AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 21, 1999
Registration No. 333-71345
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________________________
AMENDMENT NO. 5
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, (NAME, ADDRESS, INCLUDING ZIP CODE,
AND TELEPHONE NUMBER, INCLUDING AND TELEPHONE NUMBER, INCLUDING
AREA CODE, OF REGISTRANT'S AREA CODE, OF AGENT FOR SERVICE)
PRINCIPAL EXECUTIVE OFFICE)
WITH A COPY TO:
RONALD A. FLEMING, JR., ESQ.
WINTHROP, STIMSON, PUTNAM & ROBERTS
ONE BATTERY PARK PLAZA
NEW YORK, NY 10004
(212) 858-1000
___________________________
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
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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
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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
ECHOSTAR SPACE CORPORATION COLORADO 5064 84-1307367
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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 JULY 21, 1999
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 August 19, 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.
MATERIAL TERMS OF THE EXCHANGE OFFER
- - 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.
- - There has been no public market for the old notes and we cannot assure
you that any public market for the exchange notes will develop. We do not
intend to list the exchange notes on any national securities exchange or any
automated quotation system.
CONSIDER CAREFULLY THE "RISK FACTORS" BEGINNING ON PAGE 17 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
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Prospectus summary............................................................................ 3
Summary of the terms of the exchange offer.................................................... 7
Summary description of the notes.............................................................. 9
Summary financial data........................................................................ 12
Summary satellite data........................................................................ 14
The EchoStar organization..................................................................... 15
Risk factors.................................................................................. 17
Use of proceeds............................................................................... 33
The exchange offer............................................................................ 34
Selected financial data....................................................................... 43
Management's discussion and analysis of financial condition and results of operations......... 46
Business...................................................................................... 61
Management.................................................................................... 85
Certain relationships and related transactions................................................ 92
Security ownership of certain beneficial owners and management................................ 93
Description of the notes...................................................................... 96
Certain United States federal income tax considerations....................................... 141
United States ERISA considerations............................................................ 144
Plan of distribution.......................................................................... 145
Legal matters................................................................................. 146
Experts....................................................................................... 146
Where you can find more information........................................................... 146
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
ECHOSTAR DBS
We are a leading provider of direct broadcast satellite programming
services through our DISH Network-TM- in the United States, a significant
international supplier of digital satellite receiver systems and a provider of
other satellite services.
THE DISH NETWORK
We started offering subscription television services on the DISH
Network in March 1996. As of March 31, 1999, more than 2.3 million households
subscribed to DISH Network programming services. Our market share of new direct
broadcast satellite, or DBS, subscribers has consistently increased and, during
the first quarter of 1999, we estimate that we captured almost 49% of all new
satellite subscribers. We presently have four operational direct broadcast
satellites, which is more than any other direct broadcast satellite operator in
the United States. Currently, we have the ability to provide approximately 200
channels of digital television programming and CD quality audio programming
services to the entire "lower 48" continental United States. We believe that the
DISH Network offers programming packages that have a better "price-to-value"
relationship than packages currently offered by most other subscription
television providers, particularly cable TV operators. As of March 31, 1999,
approximately 11 million United States households subscribed to direct broadcast
satellite and other direct-to-home satellite services. However, we believe that
there continues to be significant unsatisfied demand for high quality,
reasonably priced television programming services.
Now that we have successfully closed the recently announced
transaction with The News Corporation Limited, its ASkyB subsidiary and MCI
WorldCom, we expect to be able to offer approximately 500 video and audio
channels to subscribers in the entire "lower 48" continental United States that
may be received with one dish. See "Business--Recent developments--Transaction
with News Corporation and MCI" and "Business--Government regulation."
ECHOSTAR TECHNOLOGIES CORPORATION
In addition to supplying EchoStar receiver systems for the DISH
Network, our subsidiary EchoStar Technologies Corporation supplies similar
digital satellite receivers to international satellite TV service operators.
Currently, we have two major customers, Telefonica and Bell Canada, which are
subsidiaries of the national telephone companies in Spain and Canada,
respectively. We also offer consulting and integration services to development
stage, international direct-to-home satellite operators. We are actively
soliciting new business for ETC and, although we are optimistic about future
growth opportunities, we cannot provide any assurance in that regard.
SATELLITE SERVICES
Our Satellite Services business unit primarily leases capacity on our
satellites to customers, including international services that broadcast foreign
language programming to our subscribers and Fortune 1000 companies that use our
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 mid-1999.
BUSINESS STRATEGY
Our primary objective is to continue to expand our DISH Network
subscriber base and to develop as an integrated, full-service satellite company.
To achieve this objective, we seek to:
3
- - LEVERAGE OUR SIGNIFICANT SHARE OF DBS SPECTRUM BY OFFERING UNIQUE
PROGRAMMING SERVICES THAT WILL DIFFERENTIATE US FROM OUR COMPETITION. THESE
SERVICES INCLUDE SATELLITE-DELIVERED LOCAL SIGNALS AND OTHER NICHE AND
FOREIGN LANGUAGE SERVICES;
- - OFFER MARKETING PROMOTIONS THAT WILL ENHANCE OUR POSITION AS A LEADING
PROVIDER OF VALUE-ORIENTED PROGRAMMING SERVICES AND RECEIVER SYSTEMS;
- - CONTINUE TO EXPAND DISH NETWORK DISTRIBUTION CHANNELS;
- - DEVELOP THE ETC AND SATELLITE SERVICES BUSINESSES; AND
- - EMPHASIZE ONE-STOP SHOPPING AND SUPERIOR CUSTOMER SERVICE.
Our principal offices are located at 5701 South Santa Fe Drive,
Littleton, Colorado 80120, and our telephone number is (303) 723-1000.
4
RECENT DEVELOPMENTS
TRANSACTION WITH NEWS CORPORATION AND MCI
We closed a transaction with News Corporation and MCI on June 24,
1999. Under this transaction, among other things that we have described in
more detail in the Business section of this prospectus, our parent company
acquired in exchange for shares of its common stock valued at $1.17 billion:
- - 28 DBS frequencies at a strategic orbital location;
- - two DBS satellites that will be delivered in orbit at no additional
cost to EchoStar;
- - a digital broadcast operations center in Gilbert, Arizona; and
- - a three-year, no fee agreement for the DISH Network to rebroadcast FOX
Broadcasting Company's local station signals in those markets where FOX
owns the local affiliate.
On May 19, 1999, the FCC approved the transfer to us of MCI's
license to operate high-powered DBS satellites at the 110DEG. WL orbital
location. Satellites at the 110DEG. WL orbital location are capable of
providing service to the entire continental United States. Space
Systems/Loral is constructing two satellites for us, EchoStar V and EchoStar
VI. The launch of Echostar V and EchoStar VI are both currently scheduled
from Florida on Atlas IIAs rockets. EchoStar V is expected to be launched in
September 1999. EchoStar VI is expected to be launched in the December 1999
to January 2000 timeframe. Delays or failures of launches preceding the
launch of EchoStar V or EchoStar VI could delay these launch dates.
Additionally, if other similar satellites experience anomalies, this could
delay the launch of EchoStar V and ExchoStar VI until technical personnel
discover the cause and correct the anomalies. It is also possible that the
launch dates could occur sooner. News Corporation is paying for the
construction, launch and insurance of the satellites. See "Business--Recent
Developments--Transaction with News Corporation and MCI" and
"Business--Government regulation."
ECHOSTAR COMMUNICATIONS TENDER OFFERS
On December 23, 1998, our parent company commenced cash tender
offers for three series of outstanding debt securities that were issued by
its subsidiaries. On January 4, 1999, our parent company also commenced a
cash tender offer for one series of its own debt securities. The tender
offers formed part of a plan to refinance existing indebtedness at more
favorable interest rates and terms. The tender offers for the first three
series of notes closed on January 25, 1999, concurrently with sale of the old
notes. More than 99% of the holders of each issue of debt securities tendered
their notes after consenting to certain amendments to the indentures. Those
amendments to the indentures eliminated substantially all restrictive
covenants and amended certain other provisions. Our parent company completed
the tender offer for the fourth series of notes on February 2, 1999. More
than 99% of holders of those notes tendered their notes after consenting 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 reorganized its legal
entities as illustrated under "The EchoStar organization." We consolidated
all direct broadcast satellites and related FCC licenses into EchoStar
Satellite Corporation, our wholly owned subsidiary. To effect this
reorganization, we merged DirectSat Corporation and Direct Broadcasting
Satellite Corporation, the owners of our EchoStar II and EchoStar III
satellites, into EchoStar Satellite Corporation. We transferred EchoStar IV
and the other satellites and related
5
FCC licenses, including those acquired in the transaction with News
Corporation and MCI, to EchoStar Satellite Corporation. We merged our Dish,
Ltd. and EchoStar Satellite Broadcasting Corporation subsidiaries into our
company. The FCC approved our applications to transfer the assignments of all
FCC DBS licenses held by various subsidiaries to EchoStar Satellite
Corporation.
6
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. The form and
terms of the exchange notes are identical in all material respects to the form
and terms of the corresponding outstanding old notes, except that we registered
the exchange notes under the Securities Act, and therefore they will not bear
legends restricting their transfer.
The exchange offer................ We are offering to exchange $1,000
principal amount of our exchange notes
which we have registered under the
Securities Act for each $1,000 principal
amount of the applicable series of
outstanding old notes. In order for us
to exchange your old notes, you must
properly tender them to us and we must
accept them. We will exchange all
outstanding old notes that are validly
tendered and not validly withdrawn.
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 you may offer for resale,
resell and otherwise transfer your
exchange notes without compliance with
the registration and prospectus delivery
provisions of the Securities Act if you
are not our affiliate and you acquire
the exchange notes issued in the
exchange offer in the ordinary course of
your business.
You must also represent to us that 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 we issue to you in the
exchange offer.
Each broker-dealer that receives
exchange notes in the exchange offer for
its own account in exchange for old
notes that it acquired 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. You may not participate in the
exchange offer if you are a
broker-dealer who purchased such
outstanding old notes directly from us
for resale pursuant to Rule 144A or any
other available exemption under the
Securities Act.
Expiration date................... The exchange offer will expire at 5:00
p.m., New York City time, August 19, 1999,
unless we decide to extend the expiration
date. You 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.
Special procedures for
beneficial owners. ............. If you are the beneficial owner of old
notes and you registered your notes in
the name of a broker or other
institution, and you wish to participate
in the exchange, you should promptly
contact the person in whose name you
registered your old notes and instruct
such person to tender on your behalf. If
you
7
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 you cannot
complete the procedure for book-entry
transfer on time or you cannot deliver
your certificates for registered old
notes on time, you may tender your old
notes pursuant to the procedures
described in this prospectus under the
heading "The exchange offer--How to use
the guaranteed delivery procedures if
you will not have enough time to send
all documents to us."
Withdrawal rights................. You may withdraw the tender of your old
notes at any time before 5:00 p.m., New
York City time, on August 19, 1999, the
business day before 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 income
tax considerations--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.................... You can reach U.S. Bank Trust National
Association at Specialized Finance
Group, 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) 244-1572 and the fax number for
the exchange agent is (651) 244-1537.
8
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 we
registered the exchange notes under the Securities Act, and therefore, they will
not bear legends restricting their transfer. 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, "subsidiaries" refers to our
direct and indirect subsidiaries and Direct Broadcast Satellite Corporation, or,
"DBSC," formerly a wholly-owned subsidiary of EchoStar Communications
Corporation which we merged into one of our wholly-owned subsidiaries in our
recent reorganization.
Securities offered........ $375.0 million aggregate principal
amount of 9 1/4% senior notes due 2006,
known as the seven year notes.
$1.625 billion aggregate principal
amount of 9 3/8% senior notes due 2009,
known as 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 of our subordinated
indebtedness and on parity in right of
payment to each other and to all of our
senior indebtedness. 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.
The notes and the guarantees are
effectively junior to our secured
obligations and our subsidiaries to the
extent of the collateral securing those
obligations, including borrowings under
our future secured credit facilities.
As of March 31, 1999, we and our
subsidiaries had long-term indebtedness
that aggregated approximately $2.04
billion. See "Description of the notes"
below.
Optional redemption of
the seven year............ Except as set forth below, the seven
year notes are not redeemable at our
option prior to February 1, 2003.
Thereafter, the seven year notes are
subject to redemption, at our option, in
whole or in part, at the redemption
prices set forth herein. In addition, at
any time prior to February 1, 2002, we
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 our company, other than
proceeds from a sale to any of our
subsidiaries, provided that:
9
- 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 our option
prior to February 1, 2004. Thereafter,
the ten year notes are subject to
redemption, at our option, in whole or
in part, at the redemption prices set
forth herein. In addition, at any time
prior to February 1, 2002, we 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 our
company, other than proceeds from a sale
to any of our subsidiaries, provided
that:
- at least 65% of the ten 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.
Change of control......... Upon the occurrence of a change of
control as defined in the "Description
of the notes," we must 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," we must 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................ Substantially all of our restricted
subsidiaries guaranteed, on a senior
basis, the ten year notes and the seven
year notes which guarantee ranks on
parity with all senior unsecured
indebtedness of such restricted
subsidiaries. EchoStar Communications
and the subsidiaries of EchoStar
Communications that are not also our
subsidiaries are not obligated under or
guaranteeing in any manner our
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, the
repurchase of our stock and subordinated
indebtedness, 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.
10
Registration rights;
liquidated damages........ Pursuant to registration rights
agreements relating to each series of
notes among us, the guarantors and the
initial purchasers, we 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; and
- to use our best efforts to
cause the exchange offer
registration statement to be
declared effective by the
SEC on or prior to July 24,
1999.
We intend the registration statement
relating to this prospectus to satisfy
these obligations.
11
SUMMARY FINANCIAL DATA
We derived the following summary financial data and the selected
financial data presented elsewhere in this prospectus for the five years ended
December 31, 1998, from the Combined and Consolidated Financial Statements of
our company, audited by Arthur Andersen LLP, independent public accountants. The
following summary financial data with respect to the three months ended March
31, 1998 and 1999, 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. You should read the data set forth in this table in
conjunction with "Management's discussion and analysis of financial condition
and results of operations," our company's Condensed Consolidated Financial
Statements and the notes thereto, and other financial information we included
elsewhere in this prospectus.
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
--------------------------------------------------------------- ----------------------
1994 1995 1996 1997 1998 1998 1999
---------- ---------- ---------- ---------- ---------- --------- ---------
(IN THOUSANDS, EXCEPT RATIOS, SUBSCRIBERS AND PER SUBSCRIBER DATA)
(UNAUDITED)
STATEMENTS OF OPERATIONS DATA:
Revenue.................... $ 179,313 $ 148,520 $ 197,103 $ 475,902 $ 985,909 $ 214,024 $ 310,063
Operating income (loss).... 13,216 (8,006) (108,865) (224,336) (130,855) (21,682) (57,437)
Net income (loss).......... 90 (12,361) (101,676) (323,424) (294,375) (57,261) (333,317)
AS OF MARCH 31,
---------------
1999
-----
(UNAUDITED)
BALANCE SHEET DATA:
Cash, cash equivalents and marketable investment securities $ 273,735
Total assets............................................... 1,604,115
Long-term debt, net of current portion..................... 2,041,024
Total stockholder's equity (deficit)....................... (1,190,042)
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
--------------------------------------------------------------- ----------------------
1994 1995 1996 1997 1998 1998 1999
---------- ---------- ---------- ---------- ---------- --------- ---------
(UNAUDITED)
OTHER DATA:
DISH Network subscribers -- -- 350,000 1,040,000 1,940,000 1,202,000 2,265,000
Average monthly revenue
per subscriber $ -- $ -- $ 35.50 $ 38.50 $ 39.25 $ 38.25 $ 41.45
EBITDA (1) 15,459 (4,892) (65,496) (51,500) (28,698) 7,659 (32,875)
Less amortization of
subscriber acquisition
costs -- -- (16,073) (121,428) (18,819) (10,971) --
---------- ---------- ---------- ---------- ---------- --------- ---------
EBITDA, without add back for
amortization of subscriber
acquisition costs 15,459 (4,892) (81,569) (172,928) (47,517) (3,312) (32,875)
Net cash flows from:
Operating activities 24,205 (21,888) (22,836) (7,549) (53,949) (26,840) 2,216
Investing activities (338,565) (1,431) (294,962) (306,079) (43,340) (3,142) (61,486)
Financing activities 325,011 19,764 342,287 337,247 60,538 (4,025) 169,604
Ratio of earnings to fixed
charges (2) -- -- -- -- -- -- --
Deficiency of earnings to
fixed charges (2) $ (5,206) $(44,315) $(188,347) $ (366,447) $ (315,923) $ (65,033) $ (104,518)
12
- -----------
(1) We believe it is common practice in the telecommunications industry for
investment bankers and others to use various multiples of current or
projected EBITDA, which stands for 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, rather than
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. We are aware of no uniform
standards for determining EBITDA and we believe that presentations of
EBITDA may not be calculated consistently by different entities in the
same or similar businesses. We have shown EBITDA with and without the add
back for amortization of subscriber acquisition costs, which we deferred
through September 1997 and amortized over one year.
(2) 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, 1997 and 1998,
and for the three months ended March 31, 1998 and 1999, earnings were
insufficient to cover the fixed charges.
13
SUMMARY SATELLITE DATA
ECHOSTAR I ECHOSTAR II ECHOSTAR III ECHOSTAR IV ECHOSTAR V ECHOSTAR VI
Orbital location. 119 degrees 119 degrees 61.5 degrees WL 110 degrees WL 110 degrees WL 110 degrees WL
WL WL
Transponders..... 16 @ 24 MHz 16 @ 24 MHz 16/32 @ 24 MHz 10/20 @ 24 MHz 16/32 @ 24 MHz 16/32 @ 24
(3) MHz
Approximate channel 160/256
capacity...... 128 channels 128 channels 128/256 channels 80/160 channels 160/256 channels channels
Output power..... 130 watts 130 watts 230/120 watts 230/120 watts 220/110 watts 240/120 watts
Expected end of
commercial life 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
We have not yet obtained permanent authorization to operate EchoStar IV
at the 110 degree orbital location; EchoStar IV currently operates under a
special temporary authorization.
Use of EchoStar V and EchoStar VI and the frequencies at the 110
degree orbital location is contingent upon successful launch of EchoStar V
and EchoStar VI.
The transponders on each of EchoStar III, EchoStar IV and EchoStar VI
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. 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 outstanding
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 18 transponders. That
number will decrease over time, but based on existing data we expect that
approximately 16 transponders will probably be available over the entire
expected life of the satellite, absent additional failures.
Our direct broadcast satellite licenses do not allow full use of that
channel capacity. They specifically cover the following:
- - 11 of the 16 transponders, a maximum of approximately 88 video channels, on
EchoStar I;
- - 10 of the 16 transponders, a maximum of approximately 80 video channels, on
EchoStar II;
- - 11 of the 16 transponders, a maximum of approximately 88 video channels, on
EchoStar III;
- - 24 of the 32 frequencies at the 148 degree orbital location, where EchoStar
IV has operated under a special temporary authorization. In light of
EchoStar IV's technical constraints, its maximum temporarily authorized
effective capacity is 160 video channels; and
- - a total of 29 transponders at the 110 degree orbital location to be
operated on EchoStar V and EchoStar VI upon successful launch of the
satellites. The satellites could achieve 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.
With digital compression, each transponder or frequency can yield 8 or
more video channels, for example 8 in low-power mode or 10 in high-power mode.
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 FCC issued the licenses for ten year periods, and would, unless
renewed by the FCC, expire prior to the end of the minimum design life. See
"Risk factors - Our business depends substantially on FCC licenses that can
expire or be revoked or modified."
14
THE ECHOSTAR ORGANIZATION
The following chart illustrates the EchoStar group's corporate structure
prior to completion of the reorganization and where significant assets and
rights were held. DBSC and substantially all of our direct and indirect wholly
owned restricted subsidiaries guaranteed the old notes. 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 SENIOR |
| PREFERRED EXCHANGE |
| NOTES |
-------------------------
|
----------------------------------------------------------
| | |
--------------------------- -------------------------- -------------------------- ----------------------
| DIRECT BROADCASTING | | ECHOSTAR DBS | | ECHOSTAR | | DISH NETWORK |
| SATELLITE | | CORPORATION | | SPACE CORPORATION | | CREDIT CORPORATION |
| CORPORATION | | | | | | |
| | | ISSUER OF THE | |- RESIDUAL RIGHTS RELATING| |-CONSUMER FINANCING OF|
| - ECHOSTAR III SATELLITE | | NOTES AND THE | | TO LAUNCH CONTRACT FOR | | ECHOSTAR RECEIVER |
|-11 FREQUENCIES 61.5DEG. WL| | 1997 NOTES | | ECHOSTAR III | | SYSTEMS |
|-11 FREQUENCIES 175DEG. WL| | | -------------------------- ----------------------
--------------------------- | -ECHOSTAR IV SATELLITE |
|-24 FREQUENCIES 148DEG. WL|
--------------------------
|
--------------------------
| ECHOSTAR SATELLITE |
| BROADCASTING |
| CORPORATION |
| |
| ISSUER OF THE |
| 1996 NOTES |
--------------------------
|
--------------------------
| DISH, LTD. |
| |
| ISSUER OF THE |
| 1994 NOTES |
--------------------------
|
------------------------------------------------------------------------------------------------
| | | | |
--------------------------- ------------------ --------------------------- ---------------- --------------------------
| ECHOSTAR TECHNOLOGIES | | ECHOSPHERE | | ECHOSTAR | | ECHOSTAR | | DIRECTSAT |
| CORPORATION | | CORPORATION | | SATELLITE | | INTERNATIONAL | | CORPORATION |
| | | | | CORPORATION | | CORPORATION | | |
| -U.S. DISTRIBUTION OF | |-U.S. DISTRIBUTION| | | | | |-ECHOSTAR II SATELLITE |
| ECHOSTAR RECEIVER SYSTEMS | |OF DIRECT-TO-HOME | |-DISH NETWORK AND SATELLITE| |-INTERNATIONAL | |-10 FREQUENCIES 119DEG. WL|
| FOR DISH NETWORK AND | | SATELLITE TV | | SERVICES | | DISTRIBUTION OF| |-11 FREQUENCIES 175DEG. WL|
| DIRECT-TO-HOME SATELLITE | | PRODUCTS AND | |-ECHOSTAR I SATELLITE | | DIRECT-TO-HOME | |-1 FREQUENCY 110DEG. WL |
| TV PRODUCTS TO | | ECHOSTAR | |-11 FREQUENCIES 119DEG. WL | | SATELLITE TV | --------------------------
| ECHOSPHERE AND OTHER | | RECEIVER SYSTEMS | |-PROGRAMMING CONTRACTS | | PRODUCTS |
| DISTRIBUTORS | | FOR THE DISH | |-DIGITAL BROADCAST CENTER | ----------------
|-INTERNATIONAL DISTRIBUTION| | NETWORK TO | |-THREE CUSTOMER SERVICE |
| SATELLITE TV PRODUCTS | | SATELLITE TV | | CENTERS |
| -RESEARCH AND DEVELOPMENT | | RETAILERS | ---------------------------
| OF DIRECT BROADCAST | ------------------
| SATELLITE STAND-ALONE |
| AND INTEGRATED PRODUCTS |
---------------------------
15
THE ECHOSTAR ORGANIZATION
The following chart illustrates the EchoStar group's corporate
structure and where significant assets and rights are held following the
reorganization that took effect as of March 31, 1999.
--------------------------------
ECHOSTAR COMMUNICATIONS
CORPORATION
Nasdaq: Dish, Dishp
- Issuer of Series C Preferred
Stock
--------------------------------
|
-------------------------------------------------
| |
--------------------------- -------------------------
ECHOSTAR DBS DISH NETWORK
CORPORATION CREDIT CORPORATION
- Issuer of the Seven and - CONSUMER FINANCING OF
Ten Year Notes ECHOSTAR RECEIVER
SYSTEMS
--------------------------- -------------------------
|
--------------------------------------------------------------------------------------------------
| | | |
- -------------------------- --------------------------- --------------------------------- --------------------------------
ECHO STAR ECHOSPHERE ECHOSTAR ECHOSTAR INTERNATIONAL
TECHNOLOGIES CORPORATION SATELLITE CORPORATION
CORPORATION - U.S. DISTRIBUTION OF CORPORATION - INTERNATIONAL DISTRIBUTION OF
- - U.S. DISTRIBUTION OF DIRECT-TO-HOME SATELLITE - DISH NETWORK AND SATELLITE DIRECT-TO-HOME SATELLITE TV
ECHOSTAR RECEIVER TV PRODUCTS AND SERVICES PRODUCTS
SYSTEMS FOR DISH ECHOSTAR RECEIVER - ECHOSTAR I SATELLITE --------------------------------
NETWORK AND DIRECT-TO- SYSTEMS FOR THE DISH - ECHOSTAR II SATELLITE
HOME SATELLITE TV NETWORK TO SATELLITE TV - ECHOSTAR III SATELLITE
PRODUCTS TO ECHOSPHERE RETAILERS - ECHOSTAR IV SATELLITE
AND OTHER DISTRIBUTORS --------------------------- - CONTRACT FOR ECHOSTAR V
- - INTERNATIONAL AND ECHOSTAR VI
DISTRIBUTION OF SATELLITE - 11 FREQUENCIES 61.5DEG. WL
TV PRODUCTS - 29 FREQUENCIES 110DEG. WL
- - RESEARCH AND - 21 FREQUENCIES 119DEG. WL
DEVELOPMENT OF DIRECT - 24 FREQUENCIES 145DEG. WL
BROADCAST SATELLITE - 22 FREQUENCIES 175DEG. WL
STAND-ALONE AND - PROGRAMMING CONTRACTS
INTEGRATED PRODUCTS - DIGITAL BROADCAST CENTER
- -------------------------- - ARIZONA DIGITAL BROADCAST
CENTER
- THREE CUSTOMER SERVICE
CENTERS
---------------------------------
16
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 you offer and sell them 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,
the law may deem that you have received restricted securities and, if so, you
must comply with the registration and prospectus delivery requirements of the
Securities Act in connection with any resale transaction. To the extent we
accept and exchange old notes in the exchange offer, the trading market, if any,
for the remaining old notes would be adversely affected. See "The exchange
offer" below.
IF YOU DO NOT PROPERLY TENDER YOUR OLD NOTES, WE MAY NOT ACCEPT YOUR OLD NOTES
AND THE TRADING MARKET FOR THEM MAY BE LIMITED
We will issue the exchange notes in exchange for your old notes only
after we have timely received your old notes, along with a letter of
transmittal that you have properly completed and duly executed and all other
documents that we require. 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 August 19, 1999, or on a later extended date and time as we may
decide.
The exchange notes and any old notes having the same maturity that
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 of the notes have taken certain actions or exercised certain rights
under the related indenture.
YOU MAY PARTICIPATE IN THE EXCHANGE OFFER ONLY IF YOU MEET THE FOLLOWING
CONDITIONS
Based on interpretations by staff of the SEC, as set forth in no-action
letters the SEC 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 our "affiliate" 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
17
in such other circumstances. If you are our affiliate, engage in or intend to
engage in or have any arrangement or understanding with respect to a
distribution of the exchange notes that you or any person will acquire
pursuant to the exchange offer, you may not rely on the applicable
interpretations of the staff of the SEC; you must also comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with any resale transaction.
RESALES OF THE EXCHANGE NOTES MAY BE SUBJECT TO FURTHER RESTRICTIONS IN SOME
JURISDICTIONS
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. 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, you may
not offer or sell the exchange notes unless someone has registered or qualified
them for sale in such jurisdictions or an exemption from registration or
qualification is available.
RESTRICTIVE COVENANTS IN THE INDENTURES FOR THE NOTES MAY LIMIT OUR ABILITY TO
OPERATE OUR BUSINESS
The indentures relating to each series of notes contain restrictive
covenants that may inhibit our ability to manage our business and to react to
changing market conditions. These restrictions, 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.
See "Description of the notes" below.
WE HAVE SUBSTANTIAL INDEBTEDNESS AND WE ARE DEPENDENT ON OUR SUBSIDIARIES'
EARNINGS TO PROVIDE INCOME TO MAKE PAYMENTS ON THE NOTES
We have substantial debt service requirements which makes us vulnerable
to changes in general economic conditions. 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 we conduct substantially all of our operations through
our subsidiaries, our ability to service our debt obligations, including our
obligations under the notes, depends 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 ability to obtain additional debt
financing for working capital, capital expenditures and general corporate
purposes. As of March 31, 1999, we had outstanding long-term debt, including
both the current and long-term portion, of approximately $2.04 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
18
obligations will depend on the success of our business strategy, which is
subject to uncertainties and contingencies beyond our control.
WE EXPECT OPERATING LOSSES THROUGH AT LEAST 2000 AND CANNOT BE CERTAIN WHEN WE
WILL HAVE SUFFICIENT CASH TO MAKE PAYMENTS ON THE NOTES
If we have insufficient income or we do not have another source of
cash, it could affect our ability to make all payments to you relating to the
notes. Our financial performance could also affect the market value or the
liquidity of any market for the notes. 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 $131 million for the
years ended December 31, 1996 and 1997, and 1998, respectively, and $22
million and $57 million for the three months ended March 31, 1998 and 1999,
respectively. We had net losses of $102 million, $323 million, $294 million,
$57 million and $333 million during those same periods. Improvements in our
results of operations depend largely upon our ability to increase our
customer base while maintaining our price structure, effectively managing our
costs and controlling subscriber turnover, which is the rate at which
subscribers terminate service. We can give no assurance 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 "--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, WHICH MAY NOT BE AVAILABLE, IN ORDER TO CONTINUE
GROWING AND BE ABLE TO MAKE PAYMENTS ON THE NOTES
Our ability to make all payments to you relating to the notes, and the
notes' market value and liquidity, will partly depend on our ability to continue
growing our business, which may require additional capital that we cannot be
certain will be available to us. 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 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 THAT HOLDERS TENDER UPON A CHANGE OF CONTROL,
WHICH COULD ADVERSELY AFFECT THE VALUE OF YOUR NOTES
The indenture for each series of the notes requires us to offer to
purchase the notes from all the holders if we have a "change of control."
However, 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 that holders tender for
purchase upon the occurrence of a change of control, and we are unable to raise
additional capital, an event of default could occur under the indentures
governing the notes. An event of default could cause any other debt that we have
to become automatically due, further exacerbating our financial condition and
diminishing the value and
19
liquidity of the notes. We cannot assure you that additional capital would be
available on acceptable terms, or at all.
WE FACE INTENSE COMPETITION FROM DIRECT BROADCAST SATELLITE AND OTHER SATELLITE
SYSTEM OPERATORS, WHICH COULD AFFECT OUR ABILITY TO GROW AND BE ABLE TO MAKE
PAYMENTS ON THE NOTES
Our ability to make payments to you relating to the notes will partly
depend on our ability to compete in the subscription television industry, which
is highly competitive. We compete with 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.
One competitor, DIRECTV, Inc., has launched three direct broadcast
satellites and has 27 frequencies at the 101 degree orbital location 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 such as DIRECTV's exclusive sports programming and, possibly, volume
discounts for programming offers. In December 1998, DIRECTV's parent executed a
definitive merger agreement whereby it agreed to acquire the business and assets
of USSB in a transaction completed on May 20, 1999. In addition to the 5 USSB
frequencies at the 101 degree orbital location, this combination gives DIRECTV
access to three additional frequencies controlled by USSB at the 110 degree
orbital location, which is also a very favorable position for coverage of the
United States.
We also face competition from PrimeStar, Inc., which currently
leases a medium power satellite at the 85 degree orbital location and as of
March 31, 1999, had approximately 2.3 million subscribers. Recently PrimeStar
received 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 location and has
launched a satellite to that location. In January 1999, DIRECTV's parent
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. The FCC recently approved DIRECTV's acquisition of
PrimeStar's subscribers and related businesses, including TCI's assets
relating to the 119 degree orbital location. 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, which could create significant additional
competition in the market for subscription television services. See
"Business--Competition for our DISH Network business--Other DBS and
direct-to-home satellite system operators."
WE COMPETE WITH CABLE TELEVISION AND OTHER LAND-BASED SYSTEMS, WHICH COULD
AFFECT OUR ABILITY TO GROW AND BE ABLE TO MAKE PAYMENTS ON THE NOTES
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,
efficient 2-way 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
20
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 for our DISH Network business--Cable
television."
When fully deployed, new technologies could have a material adverse
effect on the demand for our direct broadcast satellite services. For example,
new and advanced local multi-point distribution services are still in the
development stage. In addition, entities such as regional telephone companies
which are likely to have greater resources than we have, are implementing and
supporting digital video compression over existing telephone lines, and digital
"wireless cable." 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 has acquired cable operator TCI and has entered into a
definitive agreement to acquire MediaOne. 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 for our
DISH Network business--Telephone companies."
CABLE COMPETITORS MAY BLOCK OUR ACCESS TO POPULAR PROGRAMMING
We cannot be certain whether or not cable or other TV service providers
would seek to acquire sports franchises and exclusively distribute the
corresponding programming, which could possibly limit our access to popular
sports programming. For example, 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 DEPEND ON OTHERS TO PRODUCE PROGRAMMING
We depend 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. If we are unable to renew
any such agreements or the other parties cancel the agreements, 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. In particular, the cost of sports programming has been rising
rapidly. 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--DISH Network--Components of a DBS
system--Programming."
WE DEPEND ON THE CABLE ACT FOR ACCESS TO OTHERS' PROGRAMMING
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. Pursuant
to the Cable Television Consumer Protection and Competition Act of 1992 and the
FCC's rules, cable-affiliated programmers generally must offer programming they
have developed 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
21
percentage of our programming from cable-affiliated programmers. Some of
these restrictions on cable-affiliated programmers will expire in 2002 unless
the FCC extends the rules. 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--Regulations--Satellite Home Viewer Act and retransmission
consent."
IMPEDIMENTS TO RETRANSMISSION OF LOCAL BROADCAST SIGNALS; OUR LOCAL PROGRAMMING
STRATEGY FACES UNCERTAINTY
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, several other parties oppose that view. 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. 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. 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
There are currently a number of lawsuits regarding the efforts of
satellite TV service providers, including us, to retransmit the signals of
network programming. The national networks and local affiliate stations recently
challenged, based upon copyright infringement, PrimeTime 24's methods of selling
network programming to consumers. Historically, we obtained distant broadcast
network signals for distribution to our customers through PrimeTime 24, Joint
Venture. The United States District Court for the Southern District of Florida
entered a nationwide permanent injunction preventing PrimeTime 24 from selling
its programming to consumers unless the programming was sold in accordance with
certain stipulations in the injunction. The injunction covers "distributors" as
well. The plaintiffs in the Florida litigation informed us that they 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 in the Raleigh area and the decision in
that case could be used as legal precedent against us. In response to the recent
legal activity, we have implemented Satellite Home Viewer Act compliance
procedures which materially restrict the market for the sale of network channels
by us.
On October 19, 1998, we filed a declaratory judgment action in the
United States District Court for the District of Colorado against the four major
networks. We 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 four major broadcast networks and their affiliate groups filed a complaint
against us in federal court in Miami alleging, among other things, copyright
infringement. The plaintiffs in that action have also requested the issuance of
a preliminary injunction against us. The court combined the case that we filed
with the case in Miami and transferred it to the Miami court.
On February 24, 1999, CBS, NBC, Fox, and ABC filed a "Motion for
Temporary Restraining Order, Preliminary Injunction, and Contempt Finding"
against DIRECTV, Inc. in Miami relating to the delivery of distant network
channels to DIRECTV customers by satellite. Under the terms of a settlement
between DIRECTV and the networks, some DIRECTV customers would lose access to
their satellite-provided network channels by June 30, 1999, while other DIRECTV
customers will be disconnected
22
by December 31, 1999. Subsequently, PrimeTime 24 and substantially all
providers of satellite-delivered network programming other than us agreed to
this cut off schedule.
The networks are currently pursuing a motion for preliminary injunction
in the Miami Court, asking that court to enjoin us from providing network
programming except under very limited circumstances. In general, the networks
want us to turn off programming to our customers on the same schedule as DIRECTV
has agreed to. A decision adverse to us in this case could cause significant
material restrictions on the sale of distant ABC, NBC, CBS and Fox channels by
us. Among other things, we could be required to terminate delivery of network
signals to a material portion of our subscriber base. While the Networks have
not sought monetary damages, they have sought to recover attorney fees if they
prevail. See "Business--Government regulation" and "--Legal proceedings" below.
OUR BUSINESS RELIES ON THE INTELLECTUAL PROPERTY OF OTHERS AND WE MAY
INADVERTENTLY INFRINGE THEIR PATENTS AND PROPRIETARY RIGHTS
Many of our competitors have and may obtain patents that cover or
affect products or services directly or indirectly related to those that we
offer. If our competitors hold such rights, they can either prevent us from
using that product or service, or they can force us to license from them the
right to use the product or service, thereby increasing our costs in a way that
may affect our net income available for making payments to you on the notes. 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 the Patent and Trademark Office issues a patent 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.
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. The news media has widely reported signal theft or "piracy" of
C-band services, cable television and European direct broadcast satellite
services. We recently received reports of a compromise in our encryption system.
We can take a number of different corrective measures to limit the amount of
damage that we would incur by a breach of our conditional access system
including, as a last resort, complete replacement of the access control system.
If we do not promptly correct a compromise in our encryption technology, it
would adversely affect our revenue and our ability to contract for video and
audio services provided by programmers. Published reports indicate that a
compromise of the DIRECTV and USSB encryption systems has occurred. 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 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
23
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.
OUR SATELLITES ARE SUBJECT TO RISKS DURING THE PLANNED LAUNCHES AND AFTER LAUNCH
Satellite launches 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. 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. See "--Insurance
coverage of satellites is limited."
OUR SATELLITES HAVE MINIMUM DESIGN LIVES OF 12 YEARS, BUT COULD FAIL BEFORE THEN
Our ability to earn revenue to make payments to you on the notes wholly
depends on the usefulness of our satellites. 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, 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, moving 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.
COMPLEX TECHNOLOGY USED IN OUR BUSINESS COULD FAIL OR BECOME OBSOLETE
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 and may, at times, not function as we expect. Technology in the
satellite television industry is in a rapid and continuing state of change as
new technologies develop. 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 technology
becomes commonly accepted as the standard for satellite receivers in the United
States, we would be at a significant technological disadvantage. See
"Business--DISH Network--Components of a DBS system--Programming."
INSURANCE COVERAGE OF OUR SATELLITES IS LIMITED
We extended in-orbit insurance for EchoStar I, EchoStar II and
EchoStar III through July 25, 1999. 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
24
insurers or any change in any material fact or circumstance concerning our
satellite insured under the policy. That 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. Currently, 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. For example, as a result of losing 6 transponders on EchoStar III,
our new insurance policy for EchoStar III contains a deductible of 3 or 6
transponders, depending on the power mode that we operate in. As a result of
this deductible, we are currently insured for approximately 81% of our total
transponders on EchoStar III.
We are currently negotiating with our insurance carriers to secure
in-orbit insurance coverage for EchoStar I, II and III through July 2000. We
can provide no assurance that insurance policy renewals will be possible or
that we can obtain them at rates or on terms favorable to us. For example, if
EchoStar I, EchoStar II, EchoStar III or other similar satellites experience
problems while in orbit, the cost to renew in-orbit insurance could increase
significantly or coverage exclusions for similar problems could be necessary.
In addition, the EchoStar IV launch insurance policy provides for insurance
of $219.3 million covering the period from launch of the satellite on May 8,
1998 through May 8, 1999. Due to the anomalies experienced by EchoStar IV and
the pending claim for a total constructive loss, we did not obtain in-orbit
insurance on EchoStar IV. Consequently, in the event we are unable to resolve
our pending insurance claim to our satisfaction, EchoStar IV will not be
insured if further losses occur in the future. In addition, insurance will
not reimburse the Company for business interruption, loss of business, profit
opportunity and similar losses that might arise from delay in the launch of
any EchoStar satellite. See "Business--DISH Network--Satellite insurance."
WE MAY BE UNABLE TO SETTLE OUTSTANDING CLAIMS WITH INSURERS
EchoStar IV is currently able to use a maximum of only 18
transponders as a result of a problem with its solar power panels. The number
of available transponders will decrease over time. EchoStar IV has also
experienced transponder problems comparable to those that occurred on
EchoStar III which have resulted in the failure of 3 transponders and the
loss of use of a total of 6 transponders. Based on existing data, we expect
that approximately 16 transponders will probably be available over the entire
expected life of the satellite, absent significant additional transponder
problems or other failures. In September 1998, we filed a $219.3 million
insurance claim for a constructive total loss under the launch insurance
policy related to EchoStar IV. However, if we receive $219.3 million, for a
constructive 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. 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.
During May 1999, EchoStar IV experienced anomalies affecting its
transponders, heating systems and fuel system. In July 1999, prior to
arriving at the 110DEG. WL orbital location, EchoStar IV experienced
additional fuel system anomalies. While the recent anomalies have not caused
material reductions in functionality to date, it is not yet possible to
conclude whether these anomalies will result in further reductions of
satellite functionality or useful life in the future. While there can be no
assurance, we do not currently expect a material adverse impact on short or
medium term satellite operations. We have not completed our assessment of the
additional impairment, if any, to EchoStar IV, but we currently continue to
believe that insurance proceeds will be sufficient to offset all write-downs
of satellite assets that might ultimately be necessary because of lost
functionality caused by anomalies and consequences of which we are currently
aware. However, we can provide no assurance as to the ultimate amount that
may be received from the insurance claim, or that coverage will be available.
We will continue to evaluate the performance of EchoStar IV and may modify
our loss assessment as new events or circumstances develop.
25
As a result of the recent anomalies experienced by EchoStar IV, we
have instructed our broker to notify our insurance carriers of additional
occurrences under the terms of the EchoStar IV launch insurance policy. The
EchoStar IV launch insurance policy provides for insurance of $219.3 million
covering the period from launch of the satellite on May 8, 1998 through May
8, 1999. Due to the anomalies that EchoStar IV experienced and the pending
claim for a total constructive loss, we did not obtain in-orbit insurance on
EchoStar IV. Consequently, in the event we are unable to resolve our pending
insurance claim to our satisfaction, EchoStar IV will not be insured if
further losses occur in the future.
WE DEPEND PRIMARILY ON A SINGLE RECEIVER MANUFACTURER
SCI Technology, Inc., a high-volume contract electronics manufacturer,
is currently the primary manufacturer of EchoStar receiver systems. 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, it would impair our ability to add
additional DISH Network subscribers and grow our Technology business unit.
Likewise, it would adversely affect our results of operations.
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, and as of yet, only
JVC is manufacturing consumer electronics equipment incorporating our receivers.
As a result, our receivers, and consequently our programming services, are less
well known to consumers than those of our largest direct satellite broadcast
competitor. Due in part to the lack of product recognition, approximately 18,000
retail outlets carry our receiver systems for sale compared to approximately
30,000 retail outlets for our largest direct satellite broadcast competitor.
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, it would adversely affect our financial
condition and results of operations because we subsidize the cost of EchoStar
receiver systems.
WE MAY BE UNABLE TO MANAGE RAPIDLY EXPANDING OPERATIONS
If we are unable to manage our growth effectively, it could materially
adversely affect our business and results of 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 must assume even greater levels of responsibility.
WE MAY BE VULNERABLE TO RISKS ASSOCIATED WITH ACQUISITIONS
Acquisitions, including the transaction with News Corporation and MCI,
involve numerous risks, including, among other things, difficulties and expenses
that we incur 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 we can successfully integrate any acquisition,
including the transaction with News Corporation and MCI, into our on-going
operations or that we can achieve estimated cost savings. We have made a number
of
26
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. In addition, in the event
that the operations of an acquired business do not meet expectations, we may
need to restructure the acquired business or write-off the value of some or
all of the assets of the acquired business.
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 us, we do
not have any employment agreements with any of our executive officers.
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 52% of
the total equity securities of EchoStar Communications, assuming exercise of
employee stock options, he currently possesses approximately 91% of the total
voting power. Thus, Mr. Ergen has 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%.
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 find in the future
that we should comply with regulatory obligations 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 a
broadcast licensee, the FCC may require us 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 to carry all the local broadcast stations in the areas they serve,
not just the four major networks. 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. Congress is considering legislation
that imposes such requirements on satellite companies. If Congress passes
such legislation, or if the FCC imposes "must carry" rules on direct
broadcast satellite operations, these obligations may adversely affect our
plans to provide local programming, and such must carry requirements could
displace possibly more attractive programming. Additionally, the FCC
27
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. This could
also displace programming for which we could earn commercial rates and cause
us to have less net income available for making payments on the notes.
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 the FCC
passes.
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 types of FCC licenses,
foreign nationals or their representatives may not own or vote more than 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 is under
challenge 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 have
recently informed the FCC that we have no common carrier plans with respect to
that system.
We believe that our foreign ownership prior to the recently
consummated transaction with News Corporation and MCI was under 5%. That
transaction has resulted in the issuance to an Australian corporation, News
Corporation, of 11.7% of our total outstanding stock having 2.1% of total
voting power. This transaction has thus increased the possibility that foreign
ownership of our stock may exceed the foreign ownership limitations if they
apply. In connection with the MCI authorization that we received in
connection with that transaction, the FCC has decided to waive any foreign
ownership limitations to the extent applicable. Nevertheless, we cannot
foreclose the possibility that, in light of any subsequent FCC decisions or
policy changes, we may in the future need a separate FCC determination that
foreign ownership in excess of any applicable limits is consistent with the
public interest 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 location, which both expire in 2006, and a license to operate
EchoStar III at the 61.5 degree orbital location, 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 location. The state of Hawaii
has requested the FCC to impose several conditions on these requested
authorizations, and we have opposed many of these conditions. We cannot be
sure whether the FCC will grant these requests or whether it will impose
onerous conditions. Until recently, we operated EchoStar IV at the 148DEG. WL
orbital location under a special temporary authorization. Our authorization
at 148DEG. WL requires us to utilize all of our FCC-allocated frequencies at
that location by December 20, 2002, or risk losing those frequencies that we
are not using. Third parties have opposed, and we expect them to continue to
oppose, some of our pending and future requests to the FCC for extensions,
waivers and approvals.
We recently received another special temporary authorization from the
FCC to temporarily move the EchoStar IV satellite to the 110DEG. WL orbital
location and operate it pending the launch and successful in-orbit testing of
the first satellite we have acquired in the transaction with MCI and News
Corporation. This authorization is for a limited time and is subject to
several other conditions.
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 expired on January 1, 1999. Although we have timely
applied for extension of that authorization to November 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.
Recently, the
28
FCC released a notice of proposed rulemaking that may inhibit future
satellite operations in the "extended" C-band frequencies. The FCC also is no
longer accepting earth station applications in that band. These recent
developments might have negative implications for us.
All of our authorizations for satellite systems that are not yet
operational, including the license that we received from MCI, are subject to
construction and progress obligations, milestones, reporting and other
requirements. The FCC has 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 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, we deferred
paying a portion of the purchase price for the satellites until after the
satellites were in orbit. As of March 31, 1999, we had $15.3 million in
principal amount outstanding of these deferred payments relating to EchoStar I,
$16.1 million relating to EchoStar II, $10.9 million relating to EchoStar III
and $13.0 million relating to EchoStar IV. We provided security for the
outstanding deferred payments relating to EchoStar I and EchoStar II with
substantially all of the assets of one of our wholly-owned subsidiaries, and its
subsidiaries, subject to certain restrictions, and our parent company provided a
guarantee as security. 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 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 attorneys, which
provides for the attorneys to be paid a percentage of any net recovery obtained
in its dispute with News Corporation. As the holder of the assets acquired in
the transaction with News Corporation and MCI, we would pay any fee that is
payable under the fee arrangement. The attorneys 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 attorneys'
interpretation of the fee arrangement, which it believes significantly
overstates the magnitude of its liability. If the attorneys and our parent
company are unable to resolve this fee dispute under the fee arrangement, the
fee dispute would be resolved through arbitration. It is too early to determine
the outcome of negotiations or arbitration regarding this fee dispute.
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, if the
court finds that we were insolvent at the time we issued the old notes, a court
could hold that our obligations on the notes may be
29
void or are subordinate to our other obligations. Certain of our subsidiary
guarantors guaranteed, jointly and severally, our obligations under the
notes. 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 applicable law of the jurisdiction.
Generally, however, a court would consider a company insolvent if the sum of
its debts were greater than all of its property at a fair valuation or if the
present fair saleable value of its property was less than the amount that
will be necessary 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
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. If our Year 2000 remediation plan is not successful or
is not completed in a timely manner, the Year 2000 issue could significantly
disrupt our ability to transact business with our customers and suppliers, and
could have a material impact on our operations. Even if our Year 2000
remediation plan is successful or we complete it on time, there can be no
assurance that other companies will timely convert their systems with which our
systems interact, or that any such failure to convert by another company would
not have an adverse effect on our business or operations. 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 APPEARING 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 us or by officers,
directors or employees acting on our behalf, that are not statements of
historical fact constitute "forward-looking statements" within the meaning of
the Private Securities Litigation Reform Act of 1995. Forward-looking statements
involve known and unknown risks, uncertainties and other factors that could
cause our actual results 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 our actual results to differ materially are a
total or partial loss of a satellite due to operational failures, space debris
or otherwise. Our business could also be adversely affected by a decrease in
sales of digital equipment and related services to international direct-to-home
or DTH service providers, a decrease in DISH Network subscriber growth, an
increase in subscriber turnover, an increase in subscriber acquisition costs or
an unexpected product shortage. Our strategy of providing local channels to
customers could be adversely affected by impediments to the retransmission of
local or distant broadcast network signals, which could result from pending
litigation or legislation, or lower than expected demand for our delivery of
local broadcast network signals. In general our entire business could be
adversely affected by an unexpected business interruption due to the failure of
third-parties to remediate Year 2000 issues or our inability to retain necessary
authorizations from the FCC. Our subscriber base and our planned growth in
numbers of subscribers would be adversely affected by an increase in competition
from cable, direct broadcast satellite, other satellite system operators, and
other providers of subscription television services or the introduction of new
technologies and competitors into the subscription television business. We could
face a newly adverse competitive environment from a merger of existing DBS
competitors or a change in the regulations governing the subscription television
service industry. The outcome of any litigation in which we may be involved
could adversely affect our income or even our ability to offer some types of
popular programming or services.
30
Also our business can be adversely affected by general business and economic
conditions and other risk factors described from time to time in our reports
filed with the SEC.
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. You should read all cautionary statements
made in this prospectus 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
We are offering the exchange notes to the holders of the old notes. We
offered and sold the old notes in January 1999 to a limited number of
institutional investors. The old notes 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
it fails to subsist, 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 fail to subsist 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 they may discontinue any such market-making
with respect to the old notes and the exchange notes 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.
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USE OF PROCEEDS
We will receive no cash proceeds from the exchange offer. We intend the
exchange offer to satisfy some of our obligations under the registration rights
agreements for the notes. We will issue exchange notes in exchange for old notes
in the same principal amount, and for the same terms and form as the old notes,
except that there will be no registration rights or liquidated damages relating
to the exchange notes. The old notes that holders surrender in exchange for the
exchange notes will be retired and canceled and cannot be reissued. Accordingly,
we will not incur any new debt by issuing the exchange notes.
The gross proceeds to us from the old notes offering were
approximately $2.0 billion, with net proceeds to us of approximately
$1.8 billion. We used a portion of the net proceeds from the old notes
offering to repurchase the 12 3/8% notes, 13 1/8% notes and 12 1/2% 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.
32
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. We originally issued and sold the old notes on January 25, 1999. We
did not register those sales 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, we agreed to file with the SEC an exchange offer
registration statement relating to the exchange offer. Under the exchange
offer registration statement, we will offer exchange notes, consisting of
another series of our notes and containing substantially identical terms to
the old notes, except as set forth in this prospectus, in exchange for old
notes.
We and our guarantors will file with the SEC a shelf registration
statement to cover resales by you of your old notes if you satisfy certain
conditions relating to the provision of information in connection with the
shelf registration statement under the following conditions:
(1) SEC policy or applicable law will not permit the applicable
exchange offer; or
(2) you are a holder of "transfer restricted securities" and you
notify us within the specified time period that:
- any law or SEC policy prohibits you from
participating in the exchange offer;
- you may not resell the exchange notes that you
acquired in the exchange offer to the public without
delivering a prospectus and this prospectus is not
appropriate or available for such resales; or
- you are a broker-dealer and you own old notes that
you acquired directly from us or our affiliate.
"Transfer restricted securities" means each old note until the earliest
of:
- the date on which a holder exchanges an old note in
the exchange offer and that holder is entitled to
resell it to the public without complying with
prospectus delivery requirements;
- the date on which a broker-dealer disposes of an old
note pursuant to the "Plan of distribution" in the
exchange offer registration statement, including
delivery of the prospectus;
- the date on which a holder of an old note disposes
those old notes in accordance with a shelf
registration statement that effectively registers
those old notes under the Securities Act; or
- the date on which holders of old notes may distribute
their old notes to the public pursuant to Rule 144(k)
under the Securities Act. See "Description of the
Notes--Registration rights; liquidated damages."
We require you to make certain representations to us which the
registration rights agreement describes, in order to participate in the
exchange offer and, if you wish to include your old notes in any shelf
registration statement, you must deliver information for use in connection
with any shelf registration statement and you must provide comments on the
shelf registration statement within the
33
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 that we describe below.
HOW TO DETERMINE IF YOU ARE ELIGIBLE TO PARTICIPATE IN THE EXCHANGE OFFER
We hereby offer to exchange, upon the terms and subject to the
conditions set forth in this prospectus and in the letter of transmittal
accompanying it, $1,000 in principal amount of exchange notes for each $1,000
in principal amount of our old notes that you hold. The terms of the exchange
notes are substantially identical to the terms of the old notes for which you
may exchange pursuant to this exchange offer, except that, generally, you may
freely transfer the exchange notes, 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.
We are not making the exchange offer 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.
We are not making the exchange offer conditional upon the holders
tendering, or us accepting, any minimum aggregate principal amount of old
notes.
Based on our view of interpretations set forth in no-action letters
that the staff of the SEC has issued to third parties, we believe that you
may resell or transfer exchange notes issued pursuant to the exchange offer
in exchange for the old notes, unless you are 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. We believe that you may resell or transfer such exchange
notes without compliance with the registration and prospectus delivery
provisions of the Securities Act only if you acquired such exchange notes 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, you may incur liability under the
Securities Act if you transfer any note that we issue to you in the exchange
offer and you do not deliver a prospectus meeting the requirement of the
Securities Act or you do not have an exemption from registration of your old
notes from such requirements. We do not assume or indemnify you against such
liability.
If you are a broker-dealer that resells exchange notes that you
received for your own account pursuant to the exchange offer, and if you
participate in a distribution of the exchange notes, you may 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 you receive
may 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 we consummate the exchange offer, 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, we will not require you 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 we accept your old notes for exchange, you will waive
the right to have interest accrue, or
34
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.
INFORMATION ABOUT THE EXPIRATION DATE OF THE EXCHANGE OFFER AND CHANGES TO IT
The exchange offer expires on the expiration date, which is 5:00 p.m.,
Eastern time, on August 19, 1999, unless we, in our sole discretion, extend
the period during which the exchange offer is open. If we extend the period
for the exchange offer, 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 applicable law or regulation requires otherwise,
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 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 "--We may modify or terminate the
exchange offer under some circumstances" have occurred and we have not waived
them. We also reserve the right to amend the terms of the exchange offer in
any manner, whether before or after any tender of the old notes. If we
terminate or amend the exchange offer, 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.
We will mail this prospectus and the related letter of transmittal
and other relevant materials to you as a record holder of old notes and we
will furnish these items to brokers, banks and similar persons whose names,
or the names of whose nominees, appear on the lists of holders for subsequent
transmittal to beneficial owners of old notes.
HOW TO TENDER YOUR OLD NOTES
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 that we
describe below and in the letter of transmittal for the exchange offer.
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" include a facsimile of the letter. You must
deliver 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 that
we describe below, to the exchange agent at its address set forth on the back
cover of this prospectus on or prior to the expiration date. You may also
tender old notes by complying with the guaranteed delivery procedures that we
describe below.
Your signature does not need to be guaranteed if you registered your
old notes in your name, you will register the exchange notes in your name and
you sign the letter of transmittal. In any other case, the registered holder
of your notes must endorse them or send them with duly executed written
instruments of transfer in form satisfactory to us. Also, 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 must guarantee the signature on the
endorsement or instrument of transfer. If you want
35
us to deliver the exchange notes or non-exchanged old notes to an address
other than that of the registered holder appearing on the note register for
the old notes, an "eligible institution" must guarantee the signature on the
letter of transmittal.
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 the
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.
HOW TO TENDER IF YOU HOLD YOUR OLD NOTES THROUGH A BROKER OR OTHER INSTITUTION
AND YOU DO NOT HAVE THE ACTUAL OLD NOTES
Any financial institution that is a participant in DTC's systems may
make book-entry delivery of your old notes by causing DTC to transfer your
old notes into the exchange agent's account at DTC in accordance with DTC's
procedures for transfer. Although you may deliver your old notes through
book-entry transfer at DTC, you still must send the letter of transmittal,
with any required signature guarantees and any other required documents, to
the exchange agent at the address specified on the back cover of this
prospectus on or prior to the expiration date and the exchange agent must
receive these documents on time. If you will not be able to send all the
documents on time, you can still tender your old notes by using the
guaranteed delivery procedures described below.
YOU ASSUME THE RISK OF CHOOSING THE METHOD OF DELIVERY OF OLD NOTES
AND ALL OTHER DOCUMENTS. 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.
If you do not provide your taxpayer identification number, which is
your social security number or employer identification number, as applicable,
and certify that such number is correct, the exchange agent will withhold 31%
of the gross proceeds otherwise payable to you pursuant to the exchange
offer, unless an exemption applies under the applicable law and regulations
concerning "backup withholding" of federal income tax. 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 you prove it in a manner satisfactory to us and the
exchange agent.
HOW TO USE THE GUARANTEED DELIVERY PROCEDURES IF YOU WILL NOT HAVE ENOUGH
TIME TO SEND ALL DOCUMENTS TO US
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: your name and address, the principal amount of the
old notes that you are tendering, the names in which you registered the old
notes and, if possible, the certificate numbers of the old notes that you are
tendering.
The eligible institution's correspondence to the exchange agent must
state that the correspondence constitutes the tender and guarantee that
within three New York Stock Exchange trading days after the date that the
eligible institution executes such correspondence, the eligible institution
will deliver the old notes, in proper form for transfer, together with a
properly completed
36
and duly executed letter of transmittal and any other required documents. We
may, at our option, reject the tender if you do not tender your old notes and
accompanying documents by either the above-described method or by a timely
book-entry confirmation, and if you do not deposit your old notes and tender
documents with the exchange agent within the time period set forth above.
Copies of a notice of guaranteed delivery that eligible institutions may use
for the purposes described in this paragraph are available from the exchange
agent.
Valid receipt of your tender will occur as of the date when the
exchange agent receives your properly completed letter of transmittal,
accompanied by either the old notes or a timely book-entry confirmation. We
will issue exchange notes in exchange for old notes that you tendered
pursuant to a notice of guaranteed delivery or correspondence to similar
effect as described above by an eligible institution only against deposit of
the letter of transmittal, any other required documents and either the
tendered old notes or a timely book-entry confirmation.
WE RESERVE THE RIGHT TO DETERMINE VALIDITY OF ALL TENDERS
We will be the sole judge of all questions as to the validity, form,
eligibility, including time of receipt, and acceptance for exchange of your
tender of old notes and our judgment 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 we waive similar defects or
irregularities 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.
TO PARTICIPATE, YOU MUST COMPLETE THE LETTER OF TRANSMITTAL CERTIFYING
INFORMATION ABOUT YOURSELF
By tendering old notes and executing the letter of transmittal, you
certify that the following:
- you are not our "affiliate";
- you are not a broker-dealer that owns old notes you acquired
directly from us or our affiliate; and
- you are acquiring the exchange notes we are offering 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.
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.
By tendering old notes for exchange, you will exchange, assign and
transfer the old notes to us and irrevocably appoint the exchange agent as
your agent and attorney-in-fact to assign, transfer and exchange the old
notes. You will also 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.
The letter of transmittal requires you to agree that, when we accept your old
notes for exchange, we will acquire good and unencumbered title to them, free
and clear of all liens, restrictions, charges and encumbrances and that they
are not subject to any adverse claim.
37
You will also warrant that you will, upon our request, execute and
deliver any additional documents that we believe are necessary or desirable
to complete the exchange, assignment and transfer of your tendered old notes.
You must further agree that our acceptance of any tendered old notes and the
issuance of exchange notes in exchange for them will constitute performance
in full by us of our obligations under the registration rights agreement and
that we will have no further obligations or liabilities under that agreement,
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.
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, the exchange agent must timely
receive your written or fax notice of withdrawal prior to the expiration date
at the exchange agent's address set forth on page 41 of this prospectus. Your
notice of withdrawal must specify the following information:
- The person named in the letter of transmittal as tendering old
notes you are withdrawing;
- The certificate numbers of old notes you are withdrawing;
- The principal amount of old notes you are withdrawing;
- A statement that you are withdrawing your election to have us
exchange such old notes; 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.
The person or persons who signed your letter of transmittal, including any
eligible institutions that guaranteed signatures on your letter of
transmittal, must sign the notice of withdrawal in the same manner as their
original signatures on the letter of transmittal. If such persons and
eligible institutions cannot sign your notice of withdrawal, you must send it
with evidence satisfactory to us that you now hold beneficial ownership of
the old notes that you are withdrawing. 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 our determination will be final
and binding on all parties.
HOW WE WILL EITHER EXCHANGE YOUR OLD NOTES FOR EXCHANGE NOTES OR RETURN THEM
TO YOU
On the exchange date, we will determine which old notes the holders
validly tendered and we will issue exchange notes in exchange for the validly
tendered old notes. The exchange agent will act as your agent for the purpose
of receiving exchange notes from us and sending the old notes to you in
exchange for exchange notes promptly after acceptance of the tendered old
notes. If we do not accept your old notes for exchange, we will return them
without expense to you. If you tender your old notes by book-entry transfer
into the exchange agent's account at DTC pursuant to the procedures described
above, we do not accept your old notes for exchange, DTC will credit your
non-exchanged old notes to an account maintained with DTC. In either case, we
will return your non-exchanged old notes to you promptly following the
expiration of the exchange offer.
WE MAY MODIFY OR TERMINATE THE EXCHANGE OFFER UNDER SOME CIRCUMSTANCES
We are not 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 or, at our option, we may modify
38
or otherwise amend the exchange offer. If we terminate the exchange offer, it
will be by oral or written notice to the exchange agent and by timely public
announcement communicated no later than 5:00 p.m. on the next business day
following the expiration date, unless applicable law or regulation requires
otherwise, by making a release to the Dow Jones News Service. We may
terminate the exchange offer in the following circumstances:
- Any court or governmental agency brings a legal action seeking
to prohibit the exchange offer or assessing or seeking any
damages as a result of the exchange offer, or resulting in a
material delay in our ability to accept any of the old notes
for exchange offer; or
- Any government or governmental authority, domestic or foreign
brings or threatens any law or legal action that in our sole
judgment, might directly or indirectly result in any of the
consequences referred to above; or, if in our sole judgment,
such activity might result in the holders of exchange notes
having obligations with respect to resales and transfers of
exchange notes that are greater than those we described above
in the interpretations of the staff of the SEC 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 we may assert
them with respect to all or any portion of the exchange offer regardless of
the circumstances giving rise to such condition. We also reserve the right to
waive these conditions 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 a waiver of any such right, and each right will be an
ongoing right that we may assert 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 tendered old notes,
and we will not issue exchange notes in exchange for any such old notes, if
at that time there is, or the SEC has threatened, any stop order with respect
to the registration statement that this prospectus is a part of, or if
qualification of the indentures is required under the Trust Indenture Act of
1939.
WHERE TO SEND YOUR DOCUMENTS FOR THE EXCHANGE OFFER
We have appointed U.S. Bank Trust National Association as the
exchange agent for the exchange offer. You must send your letter of
transmittal to the exchange agent at:
U.S. Bank Trust National Association
180 East Fifth Street
St. Paul, Minnesota 55101
Telephone: (651) 244-1572
Facsimile: (651) 244-1537
Attention: Specialized Finance Group
IF YOU SEND YOUR DOCUMENTS TO ANY OTHER ADDRESS OR FAX NUMBER, YOU
WILL HAVE NOT VALIDLY DELIVERED THEM AND YOU WILL NOT RECEIVE EXCHANGE NOTES
IN EXCHANGE FOR YOUR OLD NOTES. WE WILL RETURN YOUR OLD NOTES TO YOU.
39
WE ARE PAYING OUR COSTS FOR THE EXCHANGE OFFER
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 that they incur in forwarding tenders for
their customers. We will pay the expenses incurred in connection with the
exchange offer, including the fees and expenses of the exchange agent and
printing, accounting, investment banking and legal fees. We estimate that
these fees are 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
THAT THIS PROSPECTUS CONTAINS
IF ANYONE ELSE GIVES YOU INFORMATION OR REPRESENTATIONS ABOUT THE
EXCHANGE OFFER, YOU SHOULD NOT RELY UPON THAT INFORMATION OR REPRESENTATION
OR ASSUME THAT WE HAVE AUTHORIZED IT. 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 THIS PROSPECTUS GIVES INFORMATION. WE ARE NOT MAKING THE
EXCHANGE OFFER TO, NOR WILL WE ACCEPT TENDERS FROM OR ON BEHALF OF, HOLDERS
OF OLD NOTES IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE THE EXCHANGE
OFFER OR TO ACCEPT IT. 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 A
LICENSED BROKER OR DEALER TO MAKE THE EXCHANGE OFFER ONE OR MORE REGISTERED
BROKERS OR DEALERS THAT ARE LICENSED UNDER THE LAWS OF THAT JURISDICTION IS
MAKING THE EXCHANGE OFFER ON OUR BEHALF.
THERE ARE NO DISSENTER OR APPRAISAL RIGHTS
HOLDERS OF OLD NOTES WILL NOT HAVE DISSENTERS' RIGHTS OR APPRAISAL
RIGHTS IN CONNECTION WITH THE EXCHANGE OFFER.
FEDERAL INCOME TAX CONSEQUENCES TO YOU
Your exchange of old notes for exchange notes 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.
THIS IS THE ONLY EXCHANGE OFFER THAT WE ARE REQUIRED TO MAKE
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. 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 to the old notes under the indenture All non-exchanged old notes
will continue to be subject to the restriction on transfer set forth in the
indenture. If we exchange old notes in the exchange offer, the trading
market, if any, for any remaining old notes could be much less liquid. See
"Risk 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."
We may in the future seek to acquire non-exchanged 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 exchanged in the exchange offer.
40
SELECTED FINANCIAL DATA
We have derived the following selected financial data as of, and for
each of the five years in the period ended December 31, 1998, from, and the
data is qualified by reference to, our company's Combined and Consolidated
Financial Statements which Arthur Andersen LLP, independent public
accountants have audited. The following selected financial data at March 31,
1998 and 1999, and for the three months ended March 31, 1998 and 1999, 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. You should read this data
in conjunction with our company's Condensed Consolidated Financial Statements
and related notes thereto, and "Management's discussion and analysis of
financial condition and results of operations" we included elsewhere in this
prospectus.
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
--------------------------------------------------------------- ----------------------
1994 1995 1996 1997 1998 1998 1999
-------- -------- --------- --------- ---------- -------- ---------
(IN THOUSANDS, EXCEPT RATIOS, SUBSCRIBERS AND PER SHARE DATA)
(UNAUDITED)
STATEMENTS OF OPERATIONS DATA:
Revenue:
DISH Network ..................... $ --- $ --- $ 57,888 $ 341,808 $ 682,109 $134,725 $ 263,066
DTH equipment sales and
integration services ......... --- 35,816 77,390 90,263 253,841 66,816 31,193
Satellite services ............... --- --- 5,822 11,135 22,304 4,595 7,821
C-band and other ................. 179,313 112,704 56,003 32,696 27,655 7,888 7,983
-------- -------- --------- --------- ---------- -------- ---------
Total revenue ...................... 179,313 148,520 197,103 475,902 985,909 214,024 310,063
Costs and Expenses:
DISH Network operating expenses .. --- --- 42,409 193,170 396,992 80,794 144,715
Cost of sales--DTH equipment
and integration services ..... --- 30,404 75,984 60,918 174,615 47,251 23,143
Cost of sales--C-band and other .. 133,635 84,846 42,345 23,909 16,496 5,942 4,050
Marketing expenses ............... 2,346 1,786 53,168 183,345 331,680 53,084 142,398
General and administrative ....... 27,873 36,376 48,693 66,060 94,824 19,294 28,632
Depreciation and amortization .... 2,243 3,114 43,369 172,836 102,157 29,341 24,562
-------- -------- --------- --------- ---------- -------- ---------
Total costs and expenses ......... 166,097 156,526 305,968 700,238 1,116,764 235,706 367,500
-------- -------- --------- --------- ---------- -------- ---------
Operating income (loss) .......... $ 13,216 $ (8,006) $(108,865) $(224,336) $ (130,855) $(21,682) $ (57,437)
-------- -------- --------- --------- ---------- -------- ---------
-------- -------- --------- --------- ---------- -------- ---------
Net income (loss) ................ $ 90 $(12,361) $(101,676) $(323,424) $ (294,375) $(57,261) $(333,317)
-------- -------- --------- --------- ---------- -------- ---------
-------- -------- --------- --------- ---------- -------- ---------
AS OF DECEMBER 31, AS OF MARCH 31,
---------------------------------------------------------------- ---------------
1994 1995 1996 1997 1998 1999
-------- -------- ---------- ---------- ---------- ---------------
(UNAUDITED)
BALANCE SHEET DATA:
Cash, cash equivalents and
marketable investment
securities (1) ................... $ 48,544 $ 14,161 $ 57,247 $ 65,965 $ 32,308 $ 273,735
Total assets ......................... 472,492 559,297 1,085,545 1,431,774 1,470,173 1,604,115
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 ........................... 334,206 382,218 437,127 499,863 571,674 1,503
1996 notes ........................... --- --- 386,165 438,512 497,955 1,097
1997 notes ........................... --- --- --- 375,000 375,000 15
Mortgages and other notes payable,
net of current portion ........... 5,393 33,444 51,428 51,846 43,450 38,409
Notes payable to ECC, including
accumulated interest ............. --- --- 12,000 54,597 59,812 ---
Other long-term obligations .......... --- --- 7,037 19,500 33,358 39,086
Total stockholder's equity (deficit) ..... 103,808 92,892 (6,673) (313,770) (588,137) (1,190,042)
41
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
-------------------------------------------------------------- ------------------------
1994 1995 1996 1997 1998 1998 1999
--------- -------- --------- ---------- ---------- ---------- ----------
(UNAUDITED)
OTHER DATA:
DISH Network subscribers.......... --- --- 350,000 1,040,000 1,940,000 1,202,000 2,265,000
Average monthly revenue per
subscriber ................... $ --- $ --- $ 35.50 $ 38.50 $ 39.25 $ 38.25 $ 41.45
EBITDA (2) ....................... 15,459 (4,892) (65,496) (51,500) (28,698) 7,659 (32,875)
Less amortization of subscriber
acquisition costs ............ --- --- (16,073) (121,428) (18,819) (10,971) ---
--------- -------- --------- ---------- ---------- ---------- ----------
EBITDA, without add back for
amortization of subscriber
acquisition costs ............ 15,459 (4,892) (81,569) (172,928) (47,517) (3,312) (32,875)
Net cash flows from:
Operating activities ............. 24,205 (21,888) (22,836) (7,549) (53,949) (26,840) 2,216
Investing activities ............. (338,565) (1,431) (294,962) (306,079) (43,340) (3,142) (61,486)
Financing activities ............. 325,011 19,764 342,287 337,247 60,538 (4,025) 169,604
Ratio of earnings to fixed
charges (3) .................. --- --- --- --- --- --- ---
Deficiency of earnings to fixed
charges (3) .................. $ (5,206) $(44,315) $(188,347) $ (366,447) $ (315,923) $ (65,033) $ (104,518)
- ------------
(1) Excludes restricted cash and marketable investment securities.
(2) We believe it is common practice in the telecommunications industry for
investment bankers and others to use various multiples of current or
projected EBITDA 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, rather than
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. We are aware
of no uniform standards for determining EBITDA and we believe that
presentations of EBITDA may not be calculated consistently by different
entities in the same or similar businesses. We have shown EBITDA with
and without add back of amortization of subscriber acquisition costs,
which we deferred through September 1997 and amortized over one year.
(3) For purposes of computing the ratio of earnings to fixed charges, and
the deficiency of earnings to fixed charges, earnings consist of
earnings from continuing operations before income taxes, plus fixed
charges. Fixed charges consist of interest incurred on all indebtedness
and the imputed interest component of rental expense under
non-cancelable operating leases. For the years ended December 31, 1994,
1995, 1996, 1997 and 1998, and for the three months ended March 31,
1998 and 1999, earnings were insufficient to cover the fixed charges.
42
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Our operations include three interrelated business units--the DISH
Network, Technology and Satellite Services. Our principal business strategy
is to continue to develop our subscription television service in the United
States to provide consumers with a competitive alternative to cable
television service.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1999 COMPARED TO THE THREE MONTHS ENDED MARCH 31,
1998.
REVENUE. Total revenue for the three months ended March 31, 1999
was $310 million, an increase of $96 million compared to total revenue for
the three months ended March 31, 1998 of $214 million. The increase in total
revenue was primarily attributable to DISH Network subscriber growth. We
expect that our revenues will continue to increase as the number of DISH
Network subscribers increases.
DISH Network subscription television services revenue totaled
$261 million for the three months ended March 31, 1999, an increase of
$132 million or 103% compared to the same period in 1998. This increase was
directly attributable to the increase in the number of DISH Network
subscribers and higher average revenue per subscriber. Average DISH Network
subscribers for the three months ended March 31, 1999 increased approximately
87% compared to the same period in 1998. As of March 31, 1999, we had
approximately 2.3 million DISH Network subscribers compared to 1.2 million at
March 31, 1998. Monthly revenue per subscriber approximated $41 and $38
during the three months ended March 31, 1999 and 1998, 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 we are successful in increasing the number of DISH
Network subscribers and maintaining or increasing revenue per subscriber.
During the three months ended March 31, 1999 and 1998, our subscriber
turnover was approximately 1% per month. Subscriber turnover is calculated as
the number of subscriber disconnects during the period, divided by the
weighted-average number of subscribers during the period.
For the three months ended March 31, 1999, DTH equipment sales and
integration services totaled $31 million, a decrease of $36 million compared
to 1998. DTH equipment sales consist of sales of digital set-top boxes and
other digital satellite broadcasting equipment by us to international DTH
service operators. We currently have agreements to provide equipment to DTH
service operators in Spain and Canada. This expected decrease in DTH
equipment sales and integration services revenue was primarily attributable
to a decrease in demand combined with a decrease in the sales price of
digital set-top boxes attributable to increased competition.
Substantially all of our EchoStar Technologies Corporation or ETC
revenues have resulted from sales to two international DTH providers. As a
result, our ETC business currently is economically dependent on these two DTH
providers. Our 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 our digital set-top boxes. Due to the
continued decrease in the sales price of digital set-top boxes and increasing
competition, we expect that our DTH equipment and integration services
revenue will decline during the remainder of 1999 as compared to 1998. DTH
equipment and integration services revenue may decline as much as 50% during
the remainder of 1999 as compared to 1998.
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. In October 1998, Telefonica
announced that the merger negotiations had been suspended. Subsequently,
negotiations between Telefonica and Canal Plus Satellite were resumed and
again suspended. Although
43
we have binding purchase orders from Telefonica for 1999 deliveries of DTH
equipment, we cannot yet predict the impact, if any, that consummation of
this merger might have on our future sales to Telefonica. Although we
continue 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 $8 million during the three
months ended March 31, 1999, an increase of $3 million as compared to the
same period during 1998. These revenues principally include fees charged to
content providers for signal carriage and revenues earned from business
television, or BTV customers. The increase in satellite services revenue was
primarily attributable to increased BTV revenue due to the addition of new
full-time BTV customers. Satellite services revenue is expected to increase
during the remainder of 1999 to the extent we are successful in increasing
the number of our BTV customers and developing and implementing new services.
In order, among other things, to prepare for a potential adverse
result in our pending litigation with the four major broadcast networks and
their affiliate groups, we have commenced sending letters to some of our
subscribers warning that their access to CBS, NBC, Fox and ABC distant
network channels might be terminated commencing in June of this year. Such
terminations would result in a small reduction in average monthly revenue per
subscriber. While there can be no assurance, any such decreases could be
offset by increases in average monthly revenue per subscriber resulting from
the delivery of local network channels by satellite, and increases in
programming offerings that will follow the scheduled launches of EchoStar V
and EchoStar VI later this year. While there can be no assurance, legislation
pending in the Senate would, if passed into law, reduce the number of
customers whose network channels we may otherwise be required to terminate.
DISH NETWORK OPERATING EXPENSES. DISH Network operating expenses
totaled $145 million during the three months ended March 31, 1999, an
increase of $64 million or 79%, compared to the same period in 1998. 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 55% and 63% of
subscription television services revenue during the three months ended
March 31, 1999 and 1998, respectively.
Subscriber-related expenses totaled $111 million during the three
months ended March 31, 1999, an increase of $47 million compared to the same
period in 1998. Such expenses, which include programming expenses, copyright
royalties, residuals payable to retailers and distributors, and billing,
lockbox and other variable subscriber expenses, represented 43% of subscription
television services revenues during the three months ended March 31, 1999
compared to 50% during the same period in 1998. 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.
Although we expect subscriber-related expenses as a percentage of
subscription television services revenue to remain near this level in future
periods, this expense to revenue ratio could increase.
44
Customer service center and other expenses principally consist of
costs incurred in the operation of our 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 $24 million during the three months ended March 31, 1999, an
increase of $12 million as compared to the same period in 1998. The increase
in customer service center and other expenses resulted from increased
personnel and telephone expenses to support the growth of the DISH Network.
Customer service center and other expenses totaled 9% of subscription
television services revenue during each of the three months ended March 31,
1999 and 1998. Although we expect customer service center and other expenses
as a percentage of subscription television services revenue to remain near
this level in future periods, this expense to revenue ratio could increase.
Satellite and transmission expenses include expenses associated with
the operation of our digital broadcast center, contracted satellite
telemetry, tracking and control services, and satellite in-orbit insurance.
Satellite and transmission expenses totaled $9 million during the three
months ended March 31, 1999, a $4 million increase compared to the same
period in 1998. This increase resulted from higher satellite and other
digital broadcast center operating expenses due to an increase in the number
of operational satellites. We expect satellite and transmission expenses to
continue to increase in the future as additional satellites are placed in
service. However, we expect that satellite and transmission expenses as a
percentage of subscription television services revenue may decline to the
extent we are successful in increasing the number of DISH Network subscribers
and maintaining or increasing revenue per subscriber.
COST OF SALES - DTH EQUIPMENT AND INTEGRATION SERVICES. Cost of
sales - DTH equipment and integration services totaled $23 million during the
three months ended March 31, 1999, a decrease of $24 million compared to the
same period in 1998. This decrease is consistent with the decrease 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 represented 74% and 71% during the three
months ended March 31, 1999 and 1998, respectively. We expect that cost of
sales may increase as a percentage of DTH equipment revenue in the future,
due to price pressure resulting from increased competition from other
providers of DTH equipment.
MARKETING EXPENSES. Marketing expenses totaled $142 million during
the three months ended March 31, 1999, an increase of $89 million or 168%,
compared to the same period in 1998. The increase in marketing expenses was
primarily attributable to an increase in subscriber promotion subsidies.
Subscriber promotion subsidies include the excess of transaction costs over
transaction proceeds at the time of sale of EchoStar receiver systems,
activation allowances paid to retailers, and other promotional incentives.
Advertising and other expenses totaled $12 million during the three months
ended March 31, 1999, an increase of $4 million over the same period in 1998.
During the three months ended March 31, 1999, our subscriber
acquisition costs, inclusive of acquisition marketing expenses, totaled
$142 million, or approximately $355 per new subscriber activation.
Comparatively, our subscriber acquisition costs during the three months ended
March 31, 1998, inclusive of acquisition marketing expenses and deferred
subscriber acquisition costs, totaled $51 million, or approximately $250 per
new subscriber activation. The increase in our subscriber acquisition costs,
on a per new subscriber activation basis, principally resulted from the
introduction of several aggressive marketing promotions to acquire new
subscribers.
During the first quarter of 1999, we introduced the PrimeStar bounty
program and enhanced our Network One-Rate Plan. Our subscriber acquisition
costs under these programs are significantly higher than those under our
other marketing programs. Under the enhanced DISH Network One-Rate Plan,
consumers are eligible to receive a rebate that ranges from $100 up to $298
on the purchase of certain EchoStar receiver systems. To be eligible for this
rebate, a subscriber must make a one-year commitment
45
to subscribe to our America's Top 100 CD programming package plus additional
channels. The amount of the monthly programming commitment determines the
amount of the rebate. Although subscriber acquisition costs are materially
higher under this plan compared to previous promotions, DISH Network One-Rate
Plan customers generally provide materially greater average revenue per
subscriber than a typical DISH Network subscriber. In addition, we believe
that these customers represent lower credit risk and therefore may be
marginally less likely to disconnect their service than other DISH Network
subscribers. Under the enhanced DISH Network One-Rate Plan, we presently
expect the participation rate to increase to approximately 30% to 40% of new
subscriber activations during the duration of the promotion. To the extent
that actual consumer participation levels exceed present expectations,
subscriber acquisition costs may materially increase. Although there can be
no assurance as to the ultimate duration of the DISH Network One-Rate Plan,
it will continue through at least July 1999.
Under our PrimeStar bounty program, current PrimeStar customers are
eligible to receive a free base-level EchoStar receiver system, free
installation and six months of our America's Top 40 programming, which
retails for $19.99 per month, without charge. A subscriber must make a
one-year commitment to subscribe to either our America's Top 40 or our
America's Top 100 CD programming package and prove that they are a current
PrimeStar customer to be eligible for this program.
Based upon our current promotions we do not expect a material change
in subscriber acquisition costs during the second quarter of 1999. To the
extent that we expand the PrimeStar bounty program and the DISH Network
One-Rate Plan, our subscriber acquisition costs, both in aggregate and on a
per new subscriber activation basis, may materially increase.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses totaled $29 million during the three months ended March 31, 1999, an
increase of $10 million as compared to the same period in 1998. 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 represented 9% during the each of the three months ended
March 31, 1999 and 1998. Although we expect that G&A expenses as a percentage
of total revenue to remain near this level or decline modestly in future
periods, this expense to revenue ratio could increase.
EARNINGS BEFORE INTEREST, TAXES, DEPRECIATION AND AMORTIZATION
("EBITDA"). EBITDA was negative $33 million and negative $3 million, during
the three months ended March 31, 1999 and 1998, respectively. EBITDA, as
adjusted to exclude amortization of subscriber acquisition costs, was negative
$33 million for the three months ended March 31, 1999 compared to $8 million
for the same period in 1998. This decline in EBITDA principally resulted from
a decrease in DTH equipment revenue and an increase in subscriber promotion
subsidies. It is important to note that EBITDA does not 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.
As previously discussed, to the extent we expand our current
marketing promotions and our subscriber acquisition costs materially
increase, our EBITDA results will be negatively impacted because subscriber
acquisition costs are expensed as incurred.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization
expenses including amortization of subscriber acquisition costs, aggregated
$25 million during the three months ended March 31, 1999, a $4 million
decrease compared to the same period in 1998. The decrease in depreciation
and amortization expenses principally resulted from subscriber acquisition
costs no longer being amortized, partially offset by an increase in
depreciation related to the commencement of operation of EchoStar IV in
August of 1998 and other depreciable assets placed in service during 1998.
OTHER INCOME AND EXPENSE. Other expense, net totaled $47 million
during the three months ended March 31, 1999, an increase of $12 million as
compared to the same period in 1998. The increase in other expense resulted
primarily from interest expense associated with our 9 1/4% senior notes due
2006,
46
and our 9 3/8% senior notes due 2009, both issued in January 1999, partially
offset by a decrease in interest expense associated with our 12 1/2% Senior
Secured Notes due 2002 issued in June 1997, our 12 3/8% Senior Secured
Discount Notes due 2004 issued in 1994, and our 13 1/8% Senior Secured
Discount Notes due 2004 issued in 1996.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO THE YEAR ENDED DECEMBER 31, 1997.
REVENUE. Total revenue for the year ended December 31, 1998 was
$986 million, an increase of $510 million compared to total revenue for the
year ended December 31, 1997 of $476 million. The increase in total revenue
was primarily attributable to DISH Network subscriber growth combined with
increased revenue from our ETC and Satellite Services business units. We
expect that our revenues will continue to increase as the number of DISH
Network subscribers increases.
DISH Network subscription television services revenue totaled
$669 million for the year ended December 31, 1998, an increase of $370
million or 124% compared to 1997. This increase was directly attributable to
the increase in the number of DISH Network subscribers. Average DISH Network
subscribers for the year ended December 31, 1998 increased approximately 120%
compared to 1997. As of December 31, 1998, we had approximately 1.9 million
DISH Network subscribers compared to 1.04 million at December 31, 1997.
Monthly revenue per subscriber approximated $39.25 and $38.50 during the
years ended December 31, 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 we are successful in increasing the number of DISH Network subscribers
and maintaining or increasing revenue per subscriber.
For the year ended December 31, 1998, DTH equipment sales and
integration services totaled $254 million, an increase of $164 million
compared to 1997. DTH equipment sales consist of sales of digital set-top
boxes and other digital satellite broadcasting equipment by us to
international DTH service operators. We currently have 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 our ETC revenues have resulted from sales to
two international DTH providers. As a result, our ETC business currently is
economically dependent on these two DTH providers. Our 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 our digital set-top boxes. Due to an expected decrease in demand combined
with a decrease in the sales price of digital set-top boxes attributable to
increased competition, we expect that our DTH equipment and integration
services revenue will decline during 1999 as compared to 1998. Such revenue
may decline in 1999 by as much as 50% as compared to 1998.
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. In October 1998, Telefonica
announced that the merger negotiations had been suspended. Subsequently,
negotiations between Telefonica and Canal Plus Satellite have resumed.
Although we have binding purchase orders from Telefonica for 1999 deliveries
of DTH equipment, we cannot yet predict what impact, if any, consummation of
this merger might have on our future sales to Telefonica. Although we
continue 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 $22 million during 1998, an
increase of $11 million as compared to 1997. These revenues principally
include fees charged to content providers for signal
47
carriage and revenues earned from business television customers. The increase
in satellite services revenue was primarily attributable to increased
business television revenue due to the addition of new full-time business
television customers. Satellite services revenue is expected to increase
during 1999 to the extent we are successful in increasing the number of our
business television customers and developing and implementing new services.
DISH Network operating expenses totaled $397 million during 1998, an
increase of $204 million or 106%, compared to 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 59% and 65% of subscription television
services revenue during 1998 and 1997, respectively. Although we expect DISH
Network operating expenses as a percentage of subscription television
services revenue to decline modestly from 1998 levels in future periods, this
expense to revenue ratio could increase.
Subscriber-related expenses totaled $298 million during 1998, an
increase of $154 million compared to 1997. Such expenses, which include
programming expenses, copyright royalties, residuals payable to retailers and
distributors, and billing, lockbox and other variable subscriber expenses,
represented 45% of subscription television services revenues during 1998
compared to 48% during 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 our 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 $72 million during 1998, an increase of $37 million as
compared to 1997. The increase in customer service center and other expenses
resulted from increased personnel and telephone expenses to support the
growth of the DISH Network. Customer service center and other expenses
totaled 11% of subscription television services revenue during 1998 compared
to 12% of subscription television services revenue during 1997. Although we
expect customer service center and other expenses as a percentage of
subscription television services revenue to remain near 1998 levels in the
future, this expense to revenue ratio could increase.
Satellite and transmission expenses include expenses associated with
the operation of our digital broadcast center, contracted satellite telemetry,
tracking and control services, and satellite in-orbit insurance. Satellite
and transmission expenses totaled $26 million during 1998, an $11 million
increase compared to 1997. This increase resulted from higher satellite and
other digital broadcast center operating expenses due to an increase in the
number of operational satellites. We expect satellite and transmission
expenses to continue to increase in the future as additional satellites are
placed in service.
COST OF SALES - DTH EQUIPMENT AND INTEGRATION SERVICES. Cost of
sales - DTH equipment and integration services totaled $175 million during
1998, an increase of $114 million compared to 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
represented 69% and 68% during 1998 and 1997, respectively. We expect that
cost of sales may increase as a percentage of DTH equipment revenue in the
future due to price pressure resulting from increased competition from other
providers of DTH equipment.
MARKETING EXPENSES. Marketing expenses totaled $332 million during
1998, an increase of $149 million or 81%, compared to 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. During all of 1998 we recognized
48
subscriber promotion subsidies as incurred. These expenses totaled $284 million
during 1998, an increase of $135 million over 1997. This increase resulted
from increased subscriber activations and the immediate recognition of all
subscriber promotion subsidies incurred in 1998, because promotions were
changed to eliminate the requirement for new subscribers to prepay for
programming. During 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 $48 million during 1998, an increase
of $13 million over 1997.
During 1998, our subscriber acquisition costs, inclusive of
acquisition marketing expenses, totaled $314 million, or approximately $285
per new subscriber activation. Comparatively, our 1997 subscriber acquisition
costs, inclusive of acquisition marketing expenses and deferred subscriber
acquisition costs, totaled $252 million, or approximately $340 per new
subscriber activation. The decrease in our subscriber acquisition costs, on a
per new subscriber activation basis, principally resulted from decreases in
the manufactured cost of EchoStar receiver systems. We expect that our
subscriber acquisition costs, on a per new subscriber activation basis, will
increase in the near-term as we introduce aggressive marketing promotions to
acquire new subscribers. For example, during 1999 we introduced the PrimeStar
bounty program. Our subscriber acquisition costs under this program are
significantly higher than those under our other marketing programs. To the
extent that we either extend the duration of the PrimeStar bounty program or
begin to offer similar bounty programs for other competitors' subscribers,
our subscriber acquisition costs, both in the aggregate and on a per new
subscriber activation basis, will materially increase.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses totaled $95 million during 1998, an increase of $29 million as
compared to 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% during 1998
compared to 14% during 1997. Although we expect that G&A expenses as a
percentage of total revenue will approximate 1998 levels or decline modestly
in the future, this expense to revenue ratio could increase.
EBITDA. EBITDA was negative $29 million and negative $52 million,
during 1998 and 1997, respectively. EBITDA, without the add back for
amortization of subscriber acquisition costs, was negative $48 million for
1998 compared to negative $173 million for 1997. This improvement in EBITDA
principally resulted from increases in our ETC and DISH Network revenues. We
believe our ability to repay our existing debt will be significantly
influenced by our ability to continue to improve reported EBITDA. 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.
During the fourth quarter of 1998, we introduced the DISH Network
One-Rate Plan. Under the DISH Network One-Rate Plan, consumers are eligible
to receive a rebate of up to $299 on the purchase of certain EchoStar
receiver systems. Consequently, the costs of acquiring subscribers who
qualify for the DISH Network One-Rate Plan are materially higher than for
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, which is equal to $97.96 for two months of
programming, we issue a rebate of up to $299 to the subscriber. Although
subscriber acquisition costs are materially higher under the DISH Network
One-Rate Plan, we believe that these customers are more profitable because of
the higher average revenue per subscriber. In addition, we believe 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 April 1999.
49
Our subscriber acquisition costs, both in the aggregate and on a per
subscriber basis, will increase in direct relation to the participation rate
in the DISH Network One-Rate Plan. While we presently expect approximately
one-third of our new subscriber activations to result from the DISH Network
One-Rate Plan during the duration of the promotion, the actual consumer
participation level could be significantly higher. To the extent that actual
consumer participation levels exceed present expectations and subscriber
acquisition costs materially increase, our EBITDA results will be negatively
impacted because subscriber acquisition costs are expensed as incurred.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization
expenses during 1998, including amortization of subscriber acquisition costs
of $19 million, aggregated $102 million, a $71 million decrease compared to
1997. The decrease in depreciation and amortization expenses principally
resulted from a decrease in amortization of subscriber acquisition costs of
$102 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. Promotional programs changed in October
1997 and we ceased deferral of subscriber acquisition costs after that date.
All previously deferred costs were fully amortized during 1998
OTHER INCOME AND EXPENSE. Other expense, net totaled $163 million
during 1998, an increase of $64 million as compared to 1997. The increase in
other expense resulted primarily from interest expense associated with our
12 1/2% Senior Secured Notes due 2002 issued in June 1997, combined with
increased interest expense resulting from increased accreted balances on our
12 7/8% Senior Secured Discount Notes due 2004 issued in 1994 and our 13 1/8%
Senior Secured Discount Notes due 2004 issued in 1996.
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.
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 our 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, we recognized incremental revenues related to
our 1996 promotion of approximately $39 million, an increase of $34 million
over 1996.
During 1997, DTH equipment sales and integration services totaled
$90 million. We currently have agreements for the sale of digital satellite
broadcasting equipment using our proprietary technology to two international
DTH service operators. We 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, such as 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.
50
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 our 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 our business television 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, we ceased operation of our 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.
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 our 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.
51
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.
EBITDA. 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, which was 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 our
12 1/2% notes, and increases in interest expense associated with the 12 7/8%
notes and the 13 1/8% 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.
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 12 7/8% notes
and 13 1/8% 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.
LIQUIDITY AND CAPITAL RESOURCES
CASH SOURCES
On January 25, 1999 we sold $375 million principal amount of 9 1/4%
senior notes due 2006, referred to in this prospectus as the seven year notes
and $1.625 billion principal amount of 9 3/8% senior notes due 2009, referred
to in this prospectus as the ten year notes. The seven year notes and the ten
year notes are referred to in this prospectus together as the notes.
Concurrently with the closing of these offerings, we used approximately
$1.658 billion of net proceeds received from the sale of the notes to
complete tender offers for our outstanding 1994 notes, 1996 notes and 1997
notes. In February 1999, our parent company used approximately $268 million
of net proceeds received from the sale of the notes to complete a tender
offer for its 12 1/8% Senior Preferred Exchange Notes issued on January 4,
1999, in exchange for all issued and outstanding 12 1/8% Series B Senior
Redeemable Exchangeable Preferred Stock.
As of March 31, 1999, our unrestricted cash, cash equivalents and
marketable investment securities totaled $274 million compared to $32 million
as of December 31, 1998. For the three months ended March 31, 1998 and 1999,
we reported net cash flows from operating activities of ($27 million) and
$2 million, respectively.
52
We expect that our future working capital, capital expenditure and
debt service requirements will be satisfied from existing cash and investment
balances and cash generated from operations. Our ability to generate positive
future operating and net cash flows is dependent upon our ability to continue
to rapidly expand our DISH Network subscriber base, retain existing DISH
Network subscribers and our ability to grow our ETC and Satellite Services
businesses. There can be no assurance that we will be successful in achieving
these goals. The amount of capital required to fund the remainder of our 1999
working capital and capital expenditure needs will vary, dependent upon the
growth rate of the DISH Network and our ability to expand our other business
units. During the first quarter of 1999, subscriber growth exceeded our
expectations. To the extent the subscriber growth rate continues to exceed
our expectations, it may be necessary for us to raise additional capital to
fund increased working capital requirements. In addition, our working capital
and capital expenditure requirements could increase materially in the event
of increased competition for subscription television customers, significant
satellite failures, or general economic downturn, among other factors.
SUBSCRIBER ACQUISITION COSTS
As previously described, we subsidize the cost of EchoStar receiver
systems in order to attract new DISH Network subscribers. Consequently, our
subscriber acquisition costs are significant. During the three months ended
March 31, 1999, our aggregate subscriber acquisition costs, which include
subscriber promotion subsidies and acquisition marketing expenses,
approximated $355 per new subscriber activation. To the extent that we
continue the PrimeStar bounty and the DISH Network One-Rate Plan, our
subscriber acquisition costs, both in the aggregate and on a per new
subscriber activation basis, may materially increase. Funds necessary to meet
these subscriber acquisition costs will be satisfied from existing cash and
investment balances to the extent available. We may, however, be required to
raise additional capital in the future to meet these requirements. There can
be no assurance that additional financing will be available on acceptable
terms, or at all.
OBLIGATIONS
Interest accrues at a rate of 9 1/4% and 9 3/8% on the seven and ten
year notes, respectively. Interest on the seven and ten year notes is payable
semi-annually in cash in arrears on February 1 and August 1 of each year,
commencing August 1, 1999. Although the seven and ten year notes have lower
interest rates than our previous debt securities, reported interest expense
will not materially decrease because we raised additional debt to cover
tender premiums and consent and other fees related to the refinancing.
FUTURE CAPITAL REQUIREMENTS
As of March 31, 1999, we had approximately $2.0 billion of
outstanding long-term debt. Beginning in August 1999, we will have
semi-annual cash debt service requirements of approximately $94 million
related to the notes. There will be no scheduled principal payment or sinking
fund requirements prior to maturity of the notes.
We utilized $91 million of satellite vendor financing for our first
four satellites. As of March 31, 1999, approximately $55 million of that
satellite vendor financing remained outstanding. The satellite vendor
financing bears interest at 8 1/4% and is payable in equal monthly
installments over five years following launch of the satellite to which it
relates.
During the remainder of 1999, we anticipate total capital
expenditures to be approximately $70 million. This amount includes
approximately $35 million for capital expenditures related to digital
encoders required by the Cheyenne digital broadcast center to accommodate
expansion to approximately 500 video and audio channels, as a result of the
110 acquisition. In addition, we expect to expend over $100 million, and
perhaps more than $125 million, primarily during 2000 in one-time expenses
associated with repositioning subscriber satellite dishes toward the 110DEG.
West Longitude orbital location.
53
In addition to our DBS business plan, we have licenses, or
applications pending with the FCC, for a two satellite 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
6-satellite system. We will need to raise additional capital to fully
construct these satellites. Further, there may be a number of factors, some
of which are beyond our control or ability to predict, that could require us
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 us, or
at all.
If cash generated from our operations is not sufficient to meet our
debt service requirements or other obligations, we 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 us, or if available, that
the proceeds of such financing would be sufficient to enable us to meet all
of our obligations. At March 31, 1999, a total of $2.6 million of 1994 notes,
1996 notes and 1997 notes remain outstanding. We are required to retire these
remaining notes when they mature, and the indentures governing the 1994, 1996
and 1997 notes will remain outstanding, although substantially all of the
restrictive covenants have been eliminated, until each series of notes has
been retired in full.
YEAR 2000 READINESS DISCLOSURE
We have assessed and continue to assess the impact of the Year 2000
issue on our 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. If our Year 2000 remediation plan is not successful or is not
completed in a timely manner, the Year 2000 issue could significantly disrupt
our ability to transact business with our customers and suppliers, and could
have a material impact on our operations. Even if our Year 2000 remediation
plan is successful or completed on time, there can be no assurance that the
systems of other companies with which our systems interact will be timely
converted, or that any such failure to convert by another company would not
have an adverse effect on our business or operations.
We have established a five-phase plan to address potential Year 2000
issues:
- Inventory - the identification of all relevant hardware and software
to establish the scope of subsequent testing;
- Assessment - the process of evaluating the current level of Year 2000
readiness of all components identified in the inventory phase,
defining actions necessary to retire, replace or otherwise correct all
non-conforming components and estimating resources and timelines
required by action plans;
- Remediation - the correction of previously identified Year 2000
issues;
- Validation/testing - the evaluation of each component's performance as
the date is rolled forward to January 1, 2000 and other dates and
times relating to the Year 2000 issue; and
- Implementation - the process of updating components and correcting
Year 2000 issues in the production operating environment of a system.
In connection with this effort, we have segregated our computer
systems and corresponding Year 2000 readiness risk into three categories:
internal financial and administrative systems, service-delivery systems, and
third-party systems.
54
INTERNAL FINANCIAL AND ADMINISTRATIVE SYSTEMS
With respect to our internal financial and administrative systems, we
have completed the inventory phase of the Year 2000 readiness plan by
identifying all systems with potential Year 2000 problems. We have completed
the process of assessing these systems by communicating with our outside
software and hardware vendors and reviewing their certifications of Year 2000
readiness, as well as reviewing internal custom programming codes.
Upon completion of the assessment phase, we will begin the remediation
and validation/testing phases. During the remediation phase, we will attempt to
correct all problems detected while performing the assessment phase. During the
validation/testing phase, we will create a parallel environment of all internal
and administrative systems. We will run tests on the parallel environment to
assess its reaction to changes in dates and times relating to the Year 2000
issue. We currently expect the remediation and validation/testing phases to be
complete by the end of August 1999.
Once all known problems are corrected within the parallel environment,
we will make changes to the actual operating environment of our internal
financial and administrative systems during the implementation phase. We
currently expect to complete the implementation phase by mid October 1999. While
we presently believe that our internal financial and administrative systems are
Year 2000 ready, we will not be able to certify our Year 2000 readiness until
the successful completion of the implementation phase. As new technology and
software are integrated into our financial and administrative systems we will
perform additional testing to attempt to ensure continued Year 2000 readiness.
SERVICE-DELIVERY SYSTEMS
We have defined service-delivery systems as all internal systems
necessary to deliver DISH Network programming to our subscribers. During the
inventory phase we initially identified our set-top boxes, compression and
conditional access systems at our digital broadcast center, DBS satellites and
third-party billing system as systems with potential Year 2000 issues.
Given the interdependent nature of the receiver and broadcast systems
used to deliver our service, we previously implemented a smaller, offline
version of our overall system to aid in the evaluation and test of hardware and
software changes that normally occur over time. This system gives us the ability
to perform "real-time" testing of the various elements of the system by
simulating the year 2000 rollover, and confirming system operation. This ability
to perform accurate offline simulations has provided a tremendous benefit to our
Year 2000 test process.
We have completed initial testing of our set-top receivers. During
these tests, the dates in the broadcast system, and hence the set-top receivers
were rolled forward to each of the dates and times affected by the Year 2000
issue. We deemed these initial tests successful, as no problems were detected
during thorough testing of the set-top receivers when the dates were rolled
forward. These tests also affirm the integrity of the broadcast systems
supplying the set-top receivers with critical operational system information. As
new technology and software are integrated into our set-top receivers, we will
perform additional testing to attempt to ensure continued Year 2000 readiness.
In addition to the practical testing performed above, we have
completed an independent inventory and assessment of the systems at our
digital broadcast center and are currently in the remediation phase of our
Year 2000 readiness plan. The remediation phase of the plan is expected to be
complete by August 1999. We expect to perform validation and testing of
communications between our digital broadcast center and our DBS satellites
during the third quarter of 1999. The validation and testing of our digital
broadcast center is not expected to cause interruption of programming to DISH
Network subscribers.
55
During the assessment of our DBS satellites, we determined that our
satellites do not operate under a calendar-driven system. Therefore, we do not
expect changes in dates and times to affect the operation of our DBS satellites.
We are currently working with the vendor of our third-party billing
system to attempt to ensure its Year 2000 readiness. This vendor has indicated
it has completed all remediation activities and is currently in the final stages
of testing/validation. Subsequent to completion of its testing/validation
activities, the vendor has indicated it will contractually certify its Year 2000
readiness during the second quarter of 1999, however we cannot provide any
assurance in this regard.
THIRD-PARTY SYSTEMS
We also are currently assessing our vulnerability to unexpected
business interruptions due to the failure of third-parties to remediate Year
2000 readiness issues associated with products or services on which our business
relies. In connection with this assessment, we sent letters to third-party
business partners, suppliers and vendors which we deemed significant requesting
that they certify their Year 2000 readiness. To date, we have received responses
from approximately 70% of these vendors. We are presently in the process of
contacting our critical suppliers and vendors who have either not responded or
have not responded adequately to our requests for proof of certification and
will continue to follow-up on unresolved issues. There can be no assurance that
third-parties who have responded, or will respond, to our request regarding Year
2000 readiness have responded, or will respond, accurately or satisfactorily, or
that anticipated Year 2000 actions set forth in their responses will be properly
conducted.
CONTINGENCY PLANNING
We also are involved in limited contingency planning. In the event that
previously undetected Year 2000 issues arise, contingency plans will be used to
try to mitigate potential system problems. Our internal financial and
administrative and service-delivery contingency plan includes making back-up
copies of certain systems as well as using standby power generators at our
digital broadcasting center. With respect to other third-party systems, we will
continue to contact our critical vendors in order to obtain certification of
their Year 2000 readiness. However, no assurance can be made that such
contingency plans will resolve any Year 2000 problems that may occur, in a
manner which is satisfactory or desirable to us.
COSTS
We have not yet determined the full cost of our Year 2000 readiness
plan and its related impact on our financial condition. In the ordinary course
of business, we have made capital expenditures over the past few years to
improve our systems, for reasons other than Year 2000 remediation. Because these
upgrades also resulted in improved Year 2000 readiness, replacement and
remediation costs have not been material. We currently have budgeted $300,000
for the completion of our Year 2000 readiness plan. While there can be no
assurance, we believe our costs to successfully mitigate the Year 2000 issue
will not be material to our operations. No assurance can be made, however, as to
the total cost for the Year 2000 plan until the plan has been completed.
56
BUSINESS
GENERAL
Our parent company's common stock is publicly traded on the Nasdaq
National Market. We conduct substantially all of our operations through our
subsidiaries. We operate three business units:
- - The DISH Network -- our direct broadcast satellite, or DBS, subscription
television service in the United States. As of March 31, 1999, we had
approximately 2.3 million DISH Network subscribers.
- - EchoStar Technologies Corporation -- our engineering division, which is
principally responsible for the design of digital set-top boxes, or
satellite receivers, necessary for consumers to receive DISH Network
programming, and set-top boxes that it sells to international
direct-to-home satellite operators. We also provide uplink center design,
construction oversight and other project integration services for
international direct-to-home ventures.
- - Satellite Services -- our division that provides video, audio and data
services to business television customers and other satellite users.
RECENT DEVELOPMENTS
TRANSACTION WITH NEWS CORPORATION LIMITED AND MCI
On June 24, 1999, we closed a transaction with MCI, News Corporation
and its American Sky Broadcasting, LLC subsidiary, pursuant to which in
exchange for shares of our parent company's common stock that it issued to
News Corporation and MCI, we acquired or received:
- - the rights to 28 frequencies at the 110DEG. West Longitude orbital location
from which we could transmit programming to the entire continental United
States;
- - two DBS satellites that Space Systems/Loral is constructing and will
deliver in-orbit, and which we currently expect to launch 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 News Data System, News Corporation's
encryption/decoding technology; 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.
We will not incur any of the costs of the construction, launch or
insurance (including launch insurance and one year of in-orbit insurance) of the
two DBS satellites. 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, we agreed to carry the FOX News Channel
on the DISH Network. We started carrying these signals in January 1999 and we
received standard program launch support payments in exchange for carrying the
programming.
The number of shares of our parent company's stock that it issued in
the transaction depended on the average closing price of that stock over a 20
day period. The number of the newly issued shares was determined by dividing
$1.17 billion by that average price. In a table set forth under "Security
ownership of certain beneficial owners and management," below, we describe
the number of shares and the percentage of the class of shares that our
parent company issued in this transaction. Throughout this document, we
refer to the above transaction as the "110 acquisition."
57
By combining the capacity of the two newly acquired satellites with
our four current satellites, we expect that 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 to a
subscriber's single 18-inch satellite dish. We also believe that this
transaction positions us to offer a one-dish solution for satellite-delivered
local programming to major markets across the country. Since we plan to use
many of those channels for local programming, no particular consumer could
subscribe to all 500 channels, but a single dish could receive all of those
channels. We also expect to be able to begin small dish service to Alaska,
Hawaii, Puerto Rico and the United States territories in the Caribbean.
However, we expect to expend over $100 million, and perhaps more than $125
million during 1999 and 2000 in one-time expenses associated with
repositioning subscriber satellite dishes to face the new orbital location.
On May 19, 1999, the FCC approved the transfer to us of MCI's
license to operate high-powered DBS satellites at the 110DEG. WL orbital
location. The launch of EchoStar V and EchoStar VI are both currently
scheduled from Florida on Atlas IIAS rockets. EchoStar V is expected to be
launched in September 1999. EchoStar VI is expected to be launched in
December 1999 to January 2000 timeframe. Delays or failures of launches
preceding the launch of EchoStar V and EchoStar VI could delay these launch
dates. Additionally, if other similar satellites experience anomalies, this
could delay the launch of EchoStar V and EchoStar VI until technical personnel
discover the cause and the correct the anomalies. It is also possible that
the launch dates could occur sooner. News Corporation is paying for the
construction, launch and insurance of the satellites. Satellites at the
110DEG. WL orbital location are capable of providing service to the entire
continental United States. Space Systems/Loral is constructing EchoStar V and
EchoStar VI and both are high-powered FS-1300 series spacecraft. EchoStar V
has 32 110W Ku-band transponders and EchoStar VI has 32 125W Ku-band
transponders. Both satellites are capable of power-combining to 16
transponders each of 220W and 250W, respectively. See " -- Government
regulation" below.
DISH NETWORK
We started offering subscription television services on the DISH
Network in March 1996. As of March 31, 1999, more than 2.3 million households
subscribed to DISH Network programming services. We added 100,000 new DISH
Network subscribers during each of the seven months ended April 1999. There can
be no assurance, however, that we will be able to sustain this growth rate in
the future. Our market share of new DBS subscribers has consistently increased
and, during the first quarter of 1999, we estimate that we captured almost 49%
of all new satellite subscribers. We presently have four operational DBS
satellites. Currently, we have the ability to provide approximately 200 channels
of digital television programming and CD quality audio programming services to
the entire continental United States. We believe that the DISH Network offers
programming packages that have a better "price-to-value" relationship than
packages that most other subscription television providers, particularly cable
TV operators, currently offer. As of March 31, 1999, approximately 11 million
United States households subscribed to direct broadcast satellite and other
direct-to-home satellite services. However, we believe that there continues to
be significant unsatisfied demand for high quality, reasonably priced television
programming services.
Since 1994, we have dedicated significant resources to develop the DISH
Network and our related DBS system. Our DBS system presently includes
FCC-allocated DBS licenses, four operational DBS satellites, digital satellite
receivers, a digital broadcast operations center, customer service facilities,
and other assets used in our operations.
"DBS" describes a satellite service with frequency allocation and wide
spacing between satellites that generally permits higher powered transmissions
than other satellite services and allows for reception
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with a small, 18-24 inch satellite dish. We believe that DBS provides the
most cost-efficient national point to multi-point transport of video and
audio services available today.
We presently have four operational DBS satellites in geostationary
orbit approximately 22,500 miles above the equator. Satellites occupy orbital
positions, or slots, that our industry designates by their longitude. An orbital
position describes both a physical location and an assignment of spectrum in the
applicable frequency band. The FCC has divided each orbital position into 32
frequency channels. Each transponder on our satellites can exploit one frequency
channel. Through digital compression technology, we can currently transmit
approximately eight digital video channels from each transponder. The FCC
licensed us to operate 56 frequencies at the orbital positions where we located
our satellites, including 21 frequencies at the 119DEG. WL orbital location
capable of providing service to the entire continental United States.
See " -- Government regulation -- Regulations -- DBS rules."
COMPONENTS OF A DBS SYSTEM
In order to provide programming services to DISH Network subscribers,
we have entered into agreements with programmers, who deliver their programming
content to our digital broadcast operations center in Cheyenne, Wyoming, via
commercial satellites, fiber optics or microwave transmissions. We monitor those
signals for quality, and can add promotional messages, public service
programming or other information. Equipment at our digital broadcast operations
center then digitizes, compresses, encrypts and combines the signal with other
necessary data, such as conditional access information. We then "uplink" or
transmit the signals to one of our DBS satellites where we then broadcast
directly to DISH Network subscribers.
In order to receive DISH Network programming, a subscriber needs:
- - a satellite antenna, which people sometimes refer to as a "dish," and
related components;
- - an integrated receiver/decoder, which people sometimes refer to as a
"satellite receiver" or "set-top box"; and
- - a television set.
Set-top boxes communicate with our authorization center through
telephone lines to report the purchase of pay-per-view movies and other events.
We use digital video and audio compression to maximize the amount of
programming we can offer to consumers. We use conditional access technology to
encrypt the programming so only those who pay can receive the programming. We
use microchips placed on credit card-sized access cards, or "smart cards" to
control access to authorized programming content. These smart cards, which we
can update or replace periodically, are a key element in preserving the security
of our conditional access system. When a consumer orders a particular channel,
we send a message by satellite that instructs the smart card to permit
decryption of the programming for viewing by that consumer. The set-top box then
decompresses the programming and sends it to the consumer's television.
CONDITIONAL ACCESS SYSTEM. We own 50% of NagraStar LLC, a joint venture
that provides us with "smart cards" that control access to DISH Network
programming. NagraStar purchases these smart cards from Nagra Plus SA, a Swiss
company that owns the other 50% of NagraStar LLC. The access control system is
central to the security network that prevents unauthorized viewing of
programming. Commercial pirating of other DBS operators' access control systems
has occurred. We recently received data that suggests that there may also have
been a compromise of our access control system. We are presently evaluating the
data to determine the corrective measures that are necessary. Though there can
be no assurance, we do not presently believe that the potential compromise will
materially affect future results of operations.
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PROGRAMMING. We currently offer more than 200 channels of digital
television programming and CD-quality audio programming to consumers in the
continental United States from our EchoStar I and EchoStar II satellites.
EchoStar III has the FCC-licensed capacity to provide almost 100 additional
channels to consumers in the Eastern and Central United States time zones.
EchoStar IV has the FCC-licensed and operational capacity to provide almost
100 additional channels to consumers in the Mountain and Pacific United
States time zones. Currently we use those satellites to provide local network
programming, data, business television and other "niche" services. Any
particular consumer could only subscribe to a small percentage of those niche
services. If we successfully deploy two new DBS satellites, we expect to be
able to offer a total of over 500 channels of digital video and audio
programming broadcast nationwide, including satellite-delivered local
programming. Since we plan to use many of those channels for local
programming, no particular consumer could subscribe to all 500 channels, but
a single dish could receive all of those channels. See " -- Government
regulation --Regulations -- Satellite Home Viewer Act and retransmission
consent."
We use a "value-based" strategy in structuring the content and pricing
of programming packages available from the DISH Network. For example, we sell
our entry-level "America's Top 40" programming package, which includes 40 of the
most popular cable channels, to consumers for $19.99 per month. We estimate
cable operators charge over $30 per month, on average, for their entry-level
expanded basic service that consists of approximately 55 analog channels. We
believe that our "America's Top 100 CD" programming package, which we sell for
$28.99 per month, also compares favorably to similar cable television
programming. We believe that our America's Top 100 CD package is similar to an
expanded basic cable package plus a digital music service. Based on cable
industry statistics, we estimate that cable operators would charge in excess of
$40 per month for a similar package. Similarly, we offer up to seven premium
movie channels for only $10.99 per month, which is about the same as cable
subscribers typically pay for one or two movie channels.
We are expanding our offerings to include Internet and high-speed data
services. For example, we recently entered into an agreement with WebTV
Networks, Inc., which is wholly-owned by Microsoft Corporation, to provide
Internet TV. This service integrates DISH Network's digital satellite television
programming with Internet TV services from WebTV. This product also provides for
digital video recording, an advanced electronic program guide, broadband data
delivery and video games. Customers receive the vast majority of data delivery
and video game services through telephone lines rather than via satellite. While
we are currently only able to provide a limited number of one-way data services
via satellite, we are working to further develop this technology. There can be
no assurance that we will be able to cost-effectively develop this technology,
or at all. We believe we will be able to increase our subscriber base and
average revenue per subscriber by offering these and other similar services.
LOCAL STRATEGY. In order to provide the strongest possible
competition to cable, and thereby maximize our potential market, we are
working on solutions to seamlessly provide local broadcast network channels
to our subscribers. Subject to eligibility conditions, we currently offer
satellite-delivered local network signals to consumers in some of the largest
markets in the continental United States, including Atlanta, Boston, Chicago,
Dallas/Ft. Worth, Denver, Los Angeles, Miami, New York, Phoenix, Pittsburgh,
Salt Lake City, San Francisco and Washington, D.C. Under existing regulation,
we can only broadcast these signals to "unserved households" in the local
areas from which those channels originate. See "-- Government regulation."
Presently, a subscriber must install a second 18-inch satellite dish to
receive our satellite-delivered local network programming in most markets.
Therefore, we are still at a competitive disadvantage compared to cable
operators because many consumers do not want to install a second satellite
dish. We may be able to implement a one-dish solution for local programming
in 20 or more major markets around the United States if, among other things,
we are able to effect changes in existing legislation.
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ECHOSTAR RECEIVER SYSTEMS. EchoStar receiver systems include an 18-inch
satellite dish, a digital satellite receiver that descrambles signals for
television viewing, a remote control, and other related components. DISH Network
reception equipment is incompatible with competitors' systems. We offer a number
of set-top box models. Our standard system comes with an infrared remote
control, an on-screen program guide, and the ability to switch between DISH
Network and off-air local programming using the remote control. Our mid-level
model has all of the basic features but also includes a UHF remote control that
allows subscribers to control their EchoStar receiver system from up to 150 feet
away through walls, and a high-speed data port. Our premium model includes
additional features such as on-screen caller identification capability, event
timers to automatically tune into or record selected programming and one-touch
VCR recording.
Although we internally design and engineer our receiver systems, we do
not manufacture these systems. Rather, we outsource the manufacturing process to
high-volume contract electronics manufacturers. SCI Technology, Inc.
manufactures the majority of our receiver systems. During 1998, VTech
Communications, Ltd. began manufacturing our set-top boxes. JVC Company of
America also manufactures other consumer electronics products, including a
digital VCR, that also incorporates an EchoStar receiver system.
INSTALLATION. Currently, third parties perform the majority of EchoStar
receiver system installations. We also offer installation services from 21 of
our own locations throughout the United States. We currently intend to invest to
expand our installation business during 1999.
CUSTOMER SERVICE CENTER. We currently operate customer service centers
in Thornton, Colorado, Littleton, Colorado and McKeesport, Pennsylvania. These
centers field all of our customer service calls. Potential and existing
subscribers can call a single telephone number to receive assistance for
hardware, programming, installation and technical support.
DIGITAL BROADCAST OPERATIONS CENTER. Our digital broadcast
operations center is in Cheyenne, Wyoming. We acquired a second digital
broadcast operations center in Gilbert, Arizona, when we closed the 110
acquisition. We plan to begin utilizing the second facility as our customer
base expands and the added expense can be justified. Almost all of the
functions necessary to provide satellite-delivered services occur at the
digital broadcast operations center. 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 our DBS 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. Equipment at our digital broadcast operations
center performs all compression and encryption of the DISH Network's
programming signals.
SUBSCRIBER MANAGEMENT. We presently use a third-party software system
for DISH Network subscriber management and billing functions. We are currently
negotiating a new, multi-year contract for subscriber management services and
expect to sign a contract during the first half of 1999.
SALES AND MARKETING
Approximately 18,000 independent distributors, retail stores and
consumer electronics stores currently sell EchoStar receiver systems and DISH
Network programming services. Subscribers purchased the majority of DISH Network
satellite systems from our independent dealers. These independent dealers are
primarily local retailers who specialize in TV and home entertainment systems.
We intend to enhance consumer awareness of our products by forming alliances
with nationally recognized distributors of other consumer electronics products.
We formed a strategic alliance with JVC in May 1997. JVC now distributes our
receiver systems under the JVC label through certain of its nationwide
retailers.
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Through our 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. We believe that we are presently the only DBS provider
to offer a comprehensive, single-point customer service function.
We offer our distributors and retailers a competitive residual, or
commission, program. The program pays qualified distributors and retailers an
activation bonus, along with a fixed monthly residual for programming services
over the period that the respective DISH Network subscriber remains active.
We use regional and national broadcast and print advertising to promote
the DISH Network. We also offer point-of-sale literature, product display,
demonstration kiosks and signage for retail outlets. We provide guides to our
dealers and distributors at nationwide educational seminars and directly by
mail, that describe DISH Network products and services. Our mobile sales and
marketing team visits retail outlets regularly to reinforce training and ensure
that these outlets quickly fulfill point-of-sale needs. Additionally, we
dedicate one DISH Network channel to providing information about special
services and promotions that we offer from time to time.
Our future success in the subscription television industry depends on
our ability to acquire and retain DISH Network subscribers, among other factors.
Beginning in 1996, to stimulate subscriber growth we reduced the retail price
charged to consumers for EchoStar receiver systems. Accordingly, since August
1996, we have sold our receiver systems to DISH Network subscribers below the
manufactured cost. We developed these marketing promotions to rapidly build our
subscriber base, expand retail distribution of our products, and build consumer
awareness of the DISH Network brand. These programs emphasize our long-term
business strategy of maximizing future revenue by selling DISH Network
programming to the largest possible subscriber base and rapidly increasing the
size of that subscriber base. Since we subsidize our receivers, we incur
significant costs each time we acquire a new subscriber. Assuming subscriber
turnover remains at or near existing levels, we believe that we will be able to
fully recoup the up-front costs of subscriber acquisition from future
subscription television services.
We based our marketing strategy on current competitive conditions. If
competition increases, or we determine for any other reason that it is necessary
to increase our subscriber acquisition costs to attract new customers, it could
adversely affect our profitability and costs of operation.
SATELLITES
EchoStar I and EchoStar II each have 16 transponders that operate at
130 watts of power. Subject to the anomalies described below, EchoStar III and
EchoStar IV each have 32 transponders that operate at approximately 120 watts
per channel, switchable to 16 transponders operating at over 230 watts per
channel. Each transponder can transmit multiple digital video, audio and data
channels. Each of our satellites has a design life to operate for a minimum of
12 years. From these four satellites, we have the capacity to provide a total of
over 400 channels of video and audio programming.
During 1998, 3 transponders on EchoStar III malfunctioned, resulting in
the failure of a total of 6 transponders on the satellite. While the satellite
can operate a maximum of 32 transponders at any time, the satellite manufacturer
equipped it with a total of 44 transponders to provide redundancy. As a result
of this redundancy and because the FCC licensed us to operate only 11
transponders at 61.5DEG. WL, where we located the satellite, the transponder
anomaly has not caused a loss of service to date. The satellite manufacturer,
Lockheed Martin, has advised us that it believes it has identified the root
cause of the failures, and that while further transponder failures are possible,
Lockheed Martin does not believe it is likely that the operational capacity of
EchoStar III will decline below 32 transponders. Lockheed Martin also believes
it is unlikely that we would lose the ability to operate at least the 11
licensed transponders on the satellite. We will continue to evaluate the
performance of EchoStar III and may need to modify our loss assessment as new
events or circumstances develop.
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The time for filing a claim for a loss under the satellite insurance
policy that covered EchoStar III at the time of the transponder failures has
passed. While we notified the insurance carriers of the anomaly, as a result
of the built-in redundancy on the satellite and Lockheed Martin's conclusions
with respect to further failures, we filed no claim for loss. During the
anomaly investigation, we obtained a $200 million in-orbit insurance policy
on EchoStar III at standard industry rates, which we extended through July
25, 1999. However, the policy contains a six-transponder deductible if the
satellite is operating at 120 watts per transponder, or a three-transponder
deductible if the satellite is operating at 230 watts per transponder. As
such, the policy would not cover transponder failures unless transponder
capacity reduces to less than 26 transponders in the 120 watt mode or 13
transponders in the 230 watt mode, during the coverage period. As a result of
the deductible, we could potentially experience uninsured losses of capacity
on EchoStar III. Although there can be no assurance, we expect that in-orbit
insurance can be procured on more traditional terms in the future if no
further failures occur in the interim. If further failures do occur, we may
not be able to obtain additional insurance on EchoStar III on commercially
reasonable terms. We do not maintain insurance for lost profit opportunity.
As a result of the failure of the solar power panels on EchoStar IV to
properly deploy, there is currently only sufficient available power on the
satellite to operate approximately 18 transponders. The number of available
transponders will decrease over time. Based on current data, we expect that
approximately 16 transponders will probably be available over the entire 12-year
design life of the satellite, absent significant additional anomalies or other
failures. In addition to the failure of the solar power panels, during the third
quarter of 1998 EchoStar IV also experienced an anomaly similar to that
experienced by EchoStar III, which caused 6 of EchoStar IV's transponders to
fail. Like EchoStar III, this additional anomaly has not yet resulted in a loss
of operational satellite capacity and Lockheed Martin advises that it expects no
such loss. Approximately 16 transponders should be available for the entire life
of the satellite. The satellite is equipped with a total of 44 transponders.
Twenty-four operating transponders are necessary to fully utilize our 24
frequencies at the 148DEG. WL orbital location.
In September 1998, we filed a $219.3 million insurance claim for a
constructive total loss, as defined in the launch insurance policy, related to
EchoStar IV. However, if we received $219.3 million for a constructive 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 constructive 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. During the third quarter of 1998, we recorded a $106 million impairment
provision related to the failure of the solar power panels that represents our
best estimate of the amount of capacity we lost as a result of the solar power
panels not properly deploying. We also recorded a $106 million insurance
receivable. That amount reflects our judgment that it is probable the insurance
recovery will be at least equal to the amount of the impairment loss.
During May 1999, EchoStar IV experienced anomalies affecting its
transponders, heating systems and fuel system. In July 1999, prior to
arriving at the 110DEG. WL orbital location, EchoStar IV experienced
additional fuel system anomalies. While the recent anomalies have not caused
material reductions in functionality to date, it is not yet possible to
conclude whether these anomalies will result in further reductions of
satellite functionality or useful life in the future. While there can be no
assurance, we do not currently expect a material adverse impact on short or
medium term satellite operations. We have not completed our assessment of the
additional impairment, if any, to EchoStar IV, but we currently continue to
believe that insurance proceeds will be sufficient to offset all write-downs
of satellite assets that might ultimately be necessary because of lost
functionality caused by anomalies and consequences of which we are currently
aware. However, we can provide no assurance as to the ultimate amount that
may be received from the insurance claim, or that coverage will be available.
We will continue to evaluate the performance of EchoStar IV and may modify
our loss assessment as new events or circumstances develop.
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As a result of the recent anomalies that EchoStar IV experienced, we
have instructed our broker to notify our insurance carriers of additional
occurrences under the terms of the EchoStar IV launch insurance policy. The
EchoStar IV launch insurance policy provides for insurance of $219.3 million
covering the period from launch of the satellite on May 8, 1998 through May 8,
1999. Due to the anomalies that EchoStar IV experienced and the pending claim
for a total constructive loss, we did not obtain in-orbit insurance on EchoStar
IV. Consequently, in the event we do not resolve our pending insurance claim to
our satisfaction, EchoStar IV will not be insured if further losses occur in the
future.
On May 19, 1999, the FCC approved the transfer to us of MCI's licenses
to operate high-powered DBS satellites at the 110DEG. WL orbital location. News
Corporation is paying for the construction, launch and insurance of the
satellites. Satellites at the 110DEG. WL orbital location are capable of
providing service to the entire continental United States. Space Systems/Loral
is constructing EchoStar V and EchoStar VI and both are high-powered FS-1300
series spacecraft. EchoStar V has 32 110W Ku-band transponders and EchoStar VI
has 32 125W Ku-band transponders. Both satellites are capable of power-combining
to 16 transponders each of 220W and 250W, respectively. EchoStar V and EchoStar
IV each have a minimum design life of 12 years. Notwithstanding the successful
launch of EchoStar V and VI, we would only be able to exploit the 29 frequencies
at 110DEG. WL for which the FCC has licensed them.
SATELLITE LAUNCHES
The launch of EchoStar V and EchoStar VI are both currently
scheduled from Florida on Atlas IIAS rockets. EchoStar V is expected to be
launched in September 1999. EchoStar VI is expected to be launched in the
December 1999 to January 2000 timeframe. Delays or failures of launches
preceding the launch of EchoStar V or EchoStar VI could delay these launch
dates. Additionally, if other similar satellites experience anomalies, this
could delay the launch of EchoStar V and EchoStar VI until technical
personnel discover the cause and correct the anomalies. It is also possible
that the launch dates could occur sooner.
SATELLITE INSURANCE
We extended in-orbit insurance for EchoStar I, EchoStar II and
EchoStar III through July 25, 1999. The in-orbit insurance policies for
EchoStar I, EchoStar II and EchoStar III include standard commercial
satellite insurance provisions. These provisions include, among other things,
a material change in underwriting information clause that requires 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. A
notification permits the 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.
We are currently negotiating with our insurance carriers to secure
in-orbit insurance coverage for EchoStar I, II and III through July 2000. We
may not be able to renew these policies or, if we do, we cannot be certain
that renewals will 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
necessary. In addition, the EchoStar IV launch insurance policy provides for
insurance of $219.3 million covering the period from launch of the satellite
on May 8, 1998 through May 8, 1999. Due to the anomalies that EchoStar IV
experienced and the pending claim for a total constructive loss, we did not
obtain in-orbit insurance on EchoStar IV. Consequently, if we do not resolve
our pending insurance claim to our satisfaction, EchoStar IV will not be
insured if further losses occur in the future.
The satellite insurance policies for EchoStar I, EchoStar II, EchoStar
III and EchoStar IV contain customary exclusions, including:
- - acts of war or similar actions;
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- - loss or damage caused by anti-satellite devices;
- - insurrection and similar acts;
- - governmental confiscation;
- - nuclear reaction or radioactive contamination;
- - willful or intentional acts by us or our contractors designed to cause loss
or failure of a satellite;
- - claims for lost revenue and incidental and consequential damages;
- - third-party claims against us; and
- - business interruption, loss of business and similar losses that might arise
from delay in the launch of any satellite.
In addition to the above exclusions, the current insurance policy for
EchoStar III also excludes additional occurrences of the same or similar
anomalies. If one of our satellites does not perform to specifications following
launch, there may be circumstances in which insurance will not fully reimburse
us for any loss.
COMPETITION FOR OUR DISH NETWORK BUSINESS
Our industry is highly competitive. Our competition includes companies
that offer video, audio, data, programming and other entertainment services,
including cable television, wireless cable, direct-to-home satellite, other DBS
companies and companies that are developing new technologies. Many of our
competitors have access to substantially greater financial and marketing
resources than we have. We believe that quality and variety of programming,
quality of picture and service, and cost are the key bases of competition.
CABLE TELEVISION. 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 a competitive advantage over us because they can provide local programming
and service to multiple television sets within the same household without using
another receiver. 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
DBS providers. In addition, our competitors may use such expanded capacity 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 DBS services. If such trials are
successful, many consumers may find cable service to be more attractive than DBS
service.
Since a subscriber needs to have direct line of sight to the satellite
to receive DBS service, some households may not be able to receive DISH Network
programming. Additionally, the initial cost required to receive DISH Network
programming may deter some potential customers from switching to DISH Network
service. Additionally, a subscriber must buy an EchoStar receiver system to
receive DISH Network programming. Cable operators lease their equipment to the
consumer with little, if any, initial hardware payment required. This also may
deter some potential customers from switching to DISH Network service.
Additionally, cable operators pay substantially lower royalty rates for the
retransmission of distant network and superstation signals than we do.
OTHER DBS AND DIRECT-TO-HOME SATELLITE SYSTEM OPERATORS. Several other
companies have DBS licenses and can compete with us for home satellite
subscribers. DIRECTV, Inc. operates three DBS satellites and has 27 channel
assignments at an orbital location that provides coverage to the entire
continental United States. United States Satellite Broadcasting Corporation, or
USSB, owns and operates
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an additional five transponders on one of DIRECTV's satellites and presently
offers a programming service complementary to DIRECTV's service. DIRECTV and
USSB together offer more than 200 channels of DBS video programming. As of
December 31, 1998, DIRECTV had approximately 4.5 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 completed in May
1999. This transaction gives DIRECTV access to additional DBS frequencies
which will enable them to further expand their service offering.
We also compete with PrimeStar, Inc. As of March 31, 1999, PrimeStar
had approximately 2.3 million subscribers. PrimeStar offers approximately 150
channels of medium power satellite service. In January 1999, DIRECTV's parent
announced an agreement to purchase the satellite television business of
PrimeStar, which comprises a medium power satellite business and their rights
to acquire Tele-Communications, Inc.'s DBS assets. The FCC recently approved
DIRECTV's acquisition of PrimeStar's subscribers and related businesses,
including Tele-Communications, Inc.'s DBS assets.
Two other satellite companies have conditional permits for a
comparatively small number of DBS frequency assignments that could be used to
provide service to portions of the United States. If the number of DBS operators
increases in the future, it could adversely affect DISH Network subscriber
growth.
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 recently acquired Tele-Communications, Inc. and
has entered into a definitive agreement to acquire MediaOne. Other telephone
companies are also actively engaged in the video programming distribution
business.
VHF/UHF BROADCASTERS. Most areas of the United States can receive
traditional terrestrial VHF/UHF television broadcasts of between three and 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 provided 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.
ECHOSTAR TECHNOLOGIES CORPORATION
Employees of EchoStar Technologies Corporation, one of our wholly-owned
subsidiaries, internally design and engineer EchoStar receiver systems. Our
satellite receivers have won numerous awards from dealers, retailers and
industry trade publications. We outsource the manufacture of EchoStar receiver
systems to third parties who manufacture the receivers in accordance with our
specifications. In addition to supplying EchoStar receiver systems for the DISH
Network, ETC supplies similar digital satellite receivers to international
satellite TV service operators. We also offer consulting and integration
services to development stage, international direct-to-home satellite operators.
We are actively soliciting new business for ETC and, while we are optimistic
about future growth opportunities, we cannot provide any assurance in that
regard.
Our ETC division resulted from the development of the DISH Network. We
believe that we have an opportunity to grow this business in the future. The
employees who design EchoStar receiver systems for the DISH Network are the same
as those who design the set-top boxes sold to international direct-to-home
satellite TV customers. Consequently, international ETC projects may result in
improvements in design and economies of scale in the production of EchoStar
receiver systems for the DISH Network.
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Currently, we provide digital set-top boxes to two international
direct-to-home satellite TV providers, one in Canada and one in Spain. A
substantial portion of our ETC revenue in 1997 and 1998 resulted from sales
to these two direct-to-home satellite TV providers. As a result, our ETC
business currently is economically dependent upon these two providers.
Although we continue to actively pursue other similar distribution and
integration service opportunities, we have not executed additional
agreements. Our future revenue in this area depends largely on the success of
the direct-to-home satellite TV operators we supply in Canada and Spain,
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.
COMPETITION FOR OUR ETC BUSINESS
We compete with a substantial number of foreign and domestic
companies, many of which have significantly greater resources, financial or
otherwise, than we have. We expect new competitors to enter this market
because of rapidly changing technology. Our ability to anticipate these
technological changes and introduce enhanced products expeditiously will be a
significant factor in our ability to remain competitive. Existing
competitors' actions and new entrants may have a material adverse impact on
our revenues. We do not know if we will be able to successfully introduce new
products and technologies on a timely basis in order to remain competitive.
SATELLITE SERVICES
Our Satellite Services division primarily leases capacity on our
satellites to customers on either a monthly or hourly 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 mid-1999.
COMPETITION FOR OUR SATELLITE SERVICES BUSINESS
We compete with a number of other companies, including those using
similar and different technologies, to provide Satellite Services. Many of
these competitors have substantially greater financial and other resources
than we have. Our principal competitors include other satellite system
operators, cable television system operators, Internet service providers, and
telephone companies. We believe that we can compete with these other
companies based on our knowledge and experience in the direct-to-home
satellite TV and DBS industry, our technological leadership and new product
capabilities, the quality of our video, audio and data transmissions, the
quality of service provided, and cost.
GOVERNMENT REGULATION
THE FOLLOWING SUMMARY OF REGULATORY DEVELOPMENTS AND LEGISLATION IS
NOT INTENDED TO DESCRIBE ALL PRESENT AND PROPOSED GOVERNMENT REGULATION AND
LEGISLATION AFFECTING THE VIDEO PROGRAMMING DISTRIBUTION INDUSTRY. GOVERNMENT
REGULATIONS THAT ARE CURRENTLY THE SUBJECT OF JUDICIAL OR ADMINISTRATIVE
PROCEEDINGS, LEGISLATIVE HEARINGS OR ADMINISTRATIVE PROPOSALS COULD CHANGE
OUR INDUSTRY, IN VARYING DEGREES. WE CANNOT PREDICT EITHER THE OUTCOME OF
THESE PROCEEDINGS OR ANY POTENTIAL IMPACT THEY MIGHT HAVE ON THE INDUSTRY OR
ON OUR OPERATIONS. THIS SECTION SETS FORTH A BRIEF SUMMARY OF REGULATORY
ISSUES PERTAINING TO OUR OPERATIONS.
We are required to obtain authorizations and permits from the FCC
and other similar foreign regulatory agencies to construct, launch and
operate our satellites and other components of our DBS system. Additionally,
as a private operator of a United States satellite system, we are subject to
the regulatory authority of the FCC and the Radio Regulations promulgated by
the International
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Telecommunication Union. We also have to obtain import and general
destination export licenses from the United States Department of Commerce to
deliver products to overseas destinations. Finally, we must abide by United
States export control regulations when we choose to launch our satellites
outside the United States.
FCC PERMITS AND LICENSES
The FCC has jurisdiction and review power over the following general
areas:
- - assigning frequencies and authorizations;
- - ensuring compliance with the terms and conditions of such assignments
and authorizations, including required timetables for construction and
operation of satellites and other due diligence requirements;
- - authorizing individual satellites and earth stations;
- - avoiding interference with other radio frequency emitters;
- - ensuring compliance with applicable provisions of the Communications Act.
Like other DBS operators, we received our FCC authorizations
conditioned on satisfaction of ongoing due diligence, construction, reporting
and other obligations. We cannot be certain that we will be able to comply
with all of the FCC's due diligence obligations. Moreover, the FCC could
determine we have not complied with such due diligence obligations. The FCC
has declared that it will carefully monitor the reports required to be filed
by satellite service permittees. If we do not file adequate reports or are
not able to demonstrate timely progress in the construction of our satellite
service system, we could lose our authorizations. We have not filed, or not
timely filed, all required reports or filings with the FCC. Therefore, there
is a risk that the FCC could determine that we have not complied fully with
due diligence requirements and could revoke or place conditions on our
current licenses.
Some of our permits and extension requests have been, and may
continue to be, contested in FCC proceedings and in court by several
companies with adverse interests. Those companies include Dominion Video
Satellite, Inc., PrimeStar, Tempo Satellite Inc., DIRECTV, GE American
Communications, Inc. and others.
The FCC issues DBS licenses for ten year periods, which is less than
the useful life of a healthy DBS satellite. Upon expiration of the initial
license term, the FCC has the option to renew the satellite operator's
license or authorize the operator to operate for a period of time on special
temporary authority, or decline to renew the license. If the FCC declined to
renew the operator's license, the operator would be required to cease
operations and the frequencies would revert to the FCC. The FCC usually
grants special temporary authorizations for periods of up to 180 days. These
authorizations are usually subject to several other conditions. We also must
obtain FCC authorization to operate our earth stations, including the earth
stations necessary to uplink programming to our satellites.
Our licenses to operate EchoStar I and EchoStar II both will expire
in 2006. Our license to operate EchoStar III over 11 channels at 61.5DEG. WL
will expire in 2008. EchoStar IV was originally licensed to operate at our
119DEG. WL orbital location, however, that satellite experienced
malfunctions, as discussed above, that required us to change our plans. Until
recently, we operated EchoStar IV at the 148DEG. WL orbital location under a
special temporary authorization. Our authorization at 148DEG. WL requires us
to utilize all of our FCC-allocated frequencies at that location by December
20, 2002, or risk losing those frequencies that we are not using. As a result
of the anomalies previously discussed, EchoStar IV cannot exploit all of our
frequencies at the 148DEG. WL orbital location.
On May 10, 1999, the FCC approved the assignment to us of MCI's
license to operate a DBS satellite system at 110DEG. WL Also, on June 8,
1999, the FCC granted in part MCI's request to modify and clarify that
authorization. The FCC imposed several conditions on this grant, and while
MCI has submitted certain information to the FCC in response to these
conditions, we cannot be sure that the FCC will consider that submission to
be adequate.
In connection with approval of the 110 acquisition, we have received
special temporary authorization from the FCC to temporarily move EchoStar IV
from its position at 148DEG. WL to the 110DEG. WL orbital location during
June 1999 and temporarily provide service from 110DEG. WL. This temporary
move will provide expanded service to subscribers in advance of the expected
September 1999 launch of EchoStar V. The programming EchoStar IV currently
carries has been
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moved to EchoStar I and EchoStar II at the 119DEG. WL orbital location.
Accordingly, we believe that there will be no interruption of service to our
customers subscribing to those services.
IN-ORBIT AUTHORIZATIONS
We use specific C-band frequencies to control EchoStar I. The FCC
conditionally approved the use of these frequencies to control EchoStar I in
1995. The condition stated that the coordination process with Canada and
Mexico had not been completed. In January 1996, the Ministry of
Communications and Transportation of Mexico notified the FCC that EchoStar
I's telemetry, tracking and control operations could cause unacceptable
interference to Mexican satellites. Although it is unlikely, the FCC could
subsequently require us to relinquish the use of such C-band frequencies for
telemetry, tracking and control purposes. If that happened, we might not be
able to control the satellite, which could result in a total loss of the
satellite unless we were able to move it to another location.
We use "extended" C-band frequencies to control EchoStar II. In
1996, we received conditional authority from the FCC to use these
frequencies. The condition stated that we could use those frequencies until
January 1, 1999 provided that their use would not cause harmful interference.
The FCC indicated it would review the suitability of those frequencies for
telemetry, tracking and control operations in January 1999. We have timely
filed a request to extend the authorization to November 2006. We do not know
whether the FCC will extend that authorization. If the FCC refuses to extend
our authorization, we might not be able to control EchoStar II, which could
result in a total loss of the satellite unless we were able to move it to
another location. Recently, the FCC released a notice of proposed rulemaking
that may inhibit future satellite operations in the "extended" C-band
frequencies. The FCC also is no longer accepting earth station applications
in that band. These recent developments might have negative implications for
us.
INTERNATIONAL TELECOMMUNICATION UNION STANDARDS
Our DBS system also must conform to the ITU broadcasting satellite
service plan. If any of our operations are not consistent with this plan, the
ITU will only provide authorization 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 ITU modifies its broadcasting satellite service plan to include the
technical parameters of DBS applicants' operations, our satellites, along
with those of other DBS operators, must not cause harmful electrical
interference to other assignments that are in conformance with the plan.
Further, DBS satellites are not presently entitled to any protection from
other satellites that are in conformance with the plan. To our knowledge, the
United States government has filed modification requests with the ITU for
EchoStar I, II and III. The ITU has requested certain technical information
in order to process the requested modifications. We have cooperated, and
continue to cooperate, with the FCC in the preparation of its responses to
the ITU requests. We cannot predict when the ITU will act upon these requests
for modification or if they will be granted.
AUTHORIZATIONS AND FREQUENCIES THAT WE COULD LOSE
We also have conditional authorizations for several other DBS and
fixed service satellites that are not operational. One permit for 10
unspecified western frequencies was set to expire on August 15, 1995.
Although we filed a timely extension request, the FCC has deferred a decision
on that request pending the FCC's analysis of our due diligence for that
permit. The FCC has not yet assigned the frequencies related to that permit
because in 1992 it held that we had not completed contracting for these
western assignments -- the first prong of the required diligence -- and asked
us to submit amended contract documentation. Although we 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.
We also have a conditional permit for one frequency at the 110DEG.
WL orbital location and a total of 11 western frequencies at the 175DEG. WL
orbital location that is set to expire on August 15, 1999.
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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 we make significant progress toward construction and operation of a DBS
system substantially in compliance with, or ahead of, the most recent
timetable that we submitted to the FCC. The FCC's International Bureau also
urged us to expedite construction and launch of additional satellites for our
DBS system at these frequencies. PrimeStar filed a request with the FCC that
is still pending requesting that the FCC reverse the International Bureau's
grant of an extension.
We also have a conditional permit for 11 additional frequencies at
175DEG. WL, which was set to expire on November 30, 1998. That expiration
date was set pursuant to an extension granted by the FCC's International
Bureau in 1995. When it granted the extension, the FCC reserved the right to
cancel the permit if we failed to progress toward operation of the DBS system
in accordance with the timetable that we submitted to the FCC. That extension
also is subject to a still pending challenge by PrimeStar.
While we have timely filed requests for extension of all the western
permits, we cannot be sure how the FCC will act with respect to these requests.
We also have received licenses and conditional authorizations from
the FCC to operate satellites in the Ka-band, Ku-band and extended Ku-band
frequencies. Use of those licenses and conditional authorizations are subject
to certain technical and due diligence requirements, including the
requirement to construct and launch additional satellites. The granting of
those licenses has been challenged by parties with interests that are adverse
to ours. The construction completion and launch milestones for one Ku-band
satellite, and the construction completion milestone for the other Ku-band
satellite have expired, and the launch milestone for the second satellite is
set to expire September 30, 1999. We have filed a timely request for the
extension of these milestones for our Ku-band system. If we successfully
construct and launch Ku-band, extended Ku-band, Ka-band or low earth orbit
satellites, we might be able to use those satellites 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 these licenses, or grant the pending applications, or that
we will be able to successfully capitalize on any resulting business
opportunities.
REGULATIONS
DBS RULES. Once the FCC grants a conditional construction permit,
the permittee must proceed with due diligence in constructing the system. The
FCC has adopted specific milestones that must be met in order to retain the
permit, unless the FCC determines that an extension or waiver is appropriate.
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. Additionally, the satellites must be operational within
six years of grant. For permits issued after January 19, 1996, permittees
must complete construction of the first satellite in their system within four
years of grant of the permit. The FCC also may impose other conditions on the
grant of the permit. The holders of new DBS authorizations issued on or after
January 19, 1996 must also provide DBS service to Alaska and Hawaii. We are
presently not able to satisfy this requirement from 148DEG. WL with EchoStar IV.
Accordingly, we have requested a waiver of that requirement. The state of Hawaii
has requested many conditions to such a waiver, and we have opposed several of
these conditions. Those holding DBS permits as of January 1996 must provide
DBS service to Hawaii or Alaska from at least one of their DBS satellites or
they will have to relinquish their western assignments.
Subject to applicable regulations governing non-DBS operations, a
licensee may make unrestricted use of its assigned frequencies for non-DBS
purposes during the first five years of the ten-year license term. After the
first five years, the licensee may continue to provide non-DBS service as long
as at it dedicates at least one-half of its total capacity at a given orbital
location to providing DBS service. Further, the FCC indicated its desire to
streamline and revise its rules governing DBS satellites. We cannot be sure
about the content and effect any new DBS rules might have on our business.
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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 DBS operations, although we cannot be certain.
We believe that, because we are engaged in a subscription television
programming service, we are not subject to many of the regulatory obligations
imposed upon broadcast licensees. However, the FCC could determine in the
future that we should be treated as a broadcast licensee. In fact, 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.
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 votes or equity of record of the holding company, considered
on a fully-diluted basis, except after an FCC public interest determination.
Although the FCC's International Bureau has ruled that these limitations do
not apply to providers of DBS services, certain parties challenged that
ruling. In ruling on that challenge, the FCC refrained from deciding whether
the Bureau's ruling was correct, and decided to waive any foreign ownership
limitations, without deciding whether some such limitations applied, in
connection with the DBS authorization that we eventually acquired from MCI.
Foreign ownership limitations would also 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 both a common
and non-common carrier basis. We have recently apprised the FCC that we have
no current common carrier plans with respect to that system.
We believe that our foreign ownership prior to the recently
consummated transaction with News Corporation and MCI was under 5%. That
transaction has resulted in the issuance to an Australian corporation, News
Corporation, of 11.7% of our total outstanding stock having 2.1% of total
voting power. This transaction has thus increased the possibility that foreign
ownership of our stock may exceed the foreign ownership limitations if they
apply. In connection with the MCI authorization that we received in connection
with that transaction, the FCC has decided to waive any foreign ownership
limitations to the extent applicable. Nevertheless, we cannot foreclose the
possibility that, in light of any subsequent FCC decisions or policy changes,
we may in the future need a separate FCC determination that foreign ownership
in excess of any applicable limits is consistent with the public interest in
order to avoid a violation of the Communications Act or the FCC's rules.
If we do not comply with applicable Communications Act requirements
and FCC rules, regulations, policies, and orders, the FCC could revoke,
condition, or decline to review or decline to extend an authorization.
THE TELECOMMUNICATIONS ACT OF 1996. The 1996 Act clarifies that the
FCC has exclusive jurisdiction over direct-to-home satellite services. It
further clarifies that criminal penalties may be imposed for piracy of
direct-to-home satellite services. The 1996 Act also offers DBS operators
relief from private and local government-imposed restrictions on the
placement of receiving antennas. In some instances, DBS operators have been
unable to serve areas due to laws, zoning ordinances, homeowner association
rules, or restrictive property covenants banning the installation of antennas
on or near homes. The FCC recently announced rules designed to implement
Congress' intent. The FCC's rules prohibit most organizations from imposing
restrictions on the installation of antennas, including DBS satellite dishes
smaller than one meter, on or near homes, unless the restriction is necessary
for safety or preservation of a recognized historic district. Local
governments and associations can 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, such as
71
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. Several groups have filed appeals against the
November order. The 1996 Act also pre-empted local governments from imposing
taxes or fees on direct-to-home satellite services, including DBS. Finally,
the 1996 Act required that multi-channel video programming distributors,
including DBS operators, fully scramble or block channels providing indecent
or sexually explicit adult programming. If a multi-channel video programming
distributor cannot fully scramble or block such programming, it must restrict
transmission to those hours of the day when minors are unlikely to view the
programming.
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
service providers, such as wireless cable and DBS. 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. Our business and future results of operations could
suffer if the Cable Act or any of the related rules are amended, or
interpreted differently in the future. For example, if cable companies, or
any affiliated entities, could discriminate against competitors like us with
regard to programming access, or the terms on which such programming was
available, our ability to acquire programming on a cost-effective basis would
be impaired. 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 Corporation, 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.
On January 14, 1999, we filed a program access complaint with the
FCC against Speedvision Network, L.L.C. and Outdoor Life Network, L.L.C.
seeking access to the programming controlled by these two networks. Our
program access complaint alleges that the conduct of Speedvision and Outdoor
Life Network in cutting off our access to programming after five days of
carriage constitutes an unreasonable refusal to deal and a prohibited unfair
practice under the Communications Act and the FCC's rules. Speedvision has
cut off the service allegedly based on its view that we breached a November
1998 contract between the parties and has sued us in federal district court
in Connecticut requesting several remedies. By decision released June 14,
1999, the FCC's Cable Services Bureau dismissed our complaint without
prejudice to its reinstatement after resolution of the court dispute between
us and Speedvision. We cannot be sure how the court will rule on
Speedvision's and Outdoor Life Network's complaint. We recently filed a
program access complaint alleging that the rates and terms on which we
receive the programming of Fox Sports Arizona are discriminatory. We cannot
be sure how the FCC will rule on this complaint.
Pursuant to the Cable Act, the FCC recently imposed public interest
requirements upon DBS 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. The FCC also required that the capacity be made available at
substantially below cost rates. The FCC also applied to DBS service providers
the requirement of providing reasonable access to air-time at favored low rates,
and equal opportunity, for certain qualified candidates for public office.
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Although DBS operators are not currently subject to the "must carry"
requirements of the Cable Act, the cable industry and broadcast interests
have argued that DBS operators should be subject to these requirements. The
"must carry" rules generally require cable operators to carry all the local
broadcast stations in areas they serve, not just the four major networks. 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. If the "must carry" requirements of the Cable Act are
revised to include DBS operators, or if Congress enacts new legislation of a
similar nature, our plans to provide local programming will be adversely
affected.
CERTAIN OTHER RULEMAKINGS. The FCC recently proposed to allocate
additional "expansion" spectrum for DBS 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 DBS
service within the United States. In May 1996, in its DISCO II proceeding,
the FCC proposed permitting non-U.S. satellite systems to serve the United
States 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 United States offer contained an exemption from market opening
commitments for, among other things, DBS and direct-to-home satellite
services. In November 1997, the FCC released new rules that maintained the
effective competitive opportunities test with respect to foreign-licensed
satellites seeking to provide DBS 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 DBS
and direct-to-home satellite in the United States.
The FCC has proposed allowing non-geostationary orbit fixed
satellite services to operate on a co-primary basis in the same frequency as
DBS and Ku-band FSS service. If the proposal is adopted, these satellite
operations could provide global high-speed data services. This would, among
other things, create additional competition for satellite and other services.
The FCC has also requested comment on a request that would allow a
terrestrial service proposed by Northpoint Communications, Inc. to retransmit
local television signals and provide data services to DBS subscribers. Both
of these proposed operations, if authorized and implemented, may cause
interference in the DBS spectrum.
LOCAL NETWORK SIGNALS. We believe that our ability to deliver local
programming via satellite into the markets from which the programming
originates might help us attract 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, including us,
must have a copyright license and must obtain the retransmission consent of
the station concerned, subject to certain exceptions. Through our recently
consummated agreement with News Corporation, we received the right to
retransmit programming from local FOX Network-owned and operated stations.
However, we may not be able to obtain the retransmission consents from any
other network station.
The Satellite Home Viewer Act establishes a "statutory" or
compulsory copyright license that generally allows a DBS 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 a specified quality over-the-air network signal of a primary
network station affiliated with that network with a conventional outdoor
rooftop antenna. That household must not, during the 90 days prior to
subscribing to the DBS service, have subscribed to a cable service that
provides the signal of an affiliate of that network. While we believe the
Satellite Home Viewer Act could
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be interpreted in a way that would allow us to retransmit local programming
to certain local markets via satellite, 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 efficient and comprehensive manner.
In the process of setting royalty rates for broadcast signal
retransmissions, the Librarian of Congress published a final ruling, on
review from a Copyright Arbitration Royalty Panel's recommendation, in
October 1997. With respect to "local-into-local" retransmissions, the
Librarian affirmed the zero rate 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." 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. Accordingly, he could not definitively say that the panel's
decision is arbitrary or contrary to law. At the same time, the Librarian
determined that the Copyright Office retains the authority to rule on the
permissibility of secondary transmissions of a network station's signal to
households within that station's local market.
In December 1997, we petitioned the Copyright Office to issue a rule
confirming that the statutory license provided by the Satellite Home Viewer
Act and related copyright law allow a satellite carrier to retransmit the
local network signals of the respective local network affiliates. In January
1998, the Copyright Office initiated a rulemaking proceeding to determine
whether the copyright law permits such "local-into-local" retransmissions.
Our 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. The staffs of the San Francisco Regional Office and
the Bureau of Economics of the Federal Trade Commission supported our
position. We do not know if these proceedings will result in a favorable
ruling for us.
We are also continuing to pursue the passage of legislation that
would clarify and extend current laws with respect to local network signals.
We do not know whether we will be successful in this effort. Congress is
considering legislation that could allow local-into-local retransmission of
network signals subject to several conditions. We do not know whether Congress
will enact this legislation. Further, if a court or administrative agency
rejected our interpretation of "unserved household" and legislation does not
pass that clarifies and extends the scope of the compulsory license which is
currently set to expire on December 31, 1999, we may have to engage in the
relatively cumbersome process of obtaining copyright licenses from all
individual copyright holders instead. In addition, without new legislation in
this area or a favorable outcome in the rulemaking, we do not know whether 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. The same is true if we were unable
to successfully negotiate individual copyright licenses and retransmission
consent agreements, if necessary.
DISTANT SIGNALS. Section 119 of the Satellite Home Viewer Act
authorizes us to provide satellite-delivered network channels to customers
who qualify as "unserved households," defined in the Satellite Home Viewer
Act as consumers who, 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, we obtained distant broadcast
network signals for distribution to our customers through PrimeTime 24, Joint
Venture. PrimeTime 24 also distributed network signals to certain of our
competitors in the satellite industry.
The national networks and local affiliate stations recently
challenged, based upon copyright infringement, PrimeTime 24's methods of
selling network programming to consumers. The United States District Court
for the Southern District of Florida entered a nationwide permanent
injunction preventing PrimeTime 24 from selling its programming to consumers
unless the programming was sold in accordance with certain stipulations in
the injunction. The injunction covers "distributors" as well. The
74
plaintiffs in the Florida litigation informed us that they 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 in the Raleigh area. Other copyright
litigation against PrimeTime 24 is pending.
We ceased delivering PrimeTime 24 programming in July 1998, and
began uplinking and distributing network channels directly. We have also
implemented Satellite Home Viewer Act Section 119 compliance procedures which
materially restrict the market for the sale of network channels by us.
On October 19, 1998, we filed a declaratory judgment action in the
United States District Court for the District of Colorado against the four
major networks. We 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 four major broadcast networks and their
affiliate groups filed a complaint against us in federal court in Miami
alleging, among other things, copyright infringement. The plaintiffs in that
action have also requested the issuance of a preliminary injunction against
us. The case filed by us was subsequently combined with and transferred to
the Miami court.
On February 24, 1999, CBS, NBC, Fox, and ABC filed a "Motion for
Temporary Restraining Order, Preliminary Injunction, and Contempt Finding"
against DIRECTV, Inc. in Miami relating to the delivery of distant network
channels to DIRECTV customers by satellite. On March 12, 1999, DIRECTV and
the four networks announced that they had reached a settlement of that
dispute. Under the terms of the settlement, DIRECTV customers predicted to
receive a strong signal of Grade A intensity from their local stations would
lose access to their satellite provided network channels by June 30, 1999,
while DIRECTV customers predicted to receive a weaker, but allegedly adequate
signal of Grade B intensity from their local stations will be disconnected by
December 31, 1999. Subsequently, PrimeTime 24 and substantially all providers
of satellite delivered network programming other than us agreed to this cut
off schedule.
The Networks are currently pursuing a Motion for Preliminary
Injunction in the Miami Court, asking that court to enjoin us from providing
network programming except under very limited circumstances. In general, the
networks want us to turn off programming to our customers on the same
schedule as DIRECTV has agreed to. We intend to vigorously contest the
issuance of such an injunction. In the event of a decision adverse to us in
this case, significant material restrictions on the sale of distant ABC, NBC,
CBS and Fox channels by us could result. Among other things, we could be
required to terminate delivery of network signals to a material portion of
our subscriber base. While the Networks have not sought monetary damages,
they have sought to recover attorney fees if they prevail. We have commenced
sending letters to some of our subscribers warning that their access to
distant broadcast network channels might be terminated commencing in June of
this year. Such terminations would result in a small reduction in average
monthly revenue per subscriber. While there can be no assurance, any such
decrease could be offset by increases in average monthly revenue per
subscriber resulting from the delivery of local network channels by
satellite, and increases in programming offerings that will follow the
scheduled launches of EchoStar V and EchoStar VI later this year. While there
can be no assurance, legislation pending in the Senate would, if passed into
law, reduce the number of customers whose network channels we may otherwise
be required to terminate.
As stated above, 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 that we and the National Rural Telecommunications
Cooperative filed, 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 made tentative
proposals, on among other things:
75
- - 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 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.
In February 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 weight, if any, 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. See "Legal
proceedings" for additional information regarding specific proceedings we are
involved in.
With respect to the royalty rate for retransmission of distant
network and superstation signals, the Librarian of Congress set the rate at
27 cents per subscriber per month -- a significant increase over the
previously applicable rates. While judicial review of this ruling is pending,
the new rate became effective January 1, 1998.
EXPORT REGULATION. From time to time, we require 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 for our next planned satellites, and cannot be sure that the
requisite approvals will be received.
PATENTS AND TRADEMARKS
We use a number of trademarks for our products and services,
including "EchoStar," "DISH Network," "America's Top 40," and others. We have
registered some of these trademarks. We believe that those trademarks that we
have not registered are generally protected by common law and state unfair
competition laws. Although we believe that these trademarks are not essential
to our business, we have taken affirmative legal steps to protect those
trademarks in the past and intend to actively protect these trademarks in the
future.
We have been assigned certain patents for products and product
components that we sell. We do not consider any of these to be significant to
our continuing operations. In addition, we have obtained and, although no
assurances can be given, expect to obtain licenses for certain patents
necessary to the manufacture and sale of DBS receivers and related
components. We have been notified that certain features of the EchoStar
receiver system allegedly infringe on patents held by others, and that we
therefore owe royalties. We are investigating these allegations of
infringement and, if appropriate, we would vigorously defend against any suit
filed by the parties. We do not know whether we would be able to successfully
defend any suit, if brought, or if we would be able to obtain a license for
any patent that might be required.
76
EMPLOYEES
We had 4,218 employees at March 31, 1999, of which 4,149 worked in
our domestic operations and 69 worked in our international operations. We are
not a party to any collective bargaining agreement and generally consider
relations with our 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
Digital Broadcast Operations Center................ Gilbert, Arizona 123,000 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. During late April 1997, substantial
disagreements arose between the parties regarding their obligations under
this agreement. Those substantial disagreements led the parties to litigation
which was dismissed with prejudice upon closing of the 110 acquisition. In
connection with the News Corporation litigation, our parent company has a
contingent fee arrangement with its attorneys, which provides for the
attorneys to be paid a percentage of any net recovery obtained in its dispute
with News Corporation. The attorneys 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 attorneys'
interpretation of the fee arrangement, which it believes significantly
overstates the magnitude of its liability. If the attorneys and our parent
company are unable to resolve this fee dispute under the fee arrangement, the
fee dispute would be resolved through arbitration. It is too early to
determine 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 would pay any fee that is payable under the fee
arrangement.
77
WIC PREMIUM TELEVISION LTD.
On July 28, 1998, a lawsuit was filed by WIC Premium Television Ltd.,
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, United States Satellite
Broadcasting Company, Inc., EchoStar Communications Corporation, or ECC, and
two of our wholly-owned subsidiaries. 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 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 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 $175 million. It is too early to determine whether or when any
other lawsuits 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 authorizes us to
provide satellite-delivered network channels to customers who qualify as
"unserved households," defined in the Satellite Home Viewer Act as consumers
who, 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, we obtained distant broadcast network
signals for distribution to our customers through PrimeTime 24, Joint
Venture. PrimeTime 24 also distributed network signals to certain of our
competitors in the satellite industry.
The national networks and local affiliate stations recently
challenged, based upon copyright infringement, PrimeTime 24's methods of
selling network programming to consumers. The United States District Court
for the Southern District of Florida entered a nationwide permanent
injunction preventing PrimeTime 24 from selling its programming to consumers
unless the programming was sold in accordance with certain stipulations in
the injunction. The injunction covers "distributors" as well. The plaintiffs
in the Florida litigation informed us that they 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 in the Raleigh area. Other copyright
litigation against PrimeTime 24 is pending.
We ceased delivering PrimeTime 24 programming in July 1998, and
began uplinking and distributing network channels directly. We have also
implemented Satellite Home Viewer Act Section 119 compliance procedures which
materially restrict the market for the sale of network channels by us.
On October 19, 1998, we filed a declaratory judgment action in the
United States District Court for the District of Colorado against the four
major networks. We 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 four major broadcast networks and their
affiliate groups filed a complaint against us in federal
78
court in Miami alleging, among other things, copyright infringement. The
plaintiffs in that action have also requested the issuance of a preliminary
injunction against us. The case filed by us was subsequently combined with
and transferred to the Miami court.
On February 24, 1999, CBS, NBC, Fox, and ABC filed a "Motion for
Temporary Restraining Order, Preliminary Injunction, and Contempt Finding"
against DIRECTV, Inc. in Miami relating to the delivery of distant network
channels to DIRECTV customers by satellite. On March 12, 1999, DIRECTV and
the four networks announced that they had reached a settlement of that
dispute. Under the terms of the settlement, DIRECTV customers predicted to
receive a strong signal of Grade A intensity from their local stations would
lose access to their satellite provided network channels by June 30, 1999,
while DIRECTV customers predicted to receive a weaker, but allegedly adequate
signal of Grade B intensity from their local stations will be disconnected by
December 31, 1999. Subsequently, PrimeTime 24 and substantially all providers
of satellite delivered network programming other than us agreed to this cut
off schedule.
The Networks are currently pursuing a Motion for Preliminary
Injunction in the Miami Court, asking that court to enjoin us from providing
network programming except under very limited circumstances. In general, the
networks want us to turn off programming to our customers on the same
schedule as DIRECTV has agreed to. We intend to vigorously contest the
issuance of such an injunction. In the event of a decision adverse to us in
this case, significant material restrictions on the sale of distant ABC, NBC,
CBS and Fox channels by us could result. Among other things, we could be
required to terminate delivery of network signals to a material portion of
our subscriber base. While the Networks have not sought monetary damages,
they have sought to recover attorney fees if they prevail. We have commenced
sending letters to some of our subscribers warning that their access to
distant broadcast network channels might be terminated commencing in June of
this year. Such terminations would result in a small reduction in average
monthly revenue per subscriber. While there can be no assurance, any such
decrease could be offset by increases in average monthly revenue per
subscriber resulting from the delivery of local network channels by
satellite, and increases in programming offerings that will follow the
scheduled launches of EchoStar V and EchoStar VI later this year. While there
can be no assurance, legislation pending in the Senate would, if passed into
law, reduce the number of customers whose network channels we may otherwise
be required to terminate.
ENVIRONMENTAL PROTECTION AGENCY
In connection with a recent expansion of our digital broadcast
center in Cheyenne, Wyoming, two additional underground storage tanks were
installed by a contractor. The underground storage tanks were properly
installed and are being operated in accordance with Environmental Protection
Agency regulations. However, the EPA has alleged that the State of Wyoming
was not timely advised of the installation of those tanks, and that a
certificate of compliance was not timely filed following installation. As a
result, during May 1999, we received notice that the EPA filed a complaint
against us and has proposed to assess a civil penalty of $9,500. In
accordance with our construction contract for the digital broadcast center,
the general contractor has agreed to defend and indemnify us and to hold us
harmless for any costs involved with resolving the complaint.
We are subject to various other legal proceedings and claims which
arise in the ordinary course of business. In the opinion of management, the
amount of ultimate liability with respect to those actions will not
materially affect our financial position or results of operations.
79
MANAGEMENT
DIRECTORS AND OFFICERS
Our company is a wholly owned subsidiary of ECC. The following table
sets forth information concerning certain officers and directors of ECC and
our company:
NAME AGE POSITION
- ---- --- --------
Charles W. Ergen ............. 45 Chairman, Chief Executive Officer, President and
Director of ECC and our 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
our company
David K. Moskowitz ........... 40 Senior Vice President, General Counsel, Secretary
and Director of ECC and our 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 our
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
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.
80
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.
SUMMARY COMPENSATION TABLE
LONG TERM
COMPENSATION
AWARDS
------------
SECURITIES
UNDERLYING
OTHER ANNUAL OPTIONS ALL OTHER
YEAR SALARY BONUS COMPENSATION (1) (#) COMPENSATION(2)
---- ------ ----- ---------------- ------------ ---------------
Charles W. Ergen ...................
Chairman, President and Chief
Executive Officer 1998 $248,082 $ -- $ -- 30,000 $ 21,510
1997 190,000 -- -- 30,000 13,044
1996 190,000 -- -- 17,300 140,680
James DeFranco .....................
Executive Vice President and
Director 1998 $178,860 $ -- $ -- 30,000 $ 15,995
1997 160,000 -- -- 30,000 13,094
1996 160,000 -- -- -- 48,990
Michael T. Dugan ...................
President, EchoStar Technologies
Corporation 1998 $209,231 $ -- $ -- 15,000 $ 14,235
1997 160,000 -- -- 138,820 13,094
1996 149,615 -- -- 18,735 12,882
David K. Moskowitz .................
Senior Vice President, Secretary,
General Counsel and Director 1998 $187,311 $500,000 $ -- 30,000 $ 14,235
1997 157,692 -- -- 30,000 12,918
1996 142,692 10,000 -- 7,495 12,994
Steven B. Schaver ..................
Chief Operating Officer and Chief
Financial Officer 1998 $183,081 $ -- $15,074 39,090 $ 13,765
1997 158,462 -- 15,416 59,410 11,984
1996 142,498 11,787 14,340 -- 12,516
- ------------------
81
(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 $50,000 or 10% of such
officer's salary and bonus.
(2) "All Other Compensation" consists of amounts contributed to the
corporation's 401(k) plan on behalf of the named executive officers.
With respect to Mr. Ergen and Mr. DeFranco for 1996, "All Other
Compensation" also includes payments made in connection with a tax
indemnification agreement between ECC and such individuals.
82
The following table provides information concerning grants of options
to purchase Class A shares of ECC made in 1998 to the named executive officers:
OPTION GRANTS IN LAST FISCAL YEAR
NUMBER OF PERCENT OF
SECURITIES TOTAL OPTIONS
UNDERLYING GRANTED TO
OPTIONS GRANTED EMPLOYEES IN EXERCISE PRICE GRANT DATE
NAME (#) 1998 PER SHARE ($/SH) EXPIRATION DATE PRESENT 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 Bonus Plan which
provided, among other things, the named executive officers with options to
purchase up to 30,000 Class A Shares each, depending upon ECC's
achievement of certain financial and other goals. ECC did not meet any of
the goals during 1998. Accordingly, all stock options granted pursuant to
the 1998 Executive Bonus Plan were cancelled. During February 1999, each
of the named executive officers has been granted awards under the 1999
Executive Bonus Plan, which was recently approved by the Board of
Directors. The 1999 Executive Bonus Plan provides for corporate
performance-based bonuses, including cash and stock options, all of which
are conditioned upon the achievement of certain corporate, financial and
other goals. The 1999 Executive Bonus Plan consists of three components
for each executive covered by the plan: (i) a $75,000 cash bonus; (ii)
options to purchase up to 15,000 Class A shares at $48.00 per share; and
(iii) a long-term incentive grant of options to purchase up to 50,000
Class A shares at $48.00 per share. Each of the above components is
subject to cancellation to the extent ECC does not achieve certain
pre-defined corporate, financial and other goals.
(2) In March 1998, ECC granted options to Mr. Schaver and other key employees
to purchase Class A shares. These options will vest 20% one year following
the date of the grant and continue to vest 20% each year thereafter
through 2003. These options expire five years from the date on which each
portion of the option first becomes exercisable, subject to early
termination in certain circumstances.
(3) Option values reflect Black-Scholes model output for options. The
Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and
are fully transferable. In addition, because option valuation models
require the input of highly subjective assumptions, including the expected
stock price characteristics, significantly different from those of traded
options, and because changes in the subjective input assumptions can
materially affect the fair value estimate, in management's opinion, the
existing models do not necessarily provide a reliable single measure of
the fair value of its stock- based compensation awards. The assumptions
used in the model were expected volatility of 67%, risk free rate of
return of 5.64%, dividend yield of 0%, and time to exercise of six years.
83
The following table provides information as of December 31, 1998
concerning unexercised options to purchase Class A shares:
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR END OPTION VALUES
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
NUMBER OF OPTIONS AT IN-THE-MONEY OPTIONS AT
SHARES VALUE DECEMBER 31, 1998 (#) DECEMBER 31, 1998 ($)(1)
ACQUIRED ON REALIZED --------------------- ------------------------
NAME EXERCISE(#) ($) 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 Class A shares 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 Class A share
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 Director Stock Option 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 Stock
Option 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 1995 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
84
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
2,780,834 Class A shares. Options to purchase 1,447,015 Class A shares 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 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 Class A share. 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 as 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 had significantly reduced the
incentive those options were intended to create. It was 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 would 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 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.
85
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During 1997, the law firm of Friedlob, Sanderson, Raskin, Paulson &
Tourtillott, LLC billed ECC approximately $210,000 in fees related to certain of
our 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.
We distributed approximately $269.7 million of the net proceeds of the
offering of old notes to ECC to repurchase ECC's senior preferred exchange notes
pursuant to the tender offers. In addition, ECC contributed cash or cash
equivalents of $200 million to us as common equity. See "Use of proceeds."
In addition, we repaid a $12 million demand note payable to ECC in
October 1997. Also, during 1995 and 1996, ECC advanced us $46 million in the
form of notes payable to enable us to make required payments under our EchoStar
III construction contract. The notes payable bear interest at 11.25%, which has
been added to principal. We used approximately $60.2 million of the net proceeds
of the old notes to repay such notes payable together with accrued interest.
86
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, to our best knowledge, the beneficial
ownership of our parent company's voting securities as of June 24, 1999 by (i)
each person known by our parent company, ECC, to be the beneficial owner of more
than five percent of any class of its voting shares; (ii) each director of ECC;
(iii) the five highest compensated persons acting as an executive officer of
ECC, listed below as 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.
NUMBER OF PERCENTAGE OF
NAME(1) SHARES CLASS
- ------------------------------------------------------ --------------- ----------------
CLASS A COMMON STOCK (2):
Charles W. Ergen (3), (4), (20), (21).......... 30,123,899 52.4%
The News Corporation Limited (5)............... 6,891,096 12.0%
FMR Corp. (6).................................. 2,172,864 3.8%
Morgan Stanley Dean Witter & Co (7)............ 1,936,446 3.4%
MCI WorldCom, Inc. (8)......................... 1,712,020 3.0%
Wellington Management Company, LLP (9)......... 1,657,481 2.9%
James DeFranco (10), (20), (21)................ 1,042,049 1.8%
Equitable Companies Inc. (11).................. 836,861 1.5%
AMVESCAP, PLC (12)............................. 782,050 1.4%
Montgomery Asset Management, LLC (13).......... 735,200 1.3%
David K. Moskowitz (14), (20), (21)............ 95,279 *
Michael T. Dugan (15), (20), (21).............. 32,096 *
Steven B. Schaver (16), (20), (21)............. 27,584 *
Raymond L. Friedlob (17), (21)................. 11,000 *
O. Nolan Daines (18), (21)..................... 10,000 *
All directors and executive officers as a group
(13 persons) (19), (20), (21)................ 31,384,149 54.5%
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 (13 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) The following table sets forth, to the best knowledge of ECC, the
actual ownership of Class A shares (including options exercisable
within 60 days) as of June 24, 1999 by (i) each person known by ECC to
be the beneficial owner of more than five percent of any class of ECC's
voting shares; (ii) each director or nominee of ECC; (iii) each named
executive officer; and (iv) all directors and executive officers as a
group:
87
NAME NUMBER OF SHARES PERCENTAGE OF CLASS
- -------------------------------------------------------------- -------------------- ----------------------
CLASS A COMMON STOCK:
The News Corporation Limited............................ 6,891,096 27.0%
FMR Corp................................................ 2,172,864 8.5%
Morgan Stanley Dean Witter & Co......................... 1,936,446 7.6%
Wellington Management Company, LLP...................... 1,657,481 6.5%
James DeFranco.......................................... 1,042,049 4.1%
Equitable Companies Inc................................. 836,861 3.3%
AMVESCAP, PLC........................................... 782,050 3.1%
Montgomery Asset Management, LLC........................ 735,200 2.9%
Charles W. Ergen........................................ 319,497 1.3%
David K. Moskowitz...................................... 95,279 *
Michael T. Dugan........................................ 32,096 *
Steven B. Schaver....................................... 27,584 *
Raymond L. Friedlob..................................... 11,000 *
O. Nolan Daines......................................... 10,000 *
All directors and executive officers as a group (13
persons)................................................ 1,579,758 6.2%
- -------------------
(3) Includes (i) 2,194 Class A shares held in ECC's 401(k) Employee Savings
Plan; (ii) the right to acquire 33,982 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.
(4) The percentage of total voting power held by Mr. Ergen is 90.9%, after
giving effect to the exercise of Mr. Ergen's options exercisable within
60 days.
(5) The address of The News Corporation Limited is 1211 Avenue of the
Americas, New York, New York 10036.
(6) The address of FMR Corp. is 82 Devonshire Street, Boston, Massachusetts
02109.
(7) The address of Morgan Stanley Dean Witter & Co. is 1585 Broadway, New
York, New York 10036.
(8) The address of MCI WorldCom, Inc. is 1800 Pennsylvania Avenue, N.W.,
Washington, D.C. 20006.
(9) The address of Wellington Management Company, LLP is 75 State Street,
Boston, Massachusetts 02109.
(10) Includes: (i) 2,194 Class A shares held in the 401(k) plan; (ii) the
right to acquire 64,265 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.
(11) The address of Equitable Companies Inc. is 1290 Avenue of the Americas,
New York, New York 10104.
(12) The address of AMVESCAP, PLC is 1315 Peachtree Street, N.W., Atlanta,
Georgia 30309.
(13) The address of Montgomery Asset Management, LLC is 600 Montgomery
Street, San Francisco, California 94111.
(14) Includes (i) 2,092 Class A shares held in the 401(k) plan; (ii) the
right to acquire 88,539 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; and (iv) 1,023 Class A shares held as trustee
for Mr. Ergen's children.
(15) Includes: (i) 2,093 Class A shares held in the 401(k) plan and (ii)
the right to acquire 29,963 Class A shares within 60 days upon the
exercise of employee stock options.
(16) Includes: (i) 1,962 Class A shares held in the 401(k) plan and (ii)
the right to acquire 25,582 Class A shares within 60 days upon the
exercise of employee stock options.
(17) Includes the right to acquire 11,000 Class A shares within 60 days upon
the exercise of employee stock options.
(18) Includes the right to acquire 6,000 Class A shares within 60 days upon the
exercise of employee stock options.
(19) Includes (i) 13,522 Class A shares held in the 401(k) plan; (ii) the
right to acquire 296,730 Class A shares within 60 days upon the
exercise of employee stock options; (iii) 375,000 Class A shares held
in a partnership; (iv) 29,804,401 Class A shares issuable upon
conversion of Class B shares; and (v) 2,041 Class A shares held in the
name of, or in trust for, minor children and other family.
(20) Includes 218,336 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 executive officers through their participation in the 401(k) plan
are included in each respective named executive officer's information
above.
(21) Beneficial ownership percentage was calculated assuming exercise or
conversion of all Class B shares, warrants and employee stock options
exercisable within 60 days 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, 55.2%; Mr.
DeFranco, 4.1%; less than one percent for Mr. Moskowitz, Mr. Dugan, Mr.
Schaver, Mr. Daines and Mr. Friedlob; and all officers and directors as
a group, 55.9%.
In connection with the 110 acquisition, 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 ECC stock in the manner recommended by
the Board of Directors of ECC for a period of five years following consummation
of the 110 acquisition. Mr. Ergen disclaims beneficial ownership of the shares
of Class A shares to be issued to News Corporation and MCI.
88
DESCRIPTION OF THE NOTES
The seven year notes and the ten year notes were each issued pursuant
to an indenture by and among us, 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, our affiliates or certain other persons.
The following summary of some of the provisions of each indenture and
the registration rights agreements 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 some of the capitalized terms used in
this section under the subheading "--Certain definitions." For purposes of this
section, references to "us," "our company" or "we" mean only EchoStar DBS
Corporation and not our 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 our 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 notes are subject to all such terms, and holders of notes
should refer to the applicable indenture and the Trust Indenture Act for a
statement thereof. A copy of each indenture may be obtained from us or the
initial purchasers.
The following description is a summary of the material provisions of
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
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 our company;
- - ranked equally in right of payment to each other;
- - ranked equally in right of payment with all existing and future senior
debt of our company;
- - ranked senior in right of payment to all other existing and future
subordinated debt of our company;
- - effectively junior to (i) all liabilities (including trade payables) of
our 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 our 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
89
the extent of the collateral securing such obligations,
including any borrowings under any of our future secured credit
facilities; 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
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.
THE GUARANTEES
The notes are guaranteed by the guarantors, which currently include
DBSC and substantially all of our 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 our obligations under any of our future
credit facilities; and
- ranked senior in right of payment to all other existing and
future subordinated debt of such guarantor.
As of March 31, 1999 there was:
- no outstanding debt ranking ahead of the notes or the
guarantees, as the case may be,
- $63.8 million of outstanding debt ranking equally with the
notes and the guarantees, as the case may be, $44.9 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 our 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.
90
ECC and its Subsidiaries (other than we and substantially all of our
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 of our senior indebtedness, 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 we 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. As of
March 31, 1999 our aggregate consolidated Indebtedness, for purposes of the
indentures was approximately 2.04 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.
The notes will be payable both as to principal and interest at the
office or agency of our company maintained for such purpose or, at our option,
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 us, our office or agency will be the office of the
trustee maintained for such purpose.
GUARANTEES
Each guarantor jointly and severally guarantees our 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
us or another guarantor that is our Restricted Subsidiary, 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:
91
(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 we designate 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 our option prior to February 1, 2004. Thereafter, the ten year
notes are subject to redemption at our option, 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
- ---- ----------
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,
we 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 our Equity Interests (other than Disqualified Stock) (other than proceeds
from a sale to any of our Subsidiaries or any employee benefit plan in which we
or any of our 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 our option prior to February 1, 2003. Thereafter, the seven year
notes are subject to redemption at our option, in
92
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,
we 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 our Equity Interests (other than Disqualified Stock) (other than proceeds
from a sale to any of our Subsidiaries or any employee benefit plan in which we
or any of our Subsidiaries participates); PROVIDED that:
- 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 we do 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, we 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, we 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";
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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 we default 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;
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.
We 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 our highly leveraged
structure and the terms of other indebtedness to which we and our Subsidiaries
are or may in the future be subject, we may not be able to repurchase all of the
notes tendered for purchase upon the occurrence of a Change of Control. If we
fail 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 we may be subject may
prohibit us 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 we
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 we repurchase or redeem the notes in the event of a takeover,
recapitalization or similar transaction.
CERTAIN COVENANTS
RESTRICTED PAYMENTS. The indentures provide that neither we nor any of
our Restricted Subsidiaries may, directly or indirectly:
(a) declare or pay any dividend or make any distribution on account of
any Equity Interests of our company other than dividends or distributions
payable in Equity Interests (other than Disqualified Stock) of our company;
(b) purchase, redeem or otherwise acquire or retire for value any
Equity Interests of ECC, our company or any of their respective Subsidiaries or
Affiliates, other than any such Equity Interests owned by our company or any
Wholly Owned Restricted Subsidiary;
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(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 our company or any Wholly Owned Restricted Subsidiary or
(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 our 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 our 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 our
company, each as determined for the period (taken as one accounting
period) from April 1, 1999 to the end of our 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 our company," 100% of the fair market value of the
aggregate net proceeds other than cash received by our 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 our company (other than Equity Interests sold to any Subsidiary of our
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 our 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 our company as a Restricted Subsidiary, an amount equal to
the fair market value of the net Investment of our company
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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 our 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 our company and its Wholly Owned Restricted
Subsidiaries from an Unrestricted Subsidiary to the extent not included in
Cumulative Consolidated Cash Flow plus
(E) to the extent not included in clauses (A) through (D)
above, an amount equal to the net reduction in Investments of our company
and our 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 our
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 our 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 our 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 our company (other than Equity Interests
issued or sold to any Subsidiary of our 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 our 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 our 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;
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(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 our 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 our company (other than
Equity Interests issued or sold to a Subsidiary of our 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 our 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 our 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 our 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 issued under this
indenture, 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."
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Restricted Payments made pursuant to clauses (1), (2), (4), (7) (but
only to the extent that net proceeds received by our 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
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 our 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 our 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, we 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 our company's latest available financial statements.
INCURRENCE OF INDEBTEDNESS. The indentures provide that our 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 our company and any guarantor under the indenture 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 our 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 our company or any guarantor of Acquired
Subscriber Debt not to exceed $1,250 per Acquired Subscriber;
(3) the incurrence by our company or any guarantor of Deferred
Payments and letters of credit with respect thereto;
(4) Indebtedness of our 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 any
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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 our company is the sole primary obligor (and under which the guarantors
(and no other Restricted Subsidiary) may guarantee the primary obligations of
our company);
(5) Indebtedness between and among our company and each of the
guarantors under the indenture;
(6) Acquired Debt of a person incurred prior to the date upon
which such person was acquired by our company or any guarantor under the
indenture (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 our company
or any guarantor under the indenture 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 our company," being constructed,
acquired or improved as well as any launch costs and insurance premiums related
to such assets;
(9) Hedging Obligations of our company or any of its Restricted
Subsidiaries covering Indebtedness of our 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 our company and its Restricted Subsidiaries from fluctuation in interest
rates on Indebtedness incurred in accordance with the indenture;
(10) Indebtedness of our company or any Restricted Subsidiary in
respect of performance bonds or letters of credit of our company or any
Restricted Subsidiary or surety bonds provided by our 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 our Company";
(11) Indebtedness of our company or any guarantor under the
indenture the proceeds of which are used solely to finance the construction and
development of a call center owned by our company or a guarantor under the
indenture 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 our company or any guarantor under the
indenture 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;
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(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 our company or any guarantor under the
indenture of Indebtedness of our 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 our company
or any guarantor under the indenture 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, our 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 our 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 our company or a Wholly Owned
Restricted Subsidiary of our company by our 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 our 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 our company evidenced by a
resolution of the Board of Directors of our 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) our 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 our company evidenced by a resolution of the Board of
Directors of our 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 our 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 our 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, our 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 our company or any of its Restricted
Subsidiaries in a business permitted under the covenant described under
"--Activities of our 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 our company or any Restricted Subsidiary that
are assumed by or on behalf of the transferee in connection with an Asset Sale
(and from which our 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 our
company as described under "--Activities of our company," to repurchase notes or
if our company sells any of its satellites after launch such that our 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 our company if and when required under "--Excess proceeds
offer."
Clause (B) of the second preceding paragraph shall not apply to all or
such portion of the consideration
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(1) as is designated by our 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 our company or any
Restricted Subsidiary in all such Asset Sales so designated does not exceed the
amount contributed to our 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 our 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 our 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 our 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 our company or a Restricted Subsidiary would constitute Indebtedness or
Equity Interests of a person that is not an Affiliate of ECC, our 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) our company and its
Restricted Subsidiaries continue to own at least three satellites, one uplink
center and one call center.
LIENS. The indentures provide that our 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, our
company or a Wholly Owned Restricted Subsidiary which is a guarantor under the
indenture will maintain and be the named beneficiary under Satellite Insurance
with respect to at least one-half of the satellites owned or leased by our
company or its Subsidiaries (insured in an amount at least equal to the
depreciated cost of such satellites).
In the event that our company or its Restricted Subsidiaries receive
proceeds from any Satellite Insurance covering any satellite owned by our
company or any of its Restricted Subsidiaries, or in the event that our 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:
(1) to purchase a replacement satellite if at such time our
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);
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(2) for purposes permitted under the covenant entitled
"--Activities of our company" if at such time our 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 OUR COMPANY. The indentures provide that neither our
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 our company would not have exceeded 6.0 to 1 on a pro forma
basis after giving effect to the sale of all of our 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 under the indenture and, PROVIDED that our 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, our 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
(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 our 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
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(y) the amount of the after-tax value of all
cash returns on such Investments paid to our 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 our company) minus
(z) $25 million and
(2) any contract, agreement or understanding between ETC and our company or
any Restricted Subsidiary of our company and any loan or advance to or
guarantee with, or for the benefit of, ETC issued or made by our company or
one of its Restricted Subsidiaries, is on terms that are less favorable to
our company or its Restricted Subsidiaries than those that would have been
obtained in a comparable transaction by our company or such Restricted
Subsidiaries with an unrelated person, all as evidenced by a resolution of
the Board of Directors of our 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 our company or one of its Restricted
Subsidiaries pay in cash an amount to our 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 our 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 our company and was
not paid by another person as permitted by the preceding sentence, our 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, our 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
(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 under the indenture shall be discharged and released from its
guarantee under the indenture and, provided that our 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, our
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
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(x) the amount of all Investments made in such Non-Core Asset
by our 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 our 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 our 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 our company or a Restricted Subsidiary of our 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 our company or one of
its Restricted Subsidiaries, is on terms that are less favorable to our
company or its Restricted Subsidiaries than those that would have been
obtained in a comparable transaction by our company or such Restricted
Subsidiaries with an unrelated person, all as evidenced by a resolution of
the Board of Directors of our 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 our company or one of its Restricted Subsidiaries pay in cash an amount to
our 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 our 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 our company and was not paid by another person
as permitted by the preceding sentence, our 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.
Promptly after any Payout pursuant to the terms of this covenant, our
company shall deliver an officers' certificate to the trustee setting forth the
Investments made by our 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 of the old notes, ECC was required to make a
capital contribution to the common equity of our 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 were to be contributed as
capital contributions to our company or one or more of the guarantors under
the indenture that is a Wholly Owned Restricted Subsidiary.
ADDITIONAL SUBSIDIARY GUARANTEES. The indentures provide that if our
company or any guarantor under the indenture 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
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fair market value (as determined in good faith by the Board of Directors of
our company evidenced by a resolution of the Board of Directors of our
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 under the indenture (fair market value being
determined as of the time of such acquisition) to Restricted Subsidiaries
that are not guarantors of the notes, our 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 our 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 our company or any guarantor under the indenture
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 our company evidenced by a resolution of the Board of Directors of
our 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) our company or any of its Restricted Subsidiaries acquires or
creates another Restricted Subsidiary or
(2) an Unrestricted Subsidiary of our company is redesignated as a
Restricted Subsidiary or otherwise ceases to be an Unrestricted Subsidiary,
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 our 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 our 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 our company shall not, and shall not permit any
Restricted Subsidiary of our company to, directly or
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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 our 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 our company or any of its Restricted Subsidiaries;
(b) make loans or advances to our company or any of its Restricted
Subsidiaries; or
(c) transfer any of its properties or assets to our 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;
(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 our
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 our company and
its Subsidiaries or
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(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 our 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;
(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 our company or any of its
Subsidiaries with respect to the accounts receivable sold by our company or any
of its Subsidiaries to an Accounts Receivable Subsidiary or with respect to the
servicing thereof; PROVIDED that neither our 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 our 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 our 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 our
company or a Restricted Subsidiary of our 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
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(i) pay interest or principal on the Accounts Receivable
Subsidiary Notes or any Indebtedness of such Accounts Receivable Subsidiary
owed to our 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 our 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
(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 our company may not consolidate or merge with or into (whether or not
our 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) our company is the surviving person or the person formed by or
surviving any such consolidation or merger (if other than our 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 our company) or the person to which such sale,
assignment, transfer, lease, conveyance or other disposition will have been
made assumes all the obligations of our 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
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(d) our company or the person formed by or surviving any such
consolidation or merger (if other than our 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 our 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, our company may merge with another
person if:
(a) our company is the surviving person;
(b) the consideration issued or paid by our company in such merger
consists solely of Equity Interests (other than Disqualified Stock) of our
company or Equity Interests of ECC; and
(c) immediately after giving effect to such merger, our company's
Indebtedness to Cash Flow Ratio does not exceed our company's Indebtedness to
Cash Flow Ratio immediately prior to such merger.
Each guarantor under the indenture (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 our company will not cause or permit any guarantor under the
indenture 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 our company or
a Guarantor under the indenture unless:
(a) the guarantor under the indenture 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 under the indenture) 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 under the
indenture, 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) our 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 our company immediately preceding the transaction.
TRANSACTIONS WITH AFFILIATES. Each indenture provides that our
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:
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(a) such Affiliate Transaction is on terms that are no less
favorable to our company or its Restricted Subsidiaries than those that would
have been obtained in a comparable transaction by our 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 our
company, and our 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 our
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 our company and its Wholly
Owned Subsidiaries (other than Unrestricted Subsidiaries of our company);
(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 our 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 our company or any Restricted
Subsidiary of our company and any Affiliate of our company the Equity
Interests of which Affiliate are owned solely by our company or one of its
Restricted Subsidiaries, on the one hand, and by persons who are not
Affiliates of our company or Restricted Subsidiaries of our 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, our 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 our 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 our company's certified public accountants.
PAYMENTS FOR CONSENT. Our 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
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paragraph exceeds $17.5 million, our 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 our company or a Restricted
Subsidiary is required under the terms of Indebtedness of our 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, our
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, our 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.
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 our company pursuant to the
indenture;
(e) failure by our 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 our company or any of its
Restricted Subsidiaries (or the payment of which is guaranteed by our
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 our company or any of its
Restricted Subsidiaries (or the payment of which is guaranteed by our
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
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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 our 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, our company or certain of our company's Subsidiaries (including
the filing of a voluntary case, the consent to an order of relief in an
involuntary case, the consent to the appointment of a custodian, a
general assignment for the benefit of creditors or an order of a court
for relief in an involuntary case, appointing a custodian or ordering
liquidation, which order remains unstayed for 60 days); and
(j) any guarantee under the indenture 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 our 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 our 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.
We are required to deliver to the trustee annually a statement
regarding compliance with the indentures, and we are 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 our
company or any of its Affiliates, as such, shall have any liability for any
obligations of our company or any of its Affiliates
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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.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
Each indenture provides that with respect to the notes issued
thereunder, our 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 we 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) our 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 our obligations in connection therewith; and
(d) In addition, the indenture provides that with respect to
each issue of notes, we may, at our 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 provides that with respect to the notes issued thereunder,
(i) We 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, we shall have
delivered to the trustee an opinion of counsel in the United States
reasonably acceptable to the trustee confirming that
(A) we have 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, we 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 we or any of
our Subsidiaries is a party or by which we or any of our Subsidiaries is
bound;
(vi) we shall have delivered to the trustee an officers'
certificate stating that the deposit was not made by us with the intent of
preferring the holders of the notes of such series over any of our other
creditors or with the intent of defeating, hindering, delaying or defrauding
any of our other creditors or others; and
(vii) we 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;
(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;
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(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, we, the guarantors under the indenture 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 our 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 our 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 us; 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 person in the conduct of his or
her 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.
BOOK-ENTRY, DELIVERY AND FORM
The exchange notes of each series will be represented by one or more
registered global notes without interest coupons. Upon issuance, the global
exchange notes will be deposited with the trustee, as custodian for The
Depository Trust Company, 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.
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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 us that DTC is a
limited-purpose trust company created to hold securities for its
participating organizations, known as "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 of the old notes, 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, known as "indirect participants."
DTC has also advised us that, pursuant to DTC procedures, 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 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. We expect 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 the procedures and requirements of DTC. Those
interests held through Euroclear and CEDEL may 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."
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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, we, the guarantors under the
indenture 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 we, the trustee nor any agent of ours or the trustee has or will have
any responsibility or liability for 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 any other matter relating
to the actions and practices of DTC or any of its direct participants or
indirect participants.
DTC has advised us 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, us or the guarantors under the
indenture. Neither we, the guarantors under the indenture 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 we 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.
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, which is 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
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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 us 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. Neither we, the guarantors under
the indenture, the initial purchasers of the old notes nor 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 we believe
are reliable, but we take 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 if DTC
notifies us that it is unwilling or unable to continue as depositary for the
global exchange notes and we thereupon fail to appoint a successor depositary
within 90 days or if DTC has ceased to be a clearing agency registered under
the Exchange Act. Alternatively, our company, at its option, may notify the
trustee in writing that it elects to cause the issuance of certificated notes
or certificated notes will be issued if 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, we will notify the trustee in writing
that, upon surrender by the direct and indirect participants of their
interest in such global note, certificated notes will be issued to each
person that such direct and indirect participants and DTC identify as being
the beneficial owner of the related notes.
Beneficial interests in global notes held by any direct or indirect
participant may be exchanged for certificated notes upon request to DTC, on
behalf of such direct 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 we, the guarantors under the indenture 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 we 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
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such global exchange notes. With respect to certificated notes, we 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. We
expect 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 us at, 5701 South Sante Fe
Drive, Littleton, Colorado 80120, attention David K. Moskowitz, facsimile
(303) 723-1699.
REGISTRATION RIGHTS; LIQUIDATED DAMAGES
WE AND THE GUARANTORS UNDER THE INDENTURE ARE MAKING THE EXCHANGE
OFFER TO COMPLY WITH OUR OBLIGATIONS UNDER THE REGISTRATION RIGHTS AGREEMENTS
TO REGISTER THE EXCHANGE OF EXCHANGE NOTES FOR THE OLD NOTES. IN THE
REGISTRATION RIGHTS AGREEMENTS, WE AND SUCH GUARANTORS ALSO AGREED UNDER
CERTAIN CIRCUMSTANCES TO FILE A SHELF REGISTRATION STATEMENT TO REGISTER THE
RESALE OF CERTAIN OLD NOTES AND EXCHANGE NOTES.
We, the guarantors under the indenture and the initial purchasers of
the old notes entered into the registration rights agreements on January 25,
1999. In the registration rights agreement relating to each series of notes,
we and the 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 our
respective best efforts to have it then declared effective at the earliest
possible time. We and the guarantors also agreed to use our 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.
Each registration rights agreement provides that the following
events will constitute a "registration default":
- if we or the guarantors under the indenture 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,
- if the exchange offer registration statement is not declared
effective by the SEC on or prior to the 180th day after that
closing date,
- if the exchange offer is not consummated on or before the
210th day after that closing date,
- if obligated to file the shelf registration statement and we
and the guarantors under the indenture 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,
- 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
- 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.
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If there is a registration default, then we and the guarantors under
the indenture 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 tradable 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. We and
the guarantors under the indenture 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.
All accrued liquidated damages are to be paid by us or the
guarantors under the indenture 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 us,
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 our company specifically designated as an Accounts Receivable Subsidiary
for the purpose of financing the accounts receivable of our company, and
provided that any such designation shall not be deemed to prohibit our
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 our company
at the time our 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.
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"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 our 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 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 our company or an officer of
ECC or our company with a policy making function, shall be deemed an
Affiliate of our company or any of its Subsidiaries solely by reason of such
individual's employment, position or responsibilities by or with respect to
ECC, our 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
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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 our 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 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 our 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 our 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.
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"CREDIT AGREEMENT" means any one or more credit agreements (which
may include or consist of revolving credits) between our company and one or
more banks or other financial institutions providing financing for the
business of our company and our company's Restricted Subsidiaries, provided
that the lenders party to the Credit Agreement may not be Affiliates of ECC,
our company or their respective Subsidiaries and provided further that the
guarantors under the indenture may be guarantors under such agreements.
"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 our company or
its Restricted Subsidiaries used by it in the businesses described in the
covenant "--Certain covenants--Activities of our 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 our 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 our 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.
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"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.
"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 rate 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 our company, of our 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 our
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
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under applicable law (including any conditional sale or other title retention
agreement, any lease in the nature thereof, any option or other agreement to
sell or give a security interest in and any filing of or agreement to give
any financing statement under the Uniform Commercial Code (or equivalent
status) of any jurisdiction).
"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 our 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 our 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 our 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 our
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 our 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 our 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 our 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 satellite
authorized at 83 degrees WL; (3) all intangible authorizations, rights,
interests and other
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intangible assets related to the Mobile-Satellite Service held by our 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 our 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 our company or in a
Wholly Owned Restricted Subsidiary of our company that is a guarantor under the
indenture, (b) Investments in Cash Equivalents and Marketable Securities; and
(c) Investments by our company or any Subsidiary of our company in a person if,
as a result of such Investment: (i) such person becomes a Wholly Owned
Restricted Subsidiary of our company and becomes a guarantor under the
indenture, 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, our company or a Wholly Owned Restricted Subsidiary of our
company that is a guarantor; PROVIDED that if at any time a Restricted
Subsidiary of our company shall cease to be a Subsidiary of our company, our
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 under the indenture; (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 our 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 our 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 our 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 our company
or any Restricted Subsidiary of our 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 contemplation
of, such designation; (i) Liens on property existing at the time of acquisition
thereof by our company or any Restricted Subsidiary of our 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 our company or any of its
Restricted Subsidiaries other than the property so acquired; (j) Liens to secure
the
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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 our company or any Restricted Subsidiary of our 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 our company or a
guarantor under the indenture 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 our company or
any guarantor under the indenture (including indebtedness that otherwise
satisfies this clause (i) which was incurred prior to the date the obligor
thereunder became a guarantor under the indenture) 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 our company) of our
company or any Guarantor under the indenture: (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 our company or any of its Restricted
Subsidiaries or any of their respective assets, other than the assets so
purchased; or (ii) indebtedness of our company or any guarantor under the
indenture which refinances indebtedness referred to in clause (i) of this
definition, PROVIDED that such refinancing satisfies subclauses (a) and (b) of
such clause (i).
"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
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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 our company or one or more
Subsidiaries of our 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 our
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 our 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 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 was deemed to be a Subsidiary of
our company.
"TRAILING CASH FLOW AMOUNT" means the Consolidated Cash Flow of our
company during the most recent four fiscal quarters of our company for which
financial statements are available.
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"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 our
company designated as an Unrestricted Subsidiary in a resolution of the Board of
Directors of our company (a) no portion of the Indebtedness or any other
obligation (contingent or otherwise) of which, immediately after such
designation: (i) is guaranteed by our company or any other Subsidiary of our
company (other than another Unrestricted Subsidiary); (ii) is recourse to or
obligates our company or any other Subsidiary of our company (other than another
Unrestricted Subsidiary) in any way; or (iii) subjects any property or asset of
our company or any other Subsidiary of our company (other than another
Unrestricted Subsidiary), directly or indirectly, contingently or otherwise, to
satisfaction thereof; (b) with which neither our company nor any other
Subsidiary of our 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 our
company or such other Subsidiary than those that might be obtained at the time
from persons who are not Affiliates of our company; and (c) with which neither
our company nor any other Subsidiary of our 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 our
company, ESC and Echosphere Corporation may be designated as Unrestricted
Subsidiaries. At any time after the date of the indentures that our company
designates an additional Subsidiary (other than ETC or a Subsidiary that
constitutes a Non-Core Asset) as an Unrestricted Subsidiary, our 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 our
company evidenced by a resolution of the Board of Directors of our 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 our 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
our company that is a Restricted Subsidiary.
"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.
130
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 U.S. holders 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. We
generally do not address any tax considerations relevant to holders other than
U.S. holders or to U.S. holders that may be subject to special tax rules, such
as banks, insurance companies, dealers in securities, holders of 10% or more of
our voting stock, 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 "U.S. 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 Internal Revenue 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 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."
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.
131
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 U.S. 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
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.
132
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.
133
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 AND THE
PROHIBITED TRANSACTION PROVISIONS OF ERISA AND THE CODE.
ERISA and the Internal Revenue 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 or the Internal Revenue Code, all of which are 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 Internal Revenue 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 Internal Revenue 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 Internal Revenue 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 or, "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 Internal Revenue 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, such as PTCE 84-14, which is an
exemption for certain transactions determined by an independent qualified
professional asset manager, PTCE 91-38, which is an exemption for certain
transactions involving bank collective investment funds, or PTCE 90-1, which is
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
Internal Revenue Code is applicable to such purchaser's acquisition of the
notes.
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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, our 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 so long as such holder is
not (i) our affiliate, (ii) a broker-dealer who acquired old notes directly from
us or our affiliate or (iii) a broker-dealer who acquired old notes as a result
of market-making or other trading activities. Offers, sales and transfers may be
made 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, we have 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. We have agreed that, for a period of one year
after the consummation of the exchange offer, we 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 us 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.
We 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.
We have 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.
135
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, on 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 our 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
We and ECC are subject to the informational requirements of the
Exchange Act and each of ECC and our company files reports, proxy statements
and other information with the SEC. The public may read and copy the reports,
proxy statements and other information filed by the foregoing companies at the
public reference facilities maintained by the Commission at its Public Reference
Room, 450 Fifth Street, N.W. Washington D.C. 20549. The public may obtain
information on the operation of the Public Reference Room by calling the SEC at
1-800-SEC-0330. 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. The SEC maintains an Internet site that contains reports, proxy and
information statements, and other information regarding issuers that file
electronically with the SEC. Such material may also be accessed electronically
by means of the EDGAR database at the SEC's website at HTTP://WWW.SEC.GOV. We
also maintain a website about us at WWW.DISHNETWORK.COM.
We have filed with the SEC a registration statement on Form S-4 with
respect to the notes. 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.
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INDEX TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS
Condensed and Consolidated Financial Statements:
Condensed Consolidated Balance Sheets -
December 31, 1998 and March 31, 1999 (Unaudited).................. F-2
Condensed Consolidated Statements of Operations for the
three months ended March 31, 1998 and 1999 (Unaudited)............ F-3
Condensed Consolidated Statements of Cash Flows for the
three months ended March 31, 1998 and 1999 (Unaudited)............ F-4
Notes to Condensed Consolidated Financial Statements (Unaudited).... F-5
F-1
ECHOSTAR DBS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
December 31, March 31,
1998 1999
---------------------------
ASSETS (Unaudited)
Current Assets:
Cash and cash equivalents.................................... $ 25,308 $ 135,642
Marketable investment securities............................. 7,000 138,093
Trade accounts receivable, net of allowance for
uncollectible accounts of $2,996 and $3,909, respectively.. 107,743 104,773
Insurance receivable......................................... -- 106,000
Inventories.................................................. 76,708 58,777
Other current assets......................................... 24,823 25,733
---------------------------
Total current assets........................................... 241,582 569,018
Restricted Assets:
Interest and satellite escrows and other restricted cash and
marketable investment securities........................... 77,657 --
Insurance receivable......................................... 106,000 --
---------------------------
Total restricted assets........................................ 183,657 --
Property and equipment, net.................................... 853,818 838,082
FCC authorizations, net........................................ 103,266 102,611
Deferred tax assets............................................ 60,638 63,572
Other noncurrent assets........................................ 27,212 30,832
---------------------------
Total assets............................................... $ 1,470,173 $ 1,604,115
---------------------------
---------------------------
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)
Current Liabilities:
Trade accounts payable....................................... $ 90,562 $ 92,089
Deferred revenue............................................. 132,857 145,578
Accrued expenses............................................. 176,158 206,935
Advances from affiliates, net................................ 54,805 246,681
Current portion of long-term debt............................ 22,679 22,764
---------------------------
Total current liabilities...................................... 477,061 714,047
Long-term obligations, net of current portion:
1994 Notes................................................... 571,674 1,503
1996 Notes................................................... 497,955 1,097
1997 Notes................................................... 375,000 15
Seven Year Notes............................................. -- 375,000
Ten Year Notes............................................... -- 1,625,000
Mortgages and other notes payable, net of current portion.... 43,450 38,409
Notes payable to ECC, including accumulated interest......... 59,812 --
Long-term deferred satellite services revenue and other
long-term liabilities...................................... 33,358 39,086
---------------------------
Total long-term obligations, net of current portion............ 1,581,249 2,080,110
---------------------------
Total liabilities.......................................... 2,058,310 2,794,157
Commitments and Contingencies (Note 5)
Stockholder's Equity (Deficit):
Common Stock, $.01 par value, 1,000 shares authorized,
issued and outstanding..................................... -- --
Additional paid-in capital................................... 145,164 145,164
Accumulated deficit.......................................... (733,301) (1,335,206)
---------------------------
Total stockholder's equity (deficit)........................... (588,137) (1,190,042)
---------------------------
Total liabilities and stockholder's equity (deficit)....... $ 1,470,173 $ 1,604,115
---------------------------
---------------------------
See accompanying Notes to Condensed Consolidated Financial Statements.
F-2
ECHOSTAR DBS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands)
(Unaudited)
Three Months Ended March 31,
------------------------------
1998 1999
------------------------------
REVENUE:
DISH Network:
Subscription television services........................ $ 128,541 $ 260,801
Other................................................... 6,184 2,265
------------------------------
Total DISH Network........................................ 134,725 263,066
DTH equipment sales and integration services.............. 66,816 31,193
Satellite services........................................ 4,595 7,821
C-band and other.......................................... 7,888 7,983
------------------------------
Total revenue............................................... 214,024 310,063
COSTS AND EXPENSES:
DISH Network Operating Expenses:
Subscriber-related expenses............................. 63,809 111,160
Customer service center and other....................... 11,733 24,109
Satellite and transmission.............................. 5,252 9,446
------------------------------
Total DISH Network operating expenses..................... 80,794 144,715
Cost of sales -- DTH equipment and integration services... 47,251 23,143
Cost of sales -- C-band and other......................... 5,942 4,050
Marketing:
Subscriber promotion subsidies.......................... 44,835 130,717
Advertising and other................................... 8,249 11,681
------------------------------
Total marketing expenses.................................. 53,084 142,398
General and administrative................................ 19,294 28,632
Amortization of subscriber acquisition costs.............. 10,971 --
Depreciation and amortization............................. 18,370 24,562
------------------------------
Total costs and expenses.................................... 235,706 367,500
------------------------------
Operating loss.............................................. (21,682) (57,437)
Other Income (Expense):
Interest income........................................... 3,359 3,366
Interest expense, net of amounts capitalized.............. (38,660) (50,594)
Other..................................................... (107) 147
------------------------------
Total other income (expense)................................ (35,408) (47,081)
------------------------------
Loss before income taxes.................................... (57,090) (104,518)
Income tax provision, net................................... (171) (66)
------------------------------
Net loss before extraordinary charges....................... (57,261) (104,584)
Extraordinary charge for early retirement of debt, net
of tax.................................................... -- (228,733)
------------------------------
Net loss.................................................... $ (57,261) $ (333,317)
------------------------------
------------------------------
See accompanying Notes to Condensed Consolidated Financial Statements.
F-3
ECHOSTAR DBS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Three Months Ended March 31,
--------------------------------
1998 1999
--------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss................................................... $ (57,261) $ (333,317)
Adjustments to reconcile net loss to net cash flows from
operating activities:
Extraordinary charge for early retirement of debt........ -- 228,733
Depreciation and amortization............................ 18,370 24,562
Amortization of subscriber acquisition costs............. 10,971 --
Interest on notes payable to ECC added to principal...... 1,286 330
Amortization of debt discount and deferred financing
costs.................................................. 27,803 10,973
Change in reserve for excess and obsolete inventory...... (33) (405)
Change in long-term deferred satellite services revenue
and other long-term liabilities........................ 2,964 5,728
Changes in current assets and current liabilities........ (30,940) 65,612
--------------------------------
Net cash flows from operating activities................... (26,840) 2,216
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of marketable investment securities.............. (1,970) (149,558)
Sales of marketable investment securities.................. -- 18,465
Funds released from escrow and restricted cash and
marketable investment securities......................... 27,219 77,657
Investment earnings placed in escrow....................... (2,275) --
Advances to affiliates..................................... (5,422) --
Purchases of property and equipment........................ (19,900) (8,171)
Other...................................................... (794) 121
--------------------------------
Net cash flows from investing activities................... (3,142) (61,486)
CASH FLOWS FROM FINANCING ACTIVITIES:
Advances from affiliates................................... -- 191,876
Proceeds from issuance of Seven Year Notes................. -- 375,000
Proceeds from issuance of Ten Year Notes................... -- 1,625,000
Debt issuance costs and prepayment premiums................ -- (233,452)
Retirement of 1994 Notes................................... -- (575,674)
Retirement of 1996 Notes................................... -- (501,350)
Retirement of 1997 Notes................................... -- (378,110)
Capital contribution to ECC................................ -- (268,588)
Repayment of notes payable to ECC.......................... -- (60,142)
Repayments of mortgage indebtedness and notes payable...... (4,025) (4,956)
--------------------------------
Net cash flows from financing activities................... (4,025) 169,604
--------------------------------
Net (decrease) increase in cash and cash equivalents....... (34,007) 110,334
Cash and cash equivalents, beginning of period............. 62,059 25,308
--------------------------------
Cash and cash equivalents, end of period................... $ 28,052 $ 135,642
--------------------------------
--------------------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Capitalized interest, including amounts due from
affiliates............................................. $ 7,943 $ --
Accrued capital expenditures............................. 10,653 --
See accompanying Notes to Condensed Consolidated Financial Statements.
F-4
ECHOSTAR DBS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. ORGANIZATION AND BUSINESS ACTIVITIES
PRINCIPAL BUSINESS
EchoStar DBS Corporation ("DBS Corp," or the "Company"), is a
wholly-owned subsidiary of EchoStar Communications Corporation ("ECC" and
together with its subsidiaries "EchoStar"), a publicly traded company on the
Nasdaq National Market. During March 1999, EchoStar received approval from
the Federal Communications Commission ("FCC") to reorganize certain of its
direct and indirect wholly-owned subsidiaries in order to streamline its
organization and operations. During the first quarter of 1999, EchoStar
placed ownership of all of its direct broadcast satellites and related FCC
licenses into EchoStar Satellite Corporation ("ESC"). DirectSat Corporation,
Direct Broadcasting Satellite Corporation ("DBSC") and EchoStar Space
Corporation ("Space") were merged into ESC. Dish, Ltd., and EchoStar
Satellite Broadcasting Company ("ESBC") were merged into the Company.
EchoStar IV and the related FCC licenses were transferred to ESC. The
accompanying financial statements retroactively reflect this reorganization.
Unless otherwise stated herein, or the context otherwise requires,
references herein to EchoStar shall include ECC, DBS Corp and all direct and
indirect wholly-owned subsidiaries thereof. DBS Corp's management refers
readers of this Quarterly Report on Form 10-Q to EchoStar's Quarterly Report
on Form 10-Q for the three months ended March 31, 1999. Substantially all of
EchoStar's operations are conducted by subsidiaries of DBS Corp. 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 March 31, 1999, EchoStar
had approximately 2.3 million DISH Network subscribers.
- ECHOSTAR TECHNOLOGIES CORPORATION ("ETC") -- engaged in the design,
distribution and sale of DBS set-top boxes, antennae and other digital
equipment for the DISH Network ("EchoStar receiver systems"), and the
design 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 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. EchoStar's principal business strategy is to
continue developing its subscription television service in the United States
to provide consumers with a fully competitive alternative to cable television
service.
2. SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles and
with the instructions to Form 10-Q and Article 10 of Regulation S-X for
interim financial information. Accordingly, these statements do not include
all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring adjustments)
considered necessary for a fair presentation have been included. All
significant intercompany accounts and transactions have been eliminated in
consolidation. Operating results for the three months ended March 31, 1999
are not necessarily indicative of the results that may be expected for the
year ending December 31, 1999. For further information, refer to the
combined and consolidated financial
F-5
ECHOSTAR DBS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(Unaudited)
statements and footnotes thereto included in the Company's Annual Report on
Form 10-K for the year ended December 31, 1998. Certain prior year amounts
have been reclassified to conform with the current year presentation.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses for each reporting period.
Actual results could differ from those estimates.
3. INVENTORIES
Inventories consist of the following (in thousands):
December 31, March 31,
1998 1999
------------------------
DBS receiver components.................... $27,050 $29,895
EchoStar receiver systems.................. 45,025 20,420
Consigned DBS receiver components.......... 6,073 9,567
Finished goods - analog DTH equipment...... 2,656 2,785
Spare parts and other...................... 1,085 886
Reserve for excess and obsolete inventory.. (5,181) (4,776)
------------------------
$76,708 $58,777
------------------------
------------------------
4. LONG-TERM DEBT
On January 25, 1999, the Company sold $375 million principal amount of
9 1/4% Senior Notes due 2006 (the "Seven Year Notes") and $1.625 billion
principal amount of 9 3/8% Senior Notes due 2009 (the "Ten Year Notes," and
together with the Seven Year Notes, the "Notes"). Concurrently with the
closing of these offerings, the Company used approximately $1.658 billion of
net proceeds received from the sale of the Notes to complete tender offers
for the outstanding 12 7/8% Senior Secured Discount Notes due June 1, 2004
issued by Dish, Ltd. ("the 1994 Notes"), the 13 1/8% Senior Secured Discount
Notes due 2004 issued by ESBC ("the 1996 Notes") and the 12 1/2% Senior
Secured Notes due 2002 issued by the Company ("the 1997 Notes"). In February
1999, ECC used approximately $268 million of net proceeds received from the
sale of the Notes to complete a tender offer related to the 12 1/8% Senior
Preferred Exchange Notes due 2004, issued on January 4, 1999, in exchange for
all of its issued and outstanding 12 1/8% Series B Senior Redeemable
Exchangeable Preferred Stock. Substantially all of the restrictive covenants
contained in each of the respective indentures were removed upon closing of
the tender offers. The consummation of the tender offers resulted in a
one-time extraordinary charge to the Company's net income of $229 million
(approximately $203 million of tender premiums and consent fees and
approximately $26 million associated with the write-off of unamortized
deferred financing costs and other transaction-related costs).
5. COMMITMENTS AND CONTINGENCIES
THE NEWS CORPORATION LIMITED
During February 1997, EchoStar and News Corporation Limited ("News
Corporation") announced an agreement pursuant to which, among other things,
News Corporation agreed to acquire approximately 50% of the outstanding
capital stock of EchoStar. News Corporation also agreed to make available
for use by EchoStar the DBS permit for 28 frequencies at the 110DEG. West
Longitude ("WL") orbital slot purchased by MCI Telecommunications
Corporation/WorldCom ("MCI") for more than $682 million following a 1996 FCC
auction (the "110 acquisition"). During late April 1997, substantial
disagreements arose between the parties regarding their obligations under
this
F-6
ECHOSTAR DBS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(Unaudited)
agreement. Those substantial disagreements led the parties to litigation.
In mid-1997, EchoStar 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 110 acquisition, the litigation between EchoStar
and News Corporation has been 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.
In connection with the News Corporation litigation that arose in 1997,
EchoStar has a contingent fee arrangement with its attorneys, which provides
for the attorneys to be paid a percentage of any net recovery obtained in its
dispute with News Corporation. 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. EchoStar 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
EchoStar are unable to resolve this fee dispute under the fee arrangement,
the fee dispute would be resolved through arbitration. It is too early to
determine the outcome of negotiations or arbitration regarding this fee
dispute.
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, United
States Satellite Broadcasting Corporation, ECC and two of ECC's wholly-owned
subsidiaries, Dish, Ltd. 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, Ltd. 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 authorizes EchoStar to
provide satellite-delivered network channels to customers who qualify as
"unserved households," defined in the Satellite Home Viewer Act as, consumers
who, 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, EchoStar obtained distant broadcast
network signals for distribution to its customers through PrimeTime 24, Joint
Venture ("PrimeTime 24"). PrimeTime 24 also distributed network signals to
certain of EchoStar's competitors in the satellite industry.
The national networks and local affiliate stations recently challenged
PrimeTime 24's methods of selling network programming to consumers based upon
copyright infringement. The United States District Court for the
F-7
ECHOSTAR DBS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(Unaudited)
Southern District of Florida entered a nationwide permanent injunction
preventing PrimeTime 24 from selling its programming to consumers unless the
programming was sold in accordance with certain stipulations in the
injunction. The injunction covers "distributors" as well. The plaintiffs in
the Florida litigation informed EchoStar that it considered EchoStar 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 in the Raleigh area. Other copyright
litigation against PrimeTime 24 is pending.
EchoStar ceased delivering PrimeTime 24 programming in July 1998, and
began uplinking and distributing network channels directly. EchoStar has also
implemented Satellite Home Viewer Act Section 119 compliance procedures which
materially restrict the market for the sale of network channels by EchoStar.
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. EchoStar asked the court to enter a judgment declaring that
its 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 four major broadcast networks and their
affiliate groups filed a complaint in federal court in Miami alleging, among
other things, copyright infringement against EchoStar. The plaintiffs in
that action have also requested the issuance of a preliminary injunction
against EchoStar. The case filed by EchoStar was subsequently combined with
and transferred to the Miami court.
On February 24, 1999, CBS, NBC, Fox, and ABC filed a "Motion for
Temporary Restraining Order, Preliminary Injunction, and Contempt Finding"
against DIRECTV, Inc. ("DIRECTV") in Miami relating to the delivery of
distant network channels to DIRECTV customers by satellite. On March 12,
1999, DIRECTV and the four networks announced that they had reached a
settlement of that dispute. Under the terms of the settlement, DIRECTV
customers predicted to receive a strong signal (Grade A intensity) from their
local stations will lose access to their satellite provided network channels
by June 30, 1999, while DIRECTV customers predicted to receive a weaker, but
allegedly adequate signal (Grade B intensity) from their local stations will
be disconnected by December 31, 1999. Subsequently, PrimeTime 24 and
substantially all providers of satellite delivered network programming other
than EchoStar agreed to this cut off schedule.
The Networks are currently pursuing a Motion for Preliminary Injunction
in the Miami Court, asking that Court to enjoin EchoStar from providing
network programming except under very limited circumstances. In general, the
networks want EchoStar to turn off programming to its customers on the same
schedule as agreed to by DIRECTV. EchoStar intends to vigorously contest the
issuance of such an injunction. In the event of a decision adverse to
EchoStar in this case, significant material restrictions on the sale of
distant ABC, NBC, CBS and Fox channels 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. While the Networks have not
sought monetary damages, they have sought to recover attorneys fees should
they prevail. EchoStar has commenced sending letters to some of its
subscribers warning that their access to distant broadcast network channels
might be terminated commencing in June of this year. Such terminations would
result in a small reduction in average monthly revenue per subscriber. While
there can be no assurance, any such decrease could be offset by increases in
average monthly revenue per subscriber resulting from the delivery of local
network channels by satellite, and increases in programming offerings that
will follow the scheduled launches of EchoStar V and EchoStar VI later this
year. While there can be no assurance, legislation pending in the Senate
would, if passed into law, reduce the number of customers whose network
channels EchoStar may otherwise be required to terminate.
The Company is subject to various other legal proceedings and claims
which arise in the ordinary course of business. In the opinion of
management, the amount of ultimate liability with respect to those actions
will not materially affect the Company's financial position or results of
operations.
F-8
ECHOSTAR DBS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(Unaudited)
METEOROID EVENTS
In November 1998 certain meteoroid events occurred as the earth's orbit
passed through the particulate trail of Comet 55P (Tempel-Tuttle). The
Company believes that its DBS satellites did not incur any significant damage
as a result of these events. Similar meteoroid 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 the Company's DBS
satellites. While the probability that the Company'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. The
Company is presently evaluating the potential effects that the November 1999
meteoroid events may have on its DBS satellites. While there can be no
assurance, due to its excess satellite capacity, The Company does not expect
to experience an interruption of service due to any potential damage
resulting from these meteoroid events.
6. SEGMENT REPORTING
The Company adopted Financial Accounting Standard No. 131, "Disclosures
About Segments of an Enterprise and Related Information" ("FAS No. 131")
effective as of the year ended December 31, 1998. FAS No. 131 establishes
standards for reporting information about 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.
DBS CORP,
ECHOSTAR OTHER AFFILIATES
DISH SATELLITE ELIMINATIONS CONSOLIDATED ECHOSTAR AND
NETWORK ETC SERVICES AND OTHER TOTAL ACTIVITY SUBSIDIARIES
--------- ---------- --------- -------------- ------------- ---------- ------------
THREE MONTHS ENDED MARCH 31, 1998
Revenue............................ $ 141,869 $ 63,778 $ 4,856 $ 3,936 $ 214,439 $ (415) $ 214,024
Net income (loss).................. (38,735) 8,586 4,219 (23,956) (49,886) (7,375) (57,261)
THREE MONTHS ENDED MARCH 31, 1999
Revenue............................ $ 280,776 $ 26,995 $ 9,145 $ (7,552) $ 309,364 $ 699 $ 310,063
Net income (loss) before
extraordinary charges............ (107,322) (3,625) 5,013 2,602 (103,332) (1,252) (104,584)
7. SUBSEQUENT EVENTS
F-9
ECHOSTAR DBS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(Unaudited)
ECHOSTAR IV
As previously announced, the south solar array on EchoStar IV did not
properly deploy subsequent to the launch of EchoStar IV on May 8, 1998. This
anomaly resulted in a reduction of power available to operate the satellite.
The solar array anomaly limits EchoStar to the operation of approximately 18
transponders as of May 13, 1999. Available power will continue to decline
over the next several years, resulting in continuing reductions in the number
of available transponders. Approximately 16 transponders should be available
for the entire life of the satellite. In addition, an unrelated anomaly
discovered during the third quarter of 1998 resulted in the failure of six
transponders during 1998. The satellite is equipped with a total of 44
transponders. 24 operating transponders are necessary to fully utilize
EchoStar's 24 frequencies at 148DEG. WL, where the satellite is located. 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. That claim is pending.
During May 1999, EchoStar IV experienced additional anomalies. An
investigation of those anomalies, affecting transponders, heating systems and
fuel lines but which have not caused material reductions in functionality to
date, is continuing. It is not yet possible to conclude whether the
additional anomalies will result in further reductions of satellite
functionality in the future. While there can be no assurance, EchoStar does
not currently expect short or medium term satellite operations to be
materially adversely impacted. EchoStar has not completed its assessment of
the additional impairment, if any, to EchoStar IV, but currently believes
that insurance proceeds will be sufficient to offset any additional
write-down of satellite assets that may be required because of lost
functionality caused by these anomalies. 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. EchoStar will continue to
evaluate the performance of EchoStar IV and may modify its loss assessment as
new events or circumstances develop.
As a result of the recent anomalies experienced by EchoStar IV, EchoStar
has instructed its broker to notify its insurance carriers of additional
occurrences under the terms of the EchoStar IV launch insurance policy. The
EchoStar IV launch insurance policy provides for insurance of $219.3 million
covering the period from launch of the satellite (May 8, 1998) through May 8,
1999. Due to the anomalies experienced by EchoStar IV and the pending claim
for a total constructive loss, EchoStar did not obtain in-orbit insurance on
EchoStar IV. Consequently, in the event EchoStar's pending insurance claim
is not resolved to its satisfaction, EchoStar IV will not be insured should
further losses occur in the future.
F-10
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
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(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 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 Series A 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 Series A 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
II-2
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).
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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).
II-4
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
II-5
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** Statements re computation of ratios.
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 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.
II-6
(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. 5 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 July 21, 1999.
ECHOSTAR DBS CORPORATION SATELLITE SOURCE, INC.
ECHO ACCEPTANCE CORPORATION ECHOSTAR SATELLITE CORPORATION
ECHOSPHERE CORPORATION HOUSTON TRACKER SYSTEMS, INC.
DISH INSTALLATION NETWORK CORPORATION ECHOSTAR NORTH AMERICA CORPORATION
ECHOSTAR TECHNOLOGIES CORPORATION SKY VISTA CORPORATION
HT VENTURES, INC. ECHOSTAR INDONESIA, INC.
ECHOSTAR INTERNATIONAL CORPORATION ECHOSTAR SPACE CORPORATION
By: *
--------------------------
Charles W. Ergen
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, as
amended, this Amendment No. 5 to the Registration Statement has been signed
below on July 21, 1999, by the following persons in the capacities indicated:
SIGNATURE TITLE
- --------- -----
* Chairman, Chief Executive Officer and
- ----------------------- Director (Principal Executive Officer)
Charles W. Ergen
* Chief Operating Officer and
- ----------------------- Chief Financial Officer
Steven B. Schaver (Principal Financial and Accounting Officer)
* Director
- -----------------------
James DeFranco
Director
/s/ David K. Moskowitz
- -----------------------
David K. Moskowitz
*By /s/ David K. Moskowitz
----------------------
David K. Moskowitz
Attorney-in-Fact
II-8
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 Series A 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 Series A 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).
2
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
3
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
4
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** Statements re computation of ratios.
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
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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
July 21, 1999
7
