that comprehensive coverage for similar TWTA anomalies is
ultimately denied under the launch insurance policy, the Company could
potentially experience uninsured losses of capacity on EchoStar III in the
future, up to and including a total loss of capacity. While there can be no
assurance, the Company and its insurers expect that in-orbit insurance can be
procured on more traditional terms in the future if the anomaly investigation is
satisfactorily concluded and no further failures occur in the interim.
Based on information currently available, management has evaluated the
potential financial statement impact of this satellite anomaly in accordance
with its stated accounting policies. The Company has not completed its
assessment of the impairment to EchoStar III, but currently believes that
insurance proceeds will be sufficient to offset any write-down of satellite
assets that may be required because of lost transmission capacity caused by this
anomaly. However, no assurance can be provided as to the ultimate amount that
may be received from the insurance claim, or that coverage will be available.
The Company will continue to evaluate the performance of EchoStar III and may
modify its loss assessment as new events or circumstances develop. The Company
does not maintain insurance for lost profit opportunity.
F-52
ECHOSTAR DBS CORPORATION AND AFFILIATES AND SUBSIDIARIES
(A COMBINATION OF CERTAIN WHOLLY-OWNED SUBSIDIARIES OF
ECHOSTAR COMMUNICATIONS CORPORATION AS DEFINED IN NOTE 1)
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENT (CONTINUED)
15. SUBSEQUENT EVENTS (UNAUDITED) (CONTINUED)
MEDIA4 ACQUISITION
During October 1998, EchoStar announced its intention to acquire
privately-held Media4, Inc. ("Media4"), an Atlanta-based supplier of broadband
satellite networking equipment for personal computers. Under the agreement,
EchoStar would issue approximately 386,000 shares of its Class A common stock,
subject to adjustment, for 100% ownership of Media4.
In connection with the merger, EchoStar has agreed to loan Media4 $250,000
per month for the period from October 1998 through the earlier of the
consummation of the merger, or December 31, 1998. Each advance will be
represented by a promissory note, bearing interest at 10%, compounded quarterly
and due and payable September 30, 1999.
EchoStar's obligation to acquire Media4 pursuant to the letter of intent is
non-binding and is subject to the negotiation and execution of a definitive
contract between the parties. Any contract signed by EchoStar for the purpose of
acquiring Media4 will be subject to a complete due diligence review of Media4 by
EchoStar, as well as the satisfaction by the seller of certain conditions. There
can be no assurance that the acquisition will be consummated.
NEWS AND MCI WORLDCOM TRANSACTION
The "110 Acquisition" was announced on November 30, 1998. Under the 110
Acquisition agreement, EchoStar will obtain MCI's license to operate 28 DBS
frequencies at the 110 DEG. WL full CONUS orbital location, in-orbit delivery of
two Loral-built satellites, currently expected to be launched during 1999; a
recently-constructed digital broadcast operations center located in Gilbert,
Arizona; a worldwide license agreement to manufacture and distribute set-top
boxes internationally using NDS encryption/decoding technology; a minimum
500,000 unit purchase commitment by an affiliated entity of News from ETC for
its set-top boxes; and a three-year no fee retransmission consent agreement for
DISH Network to rebroadcast FOX Network owned-and-operated local station signals
to their respective markets. The in-orbit delivery contract for the Loral-built
satellites, the cost of which will be borne by News, includes construction and
launch of the satellites and appropriate insurance coverage for launch and
one-year of in-orbit insurance. EchoStar and MCI also agreed that MCI will have
the non-exclusive right to bundle DISH Network service with MCI's telephony
service offerings on mutually agreeable terms. In addition, the Fox News Channel
is now carried on the DISH Network. The Company received standard launch support
payments and a provision for "most favored nation" programming rates in exchange
for carrying the programming.
In connection with the 110 Acquisition and based on EchoStar's Class A
common stock (Nasdaq: DISH) trading between $15.00 per share and $39.00 per
share (the Collar), News will receive 24,030,000 newly-issued shares of
EchoStar's Class A common stock and MCI will receive 5,970,000 newly-issued
shares of EchoStar's Class A common stock, which is approximately 37 percent of
EchoStar's fully-diluted equity and approximately 8.5 percent of the total
voting power. If the price of the Class A common stock is above the range of the
Collar, the number of newly issued shares will be adjusted downward.
By combining the capacity of the newly acquired satellites at the 110 DEG.WL
orbital slot and EchoStar's current satellites at 119 DEG.WL, EchoStar's DISH
Network would have the capability to provide
F-53
ECHOSTAR DBS CORPORATION AND AFFILIATES AND SUBSIDIARIES
(A COMBINATION OF CERTAIN WHOLLY-OWNED SUBSIDIARIES OF
ECHOSTAR COMMUNICATIONS CORPORATION AS DEFINED IN NOTE 1)
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENT (CONTINUED)
15. SUBSEQUENT EVENTS (UNAUDITED) (CONTINUED)
more than 500 channels of programming, Internet/data services and HDTV, along
with the capability of broadcasting to the entire United States, including
Alaska, Hawaii, Puerto Rico and the U.S. territories in the Caribbean and would
be positioned to become a one-dish solution for local-into-local channels in
major markets across the country.
The transaction is subject to receipt of appropriate regulatory approvals
and the consent of EchoStar's shareholders. EchoStar's Board of Directors has
approved the agreement.
F-54
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The following subparagraphs briefly describe indemnification provisions for
directors, officers and controlling persons of the Company against liability,
including liability under the Securities Act.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the Company
pursuant to the foregoing provisions, or otherwise, the Company has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act of
1933, as amended (the "Securities Act") and is, therefore, unenforceable.
COLORADO CORPORATIONS
As provided in the Articles of Incorporation of the Company, a Colorado
corporation, the Company may eliminate or limit the personal liability of a
director to the Company or to its shareholders for monetary damages for breach
of fiduciary duty as a director; except that such provision shall not eliminate
or limit the liability of a director to the Company or to its shareholders for
monetary damages for: any breach of the director's duty of loyalty to the
Company or to its shareholders; acts or omissions not in good faith or that
involve intentional misconduct or a knowing violation of law; acts specified in
Section 7-108-403 of the Colorado Business Corporation Act; or any transaction
from which the director derived an improper personal benefit. No such provisions
eliminate or limit the liability of a director to the Company or to its
shareholders for monetary damages for any act or omission occurring prior to the
date when such provision becomes effective.
1. Under provisions of the Bylaws of the Company and the Colorado Business
Corporation Act (the "Colorado Act"), each person who is or was a director of
officer of the Company will be indemnified by the Company as a matter of right
summarized as follows:
(a) Under the Colorado Act, a person who is wholly successful on the merits
in defense of a suit or proceeding brought against him by reason of the fact
that he is a director or officer of the Company shall be indemnified against
reasonable expenses (including attorneys' fees) in connection with such suit or
proceeding.
(b) Except as provided in subparagraph (c) below, a director may be
indemnified under such law against both (1) reasonable expenses (including
attorneys' fees), and (2) judgments, penalties, fines and amounts paid in
settlement, if he acted in good faith and reasonably believed, in the case of
conduct in his official capacity as a director, that his conduct was in the
Company's best interests, or in all other cases that his conduct was not opposed
to the best interests of the Company, and with respect to any criminal action,
he had no reasonable cause to believe his conduct was unlawful, but the Company
may not indemnify the director if the director is found liable to the Company or
is found liable on the basis that personal benefit was improperly received by
the director in connection with any suit or proceeding charging improper
personal benefit to the director;
(c) In connection with a suit or proceeding by or in the right of the
Company, indemnification is limited to reasonable expenses incurred in
connection with the suit or proceeding, but the Company may not indemnify the
director if the director was found liable to the Company; and
(d) Officers of the Company will be indemnified to the same extent as
directors as described in (a), (b) and (c) above.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
Exhibit No. Description
- ----------- -----------
No.
- ---
3.1(a) Articles of Incorporation of the Company (incorporated by
reference to Exhibit 3.4(a) to the Company's Registration
Statement on Form S-4, Registration No. 333-31929).
3.1(b) Bylaws of the Company (incorporated by reference to Exhibit
3.4(b) to the Company's Registration Statement on Form S-4,
Registration No. 333-31929).
4.1* Indenture relating to the Seven Year Notes, dated as of January
25, 1999, by and among the Company, the Guarantors and U.S. Bank
Trust National Association, as trustee.
4.2 Form of Note for Seven Year Notes (included in Exhibit 4.1).
4.3* Indenture relating to the Ten Year Notes, dated as of January 25,
1999, by and among the Company, the Guarantors and U.S. Bank
Trust National Association, as trustee.
4.4 Form of Note for Ten Year Notes (included in Exhibit 4.3).
4.5* Registration Rights Agreement relating to the Seven Year Notes by
and among the Company, the Guarantors and the parties named
therein.
4.6* Registration Rights Agreement relating to the Ten Year Notes by
and among the Company, the Guarantors and the parties named
therein.
5.1* Opinion of Winthrop, Stimson, Putnam & Roberts regarding legality
of securities being registered.
5.2* Opinion of Friedlob Sanderson Raskin Paulson & Tourtillott, LLC
regarding the legality of securities being registered.
10.1(a) Satellite Construction Contract, dated as of February 6, 1990,
between EchoStar Satellite Corporation ("ESC") and Martin
Marietta as successor to General Electric, EchoStar, Astro-Space
Division ("General Electric") (incorporated by reference to
Exhibit 10.1(a) to the Registration Statement on Form S-1 of
Dish, Ltd. ("Dish") Registration No. 33-76450).
II-2
10.1(b) First Amendment to the Satellite Construction Contract, dated as
of October 2, 1992, between ESC and Martin Marietta as successor
to General Electric (incorporated by reference to Exhibit 10.1(b)
to the Registration Statement on Form S-1 of Dish, Registration
No. 33-76450).
10.1(c) Second Amendment to the Satellite Construction Contract, dated as
of October 30, 1992, between ESC and Martin Marietta as successor
to General Electric (incorporated by reference to Exhibit 10.1(c)
to the Registration Statement on Form S-1 of Dish, Registration
No. 33-76450).
10.1(d) Third Amendment to the Satellite Construction Contract, dated as
of April 1, 1993, between ESC and Martin Marietta (incorporated
by reference to Exhibit 10.1(d)to the Registration Statement on
Form S-1 of Dish, Registration No. 33-76450).
10.1(e) Fourth Amendment to the Satellite Construction Contract, dated as
of August 19, 1993, between ESC and Martin Marietta (incorporated
by reference to Exhibit 10.1(e) to the Registration Statement on
Form S-1 of Dish, Registration No. 33-76450).
10.1(f) Form of Fifth Amendment to the Satellite Construction Contract,
between ESC and Martin Marietta (incorporated by reference to
Exhibit 10.1(f) to the Registration Statement on Form S-1 of
Dish, Registration No. 33-81234).
10.1(g) Sixth Amendment to the Satellite Construction Contract, dated as
of June 7, 1994, between ESC and Martin Marietta (incorporated by
reference to Exhibit 10.1(g) to the Registration Statement on
Form S-1 of Dish, Registration No. 33-81234).
10.1(h) Eighth Amendment to the Satellite Construction Contract, dated as
of July 18, 1996, between ESC and Martin Marietta (incorporated
by reference to Exhibit 10.1(h) to the Quarterly Report on Form
10-Q of EchoStar for the quarter ended June 30, 1996, Commission
File No. 0-26176).
10.2 Master Purchase and License Agreement, dated as of August 12,
1986, between Houston Tracker Systems, Inc. ("HTS") and
Cable/Home Communications Corp. (a subsidiary of General
Instruments Corporation) (incorporated by reference to Exhibit
10.4 to the Registration Statement on Form S-1 of Dish,
Registration No. 33-76450).
10.3 Master Purchase and License Agreement, dated as of June 18, 1986,
between Echosphere Corporation and Cable/Home Communications
Corp. (a subsidiary of General Instruments Corporation)
(incorporated by reference to Exhibit 10.5 to the Registration
Statement on Form S-1 of Dish, Registration No. 33-76450).
10.4 Merchandising Financing Agreement, dated as of June 29, 1989,
between Echo Acceptance Corporation and Household Retail
Services, Inc. (incorporated by reference to Exhibit 10.6 to the
Registration Statement on Form S-1 of Dish, Registration No.
33-76450).
10.5 Key Employee Bonus Plan, dated as of January 1, 1994
(incorporated by reference to Exhibit 10.7 to the Registration
Statement on Form S-1 of Dish, Registration No. 33-76450).
II-3
10.6 Consulting Agreement, dated as of February 17, 1994, between ESC
and Telesat Canada (incorporated by reference to Exhibit 10.8 to
the Registration Statement on Form S-1 of Dish, Registration No.
33-76450).
10.7 Form of Satellite Launch Insurance Declarations (incorporated by
reference to Exhibit 10.10 to the Registration Statement on Form
S-1 of Dish, Registration No. 33-81234).
10.8 Dish 1994 Stock Incentive Plan (incorporated by reference to
Exhibit 10.11 to the Registration Statement on Form S-1 of Dish,
Registration No. 33-76450).
10.9 Form of Tracking, Telemetry and Control Contract between AT&T
Corp. and ESC (incorporated by reference to Exhibit 10.12 to the
Registration Statement on Form S-1 of Dish, Registration No.
33-81234).
10.10 Manufacturing Agreement, dated as of March 22, 1995, between
Houston Tracker Systems, Inc. and SCI Technology, Inc.
(incorporated by reference to Exhibit 10.12 to the Registration
Statement on Form S-1 of Dish, Commission File No. 33-81234).
10.11 Manufacturing Agreement dated as of April 14, 1995 by and between
ESC and Sagem Group (incorporated by reference to Exhibit 10.13
to the Registration Statement on Form S-1 of EchoStar
Communications Corporation ("ECC"), Registration No. 33-91276).
10.12 Statement of Work, dated January 31, 1995 from ESC to Divicom
Inc. (incorporated by reference to Exhibit 10.14 to the
Registration Statement on Form S-1 of ECC, Registration No.
33-91276).
10.13 Launch Services Contract, dated as of June 2, 1995, by and
between EchoStar Space Corporation and
Lockheed-Khrunichev-Energia International, Inc. (incorporated by
reference to Exhibit 10.15 to the Registration Statement on Form
S-1 of ECC, Registration No. 33-91276).
10.14 EchoStar 1995 Stock Incentive Plan (incorporated by reference to
Exhibit 10.16 to the Registration Statement on Form S-1 of ECC,
Registration No. 33-91276).
10.15(a) Eighth Amendment to Satellite Construction Contract, dated as of
February 1, 1994, between DirectSat Corporation and Martin
Marietta (incorporated by reference to Exhibit 10.17(a) to the
Quarterly Report on Form 10-Q of ECC for the quarter ended June
30, 1996, Commission File No. 0-26176).
10.15(b) Ninth Amendment to Satellite Construction Contract, dated as of
February 1, 1994, between DirectSat Corporation and Martin
Marietta (incorporated by reference to Exhibit 10.15 to the
Registration Statement of Form S-4 of ECC, Registration No.
333-03584).
10.15(c) Tenth Amendment to Satellite Construction Contract, dated as of
July 18, 1996, between DirectSat Corporation and Martin Marietta
(incorporated by reference to Exhibit 10.17(b) to the Quarterly
Report on Form 10-Q of ECC for the quarter ended June 30, 1996,
Commission File No. 0-26176).
II-4
10.16 Satellite Construction Contract, dated as of July 18, 1996,
between EDBS and Lockheed Martin Corporation (incorporated by
reference to Exhibit 10.18 to the Quarterly Report on Form 10-Q
of ECC for the quarter ended June 30, 1996, Commission File No.
0-26176).
10.17 Confidential Amendment to Satellite Construction Contract between
DBSC and Martin Marietta, dated as of May 31, 1995 (incorporated
by reference to Exhibit 10.14 to the Registration Statement of
Form S-4 of ECC, Registration No. 333-03584).
10.18 Right and License Agreement by and among HTS and Asia
Broadcasting and Communications Network, Ltd., dated December 19,
1996 (incorporated by reference to Exhibit 10.18 to the Annual
Report on Form 10-K of ECC for the year ended December 31, 1996,
as amended, Commission file No. 0-26176).
10.19 Agreement between HTS, ESC and ExpressVu Inc., dated January 8,
1997, as amended (incorporated by reference to Exhibit 10.18 to
the Annual Report on Form 10-K of ECC for the year ended December
31, 1996, as amended, Commission file No. 0-26176).
10.20 Amendment No. 9 to Satellite Construction Contract, effective as
of July 18, 1996, between Direct Satellite Broadcasting
Corporation, a Delaware corporation ("DBSC") and Martin Marietta
Corporation (incorporated by reference to Exhibit 10.1 to the
Quarterly Report on Form 10-Q of ECC for the quarterly period
ended June 30, 1997, Commission File No. 0-26176).
10.21 Amendment No. 10 to Satellite Construction Contract, effective as
of May 31, 1996, between DBSC and Lockheed Martin Corporation
(incorporated by reference to Exhibit 10.2 to the Quarterly
Report on Form 10-Q of ECC for the quarterly period ended June
30, 1997, Commission File No. 0-26176).
10.22 Contract for Launch Services, dated April 5, 1996, between
Lockheed Martin Commercial Launch Services, Inc. and EchoStar
Space Corporation (incorporated by reference to Exhibit 10.3 to
the Quarterly Report on Form 10-Q of ECC for the quarterly period
ended June 30, 1997, Commission File No. 0-26176).
10.23 OEM Manufacturing, Marketing and Licensing Agreement, dated as of
February 17, 1998, by and among HTS, ESC and Philips Electronics
North America Corporation (incorporated by reference to Exhibit
10.1 to the Quarterly Report on Form 10-Q of ECC for the
quarterly period ended March 31, 1998, Commission File No.
0-26176).
10.24 Licensing Agreement, dated as of February 23, 1998, by and among
HTS, ESC and VTech Communications Ltd. (incorporated by reference
to Exhibit 10.2 to the Quarterly Report on Form 10-Q of ECC for
quarterly period ended March 31, 1998, Commission File No.
0-26176).
10.25 Agreement to form NagraStar LLC, dated as of June 23, 1998 by and
between Kudelski S.A., ECC and ESC (incorporated by reference to
Exhibit 10.1 to the Quarterly Report on Form 10-Q of ECC for
quarterly period ended June 30, 1998, Commission File No.
0-26176).
II-5
10.26 Purchase Agreement by and among American Sky Broadcasting, LLC,
The News Corporation Limited, MCI Telecommunications Corporation
and EchoStar Communications Corporation, dated November 30, 1998.
(incorporated by reference to Exhibit 10.1 to the Form 8-K filed
by ECC on November 30, 1998, Commission File No. 0-26176).
10.27 Form of Registration Rights Agreement to be entered into among
EchoStar Communications Corporation, MCI Telecommunications
Corporation, and a to-be-named wholly-owned subsidiary of MCI
Telecommunications Corporation, American Sky Broadcasting, LLC,
and a to-be-named wholly-owned subsidiary of The News Corporation
Limited (incorporated by reference to Exhibit 10.2 to the Current
Report on Form 8-K of EchoStar, filed as of December 1, 1998).
10.28 Voting Agreement dated November 30, 1998, among EchoStar
Communications Corporation, American Sky Broadcasting, LLC,
The News Corporation Limited and MCI Telecommunications
Corporation (incorporated by reference to Exhibit 10.3 to the
Current Report on Form 8-K of EchoStar, filed as of December 1,
1998).
12* Ratio of earnings to fixed charges.
21* Subsidiaries of the Company.
23.1 Consent of Winthrop, Stimson, Putnam & Roberts (included in
Exhibit 5.1).
23.2 Consent of Friedlob Sanderson Raskin Paulson & Tourtillott, LLC
(included in Exhibit 5.2).
23.3** Consent of Arthur Andersen LLP.
24.1* Power of Attorney (included in the signature pages to this
Registration Statement).
25.1* Statement of Eligibility on Form T-1 under the Trust Indenture
Act of 1939 of U.S. Bank Trust National Association, as Trustee
of the Indenture, relating to the Seven Year Notes (separately
bound).
25.2* Statement of Eligibility on Form T-1 under the Trust Indenture
Act of 1939 of U.S. Bank Trust National Association, as Trustee
of the Indenture, relating to the Ten Year Notes (separately
bound).
99.1* Form of Letter of Transmittal.
99.2* Form of Notice of Guaranteed Delivery.
- -------------------
* Previously filed
** Filed herewith
ITEM 22. UNDERTAKINGS
(a) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and
II-6
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question of whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
(b) The undersigned Registrant hereby undertakes to respond to requests
for information that is incorporated by reference into the Prospectus pursuant
to items 4, 10(b), 11, or 13 of this Form, within one business day of receipt of
such request, and to send the incorporating documents by first class mail or
other equally prompt means. This includes information contained in the
documents filed subsequent to the effective date of the registration statement
through the date of responding to the request.
(c) The undersigned Registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
(d) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act.
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the Registration Statement.
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the Registration Statement
or any material change to such information in the Registration
Statement.
(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a
new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination
of the offering.
II-7
SIGNATURES
Pursuant to the requirements of Securities Act of 1933, as amended, the
Registrants have duly caused this Amendment No. 1 to the Registration
Statement to be signed on their behalf by the undersigned, thereunto duly
authorized in the City of Littleton, State of Colorado, as of February 9, 1999.
ECHOSTAR DBS CORPORATION
DIRECTSAT CORPORATION
ECHO ACCEPTANCE CORPORATION
ECHOSPHERE CORPORATION
DISH INSTALLATION NETWORK CORPORATION
ECHOSTAR TECHNOLOGIES CORPORATION
HT VENTURES, INC.
ECHOSTAR INTERNATIONAL CORPORATION
SATELLITE SOURCE, INC.
ECHOSTAR SATELLITE CORPORATION
HOUSTON TRACKER SYSTEMS, INC.
ECHOSTAR NORTH AMERICA CORPORATION
SKY VISTA CORPORATION
ECHOSTAR INDONESIA, INC.
DIRECT BROADCASTING SATELLITE CORPORATION
ECHOSTAR SATELLITE BROADCASTING CORPORATION
DISH, LTD.
ECHOSTAR SPACE CORPORATION
By: *
** 1--------------------
Charles W. Ergen
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Amendment No. 1 to the Registration Statement has been signed below on
February 5, 1999, by the following persons in the capacities indicated:
SIGNATURE TITLE DATE
- ----------------- -------- --------
* Chairman, Chief Executive Officer and February 5, 1999
- -------------------- Director (Principal Executive Officer)
Charles W. Ergen
* Chief Operating Officer and February 5, 1999
- --------------------- Chief Financial Officer
II-8
Steven B. Schaver (Principal Financial and Accounting Officer)
* Director February 5, 1999
- ------------------
James DeFranco
Director February 5, 1999
/s/ David K. Moskowitz
- ----------------------
David K. Moskowitz
*By /s/ David K. Moskowitz
- --------------------------
David K. Moskowitz
Attorney-in-Fact
II-9
Index to Exhibits
Exhibit Description Page Number
------- ----------- ----------
No.
---
3.1(a) Articles of Incorporation of the Company (incorporated
by reference to Exhibit 3.4(a) to the Company's
Registration Statement on Form S-4, Registration No.
333-31929).
3.1(b) Bylaws of the Company (incorporated by reference to
Exhibit 3.4(b) to the Company's Registration Statement
on Form S-4, Registration No. 333-31929).
4.1* Indenture relating to the Seven Year Notes, dated as of
January 25, 1999, by and among the Company, the
Guarantors and U.S. Bank Trust National Association, as
trustee.
4.2 Form of Note for Seven Year Notes (included in Exhibit 4.1).
4.3* Indenture relating to the Ten Year Notes, dated as of
January 25, 1999, by and among the Company, the
Guarantors and U.S. Bank Trust National Association, as
trustee.
4.4 Form of Note for Ten Year Notes (included in Exhibit 4.3).
4.5* Registration Rights Agreement relating to the Seven
Year Notes by and among the Company, the Guarantors and
the parties named therein.
4.6* Registration Rights Agreement relating to the Ten Year
Notes by and among the Company, the Guarantors and the
parties named therein.
5.1* Opinion of Winthrop, Stimson, Putnam & Roberts
regarding legality of securities being registered.
5.2* Opinion of Friedlob Sanderson Raskin Paulson &
Tourtillott, LLC regarding the legality of securities
being registered.
10.1(a) Satellite Construction Contract, dated as of February
6, 1990, between EchoStar Satellite Corporation ("ESC")
and Martin Marietta as successor to General Electric,
EchoStar, Astro-Space Division ("General Electric")
(incorporated by reference to Exhibit 10.1(a) to the
Registration Statement on Form S-1 of Dish, Ltd.
("Dish") Registration No. 33-76450).
10.1(b) First Amendment to the Satellite Construction Contract,
dated as of October 2, 1992, between ESC and Martin
Marietta as successor to General Electric (incorporated
by reference to Exhibit 10.1(b) to the Registration
Statement on Form S-1 of Dish, Registration No. 33-
76450).
10.1(c) Second Amendment to the Satellite Construction
Contract, dated as of October 30, 1992, between ESC and
Martin Marietta as successor to General Electric
(incorporated by reference to Exhibit 10.1(c) to the
Registration Statement on Form S-1 of Dish,
Registration No. 33-76450).
10.1(d) Third Amendment to the Satellite Construction Contract,
dated as of April 1, 1993, between ESC and Martin
Marietta (incorporated by reference to Exhibit
10.1(d)to the Registration Statement on Form S-1 of
Dish, Registration No. 33-76450).
10.1(e) Fourth Amendment to the Satellite Construction
Contract, dated as of August 19, 1993, between ESC and
Martin Marietta (incorporated by reference to Exhibit
10.1(e) to the Registration Statement on Form S-1 of
Dish, Registration No. 33-76450).
10.1(f) Form of Fifth Amendment to the Satellite Construction
Contract, between ESC and Martin Marietta (incorporated
by reference to Exhibit 10.1(f) to the Registration
Statement on Form S-1 of Dish, Registration No. 33-
81234).
10.1(g) Sixth Amendment to the Satellite Construction Contract,
dated as of June 7, 1994, between ESC and Martin
Marietta (incorporated by reference to Exhibit 10.1(g)
to the Registration Statement on Form S-1 of Dish,
Registration No. 33-81234).
10.1(h) Eighth Amendment to the Satellite Construction
Contract, dated as of July 18, 1996, between ESC and
Martin Marietta (incorporated by reference to Exhibit
10.1(h) to the Quarterly Report on Form 10-Q of
EchoStar for the quarter ended June 30, 1996,
Commission File No. 0-26176).
10.2 Master Purchase and License Agreement, dated as of
August 12, 1986, between Houston Tracker Systems, Inc.
("HTS") and Cable/Home Communications Corp. (a
subsidiary of General Instruments Corporation)
(incorporated by reference to Exhibit 10.4 to the
Registration Statement on Form S-1 of Dish,
Registration No. 33-76450).
10.3 Master Purchase and License Agreement, dated as of June
18, 1986, between Echosphere Corporation and Cable/Home
Communications Corp. (a subsidiary of General
Instruments Corporation) (incorporated by reference to
Exhibit 10.5 to the Registration Statement on Form S-1
of Dish, Registration No. 33-76450).
10.4 Merchandising Financing Agreement, dated as of June 29,
1989, between Echo Acceptance Corporation and Household
Retail Services, Inc. (incorporated by reference to
Exhibit 10.6 to the Registration Statement on Form S-1
of Dish, Registration No. 33-76450).
10.5 Key Employee Bonus Plan, dated as of January 1, 1994
(incorporated by reference to Exhibit 10.7 to the
Registration Statement on Form S-1 of Dish,
Registration No. 33-76450).
10.6 Consulting Agreement, dated as of February 17, 1994,
between ESC and Telesat Canada (incorporated by
reference to Exhibit 10.8 to the Registration Statement
on Form S-1 of Dish, Registration No. 33-76450).
10.7 Form of Satellite Launch Insurance Declarations
(incorporated by reference to Exhibit 10.10 to the
Registration Statement on Form S-1 of Dish,
Registration No. 33-81234).
10.8 Dish 1994 Stock Incentive Plan (incorporated by
reference to Exhibit 10.11 to the Registration
Statement on Form S-1 of Dish, Registration No. 33-
76450).
10.9 Form of Tracking, Telemetry and Control Contract
between AT&T Corp. and ESC (incorporated by reference
to Exhibit 10.12 to the Registration Statement on Form
S-1 of Dish, Registration No. 33-81234).
10.10 Manufacturing Agreement, dated as of March 22, 1995,
between Houston Tracker Systems, Inc. and SCI
Technology, Inc. (incorporated by reference to Exhibit
10.12 to the Registration Statement on Form S-1 of
Dish, Commission File No. 33-81234).
10.11 Manufacturing Agreement dated as of April 14, 1995 by
and between ESC and Sagem Group (incorporated by
reference to Exhibit 10.13 to the Registration
Statement on Form S-1 of EchoStar Communications
Corporation ("ECC"), Registration No. 33-91276).
10.12 Statement of Work, dated January 31, 1995 from ESC to
Divicom Inc. (incorporated by reference to Exhibit
10.14 to the Registration Statement on Form S-1 of ECC,
Registration No. 33-91276).
10.13 Launch Services Contract, dated as of June 2, 1995, by
and between EchoStar Space Corporation and Lockheed-
Khrunichev-Energia International, Inc. (incorporated by
reference to Exhibit 10.15 to the Registration
Statement on Form S-1 of ECC, Registration No. 33-
91276).
10.14 EchoStar 1995 Stock Incentive Plan (incorporated by
reference to Exhibit 10.16 to the Registration
Statement on Form S-1 of ECC, Registration No. 33-
91276).
10.15(a) Eighth Amendment to Satellite Construction Contract,
dated as of February 1, 1994, between DirectSat
Corporation and Martin Marietta (incorporated by
reference to Exhibit 10.17(a) to the Quarterly Report
on Form 10-Q of ECC for the quarter ended June 30,
1996, Commission File No. 0-26176).
10.15(b) Ninth Amendment to Satellite Construction Contract,
dated as of February 1, 1994, between DirectSat
Corporation and Martin Marietta (incorporated by
reference to Exhibit 10.15 to the Registration
Statement of Form S-4 of ECC, Registration No. 333-
03584).
10.15(c) Tenth Amendment to Satellite Construction Contract,
dated as of July 18, 1996, between DirectSat
Corporation and Martin Marietta (incorporated by
reference to Exhibit 10.17(b) to the Quarterly Report
on Form 10-Q of ECC for the quarter ended June 30,
1996, Commission File No. 0-26176).
10.16 Satellite Construction Contract, dated as of July 18,
1996, between EDBS and Lockheed Martin Corporation
(incorporated by reference to Exhibit 10.18 to the
Quarterly Report on Form 10-Q of ECC for the quarter
ended June 30, 1996, Commission File No. 0-26176).
10.17 Confidential Amendment to Satellite Construction
Contract between DBSC and Martin Marietta, dated as of
May 31, 1995 (incorporated by reference to Exhibit
10.14 to the Registration Statement of Form S-4 of ECC,
Registration No. 333-03584).
10.18 Right and License Agreement by and among HTS and Asia
Broadcasting and Communications Network, Ltd., dated
December 19, 1996 (incorporated by reference to Exhibit
10.18 to the Annual Report on Form 10-K of ECC for the
year ended December 31, 1996, as amended, Commission
file No. 0-26176).
10.19 Agreement between HTS, ESC and ExpressVu Inc., dated
January 8, 1997, as amended (incorporated by reference
to Exhibit 10.18 to the Annual Report on Form 10-K of
ECC for the year ended December 31, 1996, as amended,
Commission file No. 0-26176).
10.20 Amendment No. 9 to Satellite Construction Contract,
effective as of July 18, 1996, between Direct Satellite
Broadcasting Corporation, a Delaware corporation
("DBSC") and Martin Marietta Corporation (incorporated
by reference to Exhibit 10.1 to the Quarterly Report on
Form 10-Q of ECC for the quarterly period ended June
30, 1997, Commission File No. 0-26176).
10.21 Amendment No. 10 to Satellite Construction Contract,
effective as of May 31, 1996, between DBSC and Lockheed
Martin Corporation (incorporated by reference to
Exhibit 10.2 to the Quarterly Report on Form 10-Q of
ECC for the quarterly period ended June 30, 1997,
Commission File No. 0-26176).
10.22 Contract for Launch Services, dated April 5, 1996,
between Lockheed Martin Commercial Launch Services,
Inc. and EchoStar Space Corporation (incorporated by
reference to Exhibit 10.3 to the Quarterly Report on
Form 10-Q of ECC for the quarterly period ended June
30, 1997, Commission File No. 0-26176).
10.23 OEM Manufacturing, Marketing and Licensing Agreement,
dated as of February 17, 1998, by and among HTS, ESC
and Philips Electronics North America Corporation
(incorporated by reference to Exhibit 10.1 to the
Quarterly Report on Form 10-Q of ECC for the quarterly
period ended March 31, 1998, Commission File No. 0-
26176).
10.24 Licensing Agreement, dated as of February 23, 1998, by
and among HTS, ESC and VTech Communications Ltd.
(incorporated by reference to Exhibit 10.2 to the
Quarterly Report on Form 10-Q of ECC for quarterly
period ended March 31, 1998, Commission File No. 0-
26176).
10.25 Agreement to form NagraStar LLC, dated as of June 23,
1998 by and between Kudelski S.A., ECC and ESC
(incorporated by reference to Exhibit 10.1 to the
Quarterly Report on Form 10-Q of ECC for quarterly
period ended June 30, 1998, Commission File No. 0-
26176).
10.26 Purchase Agreement by and among American Sky
Broadcasting, LLC, The News Corporation Limited, MCI
Telecommunications Corporation and EchoStar
Communications Corporation, dated November 30, 1998.
(incorporated by reference to Exhibit 10.1 to the Form
8-K filed by ECC on November 30, 1998, Commission File
No. 0-26176).
10.27 Form of Registration Rights Agreement to be entered
into among EchoStar Communications Corporation, MCI
Telecommunications Corporation, and a to-be-named
wholly-owned subsidiary of MCI Telecommunications
Corporation, American Sky Broadcasting, LLC, and a to-
be-named wholly-owned subsidiary of The News
Corporation Limited (incorporated by reference to
Exhibit 10.2 to the Current Report on Form 8-K of
EchoStar, filed as of December 1, 1998).
10.28 Voting Agreement dated November 30, 1998, among
EchoStar Communications Corporation, American Sky
Broadcasting, LLC, The News Corporation Limited and
MCI Telecommunications Corporation (incorporated by
reference to Exhibit 10.3 to the Current Report on Form
8-K of EchoStar, filed as of December 1, 1998).
12* Ratio of earnings to fixed charges.
21* Subsidiaries of the Company.
23.1 Consent of Winthrop, Stimson, Putnam & Roberts
(included in Exhibit 5.1).
23.2 Consent of Friedlob Sanderson Raskin Paulson &
Tourtillott, LLC (included in Exhibit 5.2).
23.3** Consent of Arthur Andersen LLP.
24* Power of Attorney (included in the signature pages to
this Registration Statement).
25.1* Statement of Eligibility on Form T-1 under the Trust
Indenture Act of 1939 of U.S. Bank Trust National
Association, as Trustee of the Indenture, relating to
the Seven Year Notes (separately bound).
25.2* Statement of Eligibility on Form T-1 under the Trust
Indenture Act of 1939 of U.S. Bank Trust National
Association, as Trustee of the Indenture, relating to
the Ten Year Notes (separately bound).
99.1* Form of Letter of Transmittal.
99.2* Form of Notice of Guaranteed Delivery.
- -------------------
* Previously filed
** Filed herewith
EXHIBIT 23.3
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
report and to all references to our Firm included in or made part of this
Registration Statement.
ARTHUR ANDERSEN LLP
Denver, Colorado
February 9, 1999
